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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to today's Hilltop Holdings First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance.
It is now my pleasure to turn the conference over to Erik Yohe, Executive Vice President.
Thank you. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition, credit risk and trends in credit, allowance for credit losses, liquidity and sources of funding, funding costs, the impact and potential impacts of inflation, stock repurchases, 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 the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Please note that the information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop.com.
With that, I will turn the presentation over to Hilltop President and CEO, Jeremy Ford.
Thank you, Erik, and good morning. For the first quarter, Hilltop reported net income of approximately $28 million or $0.42 per diluted share. Return on average assets for the period was 0.7% and return on average equity was 5.2%.
While the impact of economic headwinds that began in 2022 continue to persist, we are pleased with the strong returns from PlainsCapital Bank and HilltopSecurities that allowed us to improve earnings per share over the same period in the prior year. Despite a housing market that remains under pressure, PrimeLending significantly reduced its pretax loss from the same period in the prior year through meaningful but hard expense-based rightsizing.
The improvement in our consolidated results are a true reflection of ongoing hard work by our teams across Hilltop. We believe that our long-term decision-making, strategic initiatives and cost management efforts positions us to consistently serve clients across our businesses, generate consolidated profitability, return capital to shareholders via share repurchases and dividends and take advantage of opportunities when they arise.
During the quarter, PlainsCapital Bank generated $50 million of pretax income on [ $13.1 billion ] of assets, representing a return on average assets of 1.2%. While our conservative approach to credit has limited outside growth in our loan portfolio, it has also allowed us to prudently optimize the bank's liquidity and funding.
Average loans at the bank declined slightly from the fourth quarter, driven primarily by a reduction in national warehouse lending balances as normal seasonality and a depressed mortgage market continues to restrict this business. We continue to see a pullback in the commercial lending market due to the higher-for-longer interest rate environment and increased equity requirements. And we expect this pullback to pressure loan growth for the near future.
Our average deposit balance declined 3% during the period, primarily due to the bank returning nearly $380 million of suite deposits back to HilltopSecurities and returning $42 million of brokered CDs. Encouragingly, this planned reduction was partially offset by a $200 million increase in interest-bearing deposits.
Results in the quarter include a provision recapture of $2.9 million, which resulted from the impact of net charge-offs, improvements in the economic outlook and changes in migrations across the portfolio. Overall, asset quality continues to be stable as criticized loans as a percentage of bank loans has remained relatively flat for the third consecutive period.
Moving to PrimeLending, where the company reported a pretax loss of $16.5 million for the period as low housing inventory, escalating home prices and higher mortgage rates persist. Operating results were negatively impacted by a $7 million valuation adjustment on the MSR asset. We are seeing that the cost-cutting measures implemented during 2022 and 2023 are making a positive impact as nonvariable compensation has decreased by $6 million or [ 17% ] since the first quarter of 2023.
This has resulted in the pretax loss improving despite lower overall revenues relative to the prior-year period. Notwithstanding these ongoing challenges, employee engagement and morale remain remarkably high, underscored by the company's recent recognition as one of the top 10 workplaces in the 2024 USA TODAY ranking.
Looking forward, while we believe the next few quarters will remain challenged, we are beginning to see signs for optimism within the mortgage business.
In the first quarter, HilltopSecurities generated pretax income of $19 million on net revenues of $117 million, marking a 12% increase in revenue over the same period in the prior year. This growth was primarily driven by the mortgage trading business and suite deposit products within Wealth Management.
Speaking to the lines of business at HilltopSecurities. Public Finance services generated a 4% increase in net revenues compared to the same period in the last year. Municipal advisory fees and underwriting revenues remained stable, while revenues from the Public Finance spoke businesses improved due to increased fees on our cash pool products.
Our Structured Finance net revenues increased 53% compared to the same period in the last year. This was primarily due to mortgage-related business activity withing the Florida market.
While this was a very strong start to the year, we do anticipate a weaker outlook in the coming months as down payment assistance programs have slowed.
