Good day. And welcome to the Hilltop Holdings Third Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Erik Yohe. Please go ahead..

Thank you. Before we get started, please note that certain statements during today’s presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial conditions and anticipated amendments to our SEC filings, are forward-looking statements.

These statements are based on management’s current expectations concerning future events that, by their nature, are subject to risks and uncertainties.

Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC.

Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.

Additionally, this presentation includes certain non-GAAP measures, including taxable equivalent net interest margin, pre-purchase accounting taxable equivalent net interest margin, tangible common equity and tangible book value per share.

A reconciliation of these measures to the nearest GAAP measure may be found in the appendix of this presentation, which is posted on our website at ir.hilltop-holdings.com. With that, I would now turn the presentation over to Hilltop President and CEO, Jeremy Ford..

Thank you, Eric, and good morning. Before we get into the financial results, I want to recognize as part of our succession planning, we recently announced that effective January 1, 2020, Steve Thompson will be promoted to President and CEO of PrimeLending.

Our current PrimeLending, Chairman and CEO, Todd Salmans will remain as Chairman and provide ongoing strategic guidance. Todd has led PrimeLending as CEO since 2011 and has helped shape the company’s success. We are extremely grateful for his tremendous contribution and visionary leadership.

He has been an incredible asset to PrimeLending in the overall Hilltop organization. He is also a dear friend and we look forward to working with them in the future as Chairman. Steve, joined PrimeLending in 2011 and has been President since 2017.

He had previously held successive positions as the company’s regional divisional and national production leader and is very well respected across the mortgage industry. Under his direction the company has established a plan for sustained success, focused on delivering a superior mortgage experience to our valued customers.

I am excited about PrimeLending prospects and future success under Steve and Todd partnership.

Now moving on to the financial results, for the third quarter 2019 Hilltop reported net income of $79 million or $0.86 per diluted share, representing a $44 million increase compared with the same quarter last year and a $22 million increase compared to prior quarter.

Additionally, Hilltop delivered a return on average assets of 2.26% and a return on average equity of 15.6%. This quarter we delivered 20% growth in revenue compared to third quarter 2018 and 8% compared to the prior quarter.

In conjunction with that, non-interest expense, excluding variable compensation declined by 8% compared to third quarter 2018 and 4% compared to prior quarter.

This positive operating leverage is primarily a result of the impact of lower rates and market conditions in our mortgage-related businesses, in addition to our work to enhance businesses -- business operations and realize efficiencies across the organization.

Our diversified business model enables us to capitalize on low rate, high mortgage volume market, such as this past quarter in multiple ways, including mortgage origination, national warehouse lending and through our structured finance and capital markets debt at Hilltop Securities.

The strength of Hilltop is our ability to generate significant earnings growth in environments, such as this. While remain grounded with a solid earnings base from PlainsCapital Bank our cornerstone entity. This quarter average loans held for investment excluding broker dealer loans grew by $450 million or 7% compared to prior year third quarter.

Growth can be attributed primarily to our previously mentioned national warehouse lending business and the impact of lower rates and the increase in refinance activity. Similarly, mortgage loan originations at PrimeLending grew to $4.8 billion in Q3, an increase from third quarter 2018 to 31% also from strong mortgage refinancing activity.

Refinancing volume of PrimeLending as a percentage of loan origination volume during the third quarter increased from 11% in 2018 to 29% in 2019.

Net revenues of Hilltop Securities increased 28% year-over-year as trading gain and structured finance business grew revenue by $15 million compared to Q3, 2018, and favorable market conditions, coupled with improved trading performance delivered a 53% increase in trading volumes during the period.

Through the first nine-months of the year Hilltop has paid $73 million to repurchase $3.4 million shares of common stock. This includes the transaction in August with Oak Hill Capital Partners to repurchase their 2.2 million shares at a price of $22.25.

This agreement was made as a result of provisions governing the life of funds at Oak Hill Capital Partners and as a consideration of Hilltop’s Board of Directors related to our stock purchase repurchase program.

