Q1 2024 Hilltop Holdings Inc Earnings Call

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Speaker Change: Good day, everyone and welcome to today's Hilltop Holdings first quarter 'twenty 'twenty four earnings conference call and webcast.

Speaker Change: At this time all participants are in a listen only mode.

Speaker Change: Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star one on your telephone keypad you may withdraw yourself from the queue by pressing star and two. Please note. This call is being recorded I will be standing by if you should need any assistance. It is.

Speaker Change: Now my pleasure to turn the conference over to you Eric Yeah, We executive Vice President.

Eric: Thank you before.

Eric: 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.

Eric: Funding costs, the impact and potential impacts of inflation stock repurchases 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: These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.

Eric: 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 the preface their presentation and those included in our most recent annual and quarterly reports filed with the SEC.

Please note that the information presented his preliminary and based upon data available at this time.

Eric: To the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.

Eric: Additionally, this presentation includes certain non-GAAP measures, including tangible common equity intangible book value per share.

Eric: 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 Dot com.

Eric: With that I will turn the presentation over to hilltop, President and CEO Jeremy Ford.

Jeremy Blue Ford: Thank you Eric and good morning for.

Jeremy Blue Ford: For the first quarter Hilltop reported net income of approximately $28 million or <unk> 42 per diluted share.

Jeremy Blue Ford: Return on average assets for the period was <unk>, 7% and return on average equity was five 2%.

Jeremy Blue Ford: While the impact of economic headwinds that began in 2022 continued to persist. We are pleased with the strong returns from Plains capital Bank and hilltop securities that allowed us to improve earnings per share over the same period in the prior year.

Jeremy Blue Ford: Despite a housing market that remains under pressure prime lending significantly reduced its pre tax loss from the same period in the prior year through meaningful but hard expense base right sizing.

Jeremy Blue Ford: The improvement in our consolidated results are a true reflection of ongoing hard work by our teams across hilltop.

Jeremy Blue Ford: We believe that our long term decision, making strategic initiatives and cost management efforts positions us to consistently serve clients across our businesses generate consolidated profitability returned capital to shareholders via share repurchases and dividends.

Jeremy Blue Ford: And take advantage of opportunities when they arise.

Jeremy Blue Ford: During the quarter claims capital bank generated $50 million of pre tax income on $13 $1 billion of assets, representing a return on average assets of one 2%.

Jeremy Blue Ford: While our conservative approach to credit has limited outside growth in our loan portfolio. It has also allowed us to prudently optimize the bank's liquidity and funding.

Jeremy Blue Ford: Average loans at the bank declined slightly from the fourth quarter, driven primarily by a reduction in national warehouse lending balances as normal seasonality and a depressed mortgage market continues to restrict this business.

Jeremy Blue Ford: We continue to see a pullback in the commercial lending market due to the higher for longer interest rate environment and increased equity requirements and we expect this pullback to pressure loan growth for the near future.

Jeremy Blue Ford: Our average deposit balance declined 3% during the period, primarily due to the bank returning nearly $380 million of sweep deposits back to hilltop securities and returning $42 million of brokered Cds.

Jeremy Blue Ford: Encouragingly. This planned reduction was partially offset by a $200 million increase in interest bearing deposits.

Yeah.

Jeremy Blue Ford: Results in the quarter include a provision recapture of $2 9 million.

Jeremy Blue Ford: Which resulted from the impact of net charge offs improvements in the economic outlook and changes in migrations across the portfolio overall.

Jeremy Blue Ford: Overall asset quality continues to be stable as criticized loans as a percentage of bank loan has remained relatively flat for the third consecutive period.

Jeremy Blue Ford: Moving to Brian lending.

Jeremy Blue Ford: The company reported a pretax loss of $16 $5 million for the period as low housing inventory escalating home prices and higher mortgage rates persist.

Operator: Please stand by. Your program is about to begin. If you need assistance during your conference call today, please press star zero. Good day, everyone, and welcome to today's Hilltop Holdings first quarter 2024 earnings conference call and webcast.

Jeremy Blue Ford: Operating results were negatively impacted by a $7 million valuation adjustment on the MSR asset.

Operator: At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Erik Yohe, Executive Vice President.

Jeremy Blue Ford: We are seeing that the cost cutting measures implemented during 2022, and 2023 are making a positive impact as non variable compensation has decreased by $6 million or 17% since the first quarter of 2023.

Jeremy Blue Ford: This has resulted in the pretax loss improving despite lower overall revenues relative to the prior year period.

Jeremy Blue Ford: Notwithstanding these ongoing challenges employee engagement and morale remained remarkably high underscored by the company's recent recognition is one of the top 10 workplaces and the 2020 for USA today ranking.

Erik Yohe: Thank you. 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, funding costs, the impact and potential impacts of inflation, stock repurchases, dividends, and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation, are forward-looking statements.

Jeremy Blue Ford: Looking forward, while we believe the next few quarters will remain challenged we are beginning to see signs for optimism within the mortgage business.

Jeremy Blue Ford: In the first quarter Hilltop securities generated pretax income of $19 million on net revenues of $117 million, marking a 12% increase in revenue over same period in the prior year.

Jeremy Blue Ford: This growth was primarily.

Erik Yohe: These statements are based on management's current expectations concerning future events that, 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 the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time.

Jeremy Blue Ford: Driven by the mortgage trading business and sweep deposit products within wealth management.

Jeremy Blue Ford: Speaking to the lines of business at Hilltop Securities.

Jeremy Blue Ford: Public finance services generated a 4% increase in net revenues compared to the same period in the last year municipal advisory fees and underwriting revenues remained stable while revenues from the public finance both businesses improved due to increased fees on our cash pool products.

Jeremy Blue Ford: Our structured finance net revenues increased 53% compared to the same period in the last year.

Erik Yohe: 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. 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.hilltop.com. With that, I will turn the presentation over to Hilltop President and CEO, Jeremy Ford.

Jeremy Blue Ford: This was primarily due to mortgage related business activity within the Florida market.

Jeremy Blue Ford: While this was a very strong start to the year, we do anticipate a weaker outlook in the coming months as down payment assistance programs have slowed.

Jeremy Blue Ford: In wealth management net revenues were stable compared to last year's first quarter as interest rates have remained elevated which benefits our FDIC suite program.

Jeremy Blue Ford: Thank you, Erik, and good morning. For the first quarter, Hilltop reported net income of approximately $28 million, or $0.42 per diluted share. Return on average assets for the period was 0.7%, and return on average equity was 5.2%. While the impact of economic headwinds that began in 2022 continues to persist, we are pleased with the strong returns from Plains Capital Bank and Hilltop Securities that allowed us to improve earnings per share over the same period in the prior year.

Jeremy Blue Ford: Our fixed income business remains pressured as the shape of the yield curve continues to act as a headwind for the business. We are still committed to the business and look to further enhance our sales distribution capabilities, while upholding our strong culture and risk management practices.

Jeremy Blue Ford: Overall hilltop securities per firm performed very well this quarter and we continue to build on the business with recent hires that we've made from competitors, who have pulled out of certain municipal and trading businesses.

Jeremy Blue Ford: Moving to page four.

Jeremy Blue Ford: Okay.

Jeremy Blue Ford: Despite a housing market that remains under pressure, prime lending significantly reduced its pre-tax loss from the same period in the prior year through meaningful but hard expense-based ride-sizing. This improvement and our consolidated results are a true reflection of ongoing hard work by our teams across Hilltop.

Jeremy Blue Ford: Hilltop maintains robust capital levels with a common equity tier one capital ratio of 19, 7%. Additionally, our tangible book value per share increased from year end 2023 by <unk>.

Jeremy Blue Ford: To $28 44.

Jeremy Blue Ford: Despite the recent rise in rates.

Jeremy Blue Ford: During the period, we returned $21 million to shareholders with $11 million in dividends and $10 million in share repurchases.

