Hilltop Holdings Inc (HTH) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Hilltop Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

And with that, I'd 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 outlook, business strategy, acquisition, 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, prepurchase accounting taxable equivalent net interest margin, tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to 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 2018, Hilltop reported net income of $28.1 million or $0.30 per diluted share. PlainsCapital Bank delivered solid earnings, however, the results of our other businesses declined from the challenging market conditions. Building on this year's Bank of River Oaks acquisition, loans held for investment grew by 8% in the fourth quarter versus prior year and deposits were up 7% over the same period. Further, our net interest margin expanded by 18 basis points versus prior year to 3.75%. We continually focus on prudent capital management and value creation for our shareholders. To that end, we returned $86 million in dividends and share repurchases to our stockholders in 2018 or approximately 70% of net income. Additionally, Hilltop's Board of Directors just declared a quarterly cash dividend of $0.08 per common share representing a 14% year-over-year increase and reauthorized our $50 million share repurchase program. Hilltop remains well capitalized with the Tier 1 leverage ratio of 12.53% and a book value per share of $20.83.

Regarding asset quality. Our criticized loans declined in the first quarter, and we recorded net charge-offs for the year of $9.3 million, equating to 14 basis points of average loans. In the insurance business, we executed on a strategic initiative focused on our 6-key markets, and therefore, in the fourth quarter, we discontinued writing new insurance policies in 5 noncore states, which represented only 3% of our premiums.

Moving to Slide 4. Driven by higher NIM and growth in loans and deposits, fourth quarter pretax income for the bank increased by 16% compared to prior year. These results do include both $1.6 million in transaction-related expenses from the Bank of River Oaks acquisition and provision expense of $6.9 million. Volume decline of 18% compared to prior year and gain on sale margins of 334 basis points at the mortgage business resulted in a pretax loss for the quarter of $2.7 million. We have seen stabilization in secondary margins, albeit at pressured levels. We are excited to announce the hiring of Brad Winges as President and CEO of HilltopSecurities, effective February 20, 2019. At that time, Hillel Feinberg will become Chairman of HilltopSecurities. Brad has an exceptional track record as a securities industry leader, and we are fortunate to have him as Hillel's successor. Importantly, we are extremely grateful for all that Hillel has done over his career to make HilltopSecurities the quality firm it is today and for all that Hillel will be doing working with Brad to execute into the future.

At HilltopSecurities, results for the fourth quarter were impacted by a challenging trading environment for our capital markets and a 44% decline in municipal issuance. Additionally, increased competition and widening credit spreads negatively impacted structured finance during the quarter.

On a positive note, our Retail, Clearing and securities lending businesses continued to deliver solid revenue for the organization. Our insurance business had a difficult quarter, primarily due to a $6.2 million loss from Hurricane Michael that traversed through Georgia in October. Operationally, the business has continued to improve since relocating to Dallas earlier this year and delivered $5.7 million in pretax income in 2018.

Moving to Slide 5. As introduced during our third quarter earnings call, we are currently well underway in executing on a broad set of initiatives to enhance our platform and streamline operations with the goal of lowering operating costs and building a foundation for future organic and acquisitive growth. These projects include core system enhancements, procurement and strategic sourcing and shared services of our functional departments. As we now plan to communicate and now we plan to communicate our estimates for these investments.

We believe the long-term benefit of this program will drive positive operating leverage of 6% and enable Hilltop to deliver pretax, pre-provision income of $250 million in 2021, equating to an annual growth in excess of 10%. Embedded in the projections are a combination of the expense reduction efforts, including our strategic sourcing program and revenue-focused initiatives, such as the core system implementation in PrimeLending and the rollout of a digital payment network at PlainsCapital Bank. Most of the benefits will be realized towards the back end as the larger aforementioned system implementations are underway and still incurring expenses. Substantial progress has already been made, including the development of back-office shared services departments, the largest being our information technology organization, the rollout of a centralized travel and entertainment platform and the consolidation of its special assets group. We feel very confident in the roadmap ahead and are excited for the progress we have already seen.

I will now turn the presentation over to Will, who will talk through the financials.

