Hilltop Holdings Inc (HTH) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Hilltop Holdings Fourth Quarter Earnings 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 this morning 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 condition, 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 fourth quarter of 2017, net income was $13.4 million or $0.14 per diluted share. During the quarter, the Tax Cuts and Jobs Act was passed and resulted in a onetime charge that reduced net income by $28.4 million or $0.30 per share. Excluding the impact of this tax-related charge, net income was $41.8 million or $0.44 per diluted share.

We expect the new tax legislation will benefit Hilltop by reducing our effective tax rate going forward, which Will is going to cover in more detail.

During the quarter, Hilltop was able to grow core deposits and commercial loans, build on the earnings and margin momentum in the securities business and increase our overall mortgage market share. Delivering value to our shareholders remains our top priority. In 2017, Hilltop returned $50 million to shareholders through dividends and share repurchases. Including the SWS settlement, shareholder returns totaled $98 million. Meanwhile, our tangible book value per share has grown by 6% from the prior year. Additionally, Hilltop's Board of Directors declared a quarterly cash dividend of $0.07 per common share, payable on February 28, 2018, representing a 17% increase.

We are dedicated to managing risks across the organization, particularly in regards to the bank's credit quality and loan losses. For the full year 2017, we had net charge-offs of only $4.6 million, representing 8 basis points on the average bank non-covered loans.

Moving forward, fourth quarter pretax earnings reflect solid performance across all of Hilltop's businesses. Excluding the $5.3 million reduction in purchase accounting impact, the bank's core results improved from 7% non-covered loan growth.

Through our continued focus on home purchase volume, PrimeLending's pretax income declined modestly despite a 34% decrease in refinance volume.

HilltopSecurities had a strong quarter, with pretax income of $19 million, representing a 17% margin. The year-end tax bill drove up national issuances and resulted in a rebound by public finance. Additionally, HilltopSecurities was recently ranked the #1 municipal financial adviser in the nation and Texas in 2017. National Lloyds experienced low storm losses, which is in line with seasonal expectations and drove its $14 million of pretax income.

2017 was a profitable and rewarding year for Hilltop, for which I thank and credit our dedicated employees across all of our companies.

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

Thank you, Jeremy. I'll start on Page 5. Hilltop's pretax income for the fourth quarter equated to $65 million, an increase from the fourth quarter 2016 of $11.9 million. Pretax income for the full year 2017 equated to $243.3 million, an increase from the full year 2016 of $11.9 million.

As Jeremy stated, the fourth quarter and full year 2017 net income results reflect the impact of the Tax Cuts and Jobs Act that was passed in December. In my comments, I'll refer to this bill as Tax Legislation. The passing of Tax Legislation resulted in Hilltop's revaluation of deferred assets and liabilities and the review of the future deductibility of certain expenses. The net impact of these actions resulted in a nonrecurring, noncash charge of $28.4 million during the fourth quarter.

In future periods, this Tax Legislation will result in a lower federal income tax rate for Hilltop. Based on our current outlook, we expect our GAAP effective tax rate will be between 23% and 25%.

For the full year 2017, purchase accounting positively impacted pretax income by $29.1 million. The positive net impact of these items has declined approximately $18 million from the prior year. We expect the decline in purchase accounting impact to continue in 2018. Further, on a scheduled basis, we estimate that the pretax contribution, net of expenses from purchase accounting, will be between $4 million and $6 million per quarter on average for the year, and the purchase loan accretion will average $6 million to $8 million per quarter for the year.

Hilltop capital position is strong with a period-end common equity Tier 1 ratio of 17.69%. The impact of Tax Legislation on the Common Equity Tier 1 ratio was approximately 31 basis points.

Moving to Page 6. Net interest margin equated to 3.63% in the fourth quarter of 2017. The impact of purchase accounting accretion included in the net interest margin equates to 44 basis points for the quarter. The prepurchase accounting taxable equivalent net interest margin equated to 3.21% for the quarter, an increase of 10 basis points from the fourth quarter of 2016. This increase reflects the ongoing resets of our adjustable loans and securities portfolios and our ability to manage deposit costs through the first leg of the rate cycle.

