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spk04: and welcome to the Hilltop Holdings fourth quarter 2022 earnings conference call and webcast. My name is Bruno and I will be the operator of your call today. During the presentation, you can register to ask a question by pressing star one on your telephone keypad. I will now hand over to your host, Eric Yowie. Please go ahead.
spk05: Thank you, Bruno. 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 plan, financial condition, allowance for credit losses, the impact and potential impacts of inflation, stock repurchases and dividends, and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation, are forward-looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties. 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 GAAP measure may be found in the appendix to this presentation, which is posted on our website at hilltop-holdings.com. With that, I will now turn the presentation over to President and CEO Jeremy Ford.
spk06: Thank you, Eric, and good morning. For the fourth quarter, Hilltop reported net income of approximately $26 million, or $0.39 per diluted share. Return on average assets for the period was 0.6%, and return on average equity was 5%. Although the mortgage market remained under significant pressure, we still generated consolidated profitability and grew our capital base due to our diversified business model, strong balance sheet, and continued focus on expense discipline across each of our companies. During the fourth quarter, Plains Capital Bank generated $58 million in pre-tax income and a strong return on average assets of 1.3%. Though pre-tax income is down year over year due to changes in provision expense from deterioration of the economic outlook, The bank's pre-tax, pre-provision income grew materially from net interest income expansion and a relatively flat expense base, despite the inflationary environment. Average loans held for investment at Plains Capital Bank increased $101 million, or approximately 4% annualized, in the quarter as a result of both core commercial loans and an increase in retained mortgage balances. Average loan growth would have been higher if not for the approximate $116 million decline in average national warehouse lending balances versus the prior quarter, which has been impacted by the shrinking mortgage market. We are pleased with the loan growth in 2022. However, we are starting to see pressure on the pipeline as a result of our heightened credit standards and declining loan demand in general due to the economy, elevated rates, and other factors. Total average deposits decreased by $270 million or 2% quarter over quarter as customers have migrated deposit balances towards higher yielding assets, both inside and outside of the bank. We are pleased that we have been able to retain meaningful deposit relationships within our private banks assets under management as customers move some money from bank deposits into treasuries and similar securities. For the full year, The bank generated $219 million in pre-tax income and a return on average assets of 1.2%. Net interest income before purchase accounting accretion and PPP income grew by $32 million or 9% as interest rates increased throughout the year. We do expect deposit balances and costs to be under pressure in 2023 due to intense competition across Texas. where many banks will inevitably drive up market pricing for deposits to maintain liquidity. We continue to monitor credit closely in anticipation that economic conditions could result in a downward migration in asset quality. That said, we currently do not show any significant signs of credit deterioration in our loan portfolio. Additionally, with elevated rates expected throughout 2023, we anticipate continuing to see borrowers putting higher amounts of equity into transactions and projects continuing to slow. Overall, we are extremely pleased with Plains Capital Bank's results in 2022 and remain optimistic for the banking environment in 2023. We have a great group of leaders and bankers across Texas and will continue to capitalize on the growth and strong economies within our state. Moving to prime lending. During the fourth quarter, Prime Lending experienced a loss before taxes of approximately $26 million on $2 billion of originated volume. This was driven by a 59% decline in volume and a 151 basis point reduction in gain on sale margin from the same period prior year. There were multiple factors that adversely impacted the mortgage industry in 2022. including inflation, the resulting steep rise in interest rates, limited housing inventory, and the negative residual impacts of the COVID-19 pandemic. These factors have constrained the willingness and ability of prospective homebuyers and existing homeowners to conduct mortgage transactions, both in the purchase and refinancing markets. Additionally, these trends have added to already competitive mortgage pricing pressures. leading to a decline in average loan sales margins, as mortgage volume declines have materially outpaced the capacity that needs to come out of the mortgage origination ecosystem. Throughout the challenging year, our team has remained resilient and undertook difficult but impactful cost reduction and optimization actions to help resize the overall business, specifically reducing non-originator headcount by approximately 515 people. or 37% during the year. That said, our prime lending leadership team remains focused on their two primary objectives, originating profitable loans and continuing to operate the business more efficiently. During the quarter, Hilltop