Q1 2020 Earnings Call

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dead dead dead dead good day and welcome to Hilltop Holdings first quarter 2020 earnings conference, call and webcast wage.

Disciplines will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two, please Note 8 Days event is being recorded. I would now like to turn the conference over to Eric Joey, please go ahead sir.

Thank you.

And good morning before we get started. We have note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook on life strategy future plans Financial condition 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 risks and uncertainties our actual results capital and financial condition May differ materially from these statements due to a variety of factors include the precautionary statements reference in our discussion today and those included in our most recent annual report and quarterly reports 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 wage, Angela, and 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 home. Hilltop Holdings with that. I'd like to turn the presentation over to our president and CEO Jeremy Ford.

Thank you, Eric and good morning, my how the world has changed since our last earnings call. We hope that you and your families are healthy and handling the current covid-19 pandemic as best you can.

Before getting into the results for the quarter. I would like to spend a few minutes going through our organizations approach to the pandemic and some of the actions we have taken since the onset. We have worked hard to achieve the business continuity of Hilltop and our operating companies are high priorities have been to ensure the safety of our employees and their families and to ensure our customers have the access and resources they need during this unique and challenging.

Of our nearly five thousand employees approx 65% are currently working from home with remainders still coming into offices and branches to meet with customers on an employment basis and to execute critical function.

We have extended our health benefits to cover covid-19 testing for all employees and their families have enhanced cleaning and maintenance procedures across all locations and are monitoring any part or presumptive positive covid-19 cases across our organization and any shared office locations.

We are facing a lot of Uncharted Territory with the current situation, but I am proud of how our business leaders and their teams have responded as well. I would like to commend our employees for their courage and commitment in a stressful time moving to slide for.

50 currently fifty-eight of r61 PlainsCapital Bank branches are open for appointment along with a hundred thirty of our 300 prime lending mortgage branches. So certain branches are not open almost all of the employees associated with those branches are still able to fully service their clients remote Bank ATMs and drive-thru capabilities are still functioning at 100% off. We have introduced see relief for multiple situations. We are supporting customers on a case-by-case basis with different loan modification and deferment programs as of April 23rd. We have worked with over three hundred clients to help with deferments or restructuring equating to $253 a month with more in the pipeline. Notably all payment deferral request must be neat date and require at least a senior credit officer approval.

we are working with the

FDA to execute the paycheck Protection Program and have registered over $331 applications of waiting to $777 in loan our bank employees. I've been working around the clock to get these loans process and funded and as of last Friday, we have funded to nearly 2,000 loan for $585 month. Even an average loan size of $282,000 for the funded loan. Our Bankers are truly supporting the small community that drive our local small businesses that drive our local community off with the newly-approved funds for the program. We have an additional pipeline of close to sixty million dollars that we aim to process as well.

although the economy has entered into a recession we believe the prior decisions and recent preparations made to strengthen our capital and liquidity alongside our conservative lending approach us in a strong position to whether even a severe economic scenario Hilltop Consolidated in PlainsCapital Bank are well-capitalized with approximately 513 million and $1,067 respectively of Access Capital as of March Thirty One 2020 this equates to $740 and $357 respectively of capital above regulatory defied well-capitalized levels including the conservation buffer

From a liquidity perspective management began evaluating actions to further strengthen our bank liquidity position starting in February and since then has raised additional funds to Brokers office and by increasing the availability of our Hilltop Security Suite deposits. The bank is primarily funded by deposit which is reflected in our loaner deposit ratio of 90% including long tail for sale. Additionally. We paint maintain just under three point nine billion dollars borrowing capacity at the federal Home Loan Bank of wage 3.6 billion available with the utilization of only 6% as a March Thirty One 2020.

We are in a stronger liquidity position today than when the pandemic began impacting markets late in the first quarter.

From a credit perspective. No bank is going to be immune from the impact of this pandemic and the shelter-in-place orders issued around Texas and the rest of the country Additionally. The decline in oil prices has crashed another set of economic challenges in Texas while we are unable to accurately forecast. The impact fees will have on our business and future earnings. We do anticipate a higher level of credit off and a reduction in overall lending and the potential for negative impacts to our mortgage purchase volumes and trading portfolios.

Our response to current pandemic has been quick and well-coordinated across all of our businesses. We are focused on taking care of our people and our customers and will continue to make those are top priorities off financially. We are well-positioned with excess capital and sources of funds that are Diversified and accessible from a risk management perspective. We have scoped are at Risk Industries wage are actively monitoring and mitigating them as we work with our borrowers during this challenging environment will is going to provide additional details on our impacted and energy loan portfolios later in this presentation.

Now moving to slide five.

I'll provide an overview for the first quarter.