We remain pleased with our current capital position with a Tier 1 leverage ratio of 12.7%, a common equity Tier 1 capital ratio of 16.15% and approximately $500 million in excess capital. For the quarter criticized loan -- criticized loan levels and NPAs remained steady.

Moving now to slide 4, for the third quarter of 2019 PlainsCapital Bank recorded pre-tax income of $52.7 million, an increase of 37% from third quarter 2018. Growth in average balances and a reduction in operating expenses drove increased profitability.

Of note, the third quarter 2018 noninterest expense included the Bank of River Oaks transaction related costs of $6.6 million.

This past quarter also marked one year since we completed the Bank of River Oaks transaction and we now have strong leadership in Houston that has been able to drive significant deposit growth upgraded quality in the amount of our lenders and improve the region’s profitability by executing on our integration strategy.

Loan growth has been pressured by unexpected pay down. The overall customer relationships have been strengthened and in several cases expanded as a result of our additional services and balance sheet capacity. Overall, for Texas we continue to encounter intense competition for both loans and deposits which has resulted in margin compression.

We aim to remain competitive, but disciplined in our approach to pricing and underwrite. PrimeLending produced pre-tax income of $31.5 million for the third quarter, compared to $4.8 million in Q3, 2018.

In addition to the previously mentioned origination volume growth, gain on sale spreads improved by 5 basis points compared to prior year and 2 basis points linked quarter. While variable compensation increase in relation to origination volume, non-variable compensation and operating costs declined by $2.8 million compared to prior year.

This was caused by the avoidance of increases and headcount entirely managed operating cost. Hilltop Securities third quarter 2019 pre-tax income was $27 million and pre-tax margin was 22%, compared to $10 million and 10% in 2018.

It was another strong quarter for our both fixed income capital markets and structured finance businesses, driven higher annually by favorable rates and market condition. In structured finance, the TBA business were very active as a result of low mortgage rate.

Fixed income capital markets had a strong quarter, mainly driven by the CMO and credit businesses. Public finance had a better quarter as deal flow increase. Brad Winges has come in as Hilltop Securities, CEO, it made a big impact.

While favorable market conditions that aided our 2019 results, there is a lot of productive work happening to improve the cost structure and overall return profile of the business.

Results at National Lloyds were improved compared to prior year, as we reported pre-tax income of $6.5 million for the quarter with a combined ratio of 83%, compared to 94% during the third quarter of 2018.

The lower combined ratio as a result of both lower frequency and severity of storms, and the previously disclosed strategy of exiting non-core states. In summary, this was an excellent quarter for each of our businesses and I want to thank all of our teammates across Hilltop for their part and executing towards our combined vision.

We are seeing the strength of our shared services model and collaboration across the organization. Overall, our platform for growth and efficiency initiatives is moving ahead of schedule and we plan to provide a financial update of that progress during our Q4 2019 call.

With that, I will now turn the presentation over to Will, who walk through the financials..

Thank you, Jeremy. Before we review the financial performance for the quarter, I want to review disclosure made last evening.

Based upon our review recently conducted, Hilltop determined that we did not design and maintain effective internal control over certain aspects relating to the determination of the qualitative factors considered by management in the allowance for loan losses estimation process, particularly quantitative support for such qualitative factors.

Management and the Audit Committee of the Board of Directors concluded that this control deficiency constituted a material weakness as of December 31, 2018. As of the date of this press release, we do not expect this control deficiency to result in a restatement of our consolidated financial statements.

We expect to file an amendment to our annual report on Form 10-K for the fiscal year ended December 31, 2018 and quarterly reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 to include disclosures concerning this material weakness.

In addition, we anticipate that the report of PricewaterhouseCoopers on our internal control over the financial reporting at December 31, 2018 will be revised to reflect the identification of this material weakness. Hilltop management and our Board of Directors are committed to maintaining a strong internal control environment.

Management has evaluated the material weakness described above and has made significant progress and updating its design and implementation of internal controls to remediate the aforementioned control deficiency and enhance our internal control environment going forward. I am moving to page five.

