Good day and welcome to the Hilltop Holdings First Quarter 2019 Earnings Conference Call and Webcast. All participants will be in a 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 like to now turn the conference over to Isabell Novakov. Please go ahead.

Good morning. Joining me on the call this morning are Jeremy Ford, President and 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 conditions, 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 first quarter of 2019, Hilltop reported net income of $38.8 million or $0.41 per diluted share, which represents a 63% increase compared with the $0.25 reported during the same quarter last year. Additionally, Hilltop delivered a return on average assets of 1.2% and return on average equity of 8%. This quarter's strong results are representative of both our commitment to diversified and prudent growth, and the hard work by our teams to drive operational efficiencies throughout the organization. This quarter, average loans held for investment excluding broker-dealer loans grew by 10% and average deposits grew by 5% versus prior year. While Hilltop's consolidated net interest margin contracted modestly on a linked quarter basis due to lower purchase accounting and a reduction in non-accrual interest recovery. It expanded by 17 basis points from last year, driven by the benefit of higher market rate coupled with disciplined deposit pricing in addition to higher yields on investment securities as a non-bank subsidiary. Also during the quarter, lower rates and recent alignment efforts between the capital markets and structured finance department yielded a net revenue increase of $28 million versus prior year at Hilltop Securities. We continue to remain focused on value creation, with our book value per share increasing by 6% versus prior year to $21.23 and our capital structure was a Tier 1 leverage ratio of 13.2%. Our credit quality at the bank evidences our risk management efforts as net charge-offs in Q1 2019 of only $1.6 million equated to 10 basis points of average loans, and our non-performing loans decreased to $30.9 million from $34 million at year-end 2018. During the quarter, we had two significant items to call out, including expenses associated with the previously announced leadership changes and costs related to…

Thank you, Jeremy. I'm starting on page six. As Jeremy discussed, for the first quarter of 2019, Hilltop reported $38.8 million income attributable to common stockholders, equating to $0.41 per diluted share, representing growth from the prior period of 63%. During the first quarter Hilltop’s provision for loan losses was approximately $1 million. During the first quarter of ‘19, we released the remaining $2 million loan loss reserve related to Hurricane Harvey as the clients that were previously identified as at-risk, have been -- have seen sufficient improvement in their business performance to remove this reserve. The bank did not incur any credit losses related to Hurricane Harvey. The first quarter provision includes $1.6 million of net charge-offs or 10 basis points of average bank loan. Credit quality during the quarter remained solid. And while we monitor our credit portfolio very closely, we do not currently see any industry or concentrated exposures that are experiencing material deterioration at this time. During the first quarter, revenue related to purchase accounting accretion was $8.6 million and expenses were $1.9 million, resulting in a net purchase accounting pretax impact of $6.7 million for the quarter. It is notable that purchase accounting related expenses declined $3.9 million from the prior year period, principally driven by the absence of any FDIC asset amortization. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions. Related to the purchase loan creation, as the purchase loan portfolio balances continue to decline, we expect scheduled interest income related to purchase loan accretion to average between $4 million and $6 million per quarter during 2019. Hilltop's capital position remains strong with the period-end common equity Tier 1 ratio of 16.75% and a Tier 1 leverage ratio of 13.22%. Moving…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Michael Young with SunTrust. Please go ahead.

I wanted to start off just on the broker-dealer. Obviously, good performance this quarter kind of snapping back from a tough year last year. Can you maybe just give us an update on kind of your total revenue outlook for the year and the pretax margin that you provide in the past? Is that a higher rate now you think for the full year?

No. We don't -- so, my view is I gave the $360 million or $370 million last quarter. I'd probably just looked to the higher range of that to be conservative. So kind of 370 maybe 380 and pretax margin for the year 11%-plus maybe up to 14%. But it's -- I'd say it's early we had a real pop in the structured finance business late in the third quarter, and so I'd be a little tempered. This is not a trend.

Okay. And could you maybe just talk about at least from the structured finance business or anywhere else kind of within the company as a whole where just the drop in 10-year rates really drove some additional revenue or margin that we should not necessarily run rate or expect going forward at the same magnitude?

Yes. I mean that's what we're talking about. And so in that business we're basically net long on this TBA mortgages. And so when the 10-year dropped, that gave us a pop, I think it was about $12 million. And so it's a lot of what we suffered through in the first quarter last year went the other way. So that's how I would talk about it. And then on -- just the other thing on the business, I think that the first quarter of 2018 was the real depressed quarter for municipal issuance. We're starting the year stronger and nationwide issuance is up. And if you exclude the Houston team departed, we're up year-over-year as well. So we're feeling good about the momentum that's being built there. And really good about Brad's coming on board and getting his arms around the company and as well as all the employees working with him and get to know him and Hill Feinberg's continued leadership there as well.

