Good morning, and welcome to the Hilltop Holdings Third Quarter 2018 Earnings Conference Call. 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 Isabel Novikov.
Please go ahead.
Good morning. Joining me on the call this morning are Jeremy Ford, President and Co CEO Alan White, Vice Chairman and Co CEO and Will Furr, CFO. 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 business strategy, acquisition, 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 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. And now, I would like to hand the
presentation over to Jeremy Ford. Thank you, Isabel and good morning. For the Q3 2018, we reported net income of $35,800,000 or $0.38 per diluted share, which represents a $5,600,000 increase compared with the same quarter last year. This quarter's results are representative of our focus on disciplined growth, asset quality and value creation. As part of our diversified growth and disciplined M and A strategy, we successfully completed the Bank of River Oaks transaction.
The conversion and integration is now nearly complete and early financial results are ahead of expectations. Importantly, the performance of our recently integrated team and the pipeline of new opportunities give us confidence in our Houston presence. This quarter net interest income grew 5% versus prior year despite declining accretion as we saw NIM expansion and a ten percent increase in our overall loan portfolio. Non interest expense decreased $18,000,000 or 5% versus Q3 2017 driven by lower losses in the insurance business and reduced operating and compensation expenses from lower volumes in the mortgage business. Through the 1st 9 months of the year, we have returned $58,900,000 in dividends and share repurchases to stockholders.
Under our Board of Directors approved share repurchase program $61,200,000 remains available through January of 2019. Additionally, our Board of Directors declared a quarterly cash dividend of $0.07 per common share payable on November 30, 2018. Our consistent focus on asset quality through established client relationships and sound underwriting was highlighted this quarter as non covered non performing loans fell to 44 basis points of total non covered loans and year to date net charge offs were only $1,600,000 The insurance business recorded a loss in LA ratio of 54.7% for the 3rd quarter as a result of less severe storms in its geographic footprint, down from 90.6% during the same period prior year which included the impact of Hurricane Harvey. During the quarter, we had 4 significant items to call out including transaction expenses associated with the Bank of River Oaks acquisition, settlements with both the Department of Justice and the FDIC on different matters and costs related to the execution of an efficiency initiative in our mortgage business. We believe these changes in our mortgage business will put us in a better position given the current competitive environment.
Moving to Slide 4, for the Q3 2018 our banking and insurance business units reported strong results. Although income from our mortgage and broker dealer segments were down versus prior year, both showed signs of fundamental improvement. Banking results included 2 aforementioned non recurring items. First, dollars 6,600,000 in transaction expenses associated with the Bank of River Oaks acquisition and second approximately $700,000 in expenses related to the settlement and termination of the FDIC loss share agreements. Notwithstanding those items, the business delivered solid year over year deposit and loan growth in a very competitive market.
Additionally, the bank saw NIM expansion and improvement in the quality of its loan portfolio. This was a challenging quarter for mortgage originations as we saw volumes decline 8% compared to the same period prior year. We experienced some stabilization in gain on sale margins, but we believe they will remain under pressure in the Q4. As mentioned previously, PrimeLending is taking actions to improve its business in the face of this tough market. Hilltop Securities pretax income declined year over year partially driven by lower public finance issuances.
On a linked quarter basis, we did see improvement in structured finance margins as net revenue grew $9,300,000 Our insurance business had a good quarter largely due
to mild weather across the
State of Texas. We have also moderated expenses and for the 3rd consecutive quarter our expense ratio was under 40%. Moving to Slide 5, as a brief update the Bank of River Oaks existing systems were converted to PlainsCapital Bank's core platform early in Q4. Signage and employee onboarding has been completed at the legacy locations. We are on track to realize the 30 percent cost saves target previously outlined and substantially all of the synergies will be realized in the 4th quarter.
