Good day, and welcome to the Hilltop Holdings Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Eric Yohe. Please go ahead.

Thank you. Before we get started, I'd like to point out that we have filed and posted an updated earnings presentation as of 6:00 a.m. Central this morning. This updated presentation incorporates information on the sale of National Lloyds Corporation, which was announced earlier this morning. Please note that certain statements during today's presentation, that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, 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 risk and uncertainties. Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the cautionary 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 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. With that, I would like to turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Eric, and good morning. Starting on Page 3, we reported for the fourth quarter 2019 net income of $49.3 million or $0.54 per diluted share, an increase from the fourth quarter 2018 of $21.2 million or $0.24 per diluted share. Return on average assets for the period was 1.4% and return on average equity was 9.4%. The fourth quarter was a strong finish to what was a great 2019. Full year 2019 net income equated to $225 million or $2.44 per diluted share. This was an increase from $121 million or $1.28 per diluted share in 2018. Our results reflect the strength of our business model and its ability to be well positioned in an environment such as this as well as the quality of our people and the work they do every day to drive efficiency and growth. For the fourth quarter, average loans held for investment and average deposits grew by 6% compared to prior year. Loan growth was driven by National Warehouse Lending, the purchase of mortgage loans from PrimeLending and commercial lending in our Dallas and Fort Worth regions. Deposit growth was largely driven by our West Texas Weatherford Fort Worth region. At PrimeLending, origination volume increased 48% compared to prior year as the refi market remains strong, and the business recorded its best fourth quarter of fundings at $4.4 billion. Within HilltopSecurities, Structured Finance, Capital Markets and Public Finance delivered net revenues of $71 million, an increase of $25 million or 55% compared to Q4 2018. For Q4 2019, Structured Finance and Capital Markets benefited from market dynamics that improved notably from the prior year, and Public Finance saw robust activity amongst issuer, which was consistent across the municipal industry. Our strong capital position enabled us to reinvest in platform-building initiatives this past…

Thank you, Jeremy. I'm now moving to Page 6. As Jeremy discussed, for the fourth quarter of 2019, Hilltop reported $49.3 million of income attributable to common stockholders equating to $0.54 per diluted share. For the full year 2019, Hilltop reported $225 million of income attributable to common stockholders, which equated to $2.44 per diluted share. Full year results reflect a 91% increase in diluted EPS versus 2018 results. During the fourth quarter, the provision for loan losses of $6.9 million included approximately $1.3 million of net charge-offs, impairments related to certain previously acquired loan pools, and to building the overall allowance to reflect both concentration risk and negative credit migrations in the credit portfolio during the quarter. During the fourth quarter, revenue related to purchase accounting was $5.7 million and expenses were $1.7 million, resulting in a net purchase accounting pretax impact of $3.9 million for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions. Hilltop's capital position remains strong with a period-end common equity Tier 1 ratio of 16.69% and a Tier 1 leverage ratio of 12.71%. Turning to Page 7. Net interest income in the fourth quarter equated to $111 million, including the $5.7 million of purchase accounting accretion previously mentioned. Versus the prior year quarter, net interest income decreased by $6.4 million or 5%. The decline in net interest income was driven by decline in purchase accounting accretion of $7 million versus the fourth quarter of 2018. Further, versus the prior year period, both average HFI loan yields and average HFS loan yields have declined by 66 and 75 basis points, respectively. These declines in loan yields reflect both the lowering of raise by the Federal Reserve during 2019 and ongoing competitive…

[Operator Instructions]. Our first question comes from Brady Gailey with KBW.

So just to be clear, the 2020 outlook on Slide 17, that does not include any of the impact of the sale of the insurance company?

That is correct.

Okay. And when do you guys expect to update the outlook to be more in line with -- the sale of the insurance company?

We are expecting a second quarter close of the transaction announced. And once the transaction has closed, in the quarterly update call, after that, we will update full year guidance.

Okay. And -- so I appreciate the math on the capital levels at National Lloyds. It looks like you have about $86.5 million of tangible capital there. So that puts the tangible gain at about $63.5 million. So that $63.5 million gain, is that taxed?

