Hilltop Holdings reports mixed Q4 results amid market challenges By Investing.com

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Hilltop Holdings Inc . (NYSE:) announced its fourth-quarter earnings for 2023, revealing a net income of $29 million, equating to $0.44 per diluted share. The company, which operates in the financial sector, experienced a slight decline in net income for the full year, down 3% compared to the previous year, with a consolidated income of $110 million.

The earnings call highlighted both the challenges and strategic adjustments the company is facing, particularly in its mortgage business, due to the current economic environment and the impact of higher interest rates.

Key Takeaways

  • Hilltop Holdings reported a Q4 net income of $29 million, or $0.44 per diluted share.
  • Full-year net income declined by 3% to $110 million.
  • Mortgage market challenges impacted the company, with a decrease in mortgage-related income and fees.
  • The company’s net interest margin declined to 296 basis points in Q4.
  • Noninterest expenses were reduced, primarily due to cuts at PrimeLending.
  • Hilltop maintains strong liquidity with sources totaling approximately $7.6 billion.
  • A new $75 million share repurchase authorization has been announced.

Company Outlook

  • Hilltop expects net interest income to decrease by 3% to 7% in 2024.
  • Loan growth is predicted to remain challenged in the upcoming year.
  • The company aims to maintain a moderate risk profile and focus on long-term shareholder value.
  • There is uncertainty in the market, with volatile allowance for credit losses expected due to inflation, interest rates, GDP growth, and unemployment.

Bearish Highlights

  • The mortgage business is constrained by low housing inventory and higher interest rates.
  • Net interest margin is anticipated to trend modestly lower, potentially troughing in the second quarter.
  • Gain on sale margins in the mortgage business have decreased.
  • A hotel credit moved to nonperforming due to underperformance in cash flows, attributed to the ongoing impact of COVID-19.

Bullish Highlights

  • HilltopSecurities reported increased pretax income, driven by the mortgage trading business and Wealth Management suite products.
  • The company has robust capital levels and a strong culture.
  • Leadership transition at PlainsCapital Bank is underway, signaling a potential for strategic renewal.
  • The company has reduced asset sensitivity and is targeting further reductions over the next year.

Misses

  • The bank’s allowance for credit losses increased to $111.4 million.
  • Total noninterest income for Q4 decreased due to the mortgage banking industry’s challenges.
  • HFI loans declined in the fourth quarter.

Q&A Highlights

  • The company discussed the impact of rate cuts, stating that a significant number of cuts would be needed to revitalize the refinance business.
  • The availability of housing inventory was highlighted as the largest constraint in the mortgage business.
  • Concerns were raised about the potential negative impacts on clients from higher interest rates and an expected economic slowdown.
  • The company is evaluating the loss content of a nonperforming hotel credit after additional appraisals.

In summary, Hilltop Holdings is navigating a complex financial landscape, balancing the need to manage risks with efforts to capitalize on growth opportunities. While the mortgage market presents significant challenges, the company’s strategic focus on risk management and the strength of its securities and wealth management divisions provide a counterbalance. Investors will be watching closely as Hilltop Holdings continues to adapt to market conditions and strives to deliver value in a volatile environment.

InvestingPro Insights

Hilltop Holdings Inc. (HTH) has been demonstrating a mix of resilience and caution in its financial performance. As the company navigates through an evolving economic landscape, here are some insights based on real-time data and InvestingPro Tips:

InvestingPro Data shows a market capitalization of $2.19 billion, with a Price-to-Earnings (P/E) ratio standing at 20.46, which slightly adjusts to 20.1 when considering the last twelve months as of Q3 2023. Despite a challenging environment, Hilltop Holdings has managed to maintain a Price/Book ratio of 1.05, reflecting a reasonable valuation compared to the book value of its assets.

The company’s revenue for the last twelve months as of Q3 2023 was reported at $1.178 billion, although it experienced a decline of nearly 15.93% in that period. This aligns with the company’s acknowledgment of the mortgage market challenges impacting its income and fees.

