Hilltop Holdings Inc (HTH) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Hilltop Holdings Quarter 3 2017 Conference Call 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.

Good morning. Joining me on the call are Jeremy Ford, President and Co-CEO; Alan White, Vice Chairman and Co-CEO; and Will Furr, CFO.

Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our business strategy, future plans and financial conditions, are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties. 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. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.

Additionally, this presentation includes certain non-GAAP measures, including taxable equivalent net interest margin and taxable equivalent net interest margin before purchase accounting adjustments. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix of this presentation, which is posted on our website at ir.hilltop-holdings.com.

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

Thank you, Isabell, and good morning.

For the third quarter of 2017, net income was $30.2 million or $0.31 per diluted share. During the quarter, Hurricanes Harvey and, to a lesser extent, Irma adversely impacted our earnings by $6.4 million or $0.07 per diluted share. While the third quarter presented some challenges for Hilltop, we remain committed to delivering diversified growth across our businesses, maximizing value for our shareholders and proactively managing risks.

Delivering value to our shareholders remains top priority. Year-to-date, we have returned $45 million to shareholders through a combination of dividends and share repurchases. Including the SWS settlement in Q2 2017, capital distributions equate to $92 million. Despite these capital distributions, Hilltop has grown tangible book value by 7% year-over-year. We also announced that Hilltop's Board of Directors declared a quarterly cash dividend of $0.06 per common share payable on November 30, 2017.

Additionally, this quarter's results highlights our risk management efforts. Hurricane Harvey devastated the Texas coast and certain areas of Houston. In our insurance business, our actuarial estimate of gross losses were $19 million while our estimated retained losses are only $6.1 million. This reflects the exposure management actions over the past several years and the effectiveness of our reinsurance coverage. Our other businesses were also impacted by the hurricanes and have collectively recognized $3.7 million for certain exposures, which Will can cover in more -- his more detailed comments.

Moving forward to the next slide. Now I'll discuss the results of our operating businesses. The modest pretax decline from PlainsCapital Bank was driven by a reduction in purchase accounting benefit of $8.6 million. Excluding the impact of purchase accounting, the bank's core results increased due to solid loan growth, with non-covered loans ending at $5.6 billion. The mortgage business continues to transition towards the purchase mortgage market. During the quarter, refinance volumes declined by 51% while purchase volume increased by 4%. PrimeLending's business model remains focused on purchase originations while the market continues to become more competitive.

We are particularly pleased with the results of HilltopSecurities as the business generated a 19.5% pretax profit margin, up from 16% last year. Included in these positive results, our retail and clearing business showed strong performance from our integration efforts as well as higher short-term interest rates. Finally, our insurance business had experienced a challenging environment throughout 2017, including the 2 hurricanes that occurred in the second and third quarter. We expect overall storm losses to be more seasonally balanced during the fourth quarter.

I'll now turn the presentation over to Will to walk through the financials.

Thank you, Jeremy. I'll start on Page 5. Hilltop's income before taxes for the quarter equated to $48.4 million. That's (inaudible) from the third quarter of 2016 of $37.1 million. The quarter's results reflect the impact of both Hurricane Harvey and Irma, which affected results by $9.8 million pretax. Also during the third quarter of 2017, provision expense declined to $1.3 million, driven by lower linked-quarter loan growth and less than $1 million in net charge-offs during the quarter.

This quarter, we have added a supplemental table on Page 5 to provide details regarding the impact of purchase accounting adjustments, FDIC indemnification and clawback on the current and prior period results. For the third quarter of 2017, the pretax impact of purchase accounting adjustments, FDIC indemnification and clawback positively impacted pretax income by $2.8 million. The positive net impact of these items has declined by $8.6 million from the prior year and $12.3 million from the second quarter of 2017. Hilltop remains very well capitalized and maintained a Common Equity Tier 1 ratio of 17.66% at the end of the third quarter of '17.