Additionally, we have hired 2 senior loan officers and 1 treasury management professional to build out the Houston team. With the integration almost complete, we are now able to leverage our improved brand presence, larger lender base and new leadership team to drive loan and deposit growth. And we have already seen momentum in loan and deposit opportunities over $10,000,000 So overall, we're excited about the catalyst this has been for us in the Houston market and we believe the opportunity for further growth is significant and achievable. Moving to Slide 6. A strategic objective of ours is to enhance our platform and streamline operations with the goal to lower operating costs and build a foundation for organic and M and A growth.
We are currently executing on a broad set of initiatives that over time will deliver on this objective. The 3 primary areas of focus are current business operations, procurement and strategic sourcing and the build out of a shared services organization at the holding company. Key projects include the core system enhancements at Prime Lending and Hilltop Securities. Once implemented, these will both reduce operating costs and enhance our client experience. We are also in process of moving towards a single procurement platform for the entire enterprise, which will enable us to better leverage the buying power of the organization.
We believe there are significant cost saves associated with this and have experienced early success with the consolidation of travel providers already this year. We are also in the process of leveraging shared services where it makes sense in our functional department. Areas such as IT, real estate, HR, finance and legal are all in different phases of this project. And in addition to cost saves, we believe the shared services model will help us better maximize the capabilities of our people. These enhancements are based on the long term view we take in the management of our company.
As such they require significant amount of work and time to plan and execute before realizing the benefits. We will provide further details around these initiatives including future savings as we continue to make progress and results come into view primarily in 2019 2020. I will now turn the presentation over to Will to walk through the financials.
Thank you, Jeremy. I'll start on Page 7. Please note that all results, unless specifically noted otherwise, include 2 months of contribution from the Bank of River Oaks acquisition as the closing of the transaction occurred on August 1, 2018. Further, any guidance also includes consideration for the acquisition. As Jeremy mentioned, Hilltop reported $35,800,000 of net income equating to $0.38 per diluted share.
The diluted EPS has improved versus the 2nd quarter by 0 point 0 $3 or 9% and $0.07 or 21% versus the same period prior year. Hilltop's 3rd quarter results include a number of significant noninterest expense items that total approximately $11,000,000 on a pretax basis. These items represent transaction related expenses related to the closing and integration of BORO, the impact of the negotiated settlement with the DOJ and HUD and certain one time charges related to the exit of underperforming branches and a targeted staff reduction in the mortgage business. In addition, based on the agreed upon settlement with the FDIC related to our loss share agreements, we recorded approximately $700,000 of noninterest expense to reflect the final amortization related to the FDIC Indemnification asset. This expense is included in the purchase accounting and FDIC impact portion of the chart on the right and in the purchase accounting impact section on the financial table.
Related to the DOJ and HUD settlements and the agreed upon FDIC settlement, we do not expect further financial costs in future periods. As we complete the integration of the Bank of River Oaks and further optimize our businesses to align with the current market conditions, we may incur additional one time charges in the future. During the quarter, Hilltop's provision for loan losses represents a net recovery of approximately $400,000 Provision in the quarter included $1,400,000 of net charge offs, continued improvement in the oil and gas portfolio and the carrying of outstanding trade related items previously reserved for Hilltop Securities. The 3rd quarter GAAP effective tax rate equated to 17%. This rate reflects the one time impact of certain tax planning strategies and the assessment of deductibility related to the settlement with the DOJ and HUD.
In future periods, we expect the GAAP effective tax rate will range between 23% 24%. Hilltop's capital position remains strong with a period end Common Equity Tier 1 ratio of 16.95% and a Tier 1 leverage ratio of 12.4%. Of note and related to the agreed upon settlement with the FDIC, all risk weighted Basel capital ratios will be impacted by approximately 15 to 20 basis points during the Q4 as previously covered loans receive a higher risk factor. Moving to Page 8. Net interest income in the 3rd quarter equated to $110,000,000 and includes $8,100,000 of purchase loan accretion, which declined by $2,400,000 versus the Q3 of 2017.
