Hilltop Holdings Inc (HTH) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Hilltop Holdings, Inc. earnings call and webcast. (Operator Instructions). Please note this event is being recorded.

Now I'd like to turn the conference over to Isabell Novakov. Ms. Novakov, please go ahead.

Good morning, thank you for joining us. Joining me on the call this morning are Jeremy Ford, President and CEO of Hilltop Holdings; Alan White, CEO of PlainsCapital Corporation; Darren Parmenter, Principal Financial Officer, Hilltop Holdings; and John Martin, CFO PlainsCapital Corporation.

This presentation and statements made by representatives of Hilltop Holdings during the course of this presentation include forward-looking statements. Please refer to the full disclosure on page 2 for more information.

I will now turn the call over to Jeremy Ford.

Good morning and thank you, Isabell. I will give comments to the first quarter. The first quarter of 2014, our net income for Hilltop was $23.8 million or $0.26 earnings per diluted share. Our return on average equity was 7.65% for the quarter versus 11.5% last year. And our return on average assets was 1.14% for the quarter versus 1.9% last year.

PlainsCapital Corp. subsidiaries reported pretax income of $28.7 million, while National Lloyds Corporation had pretax income of $11.4 million.

Total assets increased to $9 billion at March 31 compared to $8.9 billion at year-end. And total stockholders' equity increased by $43.3 million for the quarter to $1.4 billion.

Hilltop remains well-capitalized with a 13% Tier 1 leverage ratio. And finally, Hilltop retains approximately $157 million of freely usable cash, as well as excess capital at our subsidiaries.

Moving forward to page 4. I will hit on some other financial highlights for the quarter. Our book value per share ended at $13.76, which was a 49% increase for the quarter. Our net interest margin ended at 4.62%, which is a 10 basis point increase for the quarter.

Our loans ended at $4.6 billion. which was a $40 million increase for the quarter; and our deposits ended at $6.7 billion, which was a $60 million decrease for the quarter. Our NPAs and total assets remained flat at 32 basis points.

I will now hand it over to Darren to talk about the financial results.

Thank you Jeremy. Our net interest margin expanded by 10 basis points to 4.62% in the first-quarter 2014, as compared to the fourth-quarter 2013, driven largely by lower rates on notes payable and borrowings.

Yield on earnings assets of 4.9% was driven by loan yields of 6.3%. Cost of interest-bearing deposits decreased slightly to 31 basis points relative to the fourth-quarter 2013. Notes payable and borrowings, cost of funds and interest expense, declined due to full-quarter impact and elimination of senior exchangeable notes and realization of the enhanced funding mix post First National Bank Edinburg transaction.

Higher net interest margin in the first quarter relative to the first-quarter 2013, due to improved funding mix and yield on earning assets. For the first-quarter 2014, the tax equivalent NIM for Hilltop Holdings was 95 basis points greater, due to purchase accounting. Accretion of discount on loans was $18 million. Amortization of premium on acquired securities was $1 million, and amortization of premium on acquired time deposits was $2.5 million.

Moving to noninterest income. Noninterest income was $170 million in the first quarter of 2014, down 20% from the first quarter of 2013. Noninterest income from the mortgage operation declined $55 million for the first quarter to $91.5 million, representing 54% of the total noninterest income.

Net insurance premiums earned increased $2.8 million for the quarter to $40.3 million in the first-quarter 2014, representing 24% of the total noninterest income.

Financial advisory fees and commissions decrease $700,000 for the first-quarter 2013, to $21.3 million in the first-quarter 2014, representing 13% of the total noninterest income. Accretion from the FDIC indemnification asset of $1.4 million in the first-quarter 2014 was included in other noninterest income.

Moving to noninterest expense. Noninterest expense was $213 million in the first quarter 2014, down 1.1% from the first-quarter 2013. Compensation declined $9.8 million from the first-quarter 2013, or 8.4%, to $106.4 million in the first-quarter 2014, due largely to lower variable compensation in the mortgage origination segment offset by additional compensation expense at First National Bank Edinburg.

Loss and LAE declined to $18.3 million in the first-quarter 2014, from $21.2 million in the first-quarter 2013.

Occupancy and equipment increased to $26.3 million in the first-quarter 2014, from $19.4 million in the first-quarter 2013, due primarily to the First National Bank transaction.

Amortization of the identifiable intangibles for purchase accounting was $2.5 million in the first quarter.

