Hilltop Holdings Inc (HTH) 2014 Q2 法說會逐字稿

Good morning and welcome to the Hilltop Holdings second-quarter 2014 earnings presentation and webcast. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Isabell Novakov. Please go ahead, ma'am.

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, Principal Financial Officer of Hilltop Holdings; and John Martin, CFO.

Before we get started, please note that today's presentation may contain forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risk and uncertainty. 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.

And now I would like to hand the presentation over to Jeremy Ford.

Thank you, Isabell and good morning. For the second quarter of 2014, income to common stockholders was $27.1 million, or $0.30 earnings per diluted share. Our return on average equity was 8% in the quarter compared to 7.3% in Q2 2013. Our return on average assets was 1.24%.

PlainsCapital Corp.'s subsidiary reported pretax income of $51 million while National Lloyds had a pretax loss of $5.5 million for the quarter. Total assets increased to $9.4 billion compared to $8.9 billion at December 31. Total stockholders' equity increased by $85 million from December 31 to $1.4 billion. Hilltop remains well-capitalized with 13.5% Tier 1 leverage ratio and 18.8% total risk-based capital ratio. And Hilltop retains $158 million of freely usable cash, as well as excess capital at its subsidiaries. The SWS acquisition is still pending and we continue to work on obtaining SWS shareholder and regulatory approval by year-end.

Moving forward, income to common for the quarter was $27.1 million compared to $24 million in the prior quarter and $21 million in the prior year. Our book value per share is $14.22 versus $13.76 in the prior quarter and $12.59 in the prior year. Our net interest margin continues to expand and was 5.18% for the quarter compared to 4.6% for the prior quarter and 4.33% for the prior year.

Our gross loans are $4.6 billion at the end of this quarter compared to $3.3 billion in the prior year and our deposits at the end of the quarter were $6.2 billion, down from $6.7 billion in the prior quarter, though up from $4.5 billion in the prior year and our NPAs to total assets have continued to improve to 30 basis points. I'd now like to hand the presentation over to Darren Parmenter.

Thank you, Jeremy. Our net interest margin expanded by 56 basis points to 5.18% in the second quarter of 2013. Our yield on earning assets of 5.44% was driven by gross loans as average balances increased and average yields rose by 34 basis points. The cost of our interest-bearing liabilities declined driven by a decrease in the cost of interest-bearing deposits to 27 basis points as the bank continues to run off higher cost deposit balances. A decline in the cost of interest-bearing deposits slightly offset by an increase in the balance of other borrowings driven by funding needs associated with the mortgage origination segment.

The higher net interest margin in the second quarter as compared to prior year was due to improved funding mix and yield on earning assets driven significantly by the First National Bank transaction. For the second quarter, the tax equivalent net interest margin for Hilltop was 140 basis points greater due to purchase accounting, accretion of discount on loans of $25.9 million, amortization of premium on acquired securities of $1 million and amortization of premium on acquired timed deposits of $2.5 million.

(inaudible) noninterest income. Noninterest income was $203.3 million in the second quarter, down 15% from a year ago. Noninterest income from the mortgage origination segment declined $42.2 million from the second quarter of 2013 to $123 million in the second quarter of 2014 representing 61% of the total noninterest income. Net insurance premiums earned increased $2.2 million from the second quarter of 2013 to $40.8 million representing 20% of the total noninterest income. Financial advisory fees and commissions decreased $3.7 million from the second quarter of 2013 to $22.3 million, representing 11% of the noninterest income. Accretion for the FDIC indemnification asset of $500,000 in the second quarter was also included in noninterest income.

Our noninterest expense was $251.2 million in the second quarter of 2014, down 3.5% from prior year. Compensation declined $8.3 million from the second quarter of 2013 to $124.4 million in the second quarter of 2014 due largely to lower variable compensation at the mortgage origination segment offset by additional compensation in the FNB transaction. Loss in LAE declined $35.3 million in the second quarter from $48.2 million in the second quarter of 2002. Occupancy and equipment increased to $25.8 million in the second quarter from $20.2 million in the second quarter of 2013 primarily due to the FNB transaction.

Amortization of identifiable intangibles from purchase accounting was $2.6 million in the second quarter of 2014. Our loans held for sale grew $523.7 million from Q1 2014 primarily due to spring and summer seasonal volume. Our gross covered loans held for investment increased 1.9% from the first quarter. We continue to work through problem loans and covered OREO acquired from the First National Bank transaction with covered loans net of allowance and covered OREO down $79 million since the first quarter.

