Q3 2020 Hilltop Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Hilltop Holdings third quarter, 2020, and it's called Oh Gosh.
Oh gosh, all participants will be on listen only mode should you need assistance. Please see all talking specialist clustering Starr chief.
After todays presentation, there will be an opportunity to ask questions.
Yes. Good question in the press Star then one other trade show so.
Well your question. Please press Star then too.
Please note this event is being recorded.
From a top notch or two or three please go ahead.
Thank you operator.
Before we get started please note that certain statements during today's presentation that are not statements.
Historical.
Putting statements concerning such items as our outlook business strategy future plans financial condition allowance for credit losses, and the impact and potential impact of COVID-19 are forward looking statements.
These statements are based on management's current expectations concerning future events.
Hi, there nature are subject to risks and uncertainties are at.
Actual results capital liquidity and financial condition may differ materially from these statements you do a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual report quarterly report filed with the FCC Ics.
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.
Adding tangible common equity and tangible book value per share.
A reconciliation of these measures to the nearest GAAP measure maybe found in the appendix. This presentation, which is posted on our website I are not hilltop dashboard a dot com.
Now I'll turn the presentation over to Jeremy Ford President and CEO.
Thank you Eric and good morning.
Before I get into the results for the quarter I would like to applaud our teams across all three businesses and at the holding company for their unwavering commitment to serve our customers in a safe and highly effective manner.
I believe this year has made us a stronger company and will provide the foundation for prudent future growth.
In the third quarter hilltop delivered $153 million in net income and earnings per share of $1.70 cents.
This was an increase from the third quarter 2019, $74 million or 84 cents per diluted share Oh no.
Oh No Q3 2020 results include a final true up of $736000 related to the sale of National Lloyd.
Importantly, no Pops Q3, 2020 exceptional results reflect outside mortgage related earnings that prime lending and hilltop securities.
As well as no provision for loan losses that the bank.
However, we remain cautious that the Kobe Nike and then they may continue to adversely affect our businesses, including reduced mortgage volumes and further credit deterioration in our loan portfolio.
Our net revenue for the quarter of $604 million was higher on a year over year and linked quarter basis.
The mortgage purchase and refinance market remains strong in this low rate environment.
I'm lending originated $6.5 billion in loans during the period, an increase of $1.7 billion from the third quarter 2019.
Additionally, the gain on sale margin during the period expanded by 105 basis point year over year and by 72 basis points linked quarter.
Oh deposits increased by $2.5 billion or 29% compared to the third quarter 2019.
Declined slightly on a linked quarter basis, as we returned approximately $400 million and broker dealer sweep deposits due to the bank fortified lift a liquidity position.
During the quarter the broker dealer grew net revenues by 23% from the third quarter 2019, So a $149 million and reported a pretax margin of 23.7%.
The firm's robust financial results in the quarter were driven by strong performance in the structured finance and fixed income services businesses.
Well as improvement in the public finance services business.
We continue we continually aim to optimize our capital position as of quarter end hilltop had approximately $1 billion in excess capital on September 23rd we announced the commencement of a modified Dutch auction tender offer to purchase shares of our common stock for an aggregate cash purchase price of up to three high.
And $50 million and out of per share price not less than $18.25 and not more than $21.
The tender offer is scheduled to expire on October Thirtyth 2020.
Additionally, we continue to maintain our dividend at a prudent level and the board of directors recently declared a quarterly cash dividend of nine cents per common share payable on November Thirtyth 2020.
From a risk perspective, we continue to support our bank clients, while maintaining a healthy allowance on our loan portfolio as we monitor credit and the effect of the COVID-19 pandemic on our customers and the economy.
As an update on the COVID-19 related loan deferral, our balance as of September Thirtyth was $291 million.
Now from $968 million at the end of the second quarter.
I will go into more detail on slide five where we break down the deferment and allowances by category.
Our allowance for credit losses as of September 30 totaled $155 million or 2.08% of the bank loan portfolio.
