Hilltop Holdings Inc (HTH) 2021 Q4 法說會逐字稿

Good morning. My name is Candice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hilltop Holdings Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to Erik Yohe. Erik, you may begin.

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, allowance for credit losses, the impact and potential impacts of COVID-19 or disruptions in the global or national supply chains, stock repurchases and dividends, and impacts of interest rate changes as well as such other items referenced in the process 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 fourth quarter, Hilltop reported net income of $62 million or $0.78 per diluted share. Return on average assets for the period was 1.4%, and return on average equity was 9.9%. This quarter carried forward many of the same themes we discussed in prior quarters, including improved credit quality, growth in our core loan book, the beginning of a more normalized and competitive mortgage market, and with the prospect of increasing rates in the near term, a softening in our fixed-income businesses.

Through it all, we continued to generate strong earnings and returns. PlainsCapital Bank generated $68 million in pretax income and a return on average assets of 1.4% in Q4 2021. Average loans held for investment at PlainsCapital Bank increased $122 million or 2% quarter-over-quarter, as both core loans and retained mortgage balances grew. Importantly, the bank generated commercial loan growth despite elevated paydowns. The net loan growth was impacted by the continued runoff in PPP loans and a seasonal decline in national warehouse lending balances. Our remaining PPP balance was $78 million as of December 31, 2021.

The average deposits increased by $460 million or 4% quarter-over-quarter, and by $1.2 billion or 10% year-over-year, as we continue to see growth in both interest-bearing and noninterest-bearing accounts, primarily from existing customers. For the full year, the bank generated $283 million in pretax income and a return on average assets of 1.55%. This was a fantastic year for PlainsCapital Bank and reflected the excellent job the bank's leadership teams have done across the state by managing credit, taking care of existing customers and refocusing on new business growth.

In spite of a tough year-over-year comparable due to record 2020 results, Q4 2021 was another strong quarter for PrimeLending, as it generated $31 million in pretax income. The business originated $5 billion in volume with a gain on sale margin of loans sold to third parties of 362 basis points. Refinancing volume, as a percent of total volume, was stable from prior quarter at 29%, but did decline from 46% during the same period in 2020. We remain focused on optimizing pricing and margins, while still allowing our loan officers to be as competitive as possible in this increasingly tight market.

Our purchase orientation, stable funding profile, exceptional lenders and experienced leadership team, who have managed through multiple cycles, provide institutional advantages that should enable PrimeLending to outperform the broader mortgage market during what we believe will be a challenging time in the industry, due to shrinking refinance volumes, limited inventory and heightened competition.

Overall, 2021 was another excellent year for PrimeLending. Capitalizing on the housing and mortgage market circumstances driven by the COVID-19 pandemic that started in early 2020 led the company to have its second best year ever with funded volume of $23 billion and pretax income of $236 million.

During the quarter, HilltopSecurities generated pretax income of $1.7 million on net revenue of $94.6 million, a decline in net revenues of $55.5 million or 37% compared to Q4 2020. The revenue shortfall was primarily driven by declines in our highest-margin businesses, such as Fixed Income and Structured Finance. Specifically, mortgage revenues in Structured Finance fell by $34 million or 73% and Fixed Income services revenues fell by $18 million or 57%.

Public Finance revenue also declined by 7% year-over-year on lower issuance volume, which was in line with the broader industry declines. While wealth management revenues increased by 2% on stronger transactional and managed account fees. For the year, HilltopSecurities generated net revenues of $424 million and a pretax margin of 10.3%. The second half of the year was particularly challenging for our fixed income and housing businesses, due to a slowdown in the mortgage industry, combined with investor expectations of rising interest rates, economic uncertainty and fear of inflation.

Nevertheless, we believe that HilltopSecurities is in a position to grow once the operating environment for its businesses improves. We have added key infrastructure, producers and leadership to broaden our capabilities and to expand our breadth of expertise in complementary businesses. We are focusing on diversifying and growing our revenue streams, and have already made the necessary investments to support that. This will take time but we are confident in HilltopSecurities leadership team and strategic direction.

Collectively, the fourth quarter was a strong finish to an excellent year for Hilltop, with full year 2021 net income of $374 million or $4.61 per diluted share. While 2021 was a volatile year with a tremendous amount of uncertainty including COVID-19 variants, supply chain disruptions and inflationary pressures, Hilltop's exceptional results reflect the strength of our diversified business model and the dedication of our talented people who are steadfast in taking care of our customers.

