Earnings Call Transcript - HTH Q4 2021

Operator, Operator

Good morning. My name is Candice and I will be your conference operator today. I would like to welcome everyone to the Hilltop Holdings fourth quarter 2021 earnings conference call. All lines have been placed on mute to eliminate any background noise after the speaker’s remarks. There will be a question-and-answer session. If you would like to ask a question during this time, simply follow the instructions in the prompt. If you would like to withdraw your question, please follow the instructions as well. Thank you. I would now like to hand the call over to Erik Yohe.

Erik Yohe, Executive

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 preface of our presentation, are forward-looking statements. These statements are based on management's current expectations concerning future events and 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.

Jeremy Ford, President and CEO

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 continued many of the same themes we discussed in prior quarters, including improved credit quality, growth in our core loan book, and the beginning of a more normalized and competitive mortgage market. With the prospect of increasing rates in the near-term, we anticipate a softening in our fixed income businesses. Through it all, we continue to generate strong earnings and returns. PlainsCapital Bank generated $68 million in pre-tax income, with 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 pay downs. 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. 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 non-interest-bearing accounts primarily from existing customers. For the full year, the bank generated $283 million in pre-tax income and a return on average assets of 1.55%. This was a fantastic year for PlainsCapital Bank, reflected in 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, generating $31 million in pre-tax income. The business originated $5 billion in volume with a gain on sale margin of loans sold to third parties, with refinancing volume as a percent of total volume remaining stable from the prior quarter at 29%, but declining 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, which started in early 2020. This led the company to have its second-best year ever, with funded volume of $23 billion and pre-tax income of $236 million. During the quarter, HilltopSecurities generated pre-tax income of $1.7 million on net revenue of $94.6 million. There was a decline in rent 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 and 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 fears 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 expand our breadth of expertise in complementary businesses. We are focusing on diversifying and growing our revenue streams and already made the necessary investments to support that. This will take time, but we're 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 uncertainties, 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 one 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.

Will Furr, Executive

Thank you, Jerry. I'll start. For the fourth quarter of 2021, Hilltop reported consolidated income attributable to common stockholders was $62 million equating to $0.78 per diluted share. During the fourth quarter, the provision for credit losses reflected a net recovery of previous charge-offs of $400 thousand 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 of 2021, Hilltop reported consolidated income attributable to common stockholders of $374 million or $4.61 per diluted share. 2021 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, with improvements in the macroeconomic outlook and the decline in specific reserves resulting from a significant credit recovery during the quarter supporting 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 modeled, and the changes in the allowance are 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. Turning to page 8, net interest income in the fourth quarter equated to $104 million, including $2.5 million of PPP fees in 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 nine 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 spurred substantial competitive pressure for high-quality funded assets. During the current 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 points area. As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios. Notably, 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%. Furthermore, in this scenario, each 25 basis point increase positively impacts net interest income by about $5 million. Lastly, for 2022, we expect the impact of PPP-related fees and interest, which were approximately $22 million in 2021, and purchase loan accretion could decline by $25 to $30 million compared to the 2021 levels. Moving to page 10, total non-interest income for the fourth quarter of 2021 equated to $285 million, with quarter mortgage-related income and fees decreasing by $106 million compared to the fourth quarter of 2020, driven by the evolving environment in mortgage banking, which remained strong but reflected a more traditional cyclical pattern compared to the prior-year period. Purchase mortgage volumes decreased by $124 million or 3%, and refinance volumes declined 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 come under pressure during 2022 as mortgage borrowing volumes normalize from the historically high levels seen over the last two 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 structured finance locked volumes, which declined by $72 million or 37%, and a challenging trading environment in fixed income services, where revenues declined by $18 million compared to 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, non-interest expenses decreased for the same period in the prior year by $80 million to $322 million. The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $68 million in 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 have been areas where we focused on reducing expenses over the last few years, as noted due to 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 operations. 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's 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 one to four family mortgages originated by PrimeLending. In the second half of 2021, we experienced improved customer activity in the commercial space, and our pipelines continued 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 one to four family mortgages originated by PrimeLending, at a pace of between $30 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 kept 2021, whereby the full year HGH reported 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 the substantial progress made reducing NPAs as PrimeLending executed a target loan sale, and our special assets team exited all but approximately $3 million of all year assets during the quarter. As it's 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 and PPP loans will maintain lower loss content over time. Excluding mortgage warehouse and PPP loans, the bank's ACL, total bank loans to HFI ratio equates to 1.37%. Turning to page 14, fourth-quarter average total deposits are approximately $12.4 billion, which have increased by $1.2 billion or 11% versus the fourth quarter of 2020. Throughout the pandemic, we continue to experience abnormally strong deposit flows from our customers, including through 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 a fourth-quarter average cost of 22 basis points. While we've seen solid improvement in deposit costs over the last few 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's 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 are 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. Furthermore, our financial priorities for 2022 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 shareholder value. As it's noted in the table, our current outlook for 2022 reflects two 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 the 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.

