Q4 2023 Hilltop Holdings Inc Earnings Call
[music].
Okay.
Welcome to the Hilltop Holdings fourth quarter 2020 free earnings call and webcast at this time all lines are in listen only mode.
Presentation, we will conduct a question and answer session.
At any time during this call you require immediate assistance. Please press star zero for the off rate. So this call is being recorded on Friday January 26, 2024, I would now like to turn the conference over its Eric Kirsch Executive Vice Presidents at Hilltop Holdings. Please go ahead.
Eric Kirsch: Thank you Mark and good morning.
Eric Kirsch: 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 credit risks and trends in credit allowance for credit losses.
Eric Kirsch: Quiddity in sources of funding the impact the 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.
Eric Kirsch: These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.
Eric Kirsch: 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.
Eric Kirsch: Please note that the information presented his preliminary and based upon data available at this time.
Eric Kirsch: To the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Eric Kirsch: Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share.
Eric Kirsch: 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 Tilt-up Dash holdings Dot com.
Eric Kirsch: That I would now like to turn the presentation over to President and CEO Jeremy Ford.
Jeremy B. Ford: Thank you Eric and good morning.
Jeremy B. Ford: Before we go through our fourth quarter results I'd like to take a moment to reflect on 2023 and outline our priorities for the upcoming year.
Despite hilltops profitability for the year being hampered by a historically challenging mortgage market.
Jeremy B. Ford: Outstanding performance of our employees combined with our diversified business model allowed the company to approve across a variety of areas.
Eric Kirsch: In 2023, we grew our earnings per share dividends per share and book value per share, while also strengthening our liquidity and funding positions.
Eric Kirsch: Additionally, we enhanced our future earnings potential by improving our cost structure and taking advantage of hiring opportunities given dislocation across the financial services industry.
Eric Kirsch: From a balance of standpoint, we generated average loan growth of 1% despite muted customer demand the decline in funding deposit funding and tightening of credit standards.
Eric Kirsch: This growth is a testament to our long term relationship banking approach and our ability to identify and capitalize on viable lending opportunities as competitors with strained balance sheets have pulled back.
Eric Kirsch: Conversely, our average deposit balances experienced a 7% decline.
Eric Kirsch: This trend was initially spurred by the bank failures that occurred in the first half of the year and was further exacerbated by the intense competition around deposits that persisted throughout the remainder of the year.
Eric Kirsch: Our conservative approach to growth allowed us to withstand the decline in deposits without having to significantly rely on expensive wholesale funding options.
Eric Kirsch: Which resulted in improved net interest income year over year.
Eric Kirsch: From an expense standpoint, our strategic focus on managing fixed costs, particularly in our mortgage operations, along with an enterprise wide lens on cost management resulted in a meaningful reduction in noninterest expenses year over year.
Eric Kirsch: From a credit standpoint, this year, we proactively increased our allowance for loan losses to reflect broader industry challenges and credit migration in certain portfolios, particularly CRE office.
Operator: www.thevenusproject.com Welcome to the Hilltop Holdings fourth quarter 2023 earnings call and webcast. At this time, all lines are in listen only.
Eric Kirsch: Our ongoing monitoring and this area remains a priority.
Eric Kirsch: As we enter 2024, our primary focus at the bank remains on prudent risk management, and maintaining strong capital and liquidity in order to navigate the fluctuating economic landscape and take advantage of organic and inorganic growth opportunities.
Operator: 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. This call is being recorded on Friday, January 26th, 2024. I would now like to turn the conference over to Erik Yohe, Executive Vice President at Hilltop Holdings.
Eric Kirsch: Concurrently we are committed to steering our mortgage business and a trajectory towards profitability.
Eric Kirsch: Recognizing the mortgage cycle has endured for a longer than anticipated.
Eric Kirsch: Additionally, we are strategically positioning our business at hilltop securities to capitalize on growth opportunities and adapt to a potentially lower rate environment anticipated in the latter half of the year.
Thank you, Mark, and good morning. 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, credit risk and trends in credit, 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, These statements are based on management's current expectations concerning future events, which by their nature are subject to risk and uncertainty. Our actual results, capital, liquidity, and financial condition may differ materially from these statements due to a variety of factors, including the cautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Eric Kirsch: Moving to the fourth quarter Hilltop reported net income of $29 million or <unk> 44 per diluted share return on average assets for the period was 75 basis points and return on average equity was five 5%.
During the quarter capital Bank generated $48 million of pre tax income on $13 3 billion of assets, representing a return on average assets of one 1%.
Average loans at the bank declined slightly from the third quarter as normal seasonality occurred in national warehouse lending and balances in our single family residential portfolio decline.
The pipeline for CRE lending remains challenged and we expect that to continue into the new year as clients hold off on projects due to elevated rates and higher equity requirements.
Please note that the information presented is preliminary and based upon data available at this time, except to the extent required by law to 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 gap measure may be found in the appendix to this presentation, which is posted on our website at ir.piltop-holdings.com. With that, I would now like to turn the presentation over to President and CEO, Jeremy Ford. Thank you, Erik, and good morning.
Eric Kirsch: Our average balances.
Eric Kirsch: Our average deposit balance of $11 1 billion declined 1% during the period, primarily due to management of excess liquidity and the ability to run off more expensive broker deposits.
Eric Kirsch: In the quarter, we returned $200 million of sweep deposits back to hilltop securities and had $200 million of broker deposits run off.
Eric Kirsch: In the fourth quarter the bank did experience some negative migration in asset quality, primarily from a single credit.
Eric Kirsch: Nonperforming loans increased to <unk>, 8% as a result of a $33 million, Texas hotel loan being placed on non accrual.
Jeremy B. Ford: Before we go through our fourth quarter results, I'd like to take a moment to reflect on 2023 and outline our priorities for the upcoming year. Despite Hilltop's profitability for the year being hampered by a historically challenging mortgage market, the outstanding performance of our employees, combined with our diversified business model, allowed the company to improve across a variety of areas. In 2023, we grew our earnings per share, dividends per share, and book value per share, while also strengthening our liquidity and funding position. Additionally, we enhanced our future earnings potential by improving our cross-structure and taking advantage of hiring opportunities given the dislocation across the financial services industry. From a balance standpoint, we generated average loan growth of one percent despite muted customer demand, a decline in deposit funding, and tightening of credit standards. This growth is a testament to our long-term relationship banking approach and our ability to identify and capitalize on viable lending opportunities as competitors with strained balance sheets have pulled back. Conversely, our average deposit balances experienced a 7% decline.