Our allowances based on no quantitative and qualitative factors and reflects our best estimate given the expected pace of the economic recovery the position of our customer and the value of their underlying assets.
Moving to slide four.
Well its capital Bank delivered pre tax income of $50 million at no provision was recorded during the quarter.
Net interest margin was 3.03% during the for the period a decline linked quarter of eight basis points as loan yields remained under pressure.
Prime lending had a record quarter and generated pre tax income of $146 million, an increase of $114 million from Q3 2019 that was due.
That was driven by a 35% increase in origination volume and a gain on sale margin of 440 basis points.
I would like to commend prime lien lending leadership loan originator and secondary marketing team, we're originating $16 billion in mortgage loans year to date and doing a fantastic job managing pricing during this record year.
Hilltop Securities experienced another great quarter with pretax income of $35 million, an increase of $8 million or 31% from the.
Third quarter 2019.
And the structured finance business. The TV a group took advantage of the strong purchase mortgage market, which led to a surge in lock volumes that were 71% greater than Q3 2019.
In the fixed income services business credit and municipal products continued to be relatively strong compared to last year.
And also of note the public finance services business showed considerable improvement from a favorable issuance environment.
As I referenced last quarter I believe hilltop securities is well underway and building the best municipal focused investment bank by raising the profile of the firm.
Moving to slide five.
Uh huh.
As I touched on earlier, the bank's leadership bankers and credit team have done a great job serving the needs of their clients, while protecting the banks capital.
And we saw a reduction in COVID-19 related deferral loans of 70% from the second quarter.
This positive trend was expected, but the request for <unk> for further departments coming from the most severely impacted the industry, namely hotels and restaurants.
Well. This is a good sign we do anticipate further departments and challenges in the highlighted area and potentially in other areas such as office space, where we believe shifting trends and a gradual economic recovery can have a longer term impact.
The current allowance on the deferred loan portfolio at $49 million or 17% compared to $69 million or 7% in the second quarter. We.
We believe this to be our best estimate of the reserve needed for the portfolio given our analysis of the underlying credit and current economic environment with.
With that I now turn the presentation over to Wil to talk further about the financials.
Thank you Jerry I will start on page six.
As Jeremy Scott for the third quarter for each one of those off the board of consolidated net income attributable to common stockholders of $153.3 million equating to $1.70 per diluted share.
Income from continuing operations attributable to common stockholders equated to 152.5 million $1.69 per diluted share.
We'll talk continuing operations generated $205 million or pre provision net revenue or PPNR during the third quarter, which brings year to date PPNR to 508 million up from $223 million earned in the prior year period to date.
Growth versus the prior year period was driven by our diversified revenue stream and led by strong mortgage origination.
In the third quarter provision for credit losses reflected a net recovery of approximately $600000. The bank recorded no provision for credit losses during the third quarter as net charge offs declined to $567000 and the allowance for credit losses remained relatively stable during period.
During the quarter, a number of items impacted our assessment of the allowance for credit losses, including that approximately $660 million of the loans that were on active deferral plan at June thirtyth or are no longer on an active deferral and has made a payment pursuant to their contractual terms. In addition, there was improved.
But in the base case economic scenario that was used to evaluate blog content across our portfolios at September thirtyth.
Further both the CNR NCR he loan portfolios, excluding mortgage warehouse lending declined versus the second quarter as payoffs accelerated in overall loan demand remains tepid.
Offsetting some of these favorable items was the impact of negative credit migration during the quarter.
During the third quarter, the bike migrated approximately $257 million of walls to classified and criticized status to reflect the deterioration related to the pandemic Amazon where they are.
It is important to note that we continue to monitor all segments of our portfolio very closely and we're taking proactive steps to manage risk and protect the capital by while supporting our clients through these challenging times.
As we have noted in prior periods the allowance for credit losses in the provision for credit losses could be volatile from period to period as economic assumptions and portfolio actions will change over time.
During the third quarter revenue related to purchase accounting was $3.5 million and expenses were $1.5 million, resulting in a net purchase accounting pre tax impact of $2 million for the quarter ended.