Jeremy Blue Ford: We believe that our long-term decision making, strategic initiatives, and cost management efforts position us to consistently serve clients across our businesses, generate consolidated profitability, return capital to shareholders via share repurchases and dividends, and take advantage of opportunities when they arise. During the quarter, Plains Capital Bank generated $50 million of pre-tax income on $13.1 billion of assets, representing a return on average assets of 1.2%. While our conservative approach to credit has limited outside growth in our loan portfolio, it has also allowed us to prudently optimize the bank's liquidity and funding. Average loans at the bank declined slightly from the fourth quarter, driven primarily by a reduction in national warehouse lending balances, as normal seasonality and a depressed mortgage market continue to restrict this business.

Speaker Change: Now I'd like to give a brief update on the bank leadership transition that I mentioned in our fourth quarter earnings call.

Speaker Change: As discussed Jerry Schaffner, the CEO of <unk> capital Bank will be retiring on May one and I will take over as CEO of the bank with Brian <unk> President.

Speaker Change: In preparation, we have established an internal transition team and have been making excellent progress in ensuring a smooth handoff in the coming weeks.

Speaker Change: We feel we are in an excellent position to build on the bank's incredible legacy and I look forward to working more closely with Brian Pete Darrel, Steve and everyone else at the bank.

Speaker Change: Again, I want to thank Jerry for his partnership and friendship as well as his dedication and leadership over his more than 42 years of service.

Now I will turn the presentation over to will to discuss our financials in more detail.

Jeremy Blue Ford: We continue to see a pullback in the commercial lending market due to the higher-for-longer interest rate environment and increased equity requirements, and we expect this pullback to pressure loan growth for the near future. Our average deposit balance declined 3% during the period, primarily due to the bank returning nearly $380 million of sweet deposits back to Hilltop Securities and returning $42 million of brokered CDs. Encouragingly, this planned reduction was partially offset by a $200 million increase in interest-bearing deposits.

Will: Thank you Jeremy I'll start on page five.

As Jeremy discussed for the first quarter of 2020 for Hilltop reported consolidated income attributable to common stockholders of $27 7 million equating to <unk> 42 per diluted share.

Will: Results for the first quarter include approximately $7 $3 million of negative valuation adjustments related to our MSR asset.

Will: Approximately $5 million of the valuation adjustment relates to the signing of an LOI to sell all of the MSR backed by conventional mortgage loans.

Jeremy Blue Ford: Results in the quarter include a provision recapture of $2.9 million, which resulted from the impact of net charge-offs, improvements in the economic outlook, and changes in migrations across the portfolio. Overall, asset quality continues to be stable, as criticized loans as a percentage of bank loans have remained relatively flat for the third consecutive period. Moving to prime lending, where the company reported a pre-tax loss of $16.5 million for the period as low housing inventory, escalating home prices, and higher mortgage rates persist. Additionally, operating results were negatively impacted by a $7 million valuation adjustment on the MSR asset.

Speaker Change: I cover the sale of approximately $47 million of MSR value as of March 31.

Speaker Change: As we've noted in the past the MSR asset is not a strategic asset for hilltop and while we may choose to retain MSR is at times through the cycle. Our long term view remains that we will maintain a small MSR asset sufficient to support the sale of certain products at prime lending.

Speaker Change: And that we will execute bulk sales when we deem appropriate to limit our overall exposure on the balance sheet.

In addition, as of March 31, Hilltop reported a reduction of the allowance for credit losses of $7 $2 million, which includes $4 3 million of net charge offs and our net $2 9 million release of the allowance.

Jeremy Blue Ford: We are seeing that the cost-cutting measures implemented during 2022 and 2023 are making a positive impact, as non-variable compensation has decreased by $6 million, or 17%, since the first quarter of 2023. This has resulted in the pre-tax loss improving despite lower overall revenues relative to the prior year period. Notwithstanding these ongoing challenges, employee engagement and morale remain remarkably high, underscored by the company's recent recognition as one of the top 10 workplaces in the 2024 USA Today Rankings.

Speaker Change: Driven by the improvement in the economic scenario from December 31.

Speaker Change: Turning to page six.

Speaker Change: We'll talk continues to leverage the Moody's <unk> scenario, which calls for a mild recession that began in Q1 of 2025.

Speaker Change: The 12 31, the scenario predicted that a mild recession will begin in the first quarter of 2024.

Speaker Change: The shift in the timing of the recession is a key driver to the economic impact and resulting release of reserves for the first quarter.

Jeremy Blue Ford: Looking forward, while we believe the next few quarters will remain challenged, we are beginning to see signs of optimism within the mortgage business. In the first quarter, Hilltop Securities generated pre-tax income of $19 million on net revenues of $117 million, marking a 12% increase in revenue over the same period in the prior year. This growth was primarily driven by the mortgage trading business and sweep deposit products within wealth management, speaking to the lines of business at Hilltop Security. Public finance services generated a 4% increase in net revenues compared to the same period last year.

Speaker Change: Allowance for credit losses of 104 million builds an ACL to total loans <unk> ratio of 129% as of March 31.

Speaker Change: As we've stated since introducing introduction of Cecil.

Speaker Change: 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.

Speaker Change: Migration trends and changes to the macroeconomic outlook over time.

Speaker Change: Given the current uncertainties regarding inflation.

Speaker Change: Interest rates, the future outlook for GDP growth and unemployment rates.

Speaker Change: Volatility could be heightened over the coming quarters.

Moving to page seven.

Jeremy Blue Ford: Municipal advisory fees and underwriting revenues remain stable, while revenues from the public finance spoke businesses improved due to increased fees on our cash pool products. Our structured finance net revenues increased 53% compared to the same period last year, primarily due to mortgage-related business activity within the Florida market.

Speaker Change: As noted in prior quarters, we continue to believe that the segments of our loan portfolio with the most significant potential for risk exposure include the non owner occupied office and retail portfolios.

Speaker Change: As it is provided in the table these portfolios totaled $851 million at March 31, and.

Speaker Change: And maintain an aggregate ACL coverage ratio of 3%.

Jeremy Blue Ford: While this was a very strong start to the year, we do anticipate a weaker outlook in the coming months as down payment assistance programs have slowed. In wealth management, net revenues were stable compared to last year's first quarter as interest rates have remained elevated, which benefits our FDIC suite program. Our fixed income business remains pressured as the shape of the yield curve continues to act as a headwind for the business.

Speaker Change: Which is modestly higher than what was maintained at December 31.

Speaker Change: Moving to page eight.

Speaker Change: Net interest income in the first quarter equated to $104 million, including $1 $3 million of purchase accounting accretion.

Speaker Change: Versus the prior year period, net interest income decreased by $18 million or 15% driven primarily by the ongoing increases of deposit costs.

Jeremy Blue Ford: We are still committed to the business and look to further enhance our sales distribution capabilities while upholding our strong culture and risk management practice. Overall, Hilltop Securities performed very well this quarter, and we continue to build on the business with recent hires that we've made from competitors who have pulled out of certain municipal and trading businesses. Moving to page four.

Speaker Change: Over the last quarter, our loan securities and cash yields have remained relatively stable consistent with the fed funds rates.

Speaker Change: We continue to expect the deposit competition will remain very intense for the remainder of the year, causing NII and NIM to remain pressured throughout 2024.

Speaker Change: Our estimates for future NII and NIM currently reflect our expectation that the fed will maintain stable rates.

Jeremy Blue Ford: Hilltop maintains robust capital levels with a common equity tier one capital ratio of 19.7%. Additionally, our tangible book value per share increased from year-end 2023 by $0.09 to $28.44, despite the recent rise in rates. During the period, we returned $21 million to shareholders, with $11 million in dividends and $10 million in share repurchase. Now, I'd like to give a brief update on the bank leadership transition that I mentioned in the fourth quarter earnings call.

Speaker Change: Till late 2020 for executing a single 25 basis point reduction at the December meeting.

Speaker Change: Moving to page nine.

Speaker Change: The table in the upper left of the page highlights available liquidity sources at March 31.

As of period end, including the fed discount window will top maintained available liquidity of approximately $7 4 billion.

Well in excess of deposits that are both uninsured and uncollateralized, which equated to $4 5 billion at the period end.

