Good morning, and welcome to the Hilltop Holdings Third Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. 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, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition and anticipated amendments to 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, prepurchase 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 to this presentation, which is posted on our website at ir. Hilltop holdings.com. With that, I will 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 Salmons 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 Prime Lending and the overall Hilltop organization. He is also a dear friend and we look forward to working with him in the future as Chairman. Steve joined Prime Lending in 2011 and has been President since 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'm excited about PrimeLending's prospects and future success under Steve and Todd's partnership.
Now moving on to the financial results. For the Q3 2019, Hilltop reported net income of $79,000,000 or $0.86 per diluted share, representing a $44,000,000 increase compared with the same quarter last year and a $22,000,000 increase compared to prior quarter. Additionally, Hilltop delivered a return on average assets of 2.26 percent and a return on average equity of 15.6%. This quarter, we delivered 20% growth in revenue compared to Q3 2018 and 8% compared to prior quarter. In conjunction with that, non interest expense, excluding variable compensation declined by 8% compared to Q3 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 desk at Hilltop Securities. A strength of Hilltop is our ability to generate significant earnings growth in environments such as these, while remaining grounded with the solid earnings base from Plains Capital Bank, our cornerstone entity. This quarter, average loans held for investment, excluding broker dealer loans, grew by $450,000,000 or 7% compared to prior year Q3.
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 Prime Lending grew to $4,800,000,000 in Q3, an increase from Q3 2018 of 31%, also from strong mortgage refinancing activity. Refinancing volume at prime lending as a percentage of loan origination volume during the 3rd quarter increased from 11% in 2018 to 29% in 2019. Net revenues at Hilltop Securities increased 28% year over year as trading gains in structured finance business grew revenue by $15,000,000 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 1st 9 months of the year, Hilltop has paid $73,000,000 to repurchase 3,400,000 shares of common stock. This includes the transaction in August with Oak Hill Capital Partners to repurchase their 2,200,000 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 16.2% and approximately $500,000,000 in excess capital. For the quarter, criticized loan levels and NPAs remained steady. Moving now to Slide 4.
For the Q3 of 2019, PlainsCapital Bank recorded pre tax income of $52,700,000 an increase of 37% from Q3 2018. Growth in average balances and a reduction in operating expenses drove increased profitability. Of note, the Q3 2018 non interest expense included the Bank of River Oaks transaction related cost of $6,600,000 This past quarter also marks 1 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, upgrade the quality and amount of our lenders and improve the region's profitability by executing on our integration strategy. Loan growth has been pressured by unexpected paydowns.
So 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 underwriting. Prime Lending produced pretax income of 31 $500,000 for the Q3 compared to $4,800,000 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 increased in relation to origination volume, non variable compensation and operating costs declined by $2,800,000 compared to prior year. This was caused by the avoidance of increases in headcount and tightly managed operating costs. Hilltop Securities Q3 2019 pretax income was $27,000,000 and pretax margin was 22% compared to $10,000,000 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 conditions. In structured the TBA business was very active as a result of low mortgage rates.
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 increased. Brad Wingus has come in as Hilltop Security's CEO and made a big impact. While favorable market conditions have 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 pretax income of $6,500,000 for the quarter with a combined ratio of 83% compared to 94% during the Q3 of 2018.
The lower combined ratio is 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 in 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 initiative 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 to walk through the financials.
Thank you, Jeremy. Before we review the financial performance for the quarter, I want to review the disclosure made last evening. Based upon a 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 this controlled efficiency constituted a material weakness as of December 31, 2018. As of the date of the press release, we do not expect this controlled efficiency to result in a restatement of our consolidated financial statements.
We expect to file an amendment to our annual report on Form 10 ks for the fiscal year ended December 31, 2018, and quarterly reports on Form 10 Q for the quarters ended March 31, 2019 June 30, 2019 to include disclosures concerning this material weakness. In addition, we anticipate that the report of PricewaterhouseCoopers on our internal control over 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 in updating its design and implementation of internal controls to remediate the aforementioned controlled efficiency and enhance our internal control environment going forward. I'm moving to Page 5.