Eric Kirsch: Overall asset quality continues to be stable outside of this one notable credit as criticized loans were flat and net charge offs were less than $1 million in the quarter.
Eric Kirsch: Moving to prime lending.
The fourth quarter of 2023 was significantly impacted by continued low inventory seasonality escalating home prices and notably higher interest rates, which.
Eric Kirsch: Which collectively resulted in the lowest affordability for homebuyers in over two decades and historic year over year decrease in refinance activity.
In response to these ongoing challenges prime lending continue to take proactive measures to streamline its operations and lower fixed and variable expenses.
Eric Kirsch: These measures include reducing non sales head count and underperforming loan originators as well as closing unprofitable locations.
Eric Kirsch: As a result prime lending pretax loss for the fourth quarter of 2023 shape strength relative to the prior year period.
Eric Kirsch: Despite the exceptionally tough business environment Prime lending maintained its industry, leading customer satisfaction rating and continue to be recognized as one of the top places to work.
Eric Kirsch: These achievements speak volumes about our team's resilience and commitment.
Jeremy B. Ford: This trend was initially spurred by the bank failures that occurred in the first half of the year and was further exacerbated by the intense competition around deposits that persisted throughout the remainder of the year. Our conservative approach to growth allowed us to withstand the decline in deposits without having to significantly rely on expensive wholesale funding options, which resulted in improved net interest income year over year. From an expense standpoint, our strategic focus on managing fixed costs, particularly in our mortgage operations, along with an enterprise-wide lens on cost management, resulted in a meaningful reduction in non-interest expenses year-over-year. From a credit standpoint, this year, we proactively increased our allowance for loan losses to reflect broader industry challenges and credit migration in certain portfolios, particularly CRE offices. Our ongoing monitoring in this area remains a priority.
Looking forward, we believe the measures already taken to reduce our cost base combined with improved pricing utilization of technology to reduce head count dependency and our success in hiring skilled loan originators from peers with less stability play.
Eric Kirsch: Prime lending in a strong position for the eventual recovery of the housing and mortgage markets.
Eric Kirsch: In the fourth quarter Hilltop Securities realized pretax income of $20 million on net revenues of $120 million, marking a 12% increase over the prior year.
Eric Kirsch: This growth was driven mainly by the mortgage trading business at suite products within wealth management.
Eric Kirsch: Speaking to the business lines at Hilltop Securities.
Public finance services experienced a 5% decrease in net revenues compared to a strong fourth quarter last year.
Eric Kirsch: Initial advisory fee revenues decline, while underwriting revenues increased slightly.
Eric Kirsch: Revenues from the public finance spoke products also improved due to increased fees on our cash pool products.
Jeremy B. Ford: As we enter 2024, our primary focus at the bank remains on prudent risk management and maintaining strong capital and liquidity in order to navigate the fluctuating economic landscape and take advantage of organic and inorganic growth opportunities. Concurrently, we are committed to steering our mortgage business on a trajectory toward profitability, recognizing the mortgage cycle has endured for a longer than anticipated. Additionally, we are strategically positioning our business at Hilltop Securities to capitalize on growth opportunities and adapt to a potentially lower rate environment anticipated in the latter half of the year. Moving to the fourth quarter, Hilltop reported net income of $29 million, or $0.44 per diluted share. Return on average assets for the period was 75 basis points, and return on average equity was 5.5%.
Eric Kirsch: We remain optimistic about our public finance business, particularly with the anticipated need for increased infrastructure spending and our recent opportunistic hiring from large banks that have decided to exit the municipal business.
Eric Kirsch: Our structured finance net revenues experienced a significant rise mainly due to our mortgage related businesses.
While this business remains volatile our dominant position in the taxable housing space and successful activity in key markets like Florida contributed meaningfully in the fourth quarter.
Eric Kirsch: In wealth management net revenues improved modestly compared to last year's fourth quarter.
Eric Kirsch: Our reserve rate hikes positively impacted our FDIC sweep revenues.
Eric Kirsch: We continue to focus on recruiting quality advisors and enhancing our product offerings in both the firm and independent brokerage channels.
Jeremy B. Ford: During the quarter, Plains Capital Bank generated $48 million of pre-tax income on $13.3 billion of assets, representing a return on average assets of 1.1%. Average loans at the bank declined slightly from the third quarter as normal seasonality occurred in national warehouse lending and balances in our single-family residential portfolio declined. The pipeline for CRE lending remains challenged, and we expect that to continue into the new year as clients hold off on projects due to elevated rates and higher equity requirements.
Eric Kirsch: Finally for hilltop securities our fixed income business, while facing some challenges showed resilience and we're enthusiastic about the growth prospects of the overall group as rates stabilize and our new small business loan effort takes off.
Eric Kirsch: As we move into 2024, our goal is to further enhance our sales distribution capabilities, while upholding our strong culture and risk management practices.
Eric Kirsch: Moving to page four.
Eric Kirsch: Hilltop maintains robust capital levels with a common equity tier one capital ratio of 19, 3% and our tangible book value per share increased from year end 2022 by $1 17 to $28 35.
Jeremy B. Ford: Our average balance is... Our average deposit balance of $11.1 billion declined 1% during the period, primarily due to management of excess liquidity and the ability to run off more expensive broker deposits. In the quarter, we returned $200 million of suite deposits back to Hilltop Securities and had $200 million of broker deposits run off. In the fourth quarter, the bank did experience some negative migration and asset quality, primarily from a single credit. Non-performing loans increased to 0.8% as a result of a $33 million Texas hotel loan being placed on nonaccruals.
Eric Kirsch: Over the past five years, our tangible book value per share has compounded at 10% Angel annually, while our dividend per share has compounded at 19% annually.
Eric Kirsch: Before I pass the presentation over to will to discuss our financial results I'd like to take a moment to discuss some important changes happening at the bank that we disclosed in the fourth quarter.
Will: Jerry Schaffner, the president and CEO of Plains capital Bank will be retiring on May one.
Jeremy B. Ford: Jerry has been a cornerstone of our success since plains capital founding in 1988 and his retirement marks the end of an era.