Thank you, Jeremy. As previously disclosed, PlainsCapital Bank terminated the loss-share agreement with the FDIC during the fourth quarter 2018. As a result, we have adjusted the presentation to remove any references to cover and noncovered loans or assets. These changes are present on Pages 11 and 14 in this presentation.

I'm moving to Page 7. As Jeremy discussed, for the fourth quarter of 2018, Hilltop reported $28.1 million of income attributable to common shareholders equating to $0.30 per diluted share. During the fourth quarter, Hilltop's provision for loan losses was $6.9 million. Fourth quarter provision includes $7.6 million of net charge-offs and reflects continued improvement in the oil and gas portfolio. For the full year of 2018, total net charge-offs equated to $9.3 million, resulting in a net charge-off to full year average loan balance ratio of 14 basis points. Full year 2018 provision expense equated to $5.1 million, a decline of approximately $9 million versus 2017.

During the fourth quarter, revenue related to purchase accounting accretion was $12.6 million and expenses were $2.3 million, resulting in a net purchase accounting impact of $10.3 million for the quarter. It is notable that purchase accounting-related expenses declined $3.3 million from the prior year, principally driven by the absence of FDIC asset amortization. In the current period, the purchase accounting expenses largely represent amortization of our deposit intangibles and other intangible assets related to prior acquisitions.

Hilltop's capital position remains strong with a period-end Common Equity Tier 1 ratio of 16.58% and a Tier 1 leverage ratio of 12.53%. Of note, and related to the changes in lease accounting that became effective on January 1, 2019, we expect that Hilltop's risk-based capital ratios will be negatively impacted by 15 to 20 basis points during the first quarter of 2019, driven by an increase in risk-weighted assets associated with leases.

Moving to Page 8. Net interest income in the fourth quarter equated to $118 million, including the aforementioned $12.6 million in purchase loan accretion. Net interest income increased $9 million or 8% versus the prior year quarter, while purchase loan accretion increased modestly by $0.6 million.

Interest income increased from asset growth, both organic and from the BORO acquisition and NIM expanded during the quarter.

Related to purchase loan accretion. As the purchase portfolio balances continued to decline, we expect interest income related to purchase loan accretion to average between $4 million and $6 million per quarter during 2019. Net interest margin equated to 3.75% in the fourth quarter, including 43 basis points of purchase accounting accretion. The prepurchase accounting taxable equivalent net interest margin equated to 3.33%, an improvement of 17 basis points from the prior year period. HFI loan yields, excluding purchase accounting, have increased by 42 basis points versus the prior year, somewhat offset by higher deposit costs. We remain extremely focused on managing deposits, both in terms of growth and rates paid. As expected, we have seen deposit betas continue to increase as the Federal Reserve continues to move short-term rates higher. Further, the flatness of the yield curve has increased pressure on NIM and net interest income as short-term borrowing costs rise and longer-term asset yields remain more stable.

Hilltop's cumulative beta for interest-bearing deposits from December of 2015 has been approximately 38%. During 2018, Hilltop's interest-bearing deposit beta was approximately 50%. While these betas continue to compare favorably to our through-the-cycle model beta levels of 50% to 60%, it is expected that deposit betas will continue to rise towards our through-the-cycle levels if the Federal Reserve continues to increase rates and competitive pressures persist. Given the factors noted, we are maintaining our current prepurchase accounting, taxable equivalent net interest margin outlook at 3.2% plus or minus 3 basis points.

We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset and liability flows across the portfolios. Over the past year, quarterly average net earning assets have increased by $367 million, driven by the BORO acquisition coupled with growth in HilltopSecurities portfolios.

Fourth quarter average loans held for sale have declined by $262 million to $1.3 billion versus the prior year. The blended funding cost for these loans is approximately 78 basis points. This funding cost, which is substantially lower than wholesale funding, demonstrates the value of the $1.3 billion of core deposits swept from HilltopSecurities.

I'm moving to Page 9. Total noninterest income for the fourth quarter of 2018 equated to $239 million. Fourth quarter mortgage-related income and fees declined by $28 million versus the fourth quarter of 2017.

During the fourth quarter of 2018, the competitive environment in mortgage banking remained intense as Hilltop's mortgage origination volumes declined by $631 million or 18% versus the prior year period. The majority of the annual reduction came from refinancing activity, which declined by $347 million or 47%.

