Q3 2023 Hilltop Holdings Inc Earnings Call
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Speaker 1: Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings third quarter of the 2020 three earnings conference call and webcast. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings third quarter 2023 earnings conference call and webcast. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you were quiet immediate assistance. Please.
Speaker 1: If at any time during this call you require immediate assistance, please press star zero for the operation.
Zero for the operator.
Speaker 1: This call is being recorded on Friday, October 20th, 2020.
Call is being recorded on Friday October 22023, I would now like to turn the conference over to Erik Young men Hilltop Holdings. Please go ahead.
Speaker 1: I would now like to turn the conference over to Eric Yovee with Hilltop Holdings.
Speaker 2: Thank you operator before we get started, please note that certain statements during today's presentation that are not statements of historical facts, including statements concerning such items as our outlook business strategy. Future plans, financial condition allowance for credit losses. Liquidity and sources of funding, the impact and potential impacts of inflation. Stock repurchases and dividends and impacts of interest rate changes. As well, such other items referenced in the presentation are forward looking statement.
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.
Quiddity in sources of funding.
In fact and potential impacts of inflation stock repurchases and dividends and impacts of interest rate changes as well as such other items referenced in the <unk> of our presentation are forward looking statements.
Speaker 2: These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainty.
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.
Speaker 2: 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.
And quarterly reports filed with the SEC.
Speaker 2: Please note that the information presented is 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. Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. The reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop-holdings.com.
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.
Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share I.
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 Hilltop Dash holdings Dot com.
Speaker 2: That I will now turn the presentation over to the President and CEO , Jeremy Ford.
I will now turn the presentation over to President and CEO Jeremy Ford.
Thank you Eric and good morning.
Speaker 3: For the third quarter, Hilltop reported net income of $37 million, or 57 cents per diluted share. Return on average assets for the period was 0.9% and return on average equity was 7.1%.
For the third quarter Hilltop reported net income of $37 million or <unk> 57 per diluted share return on average assets for the period was <unk>, 9% and return on average equity was seven 1%.
Speaker 3: This was a favorable quarter for the organization, despite escalating interest rates and market pressures within each business. Hilltop produced solid consolidated profitability and continued to grow its book value with our conservative liquidity management.
This was a favorable quarter for the organization.
Slight escalating interest rates and market pressures within each business hilltop produced solid consolidated profitability and continued to grow its book value with our conservative liquidity management Deader.
Speaker 3: The dedication and adaptability of our teams in this uncertain environment has been commendable. I believe our proactive measures, strategic initiatives, and the strength of our franchise positions Hilltop for resiliency in this challenging environment and sustained growth over the long term.
The dedication and adaptability of our teams in this uncertain environment has been commendable I believe our proactive measures strategic initiatives and the strength of our franchise position hilltop for resiliency in this challenging environment and sustained growth over the long term.
Speaker 3: For the quarter, Plains Capital Bank generated $53 million of pre-tax income on $13.3 billion of assets, representing a return on average assets of 1.2%.
For the quarter Plains capital Bank generated $53 million of pre tax income on $13 $3 billion of assets, representing a return on average assets of one 2%.
Speaker 3: Average loans at the bank were relatively stable from the second quarter as slower client activity particularly in commercial real estate was partially offset by reduced pay down.
Average loans at the bank were relatively stable from the second quarter as slower client activity, particularly in commercial real estate was partially offset by reduced pay downs.
Speaker 3: Higher borrowing costs and increased equity requirements needed to borrow have impacted the pipeline, and we expect this trend to continue until rates stabilize, whereby pricing can normalize and transaction volumes should pick up.
Higher borrowing costs and increased equity requirements needed to borrow have impacted the pipeline and we expect this trend to continue until rates stabilize whereby pricing can normalize and transaction volumes should pick up.
Speaker 3: Credit quality remains paramount to our bank, and we will continue to approach credit risk in the same judicious manner. Although we have, although we saw a minor amount of negative credit migration, the bank had a decline in non-performing assets and realized a net recovery in the quarter.
Credit quality remains Paramount to our bank and we will continue to approach credit risk in the same judicious manner.
Although we have although we saw a minor amount of negative credit migration. The bank had a decline in nonperforming assets and realized a net recovery in the quarter.
Speaker 3: Aberdefank deposits remain relatively stable during the quarter at $11.3 billion.
Average bank deposits remained relatively stable during the quarter at $11 3 billion.
Speaker 3: So, we continue to see a migration from non-interest-bearing deposits in the money market and CD accounts, which contributed to a 31 basis point increase in deposit costs.
So we continue to see a migration from noninterest bearing deposits in the money market and CD accounts, which contributed to a 31 basis point increase in deposit costs.
Speaker 3: This increases in line with expectations given the mid shift in prior deposit data guidance.
This increase is in line with expectations, given the mix shift and prior deposit beta data guidance.
Speaker 3: Overall, our bank continues to perform well despite NIM compression and softness in the loan pipeline.
Overall, our bank continues to perform well, despite NIM compression and softness in the loan pipeline.
Speaker 3: While we do expect the balance sheet to contract for a period, the business remains focused on bottom line profitability by managing margins where possible, being thoughtful about appropriate credit risk, and tightening down on expense.
While we do expect the balance sheet the contract for a period.
<unk> remains focused on bottom line profitability by managing margins, where possible being thoughtful about appropriate credit risks and tightening down on expenses.
Speaker 3: Moving to prime lending, the residential mortgage industry remains under pressure given the increase in the 10 year rate and the resulting highest mortgage rates in over two decades. Additionally, other negative industry factors include a persistently low supply of retail housing, elevated home prices, and surplus capacity within the mortgage origination sector.
Moving to prime lending.
The residential mortgage industry remains under pressure given the increase in the 10 year rate and the resulting highest mortgage rates in over two decades. Additionally, other negative industry factors include a persistently low supply of retail housing elevated home prices and surplus capacity within the mortgage origination sector.
Speaker 3: These dynamics have collectively exerted substantial pressures on linder loan volumes, home buyer confidence, and secondary margin.
These dynamics have collectively exerted substantial pressures on lender loan volumes homebuyer confidence in secondary markets.
Speaker 3: To weather these challenges, Prime-Linning has taken several strategic and tactical measures to ensure resiliency and sustainability.
The weather these challenges prime lending has taken several strategic and tactical measures to ensure resiliency and sustainability. These.
Speaker 3: These include a focus on optimizing operations and corporate staffing levels.
These include a focus on optimizing operations and corporate staffing levels.
Speaker 3: a judicious approach to variable expenses and a re-evaluation of brick and mortar utilization.
Judicious approach to variable expenses, and a reevaluation of brick and mortar utilization.
Speaker 3: We have begun to see the benefits of these initiatives in our expenses and in our margins, evident by the lower pre-tax loss in the business year over year, despite lower origination volumes and gain on sale marks.
We have begun to see the benefits of these initiatives in our expenses and in our margins evident by the lower pre tax loss in the business year over year, despite lower origination volumes and gain on sale margins.
Speaker 3: I'm lending originated $2.2 billion in volume. I decline of 26% from the same period prior year.
Prime lending originated $2 $2 billion and volume decline of 26% from the same period prior year.
Speaker 3: And on sale margin during the period was relatively stable to the second quarter at 198 basis points. So down from 218 basis points in the third quarter of 2022.
Gain on sale margin during the period was relatively stable to the second quarter at 198 basis points, though down from 218 basis points in the third quarter of 2022.
Speaker 3: While the gain on sale margin is still lower than the same period prior year, origination fees have increased from 131 basis points to 185 basis points, as more borrowers are choosing to buy down the higher mortgage rate.
While the gain on sale margin is still lower than the same period. Prior year origination fees have increased from 131 basis points to 185 basis points as more borrowers are choosing to buy down the higher mortgage rates.
Speaker 3: There was a positive trend in fixed costs during the period, as they declined by $16 million or 21% from prior year. This is directly related to the resizing efforts previously meant.
There was a positive trend in fixed costs during the period as they declined by $16 million or 21% from prior year. This is direct directly related to the resizing efforts previously mentioned.
Speaker 3: Notwithstanding the cost reductions, prime lending continues to focus on enhancing its sales force by recruiting quality loan originators that can bring on profitable volume in this difficult mortgage market.