In the current period, the purchase accounting expenses, largely represents amortization of deposit and other intangible assets related to prior acquisitions we.
We expect the revenue from purchase loan accretion will continue to decline as the previously purchased portfolio continues to run all further we expect that revenue from purchase loan accretion will average $2 million to $4 million per quarter over the coming quarters.
Given the significant growth in earnings in 2014, Hilltops capital position continues to improve as we address both the ongoing impact of the pandemic and position the company take advantage of opportunities that may be presented over top.
It will stop period in common equity tier one ratio equated to 19.85% in the tier one leverage ratio equated to 13.3%.
Please note the tender offer that was launched on September 20, Threerd 2020 remains open and therefore any actions that May result from this transaction did not impact hilltops capital ratios as of September Thirtyth 2020.
For reference if the tender offer we're fully subscribed to $350 million the impact the hill.
The impact to hilltop common equity tier one ratio will be approximately 325 basis points, assuming talk in risk weighted assets.
Turning to page seven.
Third quarter net interest margin from continuing operations equated to 256 basis points and declined by 24 basis points versus the prior quarter, but.
Additionally, net interest income from continuing operations for the third quarter equating to $102 million and declined by 11 million versus the third quarter of 2000 located.
Reported net interest income was driven by lower purchase loan accretion of $4.3 million, which was somewhat offset by interest income from PDP wells, which equated to approximately $1.2 million in the quarter.
Other non interest income reflected the impact of the second quarter sub debt raise substantially lower yields on investment securities at both the bank and Hilltop Securities.
As well as lower yields on loans held for sale.
Over the coming quarters, we expected net interest income will continue to be pressured as short term interest rates are projected to remain low for the foreseeable future and we believe that loan growth will remain challenging.
In our bank portfolios, we expect to continue to return broker deposits as they mature managed down deposit costs and invest excess cash judiciously.
In deploying excess cash into the securities portfolio, we do expect to take on additional duration, but remain committed to ensuring that our securities portfolio remained very liquid and.
And we will not look to take on additional credit risk with these investments.
During the third quarter hilltop consolidated average, earning assets increased by approximately 800 million as the business experienced significant inflows customer deposits.
Most product types, resulting in higher cash balance.
Further we continue to make measured investments in the securities portfolio at the bank, while mortgage warehouse lending and loans held for sale grew modestly during the quarter.
The consistent growth in customer deposits has resulted in higher cash and investment securities levels and continues to favorably impact impact built apps already robust liquidity position.
Over the coming quarters, we expect to manage all and off balance sheet liquidity levels, which remained in excess of $6 billion.
Between five and 6 billion, which should provide some improvement to net interest income.
In NIM overtime.
As we continue to manage liquidity in a prudent manner, we will continue to monitor the capital markets.
All broader market movements.
And hilltop mortgage volumes to balance our excess liquidity against risk over time.
Moving to page eight.
Noninterest income from continuing operations.
Third quarter equating to $503 million.
During the period mortgage applications and locks remains very robust as probably locked approximately 8.5 billion of new mortgages in the third quarter.
This was a record interest rate lock quarter for the business and reflected the impact of lower rates and better than expected demand for purchase mortgages across our market.
The combination of strong walk and origination volume as well.
As well as improving gain on sales spreads resulted in mortgage brings up production and fee income increasing by $161 million versus the same period in the prior year.
During the third quarter gain on sale margins in our mortgage business expanded by 72 basis points versus the second quarter of 2020.
We expect the gain on sale margins will remain elevated during the fourth quarter likely remaining within the 430 and 450 basis point range through year end.
During the third quarter the security business continued to show solid progress as fixed income services delivered revenue growth of approximately $5 million and structured finance revenue, which is included in other income and cruise increased by $28 million as both volumes and spreads improved with market conditions.
At period in the valuation Mark on the structured finance loan pipeline was approximately $12 million net reduction of 4 million versus the prior quarter.
It remains important to note that results from our fixed income and structured finance businesses can be volatile as market rate spreads and volumes can change significantly from period to period.
