Good day, and welcome to the Hilltop Holdings 4th Quarter and Full Year 2019 Earnings Conference Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eric Yohi.
Please go ahead.
Thank you. Before we get started, I would like to point out that have filed and posted an updated earnings presentation as of 6 am Central this morning. This updated presentation incorporates information on the sale of National Lloyds Corporation, which was announced earlier this morning. Please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans and financial condition are forward looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties.
Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the cautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website atir.hilltop holdings.com.
With that, I would like to
turn the presentation over to President and CEO, Jeremy Ford.
Thank you, Eric, and good morning. Starting on Page 3, we reported for the Q4 2019 net income of $49,300,000 or $0.54 per diluted share, an increase from the Q4 2018 of $21,200,000 or $0.24 per diluted share. Return on average assets for the period was 1.4% and return on average equity was 9.4%. The 4th quarter was a strong finish to what was a great 2019. Full year 2019 net income equated to $225,000,000 or $2.44 per diluted share.
This was an increase from $121,000,000 or 1 point $28 per diluted share in 2018. Our results reflect the strength of our business model and its ability to be well positioned in an environment such as this, as well as the quality of our people and the work they do every day to drive efficiency and growth. For the Q4, average loans held for investment and average deposits grew by 6% compared to prior year. Loan growth was driven by National Warehouse Lending, the purchase of mortgage loans from Prime Lending, commercial lending in our Dallas and Fort Worth region. Deposit growth was largely driven by our West Texas, Weatherford and Fort Worth region.
At PrimeLending, origination volume increased 48% compared to prior year as the refi market remained strong and the business recorded its best 4th quarter of fundings at $4,400,000,000 Within Hilltop Securities, structured finance, capital markets and public finance delivered net revenues of $71,000,000 an increase of $25,000,000 or 55% compared to Q4 2018. For Q4 2019, structured finance and capital markets benefited from market dynamics that improved notably from the prior year and public finance saw robust activity amongst issuers, which was consistent across the municipal industry. Our strong capital position enabled us to reinvest in platform building initiatives this past year, while also returning $103,000,000 to shareholders through dividends and share repurchases. Additionally, our Board of Directors recently increased our dividend by 12.5% by declaring a quarterly cash dividend of $0.09 per common share payable on February 28, 2020. 4th quarter provision for losses of $7,000,000 reflects $1,300,000 of net charge off, dollars 2,200,000 of impairment related to three-ten-thirty loans and $3,200,000 of updates to the qualitative factors for classified loans and real estate concentration.
When we get into the financial review, Will is going to provide a brief update on the impact and outlook for CECL. As previously disclosed, Hilltop entered into a definitive agreement with Align Financial Holdings for the sale of our insurance subsidiary, National Lloyds Corporation, in a $150,000,000 all cash transaction. We believe this is a compelling transaction for all parties involved. It will allow Hilltop to better focus on our core banking, mortgage and broker dealer businesses as well this is an exciting opportunity for National Lloyds to now grow under align with their experience and insurance focused leadership team. National Lloyds is an exceptional company with talent employed, longstanding agency relationships and proven financial results in a niche insurance market.
I'm very proud of the work and accomplishments we achieved during our ownership. We currently expect the transaction to close in the Q2 of 2020, subject to customary closing conditions, including required regulatory approval. Moving to Slide 4. The bank's pre tax income was relatively flat, a $7,000,000 decrease in purchase accounting accretion was offset by expense improvements in the business during the quarter. There has been a lot of positive work done at the bank to improve the efficiency ratio, and this was reflected with the lower professional and business development An increase in mortgage volumes of $1,400,000,000 and stable fixed costs offset a 30 basis point decline in gain on sale margin and resulted in pre tax income for the period of $8,500,000 an increase of $11,200,000 from Q4 2018.
The decline in gain on sale margin is attributed to pricing actions taken by the agency and production volume retained at PlainsCapital Bank. This has been an extremely strong year for PrimeLending, and I want to commend the leadership and loan officers for their stewardship and hard work. Hilltop Securities demonstrated solid financial results in the 4th quarter with pre tax income improving to $24,000,000 on net revenue of $113,000,000 a 21 percent pre tax margin. Notably, the strong quarter demonstrated improvements in nearly all business segments, while Brad and his team actively build the brand, post conferences and increase our advertising effort. National Lloyds had a positive 4th quarter.
