Good morning and welcome to the Hilltop Holdings Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Erik Yohe. 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 conditions, allowance for credit losses, the impact and potential impact of COVID-19, stock repurchases and dividends 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 report and quarterly report 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’d now like to turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Erik, and good morning. For the fourth quarter 2020, Hilltop reported net income of $116 million, or $1.35 per diluted share, representing an increase from the fourth quarter 2019 of $67 million or $0.81 per diluted share. This included a final settlement from the sale of National Lloyds of $3.7 million or $0.05 per diluted share. Return on average assets for the period with 2.8% and return on average equity was 21%. Full year 2020 net income equated to $448 million or $5 per diluted share. This was an increase from $225 million or $2.44 per diluted share in 2019. Full year results reflected discontinued operations from National Lloyds of $38 million. The fourth quarter capped off remarkable year of growth for the organization. We continue to capitalize on a tremendous mortgage market as originations for the quarter totaled $6.8 billion and increased over prior year of $2.4 billion. Driven by PPP loan balances, the bank’s average loans for the fourth quarter increased 8% from prior year and average deposits grew by $2.3 billion or 26% from prior year as well. Net revenues at the broker-dealer increased for the same period by $37 million or 33%, primarily due to robust volumes and structured finance, public finance, and fixed income businesses. Our strong capital position in 2020 enabled us to distribute $241 million in both dividends and share repurchases. This includes the Dutch auction tender that was executed in the fourth quarter, where Hilltop paid $193 million to repurchase approximately 8 million shares of common stock. Yesterday, our Board of Directors declared a quarterly cash dividend of $0.12 per common share and increase of 33% from the prior quarter. This dividend is payable on February 26, 2021. During the period, we continue to support our impacted banking clients to…

Thank you, Jeremy. I'll start on Page 6. As Jeremy discussed for the fourth quarter of 2020, Hilltop reported consolidated income attributable to common stockholders of $116 million, equating to $35 per diluted share. Hilltop produced income from continuing operations of $113 million or $1.30 per diluted share during the fourth quarter. For the full year of 2020, Hilltop reported consolidated income attributable to common stockholders of $448 million or $5.01 per diluted share. Income from continuing operations available to common stockholders equated to $409 million or $4.59 per diluted share. Earnings per share from continuing operations effectively doubled from $2.30 reported in 2019. During the fourth quarter, revenue related to purchase accounting was $5.7 million and expenses were $1.4 million resulting in a net purchase accounting pre-tax impact of $4.3 million for the quarter. In the current period, the purchase accounting expenses largely represent amortization of the positive and other intangible assets related to prior acquisitions. During the fourth quarter, the provision for loan losses reflected a net recovery of $3.5 million and included $2.7 million of net charge-offs. The impact of the improvements in the macroeconomic assumptions, as well as client pay downs and payoffs yielded a net reduction in the allowance for loan losses during the quarter. As a result of the earnings performance and capital actions taken in 2020, Hilltop’s year-end capital ratios remained strong with common equity Tier 1 of 18.97% and a Tier 1 leverage ratio of 12.64%. Moving to Page 7, as shown here on Page 7, Hilltop’s allowance for credit losses declined by $6 million versus the third quarter of 2020 as modest improvements in the macroeconomic outlook versus the prior quarter and lower specific reserves resulting from payoffs whereby clients were able to refinance their debt to other institutions, lower our…

[Operator Instructions] The first question comes from Matt Olney with Stephens, Inc. Please go ahead.

Great. Thanks. Good morning guys. I want to start on the mortgage, you guys gave us some guidance for 2021, and I fully appreciate, it's not easy to give any kind of forward guidance in the mortgage business, but we'd love to kind of hear how you arrived at some of the guidance, especially that $17 billion to $20 billion guidance range for originations. Love to hear kind of how you're thinking about that and how you guys wrap at that. Thanks.

Yes. So we obviously evaluate a number of market outlooks the MBA and other kind of industry perspective. And obviously we think the market for refinance will be somewhat challenged, but we also think our business model, which is geared and oriented towards purchase mortgage volume will continue to thrive and grow in 2021. So as a result of that, we do believe that we are positioned to kind of outperform what we left out, what we saw the market was expecting about a 26% pullback. And we believe our battle is somewhat positioned to outperform that, but we recognized as you noted earlier that the volatility in the mortgage market can be significant. So we try to provide a range there that provides some perspective of what we think the most likely outcomes are, but we'll provide those updates on a quarterly basis as well.