Purchase mortgage origination volume comprised approximately 87% of our total mortgage originations in the period. While mortgage volumes were challenged, gain on sales margins did improve to 334 basis points in the quarter from 330 basis points during the third quarter of 2018. Given the current market and competitive conditions, we expect that volumes and gain on sale margins will remain pressured in 2019.

Securities-related fees decreased versus the prior year by $14 million, primarily driven by lower public finance offering volumes at HilltopSecurities. The municipal origination market was pressured throughout the year as 2018 U.S. municipal bond issuance declined by 44%.

Other income declined by $8 million, driven primarily by challenging fixed income market, which yielded significant volatility, widening credit spreads and intense competition during the fourth quarter.

In our structured finance business, volumes increased modestly versus the fourth quarter of 2017, and while spreads improved on a linked-quarter basis, they were down versus the prior year. Also included in other income and as previously disclosed, Hilltop recorded a gain on the liquidation of an investment within the merchant banking area. The gain on this sale equated to $5.3 million. Somewhat offsetting this gain during the fourth quarter, Hilltop recognized a negative valuation adjustment of a legacy merchant banking investment from 2009, equating to $2.5 million.

Turning to Page 10. Noninterest expenses improved from the same period prior year by $18 million or approximately 5% to $311 million. Compensation-related expenses were lower by $26 million during the period related to lower production revenues, driving lower commissions and the impact of a decrease in discretionary expenses across the businesses.

The fourth quarter of 2018 included the impact of Hurricane Michael, which resulted in $6.2 million of insurance losses, principally in the state of Georgia. In addition, claims increased versus the prior year's weather, including colder temperatures impacted our clients. Overall, insurance and LAE losses increased by $12 million versus the prior year period.

As reported earlier, this quarter includes approximately $3.4 million of significant items related to the final integration of BORO and ongoing efficiency initiatives. Further, Hilltop incurred $1.6 million in -- $1.8 million in costs related to ongoing core system replacement and enhancements that were referenced earlier by Jeremy. As we continue to position our businesses for long-term success, we may take additional efficiency related charges in the future.

Moving to Page 11. Total loans, including broker-dealer loans at HilltopSecurities, grew by $479 million or 7% versus the fourth quarter of 2017. Growth versus the prior year is driven by the BORO acquisition, which contributed $327 million of net book value as of the deal closing. In 2019, we expect full year average HFI loans to grow 4% to 6% over the year. This growth reflects our focus on quality and considers current market rates, economic activity and ongoing competitive pressures.

Moving to Page 12. Total deposits are approximately $8.5 billion and have increased by $558 million or 7% versus the fourth quarter of 2017, including the BORO acquisition. Further, noninterest-bearing deposits have increased by $149 million or approximately 6% versus the prior year. Interest-bearing deposit costs have continued to increase modestly with short-term interest rates, and we remain active in the market, testing rates and terms, to ensure we remain competitive while being intentional to not be overly aggressive in our rate offerings.

Turning to Page 13. For 2019, we are providing full year outlook for some of our key balance sheet and income statement items. Our priorities of creating value by delivering diversified growth across our franchise, optimizing capital support organic growth and M&A, while rigorously managing risk in all of our businesses has not changed. The outlook represents our current perspective on the markets, rates and overall economic activity. These may change throughout the year, and we will provide updates as necessary on our quarterly calls going forward.

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

Okay. Thank you, Will. Let me talk about the bank first. The bank had a good year. Fourth quarter had $41.8 million before tax and net income year to -- up for the year, we made $152 million. That's down a little bit from '17, and you have to remember we had -- did over $15 million insurance recovery, and our accretion was a little bit stronger in '17 as it starts to roll out. So we had a very good year in '18, looking forward to '19.

