Hilltop Holdings Inc. (HTH) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Hilltop Holdings’ Third Quarter 2018 Earnings Conference Call. 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. 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 facts, including statements concerning such items as our business strategy, acquisitions, 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 conditions 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, pre-purchase 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 third quarter 2018, we reported net income of $35.8 million or $0.38 per diluted share, which represents a $5.6 million increase compared to the same quarter last year. This quarter’s results are representative of our focus on disciplined growth, asset quality and value creation. As part of our diversified growth and disciplined M&A strategy, we successfully completed The Bank of River Oaks transaction. The conversion and integration is now nearly complete, and early financial results are ahead of expectations. Importantly, the performance of our recently integrated team and the pipeline of new opportunities give us confidence in our Houston Presence. This quarter net interest income grew 5% versus prior year despite declining accretion, as we saw NIM expansion and a 10% increase in our overall loan portfolio. Noninterest expense decreased $18 million or 5% versus Q3 2017, driven by lower losses in the insurance business and reduced operating and compensation expenses from lower volumes in the mortgage business. Through the first nine months of the year, we’ve returned $58.9 million in dividends and share repurchases to stockholders. Under our Board of Directors approved share repurchase program, $61.2 million remains available through January of 2019. Additionally, our Board of Directors declared a quarterly cash dividend of $0.07 per common share payable on November 30, 2018. Our consistent focus on asset quality to establish client relationships and talent underwriting was highlighted this quarter as non-covered, non-performing loans fell to 44 basis points of total non-covered loans. And year-to-date, net charge-offs were only $1.6 million. The insurance business recorded a loss and LAE ratio of 54.7% for the third quarter as a result of less severe storms in the geographic footprint, down from 90.6% during the same period prior year, which included the impact of Hurricane Harvey. During the quarter, we had four significant items to call out, including transaction expenses associated with The Bank of River Oaks acquisition; settlements with both the Department of Justice and the FDIC on different matters; and costs related to the execution of an efficiency initiative in our mortgage business. We believe these changes in our mortgage business will put us in a better position given the current competitive environment. Moving to Slide 4. For the third quarter 2018, our banking and insurance business units reported strong results. Although income from our mortgage and broker- dealer segments were down versus prior year, both showed signs of fundamental improvement. Banking results included two aforementioned nonrecurring items. First, $6.6 million in transaction expenses associated with The Bank of River Oaks acquisition; and second, approximately $700,000 in expenses related to the settlement and termination of the FDIC law share agreements. Notwithstanding those items, the business delivered solid year-over-year deposit and loan growth in a very competitive market. Additionally, the bank saw NIM expansion and improvement in the quality of its loan portfolio. This was a challenging quarter for mortgage originations as we saw volumes declined 8% compared with the same period prior year. We experienced some stabilization and gain on sale margin, but we believe they’ll remain under pressure in the fourth quarter. As mentioned previously, PrimeLending is taking actions to improve its business in the face of this tough market. HilltopSecurities pretax income declined year-over-year, partially driven by lower public finance issuances. On a linked-quarter basis, we did see improvement in structured finance margins as net revenue grew $9.3 million. Our insurance business had a good quarter, largely due to mild weather across the State of Texas. We have also moderated expenses, and for the third consecutive quarter, our expense ratio was under 40%. Moving to Slide 5. As a brief update, The Bank of River Oaks’ existing systems were converted to PlainsCapital Bank’s core platform early in the fourth quarter. Signage and employee on-boarding has been completed at the legacy locations. We are on track to realize the 30% cost save target previously outlined, and substantially, all of these synergies will be realized in the fourth quarter. Additionally, we have hired two senior loan officers and one treasury management professional to build out the Houston team. With the integration is almost complete, we are now able to leverage our improved branch presence, larger lender base and new leadership team to drive loan and deposit growth. And we’ve already seen momentum in loan and deposit opportunities over $10 million. So overall, we are excited about the catalyst this has been for us in the Houston market, and we believe the opportunity for further growth is significant and achievable. Moving to Slide 6. A strategic objective of ours is to enhance our platform and streamline operations with the goal to lower operating costs and build a foundation for organic and M&A growth. We are currently executing on a broad set of initiatives that over time will deliver on this objective. The three primary areas of focus are: current business operations, procurement and strategic sourcing and the buildout of the shared services organization at the holding company. Key projects include the core system enhancements at PrimeLending and HilltopSecurities. Once implemented this will both reduce operating costs and enhance our client experience. We are also in the process of moving towards a single procurement platform for the entire enterprise, which will enable us to better leverage the buying power of the organization. We believe there are significant cost savings associated with this and have experienced early success with the consolidation of travel providers already this year. We are also in the process of leveraging shared services where it makes sense in our functional department. Areas such as IT, real estate, HR, finance and legal are all in different phases of this project, and in addition to cost saves, we believe the shared services model will help us better maximize the capabilities of our people. These enhancements are based on the long-term view we take in the management of our company. As such, they require significant amount of work and time to plan and execute before realizing the benefits. We will provide further details around these initiatives, including future savings, as we continue to make progress and results come into view primarily in 2019 and 2020. I will now turn the presentation over to Will to walk you through the financials.