As Jeremy discussed, for the Q3 of 2019 Hilltop reported $79,400,000 of income attributable to common stockholders equating to $0.86 per diluted share. During the 3rd quarter, the provision for loan losses included approximately $380,000 of net recoveries as charge offs for the quarter remained low. During the Q3, revenue related to purchase accounting was $7,800,000 and expenses were $1,900,000 resulting in a net purchase accounting pretax impact of $6,000,000 for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions. Regarding loan accretion, as the purchase portfolio balances continue to decline, we expect scheduled interest income related to loan accretion to average between $4,000,000 $6,000,000 per quarter over the next few quarters.
Hilltop's capital position remains strong with a period end common equity Tier 1 ratio of 16.15 percent and a Tier 1 leverage ratio of 12.67%. Moving to Page 6. Net interest income in the 3rd quarter equated to $113,000,000 including $7,900,000 of loan accretion. Net interest income increased $3,000,000 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 Q4 as the mortgage business moves into a more traditional seasonal cycle. Net interest margin equated at 3.45 percent in the 3rd quarter. The pre purchase accounting taxable equivalent net interest margin equated at 3.2%, which declined by 1 basis point versus the same period in the prior year. On a linked quarter basis, taxable equivalent prepurchase accounting, net interest margin declined by 6 basis points resulting from lower yields on loans held for sale and a one basis point increase in interest bearing deposits.
During the Q3, long term interest rates and more directly 10 year rates continued to decline that began earlier in the year. Overall, the average yield on loans held for sale during the Q3 dropped by 46 basis points to 4 14 basis points putting pressure on net interest margin during the quarter. Further, during the Q3, the 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 Q4. As it relates to interest bearing deposit costs, we do believe that the portfolio reached peak levels for this interest rate cycle during the Q3 and will begin to decline at a modest pace over the coming quarters. With the combination of lower loan 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 to the lower end of our outlook range, we are maintaining our full year average pre purchase accounting net interest margin outlook of 3.25 percent 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 and liability flows across the portfolios. I'm moving to Page 7. Total non interest income for the Q3 of 2019 equated to $341,000,000 3rd quarter mortgage related income and fees increased by $52,000,000 versus the Q3 of 2018. During the Q3 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 increased from the prior year period by $975,000,000 to $1,400,000,000 during the Q3 of 2019. Gain on sale margins outperformed our expectations for the quarter as they increased to 3 35 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 $19,000,000 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 volumes.
These businesses continue to realize the benefits of the investments we've been making to improve our structuring 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. I'm moving to Page 8. Non interest expenses increased from the same period in the prior year by $14,000,000 to $350,000,000 growth in expenses versus the prior year were driven by an increase in variable compensation of $34,000,000 at Hilltop Securities and Prime Lending. This increase in variable compensation was linked to strong fee revenue growth in the quarter.
Over the past 6 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 Q3, Hilltop incurred $3,000,000 in costs related to ongoing core system enhancements. Moving to Page 9. Total average HFI loans grew by 6% versus the Q3 of 2018.
Growth versus the same period in the prior year was driven by growth in our mortgage warehouse lending which experienced strong growth in the quarter where ending balances grew by approximately $180,000,000 on a linked quarter basis. Based on year to date average loan growth in the National Warehouse Lending portfolio, current production trends, seasonal and scheduled paydowns, the current competitive environment and our focus on high quality conservative underwriting, we now expect that full year average HFI loans will grow 6% to 8% in 2019. Turning to Page 10. As previously noted and as shown on the chart on the top right of the slide, the bank has maintained solid credit quality through the Q3 of 2019 as non performing assets declined $21,000,000 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 strained.
As it relates to energy lending, total commitments at ninethirty were approximately $285,000,000 and total loan outstanding balances were approximately 2.3% of the bank's total 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 Q3 of 2019. It is important to note that we do have remaining discounts across the purchase loan pool and these discounts provide additional coverage against future losses. Turning to Page 11. Average total deposits are approximately $8,600,000,000 and have increased by $477,000,000 versus the Q3 of 2018.
