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Edited Transcript of HTH earnings conference call or presentation 1-Nov-19 1:00pm GMT

Q3 2019 Hilltop Holdings Inc Earnings Call

DALLAS Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Hilltop Holdings Inc earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erik Yohe

Hilltop Holdings Inc. - SVP of Corporate Development

* Jeremy Blue Ford

Hilltop Holdings Inc. - President, CEO & Director

* William B. Furr

Hilltop Holdings Inc. - Executive VP & CFO

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Conference Call Participants

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* Adam Paul Freyaldenhoven

Stephens Inc., Research Division - Research Associate

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Edward Christopher Gamaitoni

Compass Point Research & Trading, LLC, Research Division - MD & Head of Research

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Wood Neblett Lay

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning and welcome to the Hilltop Holdings Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Erik Yohe. Please go ahead.

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Erik Yohe, Hilltop Holdings Inc. - SVP of Corporate Development [2]

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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 and anticipated amendments to SEC filings, 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 and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. 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 taxable equivalent net interest margin, prepurchase accounting taxable equivalent net interest margin, 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 Hilltop President and CEO, Jeremy Ford.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [3]

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Thank you, Erik, and good morning. Before we get into the financial results, I want to recognize as part of our succession planning, we recently announced that effective January 1, 2020, Steve Thompson will be promoted to President and CEO of PrimeLending. Our current PrimeLending Chairman and CEO, Todd Salmans, will remain as Chairman and provide ongoing strategic guidance. Todd has led PrimeLending as CEO since 2011 and has helped shape the company's success. We are extremely grateful for his tremendous contribution and visionary leadership. He has been an incredible asset to PrimeLending and the overall Hilltop organization. He is also a dear friend, and we look forward to working with him in the future as Chairman.

Steve joined PrimeLending in 2011 and has been President since 2017. He had previously held successive positions as the company's Regional, Divisional and National Production Leader, and is very well-respected across the mortgage industry. Under his direction, the company has established a plan for sustained success, focused on delivering a superior mortgage experience to our valued customers. I'm excited about PrimeLending's prospects and future success under Steve and Todd's partnership.

Now moving on to the financial results. For the third quarter 2019, Hilltop reported net income of $79 million or $0.86 per diluted share, representing a $44 million increase compared with the same quarter last year and a $22 million increase compared to prior quarter. Additionally, Hilltop delivered a return on average assets of 2.26% and a return on average equity of 15.6%. This quarter, we delivered 20% growth in revenue compared to third quarter 2018 and 8% compared to prior quarter. In conjunction with that, noninterest expense, excluding variable compensation, declined by 8% compared to third quarter 2018 and 4% compared to prior quarter. This positive operating leverage is primarily a result of the impact of lower rates and market conditions in our mortgage-related businesses, in addition to our work to enhance businesses, business operations and realize efficiencies across the organization.

Our diversified business model enables us to capitalize on low-rate, high mortgage volume markets, such as this past quarter, in multiple ways, including mortgage origination, National Warehouse Lending and through our Structured Finance and Capital Markets desks at HilltopSecurities. A strength of Hilltop is our ability to generate significant earnings growth in environments such as these, while remaining grounded with a solid earnings base from PlainsCapital Bank, our cornerstone entity.

This quarter, average loans held for investment, excluding broker-dealer loans, grew by $450 million or 7% percent compared to prior year third quarter. Growth can be attributed primarily to our previously mentioned National Warehouse Lending business and the impact of lower rates and the increase in refinance activity.

Similarly, mortgage loan originations at PrimeLending grew to $4.8 billion in Q3, an increase from third quarter 2018 of 31%, also from strong mortgage refinancing activity. Refinancing volume at PrimeLending as a percentage of loan origination volume during the third quarter increased from 11% in 2018 to 29% in 2019.

Net revenues at HilltopSecurities increased 28% year-over-year as trading gains in Structured Finance business grew revenue by $15 million compared to Q3 2018. And favorable market conditions coupled with improved trading performance delivered a 53% increase in trading volumes during the period.

