Hilltop Holdings Inc (HTH) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Hilltop Holdings 2015 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Isabel Novakov. Ma'am, 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, Principal Financial Officer of Hilltop Holdings; and John Martin, CFO, PlainsCapital Corporation.

Before we get started, please note that this presentation and statements made by representatives of Hilltop Holdings Inc. during the course of this presentation include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements anticipated in such statements. Forward-looking statements speak only as of the date they are made, and except as required by law, we do not assume any duty to update forward-looking statements.

Such forward-looking statements include, but are not limited to, statements concerning such things as our business strategy, our financial condition, our efforts to make strategic acquisitions, the integration of the operations acquired in the SWS merger, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, and the collectability of loans in litigation, our other plans, objectives, strategies, expectations, and intentions, and other statements that are not statements of historical fact, and may be identified by words such as anticipates, believes, could, estimate, expects, forecast, goal, intend, may, might, plan, probable, project, seeks, should, target, view, or would, or the negative of these words and phrases or similar words and phrases.

For further discussion of such factors, see the risk factors described in the Hilltop annual report on Form 10-K for the year ended December 31, 2015 and other reports filed with the Securities and Exchange Commission. All forward-looking statements are qualified in their entirety by this cautionary statement.

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

Thank you, Isabel, and good morning. For the fourth quarter of 2015, net income was $20.7 million, or $0.27 per diluted share. For the fourth quarter of 2015, adjusted net income was $33.4 million, or $0.34 per diluted share, when excluding the transaction and integration-related costs of the SWS merger.

In connection with the SWS merger, Hilltop incurred $14.4 million in pretax transaction and integration costs in the quarter consisting of $4.9 million in the broker-dealer segment and $9.5 million within corporate.

For the fourth quarter of 2014, net income was $31.7 million, or $0.35 per diluted share.

Our ROA for the quarter was 68 basis points relative to 1.4% in last year. Our ROE was 4.7% in the quarter relative to 8.6% last year.

Hilltop's four operating segments reported $49.8 million in pretax income, where PlainsCapital Bank contributed $34 million, PrimeLending contributed $4 million, Hilltop Securities contributed $4 million and National Lloyds contributed $7 million.

Our common equity increased to $1.7 billion, up $21 million from the last quarter. As well, we remain well capitalized, with a 12.65% tier one leverage ratio and 18.9% total risk-based capital ratio.

Despite the large integration costs in the quarter, all Hilltop operating subsidiaries had a strong and profitable quarter and our core fundamentals of our operating businesses continue to trend positively, particularly in the Banking segment.

And importantly, in January of 2016, our two broker-dealer subsidiaries successfully merged into one entity, HilltopSecurities.

Moving forward, this slide shows the financial summary of -- particularly for the fourth quarter of 2015 and 2015 full year and I'll just touch on the highlights. We had a solid year of capital generation with $210 million of net income resulting in a $2.09 EPS and a $17.56 book value per share.

Our net interest margin declined in the quarter to 3.73% from 4.2% though Q3 2015 had $16.5 million greater accretion of discount on loans.

Our assets declined to $11.9 billion from $12.4 billion, though our loans increased to $5.6 billion from $5.4 billion.

And our deposits increased to $7 billion from $6.8 billion.

And our credit quality remains sound, with a 21-basis point NPA ratio.

I'll now turn the presentation over to Darren Parmenter.

Thank you, Jeremy. Turning to page 5, Hilltop Holdings' net interest income and margin. Our stated net interest margin declined 47 basis points in the fourth quarter to 3.73%, compared to 4.2% in the third quarter. The decline was primarily due to favorable resolutions of significant loan relationships that increased yields in the third quarter.

Increased yields in SecuritiesLending business drove a 45-basis point increase in other earning assets, offset by a 36-basis point increase in notes payable and other borrowings.

The costs of our interest-bearing deposits remained flat.

For the fourth quarter, the tax equivalent net interest margin for Hilltop was 79 basis points greater due to purchase accounting.

Accretion on discounted loans was $19.5 million, and the amortization of premium on acquired securities was $800,000.

Hilltop's net interest margin was adversely affected by the broker-dealer security lending business, with our stated taxable equivalent net interest margin being negatively impacted by 74 basis points.

The bank's net interest margin for the fourth quarter declined to 4.92% from 5.79% in the third quarter. However, it increased 4 basis points before purchase accounting to 3.73%.