Jeremy Blue Ford: As discussed, Jerry Schaffner, the CEO of Planes Capital Bank, will be retiring on May 1st, and I will take over as CEO of the bank with Brian Heflin as president. In preparation, we have established an internal transition team and have been making excellent progress in ensuring a smooth handover in the coming weeks. We feel we are in an excellent position to build on the bank's incredible legacy, and I look forward to working more closely with Brian, Pete, Daryl, Steve, and everyone else at the bank.

Speaker Change: As we've noted in prior quarterly updates, we do expect that interest bearing deposit betas continue to drift modestly higher.

Speaker Change: And we will in this cycle between 66 and 70%.

Speaker Change: As of March 31, the cumulative interest bearing deposit beta for this portion of the rate cycle was 66%.

Speaker Change: Turning to page 10.

Speaker Change: First quarter average total deposits are approximately $10 $7 million and have declined by approximately $363 million or 3% versus the fourth quarter of 2023.

Jeremy Blue Ford: Again, I want to thank Jerry for his partnership and friendship, as well as his dedication and leadership over his more than 42 years of service. Now, I will turn the presentation over to Will to discuss our finances in more detail.

On an ending balance basis deposits declined by 179 million to $10 9 billion from the prior quarter ending balance level.

Will: Thank you, Jeremy. I'll start on page five. As Jeremy discussed, for the first quarter of 2024, Hilltop reported consolidated income attributable to common stockholders of $27.7 million, equating to $0.42 per diluted share. Results for the first quarter include approximately $7.3 million of negative valuation adjustments related to our MSR asset. Approximately $5 million of the valuation adjustment relates to the signing of an LOI to sell all of the MSR backed by conventional mortgage loans. The LOI covers the sale of approximately $47 million of MSR value as of March 31st.

Speaker Change: Turning to page 11.

Speaker Change: As was highlighted in the chart. The bank returned $377 million of broker dealer sweep deposits and $42 million of brokered Cds, which matured during the period.

Speaker Change: Adjusting for these items period end deposits rose by $240 million from December 31 levels.

Speaker Change: While we're pleased to see our customer deposits growing the growth has been centered in our higher cost offerings in particular, our top tier money market and interest bearing checking are attracting the preponderance of new deposits that have moved into the bank.

Speaker Change: As a result of total interest bearing deposit cost continue to rise with the blended rate equating to 358 basis points as of March 31.

Will: As we've noted in the past, the MSR asset is not a strategic asset for Hilltop, and while we may choose to retain MSRs at times through the cycle, our long-term view remains that we will maintain a small MSR asset, sufficient to support the sale of certain products at prime lending, and that we will execute bulk sales when we deem appropriate to limit our overall exposure on the balance sheet. In addition, as of March 31st, Hilltop reported a reduction in the allowance for credit losses of $7.2 million, which included $4.3 million of net charge-offs, and a net $2.9 million release of the allowance, largely driven by the improvement in the economic scenario from December 31. Turning to page 6.

Speaker Change: From 340 basis points at December 31.

Speaker Change: Given the current competitive environment, and our focus on retaining and growing our customer deposits. We do expect that overall interest bearing deposit costs will continue to increase over the coming quarters further in the table on the lower portion of the page we provide some detail as our CD maturities and the average rate of those maturing.

Speaker Change: Yes.

Speaker Change: Turning to page 12.

Speaker Change: Total noninterest income for the first quarter of 'twenty, four equated to a $182 million.

Speaker Change: First quarter mortgage related income and fees decreased by $2 million.

Speaker Change: Versus the first quarter of 2023.

Speaker Change: Although total mortgage fees declined in the period, we have seen signs of early stabilization in both revenue per loan and origination volumes, which were relatively stable with the prior year levels.

Will: Hilltop continues to leverage Moody's S7 scenario, which calls for a mild recession to begin in Q1 of 2025. At 1231, the scenario predicted that a mild recession would begin in the first quarter of 2024. The shift in the timing of the recession is the key driver of the economic impact and results in the release of reserves for the first quarter. The allowance for credit losses of $104 million yields an ACL to total loans HFI ratio of 1.29% as of March 31st. As we've stated since the introduction of CECL,

Speaker Change: While neither revenue nor origination volumes reflect what we would describe as a strong market. We have seen modest improvement in home inventory levels of recent.

Speaker Change: However, interest rates have remained volatile throughout the first and early parts of the second quarters in 2024.

Speaker Change: Further while we have seen.

Speaker Change: Improved levels of gain on sale margins that improvement has been largely offset by lower per loan origination fees.

Will: 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, the future outlook for GDP growth, and unemployment rates, volatility could be heightened over the coming quarters.

Speaker Change: This revenue dynamic we will continue to shift rapidly and will remain volatile until market interest rates are more predictable and likely stabilized at lower levels.

Speaker Change: Other income increased by $13 $5 million versus the prior year period, driven primarily by improved trading activity in our structured finance business at hilltop Securities.

Speaker Change: The strength in the structured finance.

Speaker Change: Revenue reflected the pull through of secondary market volume from the prior quarter's strong lock volumes, specifically related to certain states continued support of their down payment assistance programs.

Will: As noted in prior quarters, we continue to believe that the segments of our loan portfolio with the most significant potential for risk exposure include the non-owner occupied office and retail portfolio. As shown in the table, these portfolios total $851 million at March 31st and maintain an aggregate ACL coverage ratio of 3%, which is modestly higher than what was maintained on December 31st. Moving to page 8.

Speaker Change: Most states those subsidies have been depleted and the business will likely see a decline in activity until further state subsidy subsidies are put in place.

Speaker Change: It remains 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 volatility in production trends, which may include additional subsidies provided by the states to support their down payment is.

Will: Net interest income in the first quarter equated to $104 million, including $1.3 million of purchase accounting accretion. Compared to the prior year period, net interest income decreased by $18 million, or 15%, driven primarily by the ongoing increases in deposit costs. Over the last quarter, our loan, securities, and cash yields have remained relatively stable, consistent with the Fed Funds Rate. We continue to expect that deposit competition will remain very intense for the remainder of the year, causing NII and NIM to remain pressured throughout 2024. Our estimates for future NII and NIM currently reflect our expectation that the Fed will maintain stable rates until late 2024, executing a single 25 basis point reduction at their December meeting. Moving to page 9.

Speaker Change: Systems programs.

Speaker Change: Turning to page 13.

Speaker Change: Noninterest expenses remained relatively stable from the same period in the prior year, while compensation occupancy and professional services related expenses declined modestly versus the prior year period. Other expenses moved modestly higher driven by production related cost, including quotation and clearing costs and servicing and <unk>.

Speaker Change: Tax cost across hilltop securities and prime lending.

Speaker Change: Looking forward, we expect expenses other than variable compensation will remain relatively stable 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, helping to offset the ongoing inflationary pressures that persist.

Speaker Change: In the market.

Speaker Change: Moving to page 14.

Will: The table in the upper left of the page highlights available liquidity sources at March 31st. As of period end, including the Fed discount window, Hilltop maintained available liquidity of approximately $7.4 billion, well in excess of deposits that are both uninsured and uncollateralized, which equated to $4.5 billion at period end. As we've noted in prior quarterly updates, we do expect that interest-bearing deposit betas could continue to drift modestly higher and will end this cycle between 66% and 70%.

Speaker Change: First quarter average age of our loans equated to $7 8 billion.

Speaker Change: In 2024 down $59 million from the prior year period levels.

Speaker Change: As we've noted in prior quarters overall, the market market demand for funded commercial loans remains challenged driven by the combination of the borrowers preference to leverage less debt.

Current market rates and the structural requirements that new projects and investments required more upfront equity to meet key underwriting thresholds.

Speaker Change: Given these ongoing challenges we restarted the retention of originated mortgages on the balance sheet during the first quarter and expect to continue retaining these assets in the coming months and quarters.