Operator, Operator

At this time, I would like to remind everyone that in order to ask a question, press star, then press one on your telephone keypad. We will pause here for a moment to comply with the question-and-answer roster. Our first question comes from Michael Young from Truist. Michael, your line is now open. Please go ahead.

Michael Young, Analyst

Hey. Good morning, everyone.

Jeremy Ford, President and CEO

Good morning.

Will Furr, Executive

Morning.

Michael Young, Analyst

I wanted to ask a quick housekeeping question, Will. Regarding the earnings this quarter, were there many fair value impacts? Sometimes the TBA business is kind of unhedged. Was there anything on the MSR side that we should be kind of normalizing as we move throughout 2022?

Will Furr, Executive

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

Michael Young, Analyst

Okay. Maybe within the capital markets business and TBA business, obviously you can't control the macro and what's going on with interest rates, etc. But can you talk about the initiatives or efforts underway within what you can control to grow that business against a more difficult macro environment?

Jeremy Ford, President and CEO

Sure, I'll take that. On the fixed income side, as you’ve seen with other competitors, it has been a challenging quarter and a challenging second half of the year given the market, the rates, and the customer’s appetite. I do think if you see, we have recruited a lot of talented people to fixed income and we continue to build up that capital markets business. In particular, we have a real focus on building our middle-market sales effort, because what has become apparent this year, given this environment is our reliance on trading revenue versus sales. That's the biggest push we have there to diversify that side.

Michael Young, Analyst

Okay, great. Just moving over to mortgage, obviously, refinance volume is expected to fall off in 2022 as rates rise. We have seen that already somewhat, but you guys have historically been pretty strong in the purchase market, and that actually looks pretty decent. Can you talk about your outlook for that business for 2022 in that context and are you still hiring and trying to grow volume in that business or are you planning to control costs more in 2022?

Jeremy Ford, President and CEO

I'll just talk about the recruiting first, and Will can chime in. We are and always have been a purchase-focused originator, and the expectation is for purchase mortgage volumes to increase over the next three years, albeit refinancing volumes are expected to be cut by about 70%. We do think this will affect the competitive landscape, and we have already seen an impact on our margins. We are actively recruiting and it's very competitive, but we have been successful at recruiting experienced loan originators that have a purchase focus. I can say through 2021, we had a net gain of 34 producers for about $500 million of incremental volume.

Will Furr, Executive

In terms of managing the overall profitability of the business, obviously, we're moving quickly into the cycle where overcapacity in the market takes hold and the competitive set generally lowers prices to keep volumes up 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 points range. As we noted on the call, they were 347 on a reported basis and 362 on loans sold to third parties in the quarter. This is the result of our efforts to improve productivity through our new loan origination platform and our digital efforts in the mortgage space. We will be working to leverage growth in our originator base while also driving overall productivity. It's going to be a challenging year compared to the last couple of years given the mortgage backdrop, but we feel constructive on the purchase side of the business and expect it to grow, as does the market, and we expect to get our fair share.

Michael Young, Analyst

Thanks. I'll step back.

Operator, Operator

Our next question comes from Matt Olney from Stephens. Matt, please go ahead.

Matt Olney, Analyst

Hey, thanks. Good morning, guys.

Jeremy Ford, President and CEO

Hey, Matt.

Will Furr, Executive

Good morning.

Matt Olney, Analyst

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

Jeremy Ford, President and CEO

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 six months of '21 where we saw the impact on those two businesses. I expect we are going into this year with continued pressure on them. Eventually, as we see things evolve and those markets improve, our revenue and margins should improve. We are committed to these businesses. We have great people running them and I believe there will be upside.

Matt Olney, Analyst

Okay, thanks. Then switching over to the bank, regarding the loan growth in the fourth quarter. Could you provide any more color on the drivers of that loan growth? It doesn't sound like you think the fourth quarter was a turning point; any additional insight on guidance there?