As Jeremy discussed, for the third quarter of 2019 Hilltop reported $79.4 million of income attributable to common stockholders according to $0.86 per diluted share. During the third quarter, the provision to loan losses included approximately 380,000 net recoveries as charge-offs for the quarter remained low.

During the third quarter revenue related to purchase accounting with $7.8 million and expenses were $1.9 million resulting in a net purchase accounting pre-tax impact of $6 million for the quarter.

In the current period the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions.

Regarding loan accretion, as the purchase portfolio balances continue to decline we expect scheduled interest income related to the loan accretion to average between $4 million and $6 million per quarter over the next three quarters.

Hilltop’s capital position remains strong with a period end Common Equity Tier 1 ratio of 16.15% and a Tier 1 leverage ratio of 12.67%. Moving to page six, net interest income in the third quarter equated to $113 million including $7.9 million of the loan accretion.

Net interest income increased $3 million or 3% versus the same quarter in the prior year. The growth in net interest income was driven by growth in loans held for sale and our national warehouse lending business. Both of these loan portfolios were positively impacted by the favorable mortgage conditions during the quarter.

We do expect that both of these portfolios will begin to decline during the fourth quarter as the mortgage business moves into a more traditional seasonal cycle. Net interest margin equated to 3.45% in the third quarter.

The pre-purchase accounting taxable equivalent net interest margin equated to 3.2%, which declined by 1 basis point versus the same period in the prior year.

On a linked quarter basis, taxable equivalent pre-purchase accounting, net interest margin declined by 6 basis points resulting to lower yields on loans held for sale and a 1 basis point increase in interest bearing deposits.

During the third quarter long-term interest rates and more directly 10-year rates continue to decline that began earlier in the year. Overall, the average yield on loans held for sale during the third quarter dropped by 46 basis points to 414 basis points, putting pressure on net interest margin during the quarter.

Further, during the third quarter, average 10 year yields declined by 55 basis points, which we expect will continue to put downward pressure on loans held for sale yields during the fourth quarter.

As it relates to interest bearing deposit costs, we do believe that the portfolio reached peak levels for this interest rate cycle during the third quarter and will begin to decline the modest pace over the coming quarters.

With the combination of lower loans held for sale yields and lower deposit beta rates early in this rate lowering cycle given competitive pressures, we expect net interest margin will continue to trend lower for the remainder of the year and into 2020.

While these factors could move us the lower end of our outlook range, we are maintaining our full year average pre-purchase accounting net interest margin outlook of 3.25% plus or minus 3 basis points.

We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset liability flows across the portfolios. I am moving to page seven. Total non-interest income for the third quarter of 2019 equated $341 million.

Third quarter mortgage-related income and fees increased by $52 million versus the third quarter of 2018. During the third quarter of 2019, the environment in mortgage banking improved, principally driven by the aforementioned decline in the 10 year rates, which fell below 150 basis points at times during the quarter.

This decline in rates drove a significant increase in refinance activity as refinance volumes increase from the prior year period by $975 million to $1.4 billion during the third quarter of 2019. Gain on sale margins outperformed our expectations for the quarter as they increased to 335 basis points for the period.

Regarding mortgage gain on sale margins, given the current competitive dynamics recent pricing actions taken by the agencies and our expectations on market rates we expect that gain on sale margins will trend lower throughout the balance of 2019.

Other income increased by $19 million driven primarily by improvements in sales and trading activities in both the capital markets and structured finance businesses at Hilltop Securities. Favorable market conditions resulted in a 29% increase in structured finance mortgage-backed securities volume.

These businesses continue to realize the benefits of the investments we have been making to improve our structured and distribution capabilities since the third quarter of 2018.

And while we believe these investments will continue to provide ongoing benefits it is important to recognize that these businesses can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity and production trends. I am moving to page eight.

Non-interest expenses increased from the same period in the prior year by $14 million to $350 million. Growth and expenses versus the prior-year were driven by an increase in variable compensation of $34 million of Hilltop Securities and Primelending. This increase in variable compensation was linked to strong fee revenue growth in the quarter.

