Hilltop Holdings Inc.
Q3 2019 Earnings Call Transcript
Published:
- Operator:
- Good day. And welcome to the Hilltop Holdings Third Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Erik Yohe. Please go ahead.
- Erik Yohe:
- 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 conditions and anticipated amendments to our SEC filings, are forward-looking statements.
- Jeremy Ford:
- Thank you, Eric, 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 in the overall Hilltop organization. He is also a dear friend and we look forward to working with them 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 am excited about PrimeLending prospects and future success under Steve and Todd 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%.
- Will Furr:
- Thank you, Jeremy. Before we review the financial performance for the quarter, I want to review disclosure made last evening. Based upon our 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 that this control deficiency constituted a material weakness as of December 31, 2018. As of the date of this 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 the 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 and updating its design and implementation of internal controls to remediate the aforementioned control deficiency and enhance our internal control environment going forward. I am moving to page five. As Jeremy discussed, for the third quarter of 2019 Hilltop reported $79.4 million of income attributable to common stockholders according to $0.86 per diluted share. During the third quarter, the provision to loan losses included approximately 380,000 net recoveries as charge-offs for the quarter remained low.
- Operator:
- Our first question comes from Brett Rabatin with Piper Jaffray.
- Brett Rabatin:
- Hey. Good morning, everyone.
- Will Furr:
- Good morning.
- Jeremy Ford:
- How are you doing?
- Brett Rabatin:
- Good. Happy Halloween. I 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 are expecting in the fourth quarter? And then I don’t know when the Q comes up, but was just hoping for, maybe a little color on what servicing interest rate locks and the mortgage servicing a fair value mark are in the third quarter?
- Will Furr:
- Yeah. So -- this is Will. I will 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 to the agencies in terms of pricing, as well as just overall competitive pressure as volumes seasonally decline, we would expect that to moving to the 320s, as a matter of contraction.
- Brett Rabatin:
- 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 quarter business, but you have made a lot of investments and you have seen growth in a couple of the key pieces. Can you maybe give us color? I know you don’t want to give guidance, certainly, for 2020. But just thinking about how the investments might impact the revenue run rate from here aside from obviously variability and interest rates impacting a couple of the pieces?
- Jeremy Ford:
- Sure. Yeah. We are not prepared to give guidance for 2020. But and I would expect and hope that we are going to generate more than $100 million of revenue quarter. I think that we should have continued strength and building strength in our capital markets business and public finance.
- Brett Rabatin:
- Okay. And then maybe just one last one for me, just going back to the margin and you maybe a little more color on, you are going to have pressure from here. How much can you just thinking about the cost of funds is the magnitude of the pressure you are expecting in the fourth quarter less than 3Q, maybe give us a little more color on how you are thinking about the cost of funds, I mean, offsetting asset yield attrition?
- Will Furr:
- I think…
- Brett Rabatin:
- Yeah.
- Will Furr:
- Yeah. I think from our perspective, we have gotten in the range of 3.25% plus or minus 3. So we don’t want to get any more detail than that, what’s driving it though again as we do expect loan for sale, loans held for sale yields to continue to be under pressure is again throughout the third quarter, we did continue to see the 10 year decline and obviously that’s an indicator. The other parts 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 some of our key competitors across some of our key markets. That -- those will be the two significant drivers of kind of NIM compression going forward.
- Brett Rabatin:
- Okay. Great. Thanks for the color. Congrats on the quarter.
- Jeremy Ford:
- Thanks, Brett.
- Will Furr:
- Thank you.
- Operator:
- Our next call comes from Michael Rose with Raymond James.
- Michael Rose:
- Hey. Good morning guys. How are you?
- Jeremy Ford:
- Hey, Michael.
- Will Furr:
- Good morning.
- Michael Rose:
- Hey. Just wanted to talk about mortgage for a second, if I look at the NBA’s data and I know you guys are more pre-purchase shop, but clearly had a pickup in refi this quarter. The NBA’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 have seen, historically, just given the drop in rates in the NBAs forecast? Thanks.
- Will Furr:
- I think the -- I think our outlook would have us outperforming kind of normal seasonal declines in the context of modestly higher, but that said, if you to 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 volume to look like the third quarter volumes. They are going to fall off seasonally, but maybe at a slightly slower pace given the strength of the refinances.
- Michael Rose:
- That’s helpful. Just shifting gears to loan growth, which has been on the held for investment size has been pretty solid. Can you just generally talk about your pipeline, where it is now versus maybe kind of quarter ago or a couple of quarters ago, where you are seeing strength and where some challenges might be? And maybe I know the average growth this year to understand the guide but is -- should we think about next year depending on what happens economically that growth can sustain relatively near these levels? Thanks.