In Wealth Management, net revenues were stable compared to last year's first quarter as interest rates have remained elevated, which benefits our FDIC suite program. Our fixed income business remains pressured as the shape of the yield curve continues to act as a headwind for the business. We are still committed to the business and look to further enhance our sales distribution capabilities while upholding our strong culture and risk management practices.
Overall, HilltopSecurities performed very well this quarter, and we continue to build on the business with recent hires that we made from competitors who have pulled out of certain municipal and trading businesses.
Moving to Page 4. Hilltop maintains robust capital levels with a common equity Tier 1 capital ratio of 19.7%. Additionally, our tangible book value per share increased from year-end 2023 by $0.09 to $28.44 despite the recent rise in rates. During the period, we returned $21 million to shareholders with $11 million in dividends and $10 million in share repurchases.
Now I'd like to give a brief update on the bank leadership transition that I mentioned in the fourth quarter earnings call.
As discussed, Jerry Schaffner, the CEO of PlainsCapital Bank, will be retiring on May 1, and I will take over as CEO of the bank, with Brian Heflin as President. In preparation, we have established an internal transition team and have been making excellent progress in ensuring a smooth handoff in the coming weeks.
We feel we are in an excellent position to build on the bank's incredible legacy, and I look forward to working more closely with Brian, Pete, [ Darrell ], Steve and everyone else at the bank. Again, I want to thank Jerry for his partnership and friendship as well as his dedication and leadership over his more than 42 years of service.
Now, I will turn the presentation over to Will to discuss our financials in more detail.
Thank you, Jeremy. I'll start on Page 5. As Jeremy discussed, for the first quarter of 2024, Hilltop reported consolidated income attributable to common stockholders of $27.7 million, equating to $0.42 per diluted share. Results for the first quarter include approximately $7.3 million of negative valuation adjustments related to our MSR asset.
Approximately $5 million of the valuation adjustment relates to the signing of an LOI to sell all of the MSR backed by conventional mortgage loans. LOI covers the sale of approximately $47 million of MSR value as of March 31.
As we've noted in the past, the MSR asset is not a strategic asset for Hilltop. And while we may choose to retain MSRs at times through the cycle, our long-term view remains that we will maintain a small MSR asset, sufficient to support the sale of certain product to PrimeLending and that will -- and that we will execute bulk sales when we deem appropriate to limit our overall exposure on the balance sheet.
In addition, as of March 31, Hilltop reported a reduction of the allowance for credit losses of $7.2 million, which includes $4.3 million of net charge-offs and a net $2.9 million release of the allowance, largely driven by the improvement in the economic scenario from December 31.
Turning to Page 6. Hilltop continues to leverage the Moody's S7 scenario, which calls for a mild recession to begin in Q1 of 2025. At 12/31, the scenario predicted that a mild recession will begin in the first quarter of 2024. The shift in the timing of the recession is the key driver to the economic impact and resulting release of reserves for the first quarter. Allowance for credit losses of $104 million built an ACL to total loans HFI ratio of 1.29% as of March 31.
As we've stated since the introduction of CECL, we continue to believe that the allowance for credit losses could be volatile and the future changes in the allowance will be driven by net loan growth in the portfolio, credit migration trends and changes to the macroeconomic outlook over time.
Given the current uncertainties regarding inflation, interest rates, the future outlook for GDP growth and unemployment rates, volatility could be heightened over the coming quarters.
Moving to Page 7. As noted in prior quarters, we continue to believe that the segments of our loan portfolio with the most significant potential for risk exposure include the nonowner-occupied office and retail portfolios. As it is provided in the table, these portfolios totaled $851 million at March 31 and maintain an aggregate ACL coverage ratio of 3%, which is modestly higher and what was maintained at December 31.
Moving to Page 8. Net interest income in the first quarter equated to $104 million, including $1.3 million of purchase accounting accretion. Versus the prior year period, net interest income decreased by $18 million or 15%, driven primarily by the ongoing increases of deposit costs. Over the last quarter, our loan, securities and cash yields have remained relatively stable, consistent with the Fed funds rate.