Notwithstanding the cost reductions prime lending continues to focus on enhancing its sales force by recruiting quality loan originators that can bring on profitable volume in this difficult mortgage market.
Speaker 3: In addition to helping us navigate through near-term challenges, we believe that the strategic changes and improvements undertaken will position prime lending for higher margins and increase profitability when the industry recovers. We have confidence in our leadership theme and our encourage by the current favorable expense trends in the business.
In addition to helping us navigate navigate through near term challenges, we believe that the strategic changes and improvements undertaken will position prime lending for higher margins and increased profitability when the industry recovers.
We have confidence in our leadership team and are encouraged by the current favorable expense trends in the business.
Speaker 3: Delta security generated pre-text income of $22 million on net revenues of $119 million during the quarter.
Hilltop Securities generated pretax income of $22 million on net revenues of $119 million during the quarter.
Speaker 3: Pretext profit and margins improved compared to last year's third quarter, due to an increase in contribution to revenue from higher margin businesses. Primarily associated with our sweep income that has been benefited from higher short term rates.
Pre tax profit and margins improved compared to last year's third quarter due to an increase in contribution to revenue from higher margin businesses, primarily associated with our sweep income that has benefited from higher short term rates.
Speaker 3: Additionally, our Structure Finance business reads the benefits of more volume from certain state housing programs most notably in Florida.
Additionally, our structured finance business reap the benefits of more volume from FERC from certain state housing programs, most notably in Florida.
Speaker 3: This highlights the quality of our team and the relationships they have fostered with different state housing age.
This highlights the quality of our team and the relationships they have fostered with different state housing agencies.
Speaker 3: Delta-op securities has performed exceptionally well this year, which is a testament to the talented leadership and producers across its businesses.
Hilltop Securities has performed exceptionally well this year, which is a testament to the talented leadership and producers across its businesses.
Moving to page four.
Speaker 3: Hilltop maintains robust capital levels, with a common equity tier one capital ratio of 18.6%. And our tangible book value per share increased from Q3 2022 by $54 to $27.67.
Hilltop maintains robust capital levels with a common equity tier one capital ratio of 18, 6% and our tangible book value per share increase from Q3, 2022 by 54 to $27 to 67.
Speaker 3: Our capital ratios and tangible book value have grown as a result of our conservative securities management, declining balance sheet and durable profitability.
Our capital ratios and tangible book value have grown as a result of our conservative securities management declining balance sheet and durable profitability.
Speaker 3: In summary, while industry headwinds are adversely impacting our bank and mortgage businesses, this quarter's improved results again illustrate the strength of Hilltops franchise and the hard work by our
In summary, while the industry headwinds are adversely impacting our bank and mortgage businesses. This quarter's improved results again illustrate the strength of hilltops franchise and the hard work by our team.
Speaker 3: We will continue to prioritize the strength of our balance sheet, the best serve our clients, and best position hilltop.
We will continue to prioritize the strength of our balance sheet to best serve our clients and best position hilltop.
Speaker 3: With that, I will now turn the presentation over to Will to discuss the financials.
With that I will now turn the presentation over to will to discuss the financials.
Thank you Jeremy I'll start on page five.
Speaker 4: Jeremy discussed for the third quarter of 2023, those type of reported consolidated income, tribunal would come and stockholders of $37 million, equating to 57 cents per diluted share.
Jeremy discussed for the third quarter of 2023 Hilltop reported consolidated income attributable to common stockholders of $37 million.
<unk> 57 per diluted share.
Speaker 4: Portage results highlight the successful expense work. We've been executing across the franchise and most acutely the prime lending, coupled with solid credit metrics that remain resilient at least through this point in the cycle.
Quarter's results highlight the successful expense work that we've been executing across the franchise and most acutely at prime lending coupled with solid credit metrics remained resilient at least through this point in the cycle.
Speaker 4: We dress credit and the changes in allowance. I am turning the page six.
To address credit and the changes in allowance I am turning to page six.
Speaker 4: The top allowance for credit losses increased during the quarter at $1.5 million to $110.8 million.
Well tops allowance for credit losses increased during the quarter of $1 5 million to $110 8 million.
Speaker 4: improvement in the macroeconomic outlook, coupled with net recoveries of prior losses in the period, materially offset the impacts of loan growth and collected portfolio change.
Improvement in the macroeconomic outlook, coupled with net recoveries of prior losses in the period materially offset the impact of loan growth and collected portfolio changes.
Speaker 4: Allowance for credit losses of $111 million yields an ACL to total loan day to buy ratio of 1.35% as of September 30th, 2023.
Allowance for credit losses of $111 million, yielding ACL to total loans <unk> ratio of 1.35% as of September 32023.
Speaker 4: As we've seen over time, ACL can be balled as it is impacted by economic assumptions, as well as changes in the mix and makeup of the credit portfolio.
As we've seen over time.
<unk> can be volatile as it is impacted by economic assumptions as well as changes in the mix and make up of the credit portfolio.
Speaker 4: We continue to believe that the allowance for credit losses could be volatile and the future 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.
We continue to believe that the allowance for credit losses could be volatile in the future 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.
Speaker 4: Given the current uncertainties regarding inflation, interest rates, the future outlook for GDP growth and unemployment, we do expect that volatility in the ACL could be heightened over the coming quarters.
Given the current uncertainties regarding inflation interest rates the future outlook for GDP growth and unemployment, we do expect the volatility in the ACO could be heightened over the coming quarters.
Turning to page seven.
Speaker 4: As provided in the previous quarter, we wanted to show a little more detail into our CRE portfolio and the allowance distribution across some of the key loans segments.
As provided in the previous quarter and we wanted to show a little more detail on our CRE portfolio and the allowance distribution across some of the key loan segments.
Speaker 4: September 30th, the CRE portfolio total approximately 3.3 billion, which we segregate in the owner and in our own Iraqi pride for investor real estate.
The September 30.
<unk> portfolio totaled approximately $3 3 billion, which we segregated into owner and non owner occupied or investor real estate.
Speaker 4: Internally, we view owner occupied real estate more like C&I lending. That's for the most part repayment is driven by the operating business that owns the real estate.
Internally, we view owner occupied real estate more like C&I lending as for the most part repayment is driven by the operating business and only the real estate.
Speaker 4: Non-owner occupied real estate makes up 57% of the CRE book. As is noted in the upper right hand chart, his diversified across multiple income producing property types.
Non owner occupied real estate makes up 57% of the CRE book.
As noted in the upper right hand chart is diversified across multiple income producing property types.
Speaker 4: In the bottom table, we've arrived at Breakout of Non-Owner Occupied Office and Retail within the portfolio that highlights the differentiation in ACO coverage by loan segment type.
The bottom table, we provide a breakout of non owner occupied office and retail within the portfolio to highlight the differentiation in ACO coverage by loan segment type.
Speaker 4: Our view to date is that the office and retail markets across our footprint represent the highest exposure to both recession, absorption, evaluation risk, and the portfolio.
Our view today is that the office and retail markets across our footprint represents the highest exposure to both recession.
<unk> and valuation risk in the portfolio.
Speaker 4: As such, you can see that those long segments maintain a larger ACL coverage ratios than other non-owner occupied real estate products.
As such you can see that those loan segments maintain a larger ACL coverage ratios and other non owner occupied real estate products.
Speaker 4: currently monitoring the entire portfolio closely, and not seeing any systemic risk emerged as of the third quarter. That said, we do expect that the out-homegoing cash flow challenges facing existing and new projects driven by higher interest rates and ongoing inflation could lead to further credit migration over time.
We're currently monitoring the entire portfolio closely and not seeing any systemic risk emerge as of the third quarter.
That said, we do expect that the ongoing cash flow challenges facing existing and new projects driven by higher interest rates and ongoing inflation could lead to further credit migration over time.
Moving to page eight.
Speaker 4: That interest income in the third quarter equated to $116 million, including 2.2 million of purchase accounting accretion.
Net interest income in the third quarter equated to $116 million, including $2 2 million of purchase accounting accretion.
Speaker 4: versus the prior year third quarter. That interest income decreased by $7.8 million or 6%. It's been primarily by higher yields on the public.