Interest bearing deposit costs have remained relatively stable, rising by 1 basis point from the Q2 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 to focus on deepening our relationships with our clients. Turning to Page 12. During the Q3 of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability, generating $53,000,000 of pretax 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 $14,000,000 versus the prior year period, driven by lower operating costs, the elimination of lost share expenses in 2018 and lower FDIC premiums. Of note, Q3 2018 results included $6,600,000 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 recognize $2,600,000 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 Q4. The focus at PlainsCapital remains consistent, provide great service to our clients, drive profitable growth, while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue, growth and expense efficiency.
Turning to Page 13. PrimeLending generated a pre tax profit of $32,000,000 for the Q3 of 2019, driven by strong origination volumes that increased from the prior year by $1,100,000,000 or 31%. Gain on sale margins improved as noted earlier as strong secondary market conditions supported improved profitability. While overall volumes have increased, the focus on operating efficiencies has not waned 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, continue to focus on operational efficiencies and to successfully launch our new mortgage loan origination system.
Turning to Page 14. Hilltop Securities delivered a pretax profit of $27,000,000 for the Q3 of 2019, driven by solid execution in the structured finance and capital markets businesses, which have 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 grew by $3,900,000 versus the same period in the prior year and we are continuing to invest in our franchise to support long term growth by strategically hiring bankers to support client expansion and acquisition. The focus for Real Top Securities is to grow profitable revenue, optimize operating expenses, manage market and liquidity risk within a moderate risk profile and finalize deployment of the new core operating system.
Moving to Page 15. National Lloyds recorded a $6,500,000 pre tax profit for the quarter, which reflected a lower frequency and severity of storm activity and claim related losses. Crudy growth in our core markets remains our primary focus for 2019. Moving to Page 16. For 2019, we are increasing the 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 Q4.
Full year average deposit growth outlook remains consistent. Also, as a result of higher loan held for sale balances and National Warehouse Lending balances for the year, we are increasing our net interest income guidance to include 1% growth within the range. To reflect the strength in our fee businesses, we're adjusting our non interest income outlook higher to reflect the results during the 1st 3 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 to our fee revenue business. This outlook represents our current expectations with respect to the markets, rates and overall economic activity.
These, however, may change throughout the remainder of the year and 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 $80,000,000 to $110,000,000 This compares to the combined reserves as of the Q3 of 2019 of approximately $58,000,000 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 the remainder of 2019 as we work towards the January 1, 2020 implementation date. Operator, that concludes our prepared comments, and we'll turn the call over to you for the Q and A section of the call.
Our first question comes from Brett Rabatin with Piper Jaffray.
Hey, good morning, everyone.
Good morning. How is it going?
Good. Happy Halloween. 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're expecting in the Q4? And then I don't know when the Q comes out, but was just hoping for maybe a little color on what servicing interest rate locks and the mortgage servicing fair value mark were in the Q3?
Yes.
So this is Will. I'll provide some insight. So from a gain on sale perspective, as we noted, it increased and outperformed our expectations for the Q3, really based on the strength in the overall market. And from an outlook perspective, we are expecting those margins to contract into the Q4. Obviously, as it relates to changes made at the agencies in terms of pricing as well as just overall competitive pressure as volumes seasonally decline, we would expect that to move into 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 $100,000,000 revenue a quarter business, but you've made a lot of investments and you've seen growth in a couple of the key pieces. Can you maybe give us color, I know you don't want to give guidance early for 2020, but just thinking about how the investments might impact the revenue run rate from here aside from obviously variability in interest rates impacting a couple of the pieces?
Sure. Yes, we're not prepared to give guidance for 2020, but I would expect and hope that we're going to generate more than $100,000,000 of revenue a 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 maybe a little more color on you're going to have pressure from here. How much can you just think about the cost of funds? Is the magnitude of the pressure you're expecting in the 4th quarter less than 3Q? Maybe just get a little more color on how you're thinking about the cost of funds maybe offsetting asset yield attrition?