We continue to expect the deposit competition will remain very intense for the remainder of the year, causing NII and NIM to remain pressured throughout 2024. Our estimates for future NII and NIM currently reflect our expectation that the Fed will maintain stable rates until late 2024, executing a single 25 basis point reduction at their December meeting.
Moving to Page 9. The table in the upper left of the page highlights available liquidity sources at March 31. As of period end, including the Fed discount window, Hilltop maintained available liquidity of approximately $7.4 billion, well in excess of deposits that are both uninsured and uncollateralized, which equated to $4.5 billion at the period end.
As we've noted in prior quarterly updates, we do expect that interest-bearing deposit betas could continue to drift modestly higher and will end the cycle between 66% and 70%. As of March 31, the cumulative interest-bearing deposit beta for this portion of the rate cycle was 66%.
Turning to Page 10. First quarter average total deposits are approximately $10.7 billion and declined by approximately $363 million or 3% versus the fourth quarter of 2023. On an ending balance basis, deposits declined by $179 million to $10.9 billion from the prior-quarter ending balance level.
Turning to Page 11. As is highlighted in the chart, the bank returned $377 million of broker-dealer sweep deposits and $42 million of brokered CDs, which matured during the period. Adjusting for these items, period-end deposits rose by $240 million from December 31 levels.
While we're pleased to see our customer deposits growing, the growth has been centered in our higher cost offerings. In particular, our top tier money market and interest-bearing checking are attracting the preponderance of new deposits that have moved into the bank.
As a result, the total interest-bearing deposit costs continue to rise, with the blended rate equating to 358 basis points as of March 31, up from 340 basis points at December 31.
Given the current competitive environment and our focus on retaining and growing our customer deposits, we do expect that overall interest-bearing deposit costs will continue to increase over the coming quarters. Further, in the table on the lower portion of the page, we provide some detail as to our CD maturities and the average rate of those maturing CDs.
Turning to Page 12. Total noninterest income for the first quarter of '24 equated to $182 million. First quarter mortgage-related income and fees decreased by $2 million versus the first quarter of 2023. Although total mortgage fees declined in the period, we have seen signs of early stabilization in both revenue per loan and origination volumes, which were relatively stable with the prior-year levels.
While neither revenue nor origination volumes reflect what we would describe as a strong market, we have seen modest improvement in home inventory levels of recent. However, interest rates have remained volatile throughout the first and early parts of the second quarters in 2024.
Further, while we've seen improved levels of gain on sale margins, that improvement has been largely offset a lower per loan origination fees. This revenue dynamic will continue to shift rapidly and will remain volatile until market interest rates are more predictable and likely stabilize at lower levels. Other income increased by $13.5 million versus the prior-year period, driven primarily by improved trading activity in our Structured Finance business at HilltopSecurities. The strength in the Structured Finance revenue reflected the pull-through of secondary market volume from the prior quarter's strong lock volumes, specifically related to certain states continued support of their down payment assistance programs.
[ For most ] states, those subsidies have been depleted and the business will likely see a decline in activity until further state subsidies are put in place.
It remains important to recognize that both the fixed income services and Structured Finance businesses at HilltopSecurities can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity, volatility in production trends, which may include additional subsidies provided by the states to support their down payment assistance programs.
Turning to Page 13. Noninterest expenses remained relatively stable from the same period in the prior year. While compensation, occupancy and professional services-related expenses declined modestly versus the prior-year period, other expenses moved modestly higher, driven by production-related costs, including [ quotation ] and clearing costs and servicing and tax costs across HilltopSecurities and PrimeLending.
Looking forward, we expect expenses other than variable compensation will remain relatively stable as the ongoing focused efforts related to streamlining our operations and improving productivity, continue to support lower headcount and improve throughput across our franchise, helping to offset the ongoing inflationary pressures that persist in the market.