Versus the prior year third quarter net interest income decreased by $7 8 million or 6% driven primarily by higher yields on deposits.
Speaker 4: As we expected, net interest margin decline marginally versus the second quarter of 2023, a one basis point to 302 basis.
As we expected net interest margin declined marginally versus the second quarter of 2023, and one basis point to 302 basis points.
Speaker 4: Their current outlook reflects a scenario whereby Fed funds moves to between 5.50 and 5.75 by the end of 2023 and remains stable for the majority of 2024.
Our current outlook reflects a scenario whereby fed funds moves to between $5 50, and $5 75 by the end of 2023 and remained stable for the majority of 2024.
Speaker 4: Further rate increases, coupled with ongoing deposit competition, could cause an eye in them to decline further during the fourth quarter and in the 2024.
Further rate increases coupled with ongoing deposit competition could cause NII and NIM to decline further during the fourth quarter and into 2024.
I'm moving to page nine.
Speaker 4: In the chart, we highlight the approximately $7.3 billion of available liquidity sources that he'll not maintain as of September 30th.
In the chart, we highlight the approximately $7 3 billion of available liquidity sources that hilltop maintained as of September 30.
Speaker 4: We consider the Federal Reserve's discount window to be a source of liquidity. We've got planned to leverage that program under our internal liquidity modeling efforts. And as such, it's noted below our other collateralized borrowing sources.
Consider the federal reserve's discount windows to be a source of liquidity.
<unk> plan to leverage that program under our internal liquidity modeling efforts and as such its noted below our other collateralized borrowing sources.
Speaker 4: Further, comparable liquidity sources as of December 31st, 2022, equated to just over $7 billion and remained relatively stable throughout the prior quarters of the year.
Further comparable liquidity sources as of December 31, 2022 equated to just over $7 billion and remained relatively stable throughout the prior quarters of the year.
Speaker 4: As is shown in the chart, it's September 30th, Hilltop maintained $1.3 billion of excess reserves of the Federal Reserve.
As is shown in the chart at September 30th Hilltop maintained $1 3 billion.
The excess reserves at the Federal reserve.
Speaker 4: Additionally, in the bottom left chart, we provide detail on the pace of the deposit beta changes to date, noting that our current through the cycle beta are interest-bearing deposits to 62%.
Additionally, in the bottom left chart, we provide detail on the pace of the deposit beta changes to date, noting that our current through the cycle beta for interest bearing deposits of 62%.
Speaker 4: Further, we continue to expect that the marginal beta for any additional federal reserve rate actions will fall between 75 and 100%.
Further we continue to expect that the marginal beta for any additional federal reserve and.
And our reserve rate actions will fall between 75 and 100%.
Speaker 4: As a result, we're now expecting that our through the cycle intersparing deposit betas will be within the 60 to 70% range.
As a result, we're now expecting that our through the cycle interest bearing deposit betas will be within the 60% to 70% range.
Turning to page 10.
Speaker 4: Their quarter average total profits are approximately $11.2 billion, remaining largely stable versus the second quarter of 2023.
Third quarter average total deposits are approximately $11 2 billion remained largely stable versus the second quarter of 2023.
Speaker 4: On an ending balance basis, the positives decreased by $61 million to $11.1 billion from the prior quarter. Larcely driven by a decline in broker-dealer suite deposits, Hillary Clinton's capital bank.
On an ending balance basis deposits decreased by $61 million to $11 1 billion from the prior quarter.
Largely driven by a decline in broker dealer sweep deposits build plains capital Bank.
Speaker 4: As a result of our ongoing pricing efforts, intersparing deposit costs rose to 323 basis points and increased 39 basis points from the prior quarter.
As a result of our ongoing pricing efforts interest bearing deposit costs rose to 323 basis points and increased 39 basis points from the prior quarter.
Speaker 4: is our expectation and interest bearing deposit costs will continue to move higher for the balance of 2023 given our stated use on the path of potential rate increases from the Federal Reserve and the updates we've made to our pricing approach.
It is our expectation that interest bearing deposit costs will continue to move higher for the balance of 2023, given our stated views on the path to potential rate increases from the federal reserve and the updates we've made to our pricing approach.
Speaker 4: As it relates to the positive bounces and costs, we remain focused on bouncing our competitive position with a long-term customer relationships. While we continue to focus on prudent management, the manager didn't come over time.
As it relates to deposit balances and costs, we remain focused on balancing our competitive position with a long term customer relationships. While we continue to focus on prudent management of net interest income over time.
Speaker 4: However, the current environment remains challenging. And as noted earlier, we expect that the intensity of competition for deposits will continue to pressure rate higher over the coming quarters.
However, the current environment remains challenging and as noted earlier, we expect that the intensity of competition for deposits will continue to pressure rates higher over the coming quarters.
I'm moving to page 11.
Speaker 4: A little non-interesting account for the third quarter of 2023 equated to $197 million.
Total noninterest income for the third quarter of 2023 equated to $197 million.
Speaker 4: The quarter mortgage-related income and fees decreased by $9 million versus a third quarter of 2022 driven by the ongoing challenges in mortgage banking whereby the combination of higher interest rates, home price inflation, limited housing supply, and ongoing over-capacity in terms of mortgage originators across the U.S. driven volumes and margins materially lower.
Third quarter mortgage related income and fees decreased by $9 million versus the third quarter of 2022, driven by the ongoing challenges in mortgage banking.
The combination of higher interest rates home price inflation limited housing supply and ongoing overcapacity in terms of mortgage originators across the U S driven volumes and margins materially lower.
Speaker 4: Further, versus the prior year, third quarter, purchase mortgage volumes decreased by $741 million, or 26% and refinance volumes decreased by 59 million, or 28.
Further versus the prior year third quarter purchase mortgage volumes decreased by $741 million or 26%.
Refinance volume decreased by $59 million or 28%.
Speaker 4: We're in a third quarter of 2023, and on sale margins remain within the tight range. We've seen over the last 12 months remaining at what we believe are unsustainably low levels.
During the third quarter of 2023 gain on sale margins remained within a tight range. We've seen over the last 12 months remaining and what we believe are unsustainably low levels.
Speaker 4: We continue to expect that a full recovery in margins will occur slowly and likely will not be a straight line as industry capacity and other constraints remain.
We continue to expect a full recovery in margins will occur slowly and likely will not be a straight line as industry capacity and other constraints remain.
Speaker 4: During the third quarter, PVA lock volumes increased substantially from second quarter 2023 levels to just under $3 billion.
During the third quarter TBA lock volumes increase substantially from second quarter 2023 levels to just under $3 billion.
Speaker 4: Locked volumes were substantially impacted by serving the states providing additional states funding to support their housing, authorities, and down payment assisted programs.
Block volumes were substantially impacted by certain states, providing additional state funding to support their housing authorities and down payment assistance programs.
Speaker 4: Well, volumes are very strong. Secondary spreads in the market did contract substantially, reflecting the volatility in the current rate environment, causing net revenues to decline versus the prior year period.
Our volumes are very strong secondary spreads in the market did contract substantially reflecting the volatility in the current rate environment, causing net revenues to decline versus the prior year period.
Speaker 4: somewhat offsetting the decline in structure finance revenues was an increase in fixed income capital markets fee revenues, which yielded a relatively stable other income versus the prior year period.
Somewhat offsetting the decline in structured finance revenues was an increase in fixed income capital markets fee revenues, which yielded a relatively stable other income versus the prior year period.
Speaker 4: As we've noted in the past, it's important to recognize that both the fixed income services and structured financial businesses at hilltop securities can be volatile from period to period as they're impacted by interest rates, overall market liquidity, and production trends.
As we've noted in the past it's important to recognize that both the fixed income services and structured finance businesses as Youll TARP securities can be volatile from period to period as they are impacted by interest rates overall market liquidity and production trends.
Turning to page 12.
Speaker 4: Non-intersex expenses decreased from the same period in the prior year by $29 million to $260 million.
Noninterest expenses decreased from the same period, the prior year by $29 million to $260 million.
Speaker 4: The increasing expenses versus the prior year, third quarter, will support by the increases in variable compensation of approximately $14 million at Prime lending and Hilltop securities, which was linked to lower fee revenue generation and revenue mixed contribution.