Turning to page nine.
Non interest expenses from continuing operations increased from the same period in the prior year by $78 million to $399 million.
The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $51 million.
Variable production related costs, specifically related to mortgage production and instead of specific items at both the bank and hilltop Securities that were recorded in this quarter.
As in prior quarters increases in variable compensation related to strong fee revenue growth in the third quarter compared to the same period in the prior year.
In addition, while overall expenses have increased over the prior two quarters, we continue to make substantial progress against our growth and efficiency initiatives over the.
Over the last 12 month headcount has declined by approximately 200 or 4%.
Additionally, non mortgage production related consulting and other professional service related expenses has declined substantially while marketing and business development expenses have continued to move lower.
While our progress on efficiency has been broad based we are now well positioned to move into the bottle deployment phases of our core system improvements, which are already delivering value to our franchise and we expect that value will continue to grow upon their completion.
Turning to page 10.
Total average held held for investment loans grew by 8% versus the third quarter 2019 average growth continues to be driven by the 671 million of net PDP loans on the balance sheet, coupled with growth in the mortgage warehouse lending business, which grew by approximately 156 million versus the same period in the prior year.
Other business loans declined versus the second quarter of 2020 as customer demand has remained salt.
Loan yields continue to decline during the third quarter as both lower market rates, including the prime and LIBOR rate, coupled with lower purchase loan accretion contribute to lower yields.
We do expect loan yields will continue to be pressured as the yields on new loan production averaged approximately four before the quarter percent during a.
During the third quarter.
Turning to page 11.
During the quarter net charge offs equated to $567000 or three basis points of total by Overinvestment Walt on an annualized basis.
During the quarter and pursuant to our normal credit management processes. The bank migrated approximately 240 million of loan you were criticized and classified accruing loans that.
While many of these loans remain active on contractual payment deferral programs and are currently performing under their existing agreements. The deterioration arclight cash flows is apparent and in many cases substantial.
As it relates to our credit processes, we remain focused on preserving the capital bag, while continuing to work with our customers to support them through these challenging times.
During the third quarter nonperforming assets increased by approximately $13 million, which was the result of deterioration in a diverse set of credit across the portfolio, including single family residential and these credits are not generally related to the coded packaging portfolio.
The chart on the bottom right of page 11 highlights the current Hcl to bank loan held for over investment ratio, which equated to 208 basis points at September Thirtyth 2014.
As Jimmy noted earlier, the Hcl coverage related to the 291 million of loans that are currently active and on deferral is 16.7% as of September thirtyth.
Turning to page 12.
During the third quarter hilltop continue to build excess liquidity as slide deposits grew by approximately $600 million across most product categories, notably noninterest bearing deposits have continued to grow throughout this cycle as the bank has been able to take advantage of the overall liquidity trends in the market, while they continue to deepen wallet share.
And expand our Treasury service sales efforts required.
Interest bearing deposits declined in the period due to actions taken actively managed liquidity at the bank.
Some of the most pronounced actions included the bank's swept back $400 million of broker dealers Weve deposit hilltop securities.
In addition, the bank allow 400 million of broker deposits to mature and be returned during the quarter.
These actions were somewhat offset by customer deposit growth of approximately $450 million.
As previously noted we expect to allow most of the broker deposits, which currently represent 1 billion of interest bearing deposits to mature and be returned over the next nine to 12 months.
Moving to page 13.
During the third quarter of 2020, Plainscapital bank or $50 million of pre tax income, which represents a return to profitability for the second quarter.
The quarter's results reflect stable revenues and expenses, noting the bank incurred 2.4 million of expenses during the third quarter related to certain FHLB prepayment penalties and the write down certain lease obligations related to our ongoing space consolidation efforts.
As we noted earlier the bank did not incur any provision expense during the third quarter as improvements in the economic variables offset much of the previously referenced credit migration and.
And the net impact yielded only a modest change to the deal in the quarter.
The bank's efficiency ratio during the quarter improved to 52.7%.