Moving to Page 14. First quarter average HFI loans equated to $7.8 billion in 2024, down [ $59 million ] from the prior-year-period levels. As we've noted in prior quarters, overall, the market demand for funded commercial loans remains challenged, driven by the combination of the borrower's preference to leverage less debt at current market rates and structural requirements that new projects and investments require more upfront equity to meet key underwriting thresholds.
Given these ongoing challenges, we restarted the retention of originated mortgages on the balance sheet during the first quarter and expect to continue retaining these assets for the coming months and quarters.
The level of future retention will be driven by a combination of factors, including the return profile of held mortgages, commercial loan demand, the long-term value comparison to securities and other investment options, but will be within the current guidance levels of 0 to $20 million per month.
Turning to Page 15. During the fourth quarter call, we noted a marked increase in total nonperforming assets during that period and noted that the increase was largely driven by the negative migration of a single client relationship within our nonowner-occupied commercial real estate portfolio.
During the first quarter, management made the decision to move this loan to held for sale and engaged a loan sales services organization to support the potential disposition of this loan. That sale process continues and we do not have any specific updates as to the final disposition of this asset at this time.
Overall, credit quality has remained generally solid through the first quarter. However, we did experience a higher level of charge-offs during the period, specifically addressing the loans that were charged off represented a disparate set of industries and locations and includes a charge-off amount related to the loan discussed earlier that was moved to held for sale.
Currently, we do not see any prevailing trends that cause us outsized concern in our portfolio. However, we continue to monitor all aspects of the portfolio very closely as higher interest rates, potentially lower utilization rates in certain segments of the commercial real estate and an expected slowdown in economic activity could have a negative impact on our clients and our portfolio.
As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended the first quarter at 1.35%, including mortgage warehouse lending.
I'm moving to Page 16. As we move into the second quarter of 2024, there continues to be a lot of uncertainty in the market regarding interest rates, inflation and the overall health of the economy. We're pleased with the work that our team has delivered to position our company for times like these.
And our teammates across our franchise remain focused on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile and delivering long-term shareholder value.
As is noted in the table, our outlook for 2024 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes, and we adjust our business to respond, we will provide updates to our outlook on future quarterly calls.
Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call.
[Operator Instructions] And we will take our first question from Michael Rose with Raymond James.
Maybe we could just start on the reserve release this quarter. I guess I was just a little bit surprised to see the general release. I think you cited maybe better economic trends. I guess that's kind of in contrast with what we're seeing from a bunch of other banks that are actually kind of building reserves.
I understand that clearly, Texas is going to hold up a lot better than most other places in the country, but I was a little surprised by that. So maybe if you could just walk us through what happened there and kind of what you're seeing that may be a little bit different than maybe what others are seeing.
Well, thanks for the question. As we've noted, we use a single scenario for our CECL evaluation, and that's the Moody's S7. That's been consistent for a series of quarters at this point. As management went through the evaluation of the economic scenarios, we felt like the Moody's S7 at current here at [ 3/31 ] was the appropriate scenario to leverage.
If you compare those to time periods for the S7 [ 3/31 ] and [ 12/31 ], what you'll see is there is a shifting in the timing of the overall potential economic recession that they're predicting. So at [ 12/31 ], the scenario predicted that a recession would begin really in the later parts of the first quarter of 2024. That has moved now to the first quarter of 2025.
Really, that shift in timing of the overall -- of a potential recession really is what shifted and what caused, as you can see on Page 6 in our slides there, the collective economic condition, the release there of $4.1 million.
So it's really just scenario for scenario, the adjustments as we evaluate it, our view has continued to be that the economy will move into a recessionary period in the future. And as a result, we adopted that scenario and believe that to be appropriate as of [ 3/31 ].
Okay. I guess just as a follow-up, I'm just a little bit curious why you wouldn't weight the downside scenarios a little bit higher. I mean we're kind of seeing that kind of across the board, large and small. Any reason why you would be kind of in contrast to kind of what we're seeing from others?
Yes. Well, we don't [ weight ] scenarios. Again, we take one scenario that we believe most adequately reflects the economic outlook. And so as a result of that, we don't take multiple scenarios and then try to [ weight ] our way into a blended average. So that's really likely the delta that you're seeing between others, not with [ us being able ] -- how others are doing it.