Will: As of March 31st, the cumulative interest-bearing deposit data for this portion of the rate cycle was 66%, turning to page 10. First quarter average total deposits are approximately $10.7 billion and have declined by approximately $363 million or 3% versus the fourth quarter of 2023. On an ending balance basis, deposits declined by $179 million to $10.9 billion from the prior quarter ending balance level. Turning to page 11.

Speaker Change: The level of future retention will be driven by a combination of factors, including the return profile of held mortgages.

Speaker Change: <unk> loan demand in the long term value compare in comparison to securities and other investment options, but we'll be within the current guidance levels of zero to $20 million per month.

Speaker Change: Turning to page 15.

Speaker Change: During the fourth quarter call. We noted a marked increase in total nonperforming assets during that period and noted that the increase was largely driven by the negative migration of a single client relationship within our non owner occupied commercial real estate portfolio.

Will: As highlighted in the chart, the bank returned $377 million of broker-dealer sweep deposits and $42 million of brokered CDs, which matured during the period. Adjusting for these items, period end deposits rose by $240 million from December 31 levels. While we're pleased to see our customer deposits growing, the growth has been centered in our higher cost products. In particular, our top-tier money market and interest-bearing checking are attracting the preponderance of new deposits that have moved into the bank.

During the first quarter management made the decision to move this loans to held for sale and engaged alone sales services organization to support the potential disposition of this loan.

Speaker Change: That sale process continues and we do not have any specific updates as to the final disposition of this asset at this time.

Overall credit quality has remained generally solid through the first quarter. However.

Will: As a result, total interest-bearing deposit costs continue to rise, with the blended rate equating at 358 basis points as of March 31st, up from 340 basis points on December 31st. Given the current competitive environment and our focus on retaining and growing our customer deposits, we do expect that overall interest-bearing deposit costs will continue to increase over the coming quarters. In addition, in the table in the lower portion of the page, we provide some detail as to our CD maturities and the average rate of those maturing CDs. Turning to page 12, Total non-interest income for the first quarter of 24 equated to $182 million.

Speaker Change: However, we did experience a higher level of charge offs during the period, specifically addressing the loans that were charged off represented a disparate set of industries and locations and includes a charge off amount related to the loan discussed earlier that was moved to held for sale.

Speaker Change: Currently we do not see any prevailing trends that cause us outsized concern and our portfolio. However, we continue to monitor all aspects of the portfolio very closely as higher interest rates potentially lower utilization rates in certain segments of the commercial real estate and an expected slowdown in economic activity could.

Speaker Change: A negative impact on our clients and our portfolio.

Will: First quarter mortgage-related income and fees decreased by $2 million versus the first quarter of 2023. Although total mortgage fees declined in the period, we have seen signs of early stabilization in both revenue per loan and origination volumes, which were relatively stable with the prior year level. While neither revenue nor origination volumes reflect what we would describe as a strong market, we have seen modest improvement in home inventory levels in recent years.

Speaker Change: As is shown on the graph on the bottom right of the page the allowance for credit loss coverage at the bank ended the first quarter at 135%, including mortgage warehouse lending.

Speaker Change: I'm moving to page 16.

Speaker Change: As we move into the second quarter of 2024, there continues to be a lot of uncertainty in the market regarding interest rates inflation and the overall health of the economy.

Speaker Change: We're 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.

Will: However, interest rates have remained volatile throughout the first and early parts of the second quarters of 2024. Furthermore, while we've seen improved levels of gain on sale margins. That improvement has been largely offset by lower loan origination fees. This revenue dynamic will continue to shift rapidly and will remain volatile until market interest rates are more predictable and likely stabilize at lower levels. Other income increased by $13.5 million versus the prior year period, driven primarily by improved trading activity in our structured finance business at Hilltop Security.

Speaker Change: <unk>, new customers to our franchise supporting the communities, where we serve.

Speaker Change: Turning a moderate risk profile and delivering long term shareholder value.

Speaker Change: As noted in the table our outlook for 2024 reflects our current assessment of the economy and the markets where we participate.

Speaker Change: Further as the market changes and we adjust our business to respond we will provide updates to our outlook on future quarterly calls.

Speaker Change: Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.

Speaker Change: At this time I would like to ask a question. Please press the star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star Q. Once again that is star one to ask a question, we will pause for a moment to allow questions to queue.

Will: Strength in Structured Finance. Revenue reflected the pull-through of secondary market volume from the prior quarter's strong lock volumes, specifically related to certain states' continued support of their down payment assistance programs. For most states, those subsidies have been depleted, and the business will likely see a decline in activity until further state subsidies are put in place. It remains 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, volatility, and production trends, which may include additional subsidies provided by the states to support their down payment assistance programs. Turn to page 13.

Speaker Change: Okay.

Speaker Change: And we will take our first question from Michael Rose with Raymond James.

Michael Rose: Hey, good morning, everyone. Thanks for taking my questions.

Michael Rose: Maybe we could just start on the reserve release this quarter I guess I was just a little bit surprised to see the the general release I think you cited maybe better economic trends I guess thats kind of in contrast with <unk>.

Michael Rose: What we're seeing from a bunch of other banks that are actually.

Michael Rose: Kind of building reserves I understand that clearly taxes.

Will: Non-interest expenses remained relatively stable from the same period in the prior year. While compensation, occupancy, and professional services-related expenses declined modestly versus the prior year period, other expenses moved modestly higher, driven by production-related costs, including quotation and clearing costs and servicing and tax costs across Hilltop Securities and Prime Lending. Looking forward, we expect expenses other than variable compensation to remain relatively stable 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 14.

Michael Rose: Old up a lot better than most other places of the country, but I was just a little surprised by that so maybe if you could just walk us through.

What happened there and kind of what youre seeing in maybe a little bit different than maybe what others are saying.

Speaker Change: Well thanks for the question.

Speaker Change: As we've noted we use we use a single scenario for our seasonal evaluation and Thats, the Moody's <unk> seven and Thats been consistent for a series of quarters at this point.

Speaker Change: As as management went through the evaluation of the economic scenarios, we felt like the.

Speaker Change: Moody's seven at current here at 331 was the appropriate scenario to leverage if you compare those two.

Tom periods for the 733 hundred 31% and 12 31, but youll see us there.

Will: First quarter average HFI loans equated to $7.8 billion in 2024, down $59 million from the prior year period levels. As we've noted in prior quarters, overall, the market demand for funded commercial loans remains challenged, driven by the combination of the borrower's preference to leverage less debt at current market rates and the structural requirements that new projects and investments require more upfront equity to meet key underwriting thresholds. Given these ongoing challenges, we restarted the retention of originated mortgages on the balance sheet during the first quarter and expect to continue retaining these assets for the coming months and quarters.

Speaker Change: There is a shifting in the timing of the overall potential economic recession that theyre predicting so.

Speaker Change: At 12 31, this scenario predicted that a recession would begin really in the later parts of the first quarter of 2024 that has moved now to the.

Speaker Change: The first quarter of 2025 really that shift in timing.

Speaker Change: Of the overall.

A potential recession really is what shifted and what caused the as you can see on page six of our slides there.

Speaker Change: Collective economic condition.

Speaker Change: The release, there are $4 1 million. So its really just scenario for scenario the adjustments as we evaluated our view has continued to be that.

Will: The level of future retention will be driven by a combination of factors, including the return profile of held mortgages, commercial loan demand, and the long-term value comparison to securities and other investment options, but will be within the current guidance levels of $0 to $20 million per month, starting at page 15. During the fourth quarter call, we noted a marked increase in total non-performing assets during that period and noted that the increase was largely driven by the negative migration of the single client relationship within our non-owner occupied commercial real estate portfolio.

Speaker Change: The economy will move into a recessionary period in the future and as a result, we adopted that scenario and believe that to be appropriate as a 331.

Speaker Change: Okay, I guess, just as a follow up.

Speaker Change: A little bit curious why you wouldn't wait the downside scenarios, a little bit higher I mean, we're kind of seeing that kind of across the board.

Speaker Change: <unk> small.

Speaker Change: Any reason why you would be kind of in contrast.

Speaker Change: Kind of what we're seeing.

Speaker Change: Thanks.