Notwithstanding the challenges in the economy in the market our results for q1 2020 were very positive and a good example of our Diversified business model. We reported first-quarter 20-25 income for Hilltop Consolidated of forty nine point, six million dollars or $0.55 per diluted share an increase from the first quarter of 2019 of 10.9 million or 13 cents per diluted share return on average assets for the. Was 1.5% And return on average Equity was 9.4% Please note. These are HTH Consolidated results and we have called out the discontinued operations figures below discontinued operations include our insurance company National Lloyds, which we believe remains on track to close in the second order.

At prime lending mortgage origination volume of 3.6 billion increased 48% compared to the first quarter 2019 as the decline in raid push refinance volumes of having strong feed businesses, like primelending and Hilltop Securities, and the current environment is a tremendous Advantage for us from a diversification of risk and learning standpoint.

Average loan growth in the quarter of 6% compared to Prior year was driven by national warehouse lending that was positively impacted by lower rates and the increase in the mortgage refinance Market additionally average deposits grew by 650 million dollars or 8% from q1. 2019. Frozen deposits has been a mix of non-interest in interest-bearing deposit was in a bearing adding $440 year-over-year and 164 million to the Q4 2019.

At Hilltop security January and February particularly strong from the impact of both the mortgage industry and high asset valuations and managed account in March as marked off the increase. We proactively reduced limits and positions across the businesses, but did experience a significant mark on the TV a pipeline over all the fixed income and wealth management business is not as strong quarter that all set declines in the structured Finance business.

During the first quarter Hilltop repurchase seven hundred thousand shares for a total of $15 of the board authorized $75 for the full year twenty-twenty. However, given the Fallout from the covid-19. We will be suspending buyback activity until further notice that said the dividend has been maintained at a prudent level and while management is monitoring the club and economic impact resulting from the virus. There is no recommended change to the dividend at this time.

On January 1st of this year, we introduced vehicle since the beginning of the year. We have been in a very volatile Market where assumptions are changing rapidly and will continue to do so over the coming month Auto allowance for credit losses. As of March Thirty $1.20 was a hundred and seven dollars an increase of $33. We use this scenario much like many other night and projecting for a significant deterioration over the next few months with improvements coming later in the year since new assumptions are coming out and we will continue model accordingly. We will talk through our Cecil process and provide further detail on credit and Loan portfolios later in this presentation.

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Total pre-tax income for HDX Consolidated was $70 for the quarter an increase of 35% over first quarter last year. The banks decline in income can be primarily contributed to the $34 loan loss provision aside from the provision extent. The bank had a nice border though name was under pressure net interest income increases Acid Bath and the banks efficiency ratio declined to 55.5% from 58.8% a year ago work being done within the bank around overhead and Branch off and continues to progress and we are seeing meaningful Improvement.

As mentioned earlier the introduction of the government DPT program and the overall demands placed on our Bankers from the pandemic has been very high. I'm very proud of Jerry and his leadership team and all the people working to support our customers during the stressful time the volume of PPP applications over the past few weeks has been unprecedented for our bank and our people have stepped up to support small businesses in communities across, Texas.

Compared to what is historically a slow mortgage quarter. I'm leaning started the year strong and volume increased as the 10-year declined throughout the quarter accelerating into the end of March month pretax income increased $37 from the first quarter of 2019 driven by higher volume and relatively stable gain-on-sale margin of 325 basis points off from a risk standpoint. Our business model of selectively retaining loans is focus on enabling us to originate certain mortgage products as opposed to building a long-term mortgage servicing assets as a result. Our servicing portfolio is relatively small for our side and reflects approximately 1.5 billion or 10% of our annual originated volume.

The broker-dealer reported an 18% pretax margin for the. And an increase in an income by 1.8 million from the prior-year market volatility in the quarter go higher revenues across multiple payments by our leadership team at Hilltop Securities continues to do a good job of managing your risk and daily liquidity needs that arise in a market that has been as dynamic as this has been over the past few months.

National Lloyds underwriting income and prove you're over year as lower loss experience led to an improved Lawson l e ratio of 39.7% However, NLC did take off work to Market losses on its Equity Investment Portfolio of four point four million dollars consistent with the broader market decline in March.

Overall, we are pleased with our first quarter performance considering the tough conditions facing everyone. We have a history of conservative lending and a strong balance sheet supported by a diversified and low-cost funding model and we have a diversified business model with a strong Foundation that we have continued to invest in four times such as these with that I will now turn the presentation over to will to talk through the fire.

Thank you.