Moving to Page 6. Net interest margin equated to 3.5% in the third quarter of 2017. Excluding the impact of purchase accounting, taxable equivalent net interest margin equated to 3.15%, reflecting improving loan yields, managed deposits cost and improving yields in the investment portfolios across Hilltop. The pre-purchase accounting taxable equivalent net interest margin declined by 8.8 basis points versus the second quarter of 2017. This decline reflects a lower level of interest recapture of previously charged-off loans than in the second quarter of 2017.

Earning assets increased by $1.3 billion from the third quarter of 2016, reflecting growth in non-covered loans, excluding margin loans, of $474 million, which was somewhat offset by runoff in the covered loan portfolio of $104 million. Further, Hilltop's lower-risk security portfolios grew by $478 million, driven by higher mortgage security holdings at both the bank and HilltopSecurities. Lastly, loans held for sale grew by $266 million from the third quarter of 2016.

Moving to Page 7. Total noninterest income for the third quarter of 2017 equated to $298.5 million. Third quarter mortgage-related income and fees declined by $38.5 million versus the third quarter of '16. This decline is driven by a reduction in mortgage originations of 12% or $520 million compared to the prior year. The decline in mortgage originations reflects an ongoing market shift towards purchase mortgages as our refinance production declined by $661 million from the third quarter of 2016. As the refinance market contracts, pricing pressures have persisted. And as a result, the mortgage gain on sale rate fell by approximately 9 basis points to 375 basis points versus the third quarter of 2016. Securities-related fees declined versus the prior year by $12 million, driven by a reduction in capital market fees, which is a result of lower market volatility and, therefore, lower trading volumes, slower originations in public finance and lower volumes in structured finance.

I'm turning to Page 8. Noninterest expenses improved from the third quarter of 2016 by $10.3 million to $353.8 million and reflects a $6 million negative impact that resulted from the hurricanes. Expenses were positively impacted by lower variable compensation and business expenses related to lower production levels in certain of our businesses. Further, the expense improvements noted as other are driven by lower acquisition and integration expenses, declining legal costs and higher expense recapture rates on pass through expenses in our mortgage business. Insurance-related loss and loss adjustment expenses increased $15 million versus the prior year. The quantity and severity of noncatastrophic storms, coupled with the hurricanes, has impacted the loss level throughout 2017. Storm-related losses are expected to normalize to seasonality adjusted levels during the fourth quarter.

Moving to Page 9. Total loans, including margin loans at HilltopSecurities and the covered loans housed within the bank grew by approximately $370 million or 6% versus the third quarter of '16. Non-covered bank loan growth remained strong at 9% versus the prior year and continues to reflect strength across our largest markets. The yield decline of 80 basis points versus second quarter in 2017 is driven by lower accretion. Loan yields, excluding accretion, continue to improve slowly as rates continue to reset above the loan rate floor levels in our adjustable-rate portfolio. Currently, we have approximately $1.2 billion of loans that are below their rate floor levels. Approximately $900 million of those loans would reset with a 25 basis point increase in short-term rates.

I'm moving to Page 10. Total deposits are $7.7 billion, up $633 million versus the third quarter of '16. Noninterest-bearing deposits remain stable while interest-bearing deposits continue to show steady growth versus the prior year. The driver of the increase in interest-bearing deposits is growth in our money market and certificate of deposit products. We remain active in the market, testing rates and terms to ensure we remain competitive as the market moves slowly towards higher rates. The current deposit beta for non-broker deposits is approximately 20% as of the third quarter of 2017.

I'll now turn it over to Alan for more insights on the business performance.

Thank you, Will. Good morning. The bank had a solid quarter. In the third quarter, net purchase accounting adjustments, we made a 0.94% ROA. And our net interest margin continues to operate within the range that we set at 3.54% net purchase accounting. And as Will said, our loans continue to -- the floors continue to fall out. And with another rate increase, it will have a -- should have a very positive effect on us.

