Hilltop Holdings Inc (HTH) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Hilltop Holdings Q4 2013 and 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Ms. Isabell Novakov, Senior VP, Investor Relations. Please go ahead.

Good morning. Joining me on the call this morning are Jeremy Ford, President and CEO of Hilltop Holdings; Alan White, CEO of PlainsCapital Corporation; Darren Parmenter, Senior Vice President of Finance, Hilltop Holdings; and John Martin CFO of PlainsCapital Corporation.

The information in this presentation is subject to the forward-looking statements found on page 2. Please take a moment to review those.

With that, I would like to hand the call over to Jeremy Ford.

Thank you, Isabell, and good morning.

Moving forward to slide 3. For the fourth quarter 2013, net income for Hilltop Holdings was $29.5 million or $0.34 per share. Net income for Q3 2013 was revised up to $38.2 million or $0.43 per share, due to an adjustment to the preliminary bargain purchase gain associated with the First National Bank Edinburg transaction.

For the full year of 2013, our net income was $121 million or $1.40 per share. Our return on average assets for the quarter was 11% from 13% in Q3 2013. Our return on average assets was 1.34%.

PlainsCapital Corp subsidiaries reported pretax income of $38.5 million, while National Lloyds Corporation had pretax income of $17.5 million, which included $3.7 million of gain from the call of Hilltop senior exchangeable notes. The total assets for Hilltop decreased to $8.9 billion from $9.1 billion in September, and our total stockholders equity increased by $106 million to $1.3 billion at December 2013.

The call of our senior exchangeable notes was completed in Q4 2013, resulting in tangible book value accretion, as well as the issuance of 6.2 million shares of Hilltop common stock. Hilltop remains well-capitalized with a 12.8% Tier 1 leverage ratio.

Moving forward. This page shows the financial highlights for the full year of 2013, as well as by quarter. I will hit on the items not previously mentioned. Our book value per share at year-end was $13.27.

Our net interest margin built through the year from 4.35% to 4.52%. Our gross loans grew from $3.2 billion in Q1 to $4.5 billion in Q4, and our deposits grew from $4.8 billion to $6.7 billion in Q4, both as a result of the FNB acquisition as well as organic growth. Our NPL to total loans stood at 51 basis points at year-end.

Moving forward. This slide is intended to give you a financial update of the First National Bank transaction. I will describe these three boxes first. The top left box shows the bargain purchase gain at closing that was initially reported in September 30, and then revised at 12/31.

The top right box shows the income impact of First National Bank's transactions to Hilltop Holdings, and the bottom right box shows balances of FNB at September and in December. Of note, we revised our bargain purchase gain up, from $3.3 million to $12.6 million in the quarter, primarily due to an increase in net assets acquired, as well as a fair value adjustment to the REO.

FNB contributed $29 million of pretax in 2013, and $12 million in the fourth quarter. There was a $300 million decline in the FNB deposits, as the result of our planned runoff of non-core deposits.

With that, I will hand it over to Darren to talk about the consolidated results.

Thank you, Jeremy. First we will speak about net interest margin. Net interest margin expanded by 6 basis points to 4.52% in the quarter, as the result of higher loan yields, as well as our lower cost of interest-bearing deposits, yield on earning assets of 5% driven by loan yields of 6.4%.

Cost of deposits continued to climb to 27 basis points. Notes payable cost of funds was impacted by the $2 million unamortized issuance costs related to the calling for the senior notes exchangeable notes.

The significant reduction of wholesale funding and excess liquidity at PlainsCapital Bank as result of the First National Bank transaction contributed to the net interest margin expansion in the quarter. Improvement in funding mix and yield on earning assets over 2013 resulted in a full-year net interest margin of 4.47%.

For the full year 2013, the tax equivalent net interest margin for Hilltop Holdings was 103 basis points greater due to purchase accounting. Accretion and discounts on loans was $69.3 million, amortization of premium on acquired securities of $5.7 million, and amortization of premium on acquired time deposits of $5.1 million.

With that, I like to move to the next slide, and speak about non-interest income. Non-interest income was $182.5 million in the fourth quarter 2013, down 15.2% from the third quarter. Revenue from the mortgage segment declined $29.3 million from the third quarter to $98.1 million in the fourth quarter 2013, representing 54% of the total non-interest income.

Net premiums earned increased to $41.5 million in the fourth quarter, representing 23% of the total non-interest income. The financial advisory revenue increased to $22.8 million in the quarter representing 13% of the total non-interest income.