Reflects the ongoing efforts to reduce deposit costs lower operating costs and drive prudent revenue growth over time.
As we move forward and assuming markets continue to function in an orderly fashion and consumer credit remains stable, we expect to begin retaining probably being originated mortgages on the bank's balance sheet.
We expect to retain approximately $30 million to $50 million of loans per month.
As this ever will serve as an alternative for cash investments in the investment portfolio.
It helped mitigate what we're seeing in our in CRD loan demand over the medium term.
Moving to page 14.
Prime lending generated a pretax profit of 146 million during the third quarter of 2012, driven by strong origination volumes an increase from the same period in the prior year by 1.7 billion or 35%.
As noted earlier gain on sale margins expanded during the third quarter versus the same period, the prior year as market volumes and pricing actions provided for higher spreads.
During the period refinance activity represented 35% of total originations.
Further we expected during the fourth quarter. The portion of originations that are refinanced transactions will remain elevated from historical levels, which should be lower than third quarter given normal seasonality.
During the third quarter hilltop retain 89% of the mortgage servicing rights related to loans sold during the period, which resulted in an increase of the MSR asset to $128 million we.
We do expect that we will continue retaining a significant portion of the servicing rights for loans sold likely between 50 and 75% over the coming quarters, and if yes, it could grow to between $175 million and 200 million by year end.
Moving to page 15.
You will top security delivered a pretax profit of $35 million, resulting in a pretax margin of 24% in the third quarter point point.
In the quarter fixed income services generated solid revenue growth as volumes increase in the market and we continue to manage our risk positions in a very prudent manner structure.
The structured finance business delivered revenue growth versus the same period in the prior year of $28 million as volumes increased by 71% to 2.7 billion in the secondary markets for mortgage related Bob has continued to improve.
It remains important to note that results from our fixed income from structured finance businesses can be volatile as mortgage rates resin volumes and change significantly from period to period.
The public finance business revenues increased by $4 million versus the prior year period as offerings grew in the market remains strong for municipal activity.
During the third quarter, the wealth management businesses were impacted by lower market interest rates, which negatively impacted interest income versus the prior year.
For these businesses lower interest rates will provide an ongoing headwind that we're focused on mitigating through client acquisition and improved efficiency.
Turning to page 16.
Given the uncertainty surrounding the economy, specifically related to the pandemic, we're updating our 2020 commentary, but are not providing updated guidance or outlook while there.
While it is not clear exactly how the economy will rebound for that highlighted that rebound, which we believe will be directly linked to the success in managing the pandemic, we remain focused on delivering against those items that we can control.
We're committed to the ongoing safety of our associates and our clients as well as helping our hard work through president challenges.
Pandemic has presented us all.
We remain committed to executing our platform growth and efficiency initiatives and delivering against our 2021 commitments last.
Lastly, and most importantly, we are focused on delivering pretty growth across our business lines, while maintaining a moderate risk profile and delivering long term shareholder value.
Operator that concludes our prepared comments and we will turn the call over to you for the question and answer section of the call.
We will now begin the question answer session. If you would like to ask a question you May Press Star then one on your Touchtone phone.
Raising a speakerphone, please pick up to and support facilities slipped.
Let's start your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
Our first question will come from Michael Young with Trust Securities. Please go ahead.
Hey, good morning, and thanks.
Thanks for taking the question and congrats on the good quarter I just wanted to start maybe on on the capital side of the equation I don't know if you guys can provide any update on the the modified Dutch auction and either either progress there what the plan would be to now that the stocks above kind of the high end of the targeted range. There just any any comments there would be helpful.
Sure.
Yeah. The short is that we don't have a lot to comment on there we do have the 10.
And your old men and outstanding and it expires on October Thirtyth.
Okay.
And I I don't know if again, if you can comment on this either but after that processes over depending on.
That's actually filled.
Would there be.
If I guess if it wasn't fully filled would you guys look they still deploy that amount of excess capital and to maybe an accelerated share repurchase or just open market purchases.