Next to our balance sheet highlights. Stabilization of funding and liquidity, along with the increase in noncovered loan balances contributed to balance sheet growth from fourth-quarter 2013 to the first-quarter 2014. Cash, fed funds, investment securities, increased to $239 million, and short-term borrowings grew by $149 million in the quarter.

Loans held for sale declined $202 million from the fourth-quarter 2013. Gross noncovered loans held for investment increased 3.8% from the fourth quarter of 2013. We continue to work through our problem loans and REO from First National Bank with covered loans, net of allowance, down $95.5 million since the fourth quarter of 2013.

Gross loans held for investment to deposit ratio increased to 68.4% in the quarter from 67.2% in the fourth quarter.

Total deposits declined by $59.7 million. There was a revision and reclassification in deposits resulting in an increase in noninterest-bearing deposits and a decrease in interest-bearing deposits of $1.3 billion at December 31, 2013.

Common equity increased $43.4 million due to earnings and improvement in AOCI. With that, I would like to turn it over to Alan White.

Thanks, Darren, and good morning. Let me give you a rundown on PlainsCapital Corporation update. First of all, the FNB operational update. The FNB, former FNB franchise is acclimating well to the PlainsCapital Bank products, systems and business practices. We completed our conversion in February and all has gone well.

Costs remain elevated due to the integration. As of Q1 2014, costs impacted by system conversion, occupancy costs related to surrendering, closed branches and personnel reductions. At the end of Q1 2014, staff reductions resulted in $802,000 in severance and an estimated $2.7 million annually in compensation expense savings.

We surrendered 6 former FNB branches to the FDIC, and we closed 1 additional branch. The branch reduction estimated to save $1.4 million annually in occupancy and noninterest expense.

Our one-time conversion charge for the conversion in February was $1.5 million. We continue to tweak and work on improving operations and costs at FNB, and we will have further updates as we go forward.

At PlainsCapital Corporation, we opened 2 new full-service branches which were previously LPOs, and we closed 1 legacy branch. We have now a total of 78 branches, including the former FNB branches across all the major Texas markets.

Our loan growth was 11% based on an annual basis at the Legacy Bank, and we have $1.2 billion in unfunded commitments and we have a solid pipeline. We have $250 million worth of loans that that we have committed and not closed, and we have another $750 million we are working on.

We will continue to focus on growing our community bank model organically with seasoned bankers in desirable markets. I am very proud of the fact that in the 17 months that we have been with Hilltop, we have not lost one significant banker in that time, which shows a real continuity in our organization.

The mortgage segment continues to increase market share in a down environment. The US mortgage volume projected to decline 57% in Q1 2014 from Q1 2013. PrimeLending's Q1 2014 volume was down 39%, so we beat what the industry is doing relative to 2013.

Momentum in volume at the end of the first quarter was good. We are starting to feel more like the way the traditional mortgage business is. It is weak in the first quarter and then it builds up through the year. In the last several years, we have not been through that because of refinance. There has been a lot more volume. Now we are getting back to the way normal is.

In March, we had our first $1 billion allotment since October of last year. And April is trending off very strong and continuing that trend that we have seen in the past. We feel like we are positioned very well and our loan officer headcount is up. We are up 105 loan officers since first quarter of 2013, which I think certainly helps our production.

Our pretax income at the bank segment was $31.9 million in Q1 2014. Net interest income grew 17.7% over quarter 2013 to quarter 2014. And our credit quality remains strong, with our noncovered NPAs to consolidate assets remaining flat at 0.32% in Q1 2014.

That really helps with good, strong credit quality that allows our people to be out calling and making calls and soliciting business. Q1 one at PrimeLending, a consistently lower volume period for the mortgage business. However, Prime was able to increase market share to 0.84% in Q1 2014 from 0.58% in Q1 2013.

That is significant, and for us to be able to hit what we are targeting, we must increase market share, and we are very pleased with that number because we are getting a bigger market share of what is out there.

Our home purchase volume represented 79% in Q1 2014 versus 53% in Q1 2013. Today in the industry, the industry is -- purchase volume across the industry is about 51%. We are running at about 79%.

This will tell you that we are getting more than our share of business, and those people who are just running 51% in purchase volume are really not doing well because there is not a whole lot of refinance out there. So you can tell there is a lot of people hurting. We feel like we are positioned very well.

Again, California and Texas are leading the way with about 40% of our origination volume, and that holds. And we have several other states that are coming along doing quite well.

In our First Southwest Group, municipal bond volume continues to be depressed with low short-term interest rates. However, our revenue is up about 5%. And that is my report. I will turn the rest over to John Martin.