Thank you, Jeremy. I’ll start on Page 7. Please note that all results, unless specifically noted otherwise, include two months of contribution from The Bank of River Oaks acquisition as the closing of the transaction occurred on August 1, 2018. Further, any guidance also includes consideration for the acquisition. As Jeremy mentioned, Hilltop reported $35.8 million of net income equating to $0.38 per diluted share. Diluted EPS has improved versus the second quarter by $0.03 or 9% and $0.07 or 21% versus the same period prior year. Hilltop third quarter results included a number of significant noninterest expense items that totaled approximately $11 million on a pretax basis. These items represent transaction-related expenses related the closing and integration of BORO, the impact of the negotiated settlement with the DOJ and HUD and certain onetime charges related to the action of underperforming branches and targeted staff reduction in the mortgage business. In addition, based on the agreed upon settlement with the FDIC related to our offshore agreements, we recorded approximately $700,000 of noninterest expense to reflect the final amortization related to the FDIC indemnification assets. This expenses included in the purchase accounting in FDIC impact portion of the chart on the right and in the purchase accounting impact section on the financial table. Related to the DOJ and HUD settlements and the agreed upon FDIC settlement, we do not expect further financial costs in future periods. As we complete the integration of The Bank of River Oaks and further optimized our businesses to align with the current market conditions, we may incur additional onetime charges in the future. During the quarter, Hilltop provision loan loss represents a net recovery of approximately $400,000. Provision in the quarter included $1.4 million of net charge-offs. Continued improvement in the oil and gas portfolio and accruing of outstanding trade-related items previously reserved for HilltopSecurities. The third quarter GAAP effective tax rate equated to 17%. This rate reflects the onetime impact of certain tax plan strategies and the assessment of the deductibility related to the settlement with the DOJ and HUD. In future periods, we expect the GAAP effective tax rate will range between 23% and 24%. Hilltop’s capital position remains strong with the period and Common Equity Tier 1 ratio of 16.95% and a Tier 1 leverage ratio of 12.4%. Of note and related to the agreed upon settlement with the FDIC, all risk-weighted Basel capital ratios will be impacted by approximately 15 basis points to 20 basis points during the fourth quarter as previously covered loans receive a higher risk factor. Moving to Page 8. Net interest income in the third quarter equated to $110 million and includes $8.1 million of purchased loan accretion, which declined by $2.4 million versus the third quarter of 2017. As expected, the contribution from purchased loan accretion has declined versus the prior year. We expect interest income related to purchase loan accretion to range between $6 million and $8 million per quarter, and that the pretax contribution of the aggregate purchase accounting-related income and expenses will range between $4 million and $6 million over the next few quarters. Net interest margin equated to 3.48% in the third quarter, including 28 basis points of purchase accounting accretion. The purchase accounting taxable equivalent net interest margin equated to 3.21%, an improvement of 12 basis points from the prior year period. Held-for-investment loan yields have increased by 36 basis points versus the prior year, somewhat offset by higher deposit costs. While we remain extremely focused on managing deposit costs, 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 net interest margin and net interest income as short-term borrowing cost rise and longer-term asset yields remain more stable. Related to deposit cost from December 2015, our cumulative deposit betas approximately 31%. Hilltop interest-bearing deposit cumulative deposit beta from December 2015 has been approximately 36%. These continue to compare favorably to our through the cycle model beta levels of 50% to 60%. The market for deposits continues to get more competitive as rates move higher, and we expect total deposit betas will increase towards through the cycle levels over time. In addition, as absolute rates in the market have risen and cash rates have moved above 2%, we have seen more activity from clients pursuing both CD products and higher-yielding money market accounts, resulting in some product mix shift across the portfolio. While the shift in deposit mix is expected as the market moves through this portion of the rate cycle, our focus remains on growing