Hilltop Holdings Inc.

Good morning. My name is Candice and I will be your conference operator today. At this time, I would like to welcome everyone to the Hilltops Holding fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question and answer. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. I would now like to hand the conference over to Eric Yowie. Eric, you may begin.

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, allowance for credit losses, The impact and potential impacts of COVID-19 or disruptions in the global or national supply chains, stock repurchases and dividends, and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation, are forward-looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties. Our actual results, capital, liquidity, and financial condition may differ materially from these statements, due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures including tangible common equity and tangible book value per share. 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-holdings.com. With that, I will now turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Eric, and good morning. For the fourth quarter, Hilltop reported net income of $62 million, or 78 cents per diluted share. Return on average assets for the period was 1.4%, and return on average equity was 9.9%. This quarter carried forward many of the same themes we discussed in prior quarters, including improved credit quality, growth in our core loan book, the beginning of a more normalized and competitive mortgage market, and with the prospect of increasing rates in the near term, a softening in our fixed income businesses. Through it all, we continue to generate strong earnings and returns. Plains Capital Bank generated $68 million in pre-tax income and a return on average assets of 1.4% in Q4 2021. Average loans held for investment at Plains Capital Bank increased $122 million or 2% quarter over quarter as both core loans and retained mortgage balances grew. Importantly, the bank generated commercial loan growth despite elevated paydowns. The net loan growth was impacted by the continued runoff in PPP loans and a seasonal decline in national warehouse lending balances. Our remaining PPP balance was $78 million as of December 31, 2021. The average deposits increased by $460 million or 4% quarter over quarter. and by $1.2 billion or 10% year over year. As we continue to see growth in both interest bearing and non-interest bearing accounts, primarily from existing customers. For the full year, the bank generated $283 million in pre-tax income and a return on average assets of 1.55%. This was a fantastic year for Plains Capital Bank and reflected the excellent job the bank's leadership teams have done across the state by managing credit, taking care of existing customers and refocusing on new business growth. In spite of a tough year over year comparable due to record 2020 results, Q4 2021 was another strong quarter for Prime Lending as it generated $31 million in pre-tax income. The business originated $5 billion in volume with a gain on sale margin of loans sold to third parties of 362 basis points. Refinancing volume as a percent of total volume was stable from prior quarter at 29%, but did decline from 46% during the same period in 2020. We remain focused on optimizing pricing and margins, while still allowing our loan officers to be as competitive as possible in this increasingly tight market. Our purchase orientation, stable funding profile, exceptional lenders, and experienced leadership team who have managed through multiple cycles provide institutional advantages that should enable prime lending to outperform the broader mortgage market during what we believe will be a challenging time in the industry due to shrinking refinance volumes, limited inventory, and heightened competition. Overall, 2021 was another excellent year for prime lending. Capitalizing on the housing and mortgage market circumstances driven by the COVID-19 pandemic that started in early 2020 led the company to have its second best year ever, with funded volume of $23 billion and pre-tax income of $236 million. During the quarter, Hilltop Securities generated pre-tax income of $1.7 million on net revenue of $94.6 million, a decline in net revenues of $55.5 million or 37% compared to Q4 2020. The revenue shortfall was primarily driven by declines in our highest margin businesses. such as fixed income and structured finance. Specifically, mortgage revenues in structured finance fell by $34 million or 73% and fixed income services revenues fell by $18 million or 57%. Public finance revenue also declined by 7% year-over-year on lower issuance volume, which was in line with the broader industry declines. while wealth management revenues increased by 2% on stronger transactional and managed account fees. For the year, Hilltop Securities generated net revenues of $424 million and a pre-tax margin of 10.3%. The second half of the year was particularly challenging for our fixed income and housing businesses due to a slowdown in the mortgage industry combined with investor expectations of rising interest rates, economic uncertainty, and fear of inflation. Nevertheless, we believe that Hilltop Securities is in a position to grow once the operating environment for its businesses improves. We have added key infrastructure, producers, and leadership to broaden our capabilities and to expand our breadth of expertise in complementary businesses. We are focusing on diversifying and growing our revenue streams and have already made the necessary investments to support that. This will take time, but we are confident in Hilltop Security's leadership team and strategic direction. Collectively, the fourth quarter was a strong finish to an excellent year for Hilltop, with full year 2021 net income of $374 million, or $4.61 per diluted share. While 2021 was a volatile year with a tremendous amount of uncertainties, including COVID-19 variants, supply chain disruptions, and inflationary pressures, Hilltop's exceptional results reflect the strength of our diversified business model and the dedication of our talented people who are steadfast in taking care of our customers. Moving to page four. Hilltop maintains strong capital levels with a common equity tier one capital ratio of 21.2% at year end. And our tangible book value per share increased by 15% from Q4 2020 to $28.37. During 2021, Hilltop returned $163 million to shareholders through dividends and share repurchase efforts, representing approximately 43% of earnings to shareholders. This week, Hilltop Board of Directors declared a quarterly cash dividend of 15 cents per common share, a 25% increase from the prior quarter, and authorized a new stock repurchase program of $100 million through January 2023. With that, I will now turn the presentation over to Will to walk through the financials.