Our loan growth continues at 9% year-to-date. That's in line with what we've said, the 8% to 10% that we've talked about on growth for the year. Our strongest markets are Dallas and Fort Worth and Austin. They continue to be very viable. The big focus is -- or the big result is commercial real estate loans. We're seeing less and less C&I at the time, and we continue to compete fiercely for those. We have $2 billion in unfunded commitments with $750 million of that are real estate construction loans, which we'll continue to fund up. And our pipeline looks very favorable for the fourth quarter, so I think we'll be able to hold that 8% to 10% of loan growth that we have talked about.

When we look at our net charge-offs for the quarter, they were $900,000. Year-to-date, they're $2.5 million. I'm pretty proud of that figure. $2.5 million on a $5.5 billion loan portfolio, I think, shows the loan quality that we've been able to hold. However, we did put a loan on nonaccrual, a $10.6 million oil and gas loan that we've had classified for quite a while. It is a machinery and parts distribution company that distributes things to service companies. And of course, it's been slow. Their cash flow has declined, and we've been cautioned to put this on nonaccrual. We do feel good about the loan. As it continues to pick up, we should see continued reductions, and we should see maybe getting it back on accrual.

We sold our bank in El Paso. It reduced our loans by $25 million and our deposits by $20 million. So we're out of the El Paso market. But we also opened up a new branch at The Star out in Frisco. We're very happy with that and pleased to be out there and looking for good things there. Our deposits still seem to be strong. Our noninterest-bearing deposits are running 31%. And like I say, we've had about 5% deposit growth this year with -- even with the sale, so I'm happy with that.

Going to PrimeLending, things have kind of slowed down in the mortgage business primarily from the refinance area. We did about $4 billion in the third quarter, and that was about $520 million less than we did third quarter of '16. That's about a 12% decline. Our purchase volume, however, increased $141 million or 4%. And of course, that's where we really focus and that's where we think we can continue to take market share. We continue to fight pricing issues as these people try to grasp for purchase business because the refi has gone away. It's been very competitive. We've seen this before. And we play the game, and we're going to -- we'll keep our good customers, and we'll keep our good loan officers and help them out.

Inventories are still lacking across the country. Not much inventory; that does cause issues as far as the industry goes. Year-to-date volumes, this is year-to-date, for us are down 6%. And if you look at the industry, the year-to-date decline in the industry is 24%. So we continue to outpace the industry. On the purchase side of it, we're up 7% year-to-date whereas the industry is actually down 2%. So we're taking market share there, and that is our focus.

Our noninterest income decreased $38.8 million or 19% versus the prior year, and that's due to a decline in loan production. And it's a decrease in the net interest -- I mean, a gain on sale from year to year by, I think, what did you say, 9 basis points, Will. But if you look at it from second quarter to third quarter, we actually improved our net gain on sale by 13 basis points.

I think one good aspect of this is year-to-date, we're up 67 new loan officers. I think that speaks well for our company in the purchase side of the business. And so we see strength come from that if and when the industry does pick up more, and we can gain more market share from that. And we did $2.5 million in reserves this quarter. Primarily, we haven't told -- we haven't identified the losses, but as a protection against the losses on Harvey and also Irma. Things have got stuck in the pipeline, and we're trying to work through. But at this point, we haven't really identified those, but we were being on the cautious side.

As far as the securities company, as Jeremy says, we had a really good quarter. Great after-tax gain compared to what we have been doing. I think a lot of that relates to the fact that our business has been pretty good, but we've also been able to control our expenses and continue to be able to reduce those. Public banking continues to take it on the chin a little bit, but that's pretty much industry-wide and something that we expected this year because we knew there wouldn't be a bunch of refinance this year. But as things start to occur and infrastructure starts to build, we think that's going to pick back up.

In our structured finance, I mean, this had been off a little bit, and that's primarily due to the mortgage business which we experienced at the mortgage company. But retail has been strong, clearing has been good and security. So we're seeing good revenues there. And one thing that's really helped us, we're managing about $24 billion right now for municipalities, cash management. And of course, that's helped our income. And then, of course, rate increases have certainly brought along some earnings for us as they go up. Right now, the broker dealer is providing $1.3 billion to the bank, as far as funding goes, that continues to work as we planned.