core deposits with existing and new clients and being selectively differencing on rates to protect long-term relationships. The bank has been successful in growing non-interest-bearing deposits through the enhancement of new products and gaining greater share of wallet. Noninterest-bearing deposits make up 31% of the total deposit portfolio. Given the factors noted, we are maintaining our current prepurchased 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 liability flows across the portfolios. Over the past year, average earning assets have increased by $482 million, driven by the acquisition of The Bank of River Oaks, coupled with modest growth in Hilltop low-risk, highly liquid securities portfolios, principally comprised of mortgage-backed securities in both the bank and HilltopSecurities. On the page, we’ve outlined the average amount of loans held for sale, which have declined modestly versus the prior year. Also noted are the blended funding calls for these loans of approximately 83 basis points. This funding costs, which is substantially, lower than wholesale funding, demonstrates the value of the $1.3 billion of core deposits swept from HilltopSecurities coupled with the modest amount of borrowing from other wholesale sources. Moving to Page 9. Total noninterest income for the third quarter of 2018 equated to $270 million. Third quarter mortgage related income fees declined by $20.5 million versus the third quarter of 2017. During the third quarter, the competitive environment in mortgage banking continued to intensify as Hilltop’s volumes declined by $319 million or 8% versus the prior period. The majority of the annual reduction came from refinancing activity, which declined by $224 million or 35%. Hilltop purchase volume declined during the quarter by $95 million or 3% and comprised approximately of 89% of our total mortgage originations in the period. While mortgage volumes are challenged, gain on sale margins did improve to 330 basis points in the quarter from 317 basis points during the second quarter of 2018. Given the current market and competitive conditions, we expect the volumes and gain on sale margins could remain pressured throughout the remainder of 2018 and into 2019. Securities related fees decreased versus the prior year about $4 million, primarily driven by a lower finance – public finance offering volumes. Other income declined by $4 million on lower production volumes and tighter market spreads in the structured finance business as volumes declined versus 2017 by 7% during the quarter. Compared to the second quarter, secondary spreads did improve in the structured finance business. Importantly, secondary spreads are substantially market-driven and can be volatile on a quarterly basis. I’m turning to Page 10. Noninterest expenses improved for the same period prior year by $18 million or approximately 5% to $336 million. $12.5 million of the improvement came from lower loss and LAE expenses in the insurance business as storm frequency and severity were seasonally low during the third quarter. Compensation-related expenses were lower by $4 million during the period related to the lower production revenues, driving lower commissions and discretionary incentives. As reported earlier, this quarter includes approximately $11 million of significant items and approximately $2.8 million in costs related to ongoing core system replacements and enhancements that were referenced earlier by Jeremy. Moving to Page 11. Total loans, including margin loans of HilltopSecurities and the covered loans housed within the bank, grew by approximately $601 million or 9.5% versus the third quarter of 2017. Growth versus the prior years driven by the acquisition of The Bank of River Oaks, which contributed $327 million of net book value as of the deal closing. The legacy bank loan portfolio grew by approximately 4% versus the prior year. Throughout 2018, as market interest rates have risen, we have experienced a high level of pay downs as our clients finalized projects were refinanced in the term. Given the current market environment, including the competitive pressures, we expect end of year total loan growth to exceed 7%, including the impact of the BORO transaction. Moving to Page 12. Total deposits are approximately $8.3 billion and have increased by $627 million or 8% versus the third quarter of 2017. Further noninterest-bearing deposits have increased by $246 million or approximately 11% versus the prior year. The Bank of River Oaks transaction accounted for $376 million of total deposits at the close. 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 not to be overly aggressive in our rate offerings. I’ll now turn it to Alan to provide more insights on the businesses performance.

