Ladies and gentlemen, welcome to the Hilltop Holdings First Quarter 2023 Earnings Conference Call and Webcast. My name is Glenn, and I will be the moderator for today’s call. [Operator Instructions] I will now hand you over to your host, Erik Yohe, Executive Vice President of Hilltop Holdings. Erik, please go ahead.

Thank you, operator. 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 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 website 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 first quarter, Hilltop reported net income of $26 million or $0.40 per diluted share. Return on average assets for the period was 0.7% and return on average equity was 5.1%. Although there was a considerable amount of volatility in the banking industry this past quarter, we entered the year with a strong balance sheet and feel very good about the position we are in. We have always managed our capital, funding and liquidity for the long-term and through various potential rate environments so we can continue to support our customers during times like this. Specifically, we have over $7 billion in available liquidity, a common equity Tier 1 risk-based capital ratio of 18% and a diversified and granular deposit base. We will continue to prioritize the health and soundness of our balance sheet and believe this will create opportunities for us over time. PlainsCapital Bank generated $58 million of pretax income on $13.7 billion of assets, generating a return on average assets of 1.4%. Average loans at PlainsCapital Bank increased $133 million in the quarter or 8% annualized as both core bank commercial loans and retained mortgage balances increased. While the growth was strong, we are starting to see a slowdown in our pipeline as clients react to higher interest rates. Average bank deposits remained relatively stable despite the turmoil in the banking industry. Our total deposits declined 3% for the quarter, but importantly, our core bank customer deposits only declined by approximately 1% from levels immediately prior to the bank failures until the week after. Though deposit declines has occurred, as customers deploy their cash into projects or seek higher-yielding often government alternatives, we have not seen any notable customer attrition directly related to the after effects of the recent bank…

Thank you, Jeremy. I’ll start on Page 5 that Jeremy discussed for the first quarter of 2023, Hilltop reported consolidated income attributable to common stockholders of $25.8 million equating to $0.40 per diluted share. During the quarter solid year-over-year net interest income growth was offset by ongoing headwinds in the mortgage business as volumes and margins remain challenged. Further, first quarter’s results do reflect certain discrete tax items that reduce the overall tax expense in the period. The estimated EPS impact of these items is $0.04 per share, and we do not view these items as recurring. Further, we expect that the full year GAAP tax rate will remain within the range of prior guidance at 22% to 24%. Turning to Page 6. Hilltop’s allowance for credit losses increased by $2 million to $97.4 million as improvement in the macroeconomic outlook was offset by the impact of collective portfolio changes. The portfolio changes were driven by net loan growth in the portfolio, which accounts for approximately $4 million of the change and the ongoing updating of risk grades as year-end financials are captured, which accounted for approximately $3.4 million of the change. Allowance for credit losses of $97.4 million yields in ACL to total loans HFI ratio of 1.19% as of March 31, 2023. 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 volatility, we could expect heightened volatility over the coming quarters. Moving to Page 7. Net interest income in the first quarter equated to $122 million, including $1.9…

Thank you. [Operator Instructions] We have our first question comes from Brady Gailey from KBW. Brady, your line is now open.

Yes, it’s Brady. Good morning, guys.

Good morning.

So I wanted to start just with mortgage. I know the headwinds that exist there. If you look at the last three quarters, it’s been at a pretty notable loss position for the bank. Is there an opportunity to further reduce non-variable expenses at mortgage to get that business to at least a point of break even? Or what are your thoughts on continued mortgage expense rightsizing and when we should expect to see that unit get out of the red and back into the black.

