Hilltop Holdings' (HTH) CEO Jeremy Ford on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: Hilltop Holdings (HTH)

Start Time: 09:07

End Time: 09:34

Hilltop Holdings Inc. (NYSE:HTH)

Q1 2014 Earnings Conference Call

May 6, 2014 09:00 AM ET


Jeremy B. Ford - President and CEO

Darren E. Parmenter - SVP of Finance, Hilltop Holdings and COO, National Lloyds Corporation

Alan B. White - Vice Chairman, Hilltop Holdings and Chairman & CEO, PlainsCapital Corporation

John Martin - EVP and CFO of PlainsCapital Corporation

Isabell Novakov - Investor Relations


Matt Olney - Stephens, Inc.

Richard Rousseau - Raymond James


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

Now I’d like to turn the conference over to Isabell Novakov. Ms. Novakov, please go ahead.

Isabell Novakov

Good morning. Thank you for joining us. Joining me on the call this morning are Jeremy Ford, President and CEO of Hilltop Holdings; Alan White, CEO of PlainsCapital Corporation; Darren Parmenter, Principal Financial Officer, Hilltop Holdings; and John Martin, CFO, PlainsCapital Corporation.

This presentation and statements made by representatives of Hilltop Holdings, during the course of this presentation includes forward-looking statements. Please refer to the full disclosure on Page 2 for more information.

I’ll now turn the call over to Jeremy Ford.

Jeremy B. Ford

I apologize; we’re waiting for the page to come up. Okay, excuse us. So -- good morning and thank you, Isabell. I’ll give comments to the first quarter. The first quarter of 2014, our net income for Hilltop was $23.8 million or $0.26 earnings per diluted share. Our return on average equity was 7.65% for the quarter versus 11.5% last year. And our return on average assets was 1.14% for the quarter versus 1.9% last year.

PlainsCapital Corp subsidiaries reported pre-tax income of $28.7 million, while National Lloyds Corporation had pre-tax income of $11.4 million. Total assets increased to $9 billion at March 31st, compared to $8.9 billion at year-end. And total stockholder's equity increased by $43.3 million for the quarter to $1.4 billion.

Hilltop remains well capitalized with a 13% Tier 1 leverage ratio, and finally Hilltop retains approximately $157 million of freely usable cash, as well as excess capital at our subsidiaries.

Moving forward to Page 4, I will hit on some other financial highlights for the quarter. Our book value per share ended at $13.76, which was a 49% increase for the quarter. Our net interest margin ended at 4.62%, which is a 10 basis point increase for the quarter. Our loans ended at $4.6 billion, which was a $40 million increase for the quarter and our deposits ended at $6.7 billion, which was a $60 million decrease for the quarter. Our NPL to total assets remain flat at 32 basis points.

I’ll now hand it over to Darren to talk about the financial results.

Darren E. Parmenter

Thank you, Jeremy. Our net interest margin expanded by 10 basis points to 4.62% in the first quarter 2014 as compared to the fourth quarter 2013, driven largely by lower rates on notes payable and borrowings. Yield on earning assets of 4.9% was driven by loan yields of 6.3%.

Cost of interest bearing deposits decreased slightly to 31 basis points relative to the fourth quarter 2013. Notes payable and borrowings, cost of funds and interest expense declined due to full quarter impact of elimination of senior exchangeable notes and realized -- and realization of the enhanced funding mix post First National Bank, Edinburg transaction. Higher net interest margin in the first quarter relative to the first quarter of 2013 due to improved funding mix and yield on earning assets.

For the first quarter 2014, the tax equivalent NIM for Hilltop Holdings was 95 basis points greater due to purchase accounting. Accretion of discount on loans was $18 million. Amortization of premium on acquired securities was $1 million and amortization of premium on acquired time deposits was $2.5 million.

Moving to non-interest income. Non-interest income was $170 million in the first quarter 2014, down 20% from first quarter of 2013. Non-interest income from the mortgage operation declined $55 million for the first quarter to $91.5 million representing 54% of the total non-interest income.

Net insurance premiums earned increased $2.8 million for the quarter to $40.3 million in the first quarter of 2014, representing 24% of the total non-interest income. Financial advisory fees and commissions decreased $700,000 for the first quarter 2013 to $21.3 million in the first quarter 2014, representing 13% of the total non-interest income. Accretion from the FDIC indemnification asset of $1.4 million in the first quarter of 2014 was included in other non-interest income.

Moving to non-interest expense, non-interest expense was $213 million in the first quarter 2014, down 1.1% from the first quarter 2013. Compensation declined $9.8 million from the first quarter 2013 or 8.4% to $106.4 million in the first quarter 2014, due largely to lower variable compensation in the mortgage origination segment offset by additional compensation expense at First National Bank, Edinburg.