Over the last -- over the past six quarters we have continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise.

Through these efforts headcount, non-variable compensation, professional services costs and marketing and development expenses continue to trend lower as we make progress against our efficiency objectives. During the third quarter, Hilltop incurred $3 million in costs related to ongoing core system enhancements. Moving to page nine.

Total average HFI loans grew by 6% versus the third quarter of 2018. Growth versus the same period in the prior year was driven by growth in our mortgage Warehouse Lending business, which experienced strong growth in the quarter or ending balances grew by approximately $80 million -- $180 million on a linked-quarter basis.

Based on the year-to-date average loan growth in the national Warehouse Lending portfolio, current production trends, seasonal and scheduled pay downs, the current competitive environment, and our focus on high quality conservative underwriting, we now expect the full year average HFI loans will grow 6% to 8% in 2019.

Turning to page 10, as previously noted, and we shown on the chart on top right of the slide, the bank has maintained solid credit quality through the third quarter of 2019, as non-performing assets declined $21 million from the same period in the prior year.

Over the last few months, we have seen some weakness begin to emerge in our energy lending portfolio as cash flow performance coupled with overall market liquidity in the energy sector are becoming strange.

As it relates to energy lending, total commitments at 930 [ph] or approximately $285 million in total loan outstanding balances were approximately 2.3% of the bank’s total loan, loans held for investment portfolio. The bank’s allowance for loan loss to HFI loans ratio equates to 82 basis points at the end of the third quarter of 2019.

It is important to note that we do have remaining discounts across the purchase loan pools and these discounts provide additional coverage against future losses. Turning to page 11, average total deposits were approximately $8.6 billion and have increased by $477 million versus the third quarter of 2018.

Interest-bearing deposit costs have remained relatively stable, rising by 1 basis point from the second quarter of 2019 as competitive pressures remain. As shown in the graph, the bank has been able to show steady growth of non-interest-bearing deposits as we continue on the -- continued focus on deepening our relationships with our clients.

Turning to page 12. During the third quarter of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability, generating $53 million of pre-tax income during the quarter. Quarter’s results reflect the benefits of growth in national warehouse lending, as well as solid expense reductions versus the prior year.

Total non-interest expenses declined by $14 million versus the prior year period, driven by lower operating cost, the elimination of the loss share expenses in 2018 and lower FDIC premiums.

Of note, third quarter 2018 results included $6.6 million of non-recurring transaction related expenses associated with the acquisition of The Bank of River Oaks in August of 2018. Also during the quarter, the bank did recognized $2.6 million of losses on the sale of certain available for sale securities.

The proceeds of these sales will be fully reinvested in the securities portfolio during the fourth quarter.

The focus of PlainsCapital remains consistent, provide great service to our clients, drive profitable growth, while maintaining a moderate risk profile and delivering positive operating leverage, while balancing revenue, growth and expense efficiency. Turning to page 13.

PrimeLending generated a pre-tax profit of $32 million for the third quarter of 2019, driven by strong origination volumes that increased from the prior year by $1.1 billion or 31%. Gain on sale margins improved, as noted earlier, has strong secondary market conditions supported improved profitability.

While overall volumes had increased the focus on operating efficiencies has not weighed as PrimeLending has maintained solid rigor around staffing, and other middle and back office expenses across the platform.

The focus for PrimeLending is to generate profitable mortgage volume, continued to focus on operational efficiencies and to successfully launch our new mortgage loan origination system. Turning to page 14.

Hilltop Securities delivered a pre-tax profit of $27 million for the third quarter of 2019, driven by solid execution in the structured finance and capital markets businesses, which has benefited from both our ongoing investments in structuring, sales and distribution, as well as improved market conditions.

While activity was strong in the quarter, results from both of these businesses can be volatile as market rates, spreads and volumes can change significantly from period-to-period.

Related to public banking, net revenues grow by -- grew by $3.9 million versus the same period in the prior year and we are continue to invest in our franchise to support long-term growth by strategically hiring bankers to support client expansion and acquisition.