Okay. And maybe just switching to expenses really quickly. You mentioned that this year was going to be a heavy investment year. Obviously, we started off the year pretty strong with good expense control in a number of business units. But can you just help us understand where some of those incremental investments are going to be? And any sort of timing you can provide on when they might be within the year just so we can kind of get that model correctly?

As far as Prime, I think we've articulated it on a fixed-cost basis, we think that we've kind of illustrated the kind of run rate. As far as the other broader platform from growth and efficiency initiatives, it's early, we rolled out the details of the numbers last quarter of going from 89% to 83% efficiency ratio and generating $80 million of revenue and earnings and expense saves out of it, and it's going to be more in the later half or more into 2021, where it will be materialized. So, I don't have -- I wouldn't really -- I don't have anything to tell you right now about how to phase it in through this quarter. We kind of felt like on those things the level of investments going to offset a lot of the savings. Go ahead, Will.

Yes. So, what I would -- what I'd add there, Michael is, we reported kind of in, on page nine of our slide deck, core systems improvements of about $2.5 million this quarter. And in my comments noted that we do expect those to go higher. So I would say, as we start the deployment process which we are across a few of those platforms this year we're going to see those expenses that $2.5 million number trend higher really through, through the end of this year.

Okay. And you will continue to kind of call that out and point that out to us in terms of where that's going to occur and how much?

Yes. We will continue to be very transparent about what we're spending in that regard.

The next question comes from Brady Gailey with KBW. Please go ahead.

So, no buybacks this quarter. I mean the stock trades at 1.1 times tangible. You're nearing 13% TCE. Just wanted to get updated thoughts on how you guys think about the buyback? And why no buybacks this quarter?

To start with the latter part, why no buyback this quarter. Clearly we had some corporate actions that we felt that we were not legally in a position to be doing share repurchases. So we -- that's why we were inactive in the first quarter with the leadership changes. As we look toward the future and obviously the stocks come back a little bit, we have $50 million share authorization and we do plan to be active in the market in the open windows, and so we'll continue to do that as we have. And as we did last year, we had about $60 million of share repurchases.

And then, I hear you, Will on the core NIM guidance going up 5 basis points. But if you look at the last couple of quarters, your core NIM has been running closer to like in the mid-330 level, I mean, it was 338 this quarter. So what gets the core margin down to the level that you're talking about relative to the recent past?

Yes. So I think I tried to highlight it in the comments. But the view of ours is, that betas are going to continue to increase on deposits even with the Fed, even if -- presuming the Fed pauses here and kind of rates stabilize we are continuing to see a competitive environment on the deposit side from a couple of different competitive sets. Further, as I mentioned, the loans held-for-sale yield, which was higher this period, we do expect to be under some pressure, given the direct linkage to where the 10-year is. And so that while it takes about a quarter for that to pull its way through, given funding levels and pace, we do expect those two things in particular to be under pressure. And then loan yields on the core book, if you will are also remaining under pressure in an intensely competitive commercial lending market. And so, as we look at it, loan yields, both HFI and HFS under pressure, and deposit yields also under pressure from a beta perspective. So, that's what would take us there. And again, as we think about the 3.25% to 3.28% range, that's kind of how we see it right now, assuming market conditions stay reasonably consistent with current levels. Obviously, any changes, we would evaluate.

Okay. All right. And then, finally, probably my most important question, with Alan being retired, I was wondering, if you guys are going to continue with the Halloween video?

Absolutely, we've committed to that.

That's great. It's weird not to hear Alan's voice on the call. I wish him the best in retirement.

Well, thank you very much, and we agree. But, we appreciate that.

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

Going well. I wanted to touch on the structured finance business. I completely get the benefit where you have the 10-year drop at the very end of the quarter on your hold inventory. What are spreads looking like in April now that the 10-year has always been down or not having as much volatility?

I think spreads, and again, I don't want to give kind of quarterly guidance here around Q2. But what I'd say is the market rates had reasonably stabilized at current levels. And so by virtue of that, we expect -- our assumptions going forward and our outlook expectation going forward or the rates remain reasonably stable with the new reset levels after March of this year.

All right. Getting to the expense. If I remember correctly, did you give us a total number of kind of integration or core systems expense for the year?

We have not. And again, part of that is, as we pace through and we work through the final implementation, it's difficult to put an absolute dollar level on it. But what we're saying is this quarter we spent $2.5 million. Historically it's been a little closer to $2 million, and we do expect that to travel higher through the year, quarter-by-quarter, as we work into our implementation and deployment windows.