On a brighter note, one of the InvestingPro Tips highlights that Hilltop Holdings has raised its dividend for 8 consecutive years, which is a positive sign for investors looking for stable returns. The dividend yield as of the data provided stands at 1.91%, with a growth of 6.67% in the last twelve months. This consistent return to shareholders underscores the company’s commitment to delivering value, even in tough market conditions.

Another InvestingPro Tip emphasizes Hilltop Holdings’ strong return over the last three months, with a total return of 21.94%. This performance could be indicative of the company’s strategic adjustments beginning to bear fruit, despite the broader challenges in the financial sector.

For those considering an investment in Hilltop Holdings, it’s worth noting that analysts predict the company will be profitable this year, as per another InvestingPro Tip. Additionally, the company was profitable over the last twelve months, which may offer some reassurance regarding its financial health.

Investors looking for further insights will find additional InvestingPro Tips by visiting https://www.investing.com/pro/HTH. And for those interested in a deeper analysis, InvestingPro is currently offering a special New Year sale with a discount of up to 50%. Use coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription. With these subscriptions, investors can access a wealth of knowledge and data to inform their investment decisions.

Full transcript – Hilltop Holdings Inc (HTH) Q4 2023:

Operator: 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.

Erik Yohe: 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 (NYSE:).

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 broader industry challenges and credit migration in certain portfolios, particularly CRE office. Our ongoing monitoring in this area remains a priority. As we enter 2024, our primary focus at the bank remains on prudent risk management and maintaining strong capital and liquidity in order to navigate the fluctuating economic landscape and take advantage of organic and inorganic growth opportunities. Concurrently, we are committed to steering our mortgage business and a trajectory towards profitability, recognizing the mortgage cycle has endured for a longer than anticipated. Additionally, we are strategically positioning our business in Hilltop Securities to capitalize on growth opportunities and adapt to a potentially lower rate environment anticipated in the latter half of the year. Moving to the fourth quarter. Hilltop reported net income of $29 million or $0.44 per diluted share. Return on average assets for the period was 75 basis points and return on average equity was 5.5%. During the quarter, PlainsCapital Bank generated $48 million of pretax income on $13.3 billion of assets, representing a return on average assets of 1.1%. Average loans at the bank declined slightly from the third quarter as normal seasonality occurred in National Warehouse Lending and balances in our single-family residential portfolio declined. The pipeline for CRE lending remains challenged, and we expect that to continue into the new year as clients hold off on projects due to elevated rates and higher equity requirements. Our average balances — our average deposit balance of $11.1 billion declined 1% during the period, primarily due to management of excess liquidity and the ability to run off more expensive broker deposits. In the quarter, we returned $200 million of suite deposits back to Hilltop Securities and had $200 million of broker deposits run off. In the fourth quarter, the bank did experience some negative migration and asset quality, primarily from a single credit. Nonperforming loans increased to 0.8% and as a result of a $33 million Texas hotel loan being placed on nonaccrual. Overall, asset quality continues to be stable outside of this one notable credit as criticized loans were flat and net charge-offs were less than $1 million in the quarter. Moving to PrimeLending. The fourth quarter of 2023 was significantly impacted by continued low inventory, seasonality, escalating home prices and notably higher interest rates. Which collectively resulted in the lowest affordability for homebuyers in over two decades and a stark year-over-year decrease in refinance activity. In response to these ongoing challenges, PrimeLending continue to take proactive measures to streamline its operations and lower fixed and variable expenses. These measures include reducing non-sales head count and underperforming loan originators as well as closing unprofitable