Well, we would push towards -- we've got a book gain. So you take the entire book value versus the price understanding as acknowledged in the disclosure that we do have closing price adjustments that could occur. That said, the book gain, we do not expect to be taxable.

The book gain is the $150 million minus the $114 million book value.

That's correct.

Yes, so the $36 million of book gain, not tax and then the other roughly $30 million of gain would be tax?

Well, that -- I mean, that's -- you're trying to subtract it from a tangible book value number, which is not technically GAAP. We have a stated book value that includes $27 million of goodwill and intangibles of $114 million. So our book gain is difference between the purchase price of $115 million minus the stated book value of $114 million. And given the tax situation, and we kind of have a range above and below book value, but in this range, it's not tax, that it's not a taxable transaction for us.

All right. So maybe to ask the question a little simpler. What's the impact to tangible capital from this transaction?

Sure. So with this, we expect that it'll be accretive to tangible book value per share by 4%. And we think it's going to be dilutive to earnings by 6%. And we think that it'll be an increase to excess capital of $120 million.

Okay. All right. That's helpful. And then how do you think about the buyback as it relates to that inflow of excess capital?

We're going to think about it. But right now, I'm very pleased with this transaction. I think it's great for both parties. I think we found the right buyer and a great team that can really take National Lloyd to a level that we frankly weren't going to be able to. And it's going to be great for employing there. And we're going to work hard with them. But as we have been, but we know we'll work hard with them over the next few months to get this closed because it's got to go through Tax Department of insurance regulatory approval. And during that time, we'll clearly be thinking about what to -- how to invest the money.

All right. And then finally for me, 2019 was a great year for the broker dealer. I mean the pretax margin pretty much doubled from 10% to 20%. How do you think about the pretax margin and the broker dealer as we look into 2020?

Well, I think it's similar to just kind of the broader guidance. We're trying to get out of the gates here. Is that -- we had a tremendous 2019, and there's a lot of work and a lot of credit that should be given to the organization for it, but there was a lot of mortgage tailwinds, too. So we kind of want to be a little cautious about that at this time. So as now it's coming out of the gate, being early, I would assume that we're going to try to make about $400 million of net revenue and kind of low- to mid-teens pretax margin.

Our next question comes from Michael Rose with Raymond James.

Just following up on your comments, Jeremy. You said dilutive to earnings by 6%. Is that in the first year? And I guess, my question is, as it relates to the outlook, right? So the guidance that you've laid out implies negative operating leverage, which I fully understand, given the purchase accounting accretion, the mortgage is not going to repeat, we understand that. But with that additional 6% dilution to earnings from the sale of National Lloyds, do you think you can actually generate positive operating leverage in 2021? And how does that relate to the goals that you've laid out? Basically asking, how can you make up the earnings to get to the $84 million of improvements by the end of -- in PPNR by the end of 2021?

Okay. Thanks. Well, first of all, that's an LTM number as far as the EPS dilution, and that's based on fact that the company made $14 million last year and on a consolidated basis, we made a little over $200 million. So that's that. But National Lloyds was quarterly volatile, annually profitable and produced good margins. So we're going to be without those earnings. And that's going to be just an earnings thing. Now how that relates back to the platform initiatives? The $84 million still holds, and there might be some areas that we marginally don't have to have as much coverage, but I think that the $84 million still holds, and we're going to continue to execute on.

Okay. And then can you just kind of talk about the timing of the sale? I mean it's been speculated that you guys have looked at selling this on and off over the years. The $36 million booking seems to kind of match up with the CECL adjustment that you guys are expecting. Is -- did that drive the decision to kind of hit the bid here at this point?

No. We're not that coordinated. This has been something where we've -- obviously, we feel like this is not a core asset for the long-term future. We have really been trying to do a lot to improve it and put it in a good position that it was attractive. And that's really what led to the time here. And that we always thought it if we find the right buyer it could really takes us to the next level. It would be great for everybody.