Moving to our Hilltop non-interest income, our non-interest income for the fourth quarter was $276.9 million, up approximately 30% over the prior year.

Net gains from the sale of loans, other mortgage production income, and mortgage loan origination fees increased $20.9 million.

Investment advisory fees and commissions increased $36.9 million, or 107.9%. This is primarily due to the SWS merger.

Our net insurance premiums earned decreased slightly to $41 million in the quarter.

Hilltops Holdings non-interest expense -- our non-interest expense was $338.7 million in the fourth quarter, up 37.3% from prior year.

Compensation increased $49 million, or 36.8%. This was primarily due to the SWS merger and the increased mortgage volume. During the quarter, we did incur a $1.4 million employee comp expense related to severance and retention related to the SWS merger.

Our loss in LAE, policy acquisitions, and other underwriting expenses was $33.6 million in the quarter.

Occupancy and equipment expense increased $6 million or 25% in the fourth quarter.

Other expenses increased $33.5 million or 57% over prior year. During the quarter, we did incur $12.9 million in transaction and integration-related costs due to the SWS merger, as well as a $4.5 million litigation reserve related to a legacy case at the broker-dealer.

Moving to Hilltop Holdings balance sheet highlights, assets were slightly down as our growth in non-covered loans and loans held for sale were more than offset by a decline in the broker-dealers and clearing receivables and covered loans.

Our gross non-covered loans held for investment increased $220.5 million, or 4.4%. Our gross covered loans decreased $42.1 million, or 10%. This is due to our resolving troubled loans acquired in the First National Bank transaction.

Our gross covered loans have decreased $262.3 million or 41% versus the fourth quarter of last year.

Our broker-dealer and clearing receivables declined $749.4 million. Management has temporarily reduced the securities borrowing balances in connection with the merging of the broker-dealer subsidiaries.

Gross loans held for investment, covered and non-covered to deposit ratio, grew to 80.5% in the quarter.

Our total deposits increased $131.9 million, approximately 2% from the third quarter.

Our broker-dealer and clearing payables declined $707.3 million or 34.6% from the third quarter.

And our common equity increased $21.3 million in the fourth quarter.

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

Thank you, Darren. My opportunity here is to talk about the four operating companies. PlainsCapital Bank in the fourth quarter had a return on assets of 1.07%, driven by a strong net interest margin of 4.92%. After you take the accretion, it's 3.73%. We've been able to hold that interest margin in that level for the last six quarters, which is I think very good.

Our non-covered held for investment loans, excluding our margin loans, grew 22% in the fourth quarter, 9% on an annualized basis for us this year, which we felt very good about. And we have a favorable pipeline with $1.7 billion in unused commitments.

Our non-interest bearing deposits continued to increase to 32.2% of total deposits in quarter 4 and that's compared to 31.9% in quarter 3.

Our credit quality remains very, very strong. Our NPAs declined to $25.4 million and we're proud of our credit quality.

Our energy exposure declined to 3.6%, down $15 million in quarter 4 from 4% at quarter 3. The energy portfolio declined $137 million in 2015. Right now, we have 4.4% reserved on the energy portfolio, though only 16.3% of our energy loans are classified.

We're operating 67 branches, continue to divest non-core and unprofitable branches acquired during the FNB transaction, while opening new branches in attractive markets.

We just opened our Houston headquarter branch in December and we've hired a new market president, which we're very excited about, a native of Houston. Came from a competing bank and we hope to be able to build our franchise in that market using his contacts and his abilities.

So the bank, strong, with a strong net interest margin. It had strong growth. We've got strong loan quality and our energy portfolio continues to come down. So we're positioned well there.

PrimeLending had a profitable quarter, driven by increased volume of $3.1 billion, up 13% from quarter 4, 2014. You do have to remember though, the fourth quarter is not a strong quarter in the mortgage business. We had a great year at Prime and they had a -- they did an outstanding job.

Our purchase volume was 77% in quarter 4 compared to 75% in quarter 4, 2014.

Our gain on sale margins continued to increase between quarter 4, 2015 and quarter 3, 2015 due to more favorable loan sale pricing. We've been able to hold that gain on sale margin all year and things continue to look favorable in that light.

Our overall market share was 0.81% in quarter 4.

Prime remains focused on the purchase business, where it had a 1.17% market share on quarter 4 of 2015. This is down just a little bit from quarter 3, but the volumes were off in the overall industry in quarter 4.