Gross loans held for investment to deposit ratio increased to 74.1% in the second quarter of 2014, up from 68.4% in the first quarter and 67.2% in the fourth quarter of 2013. Total deposits declined $507.9 million in the second quarter as runoff of higher cost interest-bearing deposits outpaced the growth in non-interest-bearing deposits. Short-term borrowings grew by $695.8 million in the second quarter of 2014, the result of higher funding requirements associated with the increase in loans held for sale, a decrease in deposits and a slight increase in loans. Our common equity increased $41.9 million due to earnings and (technical difficulty). With that, I would like to turn the call over to Alan White.

Good morning and thank you. The bank had a good second quarter. We continue to organically grow the legacy bank while we try to continue to integrate and improve the former First National Bank that we purchased. We've hired eight new lenders, seasoned lenders in the second quarter to help grow our loan portfolio. A significant number of these are in new markets such as Corpus and Houston that we have entered in. We have also received approval for five new branches, one in downtown Corpus, the other one in Victoria, another one in Alice. That is in our Coastal Bend region. We had one approved in downtown Houston and then we have an office that has been approved in Aledo, which is just outside of Fort Worth.

Our loan pipeline continues to be solid. We have $1.2 billion in unfunded commitments. About a third of those will be draw-type notes, which are basically real estate loans that have been approved that will draw up. The other two-thirds are C&I-type loans that are revolvers that will be used by companies when the economy is strong and when they build inventories and make capital expenditures.

Our credit quality remains very good. Our noncovered NPAs to total consolidated assets reduced itself to 0.30%, which is very strong in quarter two and we think our loan portfolio is in really good shape. The acquired loans that we received in the First National Bank transaction are very high yielding. That is helping us pay for the elevated expense that we have in trying to collect the loans that we acquired, the covered loans that we acquired. That yield also helps us as we try to rationalize that platform of First National into our platform as we make changes ongoing.

PrimeLending continues to focus on the purchase business. It is a challenging market. They continue to try to hire new producers. That becomes even more challenging as we go. They were very fortunate they were able to improve their marketshare in the second quarter to 1.06, up from 0.84 and that is on gross loans, all loans and that is up from 0.66 in quarter two of 2013. So they are continuing to improve marketshare, but that is on a less base by a significant amount according to the Mortgage Bankers Association.

We are still hanging in there at about 84% purchase versus 67% in quarter two in 2013. US mortgage volume projected to decline 50% in quarter two. Our volume actually declined 20% over quarter two of last year. So you can see we are holding in there well, but it promises to be a -- continuing to be a tough year in the mortgage business and to achieve the volumes that we've had in the past is going to be very difficult.

First Southwest continues to have pressure on them year over year because of the decline in the public finance markets. They are just not many projects and many refundings going on. We hope that changes in the future, but we continue to still do well in the clearing side of our business and the TBA side of our business. And First Southwest also provides about $300 million in core funding to us, so that is very beneficial to the bank. And with that, I will turn it over to John Martin to talk more about the financials in the bank. John?

Thank you and good morning. The banking segment had income before tax of $41.5 million in the second quarter of 2014. Net interest income grew to 32.4% compared to the same quarter of last year. Our gross loans held for investment were flat compared to the first quarter of 2014 with the noncovered portfolio up about $68 million. Approximately 84% of our noninterest expense increase from the second quarter of 2013 to the second quarter of 2014 was related to the FNB transaction. PrimeLending funds originations through a $1.5 billion warehouse loan from the bank, of which $1.3 billion was drawn at June 30. The bank continues to maintain excess capital with a Tier 1 leverage ratio of 9.97% and a total risk-based capital ratio of 13.9%. Total loans were $4.6 billion, total deposits $6.2 billion.

We look at our portfolio from various angles because we have a covered and noncovered portfolio and within those portfolios, we have PCI, purchased credit-impaired loans and non-purchased credit-impaired loans. Our covered PCI loans had a carry value of $595.2 million. Our noncovered PCI loans, largely the loans acquired in the PlainsCapital transaction, were $60.8 million. On our noncovered PCI loans, we carried $250 million and the rest of the portfolio was carried at $3.7 billion.

