Hilltop Holdings Inc.

Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings second quarter 2023 earnings conference call and webcast. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press start zero for the operator. This call is being recorded on Friday, July the 21st, 2023. I would now like to turn the conference over to Eric Yohe, Executive Vice President with Hilltop Holdings. Please go ahead.

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, liquidity, and sources of funding, The impact and potential impacts of inflation, stock repurchases and dividends, and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation, are forward-looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties. 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. 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 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'd like to now turn the presentation over to Jeremy Ford, President and CEO.

Thank you, Eric, and good morning. For the second quarter, Hilltop reported net income of $18 million, or 28 cents per diluted share. Return on average assets for the period was 0.5%, and return on average equity was 3.5%. Hilltop's operating results reflect the challenging market conditions in our mortgage origination and banking segments, offset by profitability growth in our broker-dealer segment. We continue to prioritize the strength of our balance sheet by building on our robust capital and liquidity positions. And we remain confident in our ability to continue serving our valued clients through various business and interest rate cycles with our synergistic and durable business model. During the quarter, Plains Capital Bank generated $40 million of pre-tax income on $13.8 billion of assets, representing a return on average assets of 0.9%. Average loans at the bank increased by $172 million in the quarter or approximately 9% annualized as core bank commercial loans, mortgage warehouse loans, and retained mortgage balances increased. Growth was strong this quarter as a result of the great work by our bankers over the past year. But we now expect loan growth to slow given the declining pipelines we have realized over the last few months. Though our credit standards are largely unchanged, the market is still competitive and clients, particularly in commercial real estate, are pulling back as elevated rates diminish the economics of many projects. Regarding deposits, we continue to take actions to ensure the bank maintains financial flexibility while also being mindful of margin impact. During the quarter, we increased broker deposits at the bank by $390 million and continued to access $1.5 billion of core deposits from Hilltop Securities' FDIC suite program. This is an increase of approximately $500 million from the amount that we have historically accessed from the program. Given the heightened competition in the market for deposits, we were aggressive with deposit rate increases in the quarter to retrain and attract customers. We believe our deposit rates are now competitive, though still expect our cost of deposits to moderately increase throughout the second half of 2023. While our deposit base has stabilized, as expected, these actions have led to net interest margin compression. The bank's results were also impacted by a provision for credit losses of $14.9 million. This provision was driven by a combination of factors, including deterioration in the overall commercial real estate outlook, negative credit migration, particularly in the office portfolio, and loan growth. Although we have built up our allowance, we have still yet to realize any notable charge-offs. Overall, our bank continues to operate at a high level and produce solid results, despite NIM compression from deposit competition and elevated provisioning given expectations of credit normalization. Our team of seasoned bankers and tenured leadership are working hard to ensure that the bank maintains the flexibility to still lend to strong credits and longstanding relationships in the current market. Moving to prime lending. The second quarter was another challenging period for the mortgage business. The spring home buying season did not materialize on account of low housing inventory and high home prices coupled with high mortgage rates, which are adversely impacting home buyer affordability and confidence. In addition to sidelining many prospective home buyers, higher rates further reinforced inventory constraints and low refinance volume due to the rate lock-in effect caused by having so many current mortgagees with a sub 4% mortgage rate. Prime lending originated $2.5 billion in volume, a decline of 36% from the same period prior year, roughly in line with the overall industry volume projections of 32%. Of this originated volume, only 6% was refinance volume compared to 12% during the second quarter of last year. This reduction in refinance volume can be attributed to the previously mentioned rate lock-in effect that will continue to have a significant impact on volumes until rates decline. We did see some relief in gain on sale margins during the period. As reported, gain on sale margins increased from Q1 2023 by 15 basis points to 201 basis points. While this is still lower than the same period prior year, it is an encouraging sign of some stabilization in the market. Given the difficulty of projecting future market size due to inventory levels, interest rates, and prolonged industry excess capacity, prime lending continues to resize the business and correspondingly reduce its expense base. This includes actions such as non-sales headcount reductions, consolidation of unprofitable branches, termination of underperforming originators, and renegotiation of leases and vendor contracts. Additionally, we continue to recruit loan originators and take advantage of some opportunities in areas where other firms have exited by recruiting experienced originators with strong relationships. We also remain focused on improving efficiencies and lowering costs associated with the overall loan fulfillment process. We believe that the arduous resizing, recruiting and process improvement efforts by the prime lending team are going to be a substantial tailwind for us when the market does recover. Hilltop Securities realized pre-tax income of $19 million on net revenues of $113 million during the second quarter. Pre-tax profit and margins improved compared to last year's second quarter due to a 13% increase in net revenues and a lower compensation ratio of 58% compared to 64% in Q2 2022. The revenue improvement over the second quarter of 2022 was primarily related to the wealth management business, where money market and FDIC sweep accounts revenues benefited from the higher short-term interest rates, despite weaker transactional production. After a difficult start last year, Hilltop Securities has performed well over the last 12 months with nearly all business lines generating revenue growth. I believe this demonstrates the resilience of its established business lines, enhancements made to the firm, and the quality of its people. Moving to page four. Hilltop maintains strong capital levels with a common equity tier one capital ratio of 17.6%. and our tangible book value per share increased from Q2 2022 by $0.37 to $27.45. In summary, Hilltop's profitability has been challenged the first half of the year from the macroeconomic environment, and we do expect interest rates to remain elevated, so we will continue to be conservative in our approach. However, we also believe that our demonstrated focus on balance sheet strength and capital preservation will provide opportunities for long-term growth. With that, I will now turn the presentation over to Will to discuss the financials.