Good morning. Welcome to Hilltop Holdings Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Erik Yohe, Executive Vice President of Corporate Development. Please go ahead.

Thank you. Before we get started, 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, financial condition, allowance for credit losses and the impact and potential impacts of COVID-19 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 liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation, 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, Erik, and good morning. Despite the ongoing pandemic and most of our team working from home, Hilltop had an unbelievable quarter, with record breaking mortgage earnings that more than offset a sizeable and judicious reserve build at the Bank. Before getting into the results of the quarter, I would like to start on Slide 3 and provide an update on our response to the COVID-19 pandemic. From an operation standpoint, we are very fortunate to have realigned Hilltop over the past three years by building a robust holding company and integrating the functional departments of our operating company. Well, this has enabled us to ensure business continuity, while prioritizing the health and safety of our employees. We continue to operate with the majority of our employees working remotely, so that essential staff can work safely from our offices. We are tracking all COVID-19 cases to ensure the quarantine of affected employees and to ensure impacted offices are cleansed, so that they can get back open as soon as possible. We are also providing frequent and open communication, so that everyone adheres to safety protocols and feels connected. While we did see an increase in employee cases this past quarter, the overall number remains low and has not had a material impact on our businesses. Since the start of the pandemic, we have been in constant contact with our clients to continue to serve their needs and, in particular, provide relief and support where required. By partnering with our borrowers that have been impacted by COVID-19, the Bank has provided deferrals on $1 billion of loan, of which $619 million were principal only and $349 million were principal and interest for the more severely impacted borrowers. As the initial 90-day deferrals are starting to come due, the Bank has…

Thank you, Jeremy. I’ll start on Page 7. As Jeremy discussed, for the second quarter of 2020, Hilltop reported consolidated net income attributable to common stockholders of $128.5 million, equating to $1.42 per diluted share. Income from continuing operations attributable to common stockholders equated to $97.7 million, or $1.08 per diluted share. Hilltop’s continuing operations generated $202 million of pre-provision net revenue, or PPNR, during the second quarter, which brings the first-half of 2020 total PPNR to $302 million. PPNR increased by $125 million, or 162% versus the prior year period. Growth versus the prior year period was driven by our diversified revenue streams and led by strong mortgage originations. During the second quarter, revenue related to purchase accounting was $3.3 million and expenses were $1.3 million, resulting in a net purchase accounting pre-tax impact of $1.9 million for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisition. We expect revenue from purchase loan accretion will continue to decline, as the purchase loan portfolio continues to run off. Further, we expect the revenue from purchase loan accretion will average between $3 million and $5 million per quarter for the remainder of 2020. Given the significant growth in earnings, coupled with the successful sale of National Lloyds and the subordinated debt rate completed during the second quarter, Hilltop’s capital position has been significantly strengthened, as we both address the ongoing impacts of the pandemic and position the company to take advantage of opportunities that may be presented over time. Hilltop’s period-end common equity Tier 1 ratio equated to 18.46% and the Tier 1 leverage ratio equated to 12.6%. I’m moving to Page 8. Net interest income from continuing operations for the second quarter equated to $104.6 million…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Michael Young from SunTrust. Go ahead.

Hey, good morning.

Hey, Michael.

Hey, Michael.

I wanted to start actually with the broker dealer. A lot of kind of moving pieces here between the investment and the municipal business, the – I guess, the TBA business having a good quarter and then you’ve got kind of the new system coming online. So I guess, there’s a lot of moving pieces, but just trying to think about the outlook for that business, both in terms of the cost savings from the new system and revenue potential kind of in the second-half, given what could – or transpire in the TBA-related business?

Yes, there’s a lot there. Well, I would kind of just raise that a little bit. And then Brad Winges came on to be as CEO in the first quarter of 2019. And he has done an incredible job. Him and the team over the past year, they’ve accomplished so much. And we feel really good about the business and he has embraced the businesses, he has inherited, and he has really done a lot to prove them well with the team. And so I think the prospects are really strong for that business. The recruiting has really picked up in public finance and fixed income services and also in our wealth management businesses. And that’s why my commentary was, they’re really raising the profile and the caliber of the firm. The structured finance business is really tied to the mortgage, but it has a lot of streets in it with a limited supply in the first-time homebuyer appetite and we’re growing clients there. So we’re very positive about what they’re doing. And now with the systems converge, there has been something that’s been worked on for several years. I think, we’ll have a better platform to really market sort of our corresponding clearing clients, as well as our wealth management rep. So anyway, that’s what I’d say kind of high-level on that. And as far as revenue is concerned, we had a really strong net revenue for the quarter of $130 million. They kind of had a slow start to the year, given some of the market dynamics and the impact of the structured finance business. But I would look for the second-half of the year to be kind of as strong as last year. And like last year, I think, it’ll build it. We have a positive outlook on the national issuance on the municipal debt.

Okay. And maybe with the TBA business, specifically, how much is the gain this quarter was kind of fair value or mark-to-market versus volume-driven?

Well, as we acknowledged in the first quarter call that we had – during the month of March had experienced about $20 million negative mark, which left the pipeline market kind of negative $9 million for the period. As I noted in my comments, during – at June 30, the mark of the pipeline was positive $15 million. So that obviously yields a $24 million change, understanding that that’s a different pipeline. I mean, that pipeline turned over, obviously, during the window there, so it’s a different group of loans, et cetera. And then from there, you saw strong origination volumes from a TBA volume perspective year-on-year. And we expect to just – kind of given the mortgage trends that, that likely will continue.

