Hi, everyone, 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. [Operator Instructions] I will now hand over to your host, Erik Yohe. Please go ahead.

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 plans, 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 risks 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 Web site at ir.hilltop-holdings.com. With that, I will now turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Erik, 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, PlainsCapital Bank generated $58 million in pretax income, and a strong return on average assets of 1.3%. Though pretax 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 PlainsCapital 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 meaningful deposit relationships within our private bank's assets under management as customers move some money from bank deposits into treasuries…

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 $0.39 per diluted share. As shown on page six, for the full-year 2022, Hilltop reported consolidated income attributable to common stock holdings of $113 million or a $1.60 per diluted share. Of note, Hilltop's outstanding shares will reduce by 18% or 14.3 million shares during the year primarily as a result of the successful 10-year offer completed during May. Turning to page seven, 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 reverses and collective portfolio migration. Allowance for credit losses of $95 million yields an ACL to total loans HFI ratio of 1.18% as of yearend 2022. Of note, we continue to believe that the allowance for credit losses could be volatile and the future changes in 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 am turning to page eight. Net interest income in the fourth quarter equated to a $123 million including $2.2 million of purchase accounting accretion. Versus the prior year quarter, net income increased by $19 million or 18% driven primarily by higher yields on loans, securities, and cash balances which was somewhat offset by higher rates on deposits and variable rate borrowings. And interest margin continued to improve versus the third quarter of '22 increasing by…

[Operator Instructions] Our first question is from Michael Rose from Raymond James. Michael, your line is now open, please go ahead.

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? Right now, 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.

Hi, Michael, this is Will. Thanks for the question. I think as we have gone through 2022, a lot of work was done, as Jeremy mentioned, in the non-production area. We'll continue to make investments in our originators, trying to grow our sales staff obviously. We've got to originate profitable loans to 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 process than a place where we just get to an endpoint. We'll continue to evaluate the business on, really, a weekly basis -- weekly and quarterly basis as we see production trends here in to 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 is 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.

Perfect. Appreciate the color. And what -- 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 stabilize? I know we've talked about the excess capacity coming out of the system, but 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.

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 breakeven or profitability relies on some relief from a gain on sale perspective as well as mortgage origination fees continuing to remain strong. So, 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 rightsizing of the overall industry than we would have otherwise expected. So, we're going to continue to be vigilant around cost in rightsizing our franchise, and be focused on driving our businesses as best we can toward profitability.

Appreciate it. And then just maybe moving to the core bank, the margin was under, I think, some -- it was flat q-on-q, but the consolidated margin up a little bit. Obviously, that the Fed seems to be at or near peak levels of Fed funds in looking at the forward curve. Can you just give us an idea for a trajectory for the margin? I would assume that you might expect maybe flat-to-up 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 just general thoughts on near-term margin trends would be helpful? Thanks.

So, from an overall margin perspective and I'll talk about consolidated, which you could see on page eight of our materials. But we are expecting, as I said in my comments, to see, with the expected Fed funds, kind of targeting at 5 to 5.25 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 betas 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'd just give you an endpoint. So, the December net interest margin on a consolidated basis was 332, so that gives us a sense versus the 323, which was the average for the quarter. That gives you a sense of some positive trajectory there. But we're going to have to be vigilant around protecting our deposit base and protecting our relationship. 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.

Perfect. And then maybe finally for me, so the buyback, you guys were obviously fairly active last year. Just given the economic uncertainty, do you expect to use the full amount of the buyback or is it just you're going to be opportunistic, if there's declines in the price, just given the uncertainty in the economic backdrop? Thanks.

Sure. I mean, I think that part of our capital planning, we authorized a share repurchase, so we did that. And so, we'll evaluate it in open windows this quarter. And I think that's the best number you got to go on this year as we go forward.

Great. Thanks for taking my questions, guys.

Thank you.

Thank you.

Our next question is from Thomas Wendler from Stephens, Inc. Thomas, your line is now open, please go ahead.

Hey, good morning, everyone.

Morning.

Morning.

Can you guys maybe dig a little deeper into the broker dealer fee guidance you provided, the 0% to 5% growth in 2023, just looking for any color on the moving parts by business line there?

Yes, so as we look out into 2023, obviously that the investment banking business, the trading businesses can be difficult to assess. And so, as we look 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 do -- 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 sweet peas that we've talked about to continue to carry forward and -- carry forward into 2023. So, a modest improvement, but not a market shift in what I would call the overall environment for HilltopSecurities.

All right, thanks for the color there, guys. That was my only question. Thank you.

[Operator Instructions] Our next question is from Woody Lay from KBW. Woody, please your line is now open. Go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Yes, I wanted to touch on credit. I mean all the credit metrics were pretty stable quarter-over-quarter, which was good to see. Are there any loan segments in particular you are taking a closer look at at this time? Or, just how are you thinking about credit over the next six months?

We are our entire loan lookout obviously as interest rates have shot higher. Different reset period 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 has got a floating rates or variable rate loan, 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 wholesome look across the portfolio. Again because the biggest -- what we are seeing as the biggest challenge is higher interest rates and the speed with which those interest rates did move higher, our customers not necessarily being to push that through to that customers or pass that through. And so, it is impairing -- it's a very cash flow on the margin. So, we were watching that across the book.

Okay, that's good color. And then, I wanted to touch on the deposit guidance. Your way out -- you are expecting average deposits down 4% to 8% for the year. Under this scenario, do you think the overall size of the balance sheet shrinks, or would you look for a fill the hole with short-term borrowings in this scenario?

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 are looking to see -- we have got excess cash levels. Those cash levels will likely run down. And, we will see that reinvest in loans in the loan portfolio.

All right. That's all from me. Thanks, guys.

Thank you.

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.