For me before I get started. I want to review a few items that have impacted our presentation during the first quarter. First is Jeremy mentioned. We have moved National Lloyds in a discontinued operation as we continue to make progress toward the closing depending sale that business

Please refer to the quick notes on each slide for references to the basis for the presentation weather Consolidated for continuing operation. Secondly on January 1st 2020. We adopted Cecil County standard for credit losses further. We have elected to phase in the impact of this adoption over five years and the impact of this election is reflected in our Capital ratios is presented throughout the presentation and I'll start on page seven is Jeremy discussed for the first quarter of 2020. Reported Consolidated. Net income attributable to Common stockholders off 9.6 million according to $0.55 per diluted share.

You coming from operations attributable to Common stockholders?

Equated to 46.5 million or $0.51 per diluted each year during the first quarter National Roy's generated earnings of three point two million dollars hilltops continuing operations generated a hundred million dollars a pre-provision net revenue or p p and our during the first quarter which increased by $55 million or 120% versus The prior-year. Rose versus the prior-year period was driven by a diversified revenue streams and led by Strong Mortgage originations.

During the first quarter Revenue related to purchase accounting with 6.7 million dollars in expenses were 1.3 million dollars resulting in a net purchase accounting pre-tax impact of 5.3 million month for the for the quarter in the current. The purchase accounting expense is largely represented amortization of deposit and other intangible assets related to the prior acquisitions.

As we enter the early phases of the pandemic, which is brought on significant uncertainty surrounding economic growth hilltops Capital position remains strong with a. N. Common Equity Tier 1 ratio of 15.96% in Tier 1 leverage ratio of 13.08% I'm moving to page eight as previously noted Hilltop adopted Cecil during the first quarter of 2020 as a result of the adoption day one allowance for credit losses increased by twelve point six million dollars with the largest portion of that increase being the transfer of the credit discount off nor purchase portfolios in allowance into allowance for credit losses.

The capital impact of the day one transition was approximately six million dollars further during our day to assessment as of March 1st. It will Top recognized deterioration in two thousand one in the energy portfolio. And the other in the U Can real estate portfolio the combination of the no deterioration these albums contributed to certain specific reserves, totaling 17.6 million and 1/4 additionally as a result of the significant irritation the economy driven in principle by the pandemic and the accused strength of oil price declines in our energy portfolio how long it will not recognize the significant building allowance for credit losses during the first quarter related to economic factors, which also include all qualitative assessments related to our portfolios.

or economics

Just assumed unemployment to rise to approximately 9% during the second quarter of 2020 and would rebound to approximately 6% during the fourth quarter of 2021 further the scenario presented Thursday would fall by approximately 18% during the second quarter and then during the third quarter would begin to rebound and would grow it a more stable page in the 20 21 in total Hilltop recognize 34.5 million of her vision provision expense related to our loans held for Investment Portfolio, including one point five million of net charge-offs or in the first quarter this resulted in an increase in the allowance for credit losses on our loans help investment of $33.

In recent weeks Market estimates for the negative economic impact of the pandemic have deteriorated. We continue to continue to monitor both the economic Outlook from a number of sources as long as the performance of our portfolio is to determine the impact on our credit Reserves.

If it Remains the case that the actual economic data and the outlet for our critical metrics continue to deteriorate Hilltop may require additional credit reserves and coming quarters.

As we've noted we do expect the allowance for credit losses could be volatile in the future given significant shifts in the economic output from one reporting. To another I'm turning the page nine months that interested in coming the first quarter equated 110 million dollars, including 6.7 million of purchase accounting accretion previously mentioned versus the prior-year quarter an interesting job increased by $2 or 2% somewhat offsetting that interest income growth, which was driven by higher average assets including hotel for sale was declined and purchase accounting accretion offer 1.9 million dollars versus the first quarter of 2019.

We expected purchase accounting accretion will continue to decline throughout the balance of twenty-twenty as the valve who had previously purchased. Well, let's continue to decline.

Further versus the fourth quarter of 2019 load the average HFI loan yields and average HSS loan yields have declined by 6 and 13 basis points respectively these two clubs loan deals reflect both the lowering of the race by the Federal Reserve during the first quarter and ongoing competitive pressures. The Federal Reserve has reduced the target range or the FED funds rate to 0.5% for 25 days point just decline resulted in a portion of our loans falling to their contractual fluid levels in our loan portfolio, approximately 55% or 3.6 billion long balance or variable-rate home of the variable rate loans 67% or 2.4 to the inner currently at their contractual floors down back to these contractual for rates will help to provide value and additional stability in our net interest income throughout this rate cycle.

interest-bearing deposit cost decreased 17 basis points versus the fourth quarter of 2018 overall interest-bearing Deposit they just have lagged through the early quarters of this recycle and we expect God to manage our deposit costs lower over the coming quarters during the first quarter average loans up for sale increased by $605 million versus the same. The prior-year we should expect these balances will remain elevated through the second quarter as March 2020 mortgage loan locks of three point seven billion dollars or substantially elevated versus normal seasonal levels off

Let me page.