Thank you, Jeremy. I'll start on page five. As Jeremy discussed, for the fourth quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $62 million, equating 78 cents for diluted share. During the fourth quarter, the provision for credit losses reflected a net recovery prior charge-offs of $400,000 and a net reduction of reserves of $18 million. I'll cover the changes in the allowance for credit losses in more detail on page seven of the deck. Turning to page six. For the full year of 2021, Hilltop reported consolidated income attributable to common stockholders for $374 million for $4.61 per diluted share. 2021's results highlight the strength and diversity of our businesses, including the benefits of the ongoing investments we've made to support improved productivity and scale across our franchise. Additionally, earnings per share was further supported by the previously mentioned share repurchases, which drove a 4% decline in shares outstanding. As a result of the earnings performance and capital actions taken in 2021, Hilltop's year-end capital ratios strengthened versus 2020 year-end levels, with common equity Tier 1 of 21.2% and a stable Tier 1 leverage ratio of 12.6%. Turning to page 7. Hilltop's allowance for credit losses declined by $18 million versus the third quarter of 2021 as improvements in the macroeconomic outlook and the decline in specific reserves resulting from a significant credit recovery during the quarter supported a net reserve release in the period. Further, ongoing asset quality improvement across the portfolio also contributed to the ACL reduction during the fourth quarter. Allowance for credit losses of $91 million yields an ACL to total bank loans HFI ratio of 1.16% as of year-end 2021. Of note, we continue to believe that the allowance for credit losses could be modeled and that 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. As the pandemic and broader economic environment continues to create uncertainty, further volatility could occur in the coming months and quarters. I'm turning to page eight. That interest income in the fourth quarter equated to $104 million, including $2.5 million of PPP fees and interest and $4.7 million of purchase accounting accretion. versus the prior year quarter, net interest income decreased by 3.1 million, or 3%, driven primarily by lower PPP fee recognition and lower accretion income. Net interest margin declined versus the third quarter of 2021 by 9 basis points to 244 basis points, driven primarily by the impact of continued growth in deposits. This growth resulted in higher average excess cash levels, which grew by $533 million in the quarter. These items were somewhat offset by modest improvements in the yields in the investment portfolio and the ongoing gradual declines in interest-bearing deposit costs. Loan yields remained pressured during the fourth quarter as the excess liquidity in the market spurred substantial competitive pressure for high-quality funded assets. During the current quarter, commercial loan originations, including credit renewals, had an average book yield of 3.78%, which continued to trend lower through the end of 2021. Turning to page 9. In the chart, we highlight the asset sensitivity of Hilltop, assuming parallel and instantaneous rate shocks, which represent an asset-sensitive position of approximately 11% in the up 100 basis point scenario. As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios. Of note, if we shift the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months, the F-100 basis point asset sensitivity falls to approximately 5%. Further, in this scenario, each 25 basis point increase positively impacts net interest income by approximately $5 million. Lastly, for 2022, we expected the impact of PPP-related fees and interest, which were approximately $22 million in 2021, and purchase loan accretion could decline by $25 to $30 million versus the 2021 levels. Moving to page 10. Total non-interest income for the fourth quarter of 2021 equated to $285 million. Fourth quarter mortgage-related income and fees decreased by $106 million versus the fourth quarter of 2020 driven by the evolving environment in mortgage banking, which remains strong but reflected a more traditional cyclical pattern than we saw during the prior year period. Versus the prior year quarter, purchase mortgage volumes decreased by $124 million, or 3%, and refinance volumes declined much more substantially, decreasing by $1.7 billion, or 54%. During the fourth quarter of 2021, gain-on-sale margins were stable with third-quarter levels, increasing by one basis point on a reported basis, and three basis points on loans sold to third parties. We expect full year average margins to be under pressure during 2022 as mortgage volumes normalize from the historically high level seen over the last two years and the competition for that lower volume drives tighter margins. Currently, we expect that full year average gain on sale margins for loans sold to third parties will average between 300 and 325 basis points contingent on market conditions. Other income decreased by $55 million, driven primarily by declines in structured finance lock volumes, which declined by $872 million, or 37%, and a challenging trading environment in fixed income services, where revenues declined by $18 million versus the prior year period. It is important to recognize that both fixed income services and structured finance can be volatile from period to period as they're impacted by interest rates, overall market liquidity, volatility, and production trends. Turning to page 11. Non-interest expenses decreased for the same period in the prior year by $80 million to $322 