Will Furr, Executive

In the fourth quarter, if you look at the late quarter performance, we observed better activity in our CRE lending space, which saw a unique balance that was up just over $120 million. The PrimeLending retention for the period was about $190 million, which indicates where the growth was. The things that declined in the period were PPP loans, which declined just over $55 million, and national warehouse lending declined by about $94 million, which is seasonal for that business, and we also saw the mortgage space's seasonality. As we look out from a commercial loan growth perspective, we are trying to maneuver through this challenging environment with COVID, protecting our clients and associates. We pulled back near the end of the fourth quarter as the latest variant continued spreading, which impacted in-person activities. We expect a slight low in the first quarter and growth to start again in the second and third quarters of this year. We aim for commercial growth in the 2% to 5% range on an annual average basis, with stronger activity in CRE and solid activity in C&I.

Jeremy Ford, President and CEO

The commonality in our growth in the fourth quarter was primarily our existing customers.

Matt Olney, Analyst

That's helpful. Looking at the expense side, regarding guidance on Slide 15, I appreciate how you broke it out into variable expenses and non-variable expenses. On the non-variable side, it appears you expect that to increase between 3% and 6%. Can you provide any more commentary on that? I hoped there would be more opportunity to cut costs, even on the fixed side, but I understand there are wage pressures.

Will Furr, Executive

You are spot on. We are acknowledging that wage pressure is real. We expect merit or living adjustments to be higher than they have historically been, reflected in a couple of percentage points. We've also got inflationary escalators embedded in our software agreements and occupancy agreements, so those costs are real. Again, what we are focused on is that the lower end of the range reflects what I would describe as an offsetting impact of our productivity efforts. So I want to emphasize that we are laser-focused on driving productivity across all our operations. However, in the short run, we are experiencing persistent inflationary pressures, and we expect these will continue into the first quarter.

Matt Olney, Analyst

Okay, thank you, guys.

Jeremy Ford, President and CEO

Thank you.

Will Furr, Executive

Thank you.

Operator, Operator

Our next question is from Brad Milsaps from Piper Sandler. Please go ahead.

Brad Milsaps, Analyst

Hey, good morning.

Jeremy Ford, President and CEO

Morning.

Brad Milsaps, Analyst

Hey, Will, I 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 non-variable expenses in '21, I would imply like $40 million of additional expense in 2022, which seems like a big number. Just curious, is most all of that going to show up in personnel?

Will Furr, Executive

There are a few factors in that. It's not all going to be in personnel, but you will see the personnel portion at that percentage level. You'll also see the rest balance in software expenses and occupancy expenses. We believe all of those will move in that range based on contracts and the expectation of living adjustments. In addition to healthcare-related costs which continue to rise year-over-year as we enter the year. That's where you're going to see it. We are working diligently to achieve productivity improvements across the businesses, which generally relates to headcount as we automate and digitize our core processes. We have been making progress in that area. However, in the short run, the market has moved quickly in terms of compensation adjustments, so we need to manage those costs.

Brad Milsaps, Analyst

Okay. Thank you. On the balance sheet, I wanted to ask about the average taxable bond yield, which was up to over 2.8%, an increase of about 17 basis points linked quarter. Just curious if there's anything in there that would be one time driving that higher or is that kind of a new sustainable level where you're adding bonds to the portfolio? Would you anticipate continuing to grow the bond portfolio in 2022?

Will Furr, Executive

We do expect that, given where liquidity levels are and overall cash levels, our bond portfolio will start to grow. The trading portfolio, HilltopSecurities, has been between $600 and $700 million over the last few quarters on an ending reported basis. We expect the bond portfolio at the bank to increase and drift higher by an estimated $100 to $200 million per quarter. Again, we're focused on managing our asset sensitivity carefully, especially as we anticipate rates moving higher over the next quarters and perhaps longer.

Brad Milsaps, Analyst

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

Will Furr, Executive

Nothing significant moved it.

Brad Milsaps, Analyst

Okay. Just final question for me regarding your asset sensitivity. I appreciate all the disclosure. Can you remind me how the impact of the suite product at the broker-dealer affects your interest rate sensitivity table, if at all? What is the opportunity there?