Total not interested in coming for the first quarter of 2020 equated 272 million albums first ordered mortgage-related income and fees increased by $61 for Superbowl for 2019 as mortgage rate lock during. The first quarter of equated is 7.2 billion, which was a record for prime lending during the first quarter of 2020 environment and Mortgage Banking mortgage strong and our business out recorder expectations, in terms of origination volumes principally driven by lower mortgage rates, which drove improve demand for both refinance and purchase mortgages.

Versus the prior-year quarter purchase mortgage volumes increased by $291 million or 14% And refinance volumes increased by $880 billion or 223% off volume during the quarter were strong margins can press versus the prior-year by approximately 5 basis points as the makeshift related to the higher percentage of refinance volume lowered our secondary mortgage security fees and conditions improved versus the same. The prior year by seven million dollars a ticket volumes and overall activity increased as a result of the additional volatility in the market wage.

Where is the prior-year period of their income declined by twelve million dollars primarily by $20 unrealized mark-to-market loss on the mortgage Pipeline and are structured finances off the market have been functioning more normally over the last few weeks. They were. During March where significant dislocation for present including very limited liquidity for certain sectors across our business in particular 8:40 Friday pricing move materially closing our pipeline value to change significantly in the. If pricing stabilizes as these loans are funded we could recoup a portion of this unrealized loss.

Or you think 11:00 on interest expenses increase from the same period in the prior year by three point two million dollars per $282.

The road that expenses versus the prior-year we're driven by an increase in variable compensation of approximately $14 a prime lending and Hilltop Securities this increase in variable compensation. Just way too strong fee Revenue growth in the quarter compared to the prior-year. Over the past eight quarters. We have continued to make progress and alighting our businesses to the current market conditions. I'm driving efficiencies across the franchise through these efforts headcount non variable compensation Professional Services costs and marketing and development expenses continue to turn the long as we make progress against our efficiency initiatives.

During the first quarter Hilltop incurred 1.9 million cost on 5.3 million of spending related to ongoing court system improvements. We are moving into the final stages of implementation of the new lodging reservation system and probably and beginning the implementation of the new platform at Hilltop Securities. Both of these implementations will bring significant value or franchise and positions Hilltop for profitable you to turn the page twelve so leverage over investment loans through by 6% versus the first quarter of 2019 as noted previously wrote verses Thursday. The per year driven by growth in our mortgage Warehouse winning business any growth in the real estate portfolio.

What Wheels?

Throughout 2019 and continue to decline in the first quarter, but lower Market rates including the prime rate and Libor rates probably would purchase one slower purchase one occasion birthday tribute contributed to the decline. We do expect a twenty year olds will continue to be pressured in the coming quarters as Market rates remain low and we had over seven hundred and seventy-five million fptp loans off with a hundred basis points to the balance sheet.

Lastly our new loan pipeline remain stable, but many clients are delaying pricing and funding of new loan commitments until they have greater Clarity into the economic impacts of the pandemic.

Turning Page thirteen during the quarter net charge-offs remain low Antiquated 1.5 million or 9 basis points a total of five levels on an annualized basis, upper right graph. We know that non-performing assets have increased during the quarter fee increases related to the adoption of Cecil in the first quarter and the deterioration of certain homes during the quarter which typically impacted non-performing loans first, the impact of adopting seasonal accounts were thirteen million of view of the increase as loans with prior discounts for rose up and the associate project Associated Credit discount was moved into allowance for Credit Law.

Secondly, we transfer the energy related credit into real estate properties in Houston is on performing in combination these credits accounted for $39 million of the increase.

The credit that removed non-performing experienced significant deterioration from the combination of the pandemic and the significant decline in oil prices during the quarter.

In the gravel the bottom-right hilltop the lounge for credit losses the bank loans held for investment increased at 1.56% during the quarter.

I'm turning the page fourteen.

In response to the Strong Mortgage activity during the month of February and March as well as the uncertain implications of the pandemic Hilltop again to take series of steps to expand our liquidity position during the course when you travel increase in sweet balances from Hilltop Securities to one point five billion prior to the end of March further. Our treasury team was able to secure $745 and we're we're money market and brokered CD funds from the wholesale Market. The weighted average cost of The Brokerage money market funds is approximately 30 basis points while the CDs have an overage cost approximately 105 basis points and mature across a 3612 one-time adviser.

These actions are the cost for the schedule increase in interest-bearing deposit during the first quarter of 2020. It is notable that non-interest-bearing deposits have continued to grow through the early stages of pandemic wage employees the two point nine billion dollars.