Loss and LAE declined to $18.3 million in the first quarter 2014 from $21.2 million in the first quarter 2013. Occupancy and equipment increased to $26.3 million in the first quarter 2014 from $19.4 million in the first quarter 2013 due primarily to the First National Bank transaction. Amortization of the identifiable intangibles for purchase accounting was $2.5 million in the first quarter.

Next to our balance sheet highlights, stabilization of funding and liquidity along with the increase in non-covered loan balances contributed to balance sheet growth from fourth quarter 2013 to the first quarter 2014. Cash, debt funds, investment securities increased to $239 million and short-term borrowings grew by $149 million in the quarter.

Loan held for sale declined $202 million from the fourth quarter 2013. Gross non-covered loans held for investment increased 3.8% from the fourth quarter of 2013. We continue to work through our problem loans and REO from First National Bank, with covered loans, net of allowance, down $95.5 million since the fourth quarter of 2013. Gross loans held for investment to the deposit ratio increased to 68.4% in the quarter from 67.2% in the fourth quarter.

Total deposits declined by $59.7 million. There was a revision and reclassification in deposits resulting in increase in non-interest bearing interests and a decrease in interest bearing deposits of $1.3 billion at December 31, 2013. Common equity increased $43.4 million due to earnings and improvement in AOCI.

With that, I'd like to turn it over to Alan White.

Alan B. White

Thanks, Darren, and good morning. Let me give you a run down on PlainsCapital Corporation update. First of all, the FNB operational update. The FNB -- former FNB franchise is acclimating well to the PlainsCapital Bank products, systems and business practices. We completed our conversion in February and all is going well.

Cost remain elevated due to the integration as of Q1 ’14 costs impacted by systems conversion, occupancy costs related to surrendering, closed branches and personnel reductions. At the end of Q1 ’14, staff reductions resulted in $802,000 in severance and is estimated $2.7 million annually in compensation expense savings. Surrendered -- we surrendered six formal FNB branches to the FDIC and we closed one additional branch.

So branch reductions estimated to save $1.4 million annually in occupancy and non-interest expense. A one-time conversion charge -- fully conversion in February with $1.5 million. We continue to tweak and work on improving operations and cost at FNB and we will have further updates as we go forward.

PlainsCapital Corporation we opened two new full service branches, which were previously LPOs and we closed one legacy branch. We have now total 78 branches including the former FNB branches across all the major Texas markets. Our loan growth was 11% based on an annual basis at the legacy bank and we’ve $1.2 billion in unfunded commitments, and we’ve a solid pipeline. We have $250 million worth of loans that we’ve committed in that close and we’ve another $750 million we’re working on.

We continue to focus on growing our community bank model organically, with season bankers in desirable markets. I’m very proud with the fact that in the 17 months that we’ve been with Hilltop, we’ve not lost one significant banker in that time, which shows real continuity in our organization.

The mortgage segment continues to increase market share in a down environment. The U.S. mortgage volume projected to decline 57% in Q1 ’14 from Q1 ’13. PrimeLending Q1 ’14 was down 39%, so we beat what the industry is doing relative to ’13.

Momentum in the volume -- momentum in volume at the end of the first quarter was good. We are starting to feel more like the way the traditional mortgage business is. Its weak in the first quarter and then it builds up through the year. In the last several years we’ve not been through that, because of refinance there has been a lot more volume, and now we’re getting back to the way normally it is. In March we had our first $1 billion [ph] [allotments] since October last year. And April is trending all very strong in continuing that trend that we have seen in the past. We feel like we’re provisioned -- positioned very well in our loan officer headcount is up, we’re up 105 loan officers since first quarter of ’13 which I think certainly helps our production.

Our pre-tax income at the bank segment was $31.9 million in quarter one ’14. Net interest income grew 17.7% over quarter ’13 to quarter ’14, and our credit quality remained strong with our non-covered NPAs to consolidated assets remaining flat at 0.33% in quarter one 2014. Now that really helps with this strong credit quarter that allows our people to be out calling, and making calls and soliciting business.

Quarter one in PrimeLending and consistently a lower volume period for the mortgage business, however Prime was able to increase market share to 0.84% in quarter one ’14 from 0.58% in quarter one ’13, that is significant and for us to be able to hit what we’re targeting we must increase market share. We’re very pleased with that number because we’re getting a bigger market share of what's out there.

Our home purchase volume represented 79% in quarter one ’14 versus 53% in quarter one ’13. Today in the industry, the industry is -- purchase volume across the industry is about 51%, we’re running at about 79%. This will tell you that we’re getting more than our share of business, and those people who are just running at 51% in purchase volume are really not doing well because there’s not a whole lot of refinance out there, (indiscernible) there’s a lot of people hurting. We feel like we’re positioned very well.