Our loan growth was 8% year-over-year, we felt good about that. Our deposit growth was $705 million or 10% year-over-year. That does include BORO, but it excludes any broker deposits that we may or may not had. So that's true pure growth. So we look good on both the loan side, we look good both on the deposit side. We did make a provision for the year of $5 million, a little over $5 million for '18. We had net charge-offs of $9 million. As Will says, that's about 14 basis points of total loans of $6.5 billion. We did do a little cleanup in December, getting rid of the cats and the rats that we had in doing that, but our loan portfolio still remains extremely strong. All aspects of it, we see no weakness. If you look at our nonperformings, they're down from 0.55 in the third quarter, down to 0.45 in the fourth quarter and they're down from 0.65 a year ago. So we continue to improve those. Our past dues are well in line and all the aspects of our loan quality are good. We remain on our credit underwriting standards to be very conservative. We are very competitive, and we're out on the road taking care of our customers and talking to our strong relationships and trying to continue to grow that loan balance.

Bank of River Oaks has been a good transaction for us. We made approximately $2 million a month, excluding the transaction costs, and we're looking for good things in Houston as we focus on growth in that market. Our ROA for the year was 1.23%, and we're pleased with that. And our net interest margin, we're pleased with too. For the quarter, it was 3.90% after purchase accounting and year-to-date it's 3.76%. So we've seen some good improvement there and feel good. We hired an additional 13 loan officers. We've got 64 branches and 1 -- I don't know what you call it, I guess, an office, it's not a branch, but we loan money in it. I forgot the terminology, but nevertheless, we're out there and going hard at it. And I feel really good about the bank, I feel really good about the people, and I feel really good about where we are.

PrimeLending. Man, it was a tough year. The mortgage business has been a tough year. We ended up making $12.9 million, considerably less than we did prior year. Big problem in the fourth quarter was volumes were off 18% over -- the year-over-year were off 5%, industry declined 13% over the same period in the fourth quarter, so that really hurt us. The big issue has been gain on sale, and that really came to light about 1st of April in the second quarter when we saw our gain on sale drop from, gosh, 380 down to 317. And we realized then that we were going to have to do some things. We have made a lot of adjustments in trying to affect a better gain on sale. It's kind of end of the year now at around the 330, 335 range. We think it's pretty well leveled off. We did about 170 rifts at that point. We have gotten rid of 334 loan officers. But on the other side, we've hired 370 loan officers. And you might ask what are you doing? We're cleaning that up. We got rid of people that were producing and were not generating income for us, and we've been able to go out and recruit and attract a strong team of loan officers that come in with a good track record, strong purchase background. And I will tell you, it's easy to do because people are looking for places of strength and stability and PrimeLending is a company with strength and stability backed by Hilltop's balance sheet. We do have a $2 billion commitment to Prime for their warehouse lines. So these people know they can get their loans funded and because of the strong liquidity position we're in, they know that they can get them, not only committed to but funded. So we've been able to attract good people, which we think is going to come back and prove to be a good thing for us going forward. So we're going to continue to work on our gain on sale. We're going to continue to work on better expense controls. We do have a new loan operating system coming into play in 2019 towards the end, called Blue Sage. That will help us to control our pricing a lot better, a lot closer. And it will allow our loan officers and our customers to be able to do things a lot quicker and faster. So it has been a tough year. We're optimistic because we are a purchase company, that we'll be able to gain our market back. I don't think you're going to see a considerable change in '19, but we're hoping '20 will be from that standpoint. So we're all over -- they're all over it, and I'm positive and optimistic that we can turn this around. But this is typical of the mortgage business right now, and we're very competitive in all places, in all markets that we have across the country.

HilltopSecurities had a fairly difficult year. I think the big tough sign there was Public Finance. Fourth quarter of '17, we had a strong quarter and then the new tax legislation drove higher interest in December '17 and then they just fell off the wall after that. And 2018 was not good. Municipal issuance was down about 44%, which really, being one of our main businesses, really hurt us. Public Finance was off from $86 million in income to $59 million, so you can see a significant change there. The other things that kind of affected us in HilltopSecurities was our TBA or our structured finance that, again, deals with mortgage. Same story along with Prime. The volumes drop off and the spreads squeeze, and we saw a drop in income there. Our Retail and Clearing and securities lending business has been strong. Our cash management business has been strong. As Jeremy mentioned, we're bringing in a new gentleman by the name of Ken Winges (sic) [Bradley Winges] to help place, or he will succeed Hillel, but to help Hillel in his expertise as capital markets. And we think he can bring a lot opportunity for us in that business. So we're looking forward to his arrival and what we can be able to do there. The brokerage business or the broker-dealer continues to provide $1.3 billion worth of core deposits to the bank and has certainly more money available if we need it. But those are our core deposits that come to us that certainly strengthen our liquidity position each and every day and help us fund the line at Prime.