Thank you Alan, and, good morning. The bank's income before tax was $31.9 million for the first quarter of 2014. Total gross loans held for investment increased $38.4 million from the fourth quarter, and gross noncovered loans held for investment were up $132 million for the quarter.

Over 80% of noninterest expense increase from the first quarter of 2013 is related to the integration and operation of First National Bank acquired last September. PrimeLending funds its originations through a $1.3 billion warehouse line provided by PlainsCapital Bank. $800 million was drawn on that line at March 31.

Our capital remains strong with a Tier 1 leverage ratio of 9.53% and a total risk-based capital ratio of 14.14%. Our portfolio consists of covered and noncovered loans, and purchased credit impaired loans and nonpurchased credit impaired loans. The covered purchased credit impaired loans had a total of $652 million at March 31, with 81% of that real estate.

Our noncovered PCI loans carried a balance of $85.4 million at March 31, with about 38% of that real estate, and 40% commercial and industrial.

On the covered non-PCI loans, the portfolio stood at $260 million, with 84% of that real estate. And the largest portion of our portfolio, our noncovered non-PCI loans, had a total of $3.6 billion at March 31, 42% real estate and 46% C&I.

Going to slide 13. Purchased credit impaired loans are loans with evidence of credit quality deterioration, for which it is probable but not all the contractually due amounts will be collected. PCI loans include covered loans and those loans that are subject to the loss share agreement entered into by the Bank and the FDIC in connection with the First National Bank transaction. Only loans acquired in that transaction are considered covered.

Noncovered loans are loans that are not subject to the FDIC loss share agreements. Substantially, all of the PCI noncovered loans were acquired as part of the PlainsCapital merger.

PCI loans had a total discount of $327 million. $289 million of that discount was related to covered loans. During the quarter, we had an increase in expected cash flows on the PCI portfolio of $30.7 million for the covered and $3.5 million for the noncovered PCI loans.

On slide 14, our non-PCI loans at March 31, 2014, include our newly originated loans and loans acquired without credit impairment at acquisition. Non-PCI loans include covered loans, loans that are subject to the loss share agreement with the FDIC, and noncovered loans.

Our portfolio balance had a -- our loans were on the balance sheet at 97.8% of the unpaid balance, with a total discount of $53 million. $34 million of the discount was related to noncovered loans, while covered loans had an $18.6 million discount.

Moving to PrimeLending. The loss before taxes was driven by lower origination volume in the first quarter of 2014, as seasonally lower volume and market forces continued to pressure the mortgage origination business. Loan origination volume was $1.9 billion for the first quarter. Purchase volume was down 8.8% compared to the first quarter of 2013.

Refinance volume declined 47% of the total. Refinance volume declined from 40% (sic - see slide 15, "47%") of the total volume to 21% of the total volume in the same periods. We expect the refinancing volume will continue to decline throughout 2014 and, therefore, anticipate volumes in 2014 will more closely follow historical seasonal trends.

Employee reductions in the second half of 2013 and other cost savings initiatives have resulted in a decrease in recurring quarterly operating costs of approximately $8 million since the third quarter of 2013. We had mortgage servicing rights valued at about $29.9 million on a $2.7 billion servicing portfolio at March 31, compared to $20 million on a $2 billion portfolio at the end of 2013.

Moving to First Southwest. Business pressures continued to challenge First Southwest with pretax loss of $153,000 in the first quarter versus $256,000 of pretax income in the first quarter of 2013. We continue to have a substantial amount of noninterest income from the TBA program which provides interest rate protection for housing authorities.

Fair value changes on derivatives and trading portfolio produced net gains of $2.8 million and $400,000 respectively for the quarter.

With that, I will turn it back to Darren to discuss National Lloyds.

Thank you, John. Increases in earned premium, growth and core products and improvement and claim loss experience drove first-quarter 2014 pretax income of $11.4 million versus $6.2 million in the same quarter a year ago. Our combined ratio declined to 77.5% in the first-quarter 2014 versus 88.7% in 2013.

Rate filings have been made for certain products in several states, with increases to be effective in 2014. Exposure management initiatives are expected to reduce the rate of premium growth in 2014 compared to prior years, but also reduce the exposure to volatile weather to improve our loss experience.

Bob Otis was hired in April of 2014 as the new CEO and President of National Lloyds. Bob brings over 25 years of insurance experience, primarily with large carriers.