locations. As a result, PrimeLending’s pretax loss for the fourth quarter 2023 strength relative to the prior year period. Despite the exceptionally tough business environment, PrimeLending maintained its industry-leading customer satisfaction rating and continue to be recognized as one of the top places to work. These achievements speak volumes about our team’s resilience and commitment. Looking forward, we believe the measures already taken to reduce our cost base, combined with improved pricing, utilization of technology to reduce head count dependency and our success in hiring skilled loan originators from peers with less stability, place prime lending in a strong position for the eventual recovery of the housing and mortgage markets. In the fourth quarter, HilltopSecurities realized pretax income of $20 million on net revenues of $120 million, marking a 12% increase over the prior year. This growth was driven mainly by the mortgage trading business and suite products within Wealth Management. Speaking to the business lines at HilltopSecurities. Public Finance Services experienced a 5% decrease in net revenues compared to a strong fourth quarter last year. Municipal advisory fee revenues declined, while underwriting revenues increased slightly. Revenues from the public finance spoke products also improved due to increased fees on our cash pool products. We remain optimistic about our public finance business, particularly with the anticipated need for increased infrastructure spending and our recent opportunistic hiring from large banks that have decided to exit the municipal business. Our structured finance net revenues experienced a significant rise mainly due to our mortgage-related businesses. While this business remains volatile, our dominant position in the taxable housing space and successful activity in key markets like Florida contributed meaningfully in the fourth quarter. In Wealth Management, net revenues improved modestly compared to last year’s fourth quarter. The Federal Reserve rate hikes positively impacted our FDIC sweep revenues. We continue to focus on recruiting quality advisers and enhancing our product offerings in both the firm and independent brokerage channels. Finally, for HilltopSecurities, our fixed income business, while facing some challenges, showed resilience, and we’re enthusiastic about the growth prospects of the overall group as rates stabilize and our new small business loan effort, takes off. As we move into 2024, our goal is to further enhance our sales distribution capabilities while upholding our strong culture and risk management practices. Moving to Page 4. Hilltop maintains robust capital levels with a common equity Tier 1 capital ratio of 19.3% and our tangible book value per share increased from year-end 2022 by $1.17 to $28.35. Over the past 5 years, our tangible book value per share has compounded at 10% annually, while our dividend per share has compounded at 19% annually. Before I pass the presentation over to Will to discuss our financial results, I’d like to take a moment to discuss some important changes happening at the bank that we disclosed in the fourth quarter. Jerry Shafner, the President and CEO of PlainsCapital Bank will be retiring on May 1. Jerry has been a cornerstone of our success since PlainsCapital’s founding in 1988, and his retirement marks the end of an era. His leadership and dedication over a stellar 42-year career have been nothing short of transformative. I’d like to thank him for his incredible contributions to our company. You are a great partner and a dear friend. In line with this transition, I am honored to take on the role of CEO at PlainsCapital Bank, in addition to my current responsibilities at Hilltop. This step is part of a carefully crafted succession plan, ensuring continuity and stability for our organization. Further, this step is made possible due to the existing depth and strength of our bank leadership team. Notably, in the fourth quarter, Brian Heflin was promoted to President of PlainsCapital Bank, and Pete Villarrea was promoted to Chief Operating Officer of PlainsCapital Bank. Their experience and proven leadership are invaluable assets to our bank. We are excited about this new chapter and the opportunities it brings. With a solid team in place, we are poised for continued growth and success. And we remain committed to our mission of serving our customers, employees, communities and shareholders with unwavering dedication and a long-term focus. Thank you. And now I will turn it over to Will to discuss our financial results in more detail.