Okay. And then maybe finally for me. If I take the loans held for investment average, full year average growth outlook, it implies, if I'm doing on that right, kind of a low-single-digit, period-end held for investment growth rate. I guess what's driving that outlook? I thought it would have been stronger, just given the relatively solid market dynamics in your footprint?

I think we are -- as we've stated, we are going to be prudent around commercial loan growth. We do believe, and continued to believe, we're moving towards the end of this cycle and into the next portion of the cycle. So commercial loan growth will be a focus of ours, but we will be prudent around that. The second piece is National Warehouse Lending, which we've stated, provided outsized growth in 2019, we do expect to decline in 2020, as we've noted in our guidance across the board. We do expect mortgage activity to decline to more normal levels in the current environment. And then lastly, we do anticipate retaining loans from the PrimeLending business as they originate them on the balance sheet, but we will evaluate that, as I noted in my comments, against our commercial loan outlook as well as market rates and returns as well as balance sheet positioning. So that's our -- that's the way we're thinking about it.

Our next question comes from Matt Olney with Stephens.

I wanted to follow-up on the discussion around mortgage. And I think you know your expectations in the guidance for mortgage volume is to be down 5% to 10% in 2020 versus 2019. And I get that the visibility is limited in the business, but are there any data points you can provide to us more near term? In other words, are you already seeing volumes down 5% or 10% in early '20 versus early '19? Or are you just trying to give us a conservative forecast for slowing volumes sometime later in 2020?

Well, I think what we're expecting there is that we will -- the market is going to return back to the normal seasonal trend. And again, Q4, as we noted, was yielded outsized performance. So we are expecting kind of Q4 2020 to return on a normalized level. We're not going to give kind of quarter-by-quarter guidance on mortgage. It can be volatile. We do acknowledge that the 10 years rallied here just in the month of January. So obviously, that will move around. That said, the 10-year has been within the range, 160 to 190 basis points here or over the past couple of months or quarters. So again, we're not going to do quarterly guidance on it, but as we think about it, we view it as a more traditional bell-shaped curve year, where Q1 and Q4 are generally softer than Q2 and Q3. And we do expect that we received -- the market was just stronger last year than we expect this year to be, and again, by the 5% to 10% output range.

Okay. Got it. And going back to discussion around the bank retaining a portion of the mortgage loans from Prime. Well, can you just review those numbers again that they've retained in 2019? And I think you said $100 million in the fourth quarter. And what was the expectation for 2020? And also just review the strategic rationale behind this? Are you trying to protect against falling rates? Or is there something else beyond that?

Well, just to be clear, we have retained loans from Prime for a number of years. So this is not a new strategy. I will say, the volume of the retention is potentially increasing. As I noted in my comments, during Q4, we did retain about $100 million during the period. And from an asset/liability perspective, we are looking to retain up to 5% of Prime's origination volume in 2020. Now the drivers of that would be the mix, whether it be hybrid ARM products, jumbo products, 30-year products, so the mix will matter. The prevailing market rates will also matter, and also our outlook for commercial loan growth. So as we think about it, we are looking to position the balance sheet with a little more fixed-rate-exposure, not an overwhelming amount of fixed-rate-exposure, but a little more fixed-rate-exposure, and we think this objective helps us do that throughout 2020. But again, we'll provide an update every quarter on what was retained. But again, relative to Prime's overall production, we will be only up to 5%. So they will be selling 95% plus of their origination volumes.

Okay. Got it. And then my last question, I guess, with the pending sale of the insurance company, does this signal anything? I'm trying to understand if we should interpret that you're feeling better about your ability to deploy excess capital, which is already robust, and I think, around $500 million currently?

Yes. That's not -- there's no exact signal. This is just something -- over time, we thought that National Lloyd wasn't really core. It does not considered as segue to the other businesses, and this will allow us to really focus more on those 3 businesses and grow them.

Our next question comes from Chris Gamaitoni with Compass Point.

Can you help me understand what the $45 million of PPNR benefit means? Does that mean -- is that the total amount of benefit in the year? Or is that the end run rate cost? I'm unclear.

That's the year-end run rate benefit of actions that have been executed to date.

