Good morning ladies and gentlemen, and welcome to the Hilltop Holdings Fourth Quarter 2024 Earnings Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matt Dunn. 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, credit risks and trends in credit, allowance for credit losses, liquidity and sources of funding, funding cost, dividends, stock repurchases, subsequent events 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 the preface of 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.com. I'll now turn the presentation over to Jeremy Ford.

Thank you, Matt, and good morning. Before we cover the results from the quarter, I would like to spend some time reviewing the full year of 2024. During the year, we saw a dramatic shift in the Fed's posture regarding inflation, and their corresponding target rate. The FOMC cut rates three times in 2024, totaling 100 basis points of reduction. Further, the yield curve realized a material change in shape as long-term rates, namely the 10-year treasury note fluctuated over 100 basis points from peak to trough, over the course of the year. Through prudent management, Hilltop produced an increase in consolidated pretax income year-over-year, despite the volatility of both short and long-term rates. Further, during the year, Hilltop realized growth in core deposits at PlainsCapital Bank enhanced our liquidity position by returning non-core excess funding. Continued progress towards operational efficiency with improved financial results at PrimeLending, invested further in the foundational business units at HilltopSecurities and returned $64 million to stockholders. As we embark upon a New Year, we will continue to focus on risk management, sound balance sheet positioning and the commitment we have to serve our customers and communities, which we believe will drive long-term value creation through economic cycles, with our synergistic and durable business model. Moving to the fourth quarter, Hilltop reported net income of approximately $36 million or $0.55 per diluted share. Return on average assets for the period was 0.9%, and return on average equity was 6.5%. Favorable operating results from the banking and broker dealer business units, helped to produce a quarter-over-quarter and year-over-year increase in pretax income. Hilltop realized another quarterly improvement in net interest income primarily, due to a growth in average earning assets, though consolidated net interest margin at Hilltop and net interest margin at the bank, did experience…

Thank you, Jeremy. I will start on Page 5. As Jeremy discussed, for the fourth quarter of 2024, Hilltop reported consolidated income attributable to common stockholders of $35.5 million, equating to $0.55 per diluted share. The fourth quarter results reflect a few notable items, including a $5.9 million provision for credit loss recapture, which reflects the combined impacts of positive credit migration during the period, and an improved economic outlook, versus the third quarter. In addition, during the quarter we recognized a negative valuation adjustment of $5 million, related to an owned office facility that management intends to exit and sell. While we are making progress on the sale, it has not closed and as a result, Hilltop may have additional adjustments related to this transaction in future periods. Lastly, during the period, Hilltop recognized tax benefits related to various state income tax filings, and certain discrete items in the fourth quarter. The impact of these tax items, equates to approximately $3 million on an after-tax basis. Further, these tax items reduced the GAAP effective tax rate in the quarter, by approximately 7% to 14.2%. Moving to Page 6. For the full year of 2024, Hilltop reported consolidated income attributable to common stockholders of $113 million, equating to $1.74 per diluted share. During the year, net interest income declined by 11% and that was largely offset by lower provision expense in 2024, which equated to approximately $1 million for the full year. I'll address the allowance for credit losses in more detail later in my comments. A few additional items of note, while not included in the 2024 results, we disclosed on January 15 on Form 8-K that we had redeemed all outstanding senior notes that, were due to mature on April 15 of 2025. These notes were redeemed from…

Thank you. [Operator Instructions] Your first question is from Michael Rose from Raymond James. Your line is now open.

Hi, good morning guys. Thanks for taking my questions.

Good morning.

Good morning.

Start on the merchant. Good morning. Maybe we could just start on the merchant banking gain, and obviously that will add to capital. I know you guys just announced the buyback. Any plans for anything like an ASR, like you've done in the past, or to be maybe a little bit more aggressive with the buyback at this point? Just trying to appreciate the capital priorities, and if there's been any changes just given this expected gain? Thanks.