In the
near term?
Yes. And I think from
our perspective, we've got into the range of 3.25 plus or minus 3. So we don't want to get any more details on that. What's driving it though again is we do expect loan for sale, loan held for sale yields to continue to be under pressure as again throughout the Q3, 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 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 with some of our key competitors across some of our key markets. Those will be the 2 significant drivers of kind of NIM compression going forward.
Okay, great. Thanks for the color and congrats on the quarter.
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 MBA's data, and I know you guys are more of a purchase shop, but clearly had a pickup in refi this quarter. The MBA'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've seen historically just given the drop in rates and the NBA's forecast? Thanks.
I think our outlook would have us outperforming kind of normal seasonal declines in the context of modestly higher. But that said, if you take the shape of the curve, the Q4 will just seasonally be lower. So it's not we don't expect the 4th quarter volume to look like the Q3 volumes. They're going to fall off seasonally, but maybe at a slightly slower pace given the strength of the refinance business.
That's helpful. Just shifting gears to loan growth, which has been on the held for investment side, has been pretty solid. Can you just generally talk about your pipeline, where it is now versus maybe a quarter ago or a couple of quarters where are you seeing strength and where some challenges might be? And maybe I know the average growth this year, understand the guide, but should we think about next year depending on what happens economically that growth can sustain relatively near these levels? Thanks.
Yes. So 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've seen market pressures as it relates to both pricing and structure, but I'd say probably more acutely structured. And so we are, from a pull through perspective, seeing few of those deals actually get booked than 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've 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 to as Jeremy mentioned, we're not going to provide kind of full year 2020 guidance here, But we've continued 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 $250,000,000 PPNR by 2021. Now clearly, the interest rate backdrop has 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've tried to communicate that $250,000,000 is not the target. The target is to generate $84,000,000 of run rate efficiency. And that's what we're going to report on after the next quarter.
That's correct. So what we've said is just to be just what we've said is that was a all else equal twenty 18 of Allport. And to Jeremy's point, the $84,000,000 is what we expect to be kind of run rate benefit from those initiatives. And then we'll provide an update where PPNR is 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're tracking to is how we're executing against the 3 definitive programs we laid out and kind of value we will be have extracted from those.
And there's no changes to those 3 programs in terms of what you expect the 84,000,000
dollars Not in the report.
Okay. All right.
Thanks for taking my questions, guys.
Thank you.
Our next question comes from Michael Young with SunTrust.
Hey, good morning, everyone. I wanted to start with maybe just a follow-up on the prior question. Just of that $84,000,000 that you're targeting, can you give us a sense of maybe where we're at in terms of progression on that, at least to date? I mean, we've 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 2 years?
Well, as we said, when we say we rolled it out that we were planning on generating $84,000,000 of run rate benefit from these platform for growth and efficiency initiatives. But we said that we thought that a lot of that wouldn't be fully phased in until 2021 with eSystem, just to put it in context for the audience. But I think it's just like we said in our comments before is that I believe that we're ahead of schedule and you see it in the numbers and you're hearing it from a lot of what we're messaging as far as focusing on efficiency. But I can't give you anything definitive today or we're not going to give you anything definitive today. We are planning on giving you a more fulsome update next quarter.
Okay. Maybe just digging in a little deeper, we've kind of seen $1,000,000 or so improvement in the broker dealer, the mortgage business year over year. It's been a couple of $1,000,000 but the bank had a material drop in expenses this quarter. I know there was 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 $1,000,000 and again of that change as I tried to note my comments of the $14,000,000 change, $6,600,000 of that was related to borrower related expenses year on year. So we had those integration related expenses last year that obviously haven't persisted this year.
Yes. So I mean, I think to Will's point, I mean, I think that there's so the 14,000,000 dollars a big chunk of it was borrow and that, but there's a significant chunk there that we give credit to the bank and what they're doing and generating those efficiencies. So there's some real core savings there.