Okay. That's helpful, Will. And then on – same thing on the gain-on-sale margins, like the guidance you gave the 360 basis point, 385 basis point, any color – what you're seeing the first few weeks of the year? And should we assume that, that would start at the higher end of the range and could have moved down throughout the year? Is that how you're thinking about them?

I think that's right. We are – the way we're evaluating is first – the first part of the year – first part of 2021 seasonally has been stronger than you would've otherwise expected. For the fourth quarter they peaked at, we believe they peaked – gain-on-sale peaked to 448 basis points. We do expect that will trend down through the year to a more normalized level. Again, we think that first quarter remains a little stronger than it just continues to kind of roll down, but we do think the full year average will be in the range of 360 to 385 of the way you described volumes [indiscernible] thinking about volume for the year as well.

Okay. And then the last question on the mortgage front, can you provide us with what the interest rate lock commitments were in the fourth quarter? I know there can be evolve a quarter-over-quarter, I think it was around $22 million in the third quarter. I didn't see any of the materials last night, thanks.

Yes. That quarterly number will come out and indicate, which will fall in February. So I don't want to get ahead of the case.

Okay. Thanks guys.

Thank you.

Thanks.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning guys. How are you?

Hey, Michael?

Good morning.

Hey. So obviously you guys did some capital actions this past quarter with the Dutch Auction and now it's the buyback, but capital levels are still pretty robust here. I know you guys have talked about M&A in the past, the multiple has certainly improved. Can you just give us an update on your strategic capital priorities? And then if you'd be willing to kind of talk about where capital levels in a normalized environment would time for you guys. Thanks.

Okay. Thanks, Michael. I think we did have, I think a strong quarter as far as capital is concerned with the tender offer and also an increase in the dividend by 30%. We will be looking for M&A opportunities in 2021, I think we really want to seek out the right partner and I want to – it was really value us as a good buyer, given our business model and insider ownership and liquidity in our stock, so we'll hope to do that. And we – that's all I can say for right now, other than we authorized $75 million share repurchase again, as well.

Just to follow-up on M&A, what is kind of the optimal deal that you guys would look at whether it's size or whether we deliver in terms of accretion? I know you guys have done, I think the last deal you did was fairly small in the Dallas market or in the Houston market, excuse me. But what are kind of the priorities at this point, given what we're looking at from the macro? Thanks.

I think the biggest thing is just to find the right strategic set for us. So that's going to be a commercial bank and probably depository institution in Texas, that's only what our priority would be.

Okay. And then maybe finally for me the deposit costs have continued to come down, well, how much room do you think you have? Do you have any big maturities coming up just any color you could give there would be great. Thanks.

Yes, I think, we're going to continue to kind of work through in the context of just moving them down as we think is prudent, we will expect from an overall net interest income perspective that as I mentioned, there'll be a fair number of broker deposit, as they maturities through the first half of the year that will improve net interest income, but that's not necessarily NIM in that regard. Our view on deposit cost is where our CD costs, they will mature and continue to reset it lower levels. But that happens over the next 12 to 18 months. So it's going to be a slow slog lower, but nonetheless we do see deposit rates moving lower over time.

Great. Thanks for taking all my questions.

The next question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning guys.

Good morning.

So your outlook called for non-variable expenses to remain stable. And I just wanted to clarify if that was stable from the fourth quarter run rate, or if that's looking at full year 2020 non-variable expenses.

That's more of a comparative to the full year, so stable with 2020 aggregate.

Okay. That's helpful. And then one more on expenses, I think in your earnings deck, you call it some one-time professional fees incurred during the quarter with the Dutch Auction and the systems conversion of Hilltop Securities, just wondering if you had the totals of those expenses.

About $3.5 million.

Okay. That's helpful. And then last for me, you'll know that you expect net charge offs to pick up in the back half of 2021. I was wondering if you could provide an update just on your hotel and restaurant portfolios specifically on those ones that are still on deferral.

Well, the – I mean, the loans that are still on deferrals as you can see remains the preponderance of those remains kind of hotel and restaurant. And I mean I didn't take the question.

Yes. I was just hoping to get some color on those two buckets in the deferral. Do you expect occupancy rates to pick up and do you think they're trending in the right direction?