The priorities haven't changed, because of the specific gain. I think that we just got authorization for $100 million share repurchase, for the program and for the year. It's not an ASR, it's just going to be during open Windows. And so, we're certainly evaluating that. And I think that, we're hoping to be active with our share repurchase to our authorization this year. Last year we were, we started the year stronger, and did about $20 million. But we held off, because we had these looming debt maturities that we wanted to make sure we had, optimal flexibility for.

Okay. That's helpful. And then, well maybe if you could just help me better appreciate the loan growth outlook, it is fairly wide. Can you just give us some assumptions around, what you're assuming for paydowns? I know the auto book is still, will be a somewhat of a headwind, although declining. Can you just talk about, borrower activity, pipelines, things like that? It seems like there's a lot of optimism in the market, but we haven't really seen it come through in the actual industry data yet. So just trying to better appreciate what could you drive you to the lower end, versus the upper end? Thanks.

Yes so the, the range is a little wide. We're here at the early part of the year. Seems to be a pretty, pretty substantive bid and ask around where, where the Fed's going to kind of land the plane here in terms of this rate cycle. So trying to reflect that as well. I think we've seen pipelines build really through, midway the third quarter into the fourth quarter. Certainly that's continued here from a commercial lending perspective. That said, just for us, a lot of our activity is as commercial real estate oriented. So that means, we'll book the commitment it'll take. Our customers will then work through their equity installations, and then they'll start the borrowing process. So while we've got strong pipelines and strong activity that may not manifest itself in terms of actual fundings on the balance sheet for a couple of quarters. And so our outlook kind of captures that as well. We did see, as we noted on prior calls, some softness in the late first and second quarter last year, which are kind of causing a little bit of a slower start. As you can see, we're also expecting to retain loans that are originated at prime mortgage loans. Expect that retention to be $10 million to $30 million per month. We evaluate that on an economic basis. So it's not an auto drive matter in the context of just kind of turning it on at a level and forgetting about it. We will evaluate pricing, we'll evaluate the overall return profile. And so that range in and of itself, would put you anywhere from $120 million retained to $360 million retained. So those are the kind of things that start to put you within the range of 2% to 5% of the entire portfolio, and some of the variability. But as we have, we're going to be thoughtful, and prudent about how we put capital to work. Both from a credit perspective, but also a duration and asset liability perspective as it relates to mortgages we're going to retain.

Yes, that's a good point on the mortgage retention, because I think it was zero to $20 million last year, and now you're bringing it up a little bit.

Correct.

Maybe just finally from me, I'm sorry if I missed some of the margin commentary, but appreciate the NII guide. If we don't get the two rate cuts that you have built in, would you be closer, would you be at the lower end? Or could you potentially be less than that, just given some of the competitive dynamics? Or is that range kind of contemplate somewhere between zero and two, and is that the way we should kind of think about it? Or does the guide really just kind of encapsulate the two cuts? Thanks.

Yes, the guide encapsulates the two cuts across the year. We're asset sensitive, so candidly less cuts necessarily improves net interest income as a practical matter. So from our perspective, we'll wait and see where the Fed is, but the guidance we've got in place right now has kind of two Fed cuts, one in the middle of the year, one in third quarter, and we'll continue to watch those. We're going to continue to make progress on overall deposit costs. I do think it's important, to note we've got our CD portfolio, which we had structurally moved to shorten up, over the last 12 to 18 months. We've done that. The largest portion of that portfolio sits in kind of a 90 day product. Over the next 90 days we've got about $650 million of CDs that come to mature. Those have got a blended average rate on them around 430 basis points. And the current offering for that product is 395. So we're going to continue to see just through the natural matriculation of the balance sheet, as well as some of the decisions we've made as to how we position the liability side. We're going to continue to see some of that benefit, which was part of the comment around. We expect to see deposit rates continue to fall through the first quarter. Then they likely start to stabilize up and until we see the Fed, make a definitive move from here.