Jeremy B. Ford: Overall, asset quality continues to be stable outside of this one notable credit, as criticized loans were flat, and net charge-offs were less than $1 million in the quarter. Moving to prime lending. The fourth quarter of 2023 was significantly impacted by continued low inventory, seasonality, escalating home prices, and notably higher interest rates, which collectively resulted in the lowest affordability for homebuyers in over two decades and a stark year-over-year decrease in refinance activity. In response to these ongoing challenges, Prime Lending continues to take proactive measures to streamline its operations and lower fixed and variable expenses. These measures include reducing non-sales headcount and underperforming loan originators, as well as closing unprofitable locations.
Jeremy B. Ford: His leadership and dedication over a stellar 42 year career have been nothing short of transformative I'd.
Eric Kirsch: I'd like to thank him for his incredible contributions to our company.
Eric Kirsch: Great partner and a dear friend.
Eric Kirsch: In line with this transition I am honored to take on the role of CEO at Plains Capital Bank.
Eric Kirsch: In addition to my current responsibilities that hilltop.
Eric Kirsch: This step is part of our carefully crafted succession plan, ensuring continuity and stability for our organization.
Eric Kirsch: Further this step is made possible due to the existing depth and strength of our bank leadership team.
Notably in the fourth quarter, Bryan Heflin was promoted to president of Plains Capital Bank and keep Villareal was promoted to Chief operating officer of Plains Capital Bank.
Jeremy B. Ford: As a result, prime Lending's pre-tax loss for the fourth quarter of 2023 shrank relative to the prior year period. Despite the exceptionally tough business environment, Prime Lending maintained its industry-leading customer satisfaction rating and continued to be recognized as one of the top places to work. These achievements speak volumes about our team's resilience and commitment.
Eric Kirsch: Their experience and proven leadership are invaluable assets to our bank.
Eric Kirsch: We are excited about this new chapter and the opportunities it brings with a solid team in place. We are poised for continued growth and success and we remain committed to our mission of serving our customers employees communities and shareholders was unwavering dedication and a long term focus.
Jeremy B. Ford: Looking forward, we believe the measures already taken to reduce our cost base, combined with improved pricing, the utilization of technology to reduce headcount dependency, and our success in hiring skilled loan originators from peers with less stability, place prime lending in a strong position for the eventual recovery of the housing and mortgage market. In the fourth quarter, Hilltop Securities realized pre-tax income of $20 million on net revenues of $120 million, marking a 12% increase over the prior year. This growth was driven mainly by the mortgage trading business and sweet products within wealth management. Speaking to the business lines at Hilltop Security. Public finance services experienced a 5% decrease in net revenues compared to a strong fourth quarter last year. Municipal advisory fee revenues declined, while underwriting revenues increased slightly.
Eric Kirsch: Thank you and now I will turn it over to will to discuss our financial results in more detail.
Will: Thank you Jeremy I'll start on page five.
Will: Jeremy discussed for the fourth quarter of 2023 Hilltop reported consolidated income attributable to common stockholders of $29 million equating to <unk> 44 cents per diluted share.
Will: This quarter's results highlight the benefits of our diversified model is hilltop securities generated $14 million of sweep revenue, which is represented within their wealth management business one.
Will: In structured finance posted.
Eric Kirsch: Solid revenue contribution in the period.
Somewhat offsetting these positive activities during the fourth quarter prime lending in the broader mortgage industry continue to struggle as overall market inventory remains very low pressuring gross origination volumes and margins in the business.
Eric Kirsch: The bank remains stable as NIM pressures persist.
Jeremy B. Ford: Revenues from the public finance spoke products also improved due to increased fees on our cash pool products. We remain optimistic about our public finance business, particularly with the anticipated need for increased infrastructure spending and our recent opportunistic hiring from large banks that have decided to exit the municipal business. Our structured finance net revenues experienced a significant rise, mainly due to our mortgage-related business.
Eric Kirsch: And then somewhat mitigated by lower than expected credit costs, and a modest decline in noninterest expense quarter over quarter.
Eric Kirsch: Turning to page six for.
Eric Kirsch: For the full year of 2023 hilltop reported consolidated income attributable to common stockholders of $110 million.
Eric Kirsch: According to $1 69 per diluted share.
While net income declined 3% versus the prior year overall diluted EPS did improve by 5% driven by lower full year average shares.
Jeremy B. Ford: While this business remains volatile, our dominant position in the taxable housing space and successful activity in key markets like Florida contributed meaningfully in the fourth quarter. In wealth management, net revenues improved modestly compared to last year's fourth quarter. Federal Reserve rate hikes positively impacted our FDIC sweep revenue.
Turning to page seven.
Eric Kirsch: We will talk to allowance for credit losses increased during the quarter by 600000.
Eric Kirsch: $111 4 million.
Eric Kirsch: The macroeconomic outlook improved in the fourth quarter, which somewhat offset the impacts of collective portfolio changes and an increase in specific reserves.
Jeremy B. Ford: We continue to focus on recruiting quality advisors and enhancing our product offerings in both the firm and independent brokerage channels. Finally, for Hilltop Securities, our fixed income business, while facing some challenges, showed resilience, and we're enthusiastic about the growth prospects of the overall group as rates stabilize and our new small business loan effort takes off. As we move into 2024, our goal is to further enhance our sales distribution capabilities while upholding our strong culture and risk management practice. Moving to page 4.
Eric Kirsch: Allowance for credit losses of $111 million yields an ACL to total loans <unk> ratio of 138% as of December 31, 2023.
Eric Kirsch: I will address additional credit trends later in this presentation.
Eric Kirsch: As we've seen over time ACO can be volatile as it is impacted by economic assumptions as well as changes in the mix.
Eric Kirsch: Make up of the credit portfolio.
Eric Kirsch: 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.
Jeremy B. Ford: Hilltop maintains robust capital levels with a common equity tier one capital ratio of 19.3%, and our tangible book value per share increased from year-end 2022 by $1.17 to $28.35. Over the past five years, our tangible book value per share has compounded at 10% annually, while our dividend per share has compounded at 19% annually. Before I pass the presentation over to Will to discuss our financial results, I'd like to take a moment to discuss some important changes happening at the bank that we disclosed in the fourth quarter. Jerry Schaffner, the President and CEO of Planes Capital Bank, will be retiring on May 1st. Jerry has been a cornerstone of our success since Plains Capital's founding in 1988, and his retirement marks the end of an era. His leadership and dedication over a stellar 42-year career have been nothing short of transformative. I'd like to thank him for his incredible contributions to our company. You are a great partner and a dear friend.