The decrease in expenses versus the prior year third quarter was supported by decreases in variable compensation of approximately $14 million at prime lending and hilltop securities, which was linked to lower fee revenue generation and revenue mix contribution.
Operator: Good morning ladies and gentlemen and welcome to the Hilltop Holdings third quarter of 2023 earnings conference call and webcasts. At this time all lines are in listen only mode, following the presentation we will conduct a question and answer session. If at any time during this call you require immediate assistance please press star zero for the operator.
Speaker 4: Further, big expenses to Prime lending are introduced by over $14 million versus the prior year period, reflecting the ongoing work to resize our mortgage operations to support the current environment.
Further fixed expenses at prime lending have been reduced by over $14 million versus the prior year period, reflecting the ongoing work to resize, our mortgage operations to support the current environment.
Speaker 4: Looking forward, we expect expenses other than variable compensation will remain relatively stable around $190 million per quarter as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower headcount and improve throughput across our franchise helping the offset the ongoing inflationary pressures that persist in the market.
Looking forward, we expect expenses other than variable compensation will remain relatively stable.
Operator: This call is being recorded on Friday October 20, 2023.
Erik Yohe: I would now like to turn the conference over to Erik Yohe with Hilltop Holdings. Please go ahead. Thank you operator.
Round $191 million per quarter is the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower head count and improve throughput across our franchise and helping to offset the ongoing inflationary pressures that persist in the market.
Erik Yohe: Before we get started please note that certain statements during today's presentation that are not statements of historical facts including statements concerning such items as their outlook, business strategy, future plans, financial condition, allowance for credit losses, liquidity and sources of funding, the impact and potential impacts of inflation, 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 risk and uncertainties.
I'm moving to page 13.
Speaker 4: Third quarter average, HFI loans equated to $8 billion. Stable with second quarter, 2023 levels. On a period in basis, HFI loans decline versus the second quarter of 2023 by $150 million. Everybody climbs in mortgage warehouse lending and the net declines in the one-to-four family mortgage portfolio.
Third quarter average <unk> loans equated to $8 billion stable with second quarter 2023 levels on a period end basis loans decline versus the second quarter of 2023 by $150 million driven by declines in mortgage warehouse lending and the net declines in the one four family mortgage portfolio.
Speaker 4: We expect that low and growth will continue to slow into 2024 as one of the four family retention levels remain low and commercial lending activity continues to contract.
We expect that loan growth will continue to slow into 2024 as one to four family retention levels remain low and commercial lending activity continues to contract.
Erik Yohe: 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 as preliminary and based upon data available at this time except to the extent required by law we expressly display any obligation to update earlier statements as a result of new information.
Speaker 4: Currently, we are expecting full-year average bank loan growth of 2 to 4 percent during 2023, excluding mortgage warehouse lending and any retained mortgages from pride lending.
Currently we are expecting full year average bank loan growth of 2% to 4% during 2023, excluding mortgage warehouse lending and any retained mortgages from prime lending.
Turning to page 14.
Speaker 4: Overall, credit quality has remained resilient through the third quarter. That said, during the period, we did have a few credits moving a special mention as those customers cash flows and resulting coverage ratios have deteriorated.
Overall credit quality has remained resilient through the third quarter.
That said during the period, we did have a few credits move into special mention as those customers cash flows and resulting coverage ratios have deteriorated.
Erik Yohe: Additionally this presentation includes certain non-gap measures including tangible common equity and tangible book value per share. The reconciliation of these measures to the nearest gap measure may be found in the appendix to this presentation which is posted on our website at ir.hilltop-holdings.com.
Speaker 4: We're working with those customers and monitoring their performance closely to ensure that we take prudent steps to manage our exposure over time.
We're working with those customers and monitoring their performance closely to ensure that we take prudent steps to manage our exposure over time.
Speaker 4: The show on the bottom left chart, we recognize net recoveries of $1.6 million during the third quarter.
As shown in the bottom left chart recognized net recoveries of $1 $6 million during the third quarter.
Jeremy Ford: With that, I will now turn the presentation over to President and CEO Jeremy Ford. Thank you Eric and good morning. For the third quarter, Hilltop reported net income of $37 million or 57 cents per deluded share. Return on average assets for the period was 0.9 percent and return on average equity was 7.1 percent. This was a favorable quarter for the organization despite escalating interest rates and market pressures within each business. Hilltop produced solid consolidated profitability and continued to grow its book value with our conservative liquidity management. The dedication and adaptability of our teams in this uncertain environment has been commendable.
Speaker 4: Further, the graph in the upper right highlighted the NPE level to have remained relatively stable. In the third quarter of 2022, providing additional support, is at this point the cycle remains reasonably benign.
Further the graph in the upper right highlighted NPA levels have remained relatively stable in the third quarter of 2022, providing additional support is at this point in the cycle remains reasonably benign.
Speaker 4: Currently, we're not seeing any prevailing trends that cause us outsized concern.
Currently we're not seeing any prevailing trends that caused those outsized concern.
Speaker 4: Our monitoring, our loans and borrowers closely is higher interest rates, potentially lower utilization rates in certain seconds of commercial real estate, and an expected slowdown in economic activity could have a negative impact on our clients and our portfolio.
We are monitoring our loans and borrowers closely as higher interest rates potentially lower utilization rates in certain segments of commercial real estate and an expected slowdown in economic activity could have a negative negative impact on our clients and our portfolio.
Speaker 4: As is shown on the graph, the bottom right of the page, the allowance for credit loss coverage at the bank ended the third quarter at 1.41%, including mortgage-were house lending.
As is shown on the graph the bottom right of the page the allowance for credit loss coverage at the bank ended the third quarter at 141%, including mortgage warehouse lending.
Jeremy Ford: I believe our proactive measures, strategic initiatives and the strength of our franchise position Hilltop for resiliency in this challenging environment and sustained growth over the long term. For the quarter, Plains Capital Bank generated $53 million of pre-tax income on $13.3 billion of assets, representing a return on average assets of 1.2 percent. Average loans at the bank were relatively stable from the second quarter as slower client activity, particularly in commercial real estate was partially offset by reduced paydowns.
Turning to page 15.
Speaker 4: As we move into the fourth quarter of 2023, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy.
As we move into the fourth quarter of 2023, there continues to be a lot of uncertainty in the market regarding interest rates inflation and the overall health of the economy.
Speaker 4: That said, we revised some of our outlook metrics to reflect the shorter window of time remaining in 2023.
That said, we revised some of our outlook metrics to reflect the shorter window of time remaining in 2023.
Speaker 4: We are pleased with the work that our team has delivered to position our company for times like these. And our team made to cross our franchise remain 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, and delivering long-term spot-cola value.
We are pleased with the work that our team has delivered to position our company for times like these and our teammates across our franchise 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 and delivering long term stockholder value.
Jeremy Ford: Higher borrowing costs and increased equity requirements needed to borrow have impacted the pipeline and we expect this trend to continue until rates stabilize whereby pricing can normalize and transaction volume should pick up. Credit quality remains paramount to our bank and we will continue to approach credit risk in the same judicious manner Although we saw a minor amount of negative credit migration, the bank had a decline in non-performing assets and realized the net recovery in the quarter.
Speaker 4: current outlook for 2023 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on future quarterly calls.
Current outlook for 2023 reflects our current assessment of the economy and the markets, where we participate further as the market changes and we adjust our business to respond we will provide updates to our outlook on future quarterly calls.
Speaker 4: Operator that concludes our prepared comments and will turn the call back to you for the Q&A section of the call.
Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.
Speaker 1: Thank you. Ladies and gentlemen, we will now begin the question answer session. Should you have a question, please press the star followed by the one on your catch train phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the
Thank you.
Jeremy Ford: Average bank deposits remain relatively stable during the quarter at $11.3 billion. So we continue to see a migration from non-interest bearing deposits into money market and CD accounts, which contributed to a 31 basis point increase in deposit cost. This increase is in line with expectations given the mid shift in prior deposit data guidance. Overall, our bank continues to perform well despite an income pressure and softness in the loan pipeline.
Ladies and gentlemen, we will now begin the question answer session should you have a question. Please press star followed by the one thing you.
You will hear a three time from technology in your question.
Should you wish to decline from declining purchase please press star followed by Vicki <unk>.