Speaker Change: Yes, well, we don't we don't wait scenarios again, we take we take we take one scenario.

Will: During the first quarter, management made the decision to move this loan to Hell for Sale and engaged a loan sales services organization to support the potential disposition of this loan. That sale process continues, and we do not have any specific updates as to the final disposition of this asset at this time. Overall, credit quality has remained generally solid through the first quarter. However, we did experience a higher level of charge-offs during the period. Specifically, addressing the loans that were charged off, represented a disparate set of industries and locations, and includes a charge-off amount related to the loan discussed earlier that was moved to be held for sale.

Speaker Change: We believe most adequately reflects.

Speaker Change: The economic outlook and so as a result of that we don't we don't take multiple scenarios and then try to weight our way into a blended average. So that's really is likely the delta that you're seeing between between others met with Gaslog.

Speaker Change: Hello. This is we're doing it.

Speaker Change: Got it I appreciate it.

Speaker Change: Then.

Speaker Change: No.

Speaker Change: We saw.

Speaker Change: A decent step down in the in the margin. This quarter can you just talk about some of the levers whether it be on the.

Speaker Change: Liability side in terms of deposit cost betas and then.

Speaker Change: Or maybe what you might have in terms of.

Speaker Change: Loan maturities and maybe some securities maturities this year.

Will: Currently, we do not see any prevailing trends that cause us outsized concern in our portfolio. However, we continue to monitor all aspects of the portfolio very closely as higher interest rates, potentially lower utilization rates in certain segments of the commercial real estate market, and an expected slowdown in economic activity could have a negative impact on our clients and our portfolio. As shown on the graph in the bottom right-hand side of the page, the allowance for credit loss coverage at the bank ended the first quarter at 1.35 percent, including mortgage warehouse lending. I'm moving to page 16.

Speaker Change: And then how should we.

Speaker Change: Putting all that together, how should we kind of expect the margin to.

Speaker Change: <unk> Chan from here I would think that it would be kind of up particularly as you get the benefit seasonal benefit from.

Speaker Change: Some mortgage pickup even though it's a little bit more muted maybe than it might've been.

Speaker Change: Just given the higher for longer backdrop. Thanks.

Speaker Change: And so for margin as you noted 285 basis points for the first quarter, obviously down linked quarter down year on year I think as we are.

Speaker Change: Evaluate kind of the ongoing aspects of our portfolio. We've got a handful of things that are occurring first and I noted. This in my comments, we do expect that interest bearing deposit costs or continue to rise we provided some perspective to our CD maturities in the materials.

Will: As we move into the second quarter of 2024, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy. We're 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 shareholder value.

Speaker Change: But we do have a 5% 90 day CD or currently in the market and so we're seeing the preponderance of Cds roll into.

Speaker Change: That product so that will continue to drift higher we think thats the competitive product at this point secondarily, we're seeing deposit flows into our in our higher cost money market tiers, which are our larger balance tiers, but nonetheless, thats, where the dollars are flowing into here over the last couple of quarters.

Will: As noted in the table, our outlook for 2024 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, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call. At this time...

Speaker Change: So we are expecting to see.

Speaker Change: I'd say, a consistent drift higher and overall interest bearing deposit costs.

Speaker Change: On the loan side.

Speaker Change: Most of our the vast majority of our.

Operator: At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue, and then we will take our first question from Michael Rose with Raymond James.

Speaker Change: Variable rate loans have already reset.

Speaker Change: If you believe that rates are going to remain reasonably stable there'll be stable the same.

Speaker Change: From a from a fixed rate perspective, we've got about $350 million of loans.

Speaker Change: That will come up for renewal here for the balance of the year that will allow us the opportunity to reprice those loans and so we would expect that to occur the blended rate on that is there on those loans at current is just under just under 5%. So obviously, we view that as a tailwind.

Michael Edward Rose: Hey, good morning, everyone. Thanks for taking my questions.

Will: Maybe we could just start on the reserve release this quarter. I guess I was just a little bit surprised to see the general release. I think you cited maybe better economic trends. I guess that's kind of in contrast with, you know, what we're seeing from a bunch of other banks that are actually, you know, kind of building reserves. I understand that, you know, clearly Texas is going to hold up a lot better than most other places in the country, but I was just a little surprised by that. So maybe if you just walk us through what happened there and kind of what you're seeing that may be a little bit different than, you know, maybe what others are seeing. Thanks.

Speaker Change: <unk> portfolio has got a yield just at 3% we are continuing to allow that portfolio to run down and those cash flows are reinvested either in cash which.

Speaker Change: Our deposit at the fed or into the retained mortgages that we that we talked about so we we also view that as a favorable.

Speaker Change: Just given the sheer size, we would expect that NIM will be pressured here into the second and third quarters, and then likely start to turn.

Speaker Change: From there in the fourth quarter again.

Will: Well, thanks for the question. As we've noted, we use a single scenario for our CECL evaluation, and that's Moody's S7. That's been consistent for a series of quarters at this point. As management went through the evaluation of the economic scenarios, we felt like the Moody's S7 at current here at 331 was the appropriate scenario to leverage. If you compare those two time periods for the S7, 331 and 1231, what you'll see is there is a shift in the timing of the overall potential economic recession that they're predicting.

Speaker Change: Presuming that the fed holds rates reasonably stable, but again the overall flows would cause you to be.

Speaker Change: More stable, but likely has a little bit of a little bit of a negative bias here over the next.

Speaker Change: The next two quarters.

Speaker Change: Very thorough well. Thank you very much and then maybe just finally for me maybe for Jeremy.

Speaker Change: Just at a higher for longer environment.

Speaker Change: How can we think about.

Speaker Change: The broker dealer segment and what are the puts and takes of kind of.

Speaker Change: A higher for longer backdrop as it relates to the components of the business and then as you think about the pre tax margin. Thanks.

Will: So at 1231, this scenario predicted that a recession would begin really in the later parts of the first quarter of 2024. But that has moved now to the first quarter of 2025. Really, that shift in timing of the overall potential recession really is what shifted and what caused the, as you can see on page six in our slides there, the collective economic condition, the release there of $4.1 million. So it's really just scenario for scenario, the adjustments.

Speaker Change: Okay, well I think there's a lot to that I think.

Speaker Change: On the public finance business, the higher rate environment has slowed underwritings.

Speaker Change: So I think that there is.

Speaker Change: When rates decline, we think there is a pipeline building that will.

Speaker Change: I will provide some additional revenue there.

Speaker Change: I think on it's kind of the shape of the curve, having a higher short term interest rates has clearly benefited our wealth management businesses with our sweep deposits that are.

Will: As we evaluate it, our view has continued to be that the economy will move into a recessionary period in the future, and as a result, we adopted that scenario and believe it to be appropriate as of 331.

Speaker Change: Really tied to that and also having the inverted yield curve is really challenged our fixed income business.

Speaker Change: Because.

The nature of that business and the fact that a lot of what we're.

Michael Edward Rose: Okay, I guess just as a follow-up, though. I'm just a little bit curious why you wouldn't weight the downside scenarios a little bit higher. I mean, we're kind of seeing that kind of across the board, large and small. Any reason why, you know, you would be kind of in contrast to kind of what we're seeing, you know, from others? Thanks.

Speaker Change: The activity is muted.

Speaker Change: And with client demand and the activity that we're doing we're doing in shorter duration product generates less revenue so.

Speaker Change: I think in general.

Speaker Change: On a more normalized yield curve will.

Will: Yeah, well, we don't we don't wait for scenarios. Again, we take we take we take one scenario that we believe most adequately reflects what I'm here to talk to you about the economic outlook, and so as a result of that, we don't take multiple scenarios and then try to wade our way into a blended average. So that's really likely the delta that you're seeing between others, with us not being able to see how others are doing it.

Speaker Change: We'll pull up the public finance in the fixed income business and we.

Speaker Change: He will be a good offset for a potential decline in.

Speaker Change: The wealth management suites, we think that with the wealth management sweep I think with the first 100 basis points of any decline that thats probably.

Speaker Change: Something that.