Eric Kirsch: Migration trends and changes to the macroeconomic outlook over time.
Eric Kirsch: Given the current uncertainties regarding inflation.
Eric Kirsch: Interest rates GDP growth and unemployment.
Eric Kirsch: The volatility in the ACO could be heightened over the coming quarters.
Eric Kirsch: Turning to page eight.
Eric Kirsch: As provided in previous quarters, the sot highlights our CRE portfolio and the allowance distribution across some of the key loan segments.
Eric Kirsch: December 31.
The CRE portfolio totaled approximately $3 3 billion, which we segregate and the owner and non owner occupied or Investor real estate.
Eric Kirsch: Internally, we view owner occupied real estate more like C&I lending for the most part repayment is driven by the operating business that owns the real estate.
Eric Kirsch: Non owner occupied real estate makes up 57% of the CRE book.
Eric Kirsch: As noted in the upper right hand chart is diversified across multiple income producing property types.
Jeremy B. Ford: In line with this transition, I'm honored to take on the role of CEO at Planes Capital Bank, in addition to my current responsibilities at Hilltop. This step is part of a carefully crafted succession plan, ensuring continuity and stability for our organization. Further, this step is made possible due to the existing depth and strength of our bank leadership team. Notably, in the fourth quarter, Brian Heflin was promoted to President of Plains Capital Bank, and Pete Villarreal was promoted to Chief Operating Officer of Plains Capital Bank.
Eric Kirsch: In the bottom table, we provide a breakout of non owner occupied office and retail within the portfolio to.
To highlight the differentiation and ACL coverage by loan segment type.
Eric Kirsch: 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 you can see those loan segments maintain larger ACL coverage ratios and other non owner occupied real estate products.
Eric Kirsch: You should note.
Eric Kirsch: During the fourth quarter, the bank downgraded one large hotel credit.
Eric Kirsch: We are growing approximately $33 million of outstanding balance to non accrual.
Jeremy B. Ford: Their experience and proven leadership are invaluable assets to our bank. We are excited about this new chapter and the opportunities it brings. With a solid team in place, we are poised for continued growth and success. And we remain committed to our mission of serving our customers, employees, communities, and shareholders with unwavering dedication and a long-term focus. Thank you. Now, I will turn it over to Will to discuss our financial results in more detail. Thank you, Jeremy.
Eric Kirsch: The property's cash flows are not currently sufficient to meet the cash demands for the property.
Eric Kirsch: This downgrade constitutes 89% of the increase in NPA during the quarter.
Eric Kirsch: Further while the downgrade did not result in a significant increase or decrease to the ACO. We have requested new appraisals and we will update the status of the status of this loan during our first.
Eric Kirsch: Paul.
Eric Kirsch: While this credit is clearly a focus for US we are currently monitoring the entire portfolio very closely and while credit losses have not normalized to more historical levels to date.
I'll start on page five. As Jeremy discussed, for the fourth quarter of 2023, Hilltop reported consolidated income attributable to common stockholders of $29 million, equating to 44 cents per diluted share. This quarter's results highlight the benefits of our diversified model. Tilt-top securities generated $14 million of sweep revenue, which is represented within their wealth management business line, and structured finance posted a solid revenue contribution in the period.
Eric Kirsch: Do expect that the ongoing cash flow challenges facing existing and new projects as seen in the broader commercial real estate industry, driven by higher interest rates and ongoing inflation.
Eric Kirsch: Lead to further credit migration over time.
Eric Kirsch: Turning to page nine.
Eric Kirsch: Net interest income in the fourth quarter equated to $111 million, including $1 $2 million of purchase accounting accretion.
Eric Kirsch: Versus the prior year fourth quarter net interest income decreased by $12 million or 10% driven primarily by higher yields on deposits.
Eric Kirsch: As we expected net interest margin declined versus the third quarter of 2023.
Somewhat offsetting these positive activities during the fourth quarter, prime lending and the broader mortgage industry continue to struggle as overall market inventory remains very low, pressuring both origination volumes and margins in the business. The bank remained stable as NIM pressures persist and were somewhat mitigated by lower than expected credit costs and a modest decline in non-interest expense quarter over quarter. Turn to page 6.
All in by six basis points to 296 basis points.
Eric Kirsch: Our current outlook reflects the scenario, where blackbird funds remained stable for the majority of 2024.
Eric Kirsch: With only one rate reduction contemplated in the fourth quarter.
Eric Kirsch: Additional rate decreases will pressure net interest income downward.
Eric Kirsch: Turning to page 10, we have more discussion topics related to NII.
For the full year of 2023, Hilltop reported consolidated income attributable to common stockholders of $110 million, equating to $1.69 per diluted share. While net income declined 3% versus the prior year, overall diluted EPS did improve by 5%, driven by lower full-year average shares. Turning to page 7.
Eric Kirsch: In the upper left table, we provide detail nor latest sensitivity analysis for NII related to parallel and instantaneous shocks and interest rates.
Eric Kirsch: As noted in the chart hilltop remains approximately 6% asset sensitive and the down 100 scenario.
Eric Kirsch: Over the past few years, we've reduced our asset sensitivity by approximately 50%.
Eric Kirsch: 5% to 6%.
Hilltop's allowance for credit losses increased during the quarter by $600,000 to $111.4 million. The macroeconomic outlook improved in the fourth quarter, which somewhat offset the impacts of collective portfolio changes and an increase in specific reserves. Allowance for credit losses of $111 million. Yields and ACLs, the total loans HFI ratio of 1.38%. December 31, 2023.
Eric Kirsch: Going forward, most significant drivers of NII stability will be driven by our ability to manage the down rate deposit betas, which we are currently modeling at 50%.
Eric Kirsch: And deposit mix shifts from noninterest bearing into interest bearing deposit products, which we expect will continue through the first half of the year.
Eric Kirsch: To help mitigate some exposure to falling rates, we have begun investing approximately 50% of the cash flows from our securities portfolio and.
Eric Kirsch: In the securities that we believe maintain a better repayment exposure.