Speaker 1: If you're using this data phone, please lift the hands up before pressing any keys.
You're using a speaker please lift the handset before pressing images.
For the first question.
Jeremy Ford: While we do expect the balance sheet to contract for a period, the business remains focused on bottom line profitability by managing margins where possible, being thoughtful about appropriate credit risk and tightening down on expenses.
Jeremy Ford: Moving to prime lending, the residential mortgage industry remains under pressure given the increase in the 10 year rate and the resulting highest mortgage rates in over two decades. Additionally, other negative industry factors include a persistently low supply of retail housing, elevated home prices, and surplus capacity within the mortgage origination sector. These dynamics have collectively exerted substantial pressures on lender loan volumes, home buyer confidence, and secondary margins.
Speaker 1: Just as a reminder to register for a question, please press the staff followed by the one on your touch. Don't say one moment for the first question.
Just a reminder to register for a question. Please press the star followed by one on you touched on this one.
One moment for the first question.
Speaker 1: Thank you. Our first question comes from Thomas Wendler from the Steven Zinc. Please go ahead, your line is open.
Thank you Chris.
<unk> comes from Thomas <unk> from Stephens, Inc. Please go ahead your line is open.
Hey, good morning, everyone.
Jeremy Ford: To weather these challenges, prime lending has taken several strategic and tactical measures to ensure resiliency and sustainability. These include a focus on optimizing operations and corporate staffing levels, a judicious approach to variable expenses, and a re-evaluation of brick and mortar utilization. We have begun to see the benefits of these initiatives in our expenses and in our margins, evident by the lower pre-pex loss in the business year over year, despite lower origination volumes and gain on sale margins.
Speaker 5: I just wanted to touch on the CNI contraction we saw last quarter. Can you see some color there? Was it lower utilization or what drove those lower balances?
Good morning.
I just wanted to touch on the CNI contraction, we saw last quarter can you give us some color there was it lower utilization or what drove those lower balances.
C&I includes our our mortgage warehouse lending business and by virtue of that we saw a decline there just over $90 million in the quarter.
<unk> drove the majority of it.
Speaker 5: Thank you. Then just moving over to broker dealer, typically we see a strong close for the year in 4Q. Should we be expecting the same there this year?
Thank you.
Then just moving over to broker dealer.
Typically we see a strong close for the year in <unk> should we be expecting the same there this year.
Jeremy Ford: Prime lending originated $2.2 billion in volume, a decline of 26% from the same period prior year. Gain on sale margin during the period was relatively stable to the second quarter at 198 basis points, though down from 218 basis points in the third quarter of 2022. While the gain on sale margin is still lower than the same period prior year, origination fees have increased from 131 basis points to 185 basis points as more borrowers are choosing to buy down the higher mortgage rates.
Speaker 3: I think that the public finance business typically builds throughout the year and has a pretty solid fourth quarter. So I think in public finance we would, we're optimistic about that. I'll be it, you know, I think that we did have a pretty strong quarter of hilltop securities in our structured finance business, which is volatile. And we could see that decline from from this third quarter.
I think that the public finance business typically builds throughout the year and has a pretty solid fourth quarter.
So I think in public finance, we would we're optimistic about that albeit I think that we did have a pretty strong quarter at hilltop securities and our structured finance business, which is volatile and we could see that.
The decline from from this third quarter.
Speaker 5: Okay, thank you. I appreciate the color. And then one final one for me, with the stock now training near tangible value, what's your appetite for a buyback?
Okay. Thank you I appreciate the color and then.
One final one for me with the stock now trading near tangible book value, what's your appetite for buyback.
Jeremy Ford: There was a positive trend in fixed costs during the period, as they declined by $16 million or 21% from prior year. This is directly related to the resizing efforts previously mentioned. Notwithstanding the cost reductions, prime lending continues to focus on enhancing its sales force by recruiting quality loan originators that can bring on profitable volume in this difficult mortgage market.
Speaker 3: We're constantly evaluated and we've shown that we will act when we think it's appropriate. I think also in the context of the environment, we've been cautious this year.
Where we were constantly evaluate it and we've shown that we will act when we think it's appropriate I think also in the context of the environment, we've been cautious this year.
Jeremy Ford: In addition to helping us navigate through near-term challenges, we believe that the strategic changes and improvements undertaken will position prime lending for higher margins and increase profitability when the industry recovers. We have confidence in our leadership theme and are encouraged by the current favorable expense trends in the business. Business.
Alright, I appreciate all the color.
Thank you.
Speaker 1: Thank you. Our next question comes from Woody Lay from KBW. Please go ahead. Your line is now open.
Thank you. Our next question comes from Wood from K B W. Please go ahead. Your line is now open.
Hey, good morning, guys.
Good morning Juan.
Speaker 6: Wanted to start on the increase to a special mention loans. And any color you could give on sort of what drove that increase quarter of a quarter.
Jeremy Ford: Hilltop's securities generated pretext income of $22 million on net revenues of $119 million during the quarter. Pretext profit and margins improved compared to last year's third quarter due to an increase in contribution to revenue from higher margin businesses, primarily associated with our sweep income that has benefited from higher short-term rates. Additionally, our structured finance business rates of benefits of more volume from certain state housing programs, most notably in Florida.
Wanted to start on the increase to vessel mentioned wounds and any color you could give on on sort of what drove that increase quarter over quarter.
Speaker 4: You know, I think we had a few credits move over one in particular out of our CNI business that again, we're just monitoring the cash flows, we're monitoring across our portfolio. They've seen some deterioration again, so we're...
I think we have we had a few a few credits move over.
One in particular out of our C&I business that again, we're just monitoring the cash flows are monitored across across our portfolio.
They have seen some deterioration.
Again, so we're.
Speaker 4: as is noted there in Special Mission, we're monitoring it much more closely and following up very regularly with the client, working with them to try to help them work through a challenging environment here, but nothing, again, no large portfolio or other concentrations of growth to real estate book, principally a C&I client that is experiencing some cash flow challenges.
As noted there in special mentioned.
Jeremy Ford: This highlights the quality of our team and the relationships they have fostered with different state housing agencies. Hilltop's securities has performed exceptionally well this year, which is a testament to the talented leadership and producers across its businesses.
We're monitoring it much much more closely in following up the irregular with the client working with them to try to help them work through a challenging environment here, but.
Nothing.
No no large portfolio or other concentrations gross real estate book, principally a C&I clients it.
Jeremy Ford: Moving to page 4. Hilltop maintains robust capital levels for the Common Equity Tier I capital ratio of 18.6% and our tangible book value for share increase from Q3 2022 by 54 cents to $27.67. Our capital ratio and tangible book value have grown as a result of our conservative securities management, declining balance sheet, and durable profitability. In summary, while industry headwinds are adversely impacting our bank and mortgage businesses, this quarter's improved results begin to illustrate the strength of Hilltop's franchise and the hard work by our team. We will continue to prioritize the strength of our balance sheet, the best serve our clients, and best position hilltop.
Is experiencing some cash flow challenges.
Speaker 6: got it. So if I look on the ACL breakdown on slide six and the 2.7 release related to economic conditions, is that related to the Moody's forecasters? Is that driven by qualitative factors in the car you can give them?
Got it.
And so if I look on the ACL breakdown on slide six in the two seven release related to the economic conditions is that related to that to the Moody's forecast or is that driven by qualitative factors any color you can give there.
Speaker 4: That's the Moody's forecast, just period on period. We maintain consistently the S7 scenario. So we were using the S7 scenario both prior quarter and current quarter. And just modest improvements in the overall economic outlook, both timing and depth of potential recession in the future. But not a qualitative assessment.
That's that's the Moody's Moody's forecast just period on period.
We maintained consistently the seven scenario. So we were using the seven scenario both prior quarter and current quarter.
And just modest improvements in the overall economic outlook, both timing and depth of potential recession in the future.
Will: With that, I will now turn the presentation over to Will to discuss the financials. Thank you, Jeremy. I'll start on page 5.
Not a qualitative assessment.
Will: Jeremy discussed for the third quarter of 2023 Hilltop reporting consolidated income, tribute would come in stockholders of $37 million, equating to 57 cents per diluted share. Portage results highlight the successful expense work we've been executing across the franchise and most acutely the prime lending, coupled with solid credit metrics that remain resilient at least through this point in the cycle.