Less severe storm activities in the prior year drove a loss in LAE ratio of 43.6 percent in Q4 2018. Overall, results at National Lloyds have improved as our strategy to exit non core states and commercial lines of businesses is substantially complete. Moving to Slide 5. We recently completed the 1st year of a 3 year program that includes a broad set of initiatives to enhance our platform and streamline operations with the goal of lowering operating costs and building a foundation for future organic and acquisitive growth. Through year 1, we have completed actions that have resulted in $45,000,000 in benefits and are on track to meet our $84,000,000 target by the end of 2021.
We have already mentioned the improvements made in streamlining our mortgage operations and have seen the results of those efforts in 2019. Further, we are in the deployment phase of our new loan origination system at PrimeLending that will continue to drive efficiencies while also giving our loan originators better tools to service their customers. In 2018, we began investing in the build out of our securitized product asset Hilltop Security. And through the business unit, we have been able to better react and earn from the favorable mortgage environment in 2019. The procurement work that started in 2019 has enabled us consolidate existing contracts across the enterprise as they come due and realize cost saves.
We have recently started work on our larger IT and real estate contracts and are optimistic in the potential for savings to be had over the next 2 years. Our back office has been through a lot of change with the creation of a shared services platform to support IT, HR, legal, real estate and other key functions across the organizations. While our shared services departments continue to mature, we have already been able to reduce redundancies, improve consistency and enhance scalability. Overall, 2019 was a fantastic year for Hilltop, both financially and organizationally. We transitioned through substantial succession planning and the organization has done an amazing job of working together to deliver on our goals.
We now enter 2020 with strong momentum and focus. With that, I will turn the presentation over to Will to walk through the financials and provide an outlook of 2020.
Thank you, Jeremy. I'm now moving to Page 6. As Jeremy discussed, for the Q4 of 2019, Hilltop reported $49,300,000 of income attributable to common stockholders equating to $0.54 per diluted share. For the full year of 2019, Hilltop reported $225,000,000 of income attributable to common stockholders, which equated to $2.44 per diluted share. Full year results reflect a 91% increase in diluted EPS versus 2018 results.
During the 4th quarter, the provision for loan losses of $6,900,000 included approximately $1,300,000 of net charge offs, impairments related to certain previously acquired loan pools and ability overall amounts to reflect both concentration risk and negative credit migrations in the credit portfolio during the quarter. During the Q4, revenue related to purchase accounting was $5,700,000 and expenses were $1,700,000 resulting in a net purchase accounting pre tax impact of $3,900,000 for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions. Hilltop's capital position remains strong with a period end common equity Tier 1 ratio of 16.69% and a Tier 1 leverage ratio of 12.71 percent. Turning to Page 7.
Net interest income in the 4th quarter equated to 111,000,000 dollars including the $5,700,000 purchase accounting accretion previously mentioned. Versus the prior year quarter, net interest income decreased by $6,400,000 or 5%. The decline in net interest income was driven by a decline in purchase accounting accretion of $7,000,000 versus the Q4 of 2018. Further, versus the prior year period, both average HFI loan yields and average HFS loan yields have declined by 66 and 75 basis points respectively. These declines in loan yields reflect both the lowering of rates by the Federal Reserve during 2019 and ongoing competitive pressure for new loan originations.
Interest bearing deposits deposit costs increased 13 basis points versus the prior year period, but peaked during Q3 2019 and declined by 12 basis points on a linked quarter basis. We expect the deposit costs will continue to decline in 2020, albeit at a slower pace than the asset yields noted earlier. Somewhat offsetting the compression of net interest margin has been growth in both the loans held for investment and loans held for sale portfolios. As we have mentioned on prior update calls, our mortgage related loan portfolios have shown significant growth versus the prior year, principally driven by lower rates and strong mortgage origination volumes. During the 4th quarter, loans held for sale increased by $628,000,000 versus the same period in the prior year and National Warehouse Lending Business experienced growth of $334,000,000 both on an ending balance basis.
Both of these loan portfolios were positively impacted by the favorable mortgage conditions and higher production levels during the quarter. We do expect that both of these portfolios, loans held for sale and National Warehouse Lending, will begin to decline during the Q1 of 2020 as the mortgage related businesses move into a more traditional seasonal cycle. I'm moving to Page 8. Total non interest income for the Q4 of 2019 equated to $299,000,000 4th quarter mortgage related income fees increased by $40,000,000 versus the Q4 of 2018. During the Q4 of 2019, the environment in mortgage banking remained strong and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates, which drove improved demand for both refinance and purchase mortgages.
