Hilltop Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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Hilltop Holdings Inc. (NYSE:HTH) Q4 2013 Results Earnings Conference Call March 4, 2014 9:00 AM ET


Isabell Novakov - Investor Relations

Jeremy B. Ford - President and Chief Executive Officer

Darren E. Parmenter - Senior Vice President of Finance, Hilltop Holdings and Chief Operating Officer, National Lloyds Corporation

Alan B. White - Vice Chairman, Hilltop Holdings and Chairman & Chief Executive Officer, PlainsCapital Corporation

John Martin - Executive Vice President and Chief Financial Officer of PlainsCapital


Brett Rabatin - Sterne, Agee & Leach, Inc.

Matt Olney - Stephens, Inc.


Good morning, and welcome to the Hilltop Holdings Q4, 2013 and 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ms. Isabell Novakov, Senior VP Investor Relations. Please go ahead.

Isabell Novakov

Good morning. Joining me on the call this morning are Jeremy Ford, President and CEO of Hilltop Holdings, Alan White, CEO of PlainsCapital Corporation, Darren Parmenter, Senior Vice President of Finance, Hilltop Holdings, and John Martin, CFO of PlainsCapital Corporation.

The information in this presentation is subject to the forward-looking statements found on page two. Please take a moment to review those. And with that I would like to hand the call over to Jeremy Ford.

Jeremy B. Ford

Thank you, Isabell and good morning. Moving forward to slide three, for the fourth quarter 2013 net income to Hilltop Holdings was $29.5 million or $0.34 per share. Net income for Q3, 2013 was revised up to $38.2 million or $0.43 per share due to an adjustment to the preliminary bargain purchase gain associated with the First National Bank, Edinburg transaction.

For the full year 2013 our net income was $121 million or $1.40 per share. Our return on average assets for the quarter was 11% from 13% in Q3, 2013. Our return on average assets was 1.34%. PlainsCapital Corp, subsidiaries reported pretax income of $38.5 million while National Lloyds Corporation had pretax income of $17.5 million, which included $3.7 of gain from the call of Hilltop's senior exchangeable notes.

The total asset for Hilltop decreased to $8.9 billion from $9.1 billion in September. And our total stockholder's equity increased by $106 million to $1.3 billion at December of 2013. The call of our senior exchangeable notes was completed in Q4, 2013 resulting in tangible book value accretion as well as the issuance of 6.2 million shares of Hilltop common stock. Hilltop remains well capitalized with 12.8% Tier 1 leverage ratio, moving forward.

This page shows financial highlights for the full year 2013 as well as by quarter. I'll hit on the items not previously mentioned. Our book value per share at year-end was $13.27. Our net interest margin built through the year from 4.35% to 4.52%. Our gross loans grew from $3.2 billion in Q1 to $4.5 billion in Q4 and our deposits grew from $4.8 billion to $6.7 billion in Q4, both as a result of the FNB acquisition as well as organic growth. Our NPLs to total loans stood at 51 basis points at year-end.

Moving forward; this slide is intended to give you a financial update of the First National Bank transaction. I'll describe these three boxes first. The top left box shows the bargain purchase gain at closing that was initially reported in September 30th and revised at 12/31. The top right box shows the income impact of First National Bank's transaction to Hilltop Holdings and the bottom right box shows balances of FNB at September and at December.

Of note we revised our bargain purchase gain from $3.3 million to $12.6 million in the quarter, primarily due to an increase in net assets acquired as well as a fair value adjustment to the OREO. FNB contributed $29 million of pretax in 2013 and $12 million in the fourth quarter. There was a $300 million decline in the FNB deposits as a result of our planned run off of non-core deposits.

And with that I will hand it over to Darren to talk about the consolidated results.

Darren E. Parmenter

Thank you, Jeremy. First I’ll speak about net interest margin. Net interest margin expanded by six basis points to 4.52% in the quarter as a result of higher loan yields as well as lower cost of interest bearing deposits. Yield on earning assets of 5% driven by loan yields of 6.4%.