Speaker 6: got it. And then last for me, just another question on capital. I mean, the EP1 continues to increase from here. Capital levels are super strong. It sounds like, you know, five acts in this current environment might be unlikely. Is the top priority for deploying that capital through M&A or any thoughts there?
Got it.
And then last for me just.
Another question on capital I mean, CET, one continued to increase from here your capital levels are super strong it sounds like.
Buybacks in this current environment might be unlikely as that is a top priority for deploying that capital through M&A or.
Any thoughts there.
Speaker 3: We believe that through the cycle, deploying capital and M&A will be the highest return.
We believe that through the cycle deploying capital and M&A will be the highest return.
Will: To address credit and the changes in allowance, I am turning the page 6. Will tops allowance for credit losses increased during the quarter at $1.5 million to $110.8 million. Improvement in the macroeconomic outlook, coupled with net recoveries of prior losses in the period, materially offset the impacts of loan growth and collected portfolio changes. Allowance for credit losses of $111 million yields an ACL to total loan data by ratio of 1.35% as of September 30, 2023.
Speaker 3: You know, and so we're actively evaluating that. I think on the capital front in the near term, as we've seen, you know, muted loan growth, and you know, we felt some contraction in our balance sheet in the quarter. And then we also be generating capital and earnings. You know, I would see our capital continue to go higher.
And so we're actively.
Evaluating that.
I think on the capital front in the near term as we've seen you know a muted.
Loan growth.
And we saw some contraction in our balance sheet in the quarter and then we'll also be generating capital and earnings.
See our capital continue to go higher.
Alright, thanks for the color.
Thank you. Thank you.
Speaker 1: Thank you. Our next question comes from Grody from Piper Sandler. Please go ahead to your line as open.
Thank you. Our next question comes from Greg <unk> from Piper Sandler. Please go ahead. Your line is open.
Will: As we've seen over time, ACL can be volatile as it is impacted by economic assumptions as well as changes in the mix and makeup of the credit portfolio. We continue to believe that the allowance for credit losses could be volatile and the future 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.
Hey, good morning, guys.
Good morning.
Speaker 7: So I just wanted to kind of touch on some of the NIMM and balance sheet topics here, specifically non-intersparing.
So I just wanted to kind of touch on some of the NIM and balance sheet topics here.
Specifically noninterest bearing.
Speaker 7: Obviously it took another step down this quarter, which is kind of what we've seen across the industry, but Just wondering if you guys have any color on on trend so far this quarter And what kind of you're expecting going forward and maybe when you think balances might level out on non-experience
Obviously it took another step down this quarter, which is kind of what you're seeing across the industry.
Just wondering if you guys have any color on trends so far this quarter and what kind of you're expecting going forward and maybe when you think balances might level out on noninterest bearing.
Will: Given the current uncertainties regarding inflation, interest rates, the future outlook for GDP growth and unemployment, we do expect that volatility in the ACL could be heightened over the quarter, as provided in the previous quarter. We wanted to show a little more detail into our CRE portfolio and the allowance distribution across some of the key loan segments.
Speaker 4: Yeah, so you said that we've seen a very reasonably consistent trend down in non-intersparing from a mixed perspective. We expect that likely continues. We've got
Yes, So you said that we've seen.
Let's say a reasonably consistent trend down in noninterest bearing from a mix perspective, we expect that likely continues we've got.
Speaker 4: a good solid base of non-intersparing related to our treasury services.
Good solid base of noninterest bearing related to our Treasury services.
Speaker 4: offerings that we provide to customers that said as rates move higher, obviously the appetite from customers to move their access to positives into interest-bearing products continues to grow. And so we would expect to see non-interest-bearing deposits decline, at least from our perspective in the next couple of quarters.
Will: It's September 30th. The CRE portfolio is total approximately 3.3 billion, which we segregate into owner and non-owner occupied or investor real estate. Internally, we view owner occupied real estate more like C&I lending as for the most part repayment is driven by the operating business that owns the real estate. Non-owner occupied real estate makes up 57% of the CRE book. And as is noted in the upper right hand chart, is diversified across multiple income producing property types.
Offerings that we provide to customers that said.
As rates move higher obviously, the appetite from customers to move their excess deposits into interest bearing products continues to grow.
So we we would expect to see noninterest bearing deposits decline at least from our from our perspective. The next couple of quarters.
Speaker 4: and really remixing into interest bearing. So our view is deposits remain reasonably steady. I instable from here for the next couple of quarters, but we continue to remix from interest bearing into interest bearing products over time.
And really remixing into interest bearing so.
Our view is deposits remained reasonably steady and stable from here for the next couple of quarters, but we continue to remix from noninterest bearing into <unk>.
Will: In the bottom table, we provide a breakout of non-owner occupied office and retail within the portfolio to highlight the differentiation in ACO coverage by loan segment type. Our view to date is that the office and retail markets across our footprint represent the highest exposure to both recession, absorption and valuation risk in the portfolio. As such, you can see that those loan segments maintain a larger ACO coverage ratios than other non-owner occupied real estate products.
Interest bearing products overtime.
Speaker 7: Okay, great, that's helpful. And then I guess just on the, on the, on the Net I, and the NAM, obviously it'll maybe a little bit.
Okay, Great that's helpful.
And then I guess just on the on them on the NII.
And the NIM.
Have you seen maybe a little bit.
Speaker 7: If your guys tune a half to two to five percent, I guess, the full year. Are you guys implying maybe that in I'm four key takes, a similar step down as we saw this quarter? I guess on a smaller balance sheet and the NIM kind of holds in a little bit better.
If your guidance $2, 5% to 2% to 5% I guess for the <unk>.
Full year are you guys, implying maybe that ni <unk> takes a similar step down as we saw this quarter.
On a smaller balance sheet and the NIM kind of holds in a little bit better.
Will: We're currently monitoring the entire portfolio closely and not seeing any systemic risk emerged as of the third quarter. That said, we do expect that the outgoing cash flow challenges facing existing and new projects driven by higher interest rates and ongoing inflation could lead to further credit migration over time.
Speaker 4: I think from, you know, so we'll talk about NII first. So from an NII perspective, we're expecting it will continue to trend modestly lower, not a significant step function lower, but modestly lower as you noted, the balance sheet has contracted modestly and from an overall yields perspective, we are expecting the positive other costs to continue to move higher. So...
Yes, I think so we'll talk about NII first so from an NII perspective.
We're expecting it will continue to trend modestly lower not a significant step function lower but modestly lower.
As you noted the balance sheet has has contracted modestly.
Will: I'm moving to page 8.
And from from an overall yields perspective, we are expecting deposit cost to continue to move move higher so.
Will: That interest income in the third quarter equated to $116 million, including $2.2 million of purchase accounting accretion. Versus the prior year third quarter, net interest income decreased by $7.8 million or 6%, driven primarily by higher yields on the positive. As we expected, net interest margin declined marginally versus the second quarter of 2023, but one basis point to 302 basis points.
Speaker 4: without a significant shift or change in the Fed funds rate, our loan yields.
Without it without a significant shift or change.
In the fed funds rate, our loan yields are moving higher but moving higher to much more.
Speaker 4: are moving higher, but moving higher to much more.
Speaker 4: Partly paid, versus where the positive yields are. And we do expect to see the positive yields move higher. So from an NIAC perspective, we'd expect it to continue to step lower. From a NIM perspective, we'd also expect that to continue to turn a lower, I think we'd said.
Part of it pace versus versus where deposit yields are and we do expect to see expect to see those deposit yields move higher so from an NII perspective, we would expect it to continue to step lower from a NIM perspective, we would also expect that to continue to turn lower I think we've said.
Will: Our current outlook reflects a scenario whereby Fed funds moves to between 550 and 575 by the end of 2023 and remains stable for the majority of 2024. Further rate increases coupled with ongoing deposit competition could cause an eye in them to decline further during the fourth quarter and in 2024.
Speaker 4: that NIM over time likely moves toward 295. And I think depending on the number of rate movements through the Federal Reserve, which with each rate movement, we've said we would expect further deterioration in NIM. I think we're expecting NIM to be between 290 and 3%. We're given our current rate expectations that we outlined in our prepared comments.