Speaker Change: We'll pass back to the clients. So we will be able to sustain some of that revenue.

Michael Edward Rose: Got it. I appreciate it.

Speaker Change: With that.

Speaker Change: I don't know if thats all over the map.

Michael Edward Rose: And then, you know, I know we saw a decent step down in the margin this quarter. Can you just talk about some of the levers, whether it be on the, you know, liability side in terms of, you know, deposit cost data, and then, you know, maybe what you might have in terms of, you know, loan maturities and maybe some securities maturities this year. And then how should we, you know, putting all that together, how should we, you know, kind of expect the margin to kind of trend from here?

Speaker Change: <unk> response.

Speaker Change: Those are great components and I appreciate that Jeremy Thanks for taking my questions everyone.

Speaker Change: Thank you.

Speaker Change: And we will take our next question from Stephen Scouten with Piper Sandler.

Stephen Kendall Scouten: Good morning, everyone.

Stephen Kendall Scouten: Yes, if you could touch a little bit more on the mortgage business and kind of what youre seeing I know you referenced some some signs youre seeing that things might be moving a bit more positive kind of what specifically you might be seeing there.

Michael Edward Rose: I would think that it would be, you know, kind of up, particularly as you get the seasonal benefit from, you know, some mortgage pickup, even though it's a little bit more muted, maybe than it might have been, you know, just given a higher for longer backdrop. Thanks.

Stephen Kendall Scouten: And kind of what the path to that and you All's mind. It looks like there's kind of a couple of years sort of recovery to a more normalized mortgage environment or how are you thinking about that today.

Will: And so for margin, as you noted, 285 basis points for the first quarter, obviously a downlink quarter, down year on year. You know, I think as we evaluate kind of the ongoing aspects of our portfolio, we've got a handful of things that are happening first. And I noted this in my comments; we do expect that interest-bearing deposit costs are going to continue to rise. We provided some perspective on our CD maturities in the materials, but we do have a 5% 90-day CD currently in the market. And so we're seeing the preponderance of CDs roll into that product, and so that will continue to drift higher. We think that's a competitive product at this point.

Stephen Kendall Scouten: Yes.

Stephen Kendall Scouten: My point would be kind of high level there is such a.

Great amount in building pent up demand for housing.

Stephen Kendall Scouten: That.

Stephen Kendall Scouten: And it's generational and so we're seeing that we're seeing pockets are markets, where inventory is starting to become.

Stephen Kendall Scouten: More available.

Stephen Kendall Scouten: We're seeing that.

Stephen Kendall Scouten: Borrowers are starting to become accustomed to and.

Stephen Kendall Scouten: Are more accepting of a mortgage rate that is.

Stephen Kendall Scouten: And the <unk> and we think that a six 5% mortgage rate is really.

Will: Secondarily, we're seeing deposit flows into our higher cost money market tiers, which are our larger balance tiers, but nonetheless, that's where the dollars have flown into here over the last couple of quarters. And so we are expecting to see, say, a consistent drift higher in overall interest-bearing deposit costs. On the loan side, you know, most of our, the vast majority of our variable rate loans have already reset in the second and third quarters and then likely start to turn from there in the fourth quarter. Again, presuming that the Fed holds rates reasonably stable, but again, the overall flows would cause you to be more stable, but likely has a little bit of a negative bias here over the next two quarters.

Stephen Kendall Scouten: Defining level there that if it goes below that we think that there'll be more more activity.

Stephen Kendall Scouten: And if it's much higher than that then it just continues to.

Have this locked in effect that we have where there is.

Stephen Kendall Scouten: A large a vast majority of.

Stephen Kendall Scouten: The mortgage market is.

Stephen Kendall Scouten: Our mortgage holders are.

Stephen Kendall Scouten: Our rates well less than the fixes so.

Stephen Kendall Scouten: That's why we're saying and it's just kind of a <unk> kind of slowly unlocks.

Stephen Kendall Scouten: We don't predict or think that Theres, a hockey stick here, but we do think there is a light at the end of the tunnel.

Stephen Kendall Scouten: And for a prime they've done a lot of work.

Stephen Kendall Scouten: Reduced their platform costs, and we're going to really continue to work hard to maintain that.

Stephen Kendall Scouten: That win.

Stephen Kendall Scouten: The revenue comes back we'll be able to leverage that to our earnings.

Speaker Change: Okay, Yeah, that's really helpful. Thanks.

Speaker Change: And I guess you guys you referenced maybe some new hires within hilltop Securities I'm wondering.

Speaker Change: Is that have any meaningful scale that we'll see that show up in the expense base or is that just kind of normal course of business as you continue to build out that debt.

Division over time.

Speaker Change: Wilkins Vijay Cynthia I think it's normal course of business I mean, we we continue to invest in.

Speaker Change: While we believe that you really high quality teams and individuals that we believe bring skill sets I think Jeremy was mentioning was.

Speaker Change: We've seen some of our larger competitors.

Speaker Change: Exit certain businesses.

Speaker Change: And we've been able to we believe benefit from that in terms of hiring some some really quality quality folks from a from an overall cost perspective, it'll be marginal in that regard, but we do expect them to be productive and accretive here over the coming quarters.

Michael Edward Rose: Very thorough, Will, thank you very much. And then maybe just finally, for me, maybe for Jeremy, just in a hire for longer environment, how can we think about the broker dealer segment and what are the puts and takes of kind of a hire for longer backdrop as it relates to the components of the business, and then as you think about the pre-tax margin? Thanks.

Speaker Change: Okay, Great and then I guess, just lastly for me how should we think about.

Speaker Change: Share repurchases I mean, obviously you just bought back some shares at $31 were lower than that.

Speaker Change: At around 100 to a tangible or what have you. While you are up a good bit today, but would.

Jeremy Blue Ford: Okay, well, I think, I mean, there's a lot to that. I think... On the public finance business, the higher rate environment has slowed underwriting. So I think that there's a, when rates decline, we think there's a pipeline building that will..., will provide some additional revenue there. I think it's kind of the shape of the curve, having the higher short-term interest rates clearly benefit our wealth management businesses with our sweet deposits that are really tied to that.

Speaker Change: Would you expect to be fairly aggressive with.

Speaker Change: With the share repurchase around these levels.

Speaker Change: I think that what we're going to do is we're going to try to.

Speaker Change: Mindful of it we clearly are evaluating the value and and see that and.

Speaker Change: We're going to try to do share repurchases that are.

Speaker Change: Towards our share repurchase authorization of around $75 million.

Speaker Change: That's it.

Speaker Change: Valuations go down further or something maybe we'll do something more but.

Jeremy Blue Ford: And also, having the inverted yield curve has really challenged our fixed income business. Because, you know, the nature of that business and the fact that a lot of what we're seeing with client demand, and the activity that we're seeing, we're doing in shorter duration products that generate less revenue. You know, I think in general, a more normalized yield curve will pull up the public finance and the fixed income business and will be a good offset for a potential decline. And we think that with the wealth management sweeps, I think with the first 100 basis points of any decline, that's probably something that we'll pass back to the client, so we'll be able to sustain some of that revenue with that. I don't know if No, those are great components.

Speaker Change: For the time being we're going to try to live within our share repurchase authorization.

And I'll just go back to hilltop Securities I mean, I personally I'm extremely excited about the.

Speaker Change: Talent and the team that we're bringing on board combined with the existing talent that we have so I.

<unk>.

Speaker Change: When it's particularly in public finance in fixed income and I think when notes.

Speaker Change: Markets.

Speaker Change: Come back I think that will.

Speaker Change: I'm hopeful that we will see some real revenue growth.

Speaker Change: Yes makes sense, Greg I appreciate the color everyone. Thanks, so much.

Speaker Change: Thank you.

Speaker Change: And we will take our next question from Woody lay with K B W.

Wood Neblett Lay: Hey, good morning, guys.

Wood Neblett Lay: Good morning.

Wood Neblett Lay: Just wanted to follow up on mortgage it was great to see the gain on sale margin pick up in the quarter. Just what are your expectations for that margin for the remainder of the year.