Great. Thank you, Will. Let me give you an operating report. First of all, the bank continues to perform very nicely this year with our strong capital base, our asset quality being in excellent shape and strong liquidity continues to play in favor for the bank. We generated a 1.27% ROA for the quarter, which compares favorably to year-over-year. Our loans have grown year-over-year, 9.5%, and that does include BORO. And our net interest margin was 3.75%, that’s prepurchased accounting 3.75%, which is up and we continue to compete and compare favorably there. Our loan quality, which I really want to emphasize, is very strong. We have 0.29% of our total assets in non-accrual loans at Hilltop. That’s $39.5 million on an $8 billion portfolio, which we think is excellent. We’ve continued not to have to put any money in the loan loss reserve, because of the quality, and we continue strong lending standards of loaning to our relationships and our customers, and we seem to be able to handle that and do that quite well, and I think excellent position as we move forward. Our deposits have seen a 9.5% growth year-over-year. That also would include the deposits that we gained from Bank of River Oaks, but it does exclude the deposits it would come from HilltopSecurities program that we do have. Our noninterest-bearing deposits continue to remain strong at 31% of total deposits, which we’re very pleased with. And we continue to operate 65 branches and one loan production office at the end of third quarter. We’re very pleased with the operation of the bank. I think it should continue and because of the strength of the company, I think it’s quite under our hand as we move forward in the future. At PrimeLending, we continue to struggle just like anybody in the mortgage business at this point. I’m very pleased that we were profitable in the third quarter, which I don’t know how many mortgage companies can say that across the country, but we continue to do the things that we need to do to make that necessary. Volumes are off about 8% year-over-year, which makes it difficult to gain on sale. Margin has really been eaten up, primarily because of competition. People going from a non-refinance environment to a purchase environment that has really made it competitive and has really taken away the huge part of that gain on sale. However, I will say in the third quarter, we bounced back from the second quarter, which is very positive, by no means where we want to be, where we continue to work on that. But I guess, something that did kind of affect us in the third quarter as volumes dropped off, which we didn’t expect. And I think a lot of that one maybe because of competition out pricing everybody for business, but I think a lot of it too is a lack of inventory in the market. I thank the price appreciation and a lot of markets might people that are not able to qualify for loans anymore, which is unfortunate. And then as the rate environment changes, also affects us. So as we move forward, we’re going to – we’ll have to watch our volumes. We’re going to continue to work on our gain on sale. And some of the things that we have done to try to put position ourselves to tight more market share, we’ve eliminated about 100 non-producers. We’ve closed 20 branches that cause us about $800,000 charge to income this quarter. But on the positive side, because there is so much transition in the mortgage business, we’re not related to a banking entity or a stronger – certainly, a lot of these mortgage companies are starting to not able to make it. A lot of good mortgage lenders out there that are looking for a safe environment or place to move to be able to do business. PrimeLending offers that the one, because we have a $2 million – $2 billion warehouse loan that helps to fund loans, and it is supported by a strong bank and a strong holding company that allows them to be able to do business. So with that in mind, we’ve been out recruiting, and we’ve been able to attract about 215 new quality loan officers that we feel that can help us gain market share, the same line that 250 that we’ve gotten, we’ve released about 200 of those – 200 of our loan officers that weren’t meeting the standards that we require. So we’ve been able to upgrade our staff. We’ve added 15 new branches, and we’re out there in the business to compete and position ourselves as we continue to go through this. We continue to try to raise our fees. We try to compare our costs and pass as much long this – as we can. I feel good about what we’re doing, I feel good about the people that we have doing it. They are seasoned professionals who have been through this before. And this time, continues to shake out I feel comfortable that PrimeLending will take advantage of the opportunities that does provide. We also run our operating with five new joint ventures with builders, which helps generate volume for us as we go forward. At HilltopSecurities, third quarter – I think was a lot better than the second quarter. We did have a 10% pretax margin, which is something we were shooting for. We continue to struggle on the public finance arena. That market nationally is off about 9%, but we’re off about 25%. Primarily, that big jump is because we did lose a group of producing public finance people out of Houston. They were actually the municipal and utility district people, they would often open up their own office. And that hurt from an income standpoint, so that’s one of the reasons that we are down considerably. We’re normally moving now into the season, where public finance picks up. And I think we will certainly come back from that as we do. We’re seeing good improvement in our structured finance area as Will said. Clearing remains strong, securities lending is strong, and we’re managing about $30 billion worth of cash, which is right move. It certainly helps us. I think one thing you’ve got to keep in mind, HilltopSecurities provides funding for the bank and core funding for the bank, right now, the bank is using about $1.3 billion of that core funding. I think it could go up to $2.5 billion we could use. We’re using $1.3 billion of that line, and that helps us fund PrimeLending loan that’s we call it a three-legged stool. So, it is very important to us, so that funding that we get and the liquidity that it provides the company. At the insurance company, we had a good quarter. As Jeremy mentioned that our ratios look good, completely different than last year, because of Hurricane Harvey, which we took a $6.5 million loss. So, all areas there look good that we did make a profit and as we move into the fourth quarter, we hope Mother Nature stays away and it proves to be what it has in the past and be a good quarter for us in an earnings quarter. So with that, that is my report. And I guess, I’ll turn it over to Isabell.