million. The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $68 million at Hilltop Securities and Prime Lending, which was linked to lower fee revenue generation in the quarter compared to the prior year period. Additionally, non-compensation variable expenses, particularly mortgage production related expenses, declined as volumes declined versus the prior year. Professional services and consultancy related expenses is a place where we focused on reducing expense over the last few years. And the year over year benefits of these efforts is noted as expenses dropped $12 million from the prior year. Looking forward for 22, We expect that inflation will impact compensation, occupancy, and software expenses, resulting in elevated fixed costs within the business. To help mitigate some of these headwinds, we will remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage increased productivity across our front, middle, and back offices. While these inflationary pressures do exist, we are continuing to further streamline our businesses and accelerate the adoption of our digital capabilities to support client acquisition and overall business productivity. Turning to page 12. Fourth quarter, average HFI loans equated to $7.7 billion in 2021, stable with the prior year fourth quarter levels. On a period-end basis, HFI loans grew versus the third quarter of 2021 by $300 million driven by improving commercial loan growth, particularly in commercial real estate lending and the retention of one to four family mortgages originated by prime lending. In the second half of 2021, we experienced improved customer activity in the commercial space and our pipelines continue to grow through the fourth quarter. However, With the emergence of the latest COVID variant, we do expect a slowing of activity in the short term with a return to growth during the second and third quarters of 2022. During the fourth quarter of 2021, Prime Lending locked approximately 191 million of loans to be delivered to Plains Capital over the coming months. These loans had an average yield of 307 basis points and average FICO and LTVs of 775 and 61% respectively. Lastly, given our current liquidity position and the lower level of commercial loan growth, we expect to continue to retain one to four family mortgages originated prime lending at a pace of between 30 and 75 million per month through at least the first half of 2022. I'm moving to page 13. During the fourth quarter, Hilltop recorded a net recovery of previous charge-offs of $400,000. This recovery capped 2021, whereby the full year HGH recorded a net recovery of prior charge-offs of $500,000, far exceeding our expectations for credit performance from earlier in the year. Further, in the graph in the upper right, we show the substantial progress made in reducing NPAs as prime lending executed a target loan sale, and our special assets team exited all but approximately $3 million of Oreo assets during the quarter. As is shown on the graph at the bottom of the right of the page, the allowance for credit loss coverage at the bank ended 2021 at 1.28%, including both mortgage warehouse lending as well as PPP loans. We continue to believe that both mortgage warehouse lending as well as PPP loans will maintain a lower loss content over time. Excluding mortgage warehouse and PPP loans, the bank's ACL to total bank loans HFI ratio equates to 1.37%. Turning to page 14. Fourth quarter average total deposits are approximately $12.4 billion and have increased by $1.2 billion, or 11%, versus the fourth quarter of 2020. Throughout the pandemic, we've continued to experience abnormally strong deposit flows from our customers, and this continued throughout the fourth quarter. In addition to solid growth in deposits, both year-over-year and on a sequential quarter basis, interest-bearing deposit yields have continued to drift lower, with the fourth quarter average cost of 22 basis points. we've seen solid improvement in deposit costs over the last two years we do expect to see deposit costs begin to rise later in 2022 if the federal reserve adjusts the fed funds rate higher by 75 to 100 basis points during the year while deposit levels remain elevated it should be noted that we remain focused on growing our client base and deepening wallet share through our treasury's products and services these efforts were successful in 2021 and we expect that they will continue to accelerate into 2022. Moving to page 15. As a result of the team's work over the past few years, we were well positioned to take advantage of the opportunities the market presented by leveraging our franchise and our enhanced infrastructure to serve customers while attempting to keep our teams and clients as safe as possible from the ongoing pandemic. In 2022, we remain focused on staying nimble as the pandemic evolves to ensure the safety of our teammates and our clients, Further, our financial priorities for 2022 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. As is noted in the table, our current outlook for 2022 reflects two rate increases by the Federal Reserve during the year, a normalizing but constructive purchase mortgage market, A more productive balance sheet as excess cash levels moderate and loans grow at a measured pace, as well as a normalization of provision for credit losses given both growth and credit migration expectations. 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, I would like to remind everyone in order to ask a question, Press star, then press one on your telephone keypad. We will pause just here for a moment to comply with the question and answer roster. Our first question comes from Michael Young from Truist. Michael, your line is now open. Please go ahead.