And our mortgage servicing rights retention rate is 7% in quarter 4 compared to 25% in quarter 3. Those are all hedged. So when you look at Prime, our volume remains strong. Our purchase volume remains strong. Our gain on sale is strong and continues to hold its own.

In DFW, we were the number one purchase lender in 2015; in Texas, we were the number two purchase lender in both volume and units in Texas. And in the nation, we were the number six purchase lender in units. So those are things that we're very proud of in the mortgage business and feel like we're positioned well there.

At HilltopSecurities, we had net revenue of $[47.4] million. That's 8.21% up to 99.6% in quarter 15 (sic) compared to quarter 3, 2015, primarily driven by revenue from the public finance segment and the structured finance segment. Those two had really strong years and generated quite a bit of income.

Compensation to net revenue continues to improve each quarter, in 2015 from 73.7% to 73% to 69.6% and then down to quarter 4 at 63.2%. So we continue to make great progress there.

After adjusting for transaction integration costs of $4.9 million, HilltopSecurities Holdings made $8.6 million pretax in quarter 4, 2015.

And in January, we finally got to merge the two entities together to make HilltopSecurities into one location. We relocated that to the Renaissance Building in Dallas. And this is a critical milestone in our integration process. This allows us now to begin to make the cost savings that we make and to be able to attack the revenue side, which we feel very good about.

So we've got a strong public finance segment, the strong structured finance segment. Our clearing business is favorable with the increase in interest rates and is providing significant money liquidity to the bank, and has significantly liquidity we could if we need it. So that's a very favorable company for us.

National Lloyds had a light storm in December here. Whoever heard of a tornado in Dallas in the last week of December, but we had one. It elevated our losses relative to the prior year with a loss in LAE ratio of 52.8% in quarter 4 compared to 43.7% in quarter 4, 2014.

Revenues declined versus quarter 3, 2015 due to the reduction in concentration both geographically and within specific product lines. [Agent] (inaudible) initiatives and competitive pressure results -- resulting declines in policies in force have been partially offset by the increased premiums.

Our combined ratio of 94.9% for the fiscal year end 2015 continues to reflect improved risk file in our insurance book and focus on our core products offset by investments in sales, marketing and other corporate organization initiatives.

The insurance company continued to do well; it's profitable. We just need Mother Nature to kind of give us a break there and hopefully, in the foreseeable future, that will happen.

Okay. That is my report. And I will turn it on over now to John Martin for his on the bank.

Thank you, Alan. My comments begin on page 11. As Alan and Jeremy have said, we were very pleased with our fourth quarter results in the Banking segment, where we had pretax income of $34 million, compared to $41 million in the fourth quarter of 2014.

Higher net interest income was offset by lower non-interest income and higher non-interest expense. The increase in net interest income resulted from non-covered loan growth and higher accretion.

Non-interest income was down compared to 2014 as a result of a decline in ORE income or income we earned on ORE properties we own, and a lower service charge and fees resulting from the closure of branches in South Texas.

The bank's efficiency ratio was 56% for 2015.

Our total loans at Hilltop were $5.6 billion and roughly 39% of that is construction and -- excuse me -- it's commercial and industrial and 47% real estate and 13% construction and development.

Deposits at the end of the quarter were $7 billion; 32% of those were non-interest bearing deposits.

Going to page 12, we'll take a look at our energy exposure. At the end of 2015, we had $180 million in energy loans. And that was down $15 million in the quarter. The composition of those loans were exploration and production were 19%; services, 44%; transportation and distribution, 32%; and other, 5%.

Our energy loans represent 3.6% of our total loans and we had unimpaired energy reserves of $7.3 million at the end of the quarter.

Turning to page 13, a look at our credit quality and capital ratios -- our credit quality is good, as Al mentioned a moment ago, where we have $25 million in non-covered non-performing assets and that's down from the previous quarter.

Our capital ratios continue to reflect excess capital that we hold at the bank. We have a leverage ratio of 13.2% and total risk-weighted asset ratio of almost 17%.

Going to page 14, taking a look at our covered and non-covered portfolios -- our covered PCI loans had a carrying -- we were carrying at $222 million and our covered non-PCI loans were $158 million. Our non-covered PCI loans were $72 million and our non-covered non-PCI loans, or the rest of our portfolio, stood at $5.1 billion at the end of the quarter.

Our PCI loans are loans that we acquired in the FNB transaction and the other acquisitions. Our covered PCI loans are the ones that we acquired in the FNB transaction and we were carrying those at $222 million, which is about 54% of the outstanding balance. Our non-covered PCI loans had a carry amount of $72 million and that was about 73% of their carry -- of their unpaid principal balance.