Cost of deposits continues to expand to 27 basis points. Note that our cost of fund was impacted by the $2 million unamortized issuance cost related to call-ins on the senior exchangeable notes. Significant reduction of wholesale funding and excess liquidity at PlainsCapital Bank as a result of the First National Bank transaction contributed to the net interest margin expansion in the quarter. Improvement in funding mix and yield on earning assets over 2013 resulted in a full year net interest margin of 4.47%.

For the full year 2013 the tax equivalent net interest margin for Hilltop Holdings was 103 basis points greater due to purchase accounting. Accretion of discount on loan was $69.3 million, amortization of premium on acquired securities of $5.7 million and amortization of premium on acquired time deposits of $5.1 million.

With that I would like to move to the next slide and speak about non-interest income. Non-interest income was $182.5 million in the fourth quarter 2013, down 15.2% from the third quarter. Revenues from the mortgage segment declined $29.3 million from the third quarter to $98.1 million in the fourth quarter 2013, representing 54% of the total non-interest income.

Net premiums earned increased to $41.5 million in the fourth quarter representing 23% of the total non-interest income. The financial advisory revenue increased to $22.8 million in the quarter representing 13% of the total non-interest income.

Moving forward to the non-interest expense, non-interest expense was $219.8 million in the quarter, up 1.5% from the third quarter. Compensation declined $6.8 million from third quarter 2013 or 5.7% to $112.4 million in the quarter, due largely to lower variable compensation offset by a full quarter of First National Bank compensation expense.

Loss in LAE declined to $16.8 million in the quarter from $24.6 million in the third quarter. Occupancy and equipment increased to $25.7 million in the fourth quarter from $21 million in the third quarter primarily due to the First National Bank transaction. Amortization of intangibles for purchase accounting was $2.6 million in the fourth quarter.

Moving to the balance sheet highlights, there was balance sheet shrinkage of cash, debt funds and investment securities decreased $331 million and interest bearing deposits decreased $231 million in the quarter. Reduction of non-core funding excess liquidity in the fourth quarter drove the balance sheet reduction. Those non-covered loans held our investment increased to 6.2% from the third quarter, 11.5% -- from the fourth quarter 2012.

Net loans-to-deposit ratio increased to 66.7% in the fourth quarter from 63.1% in the third quarter. We reduced notes payable by $83.8 million in the fourth quarter after completing the call of senior exchangeable notes. Hilltop Holdings and PlainsCapital made a combined $60 million capital contribution, 35 million from Hilltop to PlainsCapital Bank in the third quarter in connection with the First National Bank transaction.

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

Alan B. White

Good morning. Thank you, Darren. Let me give you an upside on PlainsCapital Corporation and [CNG]. First of all I want to talk about our First National Bank, Edinburg. It has been approximately six months since we acquired that on September 13. I am proud to say that on February the 14th we completed our convergence switching from FNB to the Plains platform. It went extremely well, I think better that what we thought, very proud of that, and very proud of our people on both sides in accomplishing that, that was a major task.

Since the transition our staffing levels at the FNB franchise have been about 9%. We continue to look at this, we continue to want to right-size the company and make sure that we are hitting our profit goals and we will continue to work on that. We've been fortunate with the leadership that we've been able to acquire not, only in the Rio Grande Valley Corpus but also in Houston. In Rio Grande Valley, Larry Gonsalves is our Market President; Ian McAllen, Edinburg and [inaudible] runs our operation in Brownsville/Harlingen.

We have been able to acquire a couple of gentlemen in Corpus. Frank Hastings is our Market President and Gary Wilson is our Regional President. Gary will not start till June when he is [inaudible] and also in the Valley we've hired Bobby Norman, who will be the Regional Chairman and he can't start till November for the same reason. Now both these gentlemen are excellent, know the market and will really help us as we move forward.