Hey, good morning, everyone. Morning. Morning.

I wanted to ask a quick housekeeping one, Will. Just on the earnings this quarter, were there, you know, many fair value impacts? I know sometimes, like, the TVA business is kind of unhedged and anything on the MSR side that we should be kind of normalizing as we move throughout 2022?

Nothing substantial in the year-end period. We had some things throughout the year, but nothing in the fourth quarter of significant consequence.

Okay. Maybe within the capital markets business and TBA business, obviously, you can't control the macro and what's going on with interest rates, etc., but Can you just talk about sort of the initiatives or efforts underway, you know, within what you can control to kind of grow that business against, you know, more difficult macro environment?

Yeah, this is Jeremy. Sure, I'll take that. So on the fixed income side, obviously you've seen this with other competitors having, you know, a challenging quarter and challenging second half of the year given its market, right? for the rate and the customer's appetite. I do think if you see we have recruited a lot of talented people to fixed income and we continue to try to build up that capital markets business. In particular, we have a real focus on building our middle market sales effort because what has come to light really this year given this environment is our reliance on trading revenue versus sales. That's kind of the biggest push that we have there to diversify that on that side.

Okay, great. And, you know, just maybe moving over to mortgage, obviously, you know, refinance volume is really expected to fall off in 2022 as rates fall or as rates rise, and we've seen that already. somewhat, but you guys have historically been pretty strong in the purchase market. And that actually looks pretty decent. So could you maybe just kind of talk about your outlook for that business for 2022 is, um, you know, it kind of in that context and just, are you guys still hiring and trying to grow volume in that business? Or are you going to, you know, take efforts to maybe, uh, control costs a little bit more in 2022?