Earning assets increased by approximately $728 million compared to the fourth quarter of 2016. Non-covered HFI bank loan growth of $354 million was somewhat offset by runoff in the covered loan portfolio of $77 million during the year. Further, Hilltop's low-risk securities portfolios grew by $637 million from the prior year. At year-end, HilltopSecurities did carry additional municipal securities inventory to support future business flows given the expected seasonal supply declines in the municipal markets, coupled with the accelerated activities in public finance that could further reduce supply during the first quarter.

Further, the liquidity profile at the bank continues to strengthen and those excess funds have been leveraged to increase the unencumbered securities mix in the discretionary portfolio.

Moving to Page 7. Total noninterest income for the fourth quarter of 2017 equated to $291 million. Fourth quarter mortgage-related income and fees declined by $17 million versus the fourth quarter of '16. This decline is driven by a reduction in mortgage originations of 7% or $285 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 $387 million from the fourth quarter of '16.

As the refinance market contracts, pricing pressures have persisted, and as a result, net gain on sale of loans decreased 8 basis points from the fourth quarter of 2016 to 380 basis points. Given the continued competitive pressures, we expect that the gain on sale margins will remain pressured into 2018.

Securities-related fees increased versus the prior year by $6.3 million, driven by higher short-term rates and improvements in retail. Additionally, public finance recorded a strong fourth quarter as Tax Legislation drove higher national issuance in December.

Moving to Page 8. Noninterest expenses improved from the fourth quarter of 2016 by $27 million to $329 million. Fourth quarter 2016 professional services expenses included a $16 million legal settlement related to the Rhode Island matter. Further, expenses were positively impacted by lower variable compensation and business expenses related to lower production levels in certain of our businesses.

Insurance-related loss and loss adjustment expenses decreased $5.4 million versus the prior year, driven by seasonally low storm activity during the quarter. In other -- included in other expenses, we released $1.4 million of the initial $1.5 million hurricane-related reserve previously recorded in the mortgage segment.

Moving to Page 9. Total loans, including margin loans at HilltopSecurities and the covered loans held within the bank grew by approximately $353 million or 6% versus the fourth quarter of 2016. This performance was at the low end of our expectations, but reflects discipline in managing credit quality and underwriting standards while being responsive to our clients' financing needs.

Moving to Page 10. Total deposits were approximately $8 billion and have increased by $914 million or 13% versus the fourth quarter of 2016. The driver of the increase in interest-bearing deposits is growth in our money market products and certificates of deposit. Deposit costs have increased modestly with short-term interest rates, and we remain active in the market testing rates and terms to ensure we remain competitive. Hilltop's interest-bearing deposit beta since the beginning of this rate cycle is approximately 24%.

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

Thanks, Will. Good morning. At the bank level, first, we had a solid quarter, we had a solid year. Our loan growth ended up at 7%, which is a little below what we were expecting of 8% to 10%, but this occurs because of unexpected pay-downs and it also occurs because the market is very competitive, and we're very conservative on our underwriting and as we cautiously move through the times that we're in. Our net interest margin is in great shape as we continue to increase and we're positioned well as we go forward.

When you look at our markets, our strongest loan markets, obviously, is Dallas and Fort Worth. A very vibrant economy, lots of action going on, but it is very competitive. And then the other strong market is Austin where, again, it's very vibrant, a lot of action and it is very competitive, but those are our 3 big markets. Now the market that has the biggest potential would be Houston for us as oil and gas improves, $65 oil, we're starting to see some opportunities that are starting to pop up. We also are hoping that we'll see some of these credits, especially from the service side that have experienced some difficulty, maybe start making some positive moves. So we're optimistic and we think we've got a lot of potential in Houston. As Will said, our deposits increased 13%, really net 11% after you take away the sweep balances we brought from HilltopSecurities. But we put in place into '17 a challenge to our bankers to increase deposits, and they far exceeded what we anticipated, so we're really pleased about that.

Right now, we're operating 63 branches, and everybody is doing a good job. We're really focused on recruiting now as we go forward.