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

[Operator Instructions]. First question comes from Brady Gailey with KBW. Please go ahead.

Good morning, guys. So we didn’t see any buybacks in the third quarter. You look at your stock now one times tangible. I’ve got to imagine you all will be aggressive this quarter on the buyback front?

So this is Jeremy. Yes, we’re obviously very cognizant of where we are trading, and we’re actually considering given the selloff what we want to do for the quarter as far as share repurchases. And then for the last quarter, without doing share repurchases, we had some corporate actions that precluded us from doing some share repurchases as well as we are cautious about the environment.

Okay. And are there any other reasons that you would not be buying back your stock at one times tangible?

No, I don’t – I can’t no, there’s no reason we wouldn’t be other than we buy it in an open window, we have to abide by securities laws.

Okay. All right. And then Jeremy, you started by talking about kind of the company bigger picture. Sounds like your focus on cost saves, your shared services model, so it sounds like there are some efficiencies coming in outside of just what’s going on with mortgage. Is there any way to quantify that? Whether it’s a number of how much expenses you think will come out? Or whether you think about the efficiency ratio in certain ranges over time? Is there any way to give us a little more color on what that could produce?

This quarter, we’re not in a position to do that. We’re not planning to do that. And we do plan to next quarter, articulate what we’re laying out here today.

All right. And then, I think I’ll say that loan growth for the company should be 7% this year and that’s including The Bank of River Oaks. So I think if you back out The Bank of River Oaks, that means, organic loan growth was closer to like to 2% or 3%? And I know we’ve talked about, I think, it was 6% to 8% range in the past. So do you think that 6% to 8% range is still the right way to think about like next year or 2019?

I think as we look at it, I think, you’re correct, 7% is right. We are seeing, as I mentioned in my comments, higher net paydowns than we’ve seen historically and some of that’s driven by projects, closing some of that kind of tied up with some of our construction lending and some of the funding timing that is natural in that business. And then the other part of it is our conservative approach to underwriting. And so I think if we look out next year, we will provide kind of full year 2019 guidance at our January call and that will include, as Jeremy mentioned, expenses outlook as well as loan outlook, but I think your assessment of kind of where the core portfolio is appropriate given where we are going in the fourth quarter.

All right. And then just one more on the expense side. Alan, I heard all your comments about what you’ve done with mortgage as far as upgrading the talent and then closing some branches and get rid of some non-producers. Is there still work left to be done on the efficiency side in mortgage?

Well, I think that’s the first level, first shot. If it continues to deteriorate or we don’t see light at the end of the tunnel, we can always do more. So I’d say that’s the first shot, we would like to see kind of what happens before we take the second shot.

Okay, great. Thanks guys.

The next question comes from Michael Young with SunTrust. Please go ahead.

Hey, good morning. Just wanted to see if we could pull a little bit of a finer point on kind of all the subsequent events and onetime kind of items that occur in the quarter, just trying to understand how much was captured this quarter, like the DOJ settlement versus the gains on the termination lost share that Hilltop opportunity partners gained on that investment? And then the settlement with the HUD as well. Just trying to put all those pieces together a little bit.