Got it. Appreciate it. And then I know we saw a decent step-down in the margin this quarter. Can you just talk about some of the levers, whether it be on the liability side in terms of deposit cost betas, and then maybe what you might have in terms of loan maturities and maybe some securities maturities this year?
And then how should we -- putting all that together, how should we kind of expect the margin to kind of trend from here? I would think that it would be kind of up, particularly as you get the benefit -- seasonal benefit from some mortgage pickup, even though it's a little bit more muted maybe than it might have been, just given a higher-for-longer backdrop.
And so for margin, as you noted, 285 basis points for the first quarter, obviously, down linked quarter, down year-on-year. I think as we evaluate kind of the ongoing aspects of our portfolio. We've got a handful of things that are recurring first, and I noted this in my comments.
We do expect that interest-bearing deposit costs are [ continuing ] to rise. We provided some perspective to our CD maturities in the materials, but we do have a 5% 90-day CD that are currently in the market. And so we're seeing the preponderance of CDs roll into that product. So that will continue to drift higher. We think that's the competitive product at this point.
Secondarily, we're seeing deposit flows into our -- in our higher-cost money market tiers, which are our larger balance tiers. But nonetheless, that's where the dollars have flown into here over the last couple of quarters. And so we are expecting to see, say, a consistent drift higher in overall interest-bearing deposit costs.
On the loan side, most of our -- the vast majority of our variable rate loans have already reset. And if you believe that rates are going to remain reasonably stable, they'll be stable the same. From a fixed rate perspective, we've got about $350 million of loans that will come up for renewal here for the balance of the year. That will allow us the opportunity to reprice those loans, and so we would expect that to occur.
The blended rate on that is -- on those loans at current is just under 5%. So obviously, we view that as a tailwind. The securities portfolio has got a yield just at 3%. We are continuing to allow that portfolio to run down, and those cash flows are reinvested either in cash, which -- or deposit there at the Fed or into the retained mortgages that we talked about. So we also view that as a favorable.
I think just given the sheer size, we would expect that NIM will be pressured here into the second and third quarters and then likely start to turn from there in the fourth quarter, again, presuming that the Fed holds rates reasonably stable. But again, the overall flows would cause you to be more stable, but likely has a little bit of a negative [ match ] over the next 2 quarters.
Very thorough, Will. And then maybe just finally for me, maybe for Jeremy. Just in a higher-for-longer environment, how can we think about the broker-dealer segment? And what are the puts and takes of kind of a higher-for-longer backdrop as it relates to the components of the business and then as you think about the pretax margin?
Okay. Well, I think -- I mean, there's a lot to that. I think on the Public Finance business, the higher rate environment has slowed underwritings. So I think that there's -- when rates decline, we think there's a pipeline building that will provide some additional revenue there. I think on -- it's kind of the shape of the curve, having the higher short-term interest rates has clearly benefited our Wealth Management businesses with our suite deposits that are really tied to that. And also having the inverted yield curve has really challenged our fixed income business because the nature of that business and the fact that a lot of what we're -- the activity is muted, we're seeing with client demand and the activity that we're doing, we're doing a shorter-duration product that generates less revenue.
So I think, in general, a more normalized yield curve will pull up the Public Finance and the fixed income business and will be a good offset for a potential decline in the Wealth Management suites.
We think that with the Wealth Management suites, I think with the first 100 basis points of any decline that, that's probably something that will pass back to the client. So we'll be able to sustain some of that revenue with that. I don't know if that's all over the map, but that's my response.
And we will take our next question from Stephen Scouten with Piper Sandler.
I guess if you could touch a little bit more on the mortgage business and kind of what you're seeing. I know you referenced some signs you're seeing that things might be moving a bit more positive. Kind of what specifically you might be seeing there? And kind of what the path to that and [ yields might ] looks like? Is this kind of a couple of years sort of recovery or a more normalized mortgage environment? Or how are you thinking about that today?