Moving to page fifteen as noted earlier. So substantial steps to increase liquidity during the first quarter in those steps have continued into April as March thirty-first PlainsCapital Bank Securities insecure party secured borrowing capacity equated a 5.1 billion or approximately 30% of that total asset during April. We continue to improve our position by securing additional broker deposit and have experienced positive client deposit flows. I'm moving to page sixteen during the first quarter of 20 Place Capital Bank generated eleven and twenty five million of pre-tax income during the quarter quarter results reflect the benefits of growth and national warehouse lending as well as solid expense reductions versus however, these benefits were substantially offset by the credit reserves related to the deterioration of two credits as previously noted in the impacts associated with the Cecil adopt a dog.

in response to the pandemic

And you know the economic impact we have suspended the retention of single family mortgages by PlainsCapital Bank at this time Turning Page Seventeen to provide for clarity in the loan portfolio PlainsCapital the table provides an overview of the non-energy long segments that we believe could be most impacted by the pandemic in total these portfolios red one point 1 billion or 16.5% of what was outstanding over time as the stress of the pandemic becomes clear. We may add additional segments to our enhanced assessment reviews are priority in managing these exposures as well. As other loans to come under stress related to the pandemic oil prices or any other unforeseen challenges is to protect the principal balance outstanding job and hilltops capital while working with our customers to help them through these challenging circumstances.

We are supporting our clients as they work to assess cares act PPP and Healthcare enhancement act and other Alternatives that they may have to whether this band in black as you mentioned earlier. We have processed approximately $775 billion dollars of people request and it provided borrowers with balances of approximately $250 a month payment deferrals in forbearance, as of April 23rd further, we do expect the number of payment deferrals will continue to rise and the coming quarters.

As of March 31st. Maintains an allowance for credit loss on these portfolios of 16 million or 1.45% of the outstanding balance.

I'm moving to page eighteen.

While the pandemic has impacted the number of portfolios that were otherwise, otherwise performed well in Prior. The energy sector had been experiencing challenges before the pandemic struck. The United States wage as such page eighteen provides an overview of hilltop's current energy portfolio in total the energy portfolio represents $146 of outstanding balances and 66 million dollars of unfunded commitments for total exposure of 212 million.

Noted in the graph at the bottom left of the page. It'll prompt has progressively reduce credit exposure to the energy sector over the last four years with the concentration follicle 4.4% to 2.1% off a little earlier. We incurred a four point five million dollars Pacific reserve a large Services Credit during the quarter as a March 31st are allowed for credit off of 13.7 million or 9:40 for the outstanding balance is in this portfolio.

Starting to page nineteen Grand money generated a pre-tax profit of 39.8 million for the for the first quarter of 2027 by strong origination volumes and increase from the prior-year off at one point two billion or 48% as noted earlier gain on sale margins compressed during the first quarter versus the prior-year driven by the ship and origination towards refinance off during the period refinance activity represented 35% of total originations further. We expect that during the second quarter the portion of originations that are refinance transactions off or remain elevated from our historical level.

Well, we were all.

Please relevant in the first quarter. The focus on operating efficiencies is not waned as prime lending has maintained consistent trigger around Staffing in other middle and back-office expenses across the platform package origination team and executed very well under some challenging circumstances and delivered profitable growth during the first quarter.

Moving to page twenty Hilltop Securities delivered a pre-tax profit of $18 and the first quarter of 2020 and the quarter fixed-income Services generated solid Revenue growth Traders were able to athlete and go she ate challenging conditions both in terms of pricing and liquidity specifically in the month of March the performance of this team demonstrates the progress we've made over the last few years in improving our paging and risk management capabilities as well. As our focus on exposure management when markets become dislocated also the wealth management business delivered net revenue growth and rebirth was trying to reposition their portfolios as volatility group the equity and debt markets during the quarter.

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I'm moving to page Twenty-One National Lloyds recorded four million dollars a pre-tax profit in the quarter reflecting both mark-to-market losses and 4.4 million on 3rd and Equity Securities office portfolio as well as lower frequency and severity of storm activity and claim related laws.

Underwriting income which excludes the impacts of loss of the Investment Portfolio improve versus the prior-year period as the business introduced it streamlined product offering and substantially completed the optimism application efforts that have been underway.

Moving to page twenty-two given the uncertainty surrounding the economy specifically related to the pandemic. We are withdrawing our full year 2020 guidance at this time is not clear exactly how the economy will rebound or the timeline of that rebound which we believe will be directly linked to the success and managing the virus and subsequent outbreaks. We remain focused on the list to get those items that we can control we are committed to the ongoing safety of our Associates and our client as well as helping our clients work through the unprecedented challenges with the pandemic has presented a month.

We remain committed to executing our platform growth and efficiency initiatives and delivering against our 20 21 commitments lastly and most important. We are focused on delivering. Growth across business ones while maintaining a moderate risk profile and delivering long-term shareholder value.