I'll just talk about the recruiting first and we'll can chime in, but, uh, We are and always have been a purchase-focused originator, and the expectation is for purchase mortgage volumes to increase really over the next three years, albeit refinancing volumes are obviously expected to be cut by about 70%. So we do think that's going to affect the competitive landscape, and we do think that – and we've already seen that have an impact on our margins. We are actively recruiting and it's very competitive as well in doing that, but we are, we have been successful at recruiting and then we're looking for experienced loan originators that have a purchase focus. And you know, I can say through 2021, we had a net gain of 34 producers for about $500 million of incremental volume.

I'd say, Michael, in terms of kind of managing the overall profitability of the business, obviously we're moving quickly and have moved quickly into the cycle where overcapacity in the market takes hold and the competitive set generally tries to lower price to keep the machine, if you will, kind of fulsome while they work to rationalize the size of their operations. So we're expecting, as we guided here, gain on sale margins to decline into that 300 to 325 basis point range. As we noted on the call, they were 347 on a reported basis and 362 on a loan to third party basis in the quarter. So that's a pretty material decline as we've worked over the last three or four years with our new loan origination platform as well as our digital efforts in the mortgage space, it's a focus of ours to improve the overall productivity of our business kind of through and through. So we're going to be working to do, to kind of pull the lever Jeremy mentioned, which is grow our originator base, but we're also going to be looking to drive overall productivity. So it'll be, we're going to be pulling both levers in 2022 to try to drive as much profitability as possible, understanding it is going to be more of a challenging year than it has been in the last couple of years, just given the mortgage backdrop. But we do feel constructive and remain constructive on the purchase side of the business. We do expect that to grow. The market expects that to grow, and we expect to get our fair share of that business.

Okay, thanks. I'll step back.

Our next question comes from Matt Only from Stevens. Matt, please go ahead.

Hey, thanks. Good morning, guys. Hey, Matt. Good morning. I want to go back to the discussion around Hilltop Securities. I think you said the revenue for the full year was around $424 million, and obviously some of those industry headwinds came on kind of throughout the year. As you see it today, do you think you can achieve that $424 million in 2022?

We're not going to give exact guidance on that. I would say if you look back at the year as we described, it was really the last six months of 21 where we saw the impact to those two businesses. And I would expect, you know, we're going to go into this year with continued pressure on them. And then, you know, eventually, and as we see things kind of evolve and those businesses' markets improve, our revenues should improve and our margins should improve. I mean, we're committed to these businesses. We've got great people that run it and know what they're doing. And, you know, I think that they'll be, you know, upside to that.

Okay. Thanks for that. And then I guess switching over to the bank, the loan growth and the fourth quarter, any more color on the drivers of that loan growth? And then I guess looking at the guidance on loan growth, it doesn't sound like you think the fourth quarter was any kind of inflection, just any more color around the guidance there?

Yeah. So, you know, fourth quarter, if you kind of just go on a length quarter basis, I tried to highlight in the comments, we saw a kind of better activity in our CRE lending space on an ending balance that was up just over $120 million. The prime lending retention for the period was about $190 million. So that gives you a sense kind of where the growth was. The things that declined in the period, obviously PPP loans declined just over $55 million. And National Warehouse Lending declined about $94 million, which is seasonal for that business. And again, we saw a more seasonal mortgage space and National Warehouse Lending followed that path. As we look out from a commercial loan growth perspective, again, we're trying to negotiate what is a challenging environment with COVID to protect the safety of both our clients and our associates. We pulled back in the late parts of the fourth quarter as this strand of of the pandemic kind of continued to rage forward. We pulled back kind of in-person calling and a lot of the calling activities that you would normally be expected and that we restarted in approximately the middle of the year, last year. So, what we're expecting is, you know, if you pull back your calling efforts and your sales efforts for a short period of time, and again, we've still got people on the phone and reaching out to clients, but the in-person efforts, which is generally a more fruitful endeavor, We expect to see a little bit of a lull in the first quarter and then that growth to start as this strand looks to be abating. Our expectation is growth starts to resume in the second and third quarters of this year. The focus there will be trying to grow that commercial business in that 2% to 5% range on a full-year average basis. But what we're seeing a lot of here, certainly in the state of Texas across our footprint, is stronger activity in CRE and I'd say solid activity in C&I, but most of the activity from a CRE perspective.