Versus the prior year, purchase mortgage volumes increased by $371,000,000 or 14% and refinanced volumes increased by $1,100,000,000 or 2 75%. While volumes during the quarter were strong, gain on sale margins were compressed as the impact of pricing changes by market participants and an increase in loans retained on the balance sheet at PlainsCapital Bank reduced margins by 30 basis points. While we expect gain on sale margins could be somewhat volatile during 2020, we expect margins to move within a range of 310 to 3 20 basis points, assuming market conditions remain consistent throughout 2020. Other income increased by $20,000,000 driven primarily by improvements in sales and trading activities in both capital markets and structured finance businesses at Hilltop Securities. Favorable market conditions resulted in a 22% increase in structured finance mortgage backed securities volumes versus the prior year period.
These businesses continue to realize the benefits of the investments we've been making to improve our securitized product structure, sales and distribution capabilities since the Q3 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. Turning to Page 9. Noninterest expenses increased from the same period in the prior year by $26,000,000 to $337,000,000 The growth in expenses versus the prior year were driven by an increase variable compensation of approximately $30,000,000 at Hilltop Securities and Prime Lending. This increase in variable compensation was linked strong fee revenue growth in the quarter compared to the prior year period.
Over the past 7 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 service costs and marketing and development expenses continue to trend lower as we make progress against our efficiency initiatives. During the 4th quarter, Hilltop incurred $5,000,000 in costs related to the ongoing core system improvements. We are moving into the final stages of implementation of the new loan origination system at PrimeLending and are making significant progress on implementing new core system in Hilltop Securities and the enterprise wide accounting system across Hilltop. Turning to Page 10.
Total average HFI loans grew by 6% versus the Q4 of 2018. As previously noted, growth versus the same period in the prior year was driven by growth in our mortgage warehouse lending business and growth in the real estate portfolio. Loan yields have declined throughout 2019, which is partially the result of lower purchase loan accretion. In addition to lower accretion, yields have declined as the floating rate portfolio, which represents 62% of the
bank's loans,
excluding internal funding lines, resets to lower market rates. Further, newly originated fixed rate loans are lower yielding than the loans they are replacing. As was the case in the prior down rate cycle, we continue to have contractual rate floors in our standard loan agreements. And as of Twelvethirty Onetwenty 19, PlainsCapital had approximately $1,800,000,000 of commercial loans priced at their floors. While these floors can be renegotiated at renewal or at other contractual periods, they provide some protection against lower market rates over time.
Turning to Page 11. During the quarter, net charge offs remained low and equated to $1,300,000 or 8 basis points of total HFI loans. As noted during the Q3 and with the trend continuing into the 4th quarter, we are seeing deterioration in the energy portfolio and as a result, we moved approximately $30,000,000 of energy sector loans to criticize during the quarter. As it relates to the energy lending, total commitments at twelvethirty one were approximately $216,000,000 and total loans outstanding balances were approximately 2.2% of the Bank's total loan HFI portfolio or $150,000,000 While the market for credit remains very competitive, we remain focused on prudent growth, managing our existing portfolio and executing within a moderate credit risk profile across Hilltop. Turning to Page 12.
4th quarter average total deposits are approximately $8,900,000,000 and have increased by $525,000,000 or 6% versus the Q4 of 2018. While competitive pressure is intense, we remain focused on continuing to expand our deposit base with existing clients, acquiring new clients and lowering overall deposit costs in the portfolio. As is shown in the graph, the bank has been able to deliver growth in non interest bearing deposits, which increased by $209,000,000 or 8% versus the prior year period on an ending balance basis. Moving to Page 13. During the Q4 of 2019, Plains Capital Bank continued to demonstrate solid profitability, generating $41,000,000 of pretax income during the quarter.
The quarter's results reflect the benefits of growth in National Warehouse Lending as well as solid expense reductions versus the prior year. Further, during the 4th quarter, PlainsCapital retained approximately $100,000,000 of mortgage loans originated at PrimeLending and may retain up to 5 percent of the total origination volume from PrimeLending during 2020. During 2020, mortgage loan retention levels will be determined through an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and our outlook for commercial loan growth. Total non interest expenses declined by $5,000,000 versus the prior year period, driven by lower operating costs and the absence of onetime borrower related expenses. Further, the 4th quarter expenses include approximately $2,000,000 of costs related to real estate actions aimed at reducing long term costs across the footprint.