Operator that concludes our prepared comments and will turn the call over for Q&A at this time. Thank you. We will now begin the question-and-answer session with the question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then I do apologize for one moment to assemble our roster.

Our first question today will come from Michael Rose of Raymond James. Please proceed with your question. Hey, good morning guys. How are you? Hey wage, maybe for will of Jeremy. Can we get some color on the the increase in and non-performers this quarter look like they they jumped fairly fairly meaningfully. Thanks. Yeah. So I took try to know we had really two principal things that occurred first. We had the adoption of Cecil which accounted for about $13 of the change in non-performing loans wage, um that really driven by is as you know, the gross up of the loan loan balance and then the movement of the prior discount into allows for credit losses. So that's Thursday the 30 million and then uh, as I noted in my comments we did have uh, ZIP relationships that were moved into non-performing one in the oil and gas sector and the other in, Georgia.

real estate portfolio that were moved in

The non-performing in that equate to about $39 of the increase, uh-huh, simply related to the oil and gas item. We did take the 12.5 million dollar specific reserve for Thursday, right? So

great. I'm sorry if I missed that and then I appreciate the the call that you guys provided on the kind of at-risk categories or exposures. Can you give us an update on what the credit app Mystics there look like in terms of you know what percentage are ugh, not performing and then maybe what percentage are deferred and you know stuff like that. Next Thursday is we're evaluating these portfolios and we're in the early days. We have not seen at least through the first, you know update through March and even to some extent in the early April. We've not seen some significant delinquency, uh, emergency portfolios is customers were making their March in many cases there April payments. We are working through. I think I think would be a false number two is we relate to page 200 and you know fifty odd million of the world, we've got to be unfair because we have had many deferral request. We're working through and we working through those one at a time with our clients. So we'll continue to provide updates.

As it relates to the deferral levels as well as delinquency in these portfolios. But again as of as of coming through April, we had received the preponderance of payments off as as contractually required, even for those customers who were asking for referrals out of the gate. And again, we're continuing to work the clients every day to try to help help mitigate what has been kind of an unrepresented set of circumstances over last month.

It's helpful. Maybe just one more for me. I just wanted to touch on the margin and specifically with and without the the PPP program. Is it fair to assume that just given the phone number of rate Cuts? I know you guys have two floors and appreciate all the color there. But is it fair to assume that the the core? Margin? We should anticipate some pressure and then secondly, you know, we'll the the fees from the PPP flow through the margin. Um, and I think you mentioned last quarter that you expected. Uh, I purchased kind of concretion to be down 20 to 30% So just wanted to see if that's okay. Thanks. Yeah. So on our our 20 20 commentary slides to page twenty-two. We we reaffirm that the purchase accounting accretion is not going to decline that's on a scheduled basis Home Loans are running off and we expect that to continue to decline twenty thirty percent. We we are seeing as you'd expect based on uh, following rates as well as relatively flat yield curve.

Pressure on net interest income over the coming of the coming twelve month. And we we do expect that to continue given both decreases in our package deals would also uh, I'd say a slower growth from an asset perspective as I mentioned, uh customers at this point from a new loan perspective outstanding of PPP are pretty reliable it to to to kind of take down new new credit as you would imagine they would be so both lower asset lower levels from kind of Prior Outlook as well as flattery flattery. Birth to lower rates are going to put pressure on that interest income going forward. And yes, the PDP fees will be will be reflected through net income, but those will be baptized of the life alone.

Great. I appreciate all the color.

SunTrust, please proceed with your question

Hey, good morning.

What are the start just as a follow-up on the the TV a business you you mentioned the twenty million fair value, I guess mark-to-market impact there. Can you provide any more detail on Thursday? Typically when tenure rates moved down that that typically expand. So just wanted to see if there was something idiosyncratic and then, you know any thoughts on you know, where you would expect that to be in subsequent quarters.

Yeah, what what what occurred is we have in certain cases fix delivery prices that that when when prices declined materially we were off the Hedge was was was kind of underwater. So that's the that's the Nuance there. Um, as we as prices have recovered as I mentioned in my comments, we have seen I think overall trading activity in both mortgage and Municipal become more constructive each day in certainly more constructive through the month of one of the April as I mentioned as a relate to that specific specific Mark, which was on realized gains in terms of the pipeline as as prices have rebounded and trading becomes more constructive we could recoup some some portion of that over that Mark throughout throughout the second and third quarters.

Our next question will come from Michael Young.

Okay, so there is some hedging present there then because I thought before it was unhedged and then you know, you're seeing a rebound and and evaluation of their wage. Yeah, you're just not not really be hits capital. I guess we are providing the hedging for the housing authority and you know if we've had gains in the past this was a snapshot as March Thirty One and that's the was the impact on the value of that edge cuz we have a contract to to purchase the home alone at a later date.