I will address additional credit trends later in this presentation. 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 that 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. Given the current uncertainties regarding inflation, interest rates, GDP growth, and unemployment, we expect volatility in the ACL could be heightened over the coming quarter. As provided in previous quarters, this slide highlights our CRE portfolio and the allowance distribution across some of the key December 31st.
Eric Kirsch: In addition, we are beginning to retain additional hybrid our mortgage loans on the balance sheet. These.
Eric Kirsch: These loans will generally maintained shoulder shorter fixed rate periods, including three and five years.
Eric Kirsch: While loan retention can be volatile on a monthly basis, we expect to retain on average $10 million per month throughout 2024.
Eric Kirsch: With that said given our expectation that deposit rates remain elevated and deposit competition will remain intense we do expect that NII will be down versus 2023 by 3% to 7% in 2024.
Eric Kirsch: Turning to page 11.
Eric Kirsch: In the chart, we highlight the approximately $7 6 billion of available liquidity sources. The hilltop maintained as of December 31.
Eric Kirsch: While we considered the federal reserve's discount windows to be a source of liquidity, we do not plan to leverage that program under our internal liquidity modeling efforts such as noted below our other collateralized borrowing sources.
The CRE portfolio totaled approximately $3.3 billion, which we segregated into owner and non-owner occupied or investor real estate. Internally, we view owner occupied real estate more like C&I lending, 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.
Eric Kirsch: Further.
Eric Kirsch: Comparable liquidity sources as of December 31, 2022 equated to just over $7 billion.
Eric Kirsch: And increased steadily throughout the prior quarters of the year.
Eric Kirsch: As is shown in the chart at December 31, Hilltop maintained $1 6 billion of excess reserves at the Federal reserve.
Additionally, in the bottom left chart, we provide detail on the pace of the deposit beta changes to date.
Eric Kirsch: Our current through the cycle beta for interest bearing deposits of 65%.
And, as noted in the upper right-hand chart, it is diversified across multiple income-producing property types. In the bottom table, we provide a breakout of non-owner occupied office and retail within the portfolio, to highlight the differentiation in ACL coverage by loan segment type. Our view today 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 you can see, those loan segments maintain higher ACO coverage ratios than other non-owner-occupied real estate products.
Eric Kirsch: We currently expect that our through the cycle interest bearing deposit betas will be within the range of 60% to 70% light.
Likely drifting marginally higher over the coming two quarters.
Eric Kirsch: Turning to page 12.
Eric Kirsch: Fourth quarter average total deposits were approximately $11 $1 billion remaining largely stable versus the third quarter of 2023.
Eric Kirsch: On an ending balance basis deposits decreased by $40 million from the prior quarter whereby growth in bank client deposits was offset by the decline in broker dealer sweep and broker deposits held at plains capital during.
During the quarter, the bank returned $200 million of sweep deposits and $200 million of broker deposits in an effort to reduce overall excess cash levels at the federal reserve.
You should note, during the fourth quarter, the bank downgraded one large hotel credit, quibbling approximately $33 million of the outstanding balance to non-accrual, as the property's cash flows are not currently sufficient to meet the cash demands of the property. This downgrade constitutes 89% of the increase in NPAs during the quarter. Further, while the downgrade did not result in a significant increase or decrease to the ACL, we have requested new appraisals, and we'll update the status of this loan during our first quarter call. While this credit is clearly a focus for us, we're currently monitoring the entire portfolio very closely. And while credit losses have not normalized to more historical levels to date, we do expect that the ongoing cash flow challenges facing existing and new projects, as seen in the broader commercial real estate industry, driven by higher interest rates and ongoing inflation, could lead to further credit migration over time. Turning to page 9.
Eric Kirsch: Over the coming year, we expect that excess deposits at the federal reserve will decline to between 300 and $750 million.
Eric Kirsch: As a result of our ongoing pricing efforts interest bearing deposit costs rose to 340 basis points, an increase of 17 basis points from the prior quarter.
Eric Kirsch: It is our expectation and interest bearing deposit costs will continue to move higher in the first two quarters of 2024, and then stabilize until the federal reserve changes the fed funds target.
Eric Kirsch: As it relates to deposit balances and costs, we remain focused on balancing our competitive position.
Eric Kirsch: With our long term customer relationships, while we continue to prudently manage net interest income over time.
Eric Kirsch: However, the current environment remains very challenging and as noted earlier, we expect that the intensity of competition for deposits will remain resulting in lower overall balances and continued pressure on yields over the coming quarters.
Eric Kirsch: Turning to page 13.
Eric Kirsch: Total noninterest income for the fourth quarter of 2023 equated to $179 million fourth quarter mortgage related income and fees decreased by $2 million versus the fourth quarter of 2022, driven by the ongoing challenges in mortgage banking, whereby the combination of higher interest rates home price.
Net interest income in the fourth quarter equated to $111 million, including $1.2 million of purchase accounting accretion. Compared to the prior year, fourth quarter net interest income decreased by $12 million, or 10%, driven primarily by higher yields on deposits. As we expected, net interest margin declined versus the third quarter of 2023, falling by six basis points to 296 basis points. Our current outlook reflects a scenario whereby fed funds remain stable for the majority of 2024, with only one rate reduction contemplated in the fourth quarter. Additional rate decreases will pressure net interest income downward. Turning to page 10, we have more discussion topics related to NII.
Eric Kirsch: Inflation limited housing supply and ongoing overcapacity in terms of mortgage originators across the U S is driven volumes and margins materially lower.
Eric Kirsch: Further versus the prior year fourth quarter purchase mortgage volumes decreased by $198 million or 10% and refinance volume.
In the upper left table, we provide detail on our latest sensitivity analysis for NII related to parallel and instantaneous shocks and interest rates. As noted in the chart, Hilltop remains approximately 6% asset sensitive in the Down 100 scenario. Over the past few years, we've reduced our asset sensitivity by approximately 50%.
Eric Kirsch: Volumes increased substantially from prior year levels to $1 2 billion.
Lock volumes were substantially impacted by certain states, providing additional state funding to support their state housing authorities and down payment assistance programs.
12% to 6%. Going forward, the most significant drivers of NII stability will be driven by our ability to manage the downrate deposit betas, which we are currently modeling at 50%, and deposit mix shifts from non-interest bearing to interest-bearing deposit products, which we expect will continue through the first half of the year. To help mitigate some exposure to falling rates, we have begun investing approximately 50% of the cash flows from our securities portfolio in securities that we believe maintain a better repayment exposure. In addition, we are beginning to retain additional hybrid arm mortgage loans on the balance sheet. These loans will generally maintain shorter fixed rate periods, including 3 and 5 years.
