Hilltop Holdings Inc. (HTH) Q4 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Hilltop Holdings’ Fourth Quarter and Full Year 2018 Earnings Conference Call and Webcast. All participants today are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. And with that, I would like to turn the conference over to Isabell Novakov. Please go ahead.

Good morning. Joining me on the call are Jeremy Ford, President and Co-CEO; Alan White, Vice Chairman and Co-CEO; and Will Furr, CFO. Before we get started, please note that certain statements during today’s presentation that are not statements of historical facts, including statements concerning such items as our outlook, 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 condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including taxable equivalent net interest margin, 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 fourth quarter 2018, Hilltop reported net income of $28.1 million or $0.30 per diluted share. PlainsCapital Bank delivered solid earnings. However, the results of our other businesses declined from the challenging market conditions. Building on this year's Bank of River Oaks’ acquisition, loans held for investment grew by 8% in the fourth quarter versus prior year and deposits were up 7% over the same period. Further our net interest margin expanded by 18 basis points versus prior year to 3.75% [ph]. We continually focus on prudent capital management and value creation for our shareholders. To that end, we returned $86 million in dividends and share repurchases to our stockholders in 2018 or approximately 70% of net income. Additionally, Hilltop’s Board of Directors just declared a quarterly cash dividend of $0.08 per common share, representing a 14% year-over-year increase and reauthorized our $50 million share repurchase program. Hilltop remains well capitalized with a tier 1 leverage ratio of 12.53% [ph] and a book value per share of $20.83. Regarding asset quality, our criticized loans declined in the fourth quarter and we recorded net charge offs for the year of $9.3 million, equating to 14 basis points of average loans. In the insurance business, we executed on a strategic initiative to focus on our six key markets and therefore in the fourth quarter, we discontinued writing new insurance policies in five non-core states, which represented only 3% of our premiums. Moving to slide 4, driven by higher NIM and growth in loans and deposits, fourth quarter pretax income for the bank increased by 16% compared to prior year. These results do include both $1.6 million in transaction related expenses from the Bank of River Oaks acquisition and provision expense of $6.9 million. Volume decline of 18% compared to prior year and gain on sale margins of 334 basis points at the mortgage business resulted in a pretax loss for the quarter of $2.7 million. We have seen stabilization in secondary margins, albeit at pressured level. We are excited to announce the hiring of Brad Winges as President and CEO of Hilltop Securities, effective February 20, 2019. At that time, Hill Feinberg will become Chairman of Hilltop Securities. Brad has an exceptional track record as a securities industry leader and we are fortunate to have him as Hill’s successor. Importantly, we're extremely grateful for all that Hill has done over his career to make Hilltop Securities a quality firm it is today. And for all that Hill will be doing, working with Brad to execute into the future. At Hilltop Securities, results for the fourth quarter were impacted by a challenging trading environment for our capital markets and a 44% decline in municipal issuance. Additionally, increased competition and widening credit spreads negatively impacted structured finance during the quarter. On a positive note, our retail, clearing and securities lending businesses continued to deliver solid revenue for the organization. Our insurance business had a difficult quarter, primarily due to a $6.2 million loss from hurricane Michael that traversed through Georgia in October. Operationally, the business has continued to improve, since relocating to Dallas earlier this year and delivered $5.7 million in pretax income in 2018. Moving to slide 5, as introduced during our third quarter earnings call, we are currently well underway in executing on a broad set of initiatives to enhance our platform and streamline operations with the goal of lowering operating costs and building a foundation for future organic and acquisitive growth. These projects include core system enhancements, procurement and strategic sourcing and shared services of our functional department. As we now plan to communicate and now we plan to communicate our estimates for these investments. We believe the long term benefit of this program will drive positive operating leverage of 6% and enable Hilltop to deliver pretax pre-provision income of $250 million in 2021, equating to an annual growth in excess of 10%. Embedded in the projections are a combination of expense reduction efforts, including our strategic sourcing program and revenue focused initiatives, such as the core system implementation and prime lending and the rollout of a digital payment network at PlainsCapital Bank. Most of the benefits will be realized towards the back end, as the larger aforementioned system implementations are underway and still incurring expenses. Substantial progress has already been made, including the development of back office shared services departments, the largest being our information technology organization, the rollout of a centralized travel and entertainment platform and the consolidation of a special assets group. We feel very confident in the roadmap ahead and are excited for the progress we have already seen. I will now turn the presentation over to Will who will talk through the financials.