As far as National Lloyds, we ended the year profitable at $5.7 million. Fourth quarter was not what we were hoping, but we got hit by a hurricane in Georgia, it was -- which we were not expecting, cost us about $6.2 million and so that hurt us. So all our ratios were not out of bounds. And so it ended up not being such a good year. We have relocated everything now in Dallas. We have everything here. We're working on our core systems and our management team and our sales arm and we're out trying to recruit strong people. And we hope that we can bring this back up to the level that we had in the fourth quarter of '17 where we made about $14 million pretax. So we think we can get this back and we can bring the income and this company back up. So that's basically my report and highlights. It was a tough year, but the bank continues to do well and I anticipate it to continue to help these other businesses as we go forward for the rest of the year. So that's all I got.

This concludes our prepared remarks. We'll now take questions.

(Operator Instructions) Today's first question will be from Brady Gailey with KBW.

I just wanted to confirm the 2019 outlook that you all gave, the 4% to 6% loan and deposit growth. That is the average balance in '19 over the average balance in '18. Is that right?

That's correct.

Okay. And it just seems like -- I mean, for one, it's lower than the 6% to 8% loan growth that we had talked about before. And when -- if you look at period-end loans in 2018, that's already over 4% higher than the average for 2018. So it seems like you're, kind of, guiding flat period-end loan balances and deposit -- end of period deposit balances in '18 is already 6% higher than the average for '18. So it is -- does this guidance mean that there will be 0 period-end loan and deposit growth in '19?

I'll answer it. No, you're going to have payoffs. We didn't experience a lot of payoffs at the end of the fourth quarter like we did in '17. So we're going to see payoffs come and we're going to hit it, and we're going to have to replace those. I think we have about $500 million over the loan growth last year, but you've got to generate about $1 billion of loans to be able to generate that $500 million. So we think we'll see payoffs. We think we can grow the book about 6%, and that's where we're sticking our nose out to. And I'll tell you, I've got everybody out on the street working right now to do that and doing it with relationships that we have good people that are doing deals.

Okay. So on a consolidated basis, looking at all of Hilltop, you think you will still be able to grow period-end loans from now to the end of '19? Is it, kind of -- like I said, this guidance makes it feel like there's not going to be any growth.

I mean, the way to think about it is period-end is difficult to predict, given the timing of payoffs and the rollover of the portfolio at any given, kind of, secular point across the fiscal year. The way we're thinking about it is 4% to 6% is what we're targeting on a full year average basis. That's also kind of what translates from a net interest income perspective and earnings. So in terms of, kind of, point balances, we want to move away from kind of targeting point levels and moving to averages, which again, I think represent earnings capacity.

Okay. Right. It's still just a little confusing because when you're starting -- I mean like I said, the period-end balances are already 4% to 6% higher than the average. So I would've thought those percentages would've been higher, but okay. So moving on to Will, you talked about the $4 million to $6 million per quarter of yield accretion. I mean that's -- you did almost $10 million per quarter in '18. Maybe just a little more color on that $4 million to $6 million. Is that just a scheduled accretion, like that does not include any, sort of, possible prepayment accretion that may happen?

Yes. So that -- as it has been in the past, I try to provide a scheduled accretion view and that's the $4 million to $6 million. So it does not include any prepayments or extraordinary recoveries. I will say, however, though the portfolio continues to decline. That portfolio of addressable assets or purchased assets continues to decline. And so the number and size of items that could be, kind of, one-off, if you will, special recoveries, will continue to decline and will become, kind of, nominal over time. So the portfolio has continued to run off, and again that's just -- that's the normal course given a transaction as we did, but we're running towards the end of that -- of those accretion -- favorable accretion and variances over time.