And as to Lloyds, we really had a tough, tough quarter. Not only were we hit by Hurricane Harvey, we were hit by several storms that we didn't expect to have in the third quarter, which helped pile on to the loss that we had with Harvey. Our premiums continued to decline, and that results in difficulty when your expenses are going one way and your premiums are going the other way. But that's a lot due to competition mainly in Texas and Arizona, where we are. So we will continue to work on that, and we continue to try to find ways to increase our revenues and our premiums in our base. It'll be interesting to see, as we go through this process in Houston with Harvey, how many insurance companies are really going to be able to stay around and how many took it really on the chin. I think we came out well because of our cat coverage, and that reduced our loss significantly. So I think we were well covered there considering it was hurricane. We'll see if the others are the same. So it was a tough, tough quarter for National Lloyds. Hopefully, the fourth quarter will come back around, and we'll look for better days.

So that's the operating report from me, and I think that ends our prepared remarks, so I'll turn it back to the operator for questions.

(Operator Instructions) The first question comes from Brady Gailey with KBW.

So maybe one question on the gain on sale in mortgage. I mean, as you said, it was up around 13 basis points linked quarter. It's now 375. Going forward, would you expect a continued increase there? Or is the right way to think about that just being kind of stable at the 375 level?

This is Will. I think as I think about it, it has some seasonal variability related to kind of how volumes flow, and so I would expect to continue that. As Alan noted, the competitive pressure is there. It continues, and it will -- and we expect it to continue for a period of time. So stable to slightly down notwithstanding the seasonal outlook would be the way we'd think about it.

All right. And then, Will, I know last quarter, you guided to a core margin of around 3.10% kind of plus or minus a few basis points. You came in at 3.50% and maybe a smidge better. But is the right way to think about the core margin still kind of in the 3.10% range or is that improved?

I think we are drifting higher as we sit here. But I would -- I'd keep the guidance at 3.10%, plus or minus 3. Again, we are watching deposit costs, as I noted in my comments. We continue to test rates and terms. But we are seeing the market become more competitive for deposits. Not aggressively so from a rate perspective, but we are seeing that. So the guidance is for 3.10%, plus or minus 3.

All right. And then finally, Will, you mentioned some growth in the bond book this quarter. Do you think that will continue? How should we think about the size of the bond book going forward?

My expectation is that it's stable from here generally. So we continue to look for opportunities to put cash to work and capital to work. And that's been one way we've done that here the last couple of quarters. But I'd expect it to be reasonably stable for the rest of the year.

Okay. And maybe one more. Just an update on M&A, either Alan or Jeremy.

Yes, we -- I think right now, we have over $550 million of excess capital, and we are looking to deploy that, as always, with M&A transactions. Year-to-date, there's been 6 deals announced in Texas, over $250 million in assets; only 2 greater than $1 billion. And I think that most of these are kind of 90% stock deals. But we're looking for platforms that are the right fit for us and -- both kind of personalities and strategically, and we'll keep pursuing those.

The next question comes from Michael Young with SunTrust.

Maybe can we start just on the purchase accounting accretion? Obviously, kind of a reset to a little lower run rate this quarter. Do you expect any pops back up from here? Or should we continue to expect that on a sort of steady decline from here?

Yes. I mean, I think as we've gotten in the past, $10 million to $12 million is our quarterly run rate. Obviously, on a scheduled basis, you'd expect it to decline over time from here. That said, we still have a number of loans, still got a number of pools. And so you could see quarterly increases from here. However, on a scheduled basis, again you would expect it to decline through the end of the loan pool.

Okay, great. And Alan, just wanted to follow up on your comments on the insurance business. You mentioned specifically that maybe some of the other insurers might be more impacted. Do you think that this could be sort of a catalyst to increasing net premiums written from here and/or getting just better pricing going forward?