Again California and Texas are leading the way with that 40% of our origination volume and that holds and we have several other stakes that are coming along doing quite well. In our First Southwest group, municipal bond volume continues to be depressed with low short-term interest rates our revenue is up about 5%. And that’s my report. I’ll turn the rest of it over to John Martin.

John Martin

Thank you, Alan and good morning. The banks income before tax was $31.9 million for the first quarter of 2014. Total gross loans held for investment increased $38.4 million from the fourth quarter, and gross loans held for investment -- gross non-covered held for investment were up $132 million for the quarter.

Over 80% of the non-interest expense increase from the first quarter of 2013 is related to the integration and operation of the First National Bank acquired last September. PrimeLending funds it's originations through a $1.3 billion warehouse land provided by PlainsCapital Bank. $800 million was drawn on that line at March 31st. Our capital remained strong with a Tier 1 leverage ratio of 9.53% and a total risk-based capital ratio of 14.14%.

Our portfolio consists of covered and non-covered loans and purchase credit impaired loans and non-purchase credit impaired loans. The covered purchase credit impaired loans had a total of $652 million at March 31st with 81% of that real-estate. Our non-covered PCI loans had a total of 85 -- or a [ph] [carry balance] of $85.4 million at March 31st, with about 38% of that real estate and 40% commercial and industrial. On the covered non PCI loans, the portfolio stood at $260 million with 84% of that real estate, and the largest portion of our portfolio are non-covered, non PCI loans had a total of $3.6 billion at March 31st, 42% real estate and 46% C&I.

Going to Slide 13, purchase credit impaired loans are loans with evidence of credit quality, deterioration for which it is probable that not all the contractually due amounts will be collected. PCI loans include covered loans and those are loan’s that are subject to the loss-share agreement entered into by the bank and the FDIC and connects with the First National Bank transaction. Only loans acquired in that transaction are considered covered.

Non-covered loans are loans that are not subject to the FDIC loss-share agreements. Substantially all of the PCI non-covered loans were acquired as part of the PlainsCapital merger. PCI loans had a total discount of $327 million; $289 million of that discount was related to covered loans. During the quarter we had an increase in expected cash flows on the PCI portfolio of $30.7 billion for the covered and $3.5 million for the non-covered PCI loans.

On Slide 14, our non-PCI loans at March 31st, 2014 include our newly originated loans and loans acquired without credit impairment and acquisition. Non-PCI loans include covered loans, loans that are subject to the loss-share agreement with the FDIC and non-covered loans. Our portfolio balance had -- our loans were on the balance sheet at 97.8% of the unpaid balance with a total discount of $53 million. $34 million of the discount was related to non-covered loans while covered loans had an $18.6 million discount.

Moving to PrimeLending, the loss before taxes was driven by lower origination volume in the first quarter of ’14 as seasonally lower volume and market forces continue to pressure the mortgage origination business. Loan origination volume was $1.9 billion for the first quarter. Purchase volume was down 8.8% compared to the first quarter of ’13. Refinance volume declined 47% of the total -- the refinance volume declined from 40% of the total volume to 21% of the total volume in the same period.

We expect that the refinancing volume will continue to decline throughout 2014 and therefore anticipate volumes in 2014 will more closely follow historical seasonal trends. Employee reductions in the second half of 2013 and other cost saving initiatives have resulted in a decrease in recurring quarterly operating cost of approximately $8 million since the third quarter of 2013. We had eminent mortgage servicing rights valued at about $29.9 million on a $2.7 billion servicing portfolio at March 31st, compared to $20 million on a $2 billion portfolio at the end of 2013.

Moving to First Southwest, business pressures continued to challenge First Southwest with a pretax loss of $153,000 in the first quarter versus $256,000 of pretax income in the first quarter of 2013. We continue to have substantial amount of non-interest income from the TBA program which provides interest rate protection for housing authorities. Fair value changes on derivatives and trading portfolio produced net gains of $2.8 million and $400,000 respectively for the quarter.

With that, I’ll turn it back to Darren to discuss National Lloyds.

Darren E. Parmenter

Thank you, John. Increases in earned premium, growth in core products and improvement in claim loss experience drove first quarter 2014 pretax income of $11.4 million versus $6.2 million in the same quarter a year ago. Our combined ratio declined to 77.5% in the first quarter 2014 versus 88.7% in 2013. Regular rate filings have been made for certain products in several states with increases to be effective in 2014. Exposure management initiatives are expected to reduce the rate of premium growth in 2014 compared to prior-years, but also reduce the exposure due to volatile weather to improve our loss experience. Bob Otis was hired in April of 2014 as the new CEO and President of National Lloyds. Bob brings over 25 years of insurance experience primarily with large carriers.

With that, I’d like to turn it back over to Isabell Novakov.

Isabell Novakov

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

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from Matt Olney with Stephens.