And in Houston we've moved a gentleman in by the name of David Williams. He used to work for JPMorgan as their regional real estate guy. He is now going to be in Houston running our operation there. All three of these areas we have brought people in that live in those areas and know those areas and know what the culture and the life lines are.

Our major goal here when we took off and began this process was to get the people adapted to our culture. We wanted them to have the PlainsCapital culture and our culture is really based on community bank, even though we are fairly big size we are still a community bank and we want to take care of our employees, we want to take of our customers and we want to take care of the communities and we have done that.

We've had numerous meetings with our employees, we have had lunches and breakfasts, we have had hot dog parties, community parties, we celebrated Halloween and Christmas and Valentines and we have done many things to really make them feel like that they were part of the family and I think those exercise have gone very well. As far as the customer we've had numerous lunches, numerous breakfasts, we've been out meeting the customers, we've had two sales rallies where we've taken 14 or 15 people out of Dallas downtown and met with the loan officers in the Valley. We've gone out and done over a 100 calls, calling on existing customers and potential customers and really extending the name and the brand through the Valley.

We have 42 loan officers at FNB Edinburg, most of them in the Valley and we have them in Corpus and Houston. I think they are all coming along fine, these are people we wanted to keep, people we think can make a difference and begin to build our brand and to build our reputation.

As far as the communities are concerned down there we made a couple of sizable contributions. One, through the [inaudible] Group which deals with educational issues in the Valley, provides education for younger people, that charity, they just had a [function] this weekend and we sponsored it and it was well received within the Valley. We've also done something for the Boys and Girls Club. They had a major event there. In Corpus we've done in the Driscoll Children's Hospital and so on.

I have personally met with Mayors in McAllen and Edinburg, I have talked to the Chamber of Commerce, I have been to see the business and economic development people, state council people and these people are very excited we are there and very open to the fact that they are looking for a breath of fresh air and I think we were that. We bring our commitment to take care of the communities, take care of the people in the Valley and we want to be part of the growth and I think they are very excited about having us there and wanting us to continue to do that.

We also have a separate division in the Valley called Valley Resources. That is our arm to help collect the distressed properties and their loans that we have. We have quite a few people working in there, doing a good job and working hard. They are working in conjunction with some of our people within the bank and trying to create or collect from the assets that we've got with the transaction.

As far as the PlainsCapital update we had a good year in the bank. Our loan growth really was good, a distinctive 8% but I am going to tell you it's 10.59% without the purchase gain, that's a good number for us. We've got a strong pipeline and we have about $1.1 billion in unfunded commitments, which hopefully will create more activity for us.

We are having a lot of competition in loan processing and structuring but we're able to meet that competition, are able to do well. We have 93 loan officers in the bank. Most of these people are seasoned bankers, have been with us quite a while and we're working off a solid capital budget which really helps us in the marketplace. And I will tell you since our merger with Hilltop in 2012 I can also tell you we have not lost one key person in that transition which I think speaks highly for the transition and what we tried to accomplish at both Hilltop and PlainsCapital.

In our mortgage segment we are trying to hit a rock or brick wall, first half of the year was really good. Second half of the year has not been so good. I think everybody knows that the market is transitioning from a rebound market to the purchase market. A lot of people are scrambling around trying to save their lives, lot of people trying to shift and they have [shifted] with a lot of predatory pricing, a lot of people doing things that aren't very smart and they are beginning to fall by the wayside.

Fortunately for PlainsCapital and for PrimeLending they were purchased business and in 2013 with 69% purchase and 31% refi, whereas the [NBIA] will tell you most organizations were 33% purchase and 68% refi.

So we are seeing a good position as this market transitions and even though we know that originations are going to be down in '13 by some 37% we feel like competition will be down and we feel like we will be in a strong position to pick up market share. We continue to hire other key loan offers from these organizations that are going out. There is a lot of them floating in there and you got to be careful who you get but there are some real good potential people that can bring volumes to us and that's what we're looking at.