Okay. And then finally for me, just on the $250 million goal for the PPNR in 2021. So that's annual growth of 10% to 15%. I guess, assuming taxes and the provision are roughly unchanged, I guess that would translate into about 10% to 15% EPS growth in between now and then. And then I also noticed $166 million, so the base that you're starting from in 2018, that is what you all recorded. But I think there is roughly $30 million of, kind of, one-timers in there. So if you look at the operating PPNR, excluding one-timers, I think that number was closer to like $193 million than 2018.

But again, I think, as we go through the course of any given year, we use the baseline of 2018 principally, because as you go through the course of any year, you're going to have positives and negatives that can occur to kind of adjust, if you will, reported numbers and we'll let you all go through that. But from our perspective, the starting point of 2018 is the baseline that we consider to be realistic as we said here and the reported number is as such.

And the 10% to 15% EPS growth assuming taxes and the provisions are same, is that fair?

My point there would be as we noted provision was $5 million for the year, which we do not believe is sustainable. We do believe, as we put in our guidance, provision expense of 20 to 30 basis points of total HFI loans. We think there's going to be a credit normalization over a period of time. And so we do see and would expect provision to increase from, kind of, the $5 million level experience in '18.

Yes. And I think the other thing is -- this is Jeremy, wherever the baseline started, I think the difference is what we're really focusing on, creating value over the next 3 years. So it's the walk from the $166 million to $250 million, and so we started with our actual number to be able to articulate that.

Next question is from Chris Gamaitoni with Compass Point.

I wanted to focus a little bit on the mortgage business. So purchase volume was down 20% quarter-over-quarter, the consensus forecast was for a 13% quarter-over-quarter decline. I'm wondering if you think you lost market share. Or the overall market just performed worse than forecasted? And if there was potentially some market share from the last 2 quarters, you've laid off a fair amount of loan officers, hired a lot, and I'm sure just from a pipeline standpoint that causes maybe a transitory volume issue before everyone gets integrated into the new systems and rebuilds their pipeline at a new company.

I think you're right. I think we've held our market share, and I don't think we've lost any, but I think with the transition of 300 going out and 300 coming in, there is a lag time in there for that to pick up. We're still doing 86% to 90% purchase business. I think volumes were off, inventories were off and those kind of things. So I think you're right on target as far as getting these people into sync and into the game. And we think this will all come back and be on our side. As I say, it's easy out there to recruit good people because people are running for cover and running for safety. We're being very cautious on who we hire and the quality we're hiring. But you can hire them because there's a lot of people that are going out of business. And that lender pool is shrinking and the mortgage pool -- there's not so many people after it.

Is most of your recruiting coming from, call it, smaller non-bank lenders that may be are struggling from scale issues?

They are all non-bank lenders are all smaller companies, it's like -- and some of them are larger. But like they're going out of business, so they're looking for a place to go where they know it can be -- and they can get their loans funded and they can get paid and then we can -- have a future. So we've been able to attract good people, and we -- we're getting cleaned out. The people that we got rid of were people that maybe were not producing to the level we wanted to produce at, nor were we making enough money off of what they were doing. We tried to get ahold of our pricing and some of these people might have done pretty good volume, we weren't making any money and that doesn't work. So we weeded out a lot of that. And we did it the last half of the year. When we woke up in April and May and the gain on sale went to hell, and we found out these people that we thought were great lenders and they were, they were making a lot of loans, we weren't making any money. They were giving it away.

All right. Just an update on the insurance business. Why not just sell the business at this point? Obviously, I mean, it creates a lot of volatility, it's not a very large part of your business. What's the strategic thought for retaining that business at this point?

Well, I think that what we've done in the last year is we've relocated the business to Dallas from Waco, so it's here with all the other businesses that we have. And we're also -- taken a lot of initiatives to stabilize the business and it's performed pretty well this year, albeit for this Hurricane Michael having a positive year rebounding from last year. So I mean we're continuing to operate it, and we're continuing to make the right strategic decisions on growing it and stabilizing the business and that's what our focus is.

Okay. And just the outlook for the expense growth that you gave. Does that include the prior year, kind of, call it, onetime charges and future 2019 potential expenses related to the ongoing cost initiatives that you said would benefit towards the longer end -- the back end of -- until 2021?

Yes, so it includes all those. When we -- as I mentioned earlier, we used kind of the baseline of where we -- what we reported this year. And so the growth forward includes investments, as well as the targeted cost saves going forward.