Through the first 9 months of the year, Hilltop has paid $73 million to repurchase 3.4 million shares of common stock. This includes the transaction in August with Oak Hill Capital Partners to repurchase their 2.2 million shares at a price of $22.25. This agreement was made as a result of provisions governing the life of funds at Oak Hill Capital Partners and as a consideration of Hilltop's Board of Directors related to our stock purchase -- repurchase program.

We remain pleased with our current capital position with a Tier 1 leverage ratio of 12.7%, a Common Equity Tier 1 capital ratio of 16.2% and approximately $500 million in excess capital. For the quarter, criticized loans -- criticized loan levels and NPAs remain steady.

Moving now to Slide 4. For the third quarter of 2019, PlainsCapital Bank recorded pretax income of $52.7 million, an increase of 37% from third quarter 2018. Growth in average balances and a reduction in operating expenses drove increased profitability. Of note, the third quarter 2018 noninterest expense included the Bank of River Oaks transaction-related costs of $6.6 million. This past quarter also marks 1 year since we completed the Bank of River Oaks transaction. And we now have strong leadership in Houston that has been able to drive significant deposit growth, upgrade the quality and the amount of our lenders and improve the region's profitability by executing on our integration strategy.

Loan growth has been pressured by unexpected paydowns, though overall, customer relationships have been strengthened, and in several cases, expanded as a result of our additional services and balance sheet capacity. Overall for Texas, we continue to encounter intense competition for both loans and deposits, which has resulted in margin compression. We aim to remain competitive but disciplined in our approach to pricing and underwriting.

PrimeLending produced pretax income of $31.5 million for the third quarter compared to $4.8 million in Q3 2018. In addition to the previously mentioned origination volume growth, gain on sale spreads improved by 5 basis points compared to prior year and 2 basis points linked quarter. While variable compensation increased in relation to origination volume, nonvariable compensation and operating costs declined by $2.8 million compared to prior year. This was caused by the avoidance of increases in headcount and tightly managed operating costs.

HilltopSecurities third quarter 2019 pretax income was $27 million, and pretax margin was 22% compared to $10 million and 10% in 2018. It was another strong quarter for our both Fixed Income Capital Markets and Structured Finance businesses, driven higher annually by favorable rates and market conditions.

In Structured Finance, the TBA business was very active as a result of low mortgage rates. Fixed Income Capital Markets had a strong quarter, mainly driven by the CMO and credit businesses. Public Finance had a better quarter as deal flow increased. Brad Winges has come in as HilltopSecurities CEO and made a big impact. While favorable market conditions have aided our 2019 results, there's a lot of productive work happening to improve the cost structure and overall return profile of the business.

Results at National Lloyds were improved compared to prior year as we reported pretax income of $6.5 million for the quarter with a combined ratio of 83%, compared to 94% during the third quarter of 2018. The lower combined ratio is a result of both lower frequency and severity of storms and the previously disclosed strategy of exiting noncore states.

In summary, this was an excellent quarter for each of our businesses, and I want to thank all of our teammates across Hilltop for their part in executing towards our combined vision. We are seeing the strength of our shared services model and collaboration across the organization. Overall, our platform for growth and efficiency initiatives is moving ahead of schedule, and we plan to provide a financial update of that progress during our Q4 2019 call.

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

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [4]

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Thank you, Jeremy. Before we review the financial performance for the quarter, I want to review the disclosure made last evening.

Based upon a review recently conducted, Hilltop determined that we did not design and maintain effective internal control over certain aspects relating to the determination of the qualitative factors considered by management in the allowance for loan losses estimation process, particularly quantitative support for such qualitative factors. Management and the Audit Committee of the Board of Directors concluded this control deficiency constituted a material weakness as of December 31, 2018. As of the date of the press release, we do not expect this control deficiency to result in a restatement of our consolidated financial statements. We expect to file an amendment to our annual report on Form 10-K for the fiscal year ended December 31, 2018, and quarterly reports on Form 10-Q for the quarters ended March 31, 2019, and June 30, 2019, to include disclosures concerning this material weakness. In addition, we anticipate that the report of PricewaterhouseCoopers on our internal control over financial reporting at December 31, 2018, will be revised to reflect the identification of this material weakness. Hilltop management and our Board of Directors are committed to maintaining a strong internal control environment. Management has evaluated the material weakness described above and has made significant progress in updating its design and implementation of internal controls to remediate the aforementioned control deficiency and enhance our internal control environment going forward.