Our total PCI carried at about 58% of their unpaid principal balance.

Going to page 16, take a look at our non-PCI loans. We had covered non-PCI loans of -- carrying about $158 million, which is 93% of the outstanding balance. And then the rest of our portfolio, we carried at $5.1 billion, which was about 98% of its unpaid principal balance.

Going to PrimeLending, PrimeLending had a strong quarter, as Alan mentioned a moment ago. We had pretax income of $3.8 million compared to a pretax loss of $4.9 million in the fourth quarter of 2014. The better result in the fourth quarter of 2015 resulted from higher origination volumes of $3.1 billion, an improvement of $353 million over the fourth quarter of 2014.

The purchase volume was 76.5% in the fourth quarter of 2015.

Refinance volume of $31 million greater in the fourth quarter of 2015 compared to the same quarter of last year. The greater volumes resulted in higher non-interest income and higher non-interest variable expenses.

We had a -- our MSR -- we were carrying an MSR at the end of the year of $52.3 million on a portfolio of about -- of $5.1 billion in loans.

I'll turn it back over to Jeremy.

Okay. Thank you very much, John. And I'll discuss HilltopSecurities. I'd like to remind you that the fourth quarter of 2015 includes the operations of SWS, so prior year only includes First Southwest.

HilltopSecurities had pretax income of $3.7 million in the quarter, which showed continued improvement and profitability since the SWS merger.

In the quarter, it included $4.9 million of SWS integration-related costs. After adjusting for such costs, the pretax income was $8.6 million for HilltopSecurities.

Our public finance was very strong with investment banking and advisory fees increasing 4% over prior year to $28 million. And our public housing business was very strong and had fair value changes on derivatives that provided a net gain of $13 million for the quarter.

Our non-interest expense was $96 million and in that, included the $4.5 million litigation reserve on one specific case from legacy SWS.

And our broker-dealer segment provided the Banking segment with $145 million of core deposits, which represents 38% of the total FDIC insured [sweep] balances.

Moving forward, to National Lloyds -- National Lloyds had pretax income of $7 million in the quarter relative to $12 million in the prior year. And our written premium policies in force have continued to decline as we remained focused on profitability in our core products.

Notably, there was severe weather in North Texas in late December that drove our loss ratio to 52.8% compared to 43.7% in the prior year.

And that concludes our prepared remarks.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions) Brady Gailey from KBW.

So if you look at the mortgage group, their expenses there were a little higher than I would've thought relative to the revenue. The efficiency ratio was higher than last quarter. Was there anything notable in the mortgage expense line?

Brady, we actually increased the expense back in the third quarter because of volumes, and we knew that volumes were going to drop off in the fourth quarter. But we didn't feel like that we ought to go and cut a bunch of [bodies] out of there because we knew it would pick back up. You just don't want to run them in and run them out. So our volumes were down in the fourth quarter and our expenses were up, so -- and it should pay off in the first quarter.

Okay. And then the $4.5 million litigation charge, is that something that you all consider one-time or do you think that could possibly be a recurring expense throughout 2016?

That $4.5 million is a one-time item. It involved a case that's then -- with the legacy SWS for several years and we're continuing to defend it vigorously. We don't think that it has merit. It involves their retail brokerage segment.

Okay. All right, great. And any update on M&A in Texas on the bank side? It seems like a lot of the smaller community banks in Texas, their stocks are really trading down. You guys still have a decent amount of excess capital. Are you interested in creating a deal in the near term or do you think that you have to wait and let this cycle play out a little bit longer before you seriously look at announcing another acquisition in Texas?

No, I think it's the same thing that we said last quarter. We're actively pursuing opportunities as always and we look for situational opportunities. And so I don't think there's anything that would preclude us from doing anything at this time.

All right. And then lastly, you guys are not a big energy lender, but you are in Texas. Can you give us just an update on kind of the economic health that you're seeing in the state? Are you seeing any signs of real weakness or does it still generally feel pretty good?

You see weakness in Houston, obviously, in the energy sector in Houston. And when we look at our portfolio, our overall portfolio, and we watch it and we're watching the trends, we have not seen any trends downward. And we have not seen any softening at this point. That's not to say that there won't be or not. We're watching it, but the Houston market is the only one that we see right now that has had some negative impact that's [trickled] on beyond oil and gas. But our other markets are strong and we do not -- we have not experienced that.