When you look at PrimeLending, we had exactly what we expected. In the fourth quarter, we came very close to what we expected for the year. Seasonally, the fourth quarter is what it is and it's very difficult, but when you look at our origination volume year-over-year, it was down 7%. However, our purchase volume year-over-year was up 4%, and that was compared to the industry being up 2%. And the industry overall market -- we were down 7%, the industry was down 17%, so we continue to perform very well against the industry. Our market share actually increased year-over-year to 0.87% from 0.74%. We continue to focus on our gain on sale, as Will said, things are very competitive. We still have a lot of people moving from that refi market to the purchase market and chasing deals that makes it very competitive on the pricing side. We're going to sit there and compete with them. We're not going to let them take our customers or our people. And so we've done a good job doing that and being able to maintain our profit picture and our volume picture. The very positive thing on Prime is we're up 80 loan officers over last year, which is a good position to be in going into this year as we need to continue to drive volume and build the market. Also, we have 2 new joint ventures that are good opportunities for us on the lending side and on the volume side at Prime. That makes 3 total, and we'll continue to focus on joint ventures and we will continue to focus on recruiting. That's the lifeblood of that company.

HilltopSecurities, as both these gentlemen said, it had an excellent year, an excellent quarter. Public Finance, which is our bread and butter, was very strong in the fourth quarter, and we're pleased with that. One thing that we really looked at because of the interest rates, Hilltop benefits from -- when interest rate move, they're now managing $28 billion worth of municipal monies, which is certainly a good, solid business for us and something that we've been able to grow quite a bit.

The retail and clearing businesses have been very solid, and a lot of improvement on the retail side. Those are really important to us because that's where the balances come that generate the $2.5 billion worth of excess funds that they have for sweeps that we can use for core deposits. So those businesses are good and doing better and help solidify that $2.5 billion that we count on for liquidity purposes.

All in all, HilltopSecurities is in good shape. We've got a great, solid team that's worked together for a long time and we're optimistic about its future.

And when you come to National Lloyds, good quarter, good weather and good results. Imagine what happens when you have a little good weather and a little luck. We continue to focus on our premiums written. We're trying to turn that curve and start moving it back up and looking hard at how we're marketing, looking hard at our people, working with our agents. And our focus is really going to be on that as we try to move that line back up and continue to deal with the everyday life of the insurance business. That concludes my remarks.

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

(Operator Instructions) The first question comes from Michael Young with SunTrust.

I wanted to start maybe just on M&A, what you're kind of seeing in the market. And does the change in the tax laws affect maybe how you're evaluating your eagerness to do a deal in 2018?

Well, it's the same thing we've said before, I think we are still pursuing acquisitions and we're certainly factor in the change in the effective tax rates in our evaluations of that. And we're just going to continue to be patient but diligent and look for the right fit and also the right economics.

Okay. And Jeremy, maybe in the absence of M&A, how high are you willing to let capital levels build, where it's almost 18% Common Equity Tier 1 ratio and a 13% leverage ratio? And we're going to be accreting more capital now with the lower tax rate? So do you kind of draw a line in the sand at some point?

Well, what we've endeavored to do in the last 18 months has been to try to have a more progressive capital planning, and that we have our excess capital and we want to first use that for organic growth, and we've been able to do that, we've increased our balance sheet. We'd like for the excess capital for M&A to kind of stay where it is, and then we've embarked upon a dividend and also a share repurchase program that has had kind of an average return to shareholders so far of about 30% when you combine those. So I don't really -- we're not just adding to excess capital at this point. And we look at ourselves over a full cycle and our ability to deploy that capital and put it to work. And we think that attractive M&A is the best use for that. It's something that we think we've demonstrated the ability to do. We've just been, a lot of times, disciplined in getting a deal done.

Okay. And the share buyback that was announced, the $50 million, is kind of what you've done on a normal basis. But is that still just to offset dilution from share issuance?

It's primarily -- that's what we've done, to do that. This past year, if you look collectively, we repurchased a little over 1 million shares, and that was for $27 million. So I think that we'll certainly repurchase what we issue in shares and probably a little bit more. And then if we think that there's -- the stock warrants an attractive price repurchase, then we'll do that as well.

The next question comes from Brett Rabatin with Piper Jaffray.