Purchased credit-impaired loans are loans we have with evidence of credit quality deterioration for which is probable, but not all the contractually required payments will be collected. Our PCI loans include covered and noncovered loans. PCI loans have a total discount of $302 million at June 30, 2013. $279 million of this discount was related to the covered portfolio. Increases in expected cash flows in the second quarter of 2014 up $26.9 million for covered PCI loans and $6.1 million for noncovered PCI loans. The weighted average expected loss on our PCI portfolios associated with the PlainsCapital merger was 23% and related to the FNB transaction was 24%.

Our non-PCI loans include newly originated loans, acquired loans without credit impairment at acquisition and acquired non-PCI loans that have been renewed. Non-PCI loans include covered and noncovered loans. The portfolio had a balance at 98% of unpaid principal balance with a total discount of $47.5 million. $30.1 million of that discount was related to noncovered loans while covered loans had a discount of $17.3 million.

Income before taxes in our mortgage originations segment was $9.2 million, a decline year over year due to lower origination volume offset by a decline in variable compensation expense. Origination volume in the second quarter was $2.8 billion. Purchase volume was up 1%, refinance volume declined 33% of total volume to 16% of total volume in the same periods. Net gains from interest rate lock commitments totaled $25.7 million and $6.9 million during the second quarter of 2014 and second quarter of 2013 respectively.

Salaries and benefits and segment operating costs for the second quarter of 2014 decreased approximately 11% compared to the same period last year as benefits and headcount reductions that occurred in the third and fourth quarters of 2013 were realized. MSR was valued at $35.9 million on a $3.3 billion service portfolio at June 30 compared to $29.9 million, or $2.7 billion at the end of March, 2014. In July, we sold MSR assets of about $11.4 million, which represented approximately $1 billion of the segment service loan portfolio.

First Southwest had a pretax income of $640,000 in the second quarter versus $2 million in pretax income in that same period of last year. Noninterest income declined $3 million partially offset by a noninterest expense decline of $2 million. Noninterest expenses were down year over year mainly driven by decreases in compensation that varied with revenue. A substantial amount of noninterest income is driven by public finance, capital markets and clearing. The TBA business, which provides interest rate protection for housing authorities, had fair value changes on derivatives that provided gains of $3.2 million in the quarter. With that, I will turn it back to Darren to discuss National Lloyds Corporation.

Thank you, John. Consistent with our historic results, we expect higher losses in the second quarter from seasonal hail, wind and tornado events in Texas. Growth in earned premium and improved claims loss experience drove a $15 million year-over-year improvement in pretax loss. Based on our estimates of ultimate losses, claims associated with the 2014 storms totaled $14.3 million as compared to $20.9 million at the same point a year ago.

In 2013, we initiated rate filings and performed a review of the business concentration, which resulted in cancellation of agents, nonrenewal of policies and ceasing new business writings on certain products in problematic geographic areas. This has reduced the rate of premium growth in the first six months of 2014 and we expect a reduction in exposure to volatile weather going forward. With that, I'd like to turn it over to Isabell Novakov.

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

(Operator Instructions). Michael Rose, Raymond James.

Hey, good morning, guys. A couple questions for you. I know you are probably not going to comment on the SWS deal too much, but I did notice some lawsuits in the Q. Just wanted to get a sense for if the deal is pushed back, can you remind us if there is a provision to extend the deadline for the transaction? And then on a related note, you guys -- this will push -- assuming the deal closes at the end of the year, this will push you over the $10 billion threshold. We've seen a lot of banks that are over $10 billion be subject to additional BSA, AML type of costs. Is this built into your model and maybe what could we expect there?

Okay, thanks, Michael. This is Jeremy Ford. On the SWS transaction, I think as far as the lawsuits, they weren't necessarily unexpected by us and we are going through the process on that. I think the fact that we had a large ownership position in it beforehand just incites those.

As far as the timing on it, we still feel like we are going to close by year-end or hopefully sometime within the fourth quarter and we have until March 31 is the deadline of next year. And if we want to mutually agree to extend that deadline, we can do that as well. So right now, we are focused on the shareholder vote for SWS, which we expect in the early part of the fourth quarter. So is that good on SWS?

Yes, yes, that's helpful. Thank you for the update. And then if I can just move to the core margin, up about 11 basis points quarter to quarter, I understand there is some positive earning asset mix shift. How should we think about the core margin as we move forward? Obviously, with the understanding that the reported margin is going to be generally noisy with the accretion.

The core margin, we expect it to hold in that range while rates are in the level that they are in now. So we would expect it to be around that 350 mark.