Okay. And I’ll ask just one more and then step back. But kind of a higher-level question, Jeremy, just on M&A and M&A outlook. There’s a lot of kind of volatility right now, and maybe a difficulty in price discovery on what you may or may not acquire. So just maybe a comment on kind of what you would be looking for in M&A transaction, and what would give you comfort to begin to look at something given kind of the volatility in the credit dynamics right now?

Sure. Well, I mean, we do have a specific amount of excess capital that we’d like to deploy, largely through bank M&A. We also feel that we need to be patient. We’ve got our own issues to work through as far as the deferral amount that we have. And then we really hope to be aggressive with the right opportunities. And I just think, if you look at the industry, we all have the material amount of deferral balances, and in most cases, nonperforming assets have declined this quarter. And until those two things converge, which I would expect they would, there’s not a lot to motivate the related transaction.

Okay. So kind of clear that pipeline now for the industry, and that would give you more confidence probably to step in?

Yes. The confidence part is going to be harder, because we still don’t know what the future of a lot of these asset classes are going to be like. But we would be ready to – we’re actively monitoring and ready to look at anything that we find appealing.

Okay, thanks. I’ll step back.

Our next question is from Brady Gailey from KBW. Go ahead.

Hey, thanks. Good morning, guys.

Good morning.

Good morning.

Maybe just a follow-up on the M&A dialogue. When the time is right, it feels like you guys will be ready. Can you just remind us how big of a deal would you consider as far as a target’s assets? And then clearly, you have a big Texas franchise. Would you consider franchises outside of Texas like in the Southeast ?

On size, I think that we would consider really anything and it will just depend on the level of stock consideration that would be included in the transaction. And I think, by and large, we believe that, right now, we prefer to do something of more scale than less. We still think that, there’s a lot of strategic reasons to try to partner with somebody in Texas and we’d hope to do that. But at the same time, I think, particularly if there’s something of scale out of state, we would do that as well. But at the end of the day, we’re going to make sure that there’s a strategic rationale that drives the deal. And so I think that, that will really define our interest.

All right. That’s helpful. And then looking at the mortgage business, the gain on sale margin was up 43 basis points last quarter. You’re guiding – if you look at the 430 to 450 gain on sale margin guidance for this quarter, and that’s up another – at the midpoint is up another 72 basis points. So it’s just – it doesn’t feel like the mortgage business is slowing down at all. I mean, volumes are still robust, the gain on sale margin has gone up. I mean, you could even have a better mortgage quarter next quarter than this one. Is that a fair way to think about it?

I think the thing to remember about the gain on sale is, when you calculate the way we calculate gain on sale, as we disclose it here, it is at the final disposition of the loans, so the final sale measure. As it relates to kind of the revenue recognition, we recognized 75% to 80% of the revenue at rate lock. So that’s why during my comments, we talked about the rate lock volume, which was record in the second quarter, close to $7.4 billion. But that rate lock is really the, if you will, a defining revenue moment in the context of the overall life and earnings of that asset. I do – I would say, I think, we said it in some of our 2020 commentary, we have continued to see solid pull-through of mortgage volumes and applications through early parts of the third quarter. It’s not our expectation that we have a repeat quarter. But we certainly are seeing, again, the pull-through of strong activity in the early parts of the third quarter in terms of application volumes going forward. So we’ll, it can be – we expect, it’s going to be volatile. We expect it’s going to be related a little bit to overall consumer confidence and how people feel about the resolution of the pandemic, as well as overall economic activity. So, again, we’re not guiding forwards, but again, we are seeing some reasonable pull-through in the third quarter – early parts of the third quarter as it relates to the mortgage loan.

All right. And then just finally from me. I mean, excess liquidity is notable here. Any thoughts on deploying some of that excess liquidity, like into the bond book? And I realize, your bond yields aren’t great today, but it’s better than cash?

Yes. And that – and I think that’s, to some extent, what I was trying to suggest in my comments. I mean, we’re going to work through the second-half that excess liquidity position. We think we’ll work it down into the $5 billion to $6 billion range, again, is – but we are monitoring. And again, the reason it got as high as – certainly intra-period, we had some very high mortgage volumes, which we – we’ve articulated. But I’d also say, we were preparing for some potential market disruptions that could have occurred from the pandemic. And we get the Treasury a lot of credit for a lot of work they’ve done to kind of stabilize the overall liquidity markets over time. And it’s functioning in an orderly fashion really over the last – second-half of the second quarter and continue to do so. So we’ll work those down and we will be principally working down through cash. So we will likely be deferring or putting some of that cash to work in terms of security purchases, which again, to your point, we’re seeing a yield there of 100 to 125 basis points on average. And then we’ll also be considering kind of the sweet deposit income in Hilltop Securities. And then we’ll allow some of the broker deposit actions that we brought in, as I mentioned, we brought in about a little over $0.5 billion of it during the second quarter. We kept those very short from a duration perspective and we’ll allow a lot of that to mature in the third and fourth quarter.

Okay, great. Thanks for the color.

Thank you.

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