I guess what I'm saying is Houston was devastated. Obviously, we don't insure on flood, but every -- a lot of insurance companies didn't, and I don't know how they had to book cover or not. We had ours covered. But they didn't have their cat deal in the back. They're going to be sucking wind. And some of them, one, might not be around; two, they might pull out of there. And when they do, then that provides less competition and more opportunity. I think that will be true in the buying. The same way people pull back and we're here. So you would hope that it would help our marketing in that part of the world from that standpoint. I guess that's what I'm saying, and that's purely from what I think, not anybody else. But when you have bad things, some people don't make it and some do. And the ones that do and can hold on will end up being the ones that do all right. And I think we're -- obviously, we're in that position as an organization, as strong as we are.

And maybe just following up on the insurance business. Will, I think you mentioned in your remarks that you expect to return to kind of normal loss rates in the fourth quarter. I guess does that portend that you guys...

The sky is clear outside today, Michael. That's what I was basing that on.

Yes, I mean, the fourth quarter is typically the most mild weather that you have in North Texas and in Texas, so that's typically the most profitable quarter. So we expect to return to that weather pattern. And we do have a lower top line, but we're expecting to have a decent quarter.

Okay. So you feel confident that you got all the Harvey-related impacts in this quarter?

Yes. Yes, we feel confident in our reserving for it.

The next question comes from Matt Olney with Stephens Inc.

Wanted to start on mortgage business. And Alan, I'm curious about the mortgage volumes in 3Q. Looks like there were some good year-over-year gains on the purchase side. But can you to speak to kind of the month-to-month variability? Was anything unusual or just the normal seasonal patterns you've seen before? And...

Well, I think it dropped off in the third quarter probably more than we expected because that's really the refi business went away. In the purchase business, being out there, everybody's business is down. And if you talk to the MBA or look at their stats, third quarter wasn't as strong as it normally is. So I think that was a little bit of a struggle. We're running about 84% purchase and not much refi. But if you look at our gain of market share, we're up, for the year, like 7%, and the market's down 2%. So we're continuing to do that, but there isn't as much volume. And Matt, it's the same story. There's not a lot of inventory out there, and we've got loan officers with lots of people that are proving they can't find houses. And so that creates a problem. But on the other side, you've got these guys that were in the refinance market and didn't have the purchase side that are out there trying to scratch and scrape to stay alive, and that's where the pricing comes into play. And we've been through this before, and it'll last a couple quarters and then it'll go away. But we're going to hang in there, and we're going to take care of our customers and we're going to take care of our loan officers and our people. And I guess the real plus I've seen in this whole deal, we're up 65 loan officers for the year, and that's pretty significant in the market we're in. So you can see some of these people are leaving places they're at because they're not confident they're going to be there. So we feel like we're in a good position, but we need -- obviously, we need more growth in the mortgage business, or the mortgage industry in the country, we need more inventory. And we need probably something to settle down up in Washington and something be decided that I think would help drive our business.

Yes, Alan, I want to drill down on the inventory issue that you mentioned. And since you guys have a national footprint, I'm curious if you're seeing any more inventory pressures in certain regions or states than...

No, I think it's pretty much all over the country, we're going to have inventory problems. I think these hurricanes have slowed down some of that. Of course, Florida got wiped out. Houston is a big -- Houston and the Gulf Coast, from Corpus up, we did some production through there, and everybody has kind of died for the quarter and I think it'll probably be slow this quarter. But I think you pretty well see it across the country, the inventory. I know we were just up east, and there's not enough inventory out there. And they're building like crazy down here in our area. And I think as fast as they can get a house built, somebody's in it, or it's passed to somebody who wants to sell one, there's 7 or 8 contracts right on top of it. Now those are in the busier areas like Austin and Dallas and Fort Worth. But when you look out and -- at lesser -- Florida is our third largest producer, Texas is our first largest producer and California is our second. And those 3 states have kind of been devastated by some sort of madness from Mother Nature. So it affects us a little bit.

Okay, that's helpful, Alan. And then switching gears, want to go back to the disclosures around the purchase accounting on Slide 5. I think you -- it was mentioned on that slide that there are some expenses associated with that, the $7.4 million in third quarter. Is that just the indemnification and a clawback? Or are there other expenses associated in that $7.4 million number in 3Q?