Yes, the 14 we would and I think we tried to call it out on the slide, of the 14 we would suggest approximately half to Jeremy's point is what I call core and recurring and we had about $6,000,000 or $7,000,000 we have about $6,000,000 to $7,000,000 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've been more of a purchase money shop. So I was just curious if there have been any shift in sort of production stance or anything like that that allowed you to capture that market share? And should we
just a credit to the folks, the loan originators in the field and they were working overtime and tapping into their old customer base and being able to generate a lot of refinance volume when the market provided
Okay. And just last one on M and A appetite and kind of just what you're seeing out there in terms of pipelines. Have you guys seen any more interest in people looking for cash buyers at this point in the cycle?
We don't really have any update than we've given prior quarters and that we feel like the healthy economic environment, but we're in the later stages of a real estate cycle. We see intense competition just on deposits and loan side of banking. So we're trying to be patient and cautious. I do think that with our outperformance on a relative basis on an earnings basis, we are moderately better positioned and we are seeing we are receiving more inbound calls.
Our next question comes from Woody Lai with KBW.
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're trying to pull back on at this time?
We continue to look, so as we noted and you noted here, energy is probably the one we would highlight. But as we look across the portfolio, we are focused on multifamily. We're looking at any retail, small retail exposures. Looking at our real estate exposures really across the Texas footprint, I wouldn't say anything has systemically created any issues. But again, we do believe, as Jeremy just noted, and we've noted through our comments over time, we believe we're in the late part of this cycle.
So we're 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. I was hoping you could quantify that and sort of how those payoffs compared to last quarter?
From a payoffs perspective, without kind of they were this year, I'll just I'll quantify more on a year to date basis. The payoff large loan value, but we'd say kind of over $2,500,000 average loan size payoffs this year year to date have almost equated to what we saw all of 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 folks are taking things to the term markets faster than maybe the markets would have otherwise borne historically. So we're seeing a persistent kind of payoff headwind from a 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 a $1,000,000 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. Got it. Thanks, guys. Thanks.
Our next question comes from Chris Gamaitoni with Compass Point.
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. Go ahead, Will.
Yes. We had we actually had a pipeline mark at the end of the quarter, a negative pipeline mark this quarter just because of kind of where rates ended at the end of about $4,000,000 negative. So we had 2 quarters 1st 2 quarters, we had positive gains. 3rd quarter we had a modest negative mark of about $4,000,000
Yes. So most of the strength in the TBA the quarter was the result of increase in volumes of about 30% and then increase in spread.
Okay. I know it's a volatile business. Well, this and kind of call it the refinance environment. But if these more capital light businesses continue to act well and you're being very conservative on the loan growth side, just what
do you do with kind of the 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?
Yes, we're trying to stick to our plan, as we said, of maintaining about 500 $1,000,000 of excess capital and returning money to shareholders to the cycle. We've done that dividend. We've been pretty productive this year and $75,000,000 of cherry parts.
Okay. That's great color.
The other just a little nuance. It looked like the securities borrower yields went up a lot and the securities loan costs went up a lot as well quarter over quarter. Just wondering kind of what's the nuance there and how we think about it going forward?
That portfolio can be volatile and really is driven by the overall activity and accessibility of 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 for it to range in or around $1,500,000,000 to $1,600,000,000 over time from a balance perspective.
Yes. And the net pre tax benefit of it is $700,000
Our next question comes from Matt Olney with Stephens.
Good morning, guys. This is Adam on for Matt.
Hi, Matt.
So I wanted to ask on the insurance division. The loss in LAE ratio in insurance was down 10% year over year, you said due to lighter storm activity. But if we think about you exiting kind of the 5 non core market or core stage during the quarter, what's a good run rate for that going forward? I know it's hard to predict, but just
You're asking what's I apologize, you didn't come through very clearly.
Sorry. So the loss in LAE ratio, I know since we've exited those 5 non core markets, is it going to kind of stabilize around a 40% ratio? Or is it what's a good combined run rate with this now?
Well, it's going to be seasonally volatile. But we think that the loss penalty 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 $13,500,000 fair market gain included. What was that in 3Q?
We'll disclose that when we file our Form 2Q. 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.