All right. Thanks, guys.

Matthew Olney from Stephens.

What else can you tell us about the updated Houston strategy now that you've hired a new market president? And also remind us of your loan exposure within Houston. What does this consist of? Is it marked or covered from the previous acquisition? Thanks.

We have $134 million in loans in Houston. Approximately half of those are amortizing real estate notes, of which part of that is from the acquisition and part of it's from what we made. The rest of it will either be construction or C&I-type lending and we have not experienced any problems.

We have hired a gentleman that's come with us really effectively the 1st of January. He was the head C&E lender for a major bank in the Houston market; he's grown up in the Houston market. He has substantial experience within that market. He knows lots of people and we're excited to have him.

Now we know that you've got to be careful, but we think it's a perfect opportunity and time to go in there because there's going to be people that are going to be bounced around. The customer is going to be bounced around and there are going to be loan officers and executives that we might be able to grab up because they might not want to be part of it. Since we're not fighting rocks and getting them off our wagon because of bad energy loans, we think there might be a good opportunity for us. So we think it's a good time to enter.

We think we were forcing it when we went down there because we didn't do a good job when we went down there. But I think God was looking over us, so we didn't make a bunch of bad loans and we don't have a lot of loans. So now is a good time for us to start and we think this gentleman is the right guy for us to lead our charge.

Okay. Thanks, Alan. And it sounds like it was strategic to slow the SecuritiesLending business in the fourth quarter. What else can you tell us about why this was the strategy and what's the long-term strategy in that business?

I'm sorry, can you --

Yes, can you speak up, Matt? We can't hear you very well.

I'm sorry. I think you said on the call that you intentionally slowed the SecuritiesLending business in the fourth quarter.

Okay, yes. And you see the broker-dealer, including our receivables, declined by I think around $750 million. And part of that -- so we reduced the balances on that and those are on the easy to borrow stocks, which have low margin. And a lot of that was to ensure we had ample liquidity when we were merging the two broker-dealers in January and moving balances over. So a lot of that was related to that. And I think in the future, this is probably on the low side of where that balance would be, but I don't know if we would take it back up to $2 billion plus where it was.

Okay. And then John, on the purchase accounting accretion, I believe you've been saying $15 million to $20 million per quarter has been the outlook. Any change to that outlook near term?

I would say we'd stay around the lower end of that range during the year.

Okay. And then lastly as far as the mortgage volumes in the first quarter thus far, seen some lower mortgage rates. Any benefit you're seeing so far from PrimeLending versus what you expected a few months ago?

Yes, yes, a lot. You don't expect the first quarter to be good. A (inaudible) of [1.70], you can only imagine everybody is refinancing again, so it's been [titled].

So strong refi, has it also been reflected in the purchase volumes as well, Alan?

Well, purchase volumes in the first quarter are not strong and they don't really start until the second quarter, into the first quarter, second quarter. What's really strong right now is refi and that's what we're seeing. We'll see the other kick in as spring gets going, but right now, a strong part of it's refi.

Okay. Thank you.

Michael Young from SunTrust.

Jeremy, I had a specific question on the broker-dealer segment. You already kind of hit the 8% pretax margin contribution that you had targeted for the fourth quarter of 2016. I know the public finance volumes were strong, but can you just give us an outlook on how you expect that to trend throughout the year and any update on kind of your target? Will we get to 10% earlier, that sort of thing?

Well, I think that what you saw in the fourth quarter -- and typically, the public finance business is pretty strong in the fourth quarter -- but they had an exceptionally strong quarter, as well as our structured finance group.

And I think the reason why, if you break out -- back out the integration costs, the reason why the pretax margin is higher was we had annualized net revenue [or] we had $100 million of net revenue which annualizes to $400 million and our prior discussions were around $350 million. So that's just kind of getting the leverage to the bottom line.

I'd still be cautious and kind of go back to what I said in the last quarter, which is we expect around hopefully more than $350 million in net revenue, and that we will phase in about $20 million of cost saves and get to high single-digit 80%-plus pretax margin by the fourth quarter.

Okay, great. And Alan, switching gears a little bit just in the quarter, it looked like the PrimeLending market share was down a little bit based on the MBA forecast. Anything related to [tread] or geographic product mix that --

That's --

-- kind of drove that?

That all had to do with volume and the markets were -- volumes are down in the quarter. That's why we dropped down to 1.17%. But it'll come back up, we're confident of that. So we feel very good about it. I think we had a better fourth quarter than what we thought.