So it is but just just reiterate we are we are hedging that you're hedging the pipeline for for a client and then we have agreed. You know, we have that kind of price delivery of those Securities on buddy, and I just would add on Hilltop Securities and they really had a phenomenal quarter with the exception of this month, you know part of the market and the environment and we did a lot starting in February to kind of pull back our exposures and and became in this environment and we're going to continue to do do so, I think for the the second coordinate for the foreseeable future until we see see things stabilized more so hopefully deserved

Okay, and and maybe another one on Hilltop Securities just the expense levels were better-than-expected. They comped the net revenues down pretty considerably. Is that sustainable or is there something erotic and that number of the continent Revenue being um down is is really more of a function of makeshift of the business than it is with anything, you know.

Okay, and then maybe lastly just on the servicing portfolio. Can you just talk about you know the impact of kind of deferments within the mortgage off the mortgages that you service and then you know also you mentioned that you're going to build that servicing book. I assume that's just due to Market dislocations and the ability to to sell the servicing assets going forward.

That's correct. So, I think it's worth noting and we noted in our in our slides. We did execute a sale in the first in the first few months of the quarter which was which was a positive thoughts about 19 million of Ms. Or value. So kind of closed the quarter with a $31 MSR which reflects about 3 and 1/2 billion dollars worth of serviced assets. We have all those aspects of service on our behalf. So we are the master of shirts that said there's a we've got a servicing arrangement. We are monitoring forbearance request. I think those have been back five and six percent of that portfolio and we are also watching advances at the at the primary service or we would have to provide advances service advantage on behalf of those loans to the extent to the extent they were in forbearance or otherwise, they didn't make their payments and as a result we would have that liquidity exposure. We have side that it's we view it as well.

William material at this time will continue to watch it if it becomes something of note. We'll we'll manage we will note it and and manage it as such in terms of the dislocation Thursday Market. Obviously we've seen a pretty material dislocation in the pricing for service again, the willingness of what I call traditional providers to provide to kind of purchase service them and as a result, we would expect to be retaining a large portion of our servicing on you know, origination over the next couple of quarters, you know off the second quarter is a very significant portion up to 100% just as as overall pricing and execution and servicing space has been challenged I think due to poor parents and other environmental changes.

Okay. Thanks. Thank you.

Our next question will come from Brady gaily of KBW. Please proceed with your question say, thanks. Good morning guys.

Could you give us a little more color on the to houston-based real estate loans that went into the non-performing bucket, maybe the size and what type of cre ative?

They were office Office Buildings. And again, the the aggregate size with about $15 total loans.

Okay, it was that related to what's going on in energy or unrelated.

I think I think Houston is being impacted by the oil price declines and overall demand. So as we tried to call out the energy specifically our regular portfolio, we have not put em are kind of pandemic portfolio if you will because we're calling that a little bit different but Houston in particular is being impacted by both, uh in a in a reasonably aggressive way so long it's hard to feed out the absolute driver how much it was paying demek and how much of it was oil prices, but the combination of those certainly drove drove a material deterioration in the corner.

Okay, and then I think those things have been earning roughly a 3% fee on the PPP loans. Is that roughly where he'll pops up? I think that's a reasonable reasonable estimate.

All right, and then I just bigger picture hilltops chairman. Gerry Ford has a pretty good track record over Decades of you know, buying some attractive assets during times of stress and uncertainty. If you look at Hilltop today, you clearly have excess Capital you'll have even more excess Capital after the insurance company is is uh Soulja. How do you think about the opportunity to buy cheap assets to buy the struggling Banks over the next couple of years just given the uncertainty

I think first and foremost we're going to continue to be patient and work on our own businesses. And then when the environment presents itself, we're going to be very aggressive.

All right. Thanks guys.

Our next question will come from Chris, Tony Compass points. Please proceed with your question. Good morning guys. Could you could disclose what the overall L TVs are on average for your theory portfolio?

I think the way to way to think about it is as we as we work through the different Antics less than. Specifically referenced the ones we've called out on our own package slide believe that too often but for our and and and I'm going to give you the underwriting got a Max underwriting ltvs, and certain of the portfolio is going to be better than certain is going to be the security officer. But as we think about kind of retail it's you know, uh in the 75% kind of alt be under written from a hotel perspective. It's in the seventy to seventy percent range and then for restaurants, it's in the 85% range. And the reason I give you those rather than kind of go through and the reason we didn't call out the ltvs, Hold on the Fly here. Is it as we go through this price they're going to be surprised dislocation for assets. And uh what we can give you is what we under wrote it to uh in the event log.

David you had to actually liquidate it. Uh

There has been a significant amount of price Discovery at this point.