Now moving to Page 5. As Jeremy discussed, for the third quarter of 2019, Hilltop reported $79.4 million of income attributable to common stockholders equating to $0.86 per diluted share. During the third quarter, the provision for loan losses included approximately $380,000 of net recoveries as charge-offs for the quarter remained low. During the third quarter, revenue related to purchase accounting was $7.8 million and expenses were $1.9 million, resulting in a net purchase accounting pretax impact of $6 million for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposits and other intangible assets related to prior acquisitions.

Regarding loan accretion. As the purchase portfolio balances continue to decline, we expect scheduled interest income related to loan accretion to average between $4 million and $6 million per quarter over the next few quarters. Hilltop's capital position remains strong with a period-end Common Equity Tier 1 ratio of 16.15% and a Tier 1 leverage ratio of 12.67%.

Moving to Page 6. Net interest income in the third quarter equated to $113 million, including $7.9 million of loan accretion. Net interest income increased $3 million or 3% versus the same quarter in the prior year. The growth in net interest income was driven by growth in loans held for sale at our National Warehouse Lending business. Both of these loan portfolios were positively impacted by the favorable mortgage conditions during the quarter. We do expect that both of these portfolios will begin to decline during the fourth quarter as the mortgage business moves into a more traditional seasonal cycle.

Net interest margin equated to 3.45% in the third quarter. The prepurchase accounting taxable equivalent net interest margin equated to 3.2%, which declined by 1 basis point versus the same period in the prior year. On a linked-quarter basis, taxable equivalent prepurchase accounting net interest margin declined by 6 basis points resulting from lower yields on loans held for sale and a 1 basis point increase in interest-bearing deposits. During the third quarter, long-term interest rates and more directly, 10-year rates, continued the decline that began earlier in the year. Overall, the average yield on loans held for sale during the third quarter dropped by 46 basis points to 414 basis points, putting pressure on net interest margin during the quarter. Further, during the third quarter, the average 10-year yields declined by 55 basis points, which we expect will continue to put downward pressure on loans held for sale yields during the fourth quarter. As it relates to interest-bearing deposit costs, we do believe that the portfolio reached peak levels for this interest rate cycle during the third quarter and will begin to decline at a modest pace over the coming quarters.

With the combination of lower loan held for sale yields and lower deposit beta rates early in this rate lowering cycle, given competitive pressures, we expect net interest margin will continue to trend lower for the remainder of the year and into 2020. While these factors could move us to the lower end of our outlook range, we are maintaining our full year average prepurchase accounting net interest margin outlook of 3.25% plus or minus 3 basis points. We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset liability flows across the portfolios.

Now moving to Page 7. Total noninterest income for the third quarter of 2019 equated to $341 million. Third quarter mortgage-related income and fees increased by $52 million versus the third quarter of 2018. During the third quarter of 2019, the environment in mortgage banking improved, principally driven by the aforementioned decline in the 10-year rates, which fell below 150 basis points at times during the quarter. This decline in rates drove a significant increase in refinance activity as refinance volumes increased from the prior year period by $975 million to $1.4 billion during the third quarter of 2019. Gain on sale margins outperformed our expectations for the quarter as they increased to 335 basis points for the period.

Regarding mortgage gain-on-sale margins, given the current competitive dynamics, recent pricing actions taken by the agencies and our expectations on market rates, we expect the gain-on-sale margins will trend lower throughout the balance of 2019.

Other income increased by $19 million, driven primarily by improvements in sales and trading activities in both the Capital Markets and Structured Finance businesses at HilltopSecurities. Favorable market conditions resulted in a 29% increase in Structured Finance mortgage-backed securities volumes. These businesses continue to realize the benefits of the investments we've been making to improve our structuring and distribution capabilities since the third quarter of 2018. And while we believe these investments will continue to provide ongoing benefits, it is important to recognize that these businesses can be volatile from period to period, as they are impacted by interest rates, overall market liquidity and production trends.