Thank you, Jeremy. As previously disclosed, PlainsCapital Bank terminated the law share agreements with the FDIC during the fourth quarter of 2018. As a result, we have adjusted the presentation to remove any references to covered and non-covered loans or assets. These changes are present on pages 11 and 14 of this presentation. I'm moving to page 7. As Jeremy discussed, for the fourth quarter of 2018, Hilltop reported 28.1 million of income attributable to common shareholders, equating to $0.30 per diluted share. During the fourth quarter, Hilltop’s provision for loan losses was $6.9 million. Fourth quarter provision includes 7.6 million of net charge offs and reflects continued improvement in the oil and gas portfolio. For the full year of 2018, total net charge offs equated to $9.3 million, resulting in a net charge off to full year average loan balance ratio of 14 basis points. Full year 2018 provision expense equated to $5.1 million, a decline of approximately $9 million versus 2017. During the fourth quarter, revenue related to purchase accounting accretion was $12.6 million and expenses were $2.3 million, resulting in a net purchase accounting impact of $10.3 million for the quarter. It is notable that purchase accounting related expenses declined $3.3 million from the prior year, principally driven by the absence of FDIC asset amortization. In the current period, the purchase accounting expenses largely represent amortization of our deposit intangibles and other intangible assets related to prior acquisitions. Hilltop’s capital position remains strong with a period end common equity tier 1 ratio of 16.58% and a tier 1 leverage ratio of 12.53%. Of note and related to the changes in lease accounting that became effective on January 1, 2019, we expect that Hilltop’s risk based capital ratios will be negatively impacted by 15 to 20 basis points during the first quarter of 2019, driven by an increase in risk weighted assets associated with leases. Moving to page 8, net interest income in the fourth quarter equated to $118 million, including the aforementioned 12.6 million in purchase loan accretion. Net interest income increased 9 million or 8% versus the prior year quarter, while purchase loan accretion increased modestly by 0.6 million. Interest income increased from asset growth, both organic and from the BORO acquisition and NIM expanded during the quarter. Related to purchase loan accretion, as the purchased portfolio balances continue to decline, we expect interest income related to purchase loan accretion to average between $4 million and $6 million per quarter during 2019. Net interest margin equated to 3.75% in the fourth quarter, including 43 basis points of purchase accounting accretion. The pre-purchase accounting taxable equivalent net interest margin equated to 3.33%, an improvement of 17 basis points from the prior year period. HFI loan yields, excluding purchase accounting, have increased by 42 basis points versus the prior year, somewhat offset by higher deposit costs. We remain extremely focused on managing deposits, both in terms of growth and rates paid. As expected, we have seen deposit betas continue to increases as the Federal Reserve continues to move short term rates higher. Further, the flatness of the yield curve has increased pressure on NIM and net interest income, as short term borrowing costs rise and longer term asset yields remain more stable. Hilltop’s cumulative beta for interest bearing deposits from December 2015 has been approximately 38%. During 2018, Hilltop’s interest bearing deposit beta was approximately 50%. While these betas continue to compare favorably to our through the cycle model beta levels of 50% to 60%, it is expected that deposit betas will continue to rise towards our through the cycle levels, if the Federal Reserve continues to increase rates and competitive pressures persist. Given the factors noted, we are maintaining our current pre-purchase accounting, taxable equivalent net interest margin outlook at 3.2% plus or minus 3 basis points. We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset and liability flows across the portfolios. Over the past year, quarterly average net earning assets have increased by $367 million, driven by the BORO acquisition, coupled with growth in Hilltop Securities portfolios. Fourth quarter average loans held for sale have declined by 262 million to 1.3 billion versus the prior year. The blended funding cost for these loans is approximately 78 basis points. This funding cost, which is substantially lower than wholesale funding, demonstrates the value of the 1.3 billion of core deposits swept from Hilltop Securities. I'm moving to page 9. Total non-interest income for the fourth