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…

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…

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…

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.