Now moving to Page 8. Noninterest expenses increased from the same period in the prior year by $14 million to $350 million. The growth in expenses versus the prior year were driven by an increase in variable compensation of $34 million at HilltopSecurities and PrimeLending. This increase in variable compensation was linked to strong fee revenue growth in the quarter. Over the last -- over the past 6 quarters, we have continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise. Through these efforts, headcount, nonvariable compensation, professional services costs and marketing and development expenses continue to trend lower as we make progress against our efficiency objectives. During the third quarter, Hilltop incurred $3 million in costs related to ongoing core system enhancements.

Moving to Page 9. Total average HFI loans grew by 6% versus the third quarter of 2018. Growth versus the same period in the prior year was driven by growth in our mortgage warehouse lending business, which experienced strong growth in the quarter, where ending balances grew by approximately $80 million -- $180 million on a linked-quarter basis. Based on year-to-date average loan growth in the National Warehouse Lending portfolio, current production trends, seasonal and scheduled paydowns, the current competitive environment and our focus on high-quality conservative underwriting, we now expect that full year average HFI loans will grow 6% to 8% in 2019.

Turning to Page 10. As previously noted and as shown on the chart at the top right of the slide, the bank has maintained solid credit quality through third quarter of 2019, as nonperforming assets declined $21 million from the same period in the prior year. Over the last few months, we have seen some weakness begin to emerge in our energy lending portfolio as cash flow performance coupled with overall market liquidity in the energy sector are becoming strained. As it relates to energy lending, total commitments at 9/30 were approximately $285 million and total loan outstanding balances were approximately 2.3% of the bank's total loan -- loans held for investment portfolio. The bank's allowance for loan loss to HFI loan ratio equates to 82 basis points at the end of the third quarter of 2019. It is important to note that we do have remaining discounts across the purchased loan pool, and these discounts provide additional coverage against future losses.

Turning to Page 11. Average total deposits were approximately $8.6 billion and have increased by $477 million versus the third quarter of 2018. Interest-bearing deposit costs have remained relatively stable, rising by 1 basis point from the second quarter of 2019 as competitive pressures remain. As shown in the graph, the bank has been able to show steady growth of noninterest-bearing deposits as we continue to focus on deepening our relationships with our clients.

Turning to Page 12. During the third quarter of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability, generating $53 million of pretax income during the quarter. The quarter's results reflect the benefits of growth in National Warehouse Lending as well as solid expense reductions versus the prior year. Total noninterest expenses declined by $14 million versus the prior year period, driven by lower operating costs, the elimination of loss share expenses in 2018 and lower FDIC premiums. Of note, third quarter 2018 results included $6.6 million of nonrecurring transaction-related expenses associated with the acquisition of the Bank of River Oaks in August of 2018. Also, during the quarter, the bank did recognize $2.6 million of losses on the sale of certain available-for-sale securities. The proceeds of these deals will be fully reinvested in the securities portfolio during the fourth quarter. The focus at PlainsCapital remains consistent: provide great service to our clients, drive profitable growth while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue growth and expense efficiency.

Turning to Page 13. PrimeLending generated a pretax profit of $32 million for the third quarter of 2019, driven by strong origination volumes that increased from the prior year by $1.1 billion or 31%. Gain-on-sale margins improved, as noted earlier, as strong secondary market conditions supported improved profitability. While overall volumes have increased, the focus on operating efficiencies has not waned as PrimeLending has maintained solid rigor around staffing and other middle and back office expenses across the platform. The focus for PrimeLending is to generate profitable mortgage volume, continue to focus on operational efficiencies and to successfully launch our new mortgage loan origination system.

Turning to Page 14. HilltopSecurities delivered a pretax profit of $27 million for the third quarter of 2019, driven by solid execution in the Structured Finance and Capital Markets businesses, which have benefited from both our ongoing investments in structuring, sales and distribution as well as improved market conditions. While activity was strong in the quarter, results from both of these businesses can be volatile as market rates, spreads and volumes can change significantly from period to period.