Michael, this is Will. I will go through it, so The Bank of River Oaks transaction and kind of integration-related expenses were included in the quarter, that’s $6.6 million pretax and then tax affected – impacted EPS – or earnings by $5.2 million. The DOJ, HUD settlement impacted pretax by $3.3 million and net income by $1.1 million and the impact there is that we previously accrued for a potential settlement over time. We had a position in terms of overall tax deductibility. As we reached settlement, our opinion on that deductibility has changed. So the impact there on a net income basis does reflect our position on deductibility. The FDIC indemnification asset amortization for settlement, so as Jeremy mentioned, we did exit all of our FDIC law share agreed during the third quarter and actual – the actual settlement occurred – final settlement occurred in the fourth quarter, so it was a subsequent event very similar to the DOJ, HUD. But we obviously accrued for all of the known activity and expected outcome, which yielded approximately $700,000 of pretax impact or $0.5 million after-tax. So all of the items we’ve called out on Page 3 in our investor highlights were booked and/or recorded during the third quarter. And as I said in my comments, we don’t expect from the DOJ and HUD as well as the FDIC any future financial costs related to those going forward. I do think it’s worth noting on the indemnification amortization that had been an item that we were recognizing on a quarterly basis in prior quarters, and as such, that has been recorded in non-interest expense and for reference approximately $6 million of expense of amortization and clawback expense related to the FDIC agreements had been booked through the first and second quarters. And then, again, we booked the approximate $700,000 in Q3. So year-to-date, approximately $7 million booked related to the indemnification, amortization and clawback, which will not exist on a go-forward basis.

Okay, that’s included in other expense on the consolidated financials?

Yes.

Okay. And then, the last one just the opportunities fund in that gain. Is that going to be booked in the fourth quarter?

It was a subsequent event and will be booked in the fourth quarter.

Okay, got it. And then, well, one other one just on kind of the fair value adjustment in mortgage this quarter, the interest rate lock commitments, it was like a $20 million charge. Any color you can provide there on kind of what were the drivers? And then also in structured finance, I know that’s been an area that’s been impacted by the moving rates in the past. So any color you can provide on kind of how rates have played into the results this quarter?

Yes, so, as we look at interest rate locks we had about $19.2 million charge in the quarter. And again, as I look at – as you look at kind of value versus volume, the value of the rate loss didn’t move markedly couple of basis points. But the real driver there is the volume based one. So rate loss declined in the period and so the overall UPB if you will of the pipeline declined in line with the overall rate loss volume for the quarter declined. So that’s really the volume decline, given that particular area that’s just an asset and it’s an asset rolled forward and that decline of value is really more volume driven than rate driven. And then on structured finance, structured finance we did see an improvement linked quarter in the secondary spreads. But I would say, as I mentioned in my comments that’s volatile and can be market driven. We have seen the 10-year move over the last couple of weeks more aggressively and so albeit it pulled back off the highs. That said, on any kind of quarter-to-quarter, it’s difficult to predict. We do think that they have stabilized, and we are seeing kind of seeing a high-level stability, but it can be volatile quarter-to-quarter, so it will be difficult to put a fine point on that.

And I guess, just lastly, we saw nice kind of rebound in HilltopSecurities this quarter. Obviously, still kind of trying to pick up for the decline in public finance on a year- over-year basis. But is the outlook still for kind of seasonally stronger 4Q as is normally the case that we see in public finance? And then Jeremy, does that still give you confidence in kind of the full year outlook that you provided previously?

The answer in the end there, yes, I will just stick with what we’ve given previously, which is for the year $350 million in net revenue and 8% to 10%-ish high single-digit pretax margin for the year. So I think that the fourth quarter will be moderately more favorable than the third quarter and a lot of that is due to the seasonality of the public finance business.

Okay. Thanks. That’s all from me and look forward to hearing some of the more details on the next quarter call.

Thank you.

Thank you.

Okay. The next question comes from Chris Gamaitoni with Compass Point. Please go ahead.

Good morning. Thanks for taking my call.

Thanks, Chris.

Can you give us your thoughts on the bank obviously is a very high capital level and your stock price is underperformed. What keeps you from potentially deploying a larger buyback than you currently have approved?

I think as we look at capital and having the excess capital over the cycle, we believe M&A is going to be the highest value. And market really hasn’t been there for us over the last couple of years in a sizable way. We think that the market appears to be coming more towards our type of M&A market, and our board, our Chairman’s view is that we want to have dry powder to deploy for those opportunities. And so in the interim, we are returning capital to the shareholders in the form of dividends and share repurchases and also through the transaction that we did with The Bank of River Oaks this year. If you look year-to-date we returned about 72% return to shareholders between the dividend share repurchases.