Eric Kirsch: As we've noted in the past it's important to recognize that both the fixed income services and structured finance businesses at hilltop securities can be volatile from period to period as they are impacted by interest rates overall market liquidity and production trends.
Eric Kirsch: I'm turning to page 14.
Eric Kirsch: Noninterest expenses decreased from the same period in the prior year by $2 $6 million to $251 million.
Eric Kirsch: Driving the modest reduction versus the prior year were fixed and fixed expense reductions at prime lending.
Eric Kirsch: As they have continued to focus on the work of resizing, our mortgage operations to support the current environment.
Eric Kirsch: These reductions were somewhat offset by growth in software and computing expenses.
While loan retention could be volatile on a monthly basis, we expect to retain on average $10 million per month throughout 2024. With that said, given our expectation that deposit rates will remain elevated and deposit competition will remain intense, we do expect that NII will be down versus 2023 by 3 to 7% in 2024. Turning to page 11.
And higher FDIC assessment fees.
Looking forward, we expect expenses other than variable compensation remained relatively stable between 185 and $190 million per quarter as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower head count and improve throughput across our franchise.
In the chart, we highlight the approximately $7.6 billion of available liquidity sources that Hilltop maintained as of December 31st. While we consider the Federal Reserve's discount window to be a source of liquidity, we do not plan to leverage that program under our internal liquidity modeling efforts, and as such, it's noted below our other collateralized borrowing sources. For your information, the comparable liquidity sources as of December 31, 2022 equated to just over $7 billion and increased steadily throughout the prior quarters of the year. As shown in the chart, at December 31st, Hilltop maintained $1.6 billion of excess reserves at the Federal Reserve.
Eric Kirsch: Helping to offset the ongoing inflationary pressures that persist in the market.
Eric Kirsch: Moving to page 15.
Eric Kirsch: Fourth quarter average <unk> loans equated to $7 $9 billion.
Eric Kirsch: On a period ending basis <unk> loans declined versus the third quarter of 2023 by $124 million driven by declines in mortgage warehouse lending of $81 million.
Eric Kirsch: And the declines in the one to four family mortgage portfolio, which equated to $23 million.
Eric Kirsch: We expect that loan growth will remain challenged in 2024 as one to four family retention levels are expected to remain modest and commercial lending activity continued to remain highly competitive with the pace of new transactions remaining slower than in prior years.
Eric Kirsch: Currently we are expecting full year average bank loan growth of zero to 2% during 2024, excluding mortgage warehouse lending and any retained mortgages from prime lending.
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 is 65%, we currently expect that our through-the-cycle, interest-bearing deposit betas will be within the range of 60 to 70 percent, likely drifting marginally higher over the coming two quarters. Turning to page 12.
Eric Kirsch: Turning to page 16.
Eric Kirsch: Credit losses have remained steady as net charge offs for the fourth quarter equated to $674000 for the.
Eric Kirsch: <unk> full year of 2023, net charge offs equated to $2 4 million or three basis points of <unk> loans.
Eric Kirsch: Further.
The graph in the upper right highlights of the NPA levels increased by approximately $37 million during the fourth quarter largely driven by the hotel credit that I reviewed earlier in my comments.
In the fourth quarter, average total deposits were approximately $11.1 billion, remaining largely stable versus the third quarter of 2023. On an ending balance basis, deposits decreased by $40 million from the prior quarter, where my growth in bank client deposits was offset by the decline in broker-dealer sweep and broker deposits held at Plains Capital. During the quarter, the bank returned $200 million of sweep deposits and $200 million of broker deposits in an effort to reduce overall excess cash levels at the Federal Reserve. Over the coming year, we expect that excess deposits at the Federal Reserve will decline to between $300 and $750 million. As a result of our ongoing pricing efforts, interest-bearing deposit costs rose to 340 basis points, an increase of 17 basis points from the prior quarter.
Eric Kirsch: Despite the increase in NPA for criticized loan levels as a percentage of bank loans were relatively stable versus the third quarter of 2023.
Eric Kirsch: We are monitoring our loans and borrowers closely as higher interest rates potentially lower utilization rates in certain segments of commercial real estate and unexpected slowdown in economic activity could.
Eric Kirsch: Have a negative impact on our clients and our portfolio.
Eric Kirsch: As is shown on the graph the bottom right of the page the allowance for credit loss coverage at the bank ended the year at 144%, including mortgage warehouse lending.
Eric Kirsch: Moving to page 17.
Eric Kirsch: As we move into 2024, there continues to be a lot of uncertainty in the market regarding interest rates inflation and the overall health of the economy.
Eric Kirsch: We have provided our current outlook metrics for the coming year.
Eric Kirsch: As we've noted in the past 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.
It is our expectation and interest-bearing deposit costs will continue to move higher in the first two quarters of 2024 and then stabilize until the Federal Reserve changes the Fed Funds target. As it relates to deposit balances and costs, we remain focused on balancing our competitive position with our long-term customer relationships while we continue to prudently manage net interest income over time. However, the current environment remains very challenging, and as noted earlier, we expect that the intensity of competition for deposits will remain, resulting in lower overall balances and continued pressure on yields over the coming quarters. I'm turning to page 13. Total non-interest income for the fourth quarter of 2023 equated to $179 million.
Eric Kirsch: Term stockholder value.
Eric Kirsch: Current outlook for 2024 reflects our current assessment of the economy and markets, where we participate.
Eric Kirsch: Further as the market changes and we adjust our business to respond we will provide updates to our outlook on our future quarterly calls.
Eric Kirsch: Operator that concludes our prepared comments and I'll turn the call back to you for the Q&A section of the call.
Eric Kirsch: Thank you if you wish to ask a question. Please style star one on your telephone keypad announced the queue. Once you're names from announced you can ask your question. If your final question is I'll answer it before so to speak you can download store on suits accounts. So.
Eric Kirsch: So once I am not stall ones I'll ask a question, we'll start Sue if you need to cancel.
Eric Kirsch: Our first question comes from the line of Thomas Wendler At Stephens, Inc. Please go ahead. Your line is open.