There are some small amortization-related expenses in there, but it's principally -- the amortization is the largest number embedded in the $5.4 million -- or in the $7.4 million and equates to approximately $5.3 million of the total.

And Will, what kind of visibility do you have on that? Any kind of guidance you can give us as to what that part of the equation will look like the next few quarters?

Well, what I can say is our losses have continued to outperform across the portfolio. That has been consistent over time, and we this year have been amortizing the overall asset. The asset's down to $33 million as of the end of the third quarter, and we would expect for the remainder of this year and potentially early into next year to continue seeing amortization be at the elevated levels.

Okay, that's helpful. And then lastly, on the stock repurchase plan, you guys have been active this year. Are you guys committed to remaining active in that repurchase plan? And how much more dry power do you have under the current authorization?

We did -- we got authorization to do $50 million, and that expires in January of '18. And to date, we've done $27 million. So we're -- the plan here has been to kind of spread out and do more normal course repurchases throughout the year, and I can -- we may be doing that in the fourth quarter. And so that's kind of where we're at. But not enough to really try to move the market by any means anytime.

The next question comes from Brett Rabatin with Piper Jaffray.

Wanted to ask, I guess, first, Alan, you talked about loan growth and the challenges in C&I. And it seems like commercial real estate is also seeing some movements to the permanent market. Maybe just now look as you see it, I know it's a little early for '18, but construction was your grower this quarter. Can you grow C&I over the next 12 months, do you think? And then maybe just what you're seeing in commercial real estate. Will that continue to be a headwind? Or maybe some thoughts on that.

I think going into next year, I think we'll continue to see the level of growth that we've had, both in commercial real estate and C&I. C&I is very competitive, and we're going to compete. I think we've got some markets that we think we can do a lot better in and will as we focus next year. And we have some players in place that are going to help us do that. We have some strong relationships that they continue to grow. As they continue to grow, we'll grow. So I feel confident we can stay in the 8% range in growth next year, and that's on a pretty big portfolio. That's a lot of growth on an organic basis. And plus try to -- main thing, Brett, is we're going to keep our loan quality. We're not giving in to the loan quality issues, that we think that's in parity in $2.5 million worth of losses so -- for 3 quarters, and I have to knock on wood. It's pretty good.

Okay. And then just wanted to ask about the broker dealer. If you look at the pretax margin, it was the highest it's been. And I know there are some pieces to that, that are going to affect every quarter, but I guess I'm just curious. Jeremy, are you more optimistic on the kind of the pretax margin ongoing level? Or maybe give us some thoughts on the pieces that might move that up or down.

Yes, I mean I'd say overall, we've guided in the past to 10% to 12-ish percent pretax margins, and I think we're comfortable that it should be in the mid-teens now is how I would look at it. The quarter was very strong, and I think we've really seen the benefits of our integration efforts and a rise in short-term interest rates. So I'd look in the future for -- the fourth quarter is usually, revenue-wise, the strongest quarter with just kind of the seasonality in public finance, and I can see our margins being in the mid-teens.

Okay. And then just lastly, Alan, back on mortgage. Can you talk about the fair value marks, the interest rate lock commitments that impact in this quarter and then if you're doing anything differently to mitigate that going forward?

It's Will. I'll take it and then kind of turn to Alan. On interest rate lock commitments, obviously we had lower volumes, which impacted us. We also had kind of some rate movements through the period that caused valuations to move a little. We're not doing anything different in terms of kind of how we're managing the overall pipeline and how we're managing the hedge. So again, I -- we expect kind of to normalize as we go forward here, understanding, back to our volume outlook, understanding volumes are going to be under pressure.

I have nothing to add.

Okay. And then maybe I can just sneak one last one in. You talk about M&A, but I'm curious, if expectations are high and you guys would prefer to be a cash buyer, a lot of stuff is done with stock, you're more of a franchise buyer of things you can improve, I think, what do you do if the expectations are high and you feel like you're going to get outbid on stuff? Do you just sit on the capital? Or are you guys looking to do other stuff with the excess capital?