Yes. My point would be kind of high level. There is such a great amount in building pent-up demand for housing that -- and it's generational. And so we're seeing that. We're seeing pockets or markets where inventory is starting to become more available. And we're seeing that the borrowers are starting to become accustomed to and are more accepting of a mortgage rate that is in the 6s.
We think that 6.5% mortgage rate is really defining level there that if it goes below that, we think that there will be more activity. And if it's much higher than that, then it just continues to have this locked-in effect that we have, where there's a large -- vast majority of the mortgage market is -- or mortgage holders are at rates well less than the 6s.
So that's what we're seeing, and it's just kind of -- we're seeing it kind of slowly unlock. So I don't -- we don't predict or think that there's a hockey stick here, but we do think there's a light at the end of the tunnel.
And for Prime, they've done a lot of work to reduce their platform costs, and we're going to really continue to work hard to maintain that so that when the revenue comes back, we'll be able to leverage that to earnings.
Okay. Yes, that's really helpful. And I guess you referenced maybe some new hires within HilltopSecurities. I'm wondering, is that of any meaningful scale that we'll see that show up in the expense base? Or is that just kind of normal course of business as you continue to build out that division over time?
Yes, I think it's normal course of business. I mean we continue to invest in what we believe to be really high-quality teams and individuals that we believe bring skill sets. I think what Jeremy was mentioning was we've seen some of our larger competitors exit certain businesses, and we've been able to, we believe, benefit from that in terms of hiring some really quality folks.
From an overall cost perspective, it will be marginal in that regard, but we do expect them to be productive and accretive here over the coming quarters.
Okay. Great. And then I guess, just last thing for me. How should we think about the share repurchase here? I mean, obviously, you just bought back some shares at [ $31 ], [ we're ] lower than that. So I mean at around [ 102 ] intangible or what have you, well, you're up a good bit today, but would you expect to be fairly aggressive with the share repurchase around these levels?
I think that what we're going to do is we're going to try to -- we're mindful of it. We clearly are evaluating the value and see that. And we're going to try do new share repurchases that are towards our share repurchase authorization of around $75 million. And if it -- if valuations go down further something, maybe we'll do something more. But for the time being, we're going to just try to live within our share repurchase authorization.
And I just go back to HilltopSecurities. I mean, I personally am extremely excited about the talent and the team that we're bringing onboard, combined with the existing talent that we have, so I think that when -- and it's particularly in Public Finance and fixed income. And I think when those markets come back, I think that we'll -- I'm hopeful that we will see some real revenue growth.
And we will take our next question from Wood Lay with KBW.
Just wanted to follow up on mortgage. It was great to see the gain on sale margin pick up in the quarter. Just what are your expectations for that margin for the remainder of the year?
I think as we look at it, and I tried to highlight it in our comments, we're -- I think we've seen that we saw an improvement in overall sale margins, obviously, the 216 basis points. What we are seeing is, again, with each kind of increment in the overall mortgage rate, and it's pretty volatile at this point.
We are seeing customers make kind of real-time decisions, whether they buy down the rate pay points and buy down the rate that generates more origination fees or were able to take that loan to market and garner a higher secondary sale.
So we're looking at it. Really, to some extent, on an aggregate revenue basis of about 375 basis points is where we've been here recently. And so until we see aggregate revenue start to move materially higher, I think our view is customers are going to make those decisions. We're going to support those decisions and help them get loans executed. But one of the revenue components moving higher, while the other necessarily almost offsets it dollar-for-dollar, I think, just puts us in a similar spot.
So we are seeing more variability around the mix of revenue, but the aggregate per loan revenue, again, remains reasonably resilient and consistent between 370 and 380 basis points.
Got it. That's super helpful. Maybe shifting over to credit. It looks like classified loans were down a little bit and [ special mention ] one picked up. Was that mostly just some small dollar movement? Or any detail you can share there?
Yes. There'll be more detail that comes out in our Q. But it -- overall, we are seeing -- notwithstanding the loan, I spent some time in my comments talking about, and we spent some time last quarter talking about, notwithstanding that loan; largely [ smaller ] related movement.