All right. Can you help me understand your expense guidance. Just if I take 5% to 10% down on mortgage business, and I just assume the 5% to 10% decline on the variable mortgage comp in relation to lower production volume, it gets me to a 2% reduction in the overall company expense base. I would think that there'd be a year-over-year benefit just rolling through for next year of actions that were completed throughout the year. So I'm kind of struggling with the expense cut.

Yes. So the way to think about it is, first, we are -- as we noted, 1 year into a 3-year program. And so we've got a number of things, couple of things occurring. Number one, is we have put systems into service and are starting to recognize the depreciation- and amortization-related expenses related to those, while we're continuing to work through achieving the benefits as designed. We also, for 2020, expected the overall expense on our new projects and programs to be modestly higher than what you saw in 2019, which was approximately $13 million. So by virtue of that, those 2, we are still making substantial investments in our deployments in 2020, as we've guided we would be, and we expect that to happen. From there, there's also, with the mortgage business and the remixing, potential remixing of our fee revenue businesses and the declines in gain on sale in the mortgage business, while revenue can be coming down because those gain on sale margins have compressed, and we've got that they will be compressed, we don't compensate in the mortgage businesses on profitability, but rather on production. So that will be an overall compression, if you will, from a revenue versus expense basis. And then lastly, we've got the traditional headwinds of inflationary-related cost in our business that we are also recognizing in 2020, both in terms of compensation expense as well as real estate and other inflationary costs that you normally have. So we factored all of those through, including the expected spend related to our -- to the ongoing deployment of our core systems, and that's how the 1% to 3% was derived.

All right. That makes sense. I mean can you give us any update on how you think the cadence realizing the remaining the remaining PPNR benefit will happen. Is it all 2020 base? Is that all backloaded -- sorry, in 2021? Is it all backloaded in 2021? Just any type of idea of kind of the progression you expect?

Without giving you kind of quarter-by-quarter, the way to think about it, a large portion of the remaining benefit is tied to the deployment of these remaining core systems, and that is the final deployment of our loan origination system, which, as Jeremy mentioned, is well underway in that process, the deployment of our system operating platform at the securities business, which we do expect will occur during 2020; and then the final deployment of our accounting platform across Hilltop, which will, in earnest, go throughout the year 2020 and into '21 as the deployment matter. So those large expense pools and savings will be tied directly to the final deployment of those platforms. But from our perspective, we are well underway and making really good progress in getting those deployed. And then there will be modest actions taken throughout the year 2020 to continue to improve our run rates, and we'll capture those and try to present those as they occur.

Our next question comes from Michael Young with SunTrust.

I wanted to ask a couple of quick follow-ups on the insurance business. Just one, are there any tangential relationships from the insurance business to any other businesses or even the corporate and other segment, where we might see impacts outside of just the insurance segment?

Not really, no.

It being a stand-alone financial segment generally encompasses the costs related to that franchise.

Okay. And then second, just given the timing of the deal close, that's usually kind of right around the, I guess, peak of the storm season. Are there any risk factors to closing or any adjustments that could happen as a result of it being a better or worse storm season?

Yes. We're going to -- so agreed upon price of $150 million, and then we are to deliver $76 million of tangible book value and to the extent there's more or less than we retain that. So we make earnings, we'll retain that dollar-for-dollar if we have storm and a loss, and we have that liability.

Michael, I think what's important is we -- up until closing, we are running this business as a business as usual matter, and we have all the exposures that are commensurate with that.

Okay. And just as I think about kind of balance sheet growth holistically for the year, I mean, is it still right to think of it in kind of that 4% to 6% range? And then, I guess, a derivative of that, I know, obviously, the warehouse balances finished the year much higher than normal and much higher seasonally in 4Q on an average basis as well. So I'm just trying to think about total balance sheet growth next year, both the size and sort of the cadence, I guess, of how that moves forward?

Yes. So I think, as we guided, we expect loans will be growing 4% to 6%. However, kind of other assets on the balance sheet, securities portfolios and the like, we wouldn't expect to have the same growth rate. So total assets would grow in the low single-digit range as a matter of kind of aggregate asset growth.

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

Thank you.