And the only other thing I would just mention is on the growth in the fourth quarter, it was a lot of our existing customers. So... That was a commonality.

Okay. Okay. That's helpful. And then I guess on the expense side, looking at that guidance on slide 15, I appreciate the way you guys broke it out between variable expenses and non-variable expenses. That's helpful. On the non-variable side, it looks like you expect that to increase between 3% and 6%. Any more commentary you can provide on that? I was hoping there could be more opportunity to cut some costs even on the fixed side, but obviously there's some wage pressures going on in the industry. Just any other commentary you can give us on that?

I think you hit on it. I think wage pressure is real. We're acknowledging it here. We'll expect to see merit or cost-living adjustments be higher than they would have historically been by a couple of percentage points. That's reflected here. We've also got in our software agreements and occupancy agreements and some of the other agreements just inflationary kind of escalators that are embedded there. So that's real cost. Again, I think what we're focused on doing and the lower end of the range here reflects what I would say an offsetting impact of the work we're doing from a productivity perspective. So I want you to take away that we're not focused, laser focused on driving productivity across all of our operations, which we absolutely are. But in the short run, which we view kind of a one-year period almost to be the short run, those inflationary pressures have persisted. Certainly in the fourth quarter, we're seeing them continue into the first quarter. So we expect they'll be there for a period. And we're not, again, as it's been our practice, We're not going to overreact here to a short-term phenomena, and we're going to do the things that we think that are going to help position our business to be most successful over the long term, both from an investment perspective, but also from an expense reduction perspective.

Okay. Thank you, guys. Thank you.

Our next question is from Brad Millsaps from Piper Sadler. Please go ahead.

Hey, good morning.

Morning.

Hey, Will, just wanted to follow up on Matt's question around expenses. If I take the midpoint of the range and, you know, I think you had about $850 million of sort of non-variable expenses in 21, you know, it would imply like $40 million of additional expense in 2022, which Just seems like a big number. Just kind of curious, I mean, is most all of that going to show up, you know, just in the personnel category? It just seems like a big leap, you know, based on kind of where you are now.

Yeah, no, I think there's a few things in there. So it's not all going to show up in personnel, but you'll see the personnel portion kind of at that percentage level. You'll see the rents, a balance in software expenses and a balance in occupancy expenses. So all of those are going to, we think, move in that range. just based on contracts and then, you know, the expectation for cost of living adjustments from a personnel perspective, as well as healthcare related costs, which are up substantively year on year as we're kind of going into the year here. So that's where you're going to see it. And again, we are working diligently to affect productivity improvements across the businesses, and that generally relates to headcount and the efforts as we automate and digitize a series of our core processes. We continue to make progress there. But again, in the short run, the market is moving and has moved pretty quickly in terms of compensation adjustments and other costs as inflation has moved higher. So we're subject to deal with that.

Okay, thank you. And then just on the balance sheet, I wanted to ask about – It looked like the average taxable bond yield was up to over 2.08%, up about 17 basis points length quarter. Just curious if there's anything in there that would be one time driving that higher, or is that kind of a new sustainable level where you're adding bonds to the portfolio, and would you anticipate continuing to grow the bond portfolio in 2022?