Moving forward, to the non-interest expense. Non-interest expense was $219.8 million in the quarter, up 1.5% from the third quarter. Compensation declined $6.8 million from third quarter 2013 or 5.7% to $112.4 million in the quarter, due largely to lower variable compensation, offset by a full quarter of First National Bank compensation expense.

Loss and LAE declined to $16.8 million in the quarter from $24.6 million in the third quarter. Occupancy and equipment increased to $25.7 million in the fourth quarter from $21 million in the third quarter, primarily due to the First National Bank transaction. Amortization of intangibles for purchase accounting was $2.6 million in the fourth quarter.

Moving to the balance sheet highlights. There was balance sheet shrinkage, as cash, net funds and investment securities decreased $331 million, and interest-bearing deposits decreased $231 million in the quarter. Reduction of non-core funding, excess liquidity in the fourth quarter drove balance sheet reduction. Gross non covered loans held for investment increased to 6.2% from the third quarter, 11.5% from the fourth quarter 2012.

Net loans to deposit ratio increased to 66.7% in the fourth quarter from 63.1% in the third quarter. We reduced notes payable by $83.8 million in the fourth quarter, after completing the call of the senior exchangeable notes. Hilltop Holdings and PlainsCapital made a combined $60 million capital contribution, $35 million from Hilltop to fund Capital Bank in the third quarter in connection with the First National Bank transaction.

With that, I would like to turn it over to Alan White.

Good morning. Thank you, Darren. Let me give you an update on PlainsCapital Corporation and its entity. First of all, I want to talk about First National Bank of Edinburg. It has been approximately six months since we acquired that on September 13.

I am proud to say that on February 14, we completed our convergence, switching from FNB to the Plains platform. It went extremely well, I think better than what we thought, very proud of that, and very proud of our people on both sides in accomplishing that. That was a major task.

Since the transition, our staffing levels at the FNB franchise, they are down about 9%. We continue to look at this. We continue to want to right-size the company, and make sure that we are hitting our profit goals, and we will continue to work on that.

We have been fortunate with the leadership that we have been able to acquire, not only in the Rio Grande Valley, Corpus, but also in Houston. In the Rio Grande Valley, Larry Gonzalez is our market president in McAllen, Edinburg, and Raul Villanueva who runs our operation in Brownsville and Harlingen. We have been able to acquire a couple of gentlemen in Corpus, Frank Hastings is our market president, and Gary Wilson is our regional president. Gary will not start until June, when his [non-compete] is up.

Also in the Valley, we have hired [Bobby Norman] who will be the regional chairman and he can't start till November for the same parts. Both of these gentlemen are excellent, and know the markets, and will really help us as we move forward.

In Houston, we moved a gentlemen in by the name of Dave Williams. He used to work for JPMorgan as their regional real estate guy. He is now going to be in Houston running our operations there. All three -- all three of these areas, we have brought people in that live in those areas, and know those areas, and know what the culture and the way things are.

Our major goal here, when we took off, and began this process was to get the people adapted to our culture. We wanted them to have the PlainsCapital culture. Our culture is really based on community bank, even though we are fairly big sized, we are still a community bank.

That means we want take care of our employees. We want to take care of our customers, and we want to take care of the communities, and we have done that. We have had numerous meetings with our employees.

We have had lunches, breakfasts, we have had hotdog Friday, tamale Friday. We celebrated Halloween, Christmas and Valentines, and we have done things that really have made them feel like that they were part of the family. And I think those exercises have gone very well.

As far as the customer, we have had numerous luncheons, numerous breakfasts, we have been out meeting the customer. We have had two sales rallies, where we have taken 14 or 15 people out of Dallas and gone down and met with the loan officers in the Valley. We have gone out and done over 100 calls, calling on existing customers and potential customers, and really extended the name and the brand to the Valley.

We have 42 loan officers at FNB Edinburg, part of -- most of them in the Valley, and then we have them in Corpus and Houston. I think they are all coming along fine. These are people we wanted to keep, people we think can make a difference and begin to build our brand and to build our reputation.

As far as the communities are concerned down there, we have made a couple of sizable contributions. Ones to the VAMOS group, which deals with the educational issues in the Valley, and provides education for younger people. That charity, they just had a [fundraiser] this weekend, and we sponsored it and it was well-received within the Valley.

We have also done something for the Boys and Girls Club. They had a major event there in Corpus. We have done the Bristol Children's Hospital and so on.

I have personally met with mayors of McAllen and Edinburg. I have talked with the Chamber of Commerce. I been to, see the business and economic development people, city council people. These people are very excited we are there, and very open to the fact that they are looking for breath of fresh air, and I think we are that.