I wanted to, I guess, first ask Alan. On the mortgage side, 2017, a bit of a step back from '16's really good numbers. If you continue to take share, and just looking at the purchase forecast, it would seem like you could have better originations in '18, but that might be offset a little bit by continued pressure on gain-on-sale margins. Can you give us, maybe, just your outlook for the year on the mortgage piece?

Yes. Of course, '16, Brett, was a year that came from Mars, where you had everything going for you, and the refinance was really big. Now yes, we made up for some of that, we lost in refinance, but that number was really big. So trying to get back to where we were and what we did in '16 is very difficult. We hit our target in '17 or came very close. '18, we're expecting a very competitive market. We're expecting, according to the MDA, we're expecting volumes to be down from the overall market, but we are expecting purchases to be up. We expect to get our market share of that. That's certainly our philosophy and our direction. And so it's going to be very competitive. First quarter's going to be just like the first quarter is normally, very, very hard, and then you start coming back into the time of the year that's most beneficial, and that's second/third quarters and drops off in the fourth quarter. Now with all that said, where do think we're going to end up? We think we're going to end up okay if everything moves the way it is supposed to. And we're positioned well. As I mentioned, I'm very pleased with the 80 new loan officers. We didn't enter this -- '17 with that. So these are 80 quality loan officers that we've entered over what we had. And we're entering with 2 new joint ventures, which also is very important to us as we continue to try to add joint ventures. So I think we're moving things in the right direction and as the industry goes, we will outperform the industry just, depending on where that is. So I'm looking for a stable year, I'm not looking for a year that's going to blow it out of the tub like we did in '16, but I think we'll keep doing what we're doing and do a good job at it.

Okay, great. And then Jeremy, on the broker-dealer, you've kind of always talked about $100 million revenue run rate. And 4Q was above that. Is the thought that, that number is moving higher or was 4Q exceptionally strong? Can you maybe give us some thoughts on your outlook on that business?

Well, there's some seasonality to that as well, in that the fourth quarter is typically the strongest quarter for our public finance business, which is the key business that we have at HilltopSecurities. And it had a really strong fourth quarter, with the enactment of the new tax bill, it really drove up national issuances and they did great. So that's -- I would say it exceeded expectations, but we also expect the fourth quarter to be the highest. I think for -- we look out for the next year or so. I mean, I think you got to be careful a little bit like we did last time as the first quarter is actually, seasonally, is the slowest quarter for HilltopSecurities typically. And I would still kind of -- I still kind of view $400 million of -- or $100 million a quarter as a -- should be a pretty safe revenue number to be thinking about.

Okay, fair enough. And then maybe if I can just sneak one last one in, on the margin with 2 or 3 rate hikes this year, probably. Can you give us some thoughts on the margin? It would seem like it could have a little better tenor from loans repricing, but I was curious on your thoughts on the margin.

Yes. So, this is Will. As we look at net interest margin, if we talk about taxable equivalent prepurchase accounting, it was 3.21% for the fourth quarter. Our guidance with kind of no rate increases for 2018 is 3.15%, plus or minus [3%]. We do recognize there is increasing deposit pressure from a cost perspective and we're -- we've been very diligent in our pricing strategy to this point, and we would continue to do that and expect to continue to do that in 2018. I'd tell you, with rate increases, we would expect the NIM obviously will increase or drift north over time, but again, with the current rates as they are, our guidance would be 3.15%, plus or minus [3%,] which is an increase from the 3.10%, plus or minus 3% previously.

The next question comes from Matt Olney with Stephens Inc.

I want to start with the operating expenses. I think in the past, you've talked about managing the expense base and moving some back office systems onto one platform. Can you just update us on this initiative? How much of this is in the run rate and what's still to come?

Well, we are -- this is Will, we are in the process of, I think, going through our organization and evaluating those places where it makes sense to create synergy from a technology perspective and implementation. I'd tell you, 2017 was a development and kind of planning year. We are in the process, as we've acknowledged, of implementing a new core system at HilltopSecurities and we can talk more about that. But at the end of the day, as we look forward, 2017 was a planning year, 2018 will be, in a large part, an implementation year, and then we would expect to see the run rate benefits late -- starting late '18 going into '19.