Brady, it’s Will. You highlight the issue. It’s been a challenging few quarters in really last year for the mortgage business. As we are evaluating that franchise first, it’s worth noting, it’s a significant portion – it has been a significant portion of our business over the years and will continue to be. And as we evaluate it, we are solely focused on long-term and making sure that we maintain a robust franchise to take advantage of that market when it does rebound. I think to – acutely to your point around profitability, profitability for the full year is going to be challenging, certainly, given where the first quarter came in, we did take I’d say substantial actions in March and early April to continue to reduce fixed cost. Objectively, we expect the loss level to continue to decline for the balance of the year and move us to a position where for 2024, we would expect to be at a run rate level of break even or better, just given where the market dynamics are. I think as we sit here we’ve got to – we are being careful and prudent given the gain on sale margins at a 193 basis points to third parties as well as the overall volume in the marketplace. We think that gain on sale level is unsustainable and we’ll recover at some point I think the challenges kind of win and by how much and I’ve tried to cover that in my comments. But again, from a cost perspective, we continue to make steps every month and every quarter with the leadership team at Prime and again with a focus on improving or reducing the overall loss each quarter. But again, the market dynamics in a one handle in front of the gain on sale makes profitability a real challenge.

And I’m hopeful that this is the bottom on margins and that the over capacity is really being pulled out of the business. You are seeing some M&A and some other activity with like Wells Fargo and everything in the last quarter that would lead us to believe that we are – the cycle is turning, but it’s still not profitable.

Okay. And in the first quarter, was there any meaningful adjustment to the MSR valuation?

Yes. We had about a $5.7 million negative adjustment to the value of the MSR, really reflecting. I think the market’s view that and a valuation view that the current loans going on the books are going into the MSR with a 6%, 6.5% rate are going to have a higher propensity to refi if you believe the Fed’s going to move rates lower in the short-term. So we did make that valuation adjustment. That’s a pretax. That was a pretax, yes.

Pretax number, okay. And the $5.7 million, is that net of hedges? Did you guys hear me?

Yes. It was net of hedges. Yes.

That’s correct.

Okay. Yes, net of hedges. All right. And then my final question is just on the tax rate. I know it was abnormally low in the first quarter, you’re still sticking to the 22% to 24% guidance. So that would kind of suggest that the effective tax rate ticks up to like, I don’t know, 26% to 27% for the rest of the year. Is that – am I thinking about that right?

I think – yes, I mean, historically the first quarter, well, so the discrete items did bring the effective tax rate down to 11.4%. I think what we are expecting is as you saw second half of last year 25% to 26% is probably the normal run rate. First quarter is always historically low from an effective tax rate perspective due to some of the stock compensation related items that normally go through. So it’s historically a below trend ETR. That said, we would expect 24% to 26% for the recurring – for the remaining three quarters, but that will bring us in and likely will bring us in forward the lower end of that range for the full year.

Okay. And one more, just – I mean you guys still have excess capital. I know that M&A is tough right now, given the backdrop, but I also know that Hilltop tends to buy stuff that’s out of favor in tough times. So maybe just an update on how you’re thinking about M&A and is that a possibility today?

Sure. Well, I mean I clearly think that last quarter was a sea change. And we’re still interested in doing M&A. We’re still interested in doing deals that are strategic fits for our business. And on balance, just with the change in market prices, it better positions us in our currency.

All right, great. Thanks guys.

Thanks.

Thank you, and my apologies, Brady. Our next question comes from Brad Milsaps from Piper Sandler. Brad, your line is now open.

Hi, good morning guys.

Good morning.

Good morning.

Am I coming – Yes. Am I coming through? Okay. Thanks for taking my question. I was just curious if you could talk a little bit about the change in guidance on the broker-dealer segment. Just kind of curious as the areas you’re seeing more strength or is it really a function of revenues feeling better about revenues sort of hanging in this range. I guess you had that really low first quarter last year. So it kind of throws the year-over-year growth off a little bit. But just kind of curious what you’re seeing and kind of how to think about the change in the broker-dealer guidance?

Yes, let me speak and then Will talk specifically to the guidance. But I think, first of all, in the first quarter of last year, we had – it was a really challenging quarter, and we had some a really muted structured finance first quarter. This has been the opposite this quarter and we’ve had some really strong trading gains in the quarter, which I don’t necessarily know before we’re going to rely on those to persist throughout the year. But what is persistent is our sweep revenue, just given the rate environment, and that was up to $15 million for the quarter. So we do feel good about the momentum and the revenue and several other businesses performing well at HilltopSecurities really throughout the next – rest of the year.