We bring our commitment to take care of the community, take care of the people in the Valley, and we want to be part of the growth. I think they are very excited about having us there, and wanting us to continue to do that.

We also have a separate division in the Valley called Valley Resources. That is our arm to help collect the distressed properties and bad loans that we have. We have quite a few people working in there.

They are doing a good job and working hard. They are working in conjunction with some of our people within the bank, in trying to create or collect those problem assets we have got with the transaction.

As far as the PlainsCapital update, we had a good year in the bank. Loan growth really was good, this [banks] of 8%, but I am going to tell you it was 10.59% without the purchase gain. That is a good number for us.

We have got a strong pipeline, and we have about $1 billion, $1.1 billion in unfunded commitments we hope that will create more activity for us. We are having a lot of competition in loan pricing and structuring. But we are able to meet that competition and able to do well.

We have 93 loan officers in the bank. Most of these people are seasoned bankers, have been with us quite a while, and we are working off a solid capital base, which really helps us in the marketplace. I will tell you, since our merger with Hilltop in 2012, I can honestly tell you we have not lost one key person in that transition, which I think speaks highly for the transition, and what we have tried to accomplish at both Hilltop and PlainsCapital.

In our mortgage segment, we kind of hit a rock or a brick wall. The first half of the year was really good, the second half of the year has not been so good. I think everybody knows that the market is transitioning from a refi market to a purchase market.

A lot of people scrambling around, trying to stay alive, a lot of people trying to shift. In that shift with a lot of predatory pricing, a lot of people doing things that aren't very smart, and they are beginning to fall by the wayside.

Fortunately for PlainsCapital and for PrimeLending, they were a purchase business, and in 2013, we were 69% purchase and 31% refi, whereas the NBA will tell you most organizations were 33% purchase and 68% refi. So we are sitting in good position as this market transitions. Even though we know that originations are going to be down in 2013 by some 37%, we feel like competition will be down, and we feel like we will be in a strong position to pick up market share.

We continue to hire other key loan officers from these organizations that are going out. There is a lot of them floating around in there, and you have got to be careful who you get, but there are some real good potential people that can bring volume to us, and that is what we are looking at. I think year end, we were up a net 42 additional loan officers over the beginning, or over the beginning of July of 2013.

We are also in the mortgage area, have a servicing asset of about $20 million. This is a result of the fact that we are able to originate loans, and then be able to separate this out for better execution and better returns. Also, with interest rates where we are, we feel very good that this is a good earning asset for us in the mortgage company.

Page 11, I guess, I talk to fast. You have got page 11 somewhere? There it is.

Okay. The first one is the bank, the pretax income in the bank segment was $46.1 million in Quarter 4. The net interest grew at 21.6% in the third quarter to the fourth quarter. Credit quality remains strong.

This is something I really want to emphasize, because our credit quality, our classified loans are a little bit over 10%. When you are dealing with that small of classified loans, that gives your own people a lot more time to go out and do business, and get out and build that loan portfolio and build that pipeline. We are really proud of the fact that our loan quality is in the condition it is in.

Moving on to the mortgage company, you can see that mortgage rates increased at a pace that primarily resulted in a 21% decrease in origination volumes in the second half of 2013. That is the impact, where I said where rates bumped in May, [senior] went up over 100 basis points, and that is where the volume dropped off. I think we were off about 14% for the year.

The last two quarters, our purchase volume was 79% and 82%, which is way up there in where we want to be. Again, Prime in 2013, was the fourth largest producer of purchase loans in the country behind Wells Fargo, JPMorgan and Citibank. That is the second year in a row. That is something we are very proud of, and that is a position we really want to be in.

Refinancing volume dropped considerably, which you would expect. Our two major markets, we control about 40% of our business are in Texas and California, and those are two areas that we think will continue to grow, Texas especially.

We just opened a branch in McAllen with four loan officers, the first one in the Valley. We are excited about that. We will be opening one in Corpus, and these are in markets that we know and we are in, and we hope will help us with our volume.

In First Southwest, rising interest rates and volatility have hurt that business. However, we are positioned, and we have a lot of pent-up demand, if it will just take off, this business should do very well. But we have got to get interest rates to move, and the economy to pick up, and we will see better days for First Southwest.

Okay. Let's, and I guess, I will turn it over to you, John.

Thank you, Alan.

I am going to go to page 12 of the presentation. As Alan mentioned a moment ago, the bank's income before taxes was $46.1 million for the fourth quarter, and $172 million for the entire year of 2013. Our loans held for investment at the bank increased $113 million from the third quarter.