Securities generated pre-tax income of $19.8 million on net revenues of $107 million. an increase in revenues of $12 million or 13% compared to Q4 2021. The revenue increase was primarily driven by fixed income services, which more than offset a slow quarter in public finance as national issuance declined by 41% compared to Q4 2021. Increased revenues from fixed income can be attributed primarily to improvements in municipal and mortgage products. Additionally, Our revenue from sweep deposits continues to improve, so we expect the growth in that revenue to moderate in 2023. For the year, Hilltop Securities generated net revenues of $394 million and a pre-tax margin of 9.6%. Financial results improved over the last three consecutive quarters following a very volatile trading results in the first quarter. Moving to page four. Hilltop maintains strong capital levels with a common equity tier one capital ratio of 18.2% and tangible book value per share of $27.31 at year end. During 2022, Hilltop returned $485 million to shareholders through dividends and share repurchase efforts, repurchasing approximately 19% of the shares outstanding one year ago. This week, Hilltop's Board of Directors declared a quarterly cash dividend of 16 cents per common share, a 7% increase from the prior quarter, and authorized a new stock repurchase program of $75 million through January 2024. Overall, 2022 was a challenging year for our mortgage-related businesses, though buoyed by the strength of our banking franchise. Despite challenges in certain business lines, We feel that we have positioned the organization well entering 2023. First, our financial position is solid. We have a strong balance sheet with ample liquidity, diversified and accessible funding sources, and an outsized capital base. We believe this allows us to invest in our business, stay resilient through unknown economic cycles, and take advantage of growth opportunities as they arise. Second, We have worked to enhance productivity and expense efficiency across all businesses, and in particular, executed on significant actions within our mortgage operations groups to better align with the current market. Through those efforts, we are expecting a more efficient expense base to help combat rising inflation costs, and we are poised to benefit from higher margins as the economy recovers. Additionally, employee engagement is high. and we feel that we are more focused and aligned as a company than ever before. In conclusion, we believe that 2023 will be a prosperous year for Hilltop. We have a solid financial foundation, well-established businesses, and talented teams across our franchise. We are excited about the opportunities that lie ahead and are committed to delivering value to our shareholders. With that, I will now turn the presentation over to Will to discuss the financials.
spk00: Thank you, Jeremy. I'll start on page five. As Jeremy discussed, for the fourth quarter of 2022, Hilltop reported consolidated income attributable to common stockholders of $26 million, equating to 39 cents per diluted share. As is shown on page six, For the full year 2022, Hilltop reported consolidated income attributable to common stockholders of $113 million, or $1.60 per diluted share. Of note, Hilltop's ending shares were reduced by 18% for 14.3 million shares during the year, primarily the result of the successful tender offer completed during May. Turning to page 7, Hilltop's allowance for credit losses increased by $3.6 million, to 95.4 million as deterioration in the macroeconomic outlook drove a modest increase in the ACL. The economic impact was somewhat offset by reductions in both specific reserves and collective portfolio migration. Allowance for credit losses of $95 million yields an ACL to total loans HFI ratio of 1.18% as of year end 2022. Of note, We continue to believe that the allowance for credit losses could be volatile and the future changes in the allowance will be driven by net loan growth in the portfolio, credit migration trends, and changes to the macroeconomic outlook over time. Given the current uncertainties regarding inflation, interest rates, the future outlook for GDP growth and unemployment, changes in the ACL on a quarterly basis could be volatile. I'm turning to page eight. Net interest income in the fourth quarter equated to $123 million, including $2.2 million of purchase accounting accretion. Versus the prior year quarter, net interest income increased by $19 million, or 18%, driven primarily by higher yields on loans, securities, and cash balances, which were somewhat offset by higher rates on deposits and variable rate borrowings. Net interest margin continued to improve versus the third quarter of 22, increasing by four basis points to 323 basis points. Our current outlook reflects a scenario whereby Fed funds moves to between 5% and 5.25% during the first half of 2023 and remains stable for the balance of the year. If this scenario proves to be accurate, we expect NII and NIM to continue to expand modestly through the first half of the year and then begin to decline as interest-bearing deposit rates will likely continue to move higher throughout the balance of 2023 as the competitive environment for liquidity remains very intense. Turning to page nine. In the chart, we highlight the asset sensitivity of Hilltop, assuming parallel and instantaneous rate shocks, which represents an asset sensitive position of approximately 6% in the up 100 basis point scenario. As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios. Of note, if we shift