Will Furr: 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 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, GDP growth and unemployment, we expect volatility in the ACL could be heightened over the coming quarters. Turning to Page 8. As provided in previous quarters, this slide highlights our CRE portfolio and the allowance distribution across some of the key loan segments. December 31, the CRE portfolio totaled approximately $3.3 billion, which we segregate in the owner and nonowner occupied or investor real estate. Internally, we view owner-occupied real estate, more like C&I lending. As for the most part, repayment is driven by the operating business that owns the real estate. Nonowner-occupied real estate makes up 57% of the CRE book. And as is noted in the upper right-hand chart is diversified across multiple income-producing property types. In the bottom table, we provide a breakout of nonowner-occupied office and retail within the portfolio to highlight the differentiation in ACL coverage by loan segment type. Our view to date is that the office and retail markets across our footprint represent the highest exposure to both recession, absorption and valuation risk in the portfolio. As you can see, those loan segments maintain larger ACL coverage ratios than other nonowner-occupied real estate products. You should note during the fourth quarter, the bank downgraded one large hotel credit totaling approximately $33 million of outstanding balance to nonaccrual as the property’s cash flows are not currently sufficient to meet the cash demands for the property. This downgrade constitutes 89% of the increase in NPAs during the quarter. Further, while the downgrade did not result in a significant increase or decrease to the ACL, we have requested new appraisals and we’ll update the status of this loan during our first quarter call. While this credit is clearly a focus for us, we’re currently monitoring the entire portfolio very closely. And while credit losses have not normalized to more historical levels to date, we do expect that the ongoing cash flow challenges facing existing and new projects as seen in the broader commercial real estate industry, driven by higher interest rates and ongoing inflation could lead to further credit migration over time. Turning to Page 9. Net interest income in the fourth quarter equated to $111 million, including $1.2 million of purchase accounting accretion. Versus the prior year fourth quarter, net interest income decreased by $12 million or 10%, driven primarily by higher yields on deposits. As we expected, net interest margin declined versus the third quarter of 2023. Falling by 6 basis points to 296 basis points. Our current outlook reflects a scenario where dock Fed funds remained stable for the majority of 2024 and with only one rate reduction contemplated in the fourth quarter. Additional rate decreases will pressure net interest income downward. Turning to Page 10. We have more discussion topics related to NII. In the upper left table, we provide detail on our latest sensitivity analysis for NII related to parallel and instantaneous shocks and interest rates. As is noted in the chart, Hilltop remains approximately 6% asset-sensitive in the down 100 scenario. Over the past few years, we’ve reduced our asset sensitivity by approximately 50% from 12% to 6%. Going forward, the most significant drivers of NII stability will be driven by our ability to manage the down rate deposit betas, which we are currently modeling at 50% and deposit mix shifts noninterest-bearing into interest-bearing deposit products, which we expect will continue through the first half of the year. To help mitigate some exposure to falling rates, we have begun investing approximately 50% of the cash flows from our securities portfolio and the securities that we believe maintain a better repayment exposure. In addition, we are beginning to retain additional hybrid mortgage loans on the balance sheet. These loans will generally maintain shorter fixed rate periods including 3 and 5 years. While loan retention could be volatile on a monthly basis, we expect to retain on average, $10 million per month throughout 2024. With that said, given our expectation that deposit rates remain elevated, and deposit competition will remain intense. We do expect that NII will be down versus 2023 by 3% to 7% in 2024. Turning to Page 11. In the chart, we highlight the approximately $7.6 billion of available liquidity sources that Hilltop maintained as of December 31. While we consider the Federal Reserve’s discount window to be a source of liquidity, we do not plan to leverage that program under our internal liquidity modeling efforts. And as such, it’s noted below our other collateralized borrowing sources. Further, the comparable liquidity sources as of December 31, 2022, equated to just over $7 billion and increased steadily throughout the prior quarters of the year. As is shown in the chart, at December 31, Hilltop maintained $1.6 billion of excess reserves at the Federal Reserve. Additionally, in the bottom left chart, we provide detail on the pace of the deposit beta changes to date, noting that our current through-the-cycle beta for interest-bearing deposits of 65%. We currently expect that through the cycle interest-bearing deposit betas will be within the range of 60% to 70%, likely drifting marginally higher over the coming two quarters. Turning to Page 12. Fourth quarter average total deposits are approximately $11.1 billion, remaining largely stable versus the third quarter of 2023. On an ending balance basis, deposits decreased by $40 million from the prior quarter, whereby growth in bank client deposits was offset by the decline in broker-dealer sweep and broker deposits build at PlainsCapital. During the quarter, the bank returned $200 million of sweep deposits and $200 million of brokered deposits in an effort to reduce overall excess cash levels at the Federal Reserve. Over the coming year, we expect that excess deposits at the Federal Reserve will decline to between $300 million and $750 million. As a result of our ongoing pricing efforts, interest-bearing deposit costs rose to 340 basis