Yeah, I think we're focused on tender offer today and.
And thereafter, we'll continue to manage our capital pretty done so.
Okay.
Fair enough.
And then I guess, maybe moving to the mortgage business well appreciate the comments on on kind of volume expectations et cetera.
Looking at the gain on sale margin, though was there a benefit from maybe having the pricing of the 50 basis point.
Expected increase from the Gses in there, but not actually having to pay that in this quarter that we should sort of normalize out going forward or any other impacts we should think about on gain on sale margin.
Yeah I think.
I don't think so I think we.
We we were pleased to see that that that kind of pricing change was pushed into the fourth quarter and that that certainly I think was that a bit of customers and benefit of the business from from my perspective, what you've seen is volumes have been sufficiently large to allow for spreads to remain.
A reasonably wide I would note we continue to retain a substantial portion of the MSR, which we believe sort of through the second third quarter were beneficial to us and we believe the asset and the return on that for that asset or good or if the pricing.
At the prices that were able to get at this point, so from our perspective really market dynamics as well as prudence around our overall pricing actions.
In our business as we noted when we started to make the investments in our new mortgage loan origination system. We believe that system would allow us to provide greater oversight of overall pricing exceptions, and the like and I would say the private lending leadership team has taken advantage of both the technology capabilities, but also.
Just enhance rigor of overall pricing exceptions in the market over the last 90 to 180 days, which have allowed again gain on sale margins do increase and again I think for the fourth quarter, we expect them to stay within say range bound here between 430 450 basis points.
Okay, Thanks, and sorry to jump around but one last one just on the corporate and other segment was there anything unique or you know kind of larger and this quarter that we shouldn't expect on a go forward basis.
I think I think you will see there is an incentive related compensation variable compensation impacts there in principle.
Okay. So maybe more of a true up and then we return to more normal kind of levels correct.
Okay. Thanks, that's all for me.
Like you think Michael.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, guys and thanks for taking my questions, maybe ask them to buy.
The buyback question.
A little bit definitely you guys, obviously still being churns business generated a lot of proceeds from.
From that capital levels.
Really high assays I read read the proxy for the Dutch tender I think it does say that you can repurchase shares in the open market about 11 days after that.
Thats complete Jeremy how should we think about the levels of excess liquidity and capital that you guys.
I would hold as the hopefully the pandemic side now that the insurance business is kind of no longer part of the business mix and.
Where do you guys think that you know capital levels and liquidity I guess basically should should run.
In a more normalized period. Thanks.
Sure well. Thanks for the question you know I think when we when we came up with the size range of having a $350 million that was a combination of considering the.
Considering the go forward capital that we won during the pandemic and also be able to.
The able to pursue opportunities afterward.
We also view that in light of kind of our institutional shareholders and where the demand would be.
So that's kind of that's I can pay on sizing it and I think that we're focused on the tender offer and coming out of that we'll have to really evaluate our plan for what that bogey will be given the opportunity set in the M&A environment.
Okay. So it emanates something that you guys are looking at here you have a conversation does seem like.
Chatters picking up and is that part of the capital deployment strategy that we should be thinking about for you guys.
Well it hasn't changed.
You know the same strategy, we've always had and ER and that is we are interested in pursuing M&A opportunities are and what we're going to be patient given the environment and and be aggressive when we find the right one.
Okay, maybe just one more for me you know I've looked at the quarter's provision slightly negative yeah, we see MP migration, we see no criticized balances you know essentially double how should we think about the pace of future provisioning is it more matching charge offs from here.
Okay, and I understand the credit metrics are still very benign, but we did see some migration this quarter. So just trying to gauge how.
Gauge how you guys think about yes provision as we move forward. Thanks.
Yes. It is will I guess as we think about allowance is going to be a quarter by quarter assessment.
You know I think a lot of as I mentioned, we had a we had a lot of activity in this quarter, whether it be credit migration peripheral activity.
As well as the economic assumption. So again those will continue to be the driver of the economic assumptions will be will be significant impact as well as well as credit migration in the portfolio. We did see as you noted and I think we moved.