I think what we're seeing is certainly from June till the end of the year, we saw some improvement, some of it's seasonal, some of it's according to the year, the hoteliers are still continuing to see vacancy rates well in excess of where they would have otherwise expected them to be, but also higher than they are in terms of break-even from a cash flow perspective. So we are continuing to see cash flow challenges in the hotel space. I think the restaurant businesses are holding up a little better. I think they've been able to be more nimble in how they evolve their overall operating model to address the challenges of the pandemic. And some of the restrictions have been put in place and are starting to move a little closer to, I'd say, cash flow neutral or break-even over the next couple of quarters. But the hotels are continuing to see wild, modest improvement. I would tell you, utilization rates that are below the levels required to kind of reach profitability.

Got it. That's good color. Thanks guys.

Thank you.

Thanks.

The next question comes from Michael Young with Truist Securities. Please go ahead.

Hey, good morning. Thanks for taking the question. Wanted to start just on the kind of overall PPNR improvement plan, Jeremy, could you just maybe back up for us and give us an overview of kind of where that sets you up, what are kind of the additional product enhancements or services that you feel like you guys can offer now? Or can you manage the business much better with everything kind of more consolidated on one system in general ledger, et cetera, just any of the benefits you could kind of walk through would be helpful?

Well, I think that 2020 really showcases the benefits of the programs that we've put in place and in a lot of ways, we're really fortunate to have done it before the COVID pandemic hit because we were really able to go work cohesively as one organization. And if you see this over the last three years, the efficiency gains have also – are just underlying all the numbers and provide a lot of economic support for us. But I do think at this point, when we've gotten the efficiency, we've gotten the operating leverage, we have a really good organization and team so we got to work on finding ways to grow better together amongst this company.

Okay. And does it give you any more confidence and maybe growing your scaling certain businesses or as you can kind of proceed with potential M&A, will that be a better more fruitful process or can you assume higher cost savings? Anything like that that would be strategic would be helpful to hear about?

Absolutely. Well, I think that all those are correct. I think that we've got a holding company. They can really provide the shared services model for a larger enterprise, and it's very scalable. And I think if you just see – you hear what's going on in Hilltop Securities, PrimeLending and even at the bank for just improved capabilities, a lot of talent additions, all the systems implementations, there's a lot of improvement, a lot of confidence in what we're building.

Hey, Michael, this is Will, I'll just add just a couple of examples that we look forward. I mean, Jeremy mentioned, the structured finance group at Hilltop Securities, just in the last couple of years, we've launched National Warehouse Lending at the bank. And that business is clearly emerged profitable. The Treasury Services Group at the bank also a group that has been around a long time, but we've continued to make investments in growth there. And I think it's worth noting that we saw growth in treasury fees, gross fees in 2020 by about 9% in a pretty challenging operating year for a lot of our clients. So to the point there, to Jeremy's point, we've been making strategic investments in improving our overall platform. But these businesses are starting and have already started to demonstrate growth and enhance profitability just given what we've been able to do the last couple of years, just for some tangible examples.

Yes, that's great. I appreciate the extra color. And I wanted to actually follow up on the structured finance business. Obviously, it had a very strong year in 2020 given kind of the mortgage origination volume, purchase volume is supposed to be up next year. And I assume that's where most of that structured finance volume is related to. So should we expect that to be maybe stable at least year-over-year or any other color you could provide on that line item would be helpful?

I think that – let me just give high level and then you can jump in. But I think going to be challenging for that to be as constructive as it was in 2020. And it was extraordinary. We still think it's going to be very strong in 2021. It was very strong in 2019. We look at – first time home buying market and the very tight inventory, which is a challenge, but we’ll also provide a real support for the business. And there's a lot of investor demand for this. And we've got an incredible team that has really built a great business here. So we feel good about it. In 2021, I mean, I think 2020 was extraordinary.

Okay. And last one for me, just on the warehouse growth both from PrimeLending and this new warehouse effort, that's not contemplated in the loan growth guidance. So I would assume we should expect incremental growth in volumes year-over-year, or do you think there'll be a decline in volumes related to just lower mortgage activity year-over-year, market share gain versus volume growth, I guess.

Yes, we would expect that the national warehouse lending business, mortgage warehouse lending business would track with kind of industry level mortgage production outlook that those businesses have a little higher percentage of refinance activity than PrimeLending does on a core basis.

Okay, great. That's all for me.

Thanks.

This concludes our question-and-answer session. The conference has also now concluded. Thank you for attending today's conference. You may now disconnect.