And is there a way – I mean it’s too early for this, but it seems like loan growth is coming down a little bit, which just given your profitability, if ROE is above loan growth you will be building more capital. Is there like a payout ratio you’re thinking about if you’re being more conservative on the loan growth side because of your underwriting caution?

Well, we factor in – so when we evaluate our kind of capital spend on our current period earnings. We factor in what we think loan growth is going to be and what we think the largest organic growth capital-intensive endeavor. So certainly factor that in. And that could lead us to kind of thinking that we’re going to built excess capital. But I think then we turnaround and look and we turnaround and look and say, what’s the timing to deploy the capital with the M&A environment, and we look at ourselves and we say, where are we trading and what are our earnings forecast and what’s the pressure that we’ve had in the mortgage business and the like.

All right. Thank you very much for taking my call.

The next question comes from Matt Olney with Stephens. Please go ahead.

Thanks. Good morning.

Good morning.

Want to go back to the discussion on the broker-dealer for the fourth quarter. I appreciate there’s some seasonality there, which points to some stronger revenue in 4Q versus 3Q. But also seems like there were some unusual items in the fourth quarter of last year around the tax code change. So looking that segmented data, it looks like the revenue last year in that business increased about $10 million from 3Q to 4Q. So I just want to make sure that’s still a good way to look at this business year-over-year in the fourth quarter?

That’s a good point, and I don’t think it’s going to be that great. We had revenue in that business about $15 million this past quarter. I think it can go up from that, but just in the fourth quarter issuances but…

Okay, so you’re saying a nice sequential increase, but not as much as we saw last year. Is that fair?

I think that’s fair.

Yes, I think – I mean, I think the view is public finance offerings in general are going to rebound at the same rate. And again, last year just to be really kind of on point there, we saw a lot of issuers pull into the fourth quarter given tax effect and tax act impacts.

Okay. Understood. And then on the margin commentary, Will, it sounds like you expect deposit beta decline from year, but you still expect to have a flattish core NIM. So are you assuming that the core loan yields keep up with the increased deposit costs? Or is it just some kind of mix shift or something else we should consider?

No, I think we do – I think we’re expecting betas – and kind of the marginal betas are increasing towards our model levels. They are not at our models levels of 50 to 60, yet they’re climbing in that direction. And so we are seeing the impact of deposit betas increasing. We’re also seeing the asset beta pull through that we would expect and as we look out those virtually offset. But to your point, we do see and have seen as, I mentioned in my comments, some more appetite from clients for CDs, shorter-term and longer term candidly as well as money market products versus kind of DDA or other lower yielding kind of savings products. So it’s late stages – what I generally think about it is later stages of a rate cycle and clients becoming more aware of where cash rates are. So we do see both the beta increase as well as some portfolio shifting causing basically an offsetting impact to asset repricing.

Got it. Thanks for that Will. And then going over to the mortgage business. It sounds like the margins are pressured, but I guess there were some signs of stabilization in third quarter. Can you just elaborate on this? I’m curious if you see any positive signals in the competitive landscape in recent weeks compared to what you saw over the summer?

Yes. I think we are. We have indications that there’s a lot of red ink being generated by companies out there that are all national warehouse lending. We had to eliminate several customers because of their financial performance. That’s an indication, but we also have some comparisons against us versus some of the other companies our size. We seem to be outperforming them. Some of them are red ink, but I think the fourth quarter is going to be kind of a tail end quarter because traditionally the fourth quarter is not good. Volumes are off in the fourth quarter because everybody takes off in December for Christmas. So I think you’re going to see – might be a little bigger fallout this quarter and then we gonna all be able to line up and see better where we are starting the year of. But I think we’re going to continue to make progress towards that. We continue to try to recruit and get those top loan officers. We continue to try to look at ways we can cut costs and be competitive. So I think we’re trying to set our organization to take advantage of this thing when it does turn in, and it will turn.

Thank you.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey guys, how are you doing?

Good morning.

Good. Alan, just wanted to get your comments. So one of the other Texas banks announced a pretty large Houston strategy to expand yesterday. And just wanted to see if that may impact you guys? I’m not sure, from a deposit standpoint if you guys planned the same sandbox. But just wanted to get your thoughts on the Houston market? You have the slide in there. It seems like you guys are pretty optimistic. Just wanted to see if that announcement will have an impact? Thanks.