Perfect. Thanks for all the color. I appreciate you taking my questions.

Yes, sir. Thank you.

Thank you. Your next question is from Stephen Scouten from Piper Sandler. Your line is now open.

Yes, thanks. Appreciate it guys. Curious how - you guys are thinking about Structured Finance revenues for 2025, obviously a really nice year in '24. And you guys talked about some of the down payment assistance programs and the benefits there. What's, that kind of environment looking like as you see it today? And do you feel like that can continue to grow off of this, let's call it $100 million figure from 2024?

So well, good morning. And I think, from a Structured Finance perspective, as we've noted, it's benefited for the last couple of years from, one of our larger state housing authorities continuing to in the state putting in additional funds, to support their down payment assistance program. We don't have any control of that. They obviously operate independently in that regard. And so as a result, if they chose to continue to support the program, through their annual budgeting process. We obviously believe that would be favorable to, the constituents in the state. But also our Structured Finance business, if they didn't, we would obviously expect revenues in Structured Finance would be lower, as a result of not having had that support, versus the prior couple years where we've seen it. So that's a little bit of an unknown. We certainly can't comment on any of the state budgeting processes. But that really is an added variable that's outside of kind of capital markets, or overall prompt wherewithal.

Got it. Okay. And then, it's like you said, it's a little unclear maybe where rate cuts, how many of them we get when they come and so forth. But how do you think about the asset sensitivity of the balance sheet, over the longer term? What do you, I think you've said before, maybe reducing that asset sensitivity over time, increasing retention to some of the hybrid mortgages potentially to do that, kind of what's the goal and the target and what beyond that, those hybrid mortgages might you change around the balance sheet, to inflect those differences?

Yes. So in my comments, we noted in here on Page 9 of our document, we show our longer term targets, it's kind of 2% to 4% asset sensitive. Obviously our mortgage company provides some countercyclical, more liability sensitive components, to it in terms of overall income profile. But as it relates to NII, 2% to 4% asset sensitive, you can see here we will have started and have restarted the investment in our securities portfolio. It's worth noting that portfolio peaked at about $2.75 billion, currently has a book value about $2.25 billion. And we'll reinvest those cash flows. I think we've reached a point where the reinvestment opportunity, provides a better return and more stable earnings profile than the cash yields necessarily would. So we're starting that process. As you noted, the increase the retention of the three, five and seven-year hybrid fixed rate mortgages. We believe those products both from a profile perspective, as well as an overall credit perspective fit our profile from a longer term perspective. You'll see in our guidance we did increase the retention level expectations to $10 million to $30 million per month. And then, we'll continue to kind of move, if our deposit base remains strong, we'll continue to kind of move broker dealer suite deposits out of PlainsCapital Bank, back to the broker dealer and they can put them to work, in their third-party bank program. So those are the types of things we're doing right now to start to drive, and push that asset sensitivity down. As I noted in my comments, we have seen cash levels increase substantively, ending the period at the bank at just over $2 billion. And obviously cash, excess cash reserves of the Fed have 100% beta, significant asset sensitivity. So as we continue to work that cash level down to our target level. Which as we've stated is $300 million to $750 million versus the $2 billion. We'll see that asset sensitivity level, decline over time. But as I noted in my comments, we're not looking to kind of move the balance sheet quickly. We'll move it over time, and prudently the focus on return and long-term positioning, and that view will continue to evolve as the economic environment evolves.

Got it. That's extremely helpful. Thank you. And then last thing from me, is just, there's been maybe a little bit more volatility around the quarter-to-quarter provision, than maybe I'm used to seeing sometimes. And a couple reversals, and then there was a larger provision in the second quarter, and some of that's episodic credit obviously I know, but can you kind of talk about how you guys think about the provision and if, I don't know if you have maybe a more fluid view, than others may have. I'm just trying to get a feel for what kind of has caused some of that volatility, around the build versus the reversals and kind of, how you think about it in '25?