The focus at PlainsCapital remains consistent, provide great service to our clients, deliver profitable growth while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue growth and expense efficiency. I'm moving to Page 14. PrimeLending generated a pre tax profit of $8,500,000 for the Q4 of 2019, driven by strong origination volumes that increased from the prior year by $1,400,000,000 or 48%. As noted earlier, gain on sale margins compressed during the Q4. However, we do expect that margins will begin to recover during 2020.
While overall volumes were elevated in 2019, the focus on operating efficiencies has not waned as PrimeLending has maintained consistent rigor around staffing and other middle and back office expenses across the platform. Our focus for prime lending is to generate profitable mortgage volume, continue to focus on operational efficiencies and execute the successful launch of our new mortgage loan origination system. Moving to Page 15. Hilltop Securities delivered a pre tax profit of $24,000,000 in the Q4 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 and 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 grew by $5,000,000 versus the same period in the prior year as we continue to invest in our franchise to support long term growth by strategically hiring bankers to support client expansion and acquisition. Our focus for Hilltop Securities is to grow profitable revenue, optimize operating expenses, manage market and liquidity risk within a moderate risk profile and finalize the deployment of the new core operating system. Turning to Page 16. National Lawyers recorded $7,000,000 of pre tax profit for the quarter, which reflected a lower frequency and severity of storm activity and claim related losses. Please note that Q4 2018 results include the impact of Hurricane Michael, which contributed $6,200,000 of losses during that period.
Related to the transaction announced today, at twelvethirty onetwenty 19, National Lloyd's book value equated to $114,000,000 goodwill equated to $24,000,000 and other intangibles equated to $3,500,000 As noted, we expect that this transaction will close during the Q2 of 2020. I'm moving to Page 17. Our financial priorities for 2020 remain centered on executing our platform growth and efficiency initiatives, delivering prudent growth across our businesses while maintaining a moderate risk profile and delivering long term shareholder value. Please note the outlook included in our release and comments below do not include any impacts related to the sale of our insurance business that was announced previously. We expect that this transaction will close during the Q2 and we will provide updates to our full year outlook in the quarterly review after closing.
For 2020, we expect full year average loans HFI to grow between 4% 6%. This growth reflects our expectation at National Warehouse Lending Business loan balances decline as the mortgage market stabilizes at lower origination levels. Full year average deposit growth outlook of 4% to 6% is consistent with 2019 performance levels as we remain focused on growing low cost deposits across our franchise. We are moving away from net interest margin outlook and focusing on stabilizing net interest income given the current environment. Our net interest income outlook reflects our current view that rates remain relatively stable with current levels and we are not projecting further movements by the Federal Reserve in 2020.
Further, as the balances of our previously purchased loan portfolios continue to decline, we do expect purchase accounting accretion to decline 20% to 30% versus 2019 levels. During 2019, our fee businesses delivered solid results as we were able to take advantage of strong market conditions. As we evaluate our fee businesses, we are expecting a lower level of mortgage related activity during 2020 as the mortgage market stabilizes. Overall, we expect non interest revenue levels to decline by 6% to 8% versus the 2019 reported levels. As a result of these declines in non interest revenues, we expect that non interest expenses will also decline versus the 2019 levels by 1% to 3%.
This outlook includes the ongoing investments in our core system enhancements. While credit costs have remained low over the past few years, we are expecting net charge offs to HFI to average HFI loans to increase in 2020 to between 1525 basis points. While this is an increase versus 2019 levels, we believe this continues to reflect a solid economy, improving credit management across the Hilltop portfolios. Lastly, on January 1, 2020, we did adopt a new accounting standard for loan losses commonly referred to as CECL. We are updating our range for the potential day 1 impact to $80,000,000 to $100,000,000 As noted previously, we are providing outlook on net charge offs to HFI loans and not provision expense in 2020.
We do expect that the quarterly results of allowance for credit loss could provide a wider range of potential outcomes on a quarterly basis as macroeconomic, loan prepayment and other key assumptions are updated throughout the year. Operator, that concludes our prepared comments, and we'll turn the call over to you for the Q and A section of the call.