I think, first and foremost, we're looking for opportunities that are the right fit for our organization and that are strategic. And we'll pay a -- we've got to pay a fair price to do that. So that's our goal. And we're definitely not sitting. We're looking at a lot of opportunities and ways to deploy our capital.

The next question comes from Michael Rose with Raymond James.

Most of my questions have been answered, but just 1 or 2 more. Hey, you guys talked about the 8% to 10% loan growth. Obviously, this quarter, a little bit softer. How much of that do you think was related to the impact of the storm? And do you think we could see a rebound? And then as we -- in the fourth quarter. And as we think about next year, you guys continue to talk about really strong pipelines. I understand C&I is a tougher business, but just given the size of the pipeline, I mean, why couldn't that growth rate actually be stronger next year if the economy remains status quo?

Well, to answer your question, the 8% to 10% growth, I feel, is a good figure. I feel like it's going to be a good figure next year. It is very competitive. And yes, I think we could grow C&I and we could grow everything if the economy continues to grow. And we see some good results come out of Washington that helps drive that. We've got a couple of markets that we're in that we haven't done a lot, and we think we maybe can capitalize on those as we go into next year and as we position ourselves with additional people. I will say about the hurricane and the situation down there, yes, I think it's had an impact in this quarter. I think not only did it have an impact on those markets that we're in, but I think overall, it had an impact in the state because I think everybody kind of stopped there for a while and watched what went on. And it has been a slowdown in those markets, and I think it'll continue to be a slowdown for a couple of quarters. The insurance money's slow coming. The money coming from the government is not flowing in as fast as everybody wants it. You still got people that haven't gone back to work. They're still out messing around with their houses and everything and trying to get their lives back together. And a lot these people haven't gone back to work, and it's going to hurt small businesses and things like that. And it's going to take a little while to get this out of the system and be able to start back. So I don't think the fourth quarter is going to be strong in those markets. I think after that, then I think you can see an uptick, and I think you'll see the result of all the construction that's going on, all the purchases are going to be done. And I think there'll be stronger activity there from that standpoint. Now that activity, I hope, doesn't pull from some of these other markets like construction workers and everything else that kind of puts everything in a tizzy. But for right now, it is slow, and I think it'll pick back up. And I do think it's had some effect in all our businesses, not just the bank but the mortgage company and to a lot lesser extent would be the broker-dealer. But that's just -- that's how I feel and that's how I see it and that's what I read and that's what I see on the ground when I'm there. So but I'm optimistic that there will be an uptick, and I'm optimistic that we're going to be able to increase our market share in a couple of these areas, and we're doing things right now to be able to do that. And that's -- when you don't have a lot of loans on the ground in Houston, you can grow that pretty easy with the right people and the right people you do business with. So hopefully, next year will be a good year for us in those markets.

That's good color. And maybe just one question from me. When I just look at the deposit composition, the growth over the past year has been in some higher-cost categories like money market and time. And obviously, you guys have some pretty high beta deposits at the broker-dealer. Can you just talk about what's embedded in your assumptions for that 3.10% core, plus or minus 3 basis points in terms of betas, particularly if we got another rate hike or 2 over the next year?

So we -- generally, in the outlook, we are assuming that we will see the Fed move. I mean, we're kind of where the market is on the Q4. And so as we model out any rate increases from here, we model them towards 50% to 60% aggregate beta. Again, we've been able to maintain here through this quarter roughly 20%. But again, we are seeing pricing pressure there on the deposit side. We continue to be prudent and judicious about how we execute against that. However, the market is moving higher.

I guess just to follow up. I mean, your -- you guys' loan-to-deposit ratio is relatively low. I mean, why the decision to continue to grow the time bucket? Just seems like you have the capacity to let some of that flow out. So what's the impetus there?

Well, I think we just -- we continue to just manage toward a balanced deposit funding. We are, as Alan has noted, seeing a lot of activity on the loans side in the CRE space. And so we continue to position the balance sheet with what we deem to be core deposits. We also think, if you believe rates moving higher, which we do, that time deposits at this point are at a pretty good level. Again, we're not going to be overly reliant on it, but as we position, we want to be balanced.