With that, I would like to turn it back over to Isabell Novakov.

This concludes our prepared remarks. We will now take questions.

(Operator Instructions) Matt Olney, Stephens.

Thanks, good morning, guys. I wanted to start with PrimeLending. It sounds like you are making good progress, cutting the expenses there from the lower volumes. How should we be thinking about the overall profitability of that segment as we move through 2014?

Matt, this is Alan. Like I say, we are getting back into the traditional way the mortgage business works. Slow in the first quarter, second and third quarters are strong, and fourth quarter tails off.

We have been pleased with the first quarter. We outperformed ourselves with what we thought we were going to do, and April started out really strong. So we think spring has sprung, and we are into that cycle that I just talked about. It comes back strong the second and third quarters, and slides into the fourth quarter.

We are strong in the purchase business, as you well know, running about 80%. So we are getting more than our share. And if you look at the market share that we've driven up from 50 something to 83%, or 0.83%, that is significant in the amount of business that we are getting.

With our cost cuts and with that amount of volume, obviously we are seeing a bottom line. And if we see a bottom line and we see more volume, obviously we see more income in the bank from the warehouse line. So I think we are cautiously optimistic as we go forward here.

I think the one thing that concerns us the most is the lack of inventory out there, but we continue to get more than our share of the business. Anybody that is doing 51% purchase in this business is really sucking eggs, and they are going to be in deep trouble if they don't get their business model turned.

And it is really hard to turn it from a refinance business to a purchase business, and there is just no refinance volume out there. So we think that is a real advantage for us.

Also, the second thing is we have increased the number of producers by 105 since a year ago this time. Those producers, obviously, are going to bring more volume. So we are working on market share, and as long as we can continue to increase market share and with the cost cuts we've made, I think the profitability will show up, and it is showing up.

Alan, how much of the expense base in that mortgage division is variable, that is based off the overall mortgage production if you had to estimate?

We cut $8 million worth of expense out of there. That is not variable, that is gone. The only thing that you will see the way the expenses will come back up is if the volume picks up, then we have got to hire people to process it, and that is going to be a good problem.

So we could see the expense rise because of the fact we are going to have to hire closers and we are going to have to hire underwriters, we're going to have to hire people to be able to handle the volume.

As I told you earlier, March was the first $1 billion month that we have had since October of last year in locks, and that is significant. It is going to be, hopefully -- you know, we've seen April and it looks strong. So hopefully going forward, those numbers are big numbers.

Thank you.

Enrique Acedo, Raymond James.

Good morning, guys. You guys mentioned that your commitments were up about $100 million to $1.2 billion this quarter. I was just looking to get a little bit of color regarding your pipeline on a by category and maybe by geography basis?

Well, let me clarify that. Our unfunded commitments are $1.2 billion. Those are committed out there. Those are lines that are to businesses. Some of those are real estate commitments that will fund up over a period of time, and those others are there for working capital, capital needs from corporations.

So that is one segment you are sitting there looking at that, obviously, as these companies feel more comfortable with the economy, they're going to start borrowing. And also the ones that we committed to on real estate projects are going to start to fund up. So that is one segment.

The other segment I mentioned to you was that we have committed the $250 million worth of new credits, but we have not closed those loans yet. We are in the process of closing those loans. Those loans are real estate loans and C&I loans. I would say the majority -- not the majority -- I would say over 50% of those are real estate loans; less would be C&I.

Then we have a pipeline out there that we keep in our various markets of how many credits and how many loans we have in process, and that is about $750 million. Now, you know as well as I do a lot of those fall out, a lot of those don't ever happen, but that is kind of how we keep track.

We feel strong that our loan demand is good. And we have gotten into a couple of markets with this acquisition, FNB Edinburg, like Corpus Christi and Houston, that have really brought real opportunity for us. So those are two really strong markets that have created opportunity, besides being in Dallas and Fort Worth and Austin and San Antonio. Those are all strong markets.

And certainly if you go and look at Texas as a whole, it is pretty good. So we are pretty pleased with our lending.

However, if you look at it on an overall basis putting FNB Edinburg in there, it looks like it is kind of flat. But Edinburg, we are doing exactly what we designed to do and that is to pay those loans off, get them collected. Because obviously, that is how we bought this thing and that is how we need to do it and get those loans out of there that aren't good.

So it may not look like we are having that kind of growth, but we are. But on the other side, we are trying to run the other stuff down so that we can clean that place up.

Well, that is actually great color. Thank you very much, guys.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a nice day.