The focus for Hilltop Securities is to grow profitable revenue, optimize operating expenses, managed market and liquidity risk within a moderate risk profiles, and finalize deployment of the new core operating system. Moving to page 15.

National Lloyds recorded a $6.5 million pre-tax profit for the quarter, which reflected a lower frequency and severity of storm activity and claim-related losses. Prudent growth in our core markets remains our primary focus for 2019. Moving to page 16.

For 2019 we are increasing outlook for full year average loan growth to 6.8%, driven by the strong performance in our National Warehouse Lending business year-to-date, with an expectation that balances begin to decline seasonally during the fourth quarter. Full year average deposit growth outlook remains consistent.

Also, as a result of higher loans held for sale balances in National Warehouse Lending balances for the year, we are increasing our net interest income guidance to include 100% growth within the range.

To reflect the strength in our fee businesses, we are adjusting our non-interest income outlook higher to reflect the results during the first three quarters of 2019 and the improvement in market conditions. Our non-interest expense outlook range is projected higher as variable expenses will continue to be correlated through our fee revenue business.

This outlook represents our current expectations with respect to the market rates and overall economic activity. These, however, may change throughout the remainder of the year and we will provide updates as necessary on quarterly calls going forward.

In addition, we would like to provide an update on the projected impact of the adoption and implementation of the new accounting standard for assessing allowance for credit losses, commonly known as CECL.

Based on our current assessment of the credit risk in the portfolio, our expectations of prepayments and our base economic outlook scenario, we estimate the allowance for credit losses, plus the reserve for unfunded commitments will be in the range of $80 million to $110 million.

This compares to the combined reserves as of the third quarter of 2019 of approximately $58 million.

We will continue to assess the credit quality in the portfolio, the current economic outlook assumptions and other factors that will affect this assessment, and the ultimate range throughout the remainder of 2019, as we work towards the January 1, 2020 implementation date.

Operator, that concludes our prepared comments and we will turn the call over to you for the Q&A section of the call..

[Operator Instructions] Our first question comes from Brett Rabatin with Piper Jaffray..

Hey. Good morning, everyone..

Good morning..

How are you doing?.

Good. Happy Halloween. I wanted to talk about the guidance for a second and just thinking about the fee income change versus the expense change.

Can you maybe give us some color on the magnitude of the gain on sale margin compression that you are expecting in the fourth quarter? And then I don’t know when the Q comes up, but was just hoping for, maybe a little color on what servicing interest rate locks and the mortgage servicing a fair value mark are in the third quarter?.

Yeah. So -- this is Will. I will provide some insight. So from a gain on sale perspective, as we noted, it increased and outperformed our expectations for the third quarter, really based on the strength in the overall market.

And from an outlook perspective, we are expecting those margins to contract into the fourth quarter, obviously, as it relates to changes made to the agencies in terms of pricing, as well as just overall competitive pressure as volumes seasonally decline, we would expect that to moving to the 320s, as a matter of contraction..

Okay. That’s helpful. And then just wanted to talk about, obviously really strong performance from the broker dealer and Jeremy you used to kind of call that $100 million revenue quarter business, but you have made a lot of investments and you have seen growth in a couple of the key pieces.

Can you maybe give us color? I know you don’t want to give guidance, certainly, for 2020.

But just thinking about how the investments might impact the revenue run rate from here aside from obviously variability and interest rates impacting a couple of the pieces?.

Sure. Yeah. We are not prepared to give guidance for 2020. But and I would expect and hope that we are going to generate more than $100 million of revenue quarter. I think that we should have continued strength and building strength in our capital markets business and public finance..

Okay. And then maybe just one last one for me, just going back to the margin and you maybe a little more color on, you are going to have pressure from here.

How much can you just thinking about the cost of funds is the magnitude of the pressure you are expecting in the fourth quarter less than 3Q, maybe give us a little more color on how you are thinking about the cost of funds, I mean, offsetting asset yield attrition?.

I think….

Yeah..