Our non-covered loans for held for investment were up $204 million. The total C&I loans were $1.7 billion or 38% of our portfolio. Total real estate loans were $2.2 billion or 50% of the portfolio.

The bank provides PrimeLending a warehouse line of credit with a maximum amount of $1.3 billion. At December 31, there was $1 billion drawn on that line. The bank's Tier 1 leverage ratio was 9.29%, the total capital ratio is 14%.

Turning to slide 13. This presents how we view our loan portfolio, which we have between the covered and non-covered, and then we break it out between PCI loans and non-PCI loans. The covered PCI loans were $729 million, the non-covered PCI loans were $100 million. The covered non-PCI loans were $277 million, and the largest portfolio, the non-covered non-PCI loans were $3.4 billion at December 31, 2013.

Going to slide 14. Purchase credit impaired loans or PCI loans are loans with evidence of credit quality deterioration for which it is probable that we will not collect all the contractually required payments. PCI loans include the covered loans, and those are loans that are subject to loss share agreements entered into by the bank and the FDIC in connection with the FNB transaction. Only loans acquired in the FNB transaction are considered covered.

Non-covered loans are loans that are not subject to the FDIC loss share agreements, which substantially all the PCI non-covered loans were acquired as part of the PlainsCapital merger. PCI loans have a total discount of $335 million, $293 million of that discount was related to covered loans. We expect the FNB acquired loans to be accretive to net interest margin and yield over 6%.

Turning to slide 15. Our non-PCI loans are newly originated loans, acquired loans without credit impairment of acquisition, and acquired non-PCI loans that have renewed. The portfolio balance was 97.6% of the unpaid principle balance, with a total discount of $61 million. $40 million of the discount was related to non-covered loans, and $20.3 million was related to covered loans, $20.3 million related to covered loans

Turning to PrimeLending on slide 16. The loss before taxes was driven by lower origination volumes in the fourth quarter. The fourth quarter is typically a seasonally lower volume quarter, and the market forces continue to put pressure on the mortgage origination business. Origination volume for the fourth quarter was $2.3 billion. Purchase volume declined slightly, and refinanced volume was flat at $500 million.

Salaries and benefits decreased approximately 9% between the third quarter and fourth quarter, as benefits of headcount reductions in the third quarter were realized. PrimeLending has engaged in initiatives to reduce segment operating cost. These initiatives were primarily responsible for decrease of approximately 4% of non employee related expenses between third and fourth quarters.

As Alan mentioned a moment ago, PrimeLending does retain to servicing, It has approximately $2 billion portfolio at December 31 and that resulted in a $20 million mortgage servicing asset. Servicing is retained on an opportunistic basis.

Turning to First Southwest on slide 17. Rising interest rates, along with increased volatility in the fixed income markets in recent months have resulted in reduced sales of fixed income securities to institutional customers, some trading losses on securities held to support those sales, and a reduction in our financial advisory fee income. We did generate a substantial amount of non-interest income through our TBA business, which issues forward purchase commitments of mortgage-backed securities to certain clients, and then sells them into the TBA market. Fair value changes on derivatives and trading portfolio produced a net gain of $11.4 million and net loss of $1.8 million during the full year.

With that, I will turn it over to Darren Parmenter.

Thank you, John.

Moving to National Lloyds Corporation. Increase in earned premiums primarily attributed to rate, lower claims volume and seasonality drove the fourth quarter pretax income of $17.5 million. Our combined ratio declined to 71.7% from the fourth quarter 2013, from 80.5% in the Q4 2012. Q4 2013 included a nonrecurring gain of $3.7 million in non-interest income related to the Hilltop senior exchangeable notes. We continued focus on managing loss exposure by reducing concentration in high-frequency areas and purchasing aggregate reinsurance.

With that, I will turn the call over to Isabell.

This concludes our prepared remarks. We will take questions in just a few minutes.

(Operator Instructions)

And our first question comes from Brett Rabatin of Sterne Agee. Please go ahead.

Hello, good morning. I wanted to first, ask about mortgage. Can you give us some thoughts on that segment, in terms of pretax going forward? If you can get that back to more of a breakeven or possibly making money? And just thinking about the fourth quarter, were there any interest rate locks that affected the loss of $7.5 million? Maybe you could go into a little more color on the pretax?

Let me just, so this is Alan. We are not going to give any guidance for the year. But you can read the mortgage industry, and see what is going on. I think what you are looking at, in the last three quarters, is volume. It was all about volume, and volume fell off the wall. And as you are trying to right-size, that is normally what happens.