quarter of 2018 equated to $239 million. Fourth quarter mortgage related income and fees declined by $28 million versus the fourth quarter of 2017. During the fourth quarter 2018, the competitive environment in mortgage banking remained intense, as Hilltop’s mortgage origination volumes declined by 631 million or 18% versus the prior year period. The majority of the annual reduction came from refinancing activity, which declined by 347 million or 47%. Purchase mortgage origination volume comprised approximately 87% of our total mortgage originations in the period. While mortgage volumes were challenged, gain on sale of margins did improve to 334 basis points in the quarter from 330 basis points during the third or of 2018. Given the current market and competitive conditions, we expect that volumes and gain on sale margins will remain pressured in 2019. Securities related fees decreased versus the prior year by $14 million, primarily driven by lower public finance offering volumes in Hilltop Securities. The municipal origination market was pressured throughout the year, as 2018 US municipal bond issuance declined by 44%. Other income declined by $8 million, driven primarily by challenging fixed income market, which yielded significant volatility, widening credit spreads and intense competition during the fourth quarter. In our structured finance business, volumes increased modestly versus the fourth quarter of 2017 and while spreads improved on a linked quarter basis, they were down versus the prior year. Also included in other income and as previously disclosed, Hilltop recorded a gain on the liquidation of an investment within the merchant banking area. The gain on this sale equated to $5.3 million. Somewhat offsetting this gain, during the fourth quarter, Hilltop recognized a negative valuation adjustment of a legacy merchant banking investment from 2009, equating to $2.5 million. Turning to page 10. Non-interest expenses improved from the same period prior year by $18 million or approximately 5% to $311 million. Compensation related expenses were lowered by $26 million during the period related to lower production revenues, driving lower commissions and the impact of a decrease in discretionary expenses across the businesses. The fourth quarter of 2018 included the impacts of Hurricane Michael, which resulted in 6.2 million of insurance losses, principally in the state of Georgia. In addition, Plains increased versus the prior year’s weather, including colder temperatures, impacted our clients. Overall, insurance and LAE losses increased by $12 million versus the prior year period. As reported earlier, this quarter includes approximately $3.4 million of significant items related to the final integration of BORO and ongoing efficiency initiatives. Further, Hilltop incurred 1.6 million – 1.8 million in cost related to ongoing core system replacements and enhancements that were referenced earlier by Jeremy. As we continue to position our businesses for long term success, we may take additional efficiency related charges in the future. Moving to page 11, total loans, including broker dealer loans at Hilltop Securities, grew by 479 million or 7% versus the fourth quarter of 2017. Growth versus the prior year is driven by the BORO acquisition, which contributed 327 million of net book value as of the deal closing. In 2019, we expect full year average HFI loans to grow 4% to 6% over the year. This growth reflects our focus on quality and considers current market rates, economic activity and ongoing competitive pressures. Moving to page 12. Total deposits were approximately $8.5 billion and have increased by 558 million or 7% versus the fourth quarter of 2017, including the BORO acquisition. Further, non-interest bearing deposits have increased by $149 million or approximately 6% versus the prior year. Interest bearing deposit costs have continued to increase modestly with short term interest rates and we remain active in the market, testing rates and terms to ensure we remain competitive, while being intentional to not be overly aggressive in our rate offerings. Turning to page 13, for 2019, we are providing full year outlook for some of our key balance sheet and income statement items. Our priorities of creating value by delivering diversified growth across our franchise, optimizing capital to support organic growth and M&A while rigorously managing risk in all of our businesses has not changed. The outlook represents our current perspectives on the markets, rates and overall economic activity. These may change throughout the year and we will provide updates, as necessary on our quarterly calls going forward. I'll now turn it to Alan to provide more insights on the businesses.