NIM over time likely likely moves towards $2 95, and I think depending on the number of rate movements through the federal reserve, which with each rate movement. We said, we would expect further deterioration in NIM.
We're expecting NIM to be between 293%.
Will: I'm moving to page 9. In the chart, we highlight the approximately $7.3 billion of available liquidity sources that he'll not maintain as of September 30th. We'll consider the Federal Reserve's discount window to be a source of liquidity. We've got planned to leverage that program under our internal liquidity modeling efforts, and as such it's noted below our other collateralized borrowing sources. Further, comparable liquidity sources as of December 31st, 2022 equated to just over $7 billion and remained relatively stable throughout the prior quarters of the year.
Even given our current rate expectations that we outlined in our prepared comments.
Speaker 7: That was very helpful. I guess the last thing I wanted to hit on was just the provision going forward. Obviously you guys tighten the guidance a little bit this quarter. I'm just kind of wondering what you guys are seeing into 2024 as it relates to the provision line and charge-offs and it sounded like, I mean just based on the guidance that you guys are a little bit more optimistic or the scenarios a little more optimistic on the economy from here.
And that was very helpful and I guess the last thing I wanted to hit on was just the provision going forward. Obviously, you guys tighten the guidance a little bit this quarter.
Just kind of wondering what you guys are seeing into 2024 as it relates to the.
The provision line and charge offs and it sounded like I mean, just based on the guidance that you guys are a little bit more optimistic or the scenarios a little more optimistic on the economy from here.
Speaker 4: Yeah, I think, you know, as we're trying to say in our prepared comments, the ACL, which, you know, changes which drives the provision, can be volatile from quarter to quarter as you saw last quarter, we took a pretty significant provision just under 15 million this quarter, near zero. And so, you know, the economic outlook can move and change that obviously will impact it pretty substantially.
Yes, I think as I tried to say in our prepared comments, the ACL, which changes which drives the provision can be volatile from quarter to quarter. As you saw last quarter, we took a pretty significant provision.
Will: As is shown in the chart, it's September 30th, it will top maintain $1.3 billion of excess reserves of the Federal Reserve. Additionally, in the bottom left chart, we provide detail on the pace of the deposit beta changes to date, noting that our current through the cycle beta are intersparing deposits to 62%. Further, we continue to expect that the marginal beta for any additional federal receipt and reserve rate actions will fall between 75 and 100 percent. As a result, we're now expecting that our through the cycle interest bearing deposit betas will be within the 60 to 70 percent range.
Just under $15 million this quarter near zero and so the economic outlook can move and change that obviously, we'll impacted.
Pretty skinny getting back a pretty substantially from us from a credit management perspective as I noted in my comments, we haven't seen any material deterioration in law of large swaths of the portfolio. As we noted we're looking at office closely we're looking at retail closely we're looking across the portfolio.
Speaker 4: from a credit management perspective, you know, as I noted in my comments, we haven't seen any material deterioration in large swath of the portfolio. As we noted, we're looking at office closely, we're looking at retail closely, we're looking across the portfolio for any negative migration as it relates to interest rates and overall interest payments relative to cash flows.
For any negative migration as it relates to interest rates and overall interest payments relative to relative to cash flows, but again to date, we haven't seen any anything systemic in the portfolio that would cause us to expect the charge off step up materially, but again, we highlight in all of our comments and try to.
Speaker 4: But again, today we haven't seen anything systemic in the portfolio that would call us to expect to charge off step up materially. Again, we highlight in all of our comments and try to put the announcement out there that the allowance and therefore provision can be volatile based on the economic scenarios quarter to quarter. Okay, I understand that's helpful.
Will: We're going to get a quarter of 2023. On an ending balance basis, the positive decrease by 61 million dollars to 11.1 billion from the prior quarter, largely driven by decline in broker dealer suite deposits, Hillary Planes capital bank. As a result of our ongoing pricing efforts, interest bearing deposit costs rose to 323 basis points and increases 39 basis points from the prior quarter. This is our expectation and interest bearing deposit costs will continue to move higher for the balance of 2023 given our stated views on the path of potential rate increases from the federal reserve and the updates we've made to our pricing approach.
Put the announcement out there that the allowance and therefore provision can be volatile based on the economic scenarios quarter to quarter.
Okay understood. That's helpful. Thanks, guys.
Thank you.
Thank you.
Speaker 1: Ladies and gentlemen, this concludes today's conference call. We thank you for your participation and ask you to.
Further questions, ladies and gentlemen. This concludes today's conference call. We thank you for your participation and ask you to please disconnect your lines.
Will: As it relates to the positive balances and costs, we remain focused on balancing our competitive position with a long term customer relationships, while we continue to focus on prudent management of managers that didn't come over time.
Speaker 8: The the 8, that the eight F, eight F, eight F, eight F, eight F eight
Okay.
[music].
Will: However, the current environment remains challenging. And as noted earlier, we expect that the intensity of competition for deposits will continue to pressure rate higher over the coming quarters.
Will: I'm moving to page 11. A little non-interested income for the third quarter of 2023 equated to $197 million. The quarter mortgage-related income and fees decreased by $9 million versus the third quarter of 2022 driven by the ongoing challenges in mortgage banking, whereby the combination of higher interest rates, home price inflation, limited housing supply, and ongoing over capacity in terms of mortgage originators across the US, driven volumes, and margins materially lower. Further, versus the prior year, third quarter purchased mortgage volumes decreased by $741 million or 26%, and refinanced volumes decreased by $59 million or 28%. During the third quarter of 2023, gain on sale margins remained within the tight range we've seen over the last 12 months, remaining at what we believe are unsustainably low levels.
Okay.
Yeah.
Speaker 9: Yeah.
Okay.
Okay.
Yeah.
[music].
Okay.
Will: We continue to expect that a full recovery in margins will occur slowly and likely will not be a straight line as industry capacity and other constraints remain. During the third quarter, PVA lock volumes increased substantially from second quarter 2023 levels to just under $3 billion. Lock volumes were substantially impacted by certain states providing additional state funding to support their housing, authorities, and down payment assisted programs. While volumes are very strong, secondary spreads in the market did contract substantially reflecting the volatility in the current rate environment, causing net revenues to decline versus the prior year period. Somewhat offsetting the decline in structured finance revenues was an increase in fixed income capital markets to the revenues, which yielded a relatively stable other income versus the prior year period.
[music].
Yes.
[music].
Okay.
Yes.
Yes.
Yes.
Will: As we've noted in the past, it's important to recognize that both the fixed income services and structured financial businesses at Hilltop securities can be volatile from period to period as they're impacted by interest rates, overall market liquidity, and production trends.
Will: It's turning to face dwells. Non-interest expenses decreased from the same period in the prior year by $29 million to $260 million. The increase in expenses versus the prior year third quarter will support by the increases in variable compensation of approximately $14 million at Prime lending and Hilltop securities, which was linked to lower fee revenue generation and revenue mix contribution.
Will: Further, the expense of the Prime lending introduced by over $14 million versus the prior year period, reflecting the ongoing work to resize or mortgage operations to support the current environment. Looking forward, we expect expenses other than variable compensation will remain relatively stable around $190 million per quarter as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower headcount and improve throughput across our franchise, helping the offset the ongoing inflationary pressures that persist in the market.
Will: Moving to page 13, third quarter average HFI loans equated to $8 billion, stable with second quarter 2023 levels.
Will: On a period in basis, HFI loans decline versus the second quarter of 2023 by $150 million for everybody climbs in mortgage warehouse lending and the net declines in the one-to-four-family mortgage portfolio.
Will: We expect that loan growth will continue to slow into 2024 as one-to-four-family retention levels remain low and commercial lending activity continues to contract. Currently, we are expecting full-year average bank loan growth of 2-4 percent during 2023 excluding mortgage warehouse lending and any retained mortgages from Prime lending.
Will: Turning to page 14. Overall, credit quality has remained resilient through the third quarter. That said, during the period, we did have a few credits moving to special mention as those customers cash flows and resulting coverage ratios have deteriorated.