Okay, that makes sense and moving to the mortgage business, you know historically primelending been, you know, very purchased Focus wondering how long a marketing standpoint the business is Shifting to focusing more on refinances, uh in the more immediate terms.

I think it's just been what the Market's been given. So, you know, I think that the nature of the the purchase focus is the nature of the month, you know, really the street veterans that are embedded in their communities and are able to have that sticky business when the refi or markets not and when the reef our Market by market and like it has been um, you know, they're going to take advantage of that as well.

Okay, and I was wondering if you could give any insight into how you so keen on sale margins, you know.

Side cuz we lost you for a minute.

I think I think you feel away talks again, but I think I asked you know what they're looking like this month after the FED came in and bought the bond market changed. Yeah, I think we've we've seen a constructive Improvement in gain on sale margins through the month through the month of April and we expect that to continue through Q2 wage based on what we can see and and kind of kind of how how the market is performing today. So we we do think again until Morgan's have gotten a little more constructive here as long as the market stabilized.

All right, and one last one, I was just any any high-level thoughts on what do you think the municipal Finance business? You know, we'll look like over the next year obviously took a weird situation. Um, you know number of issuance do miss palliative need more debt less debt. Is there going to be a delay in a big wave just you know, what your you know what your Bankers are seeing right now, but we saw a pretty good start for the year. And then the March activity was notably weaker and we had expected a very strong, you know school year for twenty thousand T. And and we do think that the second half of the year has is a is a good likelihood of being reasonably strong. Um, but until stability returns, I think that you're going to have some weakness and and that you know, we think the revenue Bond deals could be remain challenged however, like the tax obligation and essential Services deals wage.

Will be fairly. Well, okay, that's perfect. Thank you so much.

Our final question today will come from Matt only of Stevens. Please proceed with your question. Hey, thanks and good morning. I want a circle back on the discussion around Home Mortgage. You gave us some good commentary around gain on sale expectations and I'm curious at this point given what we know what are your thoughts on a volumes? Do you expect mortgage volumes to peek in the second quarter and and fall beyond that just kind of curious what your crystal ball says off?

Thanks for both promote mortgage volume perspective and I think your first of all records with a good one. We are you know, I think I mentioned we are expecting to see a higher percentage of refinance volumes as I mentioned in our kind of 20 20 commentary. We think purchase purchase volume will be under some under some pressure, uh until until systems kind of feel comfortable going out looking at homes and getting a little more a little further away from the peak of each of the pandemic and that that presumes, uh, no flare-ups in in Conover all endemic related activity. But but from a we don't we don't have an option to give an Outlook in terms of overall volumes, but the the reality reality is it will be I think more heavily refinance Centric off certainly for what we can see in in the second quarter and then we'll we'll we're all watching for how the consumer and how the homebuyer responds through. What is tradition? Yep.

With the one of the stronger periods of the year as the as states and cities and markets start to I'd say reboot from the from the shutdown.

Okay, and then going back to the loan modification discussion, I think will you mention the expectations are that the number of modification require continues to rise? I'm curious if you've seen this so far in recent weeks. I know you're disclose the amount of modifications as of April 23rd on that slide for but do you have that account as of March 31st, just trying to appreciate if this has changed much in recent weeks. It is March 31st. It was a pretty it was a pretty small number. But again you were you were a couple of weeks into it but it it has we expect it will continue to grow as the shutdowns continue to to persist and off depending on the pace of recovery. So if you just take one of the some of the most impacted from a hotel perspective, you know, we've gotten most of our hotel portfolio as Thursday.

Set forth some modification request if you look at restaurants, I think the feedback is is a bifurcated set of feedback there. It's Kyu. Srma other kind of take out ready organizations have out performed. Obviously the full service dining experience restaurants. And for those full service dining dining experience just want is the question of what type of deferment and what type of kind of profile they carry forward is solely dependent on how quickly markets reopen and more importantly than how can they reopen from a governmental perspective how quickly customers come back, you know to reasonable spending levels over the coming months. I think most of at least what we're hearing most of them or realistic into that's not going to happen in May and June. Um, so if we look into the to the to the third quarter that will continue to that question will continue to persist but we'll start to get a better pulse on this month.

the latter parts of the second quarter weigh

record

the customer the client and customer response is going to be for hotels and restaurants largely the most significant driver in the pace of that and it's just it's hard for us as to maintenance and underneath to help with me. That's wonderful.

Okay, that that's helpful. And then last question for me. You mentioned that the Houston portfolio previously just remind us how big that portfolio is at this time.

I got it here. I think well, the Houston portfolio total assets is under $509. I want to say offhand that I've had here about 4:30 p.m. Okay. Thank you guys. Thank you. Thank you.

This concludes our question-and-answer session. Thank you very much for attending today's presentation. The Network Conference has now concluded you may now disconnect.

Thursday

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Thursday