I think at year-end we were up a net 42 additional loan offers over the beginning of July '13. We also in the mortgage area have a servicing asset of about $20 million. This is a result of the fact that we're able to originate loans and then we will separate this out for better execution and better returns and also with interest rates where they are we feel very good, that this is a good earning asset for us in the mortgage company.

Slide 11, okay so first one is bank pretax income of the bank segment was $46.1 million in quarter four, net interest grew to $21.6 in the third quarter to fourth quarter, credit quality remains strong. This is something I really want to emphasize because our credit quality, our classified loans is a little bit over 10% when you are dealing with that small classified loans that gives your loan people a lot more time to go out and do business and that get out and build that loan portfolio and build that pipeline. We are really proud of our loan quality and the condition it's in.

Moving on to the mortgage company you can see that mortgage rates increased at a pace that primarily resulted in a 21% decrease in origination volume in the second half of '13. That's again back [heavy] rates bumped in May, senior went up over 100 basis points and that's where the volume dropped off. I think we're off about 14% for the year.

The last three quarters our purchase volume was 79% and 82% which is way up there where we want to be. Again Prime in 2013 was the fourth largest producer of purchase loans in the country behind Wells Fargo, JPMorgan and Citibank, that's the second year in a row, that something we are very proud of and that’s a position that we really want to be in. Refinancing volume dropped considerably, which you would expect and our two major markets who contribute 40% of our business are in Texas and California and those are two areas that we frankly did continue to grow, Texas especially.

We just opened a branch in McAllen, with four loan officers, got our first loan in the Valley, we are excited about that. We’ll be opening one in Corpus and major end markets that we know and we are in and we hope that will help us with our volume. And in the First Southwest rising interest rates and volatility have hurt that business, however we're positioned and we have a lot of pent-up demand if we just take off this business should do very well, but you got to get interest rates move and the economy to pick up and we should see better days for First Southwest.

Okay, that's mine, I guess I will turn it over to you, John.

John Martin

Thank you, Alan. We are going to page 12 of the presentation and as Alan mentioned a moment ago the bank’s income before tax is $46.1 million for the fourth quarter and $172 million in entire year of 2013. Our loans held for investment for bank increased to $113 million from the third quarter, our non-covered loans held for investment were up $204 million. The total C&I loans were $1.7 billion or 38% of our portfolio, total real estate loans were $2.2 billion or 50% of the portfolio.

The bank provides PrimeLending a warehouse line of credit with a maximum amount of $1.3 billion. At December 31 there was $1 billion drawn on that line. The Bank’s tier 1 leverage ratio was 9.295, the total capital ratio is 14%.

Turning to slide 13, this presents how we view our loan portfolio which we have between covered and non-covered and then we break it out between PCI loans and non-PCI loans. The covered PCI loans were $729 million, the non-covered PCI loans were $100 million. The covered non-PCI loans were $277 million and the largest portfolio non-covered non-PCI loans were $3.4 billion in December 31, 2013.

Going to slide 14, purchase credit impaired loans or PCI loans are loans with evidence of credit quality deterioration for which it's probable that we will not collect all the contractually required payments. PCI loans include covered loans and those are loans that are subject to the loss share agreements entered into by the bank and the FDIC connection with the FNB transaction. Only loans acquired in the FNB transaction are considered covered.

Non-covered loans are 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 have a total discount of $335 million, $293 million of that discount was related to covered loans. We expect the FNB acquired loans to be accretive to net interest margins and yield over 6%.

Turning to slide 15, our non-PCI loans, our newly originated loans, acquired loans without credit impairment and acquisition and acquired non-PCI loans that have renewed. The portfolio balance was 97.6% of the unpaid principal balance with a total discount of $61 million. $40 million of the discount was related to non-covered loans and $20.3 million was related to covered loans.