the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months, the up 100 basis point sensitivity falls to approximately 3%. Further, in this scenario, each 25 basis point increase positively impacts net interest rate income by approximately $4 million. Moving to page 10. Total non-interest income for the fourth quarter of 2022 equated to $170 million. Fourth quarter mortgage-related income and fees decreased by $121 million versus the fourth quarter of 21, driven by the evolving environment in mortgage banking, which remains very challenged. The combination of higher interest rates, home price inflation, limited housing supply, and ongoing overcapacity in terms of mortgage originators across the United States has driven volumes materially lower and moved margins to levels we've not seen in recent history. Further, versus the prior year quarter, purchase mortgage volumes decreased by $1.7 billion, or 47%, and refinance volumes decreased by $1.3 billion, or 90%. During the fourth quarter of 2022, gain-on-sale margins continued, but has been a multi-quarter decline, with gain-on-sale margins for loans sold to third parties declining 16 basis points to 211 basis points. While gain on sale margins have been pressured, we are continuing to see that customers are paying to buy down their interest rate, and as such, our mortgage origin are stable versus the prior year period. We expect that gain on sale margins will continue to be pressured and trend lower throughout the first half of the year, and that customers will continue to prefer to buy down their interest rate rather than pay the prevailing market rate resulting in mortgage origination fees continuing to outperform origination volume trends. Other income increased by $18 million driven primarily by improved municipal trading results and additional favorable valuation marks across the fixed income trading books during the quarter. It is 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. I'm turning to page 11. Non-interest expenses decreased from the same period in the prior year by $69 million to $253 million. The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $50 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, which are captured in other expenses in the table in the upper right of the slide, declined as production volumes declined versus the prior year. Looking forward to 2023, we expect expenses other than variable compensation will remain relatively stable as the ongoing focused efforts relating to streamlining our operations and improving productivity continue to support a lower headcount and improved throughput across our franchise. Moving to page 12, fourth quarter average HFI loans equated to $7.8 billion in 2022, stable with the prior year fourth quarter levels. On a period ending basis, HFI loans grew versus the third quarter of 22 by $213 million, driven by improving commercial loan growth, particularly in commercial real estate, and the retention of one to four family mortgages originated by prime lending. During the fourth quarter of 2022, prime lending locked approximately 142 million of loans to be delivered to Plains Capital over the coming months. These loans had an average yield of 617 basis points, an average FICO and LTVs of 774 and 68% respectively. Turning to page 13. In the graph in the upper right, we show the progress made in reducing NPAs throughout 2022, which continue to support a relatively low level of net charge-offs throughout the fiscal year. As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended 2022 at 1.24%, including mortgage warehouse lending. I'm moving to page 14. Fourth quarter average total deposits are approximately $11.4 billion. and have declined by approximately $1 billion or 8% versus the fourth quarter of 21. On an ending balance basis, deposits declined by $1.5 billion to $11.3 billion from the prior year ending level. Included in the decline was our usage of $442 million related to the HTH tender share repurchase and $410 million of deposits that have transferred into our private bank in pursuit of higher yields in treasuries or other suite programs. While we expected deposits to decline given the level and speed of market interest rate adjustments, coupled with our decision to manage interest-bearing deposit costs with a significant lag, during the fourth quarter of 2022, we began to see customer activity shift as customers began to seek higher interest rates at an accelerated pace. Interest-bearing deposit costs rose 157 basis points from 22 basis points in the prior year period. Given the ongoing competitive intensity for liquidity by some participants in our markets, we expect the deposit rates will continue to move higher throughout 2023, driving our expected deposit data above our previous target of 50% towards 60% through the cycle for interest-bearing deposits. We remain focused on balancing our competitive position and supporting our long-term customer relationships with managing net interest income over time. turning to page 15. As we turn the calendar to 2023, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy. We are pleased with the work that our team has delivered to position our company for times like these, and our teammates across our franchise remain focused on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value. As is noted in the table, our current outlook for 2023 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes and we adjust our business, we will provide updates to our outlook on our future quarterly calls. Operator, that concludes our prepared comments. We'll turn the call back to you for the Q&A section of the call.