Okay, and then just finally, I know you guys have opened up some new offices and hired some new people in some other geographies. Just wanted to get a sense for how much of the growth this quarter in the non-PCI portfolio, the core growth, was from some of those newer territories or lenders that you hired. Thanks.

Well, if you looked at the way we look at our loans and we look at it from an organic standpoint from the legacy bank and that takes the held for sale and that takes our margin loans, excluding our warehouse and excluding those covered transactions, we are running about 11% on an annualized growth rate. So we think we can continue along that way. We think these people will bring additional strength to us. Obviously they haven't been with us that long to really affect what we are talking about there, but we hope it will help us hold in there and get our share of what is out there.

So our annual growth rate is running in the legacy bank about 11%. You have got to realize, in the covered side, we are trying to get loans paid off. We are trying to collect those loans. So those loans are going down, so it is really hard to look at it when you throw everything in there. You have got to kind of separate it out to really get a feel for where we are going on the loan growth.

Yes, understood. Thanks for taking my questions, guys.

Brett Rabatin, Sterne Agee.

Hi, guys, good morning. I wanted to first I guess ask that expense question again. I didn't hear an answer around that. Everyone is sort of worried about increased regulatory oversight costs. So was just curious where you guys stand on that and if you expect to spend any money on back office for BSA, AML kind of stuff, especially over $10 billion.

Prior to the transaction, we had embarked on a project to enhance our enterprise risk management system. We are in the process of doing that and feel very comfortable that when we cross the $10 billion mark that we will have the risk management in place to handle it. It is going to be expensive; however, on the anti-money laundering and BSA area, I think that our systems prior to the transaction were pretty robust in that while we will continue to improve them that we are not starting from scratch there.

Okay. I guess -- and then secondly, when you guys talk about the legacy bank with 11% growth rate, is that net -- are you sort of including the payoff activity in your portfolio? I know that has been a bit of an issue for the past few quarters --.

Yes, yes, we are including it. That is net.

That is net, okay. And then I guess the other thing I wanted to go through was, in the Q, you include your asset sensitivity, which you guys continue to model yourself slightly, actually liability-sensitive in an uprate environment. Are you guys going to do anything -- I know you have obviously changed the deposits this past quarter quite a bit. Are you guys looking to do anything to make yourselves at least neutral to interest rates to possibly going to be asset-sensitive --?

We are examining a number of things. The transaction that we entered into last September had a pretty dramatic effect on that position and we continue to evaluate how we will manage those assets in order to get us back to more of a neutral position.

I guess should we expect to see you guys neutral to interest rates in the 10-Q over the next few quarters or how should we --?

I would say it would be over a little longer horizon than that, but certainly within a year or so.

Okay, great. Thanks for all the color, guys.

Matt Olney, Stephens.

Hey, thanks, good morning, guys. Hey, wanted to ask about PrimeLending, the mortgage business. It looks like pretty good profitability in 2Q, but there were some tailwinds I think from some of those interest rate lock commitments. I am trying to understand the overall profitability of this segment in this new mortgage environment and how important is selling the MSRs from time to time to the overall profitability of the mortgage company?

I wouldn't describe selling those as something key to the overall profitability of the segment. I think that is more managing our balance sheet risk and making sure that we are comfortable with the level on there. So I wouldn't describe that as a key component of the profitability.

Matt, as far as the question about profitability and where is the mortgage industry, we saw a tough first quarter because of weather and normally in a traditional mortgage market, the first quarter is tough. We saw it come back in the second quarter, certainly not to the levels that we've been used to, but it came back and it drove a good bottom line for us. Again, not what we were used to. It was off significantly from the year prior and I think as we go forward, we are not going to see the volumes that we've seen. Even though we are getting bigger marketshare, the base out there has shrunk. So I think we are back into the way it used to be. Now whatever used to be means, I don't know because you would have to look back several years before refinance started going crazy. So we look for it to be different than what it was, not what it was, but by no means where it is not profitable or we are not doing okay.

So Alan, any updated commentary on overall gain-on-sale margins in the business?

They are down a little bit and there is a squeeze out there. There is lots of competition for what is out there. So the margins are --the squeeze is there and you are seeing companies fall out, but you are starting to see that become less and less and the ones that are going to survive are going to survive and we just need the market to pick up. We hoped a 4% GDP would get homebuilders out there building houses and get people confident in buying them. So you have got to look to the positive, but, in the meantime, if we can continue to gain marketshare, we are going to be able to hold in there and that is what our goal is. We want to get through this time that we are in and be in a position when it does turn around that because we are such a strong purchase company that we can take advantage of the upside.