points, an increase of 17 basis points from the prior quarter. It is our expectation and interest-bearing deposit costs will continue to move higher in the first two quarters of 2024 and then stabilize until the Federal Reserve changes the Fed funds target. As it relates to deposit balances and costs, we remain focused on balancing our competitive position with our long-term customer relationships while we continue to prudently manage net interest income over time. However, the current environment remains very challenging. And as noted earlier, we expect that the intensity of competition for deposits will remain resulting in lower overall balances and continued pressure on yields over the coming quarters. I’m turning to Page 13. Total noninterest income for the fourth quarter of 2023 equated to $179 million. Fourth quarter mortgage-related income and fees decreased by $2 million versus the fourth quarter of 2022, driven by the ongoing challenges in mortgage banking, whereby the combination of higher interest rates, home price inflation, limited housing supply and ongoing overcapacity in terms of mortgage originators across the U.S. has driven volumes and margins materially lower. Further, versus the prior year fourth quarter, purchase mortgage volumes decreased by $198 million or 10% and refinance volumes increased substantially from prior year levels to $1.2 billion. Block volumes were substantially impacted by certain states providing additional state funding to support their state housing authorities and down payment assistance programs. As we’ve noted in the past, it’s important to recognize that both the fixed income services and structured finance businesses at HilltopSecurities can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity and production trends. I’m turning to Page 14. Noninterest expenses decreased from the same period in the prior year by $2.6 million to $251 million. Driving the modest reduction versus the prior year were fixed expense reductions at PrimeLending. As they continue to focus on the work of resizing our mortgage operations to support the current environment. These reductions were somewhat offset by growth in software and computing expenses and higher FDIC assessment fees. Looking forward, we expect expenses other than variable compensation to remain relatively stable between $185 million and $190 million per quarter as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower head count and improved throughput across our franchise, helping to offset the ongoing inflationary pressures that persist in the market. Moving to Page 15. Fourth quarter average HFI loans equated to $7.9 billion. On a period ending basis, HFI loans declined versus the third quarter of 2023 by $124 million driven by declines in mortgage warehouse lending of $81 million and the declines in the 1-4 family mortgage portfolio, which equated to $23 million. We expect that loan growth will remain challenged in 2024, as 1-4 family retention levels are expected to remain modest and commercial lending activity continue to remain highly competitive with the pace of new transactions remaining slower than in prior years. Currently, we are expecting full year average bank loan growth of 0% to 2% during 2024, excluding mortgage warehouse lending and any retained mortgages from prime lending. Turning to Page 16. Credit losses have remained steady as net charge-offs for the fourth quarter equated to $674,000. For the full year of 2023, net charge-offs equated to $2.4 million or 3 basis points of ending HFI loans. Further, the graph on the upper right highlights that NPA levels increased by approximately $37 million during the fourth quarter, largely driven by the hotel credit that I reviewed earlier in my comments. Despite the increase in NPAs, our criticized loan levels as a percentage of bank loans were relatively stable versus the third quarter of 2023. We are monitoring our loans and borrowers closely as higher interest rates, potentially lower utilization rates in certain segments of commercial real estate and an expected slowdown in economic activity could have a negative impact on our clients in our portfolio. As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended the year at 1.44%, including mortgage warehouse lending. Moving to Page 17. As we move into 2024, there continues to be a lot of uncertainty in the market regarding interest rates, inflation and the overall health of the economy. That said, we have provided our current outlook metrics for the coming year. As we’ve noted in the past, we are pleased with the work that our team has delivered to position our company for times like these. And our teammates across our franchise remain focused on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile and delivering long-term stockholder value. Current outlook for 2024 reflects our current assessment of the economy and markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on our future quarterly calls. Operator, that concludes our prepared comments, and we’ll turn the call back to you for the Q&A section of the call.

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

Thomas Wendler: 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?

Will Furr: I think over the next — this is Will. Over the next year, we’d like to move that to closer to 3%.

Thomas Wendler: 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?

Will Furr: 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.

Thomas Wendler: 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?

Will Furr: 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.

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

Tim Mitchell: 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?

Will Furr: 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.

Tim Mitchell: 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?

Will Furr: 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.

Tim Mitchell: 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?

Jeremy Ford: 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.

Operator: 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.

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