Next question will be from Brett Rabatin with Piper Jaffray.

I wanted to first ask, can you, Alan, talk about the cats and the rats and just what that entails? And was that a few loans on a specific industry or what the cleanup at your end kind of entailed and...

They were all over the board. They're smaller loans, stuff that we've been messing around, trying to recollect it, a couple of them we'd already had accrued. We -- it's just at a time of the year, might as well clean it up and get it out and that's what it was. It wasn't anything in particular, it wasn't anything in a particular place. Just smaller loans that you accumulate and you don't -- you clean all your collection efforts, so you take them out.

Okay. And then wanted to go back to mortgage and just thinking about gain on sale margins and like -- I know you don't have a perfect crystal ball, but it seems like there's been some modest improvement so far this year in spreads. Can you maybe just give us a little color, if you can, around how you think '19 plays out from a gain on sale margin perspective? And just thinking about pretax profitability from mortgage. What needs to happen for that pretax margin to improve relative to what you did in...

We're working on gain on sale constantly. We're looking at our processes and our procedures and our expenses and our costs that go into it. We've been working on that. We put some policies in place to control pricing a lot better. I think that's where maybe some of it got away from us a little bit is the pricing side of it. This new loan operating system, Blue Sage, is going to help us tremendously on all of those things. It helps us to control our pricing, which I think was a significant increase. I think significantly -- I think it will show an increase. I think we'll see a better gain on sale margin. I think you're going to get it back to where you were. But I think it's going to take a little time. We're in the first quarter. First quarter is always difficult. So I don't think you're going to see a huge change in the first quarter, but as we get into the selling season, hopefully, we'll see better results there. But gain on sale is the focus. And like I say, it's leveled off now and, hopefully, we can start to move it up. Hopefully, a lot of these people that have been in the business are going to get out of the business and hopefully that the pressure that's been on pricing from a competitive standpoint, people trying to stay alive, will go away and you can get a little bit of better spread as we go forward. I don't think this we'll be a fantastic year in the mortgage business. If we can do a little bit better than we did last year, I think it's a step forward and then I think we look forward to getting the system in '20 and '21 being able to get back to a relatively decent profitability.

Okay. And then just lastly for me, just the platform growth and efficiency initiatives. It seems like a lot of that is, kind of, around HilltopSecurities and PrimeLending. Any color around just the core bank? And just how you expect the initiatives to impact the core bank? And if you're looking at branches or anything else that may impact the core bank relative to these initiatives?

So -- this is Will. I think as we look across the initiative set, as you're spot on in that a lot of the systems enhancements are mortgage related in the terms of Blue Sage. Then you've got the FIS implementation at HilltopSecurities, but as we think about the centralization and shared service work that Jeremy mentioned, that will impact our entire organization including the bank in terms of bringing in an integrated corporate real estate, integrated information technology platform, consolidating data centers, all of those things will benefit the bank as well. And as we think about a centralized general ledger and centralized, kind of, finance and accounting platform also will impact the bank. So I would say a number of the initiatives from a shared services perspective as well as a strategic sourcing perspective are enterprise-wide, while we do have a few very targeted implementations at HilltopSecurities and PrimeLending. The strategic sourcing and shared services are global and will impact favorably the entire franchise.

And I think it's to be noted, like, the bank went through a systems implementation, was it 2016? With FIS. So they had already, kind of, done the journey of what HilltopSecurities and PrimeLending are involved in. So that's really the only big isolating factor there. And I think it's just what Will said, I mean on this program here, this is something that we really started working on in the fourth quarter of 2016. And it was a result of a lot of acquisitive growth going over $10 billion and our cost for seeming to grow as much as the other aspects of our growth and it's because of what we wanted for the future and we want to build and grow on a big platform here and increase our size organically and through acquisitions. So this is -- it's been an initiative that we've been working on for some time and all -- most of these projects are fully planned and are executing. And we feel really good about what we think the results will be across the entire franchise for Hilltop.

At this time, this will conclude today's question-and-answer session as well as today's conference. We do want to thank everyone for attending. And at this time, you may now disconnect your lines. Thank you.