- Will Furr:
- Yes. I would say from a pipeline perspective, I think, as we noted in the past, our pipelines are strong. The team is working hard with our clients and prospects every day. What I would say is the pull-through rate -- our pull-through rate has declined as we have seen market pressures as it relates to both pricing and structure, but I’d say probably more acutely structure, and so we are with a -- from a flow through perspective seeing fewer of those deals actually get booked than you could 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 have 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…
- Michael Rose:
- Okay.
- Will Furr:
- As Jeremy mentioned, we are 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.
- Michael Rose:
- Understood. Maybe just last one for me, so last year you guys earlier this year rolled out the $250 million PPNR by 2021. Now clearly the interest rate backdrop’s 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?
- Jeremy Ford:
- I mean, I think, that, like, we have tried to communicate, that $250 million is not the target. The target is generally $84 million of run rate efficiency and that’s what we are going to report on after next quarter.
- Will Furr:
- That’s correct. So what we have said is -- just to be -- what we have said is that with a all else equal 2018 roll forward and the Jeremy point, $84 million is what we expect to be kind of run rate benefit from those initiatives and then we will provide an update. We are keeping orders 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 are tracking to is how we are executing against the three definitive program we laid out and kind of the value we have extracted from those.
- Michael Rose:
- And there’s no changes to those three programs in terms of what do you expect the $84 million?
- Will Furr:
- No.
- Jeremy Ford:
- None to report.
- Michael Rose:
- Okay. All right. Thanks for taking my questions, guys.
- Jeremy Ford:
- Thank you.
- Operator:
- Our next question comes from Michael Young with SunTrust.
- Michael Young:
- Hi. Good morning, everyone.
- Will Furr:
- Hi, Michael.
- Michael Young:
- I wanted to start with maybe just a follow-up on the prior question. Just of that $84 million that you are targeting, can you give us a sense of maybe where we are at in terms of progression on that at least to-date. I mean we have 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 two years?
- Jeremy Ford:
- Well, as we said, we rolled it out that we were planning on generating $84 million of run rate benefit from the platform for growth and efficiency initiatives. But we said that, we thought that a lot of that wouldn’t be fully phase until 2021 with the system. Just to put in context for the audience. But I think it’s just like we said in our comments before is that I believe that we are ahead of schedule. And you see it in the numbers and you are hearing it from a lot of what we are messaging as far as focusing on efficiency. But I can’t give you anything definitive today or we are not going to give anything definitive today, we are planning on giving you a more fulsome update in the next quarter.
- Michael Young:
- Okay. Maybe just digging in a little deeper, we have kind of seen $1 million or so improvement in the broker dealer and the mortgage business year-over-year it’s been a couple million dollars, but the bank had a material drop in expenses this quarter. I know there is 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?
- Will Furr:
- The assessment credit was approximately $1 million and the -- again of that change that I tried to note in my comments of the $14 million of change, 6.6% of that was related to Board related expenses year-on-year. So we have those integration-related expenses last year that obviously haven’t persisted this year.
- Jeremy Ford:
- Yeah. So I mean, I think to Will’s point, I mean, I think, that there is for the $14 million, a big chunk of it was more in that but there a significant jump there that we give credit to the bank and what they are doing and generating efficiencies. So there is some real core savings there.
- Will Furr:
- Yeah. The $14 million we would -- and I think try to call it out on the slide, of the $14 million we would suggest approximately half to Jeremy’s point is what I call core and recurring and we had about $6 million or $7 million -- we have up to $6 million or $7 million of items in the prior year period.
- Michael Young:
- Okay. And maybe just on the mortgage volume side, you guys really held your own in the refi market this quarter, historically, you have been more of a purchase money shop. So I was just curious if there had been any shifts in sort of production stance or anything like that that allows you to capture that market share and should we expect that to continue going forward?
- Jeremy Ford:
- 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 own customer base and being able to generate a lot of refinance volume when market provided.
- Michael Young:
- Okay. And just last one on M&A appetite and kind of just what you are 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?
- Jeremy Ford:
- No. We don’t really have any update then we given prior quarters and that we feel like the healthy economic environment, but we are in the later stages of a real estate cycle. We will see intense competition just on deposits and loan side of banking. So we are trying to be patient and cautious. I do think that with our outperformance on a relative basis, our earnings basis, we are moderately better position and we are seeing -- we are receiving more in downfall.
- Operator:
- Our next question comes from Woody Lay with KBW.
- Woody Lay:
- Good morning, guys.
- Will Furr:
- Good morning
- Jeremy Ford:
- Good morning.
- Woody Lay:
- 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 are trying to pull back on at this time.
- Will Furr:
- We continue looks, so as we noted and you noted here in energy is probably the one we would highlight. But as we look across the portfolio, we are focused on multifamily. We are looking at our any retail small retail exposures. Looking at our recent real estate exposure is really across the Texas footprint. I wouldn’t say anything has systemically created any issues. But again, we do believe that Jeremy just noted and we noted through our comments over time, we believe we are in the late part of the cycle. So we are heightened awareness of kind of looking across the portfolio and doing that inspection.