And Alan, would you expect to add additional producers in that business?

We are trying to and it has become a little bit more tougher now that there is fewer and fewer going down the tube. It is harder to get those people away. We were pretty flat in the second quarter as far as a number of mortgage bankers. So it is getting tougher. You are starting to see some consolidation in that industry, some M&A in that industry. So we will continue to work hard at it and continue to try to hire people and hire teams. It is just a little more difficult right now.

Okay. And then shifting over towards the bank, Alan, I guess some of your peers in Texas have made some interesting comments over this week as far as increasing line utilizations from some of their commercial borrowers compared to earlier this year. Are you seeing any of that in terms of utilization rates?

Not a whole lot. It's still -- on our unfunded commitments, we are not seeing a lot of people taking money down and doing things with it. Where we are seeing the most activity is on the real estate side and the projects that we have committed to. Those things are funding up, but we are seeing quite a bit of activity, people out there lining up to borrow money and our pipeline is pretty strong. It just takes a little while to get these things done. Now you just can't get them done as quick as you used to be able to because of all the regulatory issues that are involved. But we are seeing a pretty good pipeline and there is a couple of these new markets for us that are doing well and there's a couple of old markets. Austin is a strong market for us right now.

So we are seeing a lot of activity. Some of them aren't just huge loans, but the $5 million to $10 million deals are right down the fairway and we like those. So we are seeing a lot of business. We are just -- it's just taking a little longer to close it and of course, it's summertime and you've got to get everybody back to work. But I think business is okay. I'd like to see those people draw down on those lines of credit they have.

And then in the insurance business, we've talked before about you derisking that portfolio over the last year or so. 2Q this year, still a loss, but much less so than last year. Was the overall performance in 2Q kind of within your expectations given 2Q can be challenging pretty seasonally? And secondly, the overall profitability of that business, now that you derisked that, how should we be thinking about the overall profitability of the insurance business?

The second quarter was within our expectations of losses. We just have the seasonal weather in Texas. So we were pleased actually with the quarter and I think you look at the second half of the year like it performed the second half of last year. And so we expect it to be profitable and to have a decent year.

Okay, that's all for me. Thanks, guys.

Frank Barlow, KBW.

Hey, guys. It's actually Brady Gailey. Can you all hear me?

We were wondering where you were.

Yes, I had a little technical difficulties, but -- so on the deposit shrinkage, can you just comment -- I mean is that coming from the FNB deposits that are running off and when do you expect deposit balances to somewhat stabilize?

Brady, this is John Martin. It comes from both the FNB side and from the legacy side and largely from the FNB side where we had some listing service deposits when we took over, as well as some rather high cost CDs, but we have also reduced some of our higher cost deposits at the legacy bank. Second quarter is also a seasonal drop for us and we usually have a small drop in our deposit balances. But I think we are seeing -- we still have some listing service deposits, I think about a little over $100 million there that we are not going to encourage to stick around, but I think we are seeing the end of our deposit shrinkage.

Okay. And then even after SWS closes, you will still have excess capital. Is it safe to say you are not necessarily focused on Texas bank M&A as of today, but maybe after SWS happens as we get into 2015, you will be a lot more focused on building out the Texas bank via M&A?

Well, I think it's safe to say our primary focus is to close the SWS transaction and yes, after that will be Texas M&A, bank M&A to fill that out.

All right. And then lastly looking at loan growth, you have the legacy bank. It looks like over the last couple of quarters it has kind of been slowing. Is there anything to read into that or is that just quarter-to-quarter volatility?

Really at the legacy bank, it has really been hanging about 11% on an annualized basis because what you can't -- you've got to watch is the other -- the bad bank so to speak is we are trying to pay that down and that's kind of convoluted, but the legacy bank's loan growth has been just fine and continues to be just fine. And I would think that we would continue on that 10% to 11% annualized growth rate for the balance of the year. On the same token, we would consider the covered transaction portfolio hopefully continuing to go down like it's going down. That is exactly what we are trying to do.

Okay. All right, thanks for the color.

Ladies and gentlemen, this will conclude our question-and-answer session, as well as today's call. We thank you for attending today's presentation. You may now disconnect your lines.