We do expect, just given where liquidity levels are and overall cash levels are, that we'll see the bond portfolio, certainly at the bank, continue to grow. So we've got the trading portfolio, Hilltop Securities, which has moved between $600 and $700 million over the last couple of quarters on a reported basis. We expected the bond portfolio at the bank, on the other hand. will likely move higher as it has, I'd say, drift higher, you know, towards $100 to $200 million higher per quarter. Again, we're focused on not taking too much period vintage risk. as the market rolls over to what appears to be a Fed moving rates higher. We are focused on purchasing securities that allow us to maintain a reasonably high level of asset sensitivity. So that would be some more floating rate securities than we've maybe historically bought. And our going on, you know, at the money fixed rate security purchase right now is about 175 basis points. So again, we expect the securities portfolio at the bank will move higher. Rates have obviously moved up. And again, we're going to do what we can to kind of manage our asset sensitivity level so we can take advantage of what we believe to be a longer cycle of rates moving higher over the next quarters and maybe years.

Okay, great. But nothing specific in the yield this quarter. That's a pretty good number going forward.

Yeah, nothing. I wouldn't say anything significant that moved it.

Okay. And then just final question for me. Just around your asset sensitivity, I appreciate all the disclosure. Can you remind me how, you know, the impact of the suite product that you have, I think, at the broker-dealer, and how much does that impact that the interest rate sensitivity table that you disclosed in the deck, if at all. I just wanted to have a kind of a refresher reminder, kind of what the opportunity is there. I know, Jeremy, you've mentioned that in the past.

I think from an asset sensitivity perspective, it doesn't impact it. It's not a net interest income. line item as it comes through the consolidated P&L. So it's more of a fee item at the broker-dealer from a P&L perspective, so it doesn't impact asset sensitivity in that evaluation from a net interest income perspective. What it does do is as rates move higher, the value of those sweet deposits obviously will move higher, and the value of the fees generated obviously will grow. But as far as asset sensitivity from a net interest income perspective, it's not impactful.

Okay, great. I appreciate the clarity there. Thanks for that. Thanks for taking my questions.

Thanks, Brad.

Our next question is from John Jan Tunis from Raymond James. Your line is now open. Please go ahead.

Good morning. I was hoping you could unpack your deposit guidance and why you're anticipating such a relatively big drop in 2022?

Well, I think our view is as the Fed starts to move its balance sheet, pull liquidity out of the marketplace, as well as what we expect to be kind of the last innings of the stimulus, notwithstanding notwithstanding, as we note here, additional stimulus efforts. We expect to see kind of an additional usage of these deposits by customers over time. We also expect as the economic environment starts to clear, and we get a little more clarity around both the rate environment, inflation, and however temporary or otherwise this inflation is, that our customers are going to start to put money to work with additional investments, whether that be an inventory from a CNI perspective or additional projects and programs from a real estate perspective. Again, we are a commercially oriented community banking as a result. We've seen a large inflow of deposits from those customers that have been profitable over the last couple of years, as well as the benefits of the stimulus as, again, That stimulus, we believe, is in the last innings. And so we do believe that the consumer portion of our portfolio will start to see net draws and deposits. But we also expect that our commercial customers will start to put more dollars to work as they get more clarity if the pandemic starts to improve. And as we get clarity on the economic outlook for the next couple of quarters, we expect to see those customers put deposits to work.

Got it. I appreciate it. And then in your repair remarks, I believe you said that you expect deposit costs to increase in 2022. And I guess I was wondering, how quick after the first rate hike do you plan to raise deposit costs? And then do you have any sense on where the NIM will shake out in the near term?

So from a model kind of through the cycle data, so through the cycle, which would be through the entire rate cycle, we model about a 50%. pull through from a deposit cost perspective. As we think about the first couple of movements, we would expect in 2022, if the Fed were to move, raise to 100 basis points, for example, that the beta in the period of 2022 is likely 20 to 30%. as we'll take some time after the first and likely the second increases to evaluate the market and evaluate our liquidity position. But we do expect that the Fed, as I mentioned in my comments, moves 75 to 100 basis points. We'll have to start to pass through a portion of that to customers. From a NIM perspective, We're expecting NIM to likely drift, total HGH NIM likely drift a little lower here in the early part of the year. And then as those rate increases occur, if they occur, we'll see NIM start to expand. But there will be really two things. It will be expansion really on the liability side, as I just noted. On the asset side, we expect kind of rigorous competition to persist here. as well as we've got to work our way through our overall loan floors to see the expansion on the asset side.