- Woody Lay:
- Good to hear. And then in the prepared remarks, you mentioned you saw some elevated payoffs this quarter. Just hoping you could quantify that and sort of how those payoffs compared to the last quarter?
- Will Furr:
- From a payoffs perspective, without kind of -- they were this year -- I will just -- I will quantify more on a year-to-date basis. The payoff large loan, but we would say, kind of over $2.5 million average loan size payoffs this year, year-to-date have almost equated to what we saw 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 both are taking things to the term markets faster than maybe the mortgage would have otherwise born historically. So we are seeing a persistent kind of payoff headwind from our 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.
- Woody Lay:
- Okay. That’s helpful color. And then, last from me, you mentioned you got $1 million FDIC credit this quarter. Do you have any credit going forward or did you receive the full benefit this quarter?
- Will Furr:
- That is not a recurring benefit.
- Woody Lay:
- Okay. Got it. Thanks guys.
- Jeremy Ford:
- Thanks.
- Operator:
- Our next question comes from Chris Gamaitoni with Compass Point.
- Chris Gamaitoni:
- Good morning, guys.
- Will Furr:
- Good morning.
- Jeremy Ford:
- Hi, Chris.
- Chris Gamaitoni:
- I want to start on the brokerage business, were there any large inventory gains in the structured finance business like you saw in 1Q this quarter?
- Will Furr:
- Not as much.
- Jeremy Ford:
- Not as much.
- Will Furr:
- Yeah. We had -- we actually had a pipeline mark into 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 there are two quarters -- first two quarters we had positive gains, third quarter we had a, I’d say, a modest negative mark of about $4 million.
- Jeremy Ford:
- Yeah. So most of the strength in the TBA for the quarter was the result of increase in volume of about 30% and then increase in spread.
- Chris Gamaitoni:
- Okay. And yeah, I know it’s a volatile business, well, this and kind of call it the refinance environment. But if this more capital-light businesses continue to act well and you are being very conservative on the loan growth side, just what do you do with can be 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?
- Jeremy Ford:
- I think we are trying to stick to our plan. As I said of maintaining about $500 million of excess capital and returning money to the shareholders, the cycle, a dividends, it’s been pretty productive this year and $75 million share repurchase.
- Chris Gamaitoni:
- Okay. That’s great color. The other -- just a little nuance, looked like the securities borrowed yields went up a lot and the securities loan cost went up a lot as well quarter-over-quarter. Just wondering kind of what the nuance there and how we think about that going forward?
- Will Furr:
- The portfolio can be volatile and really is driven by the overall activity and accessibility of certain firm equities in the portfolio and 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 plotted to range in or around $1.5 billion to $1.6 million…
- Jeremy Ford:
- Yeah.
- Will Furr:
- …. over time from a balance perspective.
- Jeremy Ford:
- Yeah. And the net pre-tax benefit of it is $700,000.
- Will Furr:
- Yeah.
- Chris Gamaitoni:
- Thank you so much.
- Will Furr:
- Thank you.
- Jeremy Ford:
- Thanks.
- Operator:
- Our next question comes from Matt Olney with Stephens.
- Unidentified Analyst:
- Good morning, guys. This is Adam on for Matt.
- Jeremy Ford:
- Hi, Matt.
- Unidentified Analyst:
- So I wanted to ask on the insurance division, the loss and LAE ratio and the insurance was down 10% year-over-year, you said due to wider storm activity. But if we think about you actually been in kind of in five non-core market 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.
- Jeremy Ford:
- You are asking what -- I apologize, you didn’t come through very clearly.
- Unidentified Analyst:
- Sorry. So the loss and LAE ratio, I -- since we have exited those five non-core markets, is it going to kind of stabilize around a 40% ratio or is it…
- Jeremy Ford:
- Yeah.
- Unidentified Analyst:
- … what’s a good combined run rate with this now?
- Jeremy Ford:
- Well, you know it’s going to be seasonally volatile, but we think there is a loss and LAE ratio for the year should be about -- we want it to be probably in the like 50% to -- low 50%.
- Unidentified Analyst:
- Okay. Thank you. That’s helpful. And then I may have missed this, it was asked earlier. Mortgage banking, 2Q had a $13.5 million fair market gain included, what was that in 3Q?
- Will Furr:
- We will disclose that when we file our Form 10-Q.
- Unidentified Analyst:
- Okay. Thank you. That’s all I had.
- Jeremy Ford:
- All right. Thank you.
- Operator:
- As we have no further questions, this concludes our question-and-answer session and also our conference call.
- Jeremy Ford:
- Thank you very much.
- Operator:
- Thank you for attending today’s presentation. You may now disconnect.
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