Yeah. I think from our perspective, we have gotten in the range of 3.25% plus or minus 3.

So we don’t want to get any more detail than that, what’s driving it though again as we do expect loan for sale, loans held for sale yields to continue to be under pressure is again throughout the third quarter, we did continue to see the 10 year decline and obviously that’s an indicator.

The other parts of this is from a deposit pricing perspective, we are certainly across our competitive set seeing a reluctance to move rates lower at a -- at what I would call an expected pace, given the fed rate declines and so we are, as you would expect continuing to focus on being competitive, while ensuring that we are reducing rates commensurate with market changes as quickly as we can.

But we are seeing a reluctance in the market of deposit rate declines, certainly some of our key competitors across some of our key markets. That -- those will be the two significant drivers of kind of NIM compression going forward..

Okay. Great. Thanks for the color. Congrats on the quarter..

Thanks, Brett..

Thank you..

Our next call comes from Michael Rose with Raymond James..

Hey. Good morning guys.

How are you?.

Hey, Michael..

Good morning..

Hey. Just wanted to talk about mortgage for a second, if I look at the NBA’s data and I know you guys are more pre-purchase shop, but clearly had a pickup in refi this quarter. The NBA’s data calls for a pretty strong refi quarter, understand the gain on sale margin.

But should we expect less of a seasonal decline in your volumes than we have seen, historically, just given the drop in rates in the NBAs forecast? Thanks..

I think the -- I think our outlook would have us outperforming kind of normal seasonal declines in the context of modestly higher, but that said, if you to take the shape of the curve, the fourth quarter will just seasonally be lower. So it’s not -- we don’t expect the fourth quarter volume to look like the third quarter volumes.

They are going to fall off seasonally, but maybe at a slightly slower pace given the strength of the refinances..

That’s helpful. Just shifting gears to loan growth, which has been on the held for investment size has been pretty solid.

Can you just generally talk about your pipeline, where it is now versus maybe kind of quarter ago or a couple of quarters ago, where you are seeing strength and where some challenges might be? And maybe I know the average growth this year to understand the guide but is -- should we think about next year depending on what happens economically that growth can sustain relatively near these levels? Thanks..

Yes. I would say from a pipeline perspective, I think, as we noted in the past, our pipelines are strong. The team is working hard with our clients and prospects every day.

What I would say is the pull-through rate -- our pull-through rate has declined as we have seen market pressures as it relates to both pricing and structure, but I’d say probably more acutely structure, and so we are with a -- from a flow through perspective seeing fewer of those deals actually get booked than you could you might otherwise have seen earlier in the cycle.

So from our view, there’s a lot of activity out there, but the competitive pressures as we have noted and Jeremy noted in his comments do persist and we are seeing again some structural pressure on a lot of transactions, as well as some very intense pricing pressure. As it relates….

Okay..

As Jeremy mentioned, we are not going to provide kind of full year 2020 guidance here. But we continue to say we are going to be focused and rigorous about maintaining our credit underwriting standards as best we can while maintaining competitiveness through the cycle here..

Understood. Maybe just last one for me, so last year you guys earlier this year rolled out the $250 million PPNR by 2021. Now clearly the interest rate backdrop’s changed but mortgage and the capital markets business, the broker dealer has given you a boost.

Understanding all the variables that go into it, is that still a good target at this point?.

I mean, I think, that, like, we have tried to communicate, that $250 million is not the target. The target is generally $84 million of run rate efficiency and that’s what we are going to report on after next quarter..

That’s correct. So what we have said is -- just to be -- what we have said is that with a all else equal 2018 roll forward and the Jeremy point, $84 million is what we expect to be kind of run rate benefit from those initiatives and then we will provide an update. We are keeping orders as it relates to the 2021 year.

But obviously there will be substantial changes to macroeconomic environment other drivers that weren’t in there. But what we are tracking to is how we are executing against the three definitive program we laid out and kind of the value we have extracted from those..

And there’s no changes to those three programs in terms of what do you expect the $84 million?.

No..

None to report..