Thank you. We will now begin the question and answer session. Our first question comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
So just to be clear, the 2020 outlook on Slide 17, that does not include any of the impact of the sale of the insurance company?
That is correct.
Okay. And when do you guys expect to update the outlook to be more in line with the sale of the insurance company?
We are expecting a second quarter close of the transaction announced. And once the transaction has closed in the quarterly update call, after that, we will update full year guidance.
Okay. And so I appreciate the math on the capital levels at National Lloyds. It looks like you have about $86,500,000 of tangible capital there. So that puts the tangible gain at about 63,500,000 dollars So that $63,500,000 gain, is that taxed?
Well, we would push towards, we've got a book gain. So you take the entire book value versus the price, understanding as acknowledged in the disclosure that we do have closing price adjustments that could occur. That said, the book gain, we do not expect to be taxable.
And the book gain is the 150 minuteus the 114 book value?
That's correct.
Yes. So the $36,000,000 of book gain, not tax.
Not tax.
And then the other roughly $30,000,000 of gain would be taxed?
No. That's I mean, that's you're trying to subtract it from a tangible book value number, which is not technically GAAP. We have a stated book value that includes $27,000,000 of goodwill and intangibles of $114,000,000 So our book gain is difference between the purchase price of $115,000,000 minus the stated book value of $114,000,000 And given the tax situation and we kind of have a range above and below book value, but in this range, it's not tax. It's not a taxable transaction for us.
So maybe to ask the question a little simpler. What's the impact to tangible capital from this transaction?
Sure. So with this, we expect it will be accretive to tangible book value per share by 4%. And we think it's going to be diluted to earnings by 6%. And we think that it will be an increased excess capital of $120,000,000
Okay. All right. That's helpful. And then how do you think about the buyback as it relates to that inflow of excess capital?
We're going to think about it. But right now, I'm very pleased with this transaction. I think it's great for both parties. I think we found the right buyer a great team that can really take National Oil to a level that we frankly weren't going to be able to. And it's going to be great for employees the future there.
And we're going to work hard with them as we have been. We're going to work hard with them over the next few months to get this closed because it's got to go through the Texas Department of Insurance regulatory approval. And during that time, we'll clearly be thinking about what how to invest the money.
All right. And then finally for me, 2019 was a great year for the broker dealer. I mean, the pretax margin pretty much doubled from 10% to 20%. How do you think about the pretax margin and the broker dealer as we look into 2020?
Well, I think it's similar to just kind of the broader guidance we're trying to get out of the gate here is that we had a tremendous 2019 and there's a lot of work and a lot of credit that should be given to the organization for it, but there was a lot of mortgage tailwinds too. So we kind of want to be a little cautious about that at this time. So as now it's coming out of the gate being early, I would assume that we're going to try to make about $400,000,000 of net revenue and kind of low to mid teens pretax mark.
All right, great. Thanks guys.
Thank you.
Our next question comes from Michael Rose with Raymond James.
Just following up on your comments, Jeremy, you said dilutive to earnings by 6%. Is that in the first year? And then I guess my question is, as it relates to the outlook, right? So the guidance that you've laid out implies negative operating leverage, which fully understand given the purchase accounting accretion, the mortgage is not going to repeat. We understand that.
But with that additional 6% dilution to earnings from the sale of National Lloyd's, do you think you can actually generate positive operating leverage in 2021? And how does that relate to the goals that you've laid out? Basically asking how can you make up the earnings to get to the 84,000,000 dollars of improvements by the end of in PPNR by the end of 2021? Thanks.
Okay. Thanks. Well, first of all, that's an LTM number as far as the EPS dilution. And that's based on fact that the company made $14,000,000 last year and then on a consolidated basis, we made a little over $200,000,000 So that's that. But National Lloyds was quarterly volatile, annually profitable and produced good margins.
So we're going to be without those earnings. And that's going to be just an earnings thing. Now how that relates back to the platform initiatives, the $84,000,000 still holds. And there might be some areas we marginally don't have to have as much coverage, but I think that the $84,000,000 still holds and we're going to continue to execute on.
Okay. And then can you just kind of talk about the timing of the sale? I mean, it's been speculated that you guys have looked at selling this on and off over the years. The $36,000,000 book gain seems to kind of match up with the CECL adjustment that you guys are expecting. Did that drive the decision to kind of hit the bid here at this point?
Thanks.