spk04: Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you would like to cancel the question, please press star followed by two. Please do also remember to unmute your microphone. Our first question is from Michael Rose. from Raymond James. Michael, your line's now open. Please go ahead.
spk02: Hey, good morning, guys. Hope you're well. Thanks for taking my questions. Just wanted to talk about the mortgage segment. And I think you mentioned some of the steps you've taken to reduce the cost base. Can you just give a little bit more color on what steps you've taken to kind of right-size the business and how we should think about segment profitability, at least over the next couple quarters, where I know it's going to be pretty challenging. But just wanted to see if we're kind of at or near an inflection point with the loss this quarter. Thanks.
spk00: Michael, this is Will. Thanks for the question. You know, I think as we have gone through 2022, a lot of work was done, as Jeremy mentioned, in the non-production area. We are continuing to make investments in our originators, trying to grow our sales staff. Obviously, we've got to originate profitable loans to kind of reach the inflection point you talked about. We've done significant reductions in the middle and back office to focus on productivity targets that had been set forth previously. We continue to make strides in that area, so we're continuing to evaluate it. I'd say the realignment of that business is more of a is more of a process than a place where we just get to an end point. We are continuing to evaluate the business on really a weekly basis, weekly and quarterly basis as we see production trends here into the first quarter. As it relates to profitability, we are expecting that the first quarter will yield results similar to those in the fourth quarter. First quarter, seasonally, a weak origination period. Nothing we've seen in the first month here has changed that view. However, in the second half of the year, we expect to start to move closer to breakeven or profitability. So the work the team's done, I think, has positioned us to reach that inflection point. But again, we do expect a challenging first quarter.
spk02: Perfect. I appreciate the color. I know you talked about pressure on the gain on sale margin, but do you have a sense for how much either downward pressure there may be from here or maybe when you think might be the better question, when it might actually kind of stabilize? I know we've talked about the excess capacity coming out of the system, but it still seems like you and others are still seeing pressure. When do you think we kind of hit an inflection point there and then could we actually start to see some relief as we move into the back half of the year? Thanks.
spk00: I think it's hard to call. Obviously, we're playing with the market. We're playing in the market we're given. So it's hard to absolutely say. Our expectation, just based on that return to kind of break even our profitability, relies on some relief from a gain-on-sale perspective, as well as mortgage origination fees continuing to remain strong. We are projecting that it will start to improve in the second half of the year. But again, it has taken longer and moved slower from a right sizing of the overall industry than we would have otherwise expected. So we're going to continue to be vigilant around cost and right sizing our franchise and be focused on driving our businesses as best we can toward profitability.
spk02: Appreciate it. And then just maybe moving to the core bank. You know, the margin was, you know, under, you know, I think some, it was flat Q on Q, but the consolidated margin up a little bit. You know, obviously, you know, the Fed seems to be at or near peak levels of Fed funds and looking at the forward curve. Can you just give us an idea for a trajectory, you know, for the margin? I would assume that you might expect maybe flat up, you know, on a consolidated basis, just given the impact of the rate hikes, but obviously there's the deposit side of the equation too. So, if you can just give us, you know, just general thoughts on kind of near-term, you know, margin trends would be helpful. Thanks.
spk00: So, you know, from an overall margin perspective, and I'll talk about consolidated, which you can see on kind of page 8 of our materials, We are expecting, as I said in my comments, to see with the expected Fed funds kind of targeting that five to five and a quarter range, we are expecting to see modest improvement, ongoing improvement in our NII and our NIM through the first half. Now, as I noted, we are seeing deposit data in our business, in our markets, move higher faster than we would have otherwise expected. A lot of that is related to the liquidity competition and the intensity there too around banks continuing to acquire deposits. So I'll just give you an end point. So the December net interest margin on a consolidated basis was 332. So that gives you a sense versus the 323, which was the average for the quarter. It gives you a sense of some positive trajectory there. But we were going to have to be vigilant around protecting our deposit base and protecting our relationships. So, again, we're expecting modest increases in NII and NIM through the first half. We do expect that this deposit and liquidity competition will persist for the balance of the year. So we do expect to see those improvements moderate in the second half. and likely start to trend downward at least slightly through the end of 23.