Okay. All right. Thanks for taking my questions, guys..

Thank you..

Our next question comes from Michael Young with SunTrust..

Hi. Good morning, everyone..

Hi, Michael..

I wanted to start with maybe just a follow-up on the prior question. Just of that $84 million that you are targeting, can you give us a sense of maybe where we are at in terms of progression on that at least to-date. I mean we have seen really good fixed cost reductions throughout the year this year.

So just trying to see how much of that we should expect to continue over the next two years?.

Well, as we said, we rolled it out that we were planning on generating $84 million of run rate benefit from the platform for growth and efficiency initiatives. But we said that, we thought that a lot of that wouldn’t be fully phase until 2021 with the system. Just to put in context for the audience.

But I think it’s just like we said in our comments before is that I believe that we are ahead of schedule. And you see it in the numbers and you are hearing it from a lot of what we are messaging as far as focusing on efficiency.

But I can’t give you anything definitive today or we are not going to give anything definitive today, we are planning on giving you a more fulsome update in the next quarter..

Okay. Maybe just digging in a little deeper, we have kind of seen $1 million or so improvement in the broker dealer and the mortgage business year-over-year it’s been a couple million dollars, but the bank had a material drop in expenses this quarter. I know there is the FDIC assessment credit potentially this quarter.

Can you give us a sense of how much was the assessment credit versus how much is just kind of run rate expense reduction there?.

The assessment credit was approximately $1 million and the -- again of that change that I tried to note in my comments of the $14 million of change, 6.6% of that was related to Board related expenses year-on-year. So we have those integration-related expenses last year that obviously haven’t persisted this year..

Yeah. So I mean, I think to Will’s point, I mean, I think, that there is for the $14 million, a big chunk of it was more in that but there a significant jump there that we give credit to the bank and what they are doing and generating efficiencies. So there is some real core savings there..

Yeah. The $14 million we would -- and I think try to call it out on the slide, of the $14 million we would suggest approximately half to Jeremy’s point is what I call core and recurring and we had about $6 million or $7 million -- we have up to $6 million or $7 million of items in the prior year period..

Okay. And maybe just on the mortgage volume side, you guys really held your own in the refi market this quarter, historically, you have been more of a purchase money shop.

So I was just curious if there had been any shifts in sort of production stance or anything like that that allows you to capture that market share and should we expect that to continue going forward?.

No. There’s not been a change in strategy. I think it’s really just a credit to the folks the loan originators in the field and they were working overtime and tapping into their own customer base and being able to generate a lot of refinance volume when market provided..

Okay. And just last one on M&A appetite and kind of just what you are seeing out there in terms of pipeline.

Have you guys seen any more interest in people looking for cash buyers at this point in the cycle?.

No. We don’t really have any update then we given prior quarters and that we feel like the healthy economic environment, but we are in the later stages of a real estate cycle. We will see intense competition just on deposits and loan side of banking. So we are trying to be patient and cautious.

I do think that with our outperformance on a relative basis, our earnings basis, we are moderately better position and we are seeing -- we are receiving more in downfall..

Our next question comes from Woody Lay with KBW..

Good morning, guys..

Good morning.

Good morning..

So looking at the credit quality side, it was great to see NPAs remain steady outside of energy, are you seeing anything in your markets that are giving you a little bit of pause or any segments you are trying to pull back on at this time..

We continue looks, so as we noted and you noted here in energy is probably the one we would highlight. But as we look across the portfolio, we are focused on multifamily. We are looking at our any retail small retail exposures. Looking at our recent real estate exposure is really across the Texas footprint.

I wouldn’t say anything has systemically created any issues. But again, we do believe that Jeremy just noted and we noted through our comments over time, we believe we are in the late part of the cycle. So we are heightened awareness of kind of looking across the portfolio and doing that inspection..

Good to hear. And then in the prepared remarks, you mentioned you saw some elevated payoffs this quarter.

Just hoping you could quantify that and sort of how those payoffs compared to the last quarter?.