The next question comes from Jesus Bueno with Compass Point.

Just touch upon the insurance unit again. Can you provide some additional color on maybe what the Irma impact was or what your exposure to Florida is within the insurance segment?

Yes, we don't have any exposure in Florida, but we do have some policies in Georgia. And I believe that Irma really wasn't significant, but I believe it's about $0.5 million. $600,000.

So it's more just a higher frequency within kind of your core market?

No. I mean, it's -- a lot of it was the Hurricane Harvey in our core market in Texas. As well as we had the Irma, but also we had some late storm higher frequency in kind of July.

Okay. And then, I guess, moving kind of -- you had mentioned that you have up to $8 million in reinsurance coverage and that the $4.5 million seemed modest. So I guess is it correct to assume that $0.5 million from Irma, another of $4.5 million from Harvey, and then, of course, you mentioned the reinstatement of the reinsurance fee. I guess the remainder or, I guess, the disparity between your kind of normal losses that you see in this quarter, that would all be associated with the late -- the storms that came late in the quarter?

Yes. Yes, that came early in the quarter, late in the season. But you're on the right path there.

Got it. And it looks like earlier in the year, you had upstreamed some capital from the insurer to the holdco. And it looks like now you may have put some back in. I guess what was the thought process there driving that?

Well, we had excess capital, and we put -- we took a dividend of $42 million out of our insurance company. $20 million of that went to pay off some insurance company-related debt and $22 million with the Hilltop. So that was the case. I don't foresee us needing to put capital back at National Lloyds.

Understood. And just on the provision you took or the allowance you established for the $701 million in loans you have in Harvey-impacted areas, where does that lead to -- that run to? Was that just a reallocation of your reserves, your current reserves?

It was. So we had -- during the quarter, as I mentioned on -- in my comments, we had lower linked-quarter growth, and we also had a methodology adjustment in our allowance. And so it was a reallocation of that, the $2 million.

That's helpful. And If I can just slip one more. And I guess I appreciate the margin guidance, Jeremy, on the broker-dealer. But I -- in terms of kind of the net revenue outlook, is $400 million annually still a good number to use there?

Yes, I would -- last year, we made $110 million in the -- well, I don't have it there. It popped out. But yes, I'm still -- we're still kind of guiding towards the $400 million of net revenue. Year-to-date, we're at about $300 million, a little shy. It could come in a little higher than $400 million, but it's right around there.

Next comes a follow-up question from Michael Young with SunTrust.

Just wanted to ask on mortgage servicing if there was any more of an increased appetite to hold more servicing to kind of offset the decline in originations? And/or if the capital rules, if those were to change, would that change your appetite either?

So as we think about mortgage servicing, obviously we had a sale this year in the first quarter for $17 million. We continue to kind of work through normal flows there. I don't think there's going to be an intentional short-term increase in our overall MSRs, and we continue to watch the capital impact. Obviously, there's some back and forth around the potential capital rules related to MSRs. We watch those closely. But as they're current affected, obviously MSRs and the capital implications of those get materially more punitive in the first quarter of 2018. So we're watching the industry, kind of watching the guidance and watching the rules around that. But we feel comfortable with where our MSRs are today.

Yes, and I just would follow up on that. The reason why we would have more MSRs is really related to that execution for the business and what we think is strategically the best thing to do in the capital markets for that business and not necessarily a bet on mortgage originations.

Okay, great. And maybe one last one, if I could, Jeremy. Just looking out from here, where you see kind of the best opportunities within the business to continue to kind of rationalize the expense base just going forward maybe in the next year?

Well, I mean, I think that this was a tough quarter as far as our results. But I would say that I think that for the most part, our businesses are positioned well and the fundamentals are good, particularly with mortgage company focused on the purchase originations and the bank kind of coming out from this -- our accretion and growing loans. But as far as efficiencies, that's something that we are working heavily on. And in a lot of ways, we're really looking at what we have as a holding company and what we can leverage on across our businesses.

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.