Eric Kirsch: Hey, good morning, everyone.
Eric Kirsch: Good morning.
Thomas Wendler: It looks like Youre still targeting some asset sensitivity reduction can you give us an idea on the goals there how close to neutral you guys trying to move.
Fourth quarter mortgage-related income and fees decreased by $2 million versus the fourth 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 overcapacity in terms of mortgage originators across the U.S. has driven volumes and margins materially lower. Further, versus the prior year fourth quarter, purchase mortgage volumes decreased by $198 million, or 10%, and refinance volumes volumes increased substantially from prior year levels to 1.2 billion dollars. Locked volumes were substantially impacted by certain states providing additional state funding to support their state housing authorities and down payment assistance programs. As we've noted in the past, it's important to recognize that both the fixed income services and structured finance businesses at Hilltop Securities can be volatile from period to period as they are impacted by interest rates, overall market liquidity, and production trends. I'm turning to page 14. Non-interest expenses decreased from the same period in the prior year by $2.6 million to $251 million.
Thomas Wendler: So I think over the next this will over the next.
Year wed like to move that to closer to closer to 3%.
Thomas Wendler: Perfect. Thank you.
Thomas Wendler: And then just moving over to mortgage.
Eric Kirsch: A bit surprised to see the gain on sale margins decrease in <unk> can you give us any color there.
Thomas Wendler: Yes, what we've seen again as I noted in my comments is that customers have a.
Eric Kirsch: A propensity at this point to want to buy down by down the rates that we're seeing more more.
Eric Kirsch: More customers paying higher origination fees and other fees versus necessarily at rolling through our gain on sale overall total revenue for the loan remains reasonably stable.
Eric Kirsch: More customers paying higher origination fees and other fees versus necessarily at rolling through our gain on sale overall total revenue for the loan remains reasonably stable.
Eric Kirsch: But the mix mix between those two continues to continues to shift towards origination fees versus versus gain on sale. As I noted, we do expect gain on sale will rebound slowly over time, but but again its we expect that to occur slowly throughout 'twenty forward into 'twenty five.
Eric Kirsch: Thank you and if I can just sneak one more in can you have an idea of the <unk>.
Impact.
Driving the modest reduction versus the prior year were fixed expense reductions at prime lending, which they've continued to focus on the work of resizing our mortgage operations to support the current environment. These reductions were somewhat offset by growth in software and computing expenses and a Higher FDIC Assessment. Looking forward, we expect expenses other than variable compensation to remain relatively stable between $185 and $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 to offset the ongoing inflationary pressures that persist in the market. Moving to page 15. The fourth quarter average HFI loans equated to $7.9 billion.
Eric Kirsch: Increased levels of rate cuts could have on mortgage and then 24 I think you guys have one cut kind of factored into your modeling can you give an idea of how a couple of additional cuts might impact mortgage.
Eric Kirsch: Yes, I think our view is rates lower would necessarily be positive, but again.
Given where the overall mortgage industry as it relates to customer mortgage loan rates.
Eric Kirsch: We believe that a large percentage of customers have got.
Eric Kirsch: Mortgages that currently yield a rate below 6%.
Eric Kirsch: Given that it will take us what we believe to be a substantial number of cuts to really project forward a substantial return to the refinance business that said, we believe lower rates.
Eric Kirsch: Would help necessarily drive some of the purchase business I would say our view is that the largest constraint in the mortgage business right now certainly that we see as overall inventory levels and the availability of housing across across the markets, where we participate and so while rates are important and certainly affordability.
On a period ending basis, HFI loans declined versus the third quarter of 2023 by $124 million, driven by declines in mortgage warehouse lending of $81 million and declines in the 1 to 4 family mortgage portfolio, which equated to $23 million. We expect that loan growth will remain challenged in 2024, as one to four family retention levels are expected to remain modest, and commercial lending activity continues to remain highly competitive, with the pace of new transactions remaining slower than in prior years. Currently, we are expecting full-year average bank loan growth of 0 to 2% during 2024, excluding mortgage warehouse lending and any retained mortgages from prime lending. Turn to page 16. Credit losses have remained steady, as net charge-offs for the fourth quarter equated to $674,000.
Matters, the overall availability of homes and again those inventory levels, we would view as the largest constraint.
Eric Kirsch: That was great color I appreciate it guys. Congrats all my questions.
Eric Kirsch: Thank you.
Eric Kirsch: Thank you and our next question comes from the line of Tim Mitchell at Raymond James. Please go ahead do you monetize them.
Eric Kirsch: Okay.
Eric Kirsch: Hey, guys good morning.
Eric Kirsch: Good morning morning.
Tim Mitchell: So let's start on the hotel credit that moved to nonperforming. This quarter could you just give some more color on what happened with that property and then are you looking to move it out of the bank or what potential loss content could be in there.
Tim Mitchell: Paul I'll try to address those in reverse order from our loss content perspective, as I noted in my comments we've.
We've requested two additional and new appraisals.
For the full year of 2023, net charge-offs equated to $2.4 million, or three basis points of ending HFI loans. Furthermore, the graph in the upper right highlights that NPA levels increased by approximately $37 million during the fourth quarter, largely driven by the hotel credit that I reviewed earlier in my comment. Despite the increase in NPAs, the criticized loan levels as a percentage of bank loans were relatively stable versus the third quarter of 2023.
Paul: We'll evaluate those when that when that information becomes available, but we believe.
Paul: The current quarter's results Cori current year results reflect.
Cori: The loss content currently currently.
Cori: And that loan.
Cori: The short and the short story is the cash flows and the pro forma is that.
Cori: We've evaluated we've been evaluating really more our mortgage business very closely through.
Cori: Our overall hotel portfolio I should say closely since COVID-19.
Cori: The cash flows simply haven't haven't come back for this particular property.
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 impact on our clients and our portfolio. As shown in the graph at the bottom right of this page, the allowance for credit loss coverage at the bank ended the year at 1.44%, including mortgage warehouse lending. Moving to page 17, as we move into 2024, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy. That's it.
As quickly and as robustly as we would have would have expected as the operator would have expected and as a result.
Cori: The cash flow challenges, we feel like it was prudent and appropriate to move to non accrual in this period.
Cori: Perfect. Thanks for the color.
Cori: And then just moving on net interest margin.
Cori: Yes kind of took a step down this quarter when do you think that could trough and inflect.