From a payoffs perspective, without kind of -- they were this year -- I will just -- I will quantify more on a year-to-date basis. The payoff large loan, but we would say, kind of over $2.5 million average loan size payoffs this year, year-to-date have almost equated to what we saw last year. So that just gives you a sense of the speed and pace.

And some of that is reflective of, as Jeremy mentioned, a healthy market where things are turning over quickly, but also, I think, reflects a change in certain of the distribution, certain real estate markets where both are taking things to the term markets faster than maybe the mortgage would have otherwise born historically.

So we are seeing a persistent kind of payoff headwind from our loan growth perspective. But again, we continue to watch it as a matter of kind of ongoing new business, and as I mentioned earlier, while our pipelines are strong, we continue to be focused on our underwriting standards..

Okay. That’s helpful color. And then, last from me, you mentioned you got $1 million FDIC credit this quarter.

Do you have any credit going forward or did you receive the full benefit this quarter?.

That is not a recurring benefit..

Okay. Got it. Thanks guys..

Thanks..

Our next question comes from Chris Gamaitoni with Compass Point..

Good morning, guys..

Good morning..

Hi, Chris..

I want to start on the brokerage business, were there any large inventory gains in the structured finance business like you saw in 1Q this quarter?.

Not as much..

Not as much..

Yeah. We had -- we actually had a pipeline mark into the quarter, a negative pipeline mark this quarter just because of kind of where rates ended at the end of about $4 million negative. So there are two quarters -- first two quarters we had positive gains, third quarter we had a, I’d say, a modest negative mark of about $4 million..

Yeah. So most of the strength in the TBA for the quarter was the result of increase in volume of about 30% and then increase in spread..

Okay. And yeah, I know it’s a volatile business, well, this and kind of call it the refinance environment.

But if this more capital-light businesses continue to act well and you are being very conservative on the loan growth side, just what do you do with can be excess capital that’s going to be created if the balance sheet isn’t growing at the same time as earnings are doing so well?.

I think we are trying to stick to our plan. As I said of maintaining about $500 million of excess capital and returning money to the shareholders, the cycle, a dividends, it’s been pretty productive this year and $75 million share repurchase..

Okay. That’s great color. The other -- just a little nuance, looked like the securities borrowed yields went up a lot and the securities loan cost went up a lot as well quarter-over-quarter.

Just wondering kind of what the nuance there and how we think about that going forward?.

The portfolio can be volatile and really is driven by the overall activity and accessibility of certain firm equities in the portfolio and kind of opportunities as those become available. And so we did see an increase in the period, but again, our focus kind of in that business is generally plotted to range in or around $1.5 billion to $1.6 million….

Yeah..

…. over time from a balance perspective..

Yeah. And the net pre-tax benefit of it is $700,000..

Yeah..

Thank you so much..

Thank you..

Thanks..

Our next question comes from Matt Olney with Stephens..

Good morning, guys. This is Adam [ph] on for Matt..

Hi, Matt..

So I wanted to ask on the insurance division, the loss and LAE ratio and the insurance was down 10% year-over-year, you said due to wider storm activity. But if we think about you actually been in kind of in five non-core market or core states during the quarter, what’s a good run rate for that going forward? I know it’s hard to predict, but just..

You are asking what -- I apologize, you didn’t come through very clearly..

Sorry. So the loss and LAE ratio, I -- since we have exited those five non-core markets, is it going to kind of stabilize around a 40% ratio or is it….

Yeah..

… what’s a good combined run rate with this now?.

Well, you know it’s going to be seasonally volatile, but we think there is a loss and LAE ratio for the year should be about -- we want it to be probably in the like 50% to -- low 50%..

Okay. Thank you. That’s helpful. And then I may have missed this, it was asked earlier.

Mortgage banking, 2Q had a $13.5 million fair market gain included, what was that in 3Q?.

We will disclose that when we file our Form 10-Q..

Okay. Thank you. That’s all I had..

All right. Thank you..

As we have no further questions, this concludes our question-and-answer session and also our conference call..

Thank you very much..

Thank you for attending today’s presentation. You may now disconnect..