Yes, so obviously we feel like, we're kind of following the allowance for credit loss guidance from a gap perspective, adopting and adapting an economic outlook each period through our controls and governance process that, we believe kind of most reflects where management believes the economy's going. Obviously there's been some volatility, from an economic perspective. So that's one part and you should see that. I think universally it's worth noting we only use one scenario, so we don't wait if you will or probability, adjust to multiple scenarios, which may allow others, and I can't speak to that, but it may allow others to have a little less variability there. But we do leverage one scenario, because we think that generally provides the cleanest perspective. The other part has been the auto note portfolio, which honestly, as we noted late last year, started to manifest itself. We took some significant reserves. We then started to, through the workout process, lease reserves. As I noted earlier, we had a net charge-off, which obviously has a swing on the overall reserve balance as well. So that portfolio activity throughout the course of this year, has also kind of created some variability that, might have been outside of normal.

Got it. Yes. Extremely helpful. Probably right about those differences. So thank you for all those.

Thank you.

Thank you. Your next question is from Woody Lay from KBW. Your line is now open.

Hi, good morning, guys.

Good morning.

Good morning.

Just one more follow-up on the asset sensitivity - in the bond book. Do you have how much cash flows you're expecting from the securities portfolio in 2025, and how should we think about the incremental yield pickup there?

Yes, so the cash flows, it's an estimate, but cash flows between $250 million, $300 million on a full year basis. Think about the weighted average yield on the portfolio at a right, right at 310 basis points and the reinvestment yield today. And I think that's where it becomes difficult. But we believe the reinvestment yield today will be between, 450 and 475 basis points. Obviously as the rate paradigm shifts, that could change. But we believe there's probably about 150 basis points of pickup, in positive carry on that rollover balance as we go move throughout the year.

Okay. That's helpful. And then I wanted to shift over to deposits. I mean, it was a really strong quarter for deposit growth. Just any color on the trends there?

I think during the quarter and really during the second half of the year, we had had some strong customer activity both in terms of just normal flows and activity. But also we did have some, I'd say episodic events where we had customers that were able to sell their businesses, liquidate properties, exit properties and the like. And so that did drive up kind of year-end balances. We expect to see through the first quarter some of that, normalize as those customers start to put those funds to use and either new products or move them out for wealth management purposes and the like. So we do think we probably hit a high water mark at 12/31. We'll start to see that normalize in the first quarter for normal reasons, like dividend distributions and payments and incentive payments and the like, tax payments. But also some of those larger, more episodic events. Those customers starting to make longer term decisions, around where that cash will be. That said, I do think we continue to focus on growing our treasury services platform, as well as further integrating with our customers around their operating accounts and the like. So it is a foundational strategy and approach for us, to continue to grow deposits, which we'd expect to do. But that said, we did have some episodic favorable events in the third and fourth quarter. That kind of move deposit balances higher.

Got it. And then lastly, just shifting over to credit criticized, saw a nice step down. Just any detail you could provide on upgrades you saw there?

Yes I mean, we saw, as I noted in my comments, I mean we saw a few very specific upgrades. One in particular was our commercial real estate space, where we've had some customers and some property. We had some customers put forth some additional capital there, and cash flows started to improve as a result of that. So this is one of those processes that we evaluate each quarter. And again, as I noted, we look across the portfolio. We don't see any large systemic credit risk exposures in place, but we continue to monitor each credit closely, kind of one-by-one. In this particular scenario though, it was one of our real estate customers that received an upgrade in the period.

All right, that's all from me. Thanks for taking my questions.

Thank you.

Thanks.

Thank you. Your next question is from Jordan Ghent from Stephens. Your line is now open. Hello, Jordan, Your line is open. Are you on mute? Hello, Jordan. Seems like we lost Jordan. There are no further questions at this time. The question-and-answer session is now closed. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.