No, we're not that coordinated. This has been something where we've obviously, we feel like this is not a core asset for the long term future. We have really been trying to do a lot to improve it and put it in a good position that it was attractive. And that's really what led to the timing here. And thankfully, I always thought it'd be if we find the right buyer that could really take this to the next level, it would be great for everybody.
Okay. And then maybe finally for me, if I take the loans held for investment average full year average growth outlook, it implies, if I'm doing my math right, kind of a low single digit period end health for investment growth rate. I guess what's driving that outlook? I thought it would have been stronger just given the relatively solid market dynamics in your footprint?
I think we are, as we've stated, we are
going to
be prudent around commercial loan growth. We do believe and have continued to believe we're moving towards the end of this cycle and into the next portion of the cycle. So commercial loan growth will be a focus of ours, but we will be prudent around that. Second piece is National Warehouse Lending, which we've stated provided outsized growth in 2019. We do expect to decline in 2020 as we've noted in our guidance across the board.
We do expect mortgage activity to decline to more normal levels in the current environment. And then lastly, we do anticipate retaining loans from the prime lending business as they originate them on the balance sheet, but we will evaluate that as I noted in my comments against our commercial loan outlook as well as market rates and return as well as balance sheet positioning. So that's the way we're thinking about it. Okay.
Thanks for taking my questions.
Thank you.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, great. Thanks. Good morning. I wanted to follow-up on the discussion around mortgage. I think you note your expectations in the guidance for mortgage volumes to be down 5% to 10% in 2020 versus 2019.
And I get that the visibility is limited in the business, but are there any data points you can provide to us more near term? In other words, are you already seeing volumes down 5% to 10% in early 2020 versus early 2019? Or are you just trying to give us a conservative forecast for slowing volumes sometime later in 2020?
Well, I think what we're expecting there is that we will the market is going to return back to the normal seasonal trend. And again, Q4, as we noted, yielded performance. So we are expecting kind of Q4 of 2020 to return to a normalized level. We're not going to give kind of quarter by quarter guidance on mortgage. It can be volatile.
We do acknowledge that the 10 years rallied here just in the month of January. So obviously that will move around. That said, the 10 year has been within the range 160 to 190 basis points here over the past couple of months and quarters. So again, we're not going to do quarterly guidance on it. But as we think about it, we view it as a more traditional bell shaped curve year where Q1 and Q4 are generally softer than Q2 and Q3.
And we do expect that we received the market was just stronger last year than we expect this year to be and again by the 5% to 10% output range.
Okay, got it. And going back to discussion around the bank retaining a portion of the mortgage loans from Prime, Will, can you just review those numbers again that they've retained in 2019? And I think you said $100,000,000 in the Q4. And what was the expectation for 2020? And also just review the strategic rationale behind this.
Are you trying to protect against falling rates? Or is there something else beyond that?
Well, we just to be clear, we have retained loans from Prime for a number of years. So this is not a new strategy. I will say the volume of the retention is potentially increasing. As I noted in my comments during Q4, we did retain about $100,000,000 during the period. And from an asset liability perspective, we are looking to retain up to 5% of Prime's origination volume in 2020.
Now the drivers of that would be the mix, whether it be hybrid arm products, jumbo products, 30 year products, so the mix will matter. The prevailing market rates will also matter and also our outlook for commercial loan growth. So as we think about it, we are looking to position the balance sheet with a little more fixed rate exposure, not an overwhelming amount of fixed rate exposure, but a little more fixed rate exposure. And we think this objective helps us do that throughout 2020. But again, we'll provide an update every quarter on what was retained.
But again, relative to Prime's overall production, we will be only up to 5%. So they will be selling 95 percent plus of their origination volume.
Okay, got it. And then my last question, I guess, with the pending sale of the insurance company, does this signal anything? I'm trying to understand if we should interpret that you're feeling better about your ability to deploy excess capital, which is already robust, and I think around $500,000,000 currently?
Yes. That's not there's no exact signal. This is just something over time we thought that the National Debt wasn't really core and does not the synergistic fit to the other business. And this will allow us to really focus more on those three businesses and grow them.
Okay. Thank you.
Our next question comes from Chris Gamaitoni with Compass Point. Please go ahead.
Good morning, everyone.
Good morning.
Can you help me understand what the $45,000,000 of PPNR benefit means? Does that mean is that the total amount of benefit in the year or is that the end run rate cost, I'm unclear?