Moving to Page 4. Hilltop maintained strong capital levels with a common equity Tier 1 capital ratio of 21.2% at year-end. Our tangible book value per share increased by 15% from Q4 2020 to $28.37. During 2021, Hilltop returned $163 million to shareholders through dividends and share repurchase efforts, representing approximately 43% of earnings to shareholders. This week, Hilltop Board of Directors declared a quarterly cash dividend of $0.15 per common share, a 25% increase from the prior quarter, and authorized a new stock repurchase program of $100 million through January 2023.

With that, I will now turn the presentation over to Will to walk through the financials.

Thank you, Jeremy. I'll start on Page 5. As Jeremy discussed, for the fourth quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $62 million, equating to $0.78 per diluted share. During the fourth quarter, the provision for credit losses reflected a net recovery of prior charge-offs of $400,000 and a net reduction of reserves of $18 million. I'll cover the changes in the allowance for credit losses in more detail on Page 7 of the deck.

Turning to Page 6. For the full year 2021, Hilltop reported consolidated income attributable to common stockholders of $374 million or $4.61 per diluted share. 2021's results highlight the strength and diversity of our businesses, including the benefits of the ongoing investments we've made to support improved productivity and scale across our franchise. Additionally, earnings per share was further supported by the previously mentioned share repurchases, which drove a 4% decline in shares outstanding. As a result of the earnings performance and capital actions taken in 2021, Hilltop's year-end capital ratio strengthened versus 2020 year-end levels with common equity Tier 1 of 21.2% and a stable Tier 1 leverage ratio of 12.6%.

Turning to Page 7. Hilltop's allowance for credit losses declined by $18 million versus the third quarter of 2021 as improvements in the macroeconomic outlook and the decline in specific reserves, resulting from a significant credit recovery during the quarter, supported a net reserve release in the period. Further, ongoing asset quality improvement across the portfolio also contributed to the ACL reduction during the fourth quarter. Allowance for credit losses of $91 million yields an ACL to total bank loans HFI ratio of 1.16% as of year-end 2021.

Of note, we continue to believe that the allowance for credit losses could be volatile and the 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. Further, as the pandemic and broader economic environment continues to create uncertainty, further volatility could occur in the coming months and quarters.

I'm turning to Page 8. Net interest income in the fourth quarter equated to $104 million, including $2.5 million of PPP fees and interest, and $4.7 million of purchase accounting accretion, versus the prior year quarter, net interest income decreased by $3.1 million or 3%, driven primarily by lower PPP fee recognition and lower accretion income. Net interest margin declined versus the third quarter of 2021 by 9 basis points to 244 basis points, driven primarily by the impact of continued growth in deposits. This growth resulted in higher average excess cash levels, which grew by $533 million in the quarter. These items were somewhat offset by modest improvements in the yields in the investment portfolio and the ongoing gradual declines in interest-bearing deposit costs.

Loan yields remained pressured during the fourth quarter as the excess liquidity in the market has spurred substantial competitive pressure for high-quality funded assets. During the quarter, Commercial loan originations, including credit renewals had an average book yield of 3.78%, which continued to trend lower through the end of 2021.

Turning to Page 9. In the chart, we highlight the asset sensitivity of Hilltop, assuming parallel and instantaneous rate shocks, which represent an asset-sensitive position of approximately 11% in the up 100 basis point scenario. As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios. Of note, if we shift the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months, the up 100 basis point asset sensitivity falls to approximately 5%.

Further, in this scenario, each 25 basis-point increase positively impacts net interest income by approximately $5 million. Lastly, for 2022, we expected the impact of PPP-related fees and interest, which were approximately $22 million in 2021, and purchased loan accretion could decline by $25 million to $30 million versus the 2021 levels.

Moving to Page 10. Total noninterest income for the fourth quarter of 2021 equated to $285 million. Fourth quarter mortgage-related income and fees decreased by $106 million versus the fourth quarter of 2020, driven by the evolving environment in mortgage banking, which remained strong, but reflected a more traditional cyclical pattern than we saw during the prior year period. Versus the prior year quarter, purchase mortgage volumes decreased by $124 million or 3% and refinance volumes declined much more substantially, decreasing by $1.7 billion or 54%.