Turning PrimeLending on slide 16, the loss before taxes was driven by lower origination volumes in the fourth quarter. The fourth quarter is typically is the seasonally lower volume quarter and then market forces continue to put pressure on the mortgage origination business. Origination volume for fourth quarter was $2.3 billion, purchase volume declined slightly, and refinance volume was flat at $500 million.

Salaries and benefits decreased approximately 9% between the third quarter and the fourth quarter as benefits of headcount reductions in the third quarter were realized. PrimeLending has engaged in initiatives to reduce segment offering cost. These initiatives were primarily responsible for a decrease of approximately 4% in non-employee related expenses between third and fourth quarter.

And Alan mentioned [mortgage loans], PrimeLending does retain servicing, it has approximately a $2 billion portfolio at December 31 and that resulted in a $20 million mortgage servicing asset, servicing is retained on an opportunistic basis.

Turning to First Southwest on slide 17, rise in interest rates along with increased volatility in fixed income markets in recent months have resulted in reduced sales of fixed income securities to institutional customers. Some trading losses on securities helped to support those sales and a reduction in our financial advisory fee income. We did generate a substantial amount of non-interest income through our TBA business which issues forward purchase commitments of mortgage type securities to certain clients and sells them into the TBA market.

Fair value changes on derivatives and the trading portfolio produced a net gain of $1.4 million and a net loss of $1.8 million during the full year.

With that I will turn it over to Darren Parmenter.

Darren D. Parmenter

Thank you, John. Moving to National Lloyds Corporation, increase in earned premium primarily attributed to a lower claims volume and seasonality drove the fourth quarter pretax income of $17.5 million. Our combined ratio declined to 71.7% in the fourth quarter of 2013 from 80.5% in the Q4, 2012. Q4, 2013 included a non-recurring gain of $3.7 million and non-interest income related to the [thru-up] of the senior exchangeable notes. We continue to focus on managing the loss exposure by reducing concentration in high frequency areas and purchasing aggregate reinsurance.

With that I'll turn the call over to Isabell Novakov.

Isabell Novakov

This concludes our prepared remarks. And we will take questions in just a few minutes.

Question-and-Answer Session


(Operator Instructions). And our first question comes from Brett Rabatin of Sterne AG. Please go ahead.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Hi guys good morning. I wanted to first ask about mortgage. Can you guys give us some thoughts on that segment in terms of pretax going forward, if you can get that back to more of a breakeven or possibly making money and just thinking about the fourth quarter were there interest rate locks that effected the loss of $7.5 million, maybe you could go into little more color on the pretax?

Alan B. White

So let me just -- so this is Alan White. And we are not going to give any guidance for the year but you are familiar with the mortgage industry, so you know what's going on. I like what you are looking at in the last three quarters is volume, we did all of that volume and volume go off the wall and as you are trying to right-size and that's what normally happens. Normally though the fourth quarter is not very good, neither is the first quarter in the mortgage industry.

So we are just going through the cycle here but we are also going through the shift of from refi to purchase and as I say I think we are sitting good because with our position with our LO, that's what we do or as these guys in the refi business are in big trouble and they are not going to be there and the competition's going to go way. I think you just saw one of the major banks last week lay out 5,000 people and you go, oh my god. Well that plays into our hands because that just provides more opportunity for us.

So we are adding loan officers, quality loan officers I might add, you can get all kinds of loan officers, the ones that are not fitting in with us we are getting rid of, we are fine tuning our staff and I think spring's coming, the weather hopefully will clear up and I think the prospects are going to be favorable. So that's about all that I can say without giving you any guidance.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay. And then the interest rate locks or were there any timing issues?

Alan B. White

We didn't have any problems at all there, it's just all about volume.

Brett Rabatin - Sterne, Agee & Leach, Inc.