Will Furr, Executive

From an asset sensitivity perspective, it doesn't impact it. We don't account for it in the net interest income line item in the consolidated P&L. It's more of a fee item at the broker-dealer from a P&L perspective. The value of those fee deposits will increase as rates move higher, and the fees generated will grow, but it doesn't directly impact asset sensitivity from a net interest income perspective.

Brad Milsaps, Analyst

Okay, great. I appreciate the clarity there. Thanks for that. Thanks for taking my questions.

Operator, Operator

Next question is from John Yan Tunis from Raymond James. Your line is now open. Please go ahead.

John Yan Tunis, Analyst

Good morning.

Jeremy Ford, President and CEO

Morning.

Will Furr, Executive

Good morning.

John Yan Tunis, Analyst

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

Will Furr, Executive

Our view is as the Fed starts to move its balance sheet and pull liquidity out of the marketplace along with the expected end of stimulus, we believe there will be increased usage of these deposits by customers over time. We also expect that as the economic environment clears, our customers will put money to work in additional investments, whether that be inventory from a C&I perspective or projects and programs from a real estate perspective. We are a commercially oriented community bank and have seen large inflows of deposits, which we believe are in the later innings now, and we think the consumer portion of our portfolio will start seeing net draws in deposits as our commercial customers invest more as the pandemic improves and the economic outlook becomes clearer.

John Yan Tunis, Analyst

I appreciate it. In your prepared remarks, I believe you said that you expect deposit costs to increase in 2022. I was wondering how soon after the first rate hike you plan to raise deposit costs, and do you have any sense of how NIM will shake out in the near-term?

Will Furr, Executive

From a modeling perspective through the cycle, we typically expect about 50% pass-through regarding deposit costs. As we think about the first couple of movements, we would expect for 2022 that if the Fed were to move rates by 100 basis points, the impact on our costs would likely be 20% to 30%. It will take some time after the first and likely second increases to evaluate the market situation and our liquidity position. We expect that if the Fed raises by 75 to 100 basis points, we will have to start passing through part of that to customers.

John Yan Tunis, Analyst

Understood. One last question, I guess with mortgage volumes expected to shrink in 2022, has the total pool of originators in the market shrunk across the market, and keeping that backdrop in mind, are you continuing to hire or increase your number of loan originators? Just wondering if that is playing out at all?

Jeremy Ford, President and CEO

Not so much so far.

Will Furr, Executive

That's going to take 12 to 18 months as prices reset, volumes reset, and earnings expectations reset, to start to pare things down. We think that this is going to account for a series of quarters or a year to truly figure out the long-term performers in the market.

John Yan Tunis, Analyst

Thank you for taking my questions.

Jeremy Ford, President and CEO

Thanks.

Operator, Operator

We have a follow-up question from Michael Young from Truist. Michael, your line is now open. Please go ahead.

Michael Young, Analyst

Thanks for the follow-up. I wanted to inquire about capital allocation and returns. In the past, you have tried to maintain excess capital of about $500 million, but capital levels are obviously quite high now. Maybe Will, could you give us an update on your view of excess capital at this point? I know you approved a $100 million share repurchase, which is more than the standard amount, but any thoughts about share buyback versus M&A in the pipeline would be helpful.

Jeremy Ford, President and CEO

Sure. This is Jeremy. I'll take that and Will will fill in. Right now, we're sitting on excess capital of about $1 billion, which is higher than the $500 million we had pre-pandemic. We got here due to outsized earnings and some other corporate actions. I would say that we are excited to announce this dividend increase of 25%, as well as our plans to use a $100 million share repurchase authorization. We will evaluate the repurchases in open market periods. Overall, I believe we will hover around a billion dollars of excess capital until we see an event like an M&A deal.

Michael Young, Analyst

Okay. Could you give us an update on general M&A thoughts? I know you typically are more active when there's distress in the market, but it appears that many banks are on stable ground, given the stimulus and rising rates. How do you evaluate the capital base amidst those dynamics?

Jeremy Ford, President and CEO

Sure. We desire to pursue bank M&A to enhance the balance sheet and earnings profile of Hilltop collectively. We have been looking at various banks in Texas that we believe could be franchise enhancing and would make good partners. Our preference is to do more cash deals, but the tax implications have made that a challenge. We are mindful of our current currency position and hope to find the right partner for a worthwhile deal.

Michael Young, Analyst

Okay, thanks.

Jeremy Ford, President and CEO

Thank you.

Operator, Operator

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

Jeremy Ford, President and CEO

Operator, that concludes our call. Thank you.

Operator, Operator

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