spk02: Perfect. And then maybe finally for me, saw the buyback. You guys were obviously fairly active last year. Just given the economic uncertainty, do you expect to kind of use the full amount of the buyback, or is it just you're going to be opportunistic if – You know, if there's declines in the price, just given the uncertainty in the economic backdrop. Thanks.
spk06: Sure. I mean, I think that, you know, part of our capital planning, we authorized, you know, a cherry purchase. So we did that. And so we'll evaluate it in open windows, you know, this quarter. And I think that's the best number you got to go on this year as we go forward.
spk02: Great, thanks for taking my questions, guys.
spk06: Thank you. Thank you.
spk04: Our next question is from Thomas Wendler from Stevens Incorporation. Thomas, your line's now open. Please go ahead.
spk01: Hey, good morning, everyone. Morning. uh can you guys maybe dig a little deeper into the broker dealer fee guidance you provided the zero to five percent growth in 2023 just looking for any color on the uh moving parts by business line there yes so uh as we you know as we look out uh into 2023 obviously the the uh investment banking business the trading businesses can be difficult to assess
spk00: And so as we've looked forward, we expect to see improvement in our public finance services business. We had a challenging underwriting year in 2022. We think that improves modestly. From a fixed income services perspective, it's difficult necessarily to predict exactly how the year goes. We obviously saw some volatile results quarter to quarter in 2022. But we don't see the environment necessarily materially changing in the first quarter from what we saw. But it is starting to heal slowly. So we've got it improving modestly through the year. And then we expect our sweep fees that we've talked about to continue to carry forward and carry forward into 2023. So a modest improvement, but not a marked shift in what I would call the overall environment for Hilltop Securities.
spk01: All right, thanks for the color there, guys. That was my only question. Thank you.
spk04: As a reminder, ladies and gentlemen, if you'd like to ask questions, press star followed by 1 on your telephone keypad. Our next question is from Woody Lay from KBW. Woody, please, your line is now open. Go ahead.
spk03: Hey, good morning, guys. Yeah, I wanted to touch on credit. I mean, you know, all the credit metrics were pretty stable quarter over quarter, which was good to see. Are there any loan segments in particular you're taking a closer look at at this time? Or just how are you thinking about credit over the next six months?
spk00: You know, we are watching our entire loan book. Obviously, as interest rates have shocked higher, different reset periods for different clients, so it's affecting different clients at different rates here. But we are evaluating the book really across, certainly for anybody who's got a floating rate or variable rate loan. You know, portions of the book we continue to look at. I think this has been consistent. The office book, which is just under $860 million, we continue to monitor closely given work-from-home trends and the like. The hotel portfolio, which is much smaller than it used to be, but we continue to monitor that portfolio certainly for business travel. But outside of that, I think it's really a fulsome look across the portfolio, again, because what we're seeing is the biggest challenge is higher interest rates and the speed with which those interest rates have moved higher, our customers not necessarily being able to push that through to their customers or pass that through. And so it is, you know, it's impairing cash flow on the margin. So we're watching that across the book. Okay, that's good color.
spk03: And then I wanted to touch on the deposit guidance. You know, you lay out, you're expecting average deposits down 4% to 8% for the year. You know, under this scenario, do you think the overall size of the balance sheet shrinks, or would you look for fill the hole with short-term borrowings in this scenario?
spk00: Our outlook kind of expects the balance sheet is similar in size year on year. So it doesn't get materially smaller, but it does likely shrink modestly. But again, we're looking to see, you know, we've got excess cash levels. Those cash levels will likely run down and we'll see that reinvested in a loan portfolio. All right. That's all for me. Thanks, guys.
spk06: Thank you.
spk04: Ladies and gentlemen, we currently have no further questions. And this concludes today's call. Thank you for joining. You may now disconnect your lines. Have a great day.
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