As far as [tread], we have not had any issues or problems. I can't say that for a lot of other people, but we have not had any problems. We dealt with it properly and our people have done a great job. A lot of the smaller mortgage companies are still struggling. We do mortgage purchase business too and a lot of the people we do business with are struggling with tread. But our people did a great job and we've had no problem.

Okay.

(Inaudible) cost.

Right. And I guess last one for me -- just on the [Durbin] impact and interchange revenue, do you have any sort of a feel for how much that might impact your business?

Yes, right now, we're thinking that 2016 would be about $1.5 billion.

Okay. Is that -- that's full year 2016?

Yes, that's full year.

Okay.

But it's going to come in in June or so, yes --

(Inaudible) okay.

-- for the year, yes.

Okay. Thank you. That's all for me.

Brett Robinson from Piper Jaffray.

I wanted to go back to insurance and just make sure, will there be any spillover effect from the storm activity late in 4Q? Does any of that affect the first quarter results?

I don't think so. What you do and what we've done is we've tried to capture and reserve for the storm, both on a case and an IBNR basis. IBNR is essentially, Brett, the estimate of development on the storm. And so we've put that storm at about $6.8 million and we haven't seen a lot of legs on it since. But we have seen a lot of development, so I think that can be contained in the fourth quarter.

Okay. And then I just want to go back to the broker-dealer and sort of your comments, Jeremy, about expectations for 2016 versus the fourth quarter of 2015. And it sounds like you're somewhat cautious on expecting the revenue to really ramp from here.

And I know the fourth quarter is usually a little bit stronger, but is there anything else that you're seeing from a market activity perspective that is giving you some hesitancy to expect the fourth quarter to continue?

Well, first, it is --.

And it --.

Yes, I know the seasonality of the public finance business is very heavy in the fourth quarter, although the fourth quarter that HilltopSecurities had this year was exceptional. So I just -- it's more rather being cautious. And I think that now that we've got these broker-dealers, the merger done, we've got a great management team. I think the focus is on revenue growth and that's going to be the goal.

Okay. And I think you mentioned $63 million of expenses with that business. Could you give an update on what that runs down to in your guys' view?

I'm sorry?

I think you mentioned $63 million of expenses.

Oh, in the HilltopSecurities?

Right.

Oh, are you talking about a percent or -- I don't -- I'm not recognizing the (inaudible).

I guess I'm just trying to -- you talked about the revenue. I guess I'm just trying to make sure I understand what the expense opportunity might be for continued improvement on that front.

Okay. Well, I was just trying to be consistent with the prior quarter, right, that was run rate of around $350 million of net revenue and year-to-date through the third quarter had a pretax margin of around 2%. And we're expecting it to get to 8%, so I don't know what it is, but the 6% on $350 million is $20 million of the cost savings opportunity that we're trying to realize. And that's on --.

Okay.

-- how the expenses [rate], and [we said it's] kind of getting there.

Okay. And then just back on M&A, can you talk maybe about it because it would seem to me that Hilltop would be uniquely positioned to do distressed M&A in Texas. Can you maybe talk about that? Are you seeing any of that in Houston? And would that be the primary market you're looking at?

I think Texas is where we want to target and Houston is certainly an area that we'd like to grow. And it's just -- I think it's kind of a question of the bid and the ask, and expectations. I think that there's -- the public markets have really sold off, but I don't think that there's been a lot of real charge-off pain that's gone through the system yet.

Okay. And then just one last one, the loan pipeline, $1.7 billion -- I guess, Alan, can you talk maybe about expectations for loan growth this year? Is it double-digit? Can you maybe give a little color on that?

I think what we're projecting is 8% to 10% organic growth in 2016. We were about 9% in 2015 and of course, we had a big quarter in the fourth quarter, which carried over. So I'm going to say 8% to 10%.

Okay, great. Thanks for all the color.

Michael Young from SunTrust.

I just wanted to take the capital question from the other angle and just if you're not seeing a lot of potential conversations yet, is there any interest in deploying some of the excess capital in the interim, given the selloff in the public markets through buyback or even just increasing the dividend? Thanks.

No, we don't have a dividend, so that's --.

I'm sorry, yes.

But I think that we're certainly aware of that and we are evaluating it, and we don't have anything to announce at this time. But it's definitely very much on our mind.

Okay. Thanks.

And ladies and gentlemen, with that, we'll close today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.