Speaker Change: Yes, I think as we as we look at it and I tried to highlight in our comments we are now.

Michael Edward Rose: No, those are great components, and I appreciate them, Jeremy. Thanks for taking my questions, everyone.

Speaker Change: I think we've seen it we saw an improvement in overall gain on sale margins, obviously, the 216 basis points.

Speaker Change: What we are seeing is again with each with each kind of increment in the overall mortgage rate and its pretty volatile at this point, we are seeing customers make kind of real time decisions, rather they may buy down the rate pay points and buy down the rate and that generates more origination fees or we're able to take that.

Operator: And we will take our next question from Stephen Scouten with Piper Sandler.

Stephen Kendall Scouten: Thanks. Good morning, everyone.

Speaker Change: That loan to market and garner a higher secondary sale. So we're looking at it really to some extent on an aggregate revenue basis.

Jeremy Blue Ford: I guess if you could touch a little bit more on the mortgage business and kind of what you're seeing, I know you referenced some signs you're seeing that things might be moving a bit more positively, kind of what specifically you might be seeing there, and kind of what the path to that in your mind looks like. Is this kind of a couple years short of recovery, a more normalized mortgage environment? Or how are you thinking about that today? Yeah,

Speaker Change: About 375 basis points is where we've been here recently and so until we see aggregate revenues start to move materially higher I think our view is customers are going to make those decisions, we're going to support those decisions and help them get loans executed.

Jeremy Blue Ford: Yeah, my point would be kind of high level. There is such a great amount to building pent-up demand for housing. We think that a 6.5% mortgage rate is really a defining level there that if it goes below that, we think that there will be more activity. And if it's much higher than that, then it just continues to have this locked-in effect that we have where there's, you know, a large, a vast majority of the mortgage market is, or mortgage holders are at rates, you know, well less than 6.5%.

Speaker Change: But one one of the revenue components moving higher while the other necessarily.

Speaker Change: Most offsets it dollar for dollar I think just puts us puts us in a similar spot. So we are seeing more variability around the mix of revenue, but the aggregate per per loan revenue.

Speaker Change: Again remains reasonably resilient and consistent between 370 and 380 basis points.

Speaker Change: Got it that's super helpful. Maybe.

Speaker Change: Maybe shifting over to credit it looks like classified loans were down a little bit.

Speaker Change: In special mention what ticked up was that mostly just some small small dollar movement or any detail you can share there.

Speaker Change: Yes, there'll be more detail it comes out in our Q, but it.

Overall, we are seeing notwithstanding the loan I spent some time on in my comments talking about and we spent some time last quarter talking about notwithstanding that loan.

Speaker Change: Largely small small or related movement.

Jeremy Blue Ford: So that's what we're seeing, and it's just kind of, we're seeing it kind of slowly unlock. So I don't predict or think that there's a hockey stick here, but we do think there's a light at the end of the tunnel. And for Prime, you know, they've done a lot of work to reduce their platform costs, and we're going to really continue to work hard to maintain that so that when revenue comes back, we'll be able to leverage that into earnings.

Speaker Change: We don't see any material industry concentrations are geography based concentrations, what we see as individuals.

Speaker Change: Individual situations and kind of.

Speaker Change: Items that have popped up whether it be ownership or otherwise.

Speaker Change: Cause credits to otherwise underperform, we are seeing and I think we've stated this in the past.

Speaker Change: The pressure of higher rates on cash flows and thats.

Permeating the portfolio. So we do expect to continue to see some downgrades and pressure from that but again there is nothing from an industry or geography perspective, right now that causes us to to be overly concerned.

Jeremy Blue Ford: Okay, yeah, that's really helpful, thanks. And I guess you referenced maybe some new hires within Hilltop Securities. I'm wondering, you know, is that of any meaningful scale that we'll see that show up in the expense base, or is that just kind of the normal course of business as you continue to build out that division?

Speaker Change: Alright, Thats all from me thanks for taking my questions.

Speaker Change: Thank you.

Speaker Change: And we will take our next question from Matt Olney with Stephens.

Matt Olney: Hi, great. Thanks, everybody.

Jeremy Blue Ford: Welcome Steve. Yeah, I think it's just the normal course of business. I mean, we continue to invest in what we believe to be really high-quality teams and individuals that we believe bring skill sets. I think what Jeremy was mentioning was that we've seen some of our larger competitors exit certain businesses, and we've been able to, we believe, benefit from that in terms of hiring some really quality folks. From an overall cost perspective, it'll be marginal in that regard, but we do expect them to be productive and accretive here over the coming quarters.

Matt Olney: Morning.

Matt Olney: Want to go back to the deposit discussion.

Matt Olney: Noninterest bearing deposits still some pressure in the first quarter.

Matt Olney: At the bank, but also just the industry overall and the guidance I think you reiterated the same commentary about just seeing additional pressure throughout the year.

Matt Olney: And it looks like the <unk> average.

Matt Olney: Deposit balances already at the midpoint of that range that you mentioned for the end of the year. So just trying to clarify if you expect incremental pressure from here and we should be thinking about moving towards the lower end of that guidance or do you think we could stabilize here at these <unk> levels.

Stephen Kendall Scouten: Okay, great. And then I guess just last thing for me, how should we think about the Share of Purchase here today? Obviously, you just bought back some shares at $31. We're lower than that, so I mean, at around $102 a tangible or what have you, well, you're up a good bit today, but would you expect to be, you know, fairly aggressive with the share of purchase at these levels?

Speaker Change: Good question.

Speaker Change: As we look at it.

Speaker Change: We are evaluating a few a few moving parts first.

Speaker Change: Customer demand to kind of move into our suite products and out of noninterest bearing.

Speaker Change: Kind of as a primary order matter and then second what we've seen is in our treasury treasury products and those customers are using our treasury services.

Jeremy Blue Ford: You know, I think that what we're going to do is we're going to try to, uh, be mindful of it. We clearly, you know, are evaluating the value and see that and

Speaker Change: Your penchant to be willing to pay fees.

Jeremy Blue Ford: We're going to try to do share repurchases that are towards our share repurchase authorization of around $75 million. And if valuations go down further or something, maybe we'll do something more. But for the time being, we're going to just try to live within our share repurchase authorization, and I will just go back to Hilltop Securities. I mean, I personally am extremely excited about the talent and the team that we're bringing on board combined with the existing talent that we have.

Speaker Change: And then shifting their deposits they are non interest bearing deposits into suite products has also increased during also increased during the first quarter. So our expectation is we're going to continue to see.

Speaker Change: A steady steady, but modest I think movement into interest bearing products out of.

Speaker Change: Out of noninterest bearing so again, we think the range is reasonable and appropriate where we land in the range I think it will be determined by customer activity, but we are continuing to see customers with an appetite to move into higher rate products.

Jeremy Blue Ford: So I think that when it's particularly in public finance and fixed income, and I think when those markets come back, I think that we'll, I'm hopeful that we will see some real revenue growth. Yeah, makes sense.

<unk> products and <unk>.

Speaker Change: Out of there.

Speaker Change: <unk>.

Deep.

Speaker Change: Deposit accounts.

Speaker Change: Okay, Thanks for that well.

Speaker Change: And then and then within the NII guidance I think we're I think it's now down four to eight for the year I was hoping to kind of parse that out and I'm curious what you think are the major drivers of major variables within the guidance that could push the actual results on to either side of that guidance.

Stephen Kendall Scouten: Yeah, makes sense. Great, appreciate the color, everyone. Thanks so much. Thank you.

Operator: And we will take our next question from Woody Lay with KBW.

Wood Neblett Lay: Just wanted to follow up on mortgage. You know, it's great to see the gain on sale margin pick up in the quarter. But just what are your expectations for that margin for the remainder of the year?

Speaker Change: Yes so.

Speaker Change: The most significant driver is going to be our overall deposit costs and we.

Speaker Change: We continue to we continue to manage it closely our objective again remains to continue to grow and attract new customers to our franchise.