Will: We're working with those customers and monitoring their performance closely to ensure that we take prudent steps to manage our exposure over time. As shown in the bottom left chart, we recognize net recoveries of $1.6 million during the third quarter. Further, the graph in the upper right highlights at the NPA levels to have remained relatively stable in the third quarter of 2022, providing additional support to this point the cycle remains reasonably benign. Currently, we're not seeing any prevailing trends that cause us outsized concern.
Will: We are monitoring our loans and borrowers closely as higher interest rates, potentially lower utilization rates and certain savings of commercial real estate, and an expected slowdown in economic activity could have a negative impact on our clients and our portfolio. As shown in the graph, the bottom right of the page, the allowance for credit loss coverage at the bank, into the third quarter at 1.41%, including mortgage warehouse lending.
Will: As we move into the fourth quarter of 2023, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy. That said, we revised some of our outlook metrics to reflect the shorter window of time remaining in 2023. We are pleased with the work that our team has delivered to position our company for times like these, and our teammates across our franchise remain focused on delivering great customer service to our clients, attracting new customers through our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term stockholder value.
Will: Current outlook for 2023 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes, and we adjust our business to respond, we will provide updates to our outlook on future quarterly calls.
Operator: 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.
Operator: Ladies and gentlemen, we will now begin the question answer session. Should you have a question, please press the star followed by the one on your catch train phone. You will hear a three-tone prompt acknowledging your request.
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Operator: One moment for the first question. Just as a reminder, to register for a question, please press the star followed by the one on your catch train phone. One moment for the first question.
Operator: Thank you.
Thomas Wendler: Our first question comes from Thomas Wendler from the 17th.
Thomas Wendler: Please go ahead. Your line is open. Hey, good morning, everyone. Good morning.
Thomas Wendler: I just wanted to touch on the CNI contraction. We saw last quarter.
Will: Can you give us some color there? Was it lower utilization or what drove those lower balances? CNI includes our mortgage warehouse funding business and I'm sure that we saw a decline there just over $90 million in the quarter. I drove the majority up. Thank you.
Will: Then just moving over to broker dealer, typically we see a strong close for the year in 4Q.
Will: Should we be expecting the same there this year? I think that the public finance business typically builds throughout the year and has a pretty solid fourth quarter. So I think in public finance, we're optimistic about that. I'll be it. You know, I think that we did have a pretty strong quarter of hilltop securities in our structure finance business, which is volatile. And we could see that decline from the third quarter.
Thomas Wendler: Thank you. I appreciate the color.
Thomas Wendler: And then one final one for me.
Will: With the stock now, trading near tangible value, what's your appetite for a buyback? We're, you know, we were constantly evaluated and we've shown that we will act when we think it's appropriate. You know, I also in the context of the environment. We've been cautious this year. All right, I appreciate all the color.
Thomas Wendler: Thank you.
Wood Lay: Our next question comes from Woodley Lay from KVW.
Wood Lay: Please go ahead. Your line is no I've been. Hey, good morning, guys. Good morning.
Wood Lay: Wanted to start on the increase to a special mention loans and any color you could give on sort of what drove that increase quarter of a quarter. You know, I think we had a few credits move over one in particular out of our CNI business that again, we're just monitoring the cash flows or monitoring across our portfolio. They've seen, they've seen some deterioration. Again, so we're, as is noted there in special mention, you know, we're monitoring it much, much more closely and following up very regularly with the client, working with them to try to help them work through a challenging environment here, but nothing, you know, again, no, no large portfolio or other concentrations of growth to real estate book, principally a CNI client that is experiencing some cash flow challenges. Got it.
Will: So if I look on the ACL breakdown on slide six and the 2.7 release related to economic conditions, is that related to the Moody's forecasters? Is that driven by qualitative factors in the car you can get there? That's that's the Moody's forecast just period on period.
Will: We maintain consistently the S7 scenario. So we were using the overall economic outlook both timing and depth of potential recession in the future, but not not a qualitative assessment. Got it.
Will: And then last for me, just another question on capital. I mean, the EP1 continues to increase from here. Capital levels are super strong.
Will: It sounds like, you know, five acts in this current environment might be unlikely. Is the top priority for deploying that capital through M&A or any thoughts there? We believe that through the cycle, deploying capital in M&A will be the highest return, you know, and so we're actively evaluating that. I think on the capital front in the near term, as we've seen, you know, muted loan growth and, you know, we sell some contraction and our balance sheet in the quarter.
Will: And then we also be generating capital and earnings, you know, I would see our capital continue Alright, thanks for the caller.
Wood Lay: Thank you, thank you.
Wood Lay: Thank you.
Greudite: Our next question comes from Greudite, from Piper Sandler, please go ahead to your line as open. Hey, morning guys. Morning.
Greudite: So I just wanted to kind of touch on some of the benign and balance sheet topics here, specifically non-intersparing. Obviously it took another step down this quarter, which is kind of what we've seen across the industry.
Will: But I'm just wondering if you guys have any color on on trends so far this quarter and what kind of you're expecting going forward and maybe when you think balances might level out on non-intersparing. Yeah, so you you said that we've seen a fairly reasonably consistent trend down in non-intersparing from a mixed perspective. We expect that likely continues. We've got a good solid base of non-intersparing related to our treasury services offerings that we provide to customers.
Will: That said, as rates move higher, obviously, the appetite from customers to move their excess deposits into interest bearing products continues to grow. And so we, you know, we would expect to see non-intersparing deposits decline, at least from our perspective in the next couple of quarters, and really remixing into interest bearing. So our view is deposits remain reasonably steady and stable from here for the next couple of quarters, but we continue to remix from non-intersparing into interest bearing products over time. Okay, great. That's helpful.
Will: And then I guess there's something on the on the net eye and the NIM. Obviously, look, maybe a little bit. If you're guys two and a half to two to five percent, I guess, the full year, are you guys implying maybe that NII 4K takes a similar step down as we saw this quarter? I guess on a smaller balance sheet than the NIM kind of holds in a little bit better.
Will: Yeah, I think from, you know, so we'll talk about NII first. So from an NII perspective, we're expecting it will continue to trend modestly lower, not a significant step function lower, but modestly lower, as you noted, the balance sheet has contracted modestly and from an overall yields perspective, we are expecting deposit costs to continue to move higher. So without a significant shift or change in the Fed funds rate, our loan yields are moving higher, but moving higher to much more part of the pace versus versus where the deposit yields are.
Will: And we do expect to see the expected those deposit yields move higher. So from an NII perspective, we'd expect it to continue to step lower. From a NIM perspective, we'd also expect that to continue to turn lower. I think we'd said that NIM over time likely moves toward 295. And I think, depending on the number of rate movements through the Federal Reserve, which with each rate movement, we've said we would expect further deterioration in NIM. I think we're expecting NIM to be between 290 and 3%, given our current rate expectations that we outlined in our prepared comments.
Greudite: Yeah, that was very helpful.
Will: And I guess the last thing I wanted to hit on was just the provision going forward. Obviously, you guys tightened the guidance a little bit this quarter. I'm just kind of wondering what you guys are seeing into 2024 is it relates to the provision line and charge options and it sounded like, I mean, just based on the guidance that you guys are a little bit more optimistic or the scenarios a little more optimistic on the economy from here.
Will: Yeah, I think, you know, as we're trying to say in our prepared comments, the ACL, which, you know, changes which drives the provision can be volatile from quarter to quarter. As you saw last quarter, we took a pretty significant provision just under 15 million this quarter near zero. And so, you know, the economic outlook can move and change that obviously will impact it pretty can impact it pretty substantially from a credit management perspective.
Will: You know, as I noted in my comments, we haven't seen any material deterioration in large swaths of the portfolio as we noted, we're looking at office closely. We're looking at retail closely. We're looking across the portfolio for any negative migration as it relates to interest rates and overall interest payments relative to those cash flows. But again, today we haven't seen anything systemic in the portfolio that would call us to expect to charge off step up materially.
Will: Again, we highlight in all of our comments and try to put the announcement out there that the allowance and therefore provision can be volatile based on the economic scenarios quarter to quarter. Okay, I understand that's helpful.
Greudite: Thanks, guys. Thank you. There are no further questions.
Operator: Ladies and gentlemen, this concludes today's conference call. We thank you for your participation and ask you to please disconnect your lines.
Thank you.