That's the year end run rate benefit of actions that have been executed to date.
All
right. Can you help me understand your expense guidance? Just if I take 5% to 10% down on mortgage business and I just assume the 5% to 10% decline on the variable mortgage comp in relation to lower production volume, it gets me to a 2% reduction in the overall company expense base. I would think that there'd be a year over year benefit just rolling through for next year of actions that were completed throughout the year. So I'm kind of struggling with the expense, guys.
Yes. So
the way to think about it is, first, we are as we noted, 1 year into a 3 year program. And so we've got a number of things, confluence of things occurring. Number 1 is we have put systems into service and are starting to recognize the depreciation and amortization related expenses related to those, while we're continuing to work through achieving the benefits as designed. We also for 2020 expected the overall expense on our new projects and programs to be modestly higher than what you saw in 2019, which was approximately $13,000,000 So by virtue of that, those 2, we are still making substantial investments in our deployments in 2020 as we've guided we would be and we expect that to happen. From there, there's also with the mortgage business and the remixing, potential remixing of our fee revenue businesses and the declines in gain on sale in the mortgage business, while revenue can be coming down because those gain on sale margins have compressed and we've got it, they will be compressed.
We don't compensate in the mortgage businesses on profitability, but rather on production. So that will be an overall compression, if you will, from a revenue versus expense basis. And then lastly, we've got the traditional headwinds of inflationary related costs in our business that we are also recognizing in 2020, both in terms of compensation expense as well as real estate and other inflationary costs that you normally have. So we factored all of those through, including the expected spend related to our to the ongoing deployment of our core systems, And that's how the 1 to 3 was derived.
All right. That makes sense. And then can
you give us any update on how you think the cadence of realizing the remaining PPNR benefit will happen? Is it all 2020 base? Is that all back loaded into sorry, I mean 2021, is it all back loaded in 2021? Just any type of idea of kind of the progression you expect?
Without giving you kind of quarter by quarter, the way to think about it, a large portion of the remaining benefit is tied to the deployment of these remaining core systems and that is the final deployment of our loan origination system, which as Jeremy mentioned, is well underway in that process. The deployment of our system operating platform at the securities business, which we do expect will occur during 2020. And then the final deployment of our accounting platform across Hilltop, which will in earnest go throughout the year 2020 and into 2021 as a deployment matter. So those large expense pools and savings will be tied directly to the final deployments of those platforms. But from our perspective, we are well underway and making really good progress in getting those deployed.
And then there will be modest actions taken throughout the year 2020 to continue to improve our run rates and we'll capture those and try to present those as they occur.
All right. Thank you.
Thank you.
Our next question comes from Michael Young with SunTrust. Please go ahead.
Hey, good morning, everyone.
Good morning.
I wanted to ask a couple of quick follow ups on the insurance business. Just one, are there any tangential relationships from the insurance business to any other businesses or even the corporate and other segment where we might see impacts outside of just the insurance segment?
Not really, no. It's being a standalone financial segment generally encompasses the costs related to that franchise.
Okay. And then second, just given the timing of the deal close, that's usually kind of right around the, I guess, peak of the storm season. Are there any risk factors to closing or any adjustments that could happen as a result of it being a better or worse storm season?
Yes. We're going to so we agreed on a price of $150,000,000 and then we are to deliver $76,000,000 of tangible book value and to the extent there's more or less than we retain that. So if we make earnings, we'll retain that dollar for dollar. If we have a storm and a loss, then we have that liability.
Michael, I think what's important is we up until closing, we are running this business as a business as usual matter and we have all the exposures that are commensurate with that.
Okay. Thanks. And just as I think about kind of balance sheet growth holistically for the year, I mean, is it still right to think of it in kind of that 4% to 6% range? And then I guess a derivative of that, I know obviously the warehouse balances finished the year much higher than normal and much higher seasonally in 4Q on an average basis as well. So I'm just trying to think about total balance sheet growth next year, both the size and sort of the cadence, I guess, of how that moves forward?
Yes. So I think as we guided, we expect loans will be growing 4% to 6%. However, kind of other assets on the balance sheet, securities portfolios and the like, we wouldn't expect to have the same growth rate. So total assets would grow in the low single digit range as a matter of kind of aggregate asset growth.
Okay. That's it for me. Thanks.
Thank you.
This concludes our question and answer session. And the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
Thank you.