Related to public banking, net revenues grew by $3.9 million versus the same period in the prior year, and we are continuing to invest in our franchise to support long-term growth by strategically hiring bankers to support client expansion and acquisition. The focus for HilltopSecurities is to grow profitable revenue, optimize operating expenses, manage market and liquidity risk within a moderate risk profile and finalize deployment of the new core operating system.

Moving to Page 15. National Lloyds recorded a $6.5 million pretax profit for the quarter, which reflected a lower frequency and severity of storm activity and claim-related losses. Prudent growth in our core markets remains our primary focus for 2019.

Moving to Page 16. For 2019, we are increasing the outlook for full year average loan growth to 6.8% (sic) [6% to 8%], driven by the strong performance in our National Warehouse Lending business year-to-date, with an expectation that balances begin to decline seasonally during the fourth quarter. Full year average deposit growth outlook remains consistent. Also, as a result of higher loan held for sale balances and National Warehouse Lending balances for the year, we are increasing our net interest income guidance to include 1% growth within the range. To reflect the strength in our fee businesses, we're adjusting our noninterest income outlook higher to reflect the results during the first 3 quarters of 2019 and the improvement in market conditions. Our noninterest expense outlook range is projected higher as variable expenses will continue to be correlated to our fee revenue businesses. This outlook represents our current expectations with respect to the markets, rates and overall economic activity. These, however, may change throughout the remainder of the year, and we'll provide updates as necessary on quarterly calls going forward.

In addition, we would like to provide an update on the projected impact of the adoption and implementation of the new accounting standard for assessing allowance for credit losses, commonly known as CECL. Based on our current assessment of the credit risk in the portfolio, our expectations of prepayments and our base economic outlook scenario, we estimate the allowance for credit losses plus the reserve for unfunded commitments will be in the range of $80 million to $110 million. This compares to the combined reserves as of the third quarter of 2019 of approximately $58 million. We will continue to assess the credit quality of the portfolio, the current economic outlook assumptions and other factors that will affect this assessment and the ultimate range throughout the remainder of 2019, as we work towards the January 1, 2020, implementation date.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [2]

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Wanted to talk about the guidance for a second and just thinking about the fee income change versus the expense change. Can you maybe give us some color on the magnitude of the gain-on-sale margin compression that you're expecting in the fourth quarter? And then I don't know when the Q comes out, but was just hoping for maybe a little color on what servicing, interest rate locks and the mortgage servicing and fair value mark were in the third quarter?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [3]

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Yes. So this is Will, I'll provide some insight. So from a gain on sale perspective, as we noted, it increased and outperformed our expectations for the third quarter, really based on the strength in the overall market. And from an outlook perspective, we are expecting those margins to contract into the fourth quarter. Obviously, as it relates to changes made at the agencies in terms of pricing as well as just overall competitive pressure as volumes seasonally decline, we would expect that to move into the 3.20s as a matter of contraction.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [4]

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Okay. That's helpful. And then just wanted to talk about, obviously, really strong performance from the broker-dealer and Jeremy, you used to kind of call that $100 million revenue a quarter business, but you've made a lot of investments, and you've seen growth in a couple of the key pieces. Can you maybe give us color, I know you don't want to give guidance necessarily for 2020, but just thinking about how the investments might impact the revenue run rate from here aside from, obviously, variability in interest rates impacting a couple of the pieces?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [5]

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Sure. Yes, we're not prepared to give guidance for 2020, but I would expect and hope that we're going to generate more than $100 million of revenue a quarter. I think that we should have continued strength in building streams in our Capital Markets business and Public Finance.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [6]

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Okay. And then maybe just one last one for me. Just going back to the margin and maybe a little more color on -- you're going to have pressure from here. How much can you -- just thinking about the cost of funds, is the magnitude of the pressure you're expecting in the fourth quarter less than 3Q? Maybe give us a little more color on how you're thinking about the cost of funds maybe offsetting asset yield attrition in the near term?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [7]