And normally too, the fourth quarter is not very good, neither is the first quarter in the mortgage industry. So we are just going through the cycle here. But we are also going through the shift of -- from refi to purchase. And as I say, I think we are sitting good because of our position with our LOs, that is what we do. Whereas these guys in the refi business are in big trouble, and they are not going to be there, and the competition is going to go away. I think you just saw one of the major banks last week lay off 8,000 people. And you go, oh my God. Well, that plays into our hand, because that just provides more opportunity for us.

So we are adding loan officers, quality loan officers I might add. You can get all kinds of loan officers. The ones that are not fitting in with us, we are getting rid of. We are fine-tuning our staff. And I think spring is coming, the weather hopefully will clear up, and I think the prospects are going to be favorable. So that is about all I can say without giving you any guidance.

Okay. And then, did interest rate locks or were there any timing issues in the quarter -- ?

We didn't have any problems at all there. It's all about volume.

Okay. And the other thing I was curious about, was just thinking about FNB Edinburg, and just thinking about efficiencies going forward there. Do you have more work to do in terms of improving -- (Multiple Speakers).

Yes, I think we have got more work to do, and we continue to look at it. We wanted to get through the conversion. We have got a lot of branches. We want to make sure that makes sense, want to make sure they work. So we will continue to look at the efficiencies.

But I will tell you, the things that we built from the lending side, and the ones we want to keep, we have been able to keep, and we are excited about the future. But we will continue to make adjustments, just like we make adjustments every day in the bank, or the mortgage company or First Southwest So I think that is always on the table.

Okay. And then just last, I don't know if you cared to or wanted to make any comments around the Southwest Securities bid, and any thoughts on that whole process?

Well, as you know, we made the offer, and it was public, and you have probably seen their Board responded. They have formed a special committee, and that is really all that we can comment too, and it is kind of in the public. So we are just, going through the process.

Okay. Great. Thanks for all the color.

Our next question comes from Matt Olney of Stephens. Please go ahead.

Hello, thanks. I want to start, going back to PrimeLending. There was some language in the 10-K, Alan, about the expense initiatives at PrimeLending. Did we see those expense initiatives come through in the fourth quarter, or is that something we will see in the next few quarters?

It is started to come through in the fourth quarter. Part of those expense initiatives are people, and the other part are just cutbacks in projects and things like that. I think that for the most part, you have seen them. I think you will continue to see, right-sizing continues to improve while the fund turns around. But, yes, you did.

And, Alan, also you mentioned in the prepared remarks that you are retaining more of the servicing then you have in the past. Can you monitor your strategy here, and give us more detail as to what portion you have been retaining?

We have been able to go direct to Freddie and Fannie, and by doing that we can strip out the servicing and make more money. And so, we have been retaining it. The interest rates have been favorable for us retaining it. And so, we continue to build that asset, and it continues to build value.

How high we go, I don't know. We have room to go higher. But it is providing the source of income for us. And with the rates where they are, and we do hedge our side, hedges to make sure we don't lose any money. It has been a good situation for us.

So it is something relatively new for us in the last year. But I think it's something, once we were able to sell direct, makes all the sense in the world, and we were able to make a better delivery to them, and a better price and we were able to strip it out and make more money on the servicing side. And we were able to keep it, against an interest rate environment that is positive for us. So I mean, it sounds like a lot of good things, if I am pretty smart.

(Laughter). That's helpful, Alan. And then my last question, on the held for investment growth, good growth in the fourth quarter. Any more information you can provide as far as kind of by mark or by loan type? And some of your Texas peers talk about the seasonality of their loan book. Were there any seasonal benefits in the fourth quarter?

We have been really pleased with the loan growth, because the last few years, we have kind of been flat. So we have been pleased with it. Where we are seeing a lot of loan growth, is coming in the real estate side of it. But we are starting to see some C&I. I think there is opportunity with the purchase of the First National Bank of Edinburg. We made a couple of good loans in Corpus, we have made a couple of good loans in Houston. Those things start adding up, and that is building that pipeline. So but right now, I would say the majority or a big part of it is coming from the standpoint of real estate.

And then, we had all of the unfunded commitments that really deal with C&I and real estate. A lot of them are operating lines and capital expenditure lines. If we get this economy going, then I think these companies will start drawing down on it, and we will see even more growth. That is what we are optimistic about.

And our loan quality; this is the best our loan quality has been since I have known you. And I guess, that has been a long time. You were just a kid when I first met you, you obviously are much older than that now. But we have had good, good loan quality, but we fought through for through three years, like everybody else did. But we got it in good shape now, and that just allows our people more time to go out and hustle, instead of digging rocks off their backs.

All right, Alan. That's helpful, and I will hop back in the queue. Thanks.

This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.