During the fourth quarter of 2021, gain on sale margins were stable with third quarter levels, increasing by 1 basis point on a reported basis, and 3 basis points on loans sold to third parties. We expect full year average margins to be under pressure during 2022 as mortgage volumes normalize from the historically high levels seen over the last 2 years and the competition for that lower volume drives tighter margins. Currently, we expect the full year average gain on sale margins for loans sold to third parties will average between 300 and 325 basis points, contingent on market conditions.

Other income decreased by $55 million, driven primarily by declines in the structured finance lock volumes, which declined by [$172 million] or 37% and a challenging trading environment in fixed income services whereby revenues declined by $18 million versus the prior year period. It is important to recognize that both fixed income services and structured finance can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity, volatility and production trends.

Turning to Page 11. Noninterest expenses decreased for the same period in the prior year by $8 million to $322 million. The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $68 million at HilltopSecurities and PrimeLending, which was linked to lower fee revenue generation in the quarter compared to the prior year period. Additionally, non-compensation variable expenses, particularly mortgage production-related expenses, declined as volumes declined versus the prior year. Professional services and consultancy-related expenses is a place where we focused on reducing expense over the last few years and the year-over-year benefits of these efforts is noted as expenses dropped $12 million from the prior year.

Looking forward for '22, we expect that inflation will impact compensation, occupancy and software expenses resulting in elevated fixed costs within the business. To help mitigate some of these headwinds, we will remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage increased productivity across our front, middle and back offices. While these inflationary pressures do exist, we are continuing to further streamline our businesses and accelerate the adoption of our digital capabilities to support client acquisition and overall business productivity.

Turning to Page 12. Fourth quarter average HFI loans equated to $7.7 billion in 2021, stable with the prior year fourth quarter levels. On a period-end basis, HFI loans grew versus the third quarter of 2021 by $300 million, driven by improving Commercial loan growth, particularly in Commercial real estate lending and the retention of 1 to 4 family mortgages originated by PrimeLending. During the second half of 2021, we experienced improved customer activity in the Commercial space, and our pipelines continue to grow through the fourth quarter.

However, with the emergence of the latest COVID variant, we do expect a slowing of activity in the short term with a return to growth during the second and third quarters of 2022. During the fourth quarter of 2021, PrimeLending locked approximately $191 million of loans to be delivered to PlainsCapital over the coming months. These loans had an average yield of 307 basis points and average FICO and LTVs of 775% and 61%, respectively.

Lastly, given our current liquidity position, and the lower level of Commercial loan growth, we expect to continue to retain 1 to 4 family mortgages originated at PrimeLending at a pace of between $30 million and $75 million per month through at least the first half of 2022.

I'm moving to Page 13. During the fourth quarter, Hilltop recorded a net recovery of previous charge-offs of $400,000. This recovery capped 2021, whereby the full year, HTH recorded a net recovery of prior charge-offs of $500,000 far exceeding our expectations for credit performance from earlier in the year. Further, in the graph in the upper right, we show substantial progress made in reducing the NPAs as PrimeLending executed a target loan sale and our special assets team exited all, but approximately $3 million of OREO assets during the quarter.

As is shown on the graph at the bottom of the right of the page, the allowance for credit loss coverage at the bank ended 2021 at 1.28%, including both mortgage warehouse lending as well as PPP loans. We continue to believe that both mortgage warehouse lending as well as PPP loans will maintain a lower loss content over time. Excluding mortgage warehouse and PPP loans, the bank's ACL to total bank loans HFI ratio equates to 1.37%.

Turning to Page 14. Fourth quarter average total deposits were approximately $12.4 billion and have increased by $1.2 billion or 11% versus the fourth quarter of 2020. Throughout the pandemic, we've continued to experience abnormally strong deposit flows from our customers and has continued throughout the fourth quarter. In addition to solid growth in deposits, both year-over-year and on a sequential-quarter basis, interest-bearing deposit yields have continued to drift lower with the fourth quarter average cost of 22 basis points. While we've seen solid improvement in deposit costs over the last 2 years, we do expect to see deposit costs begin to rise later in 2022, if the Federal Reserve adjusts the Fed funds rate higher by 75 to 100 basis points during the year.

While deposit levels remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through our treasury products and services. These efforts were successful in 2021 and we expect that they will continue to accelerate into 2022.