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Yes. And I think from our perspective, we guided to the range of 3.25% plus or minus 3, so we don't want to give any more detail than that. What's driving it, though, again, is we do expect loan for sale -- loans held for sale yields to continue to be under pressure as, again, throughout the third quarter, we did continue to see the 10-year decline and obviously, that's an indicator. The other part of this is from a deposit pricing perspective, we are certainly, across our competitive set, seeing a reluctance to move rates lower at a, at what I would call, an expected pace, given the Fed rate declines. And so we are, as you would expect, continuing to focus on being competitive while ensuring that we are reducing rates commensurate with market changes as quickly as we can. But we are seeing a reluctance in the market of deposit rate declines, certainly with some of our key competitors across some of our key markets. That -- those will be the 2 significant drivers of kind of NIM compression going forward.

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Operator [8]

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Our next call comes from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [9]

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Just wanted to talk about mortgage for a second. If I look at the MBA's data, and I know you guys are more of a purchase shop, but clearly had a pickup in refi this quarter, the MBA's data calls for a pretty strong refi quarter. Understand the gain-on-sale margin, but should we expect less of a seasonal decline in your volumes than we've seen historically, just given the drop in rates and the MBA's forecast?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [10]

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I think our outlook would have us outperforming kind of normal seasonal declines in the context of modestly higher. But that said, if you take the shape of the curve, the fourth quarter will just seasonally be lower. So it's not -- we don't expect the fourth quarter volumes to look like the third quarter volumes. They're going to fall off seasonally, but maybe at a slightly slower pace, given the strength of the refinances.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [11]

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That's helpful. Just shifting gears to loan growth, which has been on the held for investment side has been pretty solid. Can you just generally talk about your pipeline, where it is now versus maybe kind of a quarter ago or a couple of quarters ago, where you're seeing strength and where some challenges might be? And maybe I know the average growth this year, understand the guide, but is -- should we think about next year, depending on what happens economically, that growth can sustain relatively near these levels?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [12]

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Yes. I would say from a pipeline perspective, I think as we've noted in the past, our pipelines are strong. The team is working harder with our clients and prospects every day. What I would say is the pull-through rate, our pull-through rate has declined as we've seen market pressures as it relates to both pricing and structure, but I'd say probably more acutely structured. And so we are, from a pull-through perspective, seeing a few of those deals actually get booked than you might otherwise have seen earlier in the cycle. So from our view, there's a lot of activity out there, but the competitive pressures, as we've noted and Jeremy noted in his comments, do persist, and we are seeing, again, some structural pressure on a lot of transactions as well as some very intense pricing pressure. As it relates to -- as Jeremy mentioned, we're not going to provide kind of full year 2020 guidance here, but we continue to say we are going to be focused and rigorous about maintaining our credit underwriting standards as best we can while maintaining competitiveness through the cycle here.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [13]

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Understood. Maybe just last 1 for me. So last year, you guys earlier this year rolled out the $250 million PPNR by 2021. Now clearly, the interest rate backdrop has changed, but mortgage and the Capital Markets business, the broker-dealer has given you a boost. Understanding all the variables that go into it, is that still a good target at this point?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [14]

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I mean I think that like we've tried to communicate that, that $250 million is not the target. The target is to generate $84 million of run rate efficiencies. And that's what we're going to report on after the next quarter.

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [15]

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That's correct. So what we've said is, just to be -- what we've said is that was an all else equal 2018 roll forward. And to Jeremy's point, the $84 million is what we expect to be kind of run rate benefit from those initiatives, and then we'll provide an update where PPNR is as it relates to the 2021 year. But obviously, there will be substantial changes to macroeconomic environment, other drivers that weren't in there, but what we're tracking to is how we're executing against the 3 definitive programs we laid out and kind of the value we will be -- we have extracted from those.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [16]

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And there's no changes to those 3 programs in terms of what you expect the $84 million?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [17]

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That's correct.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [18]

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None to report.