We moved aggressively to.
I'm great assets that we believed.
Displaying no impairment in a.
From a from a cash flow and promote and ability to pay perspective, we.
We expect that through both the deferral programs as well as just kind of the normal tribulation or credit losses likely don't start to a substantial substantially materialize into the late first quarter second quarter third quarter next year so into 2021.
Point, obviously as that much regulation occurs or credit migration occurs whether favorable or unfavorable we'll evaluate the allowance as it relates to that it's difficult to say what the allowed to do on a quarter on a quarterly basis.
Given given kind of the seasonal analyses and the amount of impact of economic or looking but again I think it's important to note. Our view is that the charge offs will start to materialize until towards the middle of 2021.
Okay. So it's fair to assume that it yeah.
The economic scenarios don't really change that we probably are at or near peak for.
The reserve.
There will be.
I'd say, we feel adequately reserved given the economic outlook.
We used for our analysis for the for the third quarter.
Okay. Thanks for taking my questions guys. Thank you.
Our next question will come from not only with Stephens. Please go ahead.
Hey, good morning, Thanks, guys I wanted to go back to the mortgage discussion and just remind me of the strategy around the MSR you increase the asset a lot in the third quarter more in the fourth quarter, just remind me of the strategy behind this and does that mean you were not really seeing the servicing.
With your sales so gain on sale margins could have been even even stronger.
No I think well, let me try to.
Unpack that a little bit so first as it relates to the strategy as we noted.
Late in March and certainly into the second quarter.
The overall demand by by those two service for Dubai servicing was pretty much.
Pretty muted if not nonexistent there were there were some periods, where there was a no bid for servicing.
And so as a result of our liquidity and our capital position, we were able to take advantage of that and decided to retain servicing understanding that it hasn't historically been an asset we were up we were overly focused on.
Focused on growing we thought that the pricing dislocation allowed us an opportunity to take advantage of.
Of that as it relates to the to the third quarter and going forward. We are continuing to monitor the market based on the values, we can receive and the value that we can.
Sale on a flow flow originated basis.
Those spreads those overall the overall market has improved and the spread that we believe that is the value that we believe the assets worth versus what the mortgage willing to pay has certainly tightened, but we still.
But we still believe there's there's value in India in the asset in excess of what we would otherwise get paid on.
Get paid on a flow basis for at least a large portion of the asset.
In terms of the impact on the overall gain on sale in the way you will you recognize MSR as you book the asset you book the income so it flows through as the capitalization rate I would say that that had a favorable impact on gain on sale in the second quarter, just given the fact that there was.
As I mentioned virtually inovios for servicing and then during the third quarter again, we're capitalizing at the market rate today mortgage sales rate. So limited impact it was favorable with a favorable limited favorable impact as it relates to MSR impact on the 444 40 again more impacted by the O.
Overall market volumes in the in the full pipelines across the mortgage debt and the competitive set coupled with again as I mentioned earlier, the strong pricing actions and the focus that are a prime lending leadership team is taking on pricing given our new tools, but also the focused on managing pricing except.
Yes.
Okay. That's that's helpful well, thank you for that.
[music].
And then just a comment you mentioned briefly will and prepared remarks to of the various system upgrades throughout the entire company can you just give us an update of where we are on this various upgrades. It seems like it was a two year initiative that was going to run through the end of the.
This year is that correct.
Yes, so what we what Weve asserted was we were going to improve PPNR by $84 million on a run rate basis through the end of 21.
I think as we sit here today, we feel very good about the efforts that have been launched specifically as it relates to your question around the three major programs, we had a mortgage loan origination system implementation, which we would say is virtually complete there's still some minor minor rollout for us use very kind of model.
Products left but that processing program is is effectively fully launch of RF is system core system enhancement at hilltop Securities.
Has been was.
How to launch in May.
This year and we continue to work aggressively on kind of day to enhancements.