Perfect. I appreciate it. And I was hoping I could sneak in one last question. I guess with mortgage volumes, you know, expected to shrink in 2022, has the pool of, I guess, total originators shrunk, you know, across the market, you know, I'm asking that with the backdrop of you guys continuing to hire and increase your number of loan originators. Just wondering if that's playing out at all.

Not so much. Not so far.

That's going to take 12 to 18 months as prices reset, volumes reset, people's earnings expectations reset. of what they can make in this particular business, that has historically taken, I'd say, a series of quarters or a year or so for it to start to pair it out and those who have the will and capability to perform in the market long term kind of shake out.

Understood. Thank you for taking my questions.

Thanks.

We have a follow-up question from Michael Young from Trustus. Michael, your line is now open. Please go ahead.

Hey, thanks for the follow-up. Just wanted to ask on, you know, kind of capital allocation and returns. You guys in the past have kind of tried to maintain, you know, a buffer of, you know, maybe $500 million or so of excess capital, but, you know, the capital levels are obviously high. uh quite high um even more so than that today so maybe will if you could give an update on you know kind of what you view as excess capital at this point and you know i know you guys approved the 100 million share repurchase which is more than you know maybe the standard 50 but um just any other thoughts about you know share buyback versus are you seeing m a in the pipeline that would you know cause you to kind of hold on to some more capital here or anything like that would be helpful

Sure. This is Jeremy. I'll take that and we'll fill in. But right now we're sitting on excess regulatory capital of about a billion dollars. That is higher than the 500 million that we had kind of pre-pandemic. And we got there, I think, due to really more outsized earnings and some other corporate actions. I would say that we're excited about announcing this dividend increase. It's 25% up. That's on prior year 33% up. I would caution that we don't expect for dividends to increase at this rate in the future. But I think it's a real affirmation of what we've been able to do and strength to the future and shareholder return. And for that matter, as I mentioned, we did return about 43% of earnings last year to shareholders through share repurchases and dividends. And so similarly, we announced an increase in our share authorization or repurchase of $100 million. And so we'll be evaluating that to do those repurchases in the open markets. Oh, excuse me, open window periods.

So that's all to say, you know, I think that even still, you know, we're going to probably hover around that billion dollars of excess capital until we have an event, you know, like an M&A deal of some type.

Okay. And could you give us an update just kind of on M&A thoughts generally, you know, I know you guys typically are more active when there's more distress in the market, but it seems like, you know, within the bank space, that's, that's maybe not going to be the case for some period of time, just given the amount of stimulus running through the economy and higher rates, you know, coming, you know, a lot of banks are going to be in pretty strong position. So, you know, do you reevaluate or look at that capital base any different in light of that? Um, generally, but also just kind of general M&A talk.

Sure. You know, our desire is to do bank M&A and to bolster the balance sheet of the bank and the earnings profile of our, you know, of Hilltop collectively. And we've got kind of dialed in looking at, you know, a set of banks in Texas that we think are franchise enhancing and, you that would be good partners, you know, where we – our preference would do more cash in a transaction, and that's not been a strategic advantage in this environment and given the tax implications of it. So we are challenged based on our currency. We're mindful of that. But, you know, hopefully we can find the right partner and, you know, with enough cash in the deal, it would be worthwhile for us. Okay, thanks.

Thank you.

There are no further questions at this time. I would like to turn the call back over to our presenters.

Operator, that concludes our call. Thank you.

This concludes today's conference call. You may now disconnect your line.