Moving to Page 15. As a result of the team's work over the past few years, we were well positioned to take advantage of the opportunities the market presented by leveraging our franchise and our enhanced infrastructure to serve customers while attempting to keep our teams and clients as safe as possible from the ongoing pandemic. In 2022, we remain focused on staying nimble as the pandemic evolves to ensure the safety of our teammates and our clients. Further, our financial priorities for 2022 remains 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 shareholder value.

As is noted in the table, our current outlook for 2022 reflects 2 rate increases by the Federal Reserve during the year, a normalizing but constructive purchase mortgage market, a more productive balance sheet as excess cash levels moderate and loans grow at a measured pace, as well as a normalization of provision for credit losses given both growth and credit migration expectations.

Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call.

(Operator Instructions) Our first question comes from Michael Young from Truist.

Wanted to ask a quick housekeeping one, Will. Just on the earnings this quarter. Were there many fair value impacts? I know sometimes like the TBA business is kind of unhedged and anything on the MSR side that we should be kind of normalizing as we move throughout 2022?

Nothing substantial in the year-end period. So we had some things throughout the year, but nothing in the fourth quarter of significant consequence.

Okay. And maybe within the capital markets business and TBA business, obviously, you can't control the macro and what's going on with interest rates, et cetera. But can you just talk about sort of the initiatives or efforts underway within what you can control to kind of grow that business against more difficult macro environment?

This is Jeremy. Sure. I'll take that. So on the fixed income side, obviously, you've seen this with other competitors having a challenging quarter and challenging second half of the year given its market, the rate and the customers' appetite. I do think if you see, we have recruited a lot of talented people to fixed income, and we continue to try to build up that capital markets business. In particular, we have a real focus on building our middle-market sales effort, because what has come to light really this year given this environment is our reliance on trading revenue versus sales.

So that's kind of the biggest push that we have there to diversify that on that side.

Okay. Great. And just maybe moving over to mortgage. Obviously, refinance volume is really expected to fall off in 2022 as rates fall and -- or as rates rise, and we've seen that already somewhat, but you guys have historically been pretty strong in the purchase market, and that actually looks pretty decent. So could you maybe just kind of talk about your outlook for that business for 2022 as kind of in that context? And -- just are you guys still hiring and trying to grow volume in that business? Or are you going to take efforts to maybe control cost a little bit more in 2022?

I'll just talk about the recruiting first, and Will can chime in. But we are and always have been a purchase-focused originator and the expectation is for purchase mortgage volumes to increase really over the next 3 years, albeit refinancing volumes are obviously expected to be cut by about 70%. So we do think that's going to affect the competitive landscape. And we do think that -- and we've already seen that have an impact on our margins.

We are actively recruiting, and it's very competitive as well in doing that, but we are -- we have been successful at recruiting. And then we're looking for experienced loan originators that have a purchase focus. And I can say, through 2021, we had a net gain of 34 producers for about $500 million of incremental volume.

I'd say, Michael, in terms of kind of managing the overall profitability of the business, obviously, we're moving quickly and have moved quickly into the cycle where overcapacity in the market takes hold and the competitive set generally [surprised] at lower price to keep the machine, if you will, kind of fulsome, while they work to rationalize the size of their operations. So we're expecting, as we guided here, gain on sale margins to decline into that 300 to 325 basis-point range. As we noted on the call, they were 347 on a reported basis and 362 on loans of third-party basis in the quarter.

So that's a pretty material decline as we -- as we've worked over the last 3 or 4 years with our new loan origination platform as well as our digital efforts in the mortgage space. It's a focus of ours to improve the overall productivity of our business kind of through and through. So we're going to be working to do -- to kind of pull the leverage, Jeremy mentioned, which is grow our originator base, but we're also going to be looking to drive overall productivity. So it will be -- we're going to be pulling both levers in 2022 to try to drive as much profitability as possible, understanding it is going to be more of a challenging year than it has been in the last couple of years, just given the mortgage backdrop.

But we do feel constructive and remain constructive on the purchase side of the business. We do expect that to grow. The market expects that to grow, and we expect to get our fair share of that business.

Our next question comes from Matt Olney from Stephens.

I want to go back to the discussion around HilltopSecurities. I think you said the revenue for the full year was around $424 million. And obviously, some of those industry headwinds came on kind of throughout the year. As you see it today, do you think you can achieve that $424 million in 2022?