As expected, the contribution from purchase loan accretion has declined versus the prior year. We expect interest income related to purchase loan accretion to range between $6,000,000 $8,000,000 per quarter and that the pretax contribution of the aggregate purchase accounting related income and expenses will range between $4,000,000 $6,000,000 over the next few quarters. Net interest margin equated to 3.48 percent in the 3rd quarter, including 28 basis points of purchase accounting accretion. The purchase accounting taxable equivalent net interest margin equated to 3.21%, an improvement of 12 basis points from the prior year period. Held for investment loan yields have increased by 36 basis points versus the prior year, somewhat offset by higher deposit costs.
While we remain extremely focused on managing deposit costs, we have seen deposit betas continue to increase as the Federal Reserve continues to move short term rates higher. Further, the flatness of the yield curve has increased pressure on net interest margin and net interest income as short term borrowing costs rise and longer term asset yields remain more stable. Related to deposit costs, from December of 2015, our cumulative deposit beta is approximately 31%. Hilltop's interest bearing deposit cumulative deposit beta from December of 2015 has been approximately 36%. These continue to compare favorably to our through the cycle model beta levels of 50% to 60%.
The market model beta levels of 50% to 60%. The market for deposits continues to get more competitive as rates move higher and we expect that total deposit betas will increase toward our prudent cycle levels over time. In addition, as absolute rates in the market have risen and cash rates have moved above 2 percent, we have seen more activity from clients pursuing both CD products and higher yielding money market accounts, resulting in some product mix shift across the portfolio. While this shift in deposit mix is expected as the market moves through this portion of the rate cycle, our focus remains on growing core deposits with existing and new clients and being selectively defensive on rates to protect long term relationships. The bank has been successful in growing noninterest bearing deposits through the enhancement of new products and gaining greater share of wallet.
Noninterest bearing deposits make up 31% of the total deposit portfolio. Given the factors noted, we are maintaining our current prepurchase accounting taxable equivalent net interest margin outlook at 3.2% 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. Over the past year, average earning assets have increased by 482,000,000 dollars driven by the acquisition of the Bank of River Oaks, coupled with modest growth in Hilltop's low risk, highly liquid securities portfolios, principally comprised of mortgage backed securities at both bank and Hilltop Securities. On the page, we've outlined the average amount of loans held for sale, which have declined modestly versus the prior year.
Also noted are the blended funding cost for these loans of approximately 83 basis points. This funding cost, which is substantially lower than wholesale funding, demonstrates the value of the $1,300,000,000 of core deposits swept from Hilltop Securities, coupled with a modest amount of borrowing from other wholesale sources. Moving to Page 9. Total non interest income for the Q3 of 2018 equated to $270,000,000 3rd quarter mortgage related income and fees declined by $20,500,000 versus the Q3 of 2017. During the Q3, the competitive environment in mortgage banking continued to intensify as Hilltop's volumes declined by $319,000,000 or 8% versus the prior period.
The majority of the annual reduction came from refinancing activity, which declined by $224,000,000 or 35%. Hilltop's purchase volume declined during the quarter by $95,000,000 or 3% and comprised approximately 89% of our total mortgage originations in the period. While mortgage volumes were challenged, gain on sale margins did improve to 3 30 basis points in the quarter from 3 17 basis points during the Q2 of 2018. Given the current market and competitive conditions, we expect that volumes and gain on sale margins could remain pressured throughout the remainder of 2018 and into 2019. Securities related fees decreased versus the prior year by $4,000,000 primarily driven by lower public finance offering volumes.
Other income declined by $4,000,000 on lower production volumes and tighter market spreads in the structured finance business as volumes declined versus 2017 by 7% during the quarter. Compared to the 2nd quarter, secondary spreads did improve in the structured finance business. Importantly, secondary spreads are substantially market driven and can be volatile on a quarterly basis. I'm turning to Page 10. Non interest expenses improved for the same period prior year by $18,000,000 or approximately 5% to $336,000,000 $12,500,000 of the improvement came from lower loss in LAE expenses in the insurance business as storm frequency and severity were seasonally low during the Q3.