Will: I think as we look at it, and I tried to highlight it in our comments, we're, I think we've seen that we saw an improvement in overall gain on sale margins, obviously the 216 basis points. What we are seeing is, again, with each kind of increment in the overall mortgage rate, and it's pretty volatile at this point, we are seeing customers make kind of real-time decisions whether they buy down the rate, pay points and buy down the rate. You know, that generates more origination fees, or we're able to take that loan to market and garner a higher secondary sale.

Speaker Change: As a result, we've got to be competitive I think where we are currently positioned.

Speaker Change: We feel comfortable we've got some products that do have kind of 5%, 5% rates on them, but largely the products are below that certainly in some of our competitive markets and some of our competitors have got rates higher than that across both their CD products and in certain cases their money market product. So we are again.

Speaker Change: Not top of market, but we believe competitive.

Speaker Change: But again customer customer demand for higher interest rates persist.

Will: So we're looking at it really to some extent on an aggregate revenue basis of about, you know, 375 basis points is where we've been here recently. And so until we see aggregate revenue start to move materially higher, I think our view is customers are going to make those decisions, and we're going to support those decisions and help them get loans executed. But one, you know, one of the revenue components moving higher while the other necessarily almost offsets it dollar for dollar, I think just puts us in a similar spot. So we are seeing more variability around the mix of revenue, but the aggregate per loan revenue, again, remains reasonably resilient and consistent between 370 and 380 basis.

Speaker Change: They continue to reach out and ask for.

Speaker Change: Higher rates and different products, whether it be sweeper, otherwise. So we are going to continue to kind of work our way through that but we do expect deposit rates are going to move higher and we expect that data as I noted earlier in my comments.

Speaker Change: To move.

Speaker Change: Up within that range of 66% to 70%.

Speaker Change: The other parts that we noted we've got loans, which again, we've got we've got some repricing that will occur on our fixed rate portfolio through the balance of the year. We think that's a tailwind. We also think we are allowing the securities portfolio to continue to run down and we expect that those cash flows will be reinvested in either cash or.

Will: Got it. That's super helpful. Maybe shifting over to credit. It looks like classified loans were down a little bit and special mention ones picked up. Was that mostly just some small, small dollar movement, or any detail you can share there?

Speaker Change: Or loans likely loans retained.

Speaker Change: In our mortgage retention program.

Speaker Change: So both of those are tailwind, which cause us to believe that both NII and NIM are going to be pressured here for the coming quarters.

Will: Yeah, there'll be more detail that comes out in our queue, but, you know, overall, we are seeing, notwithstanding the loan I spent some time on in my comments talking about, and we spent some time last quarter talking about, largely small or related movement. Again, we don't see any material industry concentrations or geography-based concentrations, items that have popped up, whether it be ownership or otherwise, that cause credits to otherwise underperform.

Speaker Change: One or two quarters, and then likely stabilizes and starts to move higher we believe in the fourth quarter. So those are really the largest drivers as I noted we started a restarted the retention of mortgage loans.

Speaker Change: On the balance sheet in the first quarter.

Speaker Change: We will continue to do that the average rate coming on rate for those mortgages at this point and Theyre. All hybrid arm product is is about 7% and so obviously thats a higher rate than cash earnings and certainly a higher rate than our securities portfolio as well.

Speaker Change: We will continue to do that at a modest level relative to our overall balance sheet.

Will: We are seeing, and I think we've stated this in the past, the pressure of higher rates on cash flows, and that's permeating the portfolio, so we do expect to continue to see some downgrades and pressure from that, but again, there's nothing from an industry or geography perspective right now that causes us to be overly concerned.

Speaker Change: But again I think that the.

Speaker Change: Current environment, the inverted yield curve.

Speaker Change: And fifth fed funds remaining with what we believe to be elevated labeled levels for the vast majority of this year are going to continue to pressure.

Speaker Change: And NIM.

Okay.

Wood Neblett Lay: All right, that's all for me. Thanks for taking my questions.

Speaker Change: Great details thanks, guys Thats all from me.

Speaker Change: Thank you.

Operator: And we will take our next question from Matt Olney with Stevens.

Speaker Change: It appears that we have no further questions at this time.

Matthew Covington Olney: Hey, great. Thanks for everybody.

Speaker Change: This does conclude the hilltop earnings first quarter 2024 earnings call. Thank you for your participation you may disconnect at any time.

Will: I want to go back to the deposit discussion and non-interest bearing deposits, still some pressure in the first quarter at the bank but also just the industry overall. In the guidance, I think you reiterated the same commentary about just seeing additional pressure throughout the year, but it looks like the 1Q average NIB deposit balance is already at the midpoint of that range that you mentioned for the end of the year. I'm just trying to clarify if you expect incremental pressure from here and if we should be thinking about moving towards the lower end of that guidance, or if you think we could stabilize here at these 1Q levels. Thanks.

Speaker Change: [music].

Speaker Change: Hum.

Speaker Change: Sure.

[music].

Will: A good question, and you know, as we as we look at it, we're evaluating a few, a few moving parts first, you know, customer demand to kind of move into our sweep products and out of non-interest bearing kind of as a primary order matter. And then second, what we've seen is in our treasury products, and those customers are using our treasury services; their penchant to be willing to pay fees and then shift their deposits, their non-interest-bearing deposits into sweep products has also increased during the first quarter.

Speaker Change: Hum.

Speaker Change: [music].

Will: So our expectation is we're going to continue to see a steady but modest, I think, movement into interest-bearing products out of non-interest-bearing. So again, we think the range is reasonable and appropriate. Where we land in the range will be determined by customer activity. But we are continuing to see customers with an appetite to move into higher-rate products and out of their NIB deposit accounts.

Matthew Covington Olney: Okay, thanks for that, Will. And then within the NII guidance, I think it's now down four to eight for the year. I was hoping to kind of parse that out, and I'm curious what you think are the major drivers, the major variables within the guidance that could push the actual results onto either side of that guidance.

Will: Yeah, so, you know, the most significant driver is going to be our overall deposit cost, and we continue to manage it closely. Our objective, again, remains to continue to grow and attract new customers to our franchise. And as a result, we've got to be competitive, I think, where we are currently positioned. We feel comfortable.

Will: We've got some products that do have kind of 5% rates on them, but largely, the products are below that. Certainly, in some of our competitive markets, and some of our competitors have got rates higher than that across both their CD products and, in certain cases, their money market products. So we are, again, not top of the market, but we believe we are competitive.

Will: But, again, customer demand for higher interest rates persists. They continue to reach out and ask for higher rates on different products, whether it be sweep or otherwise. So we are going to continue to kind of work our way through that, but we do expect deposit rates are going to move higher, and we expect that beta, as I noted earlier in my comments, to move up within that range of 66% to 70%. The other parts that we noted, we've got loans, which, again, we've got some repricing that will occur on our fixed rate portfolio through the balance of the year. We think that's a tailwind.

Will: We also think we're allowing the securities portfolio to continue to run down, and we expect that those cash flows will be reinvested in either cash or loans, likely loans retained in our mortgage retention program. And so both of those are tailwinds, which cause us to believe that both NII and NIM are going to be pressured here for the coming quarters, one or two quarters, and then likely stabilize and start to move higher, we believe, in the fourth quarter. So those are really the largest drivers.

Matthew Covington Olney: As I noted, we restarted the retention of mortgage loans on the balance sheet in the first quarter. We'll continue to do that. The average coming-on rate for those mortgages at this point, and they're all hybrid arms products, is about 7%. And so, obviously, that's a higher rate than cash earnings and certainly a higher rate than our securities portfolio as well. We'll continue to do that at a modest level relative to our overall balance sheet.

Matthew Covington Olney: But again, I think that the current environment, the inverted yield curve, and fed funds remaining, you know, at what we believe to be elevated levels for the vast majority of this year are gonna continue to pressure NII and NIM.

Will: Great details. Thanks guys, that's all from me.

Operator: It appears that we have no further questions at this time. This does conclude the Hilltop Earnings first quarter 2024 earnings call. Thank you for your participation. You may disconnect at any time.

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