We're not going to give exact guidance on that. I would say if you look back at the year, as we've described, it's really the last 6 months of '21, where we saw the impact to those 2 businesses. And I would expect we're going to go into this year with continued -- pressure on them and then eventually, and as we see things kind of evolve and those businesses, markets improve, our revenue should improve and our margin should improve. I mean we're committed to these businesses. We've got great people that run it and know what they're doing. And I think that there'll be upside to that.

Okay. And then, I guess, switching over to the bank, the loan growth in the fourth quarter. Any more color on the drivers of that loan growth? And then, I guess, looking at the guidance on loan growth, it doesn't sound like you think the fourth quarter was any kind of inflection. Just any more color around the guidance there?

Yes. So fourth quarter, if you kind of just go on a linked quarter basis, I tried to highlight in the comments, we saw kind of better activity in our CRE lending space on an ending balance that was up just over $120 million. The PrimeLending retention for the period was about $190 million. So that gives you a sense of kind of where the growth was. The things that declined in the period, obviously, PPP loans declined just over $55 million, and National Warehouse Lending declined about $94 million, which is seasonal for that business.

And again, we saw a more seasonal mortgage space and National Warehouse Lending followed that path. As we look out in the -- from a Commercial loan growth perspective, again, we're trying to negotiate what is a challenging environment with COVID to protect the safety of both our clients and our associates. We pulled back in the late parts of the fourth quarter as this strand of the pandemic kind of continued to rage forward. We pulled back kind of in-person calling and a lot of the calling activities that you would normally have expected and that we've restarted in approximately the middle of the year last year.

So what we're expecting is -- if you pull back our calling efforts and your sales efforts for a short period of time. And again, we still got people on the phone and reach out to clients, but the in-person efforts, which is generally a more fruitful endeavor. We expect to see a little bit of a lull in the first quarter and then that growth to start as this strand looks to be abating, our expectation is growth starts to resume in the second and third quarters of this year.

But again, the focus there will be trying to grow that commercial business in that 2% to 5% range on a full year average basis. But what we're seeing a lot of here, certainly (inaudible) across our footprint is stronger activity in CRE and I'd say solid activity in C&I, but most of the activity from a CRE perspective.

Yes. The only other thing I would just mention is on the growth in the fourth quarter, it was a lot of our existing customers. So that was a commonality.

Okay. Okay. That's helpful. And then I guess on the expense side, looking at that guidance on Slide 15. I appreciate the way you guys broke it out between variable expenses and nonvariable expenses. That's helpful. On the nonvariable side, it looks like you expect that to increase between 3% and 6%. Any more commentary you can provide on that? I guess, I thought -- I was hoping there could be more opportunity to cut some cost even on the fixed side, but obviously, there's some wage pressures going on in the industry. Just any other commentary you can give us on that?

Well, I think you hit on it. I think wage pressure is real. We're acknowledging it here. We'll expect to see kind of merit or cost-of-living adjustments be higher than they would have historically been by a couple of percentage points. That's reflected here. We've also got our software agreements and occupancy agreements, and some of the other agreements, just inflationary kind of escalators that are embedded there. So that's real cost. Again, I think what we're focused on doing and the lower end of the range here reflects what I would say, an offsetting impact of the work we're doing from a productivity perspective.

So I want you to take away that we're not focused -- laser-focused on driving productivity across all of our operations, which we absolutely are. But in the short run, which we view kind of a 1-year period almost to be the short run, those inflationary pressures have persisted certainly in the fourth quarter. We're seeing them continue into the first quarter. So we expect they'll be there for a period. And we're not -- again, as it's been our practice, we're not going to overreact here to a short-term phenomena, and we're going to do the things that we think that are going to help position our business to be most successful in the long term, both from an investment perspective, but also from an expense reduction perspective.

Our next question is from Brad Milsaps from Piper Sandler.

Will, just wanted to follow up on Matt's question around expenses. If I take the midpoint of the range, and I think you had about $850 million of sort of nonvariable expenses in '21, it would imply like $40 million of additional expense in 2022, which just seems like a big number. Just kind of curious, I mean is most all of that going to show up just in the personnel category? It just seems like a big leap based on kind of where you are now.