Got it. And I believe, Will, you've talked about part of that expense management's to offset some of the runoff at the purchase accounting accretion. And given the guidance, it sounds like that there's a step-down as far as the accretion levels in '18 versus '17. Anything behind that step-down?

Yes. I'll let Will talk to the step-down, but I kind of think just -- not just to -- I don't think those are necessarily related projects for the accretion going down. We're just -- when we look at it, we've got 4 businesses and we're endeavoring to find ways to operate as one, and with a platform that we can leverage and create efficiencies. And I'll let Will talk about purchase accounting.

Yes. So purchase accounting, as we noted, and we tried to be a little more descriptive about kind of the overall pretax contribution down this year from the $47 million in pretax to $29 million. We do expect as the portfolio runs off, that both the accretion and the pretax implication of purchase accounting decline. So where we were, kind of $10 million to $12 million per quarter in, what I call net interest income -- purchase loan accretion, we are moving that guidance to $6 million to $8 million, and again, that's just a reflection of both our schedule basis as well as lower loans and overall runoff in the portfolio.

Next question comes from Jesus Bueno with Compass Point.

Just on the mortgage unit, it looked like the total mortgage income was down but it looked like gain on loan sales and origination fees held up pretty well. You've had some impacts from, what seems -- hedging last quarter. Did you see that again this quarter, and can you provide some color around that?

I would have called hedging generally stable quarter-to-quarter. I'd tell you, the gain on sale, as we reported here, is the gain on sale is explicitly going to be the kind of reported gain on sale number divided by total loan sales. So it's -- and again, what we're saying there is the pricing in the marketplace when we talk about under pressure, the pricing in the marketplace has been pressured and so overall rate to the client is down. I'd tell you, the team, and we've said this before, we've got a great team in our revenue management unit at Prime, and they are spending -- they spend kind of a lot of time focused on how do we manage exceptions, pull through and overall kind of pricing. And so that team is vigilantly kind of maintaining and being diligent about managing the margin. However, we do expect it to be under pressure from the 3.80% level in 2018.

Got it, that's helpful. And I just want to ask on, kind of, residual effects from Harvey. You had some impact last quarter. It was positive because -- you released a reserve you mentioned tied to mortgage. Are you confident that the impacts are limited? And as far as fees, did you see any impact in the fourth quarter?

Yes. I might -- what we've seen, we -- in the bank and the mortgage company, we haven't seen any impacts. Nothing has really developed at this point on the either side. Those millions we released was because we're conservative on our thoughts, and it proved to be. But what we haven't seen any really development in any kind of substantial loan problems from either one or especially, Harvey, which was the bigger one that affected us.

Yes. Just to -- I mean, so we took a bank reserve, as we noted in the third quarter. That exists, that continues to be in the allowance. And we're -- we continue to watch loans, but as Alan said, we haven't seen any development there. We did go through all the loans that we would have anticipated to be impacted at Prime and that resulted in the release of the $1.4 million versus the $1.5 million that we booked in the third quarter. And at the insurance company, we feel like we've adequately reserved for any exposure that was borne there in the third quarter.

That's great. And if I could just slip in just one follow-up on M&A. You mentioned being opportunistic, are you still focused entirely on a bank acquisition? I mean, would you be willing to look at other areas, perhaps on the broker-dealer side, or perhaps even on the mortgage side in terms of doing some type of non-bank M&A?

No, our focus is on bank M&A. We want to continue to build our bank assets, and that really fits into our strategic plan of having the bank be the cornerstone that provides permanent financing for the mortgage company and utilizes the sweeps from the broker-dealer.

That's fair. And just -- you didn't use the whole buyback authorization last year. I guess, just given where your stock's trading relative to peers and opportunity out there in the market, I guess, what's your thinking behind, I guess, why not using the whole thing? And just the -- again, just given your capital position, it didn't seem like a large amount?

Well, we look at it on a quarterly basis. And we don't have a set program so we're just doing it during open-market periods, in between quarters, and just kind of evaluate it. We definitely don't want to be moving the market when we're doing it.

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

Thank you.