And Brad, I think that covers it. So you’ll see the sweep revenue show up in retail and clearing services in the revenue items at the broker-dealer. But that’s really the primary contributor to the increase in the overall outlook, coupled with, as Jeremy mentioned, a stronger first quarter than we might have otherwise expected.

And Will, just back to the expense conversation. What are really most of the expense saves coming at Prime? Or I did notice too that the expenses, at least on a linked quarter basis, I know that’s maybe not the best comparison we’re down to at the bank. But just kind of curious if you could maybe delve into the kind of sources of – or the primary sources of the expenses? Or is it really just kind of across the franchise?

I think the preponderance of the expense saves have occurred at Prime. But that said, we are – with the work we’re doing there to right size the business to meet the market from a profitability perspective. But across as we have and as we’ve continued, we are looking for productivity improvements and enhancements across the bank as we reevaluate a series of core processes there. That team is doing a very nice job kind of managing expenses over time in what’s otherwise been a pretty inflationary environment. I would say exactly the same for HilltopSecurities. Again, continue to evaluate large processes where we can improve productivity and throughput, and we’re doing that across. So it’s been across the franchise where we’ve seen kind of headcount declines and overall productivity improvement, but the preponderance of the cost saves have come from PrimeLending.

Got it. And then just final one for me to follow-up on Brady’s question on M&A, I mean, you guys historically have been proactive when things look toughest for the sector. Can you just talk about sort of how you think about maybe buying a bank that might have really low TCE because of marks that you would potentially have to take on a bond portfolio. You guys are typically a cash buyer or can put a lot of cash in a deal to make it work. Just kind of curious how your approach might be different or not in this environment kind of given everything’s on – everything that’s gone on and opportunities you may or may not see.

Sure. Well, from a balance sheet perspective, we feel like we have a very strong balance sheet that can be – can solve for issues of a potential target certainly and the combined entity could get past a lot of this overhang that that’s out there. And just by nature of where stocks have drifted and where we’ve kind of always been around tangible book value, our ability to transact is better whether it’s cash or our stock.

And Jeremy, what would an ideal candidate look like? I mean smaller banks tend to have a lot more CRE obviously that is not in vogue right now, but just kind of curious, if you were drawing it up, what would it look like? Would it be necessarily certainly in Texas or you might you look elsewhere just kind of curious kind of what your criteria might be.

Well, I think it would be – it would make a better strategic fit to be in Texas and to be similar business. And look, I mean, I think we’re working hard to stay on top of what’s going on in the market. And we also are going to be patient and careful in this environment, not just from a balance sheet liquidity standpoint, but also from a potential credit standpoint.

Okay. Great. Thank you, guys.

Thank you.

Thank you. We have our next question comes from Thomas Wendler from Stephens, Inc. Thomas, your line is now open.

Hey, good morning, everyone.

Good morning.

Good morning.

Lots of moving pieces this quarter in excess liquidity. We’re bringing on the sweep deposits and some borrowings from the FHLB. Can you give us an idea of what kind of levels of excess liquidity you’re looking to hold on the balance sheet moving forward?

Yes. This will as I noted in my comments, objectively, we are looking to hold between $1.5 billion and $2 billion of deposits at the Fed. And so we’ll manage the levels and manage the levels to do that. The levers we have to do that really out of an abundance of caution that’s not an operating level that we necessarily need. But as we sit here today with the uncertainty around the economy, potentially uncertainty around the banking segment, we want to make sure we’re nimble and agile in the event something else were to occur.

Thank you. And then one final one for me. I think you were a little less active in the buyback than we were expecting. Can you just give me your – an idea of your appetite from here in your buyback program?

Sure. So for the first quarter, I mean, if you recall, we filed our 10-K was filed kind of late in the quarter, so our window was pretty narrow. And then we were just trying to do a little bit of activity while we had an open window. Since then, where our share repurchase authorization, we still got about $70 million left, but I think we’re going to proceed cautiously there, clearly given the state of balance sheets and liquidity and…

All right. Thank you for answering my questions.

Thank you.

Thank you. We have no further questions on the line. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.