Welcome to the Hilltop Holdings Fourth Quarter 2023 Earnings Call and Webcast. [Operator Instructions] This call is being recorded on Friday, January 26, 2024. I would now like to turn the conference over to Erik Yohe, Executive Vice President at Hilltop Holdings. Please go ahead.

Thank you, Mark and good morning. 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, credit risk and trends in credit, allowance for credit losses, liquidity and sources of funding, the impact -- the 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, 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 would now like to turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Erik, and good morning. Before we go through our fourth quarter results, I'd like to take a moment to reflect on 2023 and outline our priorities for the upcoming year. Despite Hilltop's profitability for the year being hampered by a historically challenging mortgage market, the outstanding performance of our employees combined with our diversified business model, allowed the company to approve across a variety of areas. In 2023, we grew our earnings per share, dividends per share and book value per share, while also strengthening our liquidity and funding positions. Additionally, we enhanced our future earnings potential by improving our cost structure and taking advantage of hiring opportunities given dislocation across the financial services industry. From a balance standpoint, we generated average loan growth of 1% despite muted customer demand, a decline in funding -- deposit funding and tightening of credit standards. This growth is a testament to our long-term relationship banking approach and our ability to identify and capitalize on viable lending opportunities as competitors with strained balance sheets have pulled back. Conversely, our average deposit balances experienced a 7% decline. This trend was initially spurred by the bank failures that occurred in the first half of the year, and was further exacerbated by the intense competition around deposits that persisted throughout the remainder of the year. Our conservative approach to growth allowed us to withstand the decline in deposits without having to significantly rely on expensive wholesale funding options, which resulted in improved net interest income year-over-year. From an expense standpoint, our strategic focus on managing fixed costs, particularly in our mortgage operations, along with an enterprise-wide lens on cost management resulted in a meaningful reduction in noninterest expenses year-over-year. From a credit standpoint, this year, we proactively increased our allowance for loan losses to reflect…

Thank you, Jeremy. I'll start on Page 5. As Jeremy discussed, for the fourth quarter of 2023, Hilltop reported consolidated income attributable to common stockholders of $29 million, equating to $0.44 per diluted share. This quarter's results highlight the benefits of our diversified model. As HilltopSecurities generated $14 million of sweep revenue, which is represented within their Wells management business line. In structured finance posted solid revenue contribution in the period. Somewhat offsetting these positive activities during the fourth quarter, prime lending and the broader mortgage industry continue to struggle as overall market inventory remains very low, assuring both origination volumes and margins in the business. The bank remained stable as NIM pressures persist and somewhat mitigated by lower than expected credit cost and a modest decline in noninterest expense quarter-over-quarter. Turning to Page 6. For the full year of 2023, Hilltop reported consolidated income attributable to common stockholders of $110 million, equating to $1.69 per diluted share. While net income declined 3% versus the prior year, overall diluted EPS did improve by 5%, driven by lower full year average shares. Turning to Page 7. Hilltop's allowance for credit losses increased during the quarter by $600,000 to $111.4 million. The macroeconomic outlook improved in the fourth quarter, which somewhat offset the impacts of collective portfolio changes and an increase in specific reserves. Allowance for credit losses of $111 million, yield an ACL to total loans HFI ratio of 1.38% as of December 31, 2023. I will address additional credit trends later in this presentation. As we've seen over time, ACL can be volatile as it is impacted by economic assumptions as well as changes in the mix and makeup of the credit portfolio. We continue to believe that the allowance for credit losses could be volatile and the future changes…

[Operator Instructions] Our first question comes from the line of Thomas Wendler at Stephens Inc.

It looks like you're still targeting some asset sensitivity reduction. Can you give us an idea on the goals there? How close to neutral are you guys trying to move?

I think over the next -- this is Will. Over the next year, we'd like to move that to closer to 3%.

And then just moving over to mortgage. I'm a bit surprised to see the gain on sale margins decrease in 4Q. Can you give us any color there?

What we've seen, again, as I noted in my comments, is that customers have a propensity at this point to want to buy down the rate. So we're seeing more customers paying higher origination fees and other fees versus necessarily is rolling through our gain on sale. Overall, total revenue for the loan remains reasonably stable. But the mix between those two continues to shift towards origination fees versus gain on sale as I noted, we do expect annual sales will rebound slowly over time. But again, it's -- we expect that to occur slowly throughout '24 and into '25.

If I can just sneak one more in. Can you give us an idea of the impact, like increased levels of rate cuts could have on mortgage in 2024. I think you guys have one cut kind of factored into your modeling. Can you give us an idea of how a couple of additional cuts might impact mortgage?

I think our view is rates lower would necessarily be positive. But again, given where the overall mortgage industry is as it relates to customer mortgage loan rates, we believe that a large percentage of customers have got mortgages that currently yield a rate below 6%. Given that, it will take us what we believe to be a substantial number of cuts to really project forward a substantial return to the refinance business. That said, we believe lower rates would help necessarily drive some of the purchase business. I would say our view is that the largest constraint in the mortgage business right now, certainly that we see as overall inventory levels and the availability of housing across the markets where we participate. And so while rates are important and certainly, affordability matters, the overall availability of homes and again, those inventory levels, we would view as the largest constraint.

And our next question comes from the line of Tim Mitchell at Raymond James.

So to start on the hotel credit that moved to nonperforming this quarter. Could you just give some more color on what happened with that property? And then are you looking to move it out of the bank or what potential loss content could be in there?

Well, I'll try to address those in reverse order from a loss content perspective. As I noted in my comments, we've requested two additional and new appraisals. We'll evaluate those when that information becomes available, but we believe the current quarter's results or current year results reflect the lost content currently in that loan. The short story is the cash flows and the pro formas that we've evaluated -- we've been evaluating really more -- our mortgage business very closely through our overall hotel portfolio, I should say, closely since COVID, the cash flows simply haven't come back for this particular property as quickly and as robustly as we would have expected as the operator would have expected. And as a result, the cash flow challenges, we feel like it was prudent and appropriate to move to nonaccrual in this period.

Perfect. And then just moving to net interest margin. kind of took a step down this quarter. When do you think that could trough and inflect in '24? And how might rate cuts play into that?

Yes. So we would expect net interest margin to trend modestly lower from current levels. I'll give you the reported statistics. So for the quarter, we ended 2.96%. For December, however, we were at 2.92%. So that gives you some sense that there's headwinds kind of right here in the immediate future. That said, we expect it would trough in the second quarter. And again, depending on where the Fed moves and how quickly they move could start to move higher as soon as the third and fourth quarter. But again, we would expect it to trough in the second quarter.

Awesome. And then just one last one for me. You guys bought back about $5 million of stock this quarter and you announced a new program, I think, $75 million because do you think of 4Q levels are kind of a good run rate through '24? Or how you're thinking about buybacks?

I think that we have a $75 million share repurchase authorization that we just put in place. So I'd kind of look at that as the target for this year, but we're going to be evaluating as we do every quarter where our stock is trading.

And currently, there are no further questions on the line. So at that point, we'll conclude today's call. Thank you all very much for attending. This now concludes the conference. You may now disconnect your lines.