Yes. No, I think Well, I think there's a few things in there. So it's not all going to show up in personnel, but you'll see the personnel portion kind of at that percentage level. You'll see the rest of the balance in software expenses and a balance in occupancy expenses. So the -- all of those are going to, we think, move in that range just based on contracts and then the expectation for cost of living adjustments from a personnel perspective. As well as health-care-related costs, which are up substantively year-on-year, as we're kind of going into the year here.

So that's where you're going to see it. And again, we are working diligently to affect productivity improvements across the business and that generally relates to headcount and the efforts as we automate and digitize a series of our core processes. We continue to make progress there. But again, in the short run, the market is moving and it has moved pretty quickly in terms of compensation adjustments and other cost as inflation has moved higher. So we're subject to deal with that.

Okay. And then just on the balance sheet, I wanted to ask about, it looks like the average taxable bond yield was up to over 2.08%, up about 17 basis points linked quarter. Just curious if there's anything in there that would be onetime driving that higher? Or is that kind of a new sustainable level where you're adding bonds to the portfolio? And would you anticipate continuing to grow the bond portfolio in '22?

We will -- we do expect, just given where liquidity levels are and overall cash levels are, that we'll see the bond portfolio, certainly at the bank continue to grow. So we've got the trading portfolio, HilltopSecurities, which has moved between $600 million and $700 million the last couple of quarters on a reported basis. We expected the bond portfolio at the bank, on the other hand, will likely move higher as it has, I'd say, drift higher towards $100 million to $200 million higher per quarter. Again, we're focused on not taking too much period vintage risk, as the market rolls over to what appears to be a Fed moving rates higher.

We are focused on purchasing securities that allow us to maintain a reasonably high level of asset sensitivity. So that would be some more floating-rate securities than we've maybe historically bought and are going on -- or kind of going on at the money fixed-rate security purchase right now is about 175 basis points. So again, we expect the securities portfolio at the bank will move higher. Rates have obviously moved up. And again, we're going to do what we can to kind of manage our asset sensitivity level, so we can take advantage of what we believe to be a longer cycle of rates moving higher over the next quarters and maybe years.

Okay. Great. But nothing specific in the yield this quarter, that's a pretty good number going forward?

Yes, nothing. I wouldn't say anything significant that moved it.

Okay. And then just final question for me. Just around your asset sensitivity, I appreciate all the disclosure. Can you remind me how the impact of the Sweep product that you have, I think, at the broker-dealer. And how much does that impact that the interest rate sensitivity table that you disclosed in the deck, if at all? I just wanted to have a kind of a refresh or a reminder kind of what the opportunity is there? I know, Jeremy, you've mentioned that in the past.

I think from an asset sensitivity perspective, it doesn't impact it. We -- it's not a net interest income line item as it comes through the consolidated P&L. So it's more of a fee item at the broker-dealer from a P&L perspective, so it doesn't impact asset sensitivity in that evaluation from a net interest income perspective. What it does do is as rates move higher, the value of those Sweep deposits obviously will move higher and the value of the fees generated, obviously, will grow. So -- but as far as asset sensitivity from a net interest income perspective, it's not impacted.

Our next question is from John Yanchunis (sic) [Joe Yanchunis] from Raymond James.

I was hoping you could unpack your deposit guidance and why you're anticipating such a relatively big drop in 2022?

Well, I think our view is as the Fed starts to move its balance sheet, full liquidity out of the marketplace as well as what we expect to be kind of the last innings of the stimulus notwithstanding, as we note here, additional stimulus efforts, we expect to see kind of an additional usage of these deposits by customers over time. We also expect as the economic environment starts to clear and we get a little more clarity around both the rate environment, inflation and, however, temporary or otherwise, this inflation is that our customers are going to start to put money to work with additional investments, whether that be in inventory from a C&I perspective or additional projects and programs from a real estate perspective.

Again, we are a commercially oriented community bank, and as a result, we've seen a large inflow of deposits from those customers that have been profitable over the last couple of years as well as the benefits of the stimulus, both as, again, that stimulus, we believe, is in the last innings and so we do believe that the consumer portion of our portfolio will start to see net draws in deposits. But we also expect that our Commercial customers will start to put more dollars to work as they get more clarity, if the pandemic starts to improve and as we get clarity on the economic outlook for the next couple of quarters. We expect to see those customers put deposits to work.