Okay. Thank you, Will. Let me talk about the bank first. The bank had a good year. Fourth quarter had $41.8 million before tax and net income up for the year, we made 152 million, that's down a little bit from ‘17 and you have to remember we did over [ph] $15 million insurance recovery and our accretion was a little bit stronger in ’17, as it starts to roll on. So, we had a very good year in ’18, looking forward to ‘19. Our loan growth was 8%. Year-over-year, we felt good about that. Our deposit growth was 705 million or 10% year-over-year. That does include BORO, but it excludes any broker deposits that we might or might not have. So that’s true pure growth. So we look good on both the loan side, we look good both on the deposit side. We did make a provision for the year of $5 million, little over $5 million for ’18. We had net charge offs of $9 million. As Will says, that’s about 14 basis points of total loans of $6.5 billion. We did do a little cleanup in December, getting rid of the cats and the rates that we had in doing that, but our loan portfolio still remains extremely strong. All aspects, we see no weakness. If you look at our non-performings, they're down from 0.55 in the third quarter, down to 0.45 in the fourth quarter and they're down from 0.65 a year ago. So we continue to improve those. Our past dues are well in line and all the aspects of our loan quality are good. We remain on our credit underwriting standards to be very conservative. We are very competitive and we're out on the road, taking care of our customers and talking to our strong relationships and trying to continue to grow that loan balance. Bank of River Oaks has been a good transaction for us. We made approximately $2 million a month, excluding the transaction costs and we're looking for good things in Houston, as we focus on growth in that market. Our ROA for the year was 123 and we're pleased with that and our net interest margin, we’re really pleased with it too. For the quarter, it was 390 after purchase accounting and year-to-date, it’s 376. So we’re seeing some good improvement there and feel good. We hired an additional 13 loan officers. We got 64 branches and 1, I don’t know what you call it, I guess an office, it is not a branch, but we have money in it, I forgot the terminology, but nevertheless, we're out there and going hard at it and I feel really good about the bank, I feel really good about the people and I feel really good about where we are. PrimeLending, man, it was a tough year, the mortgage business, it’s been a tough year. We ended up making $12.9 million, considerably less than we did the prior year. Big problem in the fourth quarter was volumes were up 18% over the year-over-year, we’re off 5%, industry declined 13% over the same period in the fourth quarter. So that really hurt us. The big issue has been gain on sale and that really came to light about 1 of April and in the second quarter when we saw our gain on sale drop from, gosh, 380 down to 317. And we realize in that we were going to have to do some things, we have made a lot of adjustments in trying to effect a better gain on sale. It's kind of end of the year now at around the 330, 335 range. We think it's pretty well leveled off. We did about 170 risks at that point. We have gotten rid of 334 loan officers, but on the other side, we've hired 370 loan officers. And you might ask, what are you doing, we’re cleaning that up, we got rid of people that were not producing and were not generating income for us and we've been able to go out and recruit and attract a strong team of loan officers to come in with a good track record, strong purchased background and I will tell you, it's easy to do because people are looking for places of strength and stability and PrimeLending is a company with strength and stability, backed by Hilltop’s balance sheet. We do have a $2 billion commitment to prime for the warehouse line. So these people know they can get their loans funded and because of the strong liquidity position we’re in, they know that they can get them not only committed to, but funded and so we've been able to track good people, which we think is going to come back and prove to be a good thing for us going forward. So we're going to continue to work on our gain on sale, we’re going to continue to work on better experience controls. We do have new loan operating system coming into play in 2019 towards the end call Blue Sage. That will help us to control our pricing a lot better, a lot closer and it will allow our loan officers and our customers to be able to do things a lot quicker and faster. So it has been a tough year. We're optimistic because we are a purchase company that we’ll be able to gain our market back, I don't think you're going to see a considerable change in ’19, but we’re hoping ’20 will be, from that standpoint. So, we're all over it, they're all over it and I’m positively optimistic that we can turn this around, but this is typical of the mortgage business right now and we're very competitive in all places and all markets that we have across the country. Hilltop Securities had a fairly difficult year. I think the big tough saying there was public finance. Fourth quarter of ’17, we had a strong quarter and then the new tax legislation drove [indiscernible] in December ‘17 and then they just fell off of the wall after that. And 2018 was not good, municipal issuance is down about 44%, which has really been one of our main business, is really hardest, public finance was off from 86 million in income to 59 million. So you can see a significant change there. The other things that kind of affected us in Hilltop Securities was our TVA or our structured finance that again deals with mortgage, same story along with prime, the volumes drop off and the spread squeeze and we saw a drop in income there. Our retail and clearing and securities lending business has been strong. Our cash management business has been strong. As Jeremy mentioned, we're bringing in a new gentleman in the name Brad Winges to Hill place, he will succeed Hill, but to help Hill in his expertise as capital markets and we think he can bring a lot of opportunity for us in that business. So, we're looking forward to his arrival and what we can be able to do there. The brokerage business, the broker dealer continues to provide $1.3 billion worth of core deposits to the bank and has certainly more money available if we needed, but those are core deposits that come to us that certainly strengthen our liquidity position each and every day and help us fund the line at prime. As far as National Lloyds, we ended the year profitable at $5.7 million. Fourth quarter was not what we were hoping, but we got hit by hurricane in Georgia, which we were not expecting, cost us about $6.2 million. And so that hurt us, so all our ratios were not out of balance and so it does not mean such a good year. We have relocated everything now in Dallas. We have everything here, we're working on our core systems in our management team and our sales arm and we're out trying to recruit strong people and we hope we can bring this back up to the level that we had in the fourth quarter of ‘17 where we made about $14 million free tax. So we think we can get this back and we can bring the income in this company back up. So that's basically my report and highlights. It was a tough year, but the bank continues to do well and I anticipate it to continue to help these other businesses, as we go forward through the rest of the year. So that's all I got.

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

[Operator Instructions] Today's first question will be from Brady Gailey with KBW.

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

That’s correct.

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

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

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

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

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

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

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

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

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

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

And I think, the other thing is, this is Jeremy. Whatever the baseline started, I think that the difference is what we're really focusing on, creating value over the next three years. So it’s the walk from the 166 to 250. And we started with our actual number, to be able to articulate that.

Next question is from Chris Gamaitoni with Compass Point.

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

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

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

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

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

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

And then just the outlook for the expense growth that you gave, does that include the prior year kind of cal it, one-time charges and future 2019 potential expenses related to the ongoing cost initiatives that you said would benefit towards the longer -- the back end of 2021?

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

Next question will be from Brett Rabatin with Piper Jaffray.

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

They’re all over the board. They’re smaller loans, stuff that we've been messing around, we’re trying to get collected, couple of them, we’d already had a credit. It’s just the time of the year, just wanted to clean it up and get it out. And that's what it was. One thing in particular [indiscernible] collection efforts and you take them out.

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

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

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

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

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

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