And another one following up on expenses. If I remember correctly, in the fourth quarter, you attributed I think higher variable comp for mortgage for the year. It looks like you've done a great job at fixing the operations mortgage, you need to be congratulated on that. But it seems like you've really curtailed, call out the money loser loans. So with -- that will make me think that volume, at least down a lot in the first quarter and stable throughout the year is -- variable comps should be down year-over-year if volumes down.

That's correct.

Okay. And then my last one is just on the loan growth guidance is if I just take our average loan growth guidance, if I take the first quarter rate and just assume that you don't grow period-end balances at all for the rest of the year, I could do 6%. It would seem your number has upward bias with just seasonality warehouse lines and I know there's still $1.1 billion of unfunded construction commitments. Can you kind of bridge that gap of why your average loan growth won't be at least mildly higher than your guidance?

Well, I think with the first quarter we're tracking pretty close to where we would have otherwise expected. So by virtue of that, we did see, as I mentioned in my comments an improvement or growth in our mortgage warehouse lending business which we know is seasonal and will trail toward the end of the year. And also, again, contingent upon mortgage volumes in the market. So that's kind of driver -- the first driver of maintaining the guidance where we are relative to the first quarter performance. And then we are seeing an intense pressure around structures and underwriting in our commercial lending businesses. And by virtue of that, while we expect to continue to grow, it will be at a pace that we think is prudent given where the market currently is.

All right. I mean, you don't have an estimate of how much -- I'll take that offline. Thank you so much for the answers. I appreciate it.

Thank you.

The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

I wanted to first ask, just follow-up on mortgage, I guess I'm surprised -- I guess, there's been mixed results from some various banks this quarter on mortgage. But you guys are a strong player in that market, and I kind of get that guidance around gain-on-sale not improving. But I guess, I expected you to talk about higher fee income level this year. And I guess, I'm just still struggling a little bit with the guidance around fee income and mortgage. And just like why you're not expecting higher volumes than you had last year?

So, as it relates to just both the fees, so volume first quarter -- origination volume first quarter was down 17% year-on-year, which is a little over $0.5 billion. So as you think about kind of the rest of the year at our -- what we expect. We expect that to look like it's going to travel in line with 2018 levels of production which is obviously an improvement versus what has been down year-on-year to this point. That's Part A. In terms of our overall non-interest income guidance of 1% to 3%, as Jeremy mentioned, we did see strong activity in our capital markets and structured finance businesses in Hilltop Securities. But we do recognize that a portion of that was driven by the rate -- the late rate movement in March and without a significant additional rate movement you wouldn't expect that to be recurring. And then the next portion of that is the mortgage business generally both TBA as well as our mortgage origination business generates a large portion of its fees in the second quarter and third quarters. And so as a result of that, we need to -- we're still cautiously optimistic that production volumes will be stronger through the second quarter and third quarters of this year. But given the preponderance of that fee income generation in those quarters, we think it's prudent to maintain guidance at the current level.

And just a follow-up on that. I think, maybe a little bit more specific to mortgage and PrimeLending. The gain on sale margins relative -- a little bit off from last year, 4 basis points, but they've done a great job of increasing their mortgage loan origination fees on a per-unit basis. That's up 19 basis points year-over-year.

And then, I guess the other question I wanted to ask is you're going through an expense initiative and I think you guys are doing a pretty good job at working on that very early. Could you maybe give us some color on just how you might expect the efficiency ratio to trend over the next year? As we think about 2020, like what's a realistic goal, whether it's in 4Q 2019 or 2020 like where do you think the efficiency ratio can get to?

You're talking about on a consolidated basis?

Correct.

Yes. I mean we just don't have that to give right now. I think we're -- we try to articulate is where we're trying to go. And as we get closer with just one quarter end we'll be able to articulate the shape of that curve more.

And then maybe just one last one for me. Just on Houston. I just wanted to hear, I know you've been spending money on Houston and trying to grow Houston. Can you talk about Houston vis-à-vis the rest of profile of the company and just how much of the growth, either in 1Q or this year, how much of that's going to be Houston-focused?

As far as -- okay. So, I think...

Commercial bank, not other stuff.

Yes. I think that we had -- first of all, we're really pleased with the integration and the leadership there. And Andy Lane and Jerry Brewer and Mark Troth, they've really come together and we've got one cohesive unit in Houston that's doing a great job. And I think they're building a business, and it's not a hockey stick. And at the same time -- so in the first quarter, I think the loan growth there wasn't maybe as significant. But, we do see some opportunities and some things that are actually getting through credit process right now, and going to be funding that are really pointing towards -- there's a level of growth that we articulated and want there.

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