Got it. I appreciate it. And then in your prepared remarks, I believe you said that you expect deposit cost to increase in 2022. And I guess I was wondering how quick after the first rate hike do you plan to raise deposit costs? And then, do you have any sense on where the NIM will shake out in the near term?

Yes. So from a model kind of through-the-cycle beta, so through the cycle, which would be through the entire rate cycle, we modeled about a 50% pull-through on -- from a deposit cost perspective. As we think about the first couple of movements, we would expect in 2022, if the Fed were to move rates 100 basis points, for example, that our -- the beta in the period of 2022 is likely 20% to 30%, as we'll take some time after the first and likely the second increases to evaluate the market, and evaluate our liquidity position. But we do expect that the Fed, as I mentioned in my comments, move 75 to 100 basis points, we'll have to start to pass through a portion of that to customers.

From a NIM perspective, we're expecting NIM to likely drift total HTH NIM, likely drift a little lower here in the early part of the year. And then as those rate increases occur, if they occur, we'll see NIM start to expand, but there will be really 2 things. It will be expansion really on the liability side, as I just noted. On the asset side, we expect kind of rigorous competition to persist as well as we've got to work our way through our overall loan floors to see the expansion on the asset side.

Perfect. I appreciate it. And I was hoping I could sneak in one last question. I guess with mortgage volumes expected to shrink in 2022, has the pool of, I guess, total originators shrunk across the market? I'm asking that with the backdrop of you guys continuing to hire and increase your number of loan originators. Just wondering if that's playing out well.

Not so much, not so far.

That's going to take 12 to 18 months. As prices reset, volumes reset, people's earnings expectations reset, of what they can make in this particular business that has historically taken, I'd say, a series of quarters or a year or so, for it to start to figure it out and those who have the will and capability to perform in the market long term kind of shake out.

We have a follow-up question from Michael Young from Truist.

Just wanted to ask on kind of capital allocation and returns. You guys in the past have kind of tried to maintain a buffer of maybe $500 million or so of excess capital, but the capital levels are obviously quite high, even more so than that today. So maybe, Will, if you could give an update on kind of what you view as excess capital at this point. And I know you guys approved the $100 million share repurchase, which is more than maybe the standard $50 million, but just any other thoughts about share buyback versus are you seeing M&A in the pipeline that would cause you to kind of hold on to some more capital here or anything like that would be helpful.

Sure. This is Jeremy. I'll take that and Will fill in. But right now, we're sitting on excess regulatory capital of about $1 billion. That is higher than the $500 million that we had kind of pre-pandemic, and we got there as, I think, due to really more outsized earnings and some other corporate actions. I would say that we're excited about announcing this dividend increase. It's 25% up. That's on the prior year 33% up. I would caution that we don't expect for dividends to increase at this rate in the future. But I think it's a real affirmation of what we've been able to do, and strength of the future and shareholder return.

And for that matter, as I mentioned, we did return about 43% of earnings last year to shareholders through share repurchases and dividends. And so similarly, we announced an increase in our share authorization or repurchase of $100 million. And so we'll be evaluating that to do those repurchases in the open markets -- excuse me, open window periods. So that's all to say. I think that even still, we're going to probably hover around that $1 billion of excess capital until we have an event, like an M&A deal of some type.

Okay. And could you give us an update just kind of on M&A thoughts generally? I know you guys typically are more active when there's more distress in the market, but it seems like within the bank space, that's maybe not going to be the case for some period of time, just given the amount of stimulus running through the economy and higher rates coming, a lot of banks are going to be in a pretty strong position. So do you reevaluate or look at that capital base any different in light of that, generally, but also just kind of general M&A thoughts?

Sure. Our desire is to do bank M&A and to bolster the balance sheet of the bank and the earnings profile of our -- of Hilltop collectively. And we've kind of dialed in looking at a set of banks in Texas that we think are franchise enhancing, and that would be good partners. Where we -- our preference would do more cash in a transaction, and that's not been a strategic advantage in this environment and given the tax implications of it.

So we are challenged based on our currency. We're mindful of that. But hopefully, we can find the right partner and with enough cash in the deal, it would be worthwhile for us.

There are no further questions at this time. I would like to turn the call back over to our presenters.

Operator, that concludes our call.

Thank you.

This concludes today's conference call. You may now disconnect your line.