And then the other thing I was curious about was just thinking about FNB Edinburg and just thinking about efficiencies going forward there, do you guys have more work to do in terms of improving...

Jeremy B. Ford

Yeah, we've got more work to do and we continue to look at it. We wanted to get through the conversion, we got a lot of branches. We will make sure those make sense, we'll make sure they work. So we'll continue to look at the efficiency but I'll tell you that the thing that we built from the lending side and the ones that we want to keep we've been able to keep and we're excited about the future.

But we'll continue to make adjustments just like we make adjustments every day in the bank or the mortgage company [works] that way, so I think that's always on the table.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay and then just lastly if you guys care to or wanted to make any comments around the Southwest Securities bid and any thoughts on that whole process.

Jeremy B. Ford

Well, as you know we made the offer and it was public and as you've probably seen their Board responded, they've formed a special committee. And that's really all that we can comment to and it's kind of in the public, so we're just going through the process.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay, great thanks for the color.


Our next question comes from Matt Olney of Stephens. Please go head.

Matt Olney - Stephens, Inc.

Hi, thanks want to start, going back to PrimeLending, there is some language in the 10-K Alan about the expense initiatives at PrimeLending, did we see those expense initiatives come through in the fourth quarter or is that something we'll see the next few quarters?

Alan B. White

Yeah, it started to come through in the fourth quarter. Part of those expense initiatives are people and the other parts are just cut backs and projects and things like that. I think that for most part you are seeing them, I think you will continue to see write backs and continue to see improvement when the time comes around. But yes we did.

Matt Olney - Stephens, Inc.

And Alan also you mentioned in the prepared remarks you are attending more the servicing than you have in the past. Can you remind us of your strategy here and give us more details so what portion you've been retaining?

Alan B. White

We've been able to go direct to Freddie and Fannie and by doing that we can strip out the servicing and make more money, and so we have been with Fannie Mae, the interest rates have been favorable for us with Fannie Mae. And so we company to build that asset and it continues to build value, how high we go I don't know. We have learned to go higher but it is providing a source of income for us and with the rates where they are. And we do hedge our [client hedges] to make sure we're not losing them.

It's been a good situation for us. So it's something relatively new for us in the last year but I think it's something once we were able to sell direct makes all the sense in the world and we'll be able to make a better delivery to them and a better class and we will be able to strip it out and make more money on the servicing side.

We were able to keep it against the interest rate environment as [inaudible]. So I mean it sounds like a lot of good times for us if I am very smart.

Matt Olney - Stephens, Inc.

That's helpful Alan and then my last question on the held for investment growth, good growth in the fourth quarter. Any more information you can provide as far as kind of by market or by loan type and some of your Texas peers talked about the seasonality of their loan book. Were there any seasonal benefits here in the fourth quarter?

Alan B. White

We've been really pleased with the loan growth, because last few years it's been kind of flat, so we've been pleased with it. So we're seeing a lot of loan growth in this company in real estate side. But we're starting to see some C&I, I think there is opportunity with the purchase of First National Bank, Edinburg. We might have couple of good loans in Corpus, we've made a couple of good loans in Houston. Those things started with building that pipeline. So but right now it's like the majority or a big part of it's come from the standpoint of real estate.

And then we have all of them, we have all of them for commitment that really deal with C&I and real estate, a lot of them are off the starting line and in fact we have seen this and we think this economy is growing then I think this company will start growing down on it and we'll see more growth and that's what we're optimistic about. And our loan quality, this is the best -- our loan quality's been -- since I have known you and I guess that's been a long time, you were just a kid when I first met you, you are much older than that now but we've had good loan quality but thought through it like everybody else, we have got it in good shape now.

And that just allows our people more time to go out and hustle. I mean instead of digging [inaudible].

Matt Olney - Stephens, Inc.

All right, Alan, that's helpful and I will hop back in the queue. Thanks.


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

Jeremy B. Ford

Thank you.

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