Again, we don't see any material industry concentrations or geography-based concentrations. What we see is individual situations and kind of items that have popped up, whether it be ownership or otherwise, that cause credits to otherwise underperform.
We are seeing, and I think we've stated this in the past, the pressure of higher rates on cash flows, and that's permeating the portfolio. So we do expect to continue to see some downgrades and pressure from that. But again, there's nothing from an industry or geography perspective right now that causes us to be overly concerned.
We will take our next question from Matt Olney with Stephens.
I want to go back to the deposit discussion and noninterest-bearing deposits, still some pressure in the first quarter at the bank, but also just the industry overall. In the guidance, I think you reiterated the same commentary about just seeing additional pressure throughout the year. But it looks like the 1Q average NIB deposit balance is already at the midpoint of that range that you mentioned for the end of the year.
So just trying to clarify, if you expect incremental pressure from here and we should be thinking about moving towards the lower end of that guidance? Or you think we could stabilize here at these 1Q levels?
Good question. And as we look at it, we're evaluating a few moving parts. First, customer demand to kind of move into our [ suite ] products and out of noninterest-bearing kind of as a primary order matter.
And then second, what we've seen is in our treasury products, and those customers are using our treasury services, their [ pension ] to be willing to pay fees and then shift their deposits, their noninterest-bearing deposits into [ suite ] products has also increased during the first quarter.
So our expectation is we're going to continue to see a steady but modest, I think, movement into any interest-bearing products out of noninterest bearing. So again, we think the range is reasonable and appropriate. Where we land in the range I think will be determined by customer activity, but we are continuing to see customers with an appetite to move into high rate products and out of their NIB deposit accounts.
Okay. And then within the NII guidance, I think we're -- I think it's now down 4 to 8 for the year. Hoping to kind of parse that out, and I'm curious, what you think are the major drivers, major variables within the guidance that could push the actual results on to either side of that guidance?
Yes. So the most significant driver is going to be our overall deposit cost. And we continue to manage it closely. Our objective, again, remains to continue to grow and attract new customers to our franchise. And as a result, we've got to be competitive. I think where we are currently positioned, we feel comfortable, we've got some products that do have kind of 5% rates on them. But largely, the products are below that.
Certainly, in some of our competitive markets and some of our competitors have got rates higher than that across both their CD products and in certain cases, their money market products. So we are, again, not top of market, but we believe competitive.
But again, customer demand for higher interest rates persist. They continue to reach out and ask for higher rates in different products, whether it be sweep or otherwise. So we are going to continue to kind of work our way through that.
But we do expect deposit rates are going to move higher,. and we expect that beta, as I noted earlier in my comments, to move up within that range of 66% to 70%.
The other parts that we noted, we've got loans, which, again, we've got some repricing that will occur on our fixed rate portfolio through the balance of the year. We think that's a tailwind. We also think we're allowing the securities portfolio to continue to run down, and we expect that those cash flows will be reinvested in either cash or loans, likely loans retained in our mortgage retention program.
And so both of those are tailwinds which cause us to believe that both NII and NIM are going to be pressured here for the coming quarters, 1 or 2 quarters and then likely stabilizes and starts to move higher, we believe, in the fourth quarter.
So those are really the largest drivers. As I noted, we started -- restarted the retention of mortgage loans on the balance sheet in the first quarter. We'll continue to do that. The average rate -- coming on rate for those mortgages at this point, and they're all hybrid ARM product, is about 7%. And so obviously, that's a higher rate than cash earnings and certainly a higher rate than our securities portfolio as well.
We'll continue to do that at a modest level relative to our overall balance sheet. But again, I think the earn environment, the inverted yield curve and Fed funds remaining at what we believe to be elevated levels for the vast majority of this year are going to continue to pressure NII and NIM.
It appears that we have no further questions at this time. This does conclude the Hilltop Earnings First Quarter 2024 Earnings Call. Thank you for your participation. You may disconnect at any time.