I don’t know. It won’t have any impact. I don’t know if you have been to Houston lately there are seven million people that live down there. We’ve got four banks in an affluent area. And we’ve got pretty good chance to continue to grow that and look for opportunities. So I think Houston is an opportunity for us. There’s been a lot of changes in the banking industry down there. Lot of people moving around. Lot of acquisitions and whatever you might want to call it and I think that creates opportunity for everybody. As far as what was announced yesterday that doesn’t have any impact on us.

Got it. And then maybe just one more to circle back on the buybacks sort of beat a dead horse. But is there any reason why you guys wouldn’t actually finish our your authorization before expires in January?

Well, first, I think that’ll be conditioned on our volume limitations and not wanting to obviously do a share repurchase, it impacts the price. I mean, that’s the practical nature, I mean.

Okay. Thanks for taking my question.

Thank you.

Okay. The next question is a follow-up from Michael Young with SunTrust. Please go ahead.

Hey, just wanted to ask one follow-up on the mortgage business kind of the repositioning you did. Alan, I know previously you talked about kind of trying to trim the people who are generating volume, but not profit. And I’m curious with kind of the repositioning this quarter, maybe when that occurred during the quarter and how much of that benefit? I guess, we were already seeing in the numbers versus how much of that is still kind of yet to come?

I don’t think, we’ve seen a lot it. We really started this back end of the second quarter and the third quarter, as you start planning what are you’re going to do and you start evaluating. You look at these people that are producing large volume, we’re not getting any profit. So we’ve gone through and called that out, but we haven’t seen any benefits so we took an $800,000 charge this quarter and let the bunch of non-producers go, and we will see some benefit from that. But as far as the loan officers know and as far as bringing on new loan officers, it takes a little while before they start really being able to generate the volume that allows us to – the thing is that we’re pleased with as we’ve really been able to improve our stable of loan officers and the quality they’re building to do purchase business. We’re doing 90% purchase business. You can’t do anything more than that. So we’re going to continue to try to gain market share and continue to build on that. And we’re going to just have to wait and see how the market shakes out. We’re going to have to see how the market does. And so I think that’s kind of where we are. But we’ve not seen any financial impact yet on this, but we’re putting the things into place and meeting. We have seen an increase in basic stuff that we’ve implemented from that standpoint but as far as people know.

Okay, so the fixed noninterest expense base in that business should still be coming down. There’s still some tailwinds to that?

Yes.

Okay perfect. And just on the loan side, Alan. Obviously, a little bit lower than probably where you had hoped at the beginning of the year, but obviously we’ve seen across the industry a lot more competition, particularly in the CRE space, which has been big for you guys. Can you just talk about maybe how much has been related to just heavier paydowns versus maybe just lower production in the competitive landscape?

I’ve been trying to talk you all down from the first of the year, I thought I had you down to 6%, but I don’t guess anybody will listen. It is competitive out there. And again, we’re not going to give up our underwriting standards, where as maybe we’re seeing sometimes they do, so we’re sticking to our guns. Now we’ve had some paydowns, but we’ve also come back in and made some pretty good sizable loans to replace all paydowns. The problem you got is those are construction loans and they don’t start funding to the use their own equity. And we’ve got about $850 million worth of those loans out there and $100 million of that has been probably made in the last 60 days, but we’re not going to see any really drawdowns on those construction loans so after the first of the year, we’re going to have to take the – pull down our equity bar. So we’ve been making some really good loans in some markets that are really good and the relationship loans to people that we do know, so we’re going to see the benefit of it. Now I think what you’re going to experience and I thought we’re experienced in that, and while maybe a 4% number might be better than 6% number, is we are seeing a lot of paydowns, and what’s causing these paydowns is the back of the interest rates are going up and these people are trying to get these projects finished and add into the secondary market where they can get a fixed rate and nonrecourse financing. So we are seeing some movement there, a lot more movement we would like, but you got to understand what they’re trying to do and we do, and we just have to try to make it up somewhere else. I just don’t think we can make it up as quick as it’s going to play off.

Makes sense. Thanks.

Okay, this concludes our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.