Matt Olney - Stephens, Inc.

Hi, thanks. Good morning, guys.

Jeremy B. Ford

Good morning.

Matt Olney - Stephens, Inc.

I wanted to start with PrimeLending, it sounds like you’re making good progress cutting the expenses there from the lower volumes. How should we be thinking about the overall profitability of that segment as we move through 2014?

Alan B. White

Matt, this is Alan.

Matt Olney - Stephens, Inc.

Hi, Alan.

Alan B. White

Like I said, we’re getting back into the traditional way the mortgage business works, slow in the first quarter, second and third quarters are strong, fourth quarter tails off. We have been pleased with the first quarter. We outperformed our sales what we thought we were going to do, and April started out really strong. And so, with that experience sprung and we’re into that cycle that I just talked about. It comes back strong in the second and third quarters and slides into the fourth quarter. We are strong in the purchase business as you will know we’re running about 80%. So, we’re getting more than our share. And if you look at the market share that we’ve driven up from 50% something to 83% or 0.83% that is significant in the amount of business that we’re getting. With our cost cuts and with that amount of volume obviously we’re seeing a bottom line, and if we see a bottom line and we see more volume, obviously we see more [ph] [income and the buying] from the warehouse line. So, I think we’re cautiously optimistic as we go forward here. I think the one thing that concerns us the most is the lack of inventory out there, but we continue to get more than our share of the business. Anybody that’s doing 51% purchase in this business is really sucking eggs, and they’re going to be in deep trouble if I don’t get their business model turned. And it's really hard to turn it from a refinance business to a purchase business and there’s just no refinance volume out there. So we think that’s a real advantage for us. Also the second thing is, we have increased the number of producers by 105 since a year ago this time. Those producers obviously are going to bring more volume. So we’re working on market share and as long as we can continue to increase market share and with the cost cuts we’ve made, I think the profitability will show up and maybe it's showing up.

Matt Olney - Stephens, Inc.

And Alan, how much of the expense base in that mortgage division is variable that that’s based off the overall mortgage production you would anticipate?

Alan B. White

We cut $8 million it was expensed out there and that’s not variable, that’s gone. The only thing that you’ll see the way the expenses will come back up is if the volume picks up and we’ve got to hire people to process it, and that’s going to be a good problem. So, we could see the expense rise because of the fact we’re going to have to hire closers and we’re going to have to hire underwriters, we have to have people to be able to handle the volume. As I told you earlier, March was the first $1 dollar month that we’ve had since October last year in locks and that is significant. It's going to be hopefully, we’ve seen April and it looks strong, so hopefully going forward those numbers are big numbers.

Matt Olney - Stephens, Inc.

Thank you.


Thank you. And the next question comes from Rick Rousseau from Raymond James.

Richard Rousseau - Raymond James

Hi, good morning guys. You guys mentioned that your commitments were up about $100 million to $1.2 billion this quarter. I was just looking to get a little bit color regarding your pipeline on a bank category and maybe by geography basis?

Alan B. White

Well, let me clarify that. Our unfunded commitments are $1.2 billion. Those are committed out there, those are lines that are to businesses, some of those are real estate commitments that will fund up over a period of time, and those others are there for working capital, capital needs for corporation. So that’s one segment you’re sitting there looking at, that obviously as these companies feel more comfortable with the economy they’re going to start borrowing, and also the ones that we committed to on real estate projects are going to start to fund up, so that’s one segment. The other segment I mentioned to you was that we have committed the $250 million worth of new credits, but we have not closed those loans yet, we’re in the process of closing those loans. Those loans are real estate loans and C&I loans. I would say the majority -- not the majority, I would say over 50% of those are real estate loans, the last would be C&I. Then we have a top line out there that we keep in our various markets of how many credits and how many loans that we have in process and that’s about $750 million. Now you know as well as I do, a lot of those fall out. A lot of those don’t ever happen. But that’s kind of how we keep track. We feel strong that our loan demand is good and we’ve gotten into a couple of markets with this acquisition, FNB, Edinburg, Corpus Christi, and Houston that have really brought real opportunity for us. So those are two really strong markets that have created opportunity, besides being in Dallas and Fort Worth and Austin and San Antonio, those are all strong markets and certainly if you go and look at Texas as a whole, it's pretty good. So we’re pretty pleased with our lending. However if you look at it on an overall basis excluding FNB Edinburg and there it looks like it's kind of flat, but Edinburg we’re doing exactly what we designed to do and that’s to pay those loans off, get them collected because obviously that’s how we bought this thing, and that’s how we need to do and get those loans out there that aren’t good. So, it might not look like we’re having that kind of growth but we are, but on the other side we’re trying to run the other stuff down so that we can clean that place

Richard Rousseau - Raymond James

Well that’s actually great color. Thank you very much guys.


Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a nice day.

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