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Operator [19]

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Our next question comes from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [20]

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I wanted to start with maybe just a follow-up on the prior question. Just of that $84 million that you're targeting, can you give us a sense of maybe where we're at in terms of progression on that, at least to date? I mean we've seen really good fixed cost reductions throughout the year, this year. So just trying to see how much of that we should expect to continue over the next 2 years?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [21]

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Well, as we've said -- when we said we rolled it out, that we were planning on generating $84 million of run rate benefit from these platform for growth and efficiency initiatives. But we said that we thought that a lot of that wouldn't be fully phased in until 2021 with these systems, to put it in context for the audience. But I think it's just like we said in our comments before, is that I believe that we're ahead of schedule, and you see it in the numbers, and you're hearing it from a lot of what we're messaging as far as focusing on efficiency. But I can't give you anything definitive today or we're not going to give you anything definitive today. We are giving you a more fulsome update next quarter.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [22]

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Okay. Maybe just digging in a little deeper. We've kind of seen $1 million or so improvement in the broker-dealer, the mortgage business year-over-year, it's been a couple of million dollars, but the bank had a material drop in expenses this quarter. I know there was the FDIC assessment credit potentially this quarter. Can you give us a sense of how much was the assessment credit versus how much is just kind of run rate expense reduction there?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [23]

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The assessment credit was approximately $1 million. And again, of that change, as I tried to note in my comments, the $14 million change, $6.6 million of that was related to BORO-related expenses year-on-year. So we had those integration-related expenses last year that obviously haven't persisted this year.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [24]

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Yes. So I mean I think to Will's point, I mean I think that there's -- of the $14 million, a big chunk of it was BORO in that. But there's a significant jump there, give credit to the bank and what they're doing in generating efficiency. So there's some real core savings there.

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [25]

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Yes. The $14 million, we would -- and I think we tried to call it out on the slide, of the $14 million, we would suggest approximately half, to Jeremy's point, is what I'd call core and recurring, and we had about $6 million to $7 million of items in the prior year period.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [26]

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Okay. And maybe just on the mortgage volume side, you guys really held your own in the refi market this quarter. Historically, you all have been more of a purchase money shop. So I was just curious if there have been any shift into a production stance or anything like that, that allowed you to capture that market share? And should we expect that to continue going forward?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [27]

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No, there's not been a change in strategy. I think it's really just a credit to the folks, the loan originators in the field, and they were working overtime and tapping into their old customer base and being able to generate a lot of refinance volume when the market provided it.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [28]

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Okay. And just last one on M&A appetite and kind of just what you're seeing out there in terms of pipeline? Have you guys seen any more interest in people looking for cash buyers at this point in the cycle?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [29]

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No, we don't really have any update than we've given in prior quarters and that we feel like the -- it's a healthy economic environment, but we're in the later stages of a real estate cycle. We will see intense competition just on deposits and loan side of banking. So we're trying to be patient and cautious. I do think that with our outperformance on a relative basis, on an earnings basis, we are moderately better positioned, and we are seeing -- we are receiving more inbound calls.

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Operator [30]

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Our next question comes from Woody Lay with KBW.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [31]

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So looking at the credit quality side, it was great to see NPAs remain steady. Outside of energy, are you seeing anything in your markets that are giving you a little bit of pause or any segments you're trying to pull back on at this time?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [32]

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We continue to look -- so as I noted, and you noted here, energy is probably the one we would highlight. But as we look across the portfolio, we are focused on multi-family. We're looking at any retail, small retail exposures, looking at our real estate exposures really across the Texas footprint, I wouldn't say anything has systemically created -- created any issues. But again, we do believe, as Jeremy just noted, and we've noted through our comments over time, we believe we're in the late part of the cycle. So we're on high awareness of kind of looking across the portfolio and doing that inspection.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [33]

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Good to hear. And then in the prepared remarks, you mentioned you saw some elevated payoffs this quarter. I was hoping you could quantify that on sort of how those payouts compared to last quarter?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [34]

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From a payout perspective, without kind of -- they were this year, I'll just -- I'll quantify more on a year-to-date basis. The payoff, large loan payoff, we'd say, kind of over $2.5 million average loan size payoffs, this year, year-to-date have almost equated to what we saw all of last year. So that just gives you a sense of the speed and pace, and some of that is reflective of, as Jeremy mentioned, a healthy market, where things are turning over quickly, but also, I think reflects a change in certain of the distribution, certain real estate markets where folks are taking things to the term markets faster than maybe the markets would have otherwise borne historically. So we're seeing a persistent kind of payoff headwind from a loan growth perspective. But again, we continue to watch it as a matter of kind of ongoing new business. And as I mentioned earlier, while our pipelines are strong, we continue to be focused on our underwriting standards.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [35]

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Okay, that's helpful color. And then last for me, you mentioned you got a $1 million FDIC credit this quarter. Do you have any credit going forward or did you receive the full benefit this quarter?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [36]

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That is not a recurring benefit.