Cori: <unk> 24.
Cori: Highlight rate cuts play into that.
Cori: Yes so.
Cori: We would expect net interest margin to trend.
Tim Mitchell: A modestly lower from current levels I will give you give you the reported statistics so.
We have provided our current outlook metrics for the coming year. As we've noted in the past, 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 to our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term stockholder value. Our current outlook for 2024 reflects our current assessment of the economy and markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on our next quarterly call. Operator, that concludes our prepared comments. We'll turn the call back to you for the Q&A section of the call. Thank you. If you wish to ask a question, please dial star 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question.
Tim Mitchell: For the quarter, we ended $2 96 for December However, we were at $2, 92%. So that gives you some sense that there is theres headwinds.
Tim Mitchell: Headwinds kind of right here in the immediate future that said, we expect it would trough in the second quarter and again, depending on where the.
Tim Mitchell: Fed moves and how quickly they move.
Tim Mitchell: Start to move higher as soon as the third third and fourth quarter, but again, we would expect it to trough in the second quarter.
Tim Mitchell: Awesome. Thank you and then just one last one for me.
Tim Mitchell: <unk> bought back about $5 million of stock this quarter, and you announced a new program with $75 million.
Tim Mitchell: For Q levels is kind of a good run rate through 'twenty, four or how you're thinking about buybacks.
Tim Mitchell: Yes, I think that.
Tim Mitchell: We have a $75 million share repurchase authorization that we just.
Tim Mitchell: We put in place so I'd kind of look at that as the.
Tim Mitchell: Target for this year.
Tim Mitchell: Going to be evaluating.
Tim Mitchell: As we do every quarter.
Tim Mitchell: Hmm.
Tim Mitchell: Our stock's trading.
Tim Mitchell: Okay. Thank you alright, thanks, guys. Thanks for taking my questions guys.
Operator: If you find your question is answered before it's your turn to speak, you can dial upstar2 to cancel. So once again, that's star one to ask a question, or star two if you need to cancel. Our first question comes from the line of Thomas Wendler at Stephen's Inc. Please go ahead; your line is open. Hey, good morning, everyone.
Thank you.
Tim Mitchell: Thank you and currently there are no further questions on the line. So at that point, we will conclude today's call. Thank you very much for attending this now concludes the conference you may now disconnect your lines.
Operator: Morning. It looks like you're still targeting some asset sensitivity reduction. Can you give us an idea of the goals there? How close to neutral are you guys trying to move? I think over the next, this is Will, over the next, you know, year, we'd like to move that closer to closer to 3%. Perfect, thank you. And then just moving over to mortgages, I'm a bit surprised to see the gain on sale margins decrease in 4Q. Can you give us any color there?
What we've seen, again, as I noted in my comments, is that customers have a propensity at this point to want to buy down their rates. So we're seeing more customers paying higher origination fees and other fees versus necessarily rolling them through our gain on sale. Overall, total revenue for the loan remains reasonably stable, but the mix between those two continues to shift towards origination fees versus gain on sale.
As I noted, we do expect gain on sale to rebound slowly over time, but again, we expect that to occur slowly throughout 24 and into 25. Thank you. If I can just sneak one more in.
Can you give us an idea of the impact, like increased levels of rate cuts could have on mortgages in 2024? I think you guys have one cut kind of factored into your modeling. Can you give us an idea of how a couple additional cuts might impact mortgage rates? I think our view is that rates lower would necessarily be positive. But again, given where the overall mortgage industry is, as it relates to customer mortgage loan rates, we believe that, you know, a large percentage of customers have mortgages that currently yield a rate below 6%. Given that, it will take us what we believe to be a substantial number of cuts to really project forward a substantial return on the refinance business.
That said, we believe lower rates would help necessarily drive some of the purchase business. I would say our view is that the largest constraint in the mortgage business right now, certainly what we see, is overall inventory levels and the availability of housing across the markets where we participate. And so while rates are important, and certainly affordability matters, the overall availability of homes, and again, those inventory levels, we would view as the largest constraint. That was a great color.
Operator: I appreciate it, guys. Thanks for answering my questions. Thank you. Thank you, and our next question comes from the line of Tim Mitchell at Raymond James. Please go ahead to your line as well. Thank you. Hey guys, good morning. Good morning. I just want to start on the hotel credit that moved to non-performing this quarter. Could you just give some more color on what happened with that property and then are you looking to move it out of the bank, or what potential lost content could be in there?
Well, I'll try to address those in reverse order. From a loss content perspective, as I noted in my comments, we've requested two additional and new appraisals. We'll evaluate those when that information becomes available. But we believe, you know, the current quarter's results for the current year reflect the loss content currently currently in that loan. You know, the short story is the cash flows and the pro formas that We've been evaluating our mortgage business very closely through our overall hotel portfolio, I should say, closely since COVID. You know, the cash flows simply haven't come back for this particular property as quickly and as robustly as we would have expected, as the operator would have expected. And as a result of, you know, the cash flow challenges, we feel like it was prudent and appropriate to move to non-accrual in this period.
Thanks for the call. And then just moving on, that interest margin kind of took a step down this quarter. When do you think that could draw off and inflect in 24? And, you know, how might rate cuts play into that? Yeah, so, we would expect net interest margin to trend modestly lower from current levels. I'll give you the reported statistics.
So, you know, for the quarter, we ended at 296. For December, however, we were at 2.92%. So that gives you some sense that there's headwinds kind of right here in the immediate future. That said, we expect it to trough in the second quarter. And again, depending on where the Fed moves and how quickly they move, inflation could start to move higher as soon as the third and fourth quarters. But again, we would expect it to peak in the second quarter. Awesome, thank you. And then there is one last one for me. You guys bought back about $5 million of stock this quarter, and you announced a new program. I think it was $75 million. Do you think four Q levels is kind of a good run rate through 24?
Or how are you thinking about buyback? Yeah, I think that we have a $75 million share repurchase authorization that we just put in place. So, you know, I'd kind of look at that as the target for this year, but we're going to be evaluating, you know, as we do every quarter, and where are our stocks trading?
Operator: Okay, thank you. All right, thanks for taking my questions, guys. Thank you. Thank you, and currently, there are no further questions on the line, so at that point, we'll conclude today's call. Thank you all very much for attending. This now concludes the conference; you may now disconnect.