With that with that overall program. So still some day to work to be done there, but again, we're looking to bring that in principle to close by the end of the year and then we also had a financial ERP, principally the general ledger and all the accompanying.
Of installations around that and I would say we have a we have one business left to bring onto the the general ledger, but we have implemented that general ledger across three of our three of our operating units as we speak and we like that we've got one remaining implementation there that will occur in the early second quarter of next year. So we're.
Sure.
We're certainly on target in terms of the deployment, we're already seeing some of the cost saves and benefits whether it be at the mortgage company around some of the pricing rigor we're talking about.
Or some of the controls and productivity that we expected to receive from that system or.
Or some of the benefits we're seeing from the general Ledger and other also in that 84 million dollar growth and efficiency program. We had efforts as it relates to our focus on purchasing procurement and integration of all those things that work is complete and functioning as designed as we.
Sit here today, so again as it relates to the overall program will give a more fulsome update on our January call, but we feel very good about the progress we've made year to board.
Okay.
Okay. That's great and then just lastly from me will you you mentioned in prepared remarks, some comments around excess liquidity and how you expect that to manage that I didn't quite get all that can you just kind of go to how to do that again. Thanks, yes. So that I think due to two primary items. One I mentioned, we will during the fourth quarter start to retain.
Prime Prime lending originated mortgage is on the bank balance sheet that has been a program that we had had in place for years previously we suspended it as a result of the pandemic in March as.
As we both were wanted to monitor the impacts on consumer credit, but also capital liquidity management as we worked our way through.
The pandemic now that we believe we've got better visibility there we are expecting to retain $30 million to $50 million of mortgage is per month.
As a means of which to deploy liquidity, but also some.
Some capital in a pretty efficient way with a product that we originate in house.
The second piece is will likely be expanding the overall investment securities portfolio, which at the bank, which currently stands at about $1.6 billion.
We are seeing enhanced paydown of overall flows there, but we do expect that $1.6 billion will go higher.
Given the given the overall cash position.
The organization and then lastly, we will continue likely to US we have additional funds back to hilltop securities of those kind of contingent liquidity. If they can put those deposits to higher and better use at current than we can from an excess cash earnings perspective. So those are really the three things we're doing in that regard.
Yeah.
Okay. That's helpful. Congrats on the quarter. Thank you. Thank you.
Thank you Matt.
Our next question will come from Michael Young Trust Securities. Please go ahead.
Hey, Thanks for the follow up just wanted to touch base on the yeah.
Mortgage is you're going to retain or there's going to be qualified or would those be some they're just outside of qualified and then also.
What would the what are your expectations for maybe rate on those.
Principally qualified so we would be able to as we did during the second.
Second quarter any event you know in the event, we felt like we needed to sell those.
We were able to kind of execute that sale back through the agencies in the second quarter. So principally qualified. These are these are going to be high quality mortgages. I would tell you is target FICO score is going to be 750, plus.
On an average basis, while there'll be a range. There historically, we've averaged 750 to 70 to 75 on the retained assets from a yield perspective. It will be you know 15 year and 30 year product. So we're expecting that yield to be between 275, and 325 basis points, depending on the mix on any given period.
Okay, and as a follow up I mean, it seems like this would be a fairly effective strategy to leverage some of the excess capital and creating more or.
Creating more earnings maybe over more the medium term because different saleable product you could always ratchet that back down with an M&A deal and sell off.
The mortgage portfolios is that something we should expect that maybe grow even as a part of the strategy going forward.
I think eight audience of context is kind of from some prior comments. One is we're going to manage in the context of overall liquidity position and kind of how those how the pandemic and the economy continue to mature and then second we're balancing it against commercial loan growth, obviously, we'd like to be doing more business with us.
With our core commercial business customers.
But is that demand remains soft.
For the foreseeable future at least our expectation to where it will remain so we are used.
We are using these assets to backfill both kind of liquidity position, but also offset some of that softer demand.
Okay makes sense, thanks for the follow up.
Thank you Hey, Michael.
At this time there are no further questions. This will conclude our Q and a session.
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