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Operator [37]

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Our next question comes from Chris Gamaitoni with Compass Point.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [38]

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I wanted to start on the brokerage business. Were there any large inventory gains in the Structured Finance business like you saw in 1Q this quarter?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [39]

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Not as much, but...

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [40]

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Yes, we had -- we actually had a pipeline mark at the end of the quarter, a negative pipeline mark this quarter just because of kind of where rates ended at the end of about $4 million negative. So the 2 quarters -- first 2 quarters, we had positive gains; third quarter, we had, as I said, a modest negative mark of about $4 million.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [41]

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Yes. So most of the strength in the TBA for the quarter was a result of increase in volumes of about 30% and then increase in spreads.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [42]

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Okay. And I know it's a volatile business, well, this -- and kind of call it the refinance environment. But if these more capital-light businesses continue to act well and you're being very conservative on the loan growth side, just what do you do with kind of the excess capital that's going to be created if the balance sheet isn't growing at the same time as earnings are doing so well?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [43]

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We're trying to stick to our plan, as I said, of maintaining about $500 million of excess capital and returning money to the shareholders, to the cycle. We've done a dividend, it's been pretty productive this year and $75 million of share repurchase.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [44]

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Okay, that's great color. The other, just a little nuance. It looked like the securities borrower deals went up a lot and the securities loan costs went up a lot as well quarter-over-quarter. Just wondering kind of what's the nuance there? How we think about it going forward?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [45]

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That portfolio can be volatile and really is driven by the overall activity and accessibility of certain equities in the portfolio kind of opportunities as those become available and so we did see an increase in the period. But again, our focus kind of in that business is generally for it to range in or around $1.5 billion to $1.6 billion over time from a balance perspective.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [46]

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Yes. And the net pretax benefit of it is $700,000.

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Operator [47]

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Our next question comes from Matt Olney with Stephens.

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Adam Paul Freyaldenhoven, Stephens Inc., Research Division - Research Associate [48]

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This is Adam, on for Matt. So I wanted to ask on the insurance division. The loss and LAE ratio in insurance was down 10% year-over-year, you said due to lighter storm activity. But if we think about you exiting kind of the 5 noncore markets or core states during the quarter, what's a good run rate for that going forward? I know it's hard to predict, but just...

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [49]

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You're asking what -- I apologize, you didn't come through very clearly.

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Adam Paul Freyaldenhoven, Stephens Inc., Research Division - Research Associate [50]

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Sorry. So the loss and LAE ratio. I understand, you've exited those 5 noncore markets. Is this going to kind of stabilize around a 40% ratio or is it -- what's a good combined run rate with this now?

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [51]

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Well, it's going to be seasonally volatile. But we think that the loss and LAE ratio for the year should be about -- we want it to be probably in the -- like 50% to low 50s percent.

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Adam Paul Freyaldenhoven, Stephens Inc., Research Division - Research Associate [52]

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Okay. That's helpful. And then I may have missed this, if it was asked earlier, in mortgage banking, 2Q had a $13.5 million fair market gain included. What was that in 3Q?

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William B. Furr, Hilltop Holdings Inc. - Executive VP & CFO [53]

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We'll disclose that when we file our Form 10-Q.

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Operator [54]

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As we have no further questions, this concludes our question-and-answer session and also our conference call.

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Jeremy Blue Ford, Hilltop Holdings Inc. - President, CEO & Director [55]

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Thank you very much.

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Operator [56]

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Thank you for attending today's presentation. You may now disconnect.