Compensation related expenses were lower by $4,000,000 during the period related to lower production driving lower commissions and discretionary incentives. As reported earlier, this quarter includes approximately $11,000,000 of significant items and approximately $2,800,000 in costs related to ongoing core system replacements and enhancements that were referenced earlier by Jeremy. Moving to Page 11. Total loans, including margin loans at Hilltop Securities and the covered loans housed within the bank, grew by approximately $601,000,000 or 9.5 percent versus the Q3 of 2017. Growth versus the prior year is driven by the acquisition of Bank of River Oaks, which contributed $327,000,000 of net book value as of the deal closing.
The legacy bank loan portfolio grew by approximately 4% versus the prior year. Throughout 2018, as market interest rates have risen, we have experienced a high level of pay down as our clients finalize projects or refinance them to term. Given the current market environment, including the competitive pressures, we expect end of year total loan growth to exceed 7%, including the impact of the Borrow transaction. I'm moving to Page 12. Total deposits are approximately $8,300,000,000 and have increased by $627,000,000 or 8% versus the Q3 of 20 17.
Further non interest bearing deposits have increased by $246,000,000 or approximately 11% versus the prior year. The Bank of River Oaks transaction accounted for $376,000,000 of total deposits at the close. Interest bearing deposit costs have continued to increase modestly with short term interest rates, and we remain active in the market testing rates and terms to ensure we remain competitive while being intentional not to be overly aggressive in our rate offerings. I'll now turn it to Alan to provide more insights on the business' performance. Okay.
Thank you, Will. Let me give you an operating report. First of all, the bank continues to perform very nicely this year with our strong capital base, our asset quality being in excellent shape and strong liquidity continues to play in favor for the bank. We generated a 1.27 percent ROA for the quarter, which compares favorably to year over year. Our loans have grown year over year 9.5%.
Now that does include borrow. And our net interest margin was 3.75% as a purchase and prepurchase accounting, 3.75%, which is up and we continue to compete and compare favorably there. Our loan quality, which I really want to emphasize, is very strong. We have 0.29 percent of our total assets in non accrual loans at Hilltop. That's 39 point $5,000,000 on an $8,000,000,000 portfolio, which we think is excellent.
We've continued not to have to put any money in the loan loss reserve because of the quality. And I think we continue strong lending standards, loaning to our relationships and our customers, and we seem to be able to handle that and do that quite well and I think puts us in an excellent position as we move forward. Our deposits have seen a 9.5% growth year over year. That also would include the deposits that we've gained from Bunk River Oaks, but it does exclude the deposits that would come from Hilltop Securities through the sweep program that we do have. Our non interest bearing deposits continue to remain strong at 31% of total deposits, which we're very pleased with and we continue to operate 65 branches and 1 loan production office at the end of Q3.
Very pleased with the operation of the bank. I think it should continue and because of the strength of the company, I think will play under our hand as we move forward in the future. At Prime Lending, we continue to struggle just like anybody in the mortgage business at this point. I'm very pleased that we were profitable in the 3rd quarter, which I don't know how many mortgage companies can say that across the country, but we continue to do the things that we need to do to make that necessary. Volumes are off about 8% year over year, which makes it difficult.
But the gain on sale margin has really been eaten up primarily because of competition. People going from non refinance or non refinance environment to a purchase environment has really made it competitive and has really taken away the huge part of that gain on sale. However, I will say in the Q3, we bounced back from the Q2, which is very positive. We're by no means where we want to be, but we continue to work on that. But I guess something that did kind of affect us in the 3rd quarter is volumes dropped off, which we didn't expect.
And I think a lot of that, one, maybe comes because of competition out pricing everybody for business, but I think a lot of it too is the lack of inventory in the market. I think the price appreciation in a lot of markets has made people that are not able to qualify for loans anymore, which is unfortunate. And then as the rate environment changes also affects that. So as we move forward, we're going to have to watch our volumes. We're going to continue to work on our gain on sale.
Some of the things that we have done to try to put position ourselves to take more market share, we've eliminated about 100 nonproducers. We closed 20 branches. That caused us about an $800,000 charge to income this quarter. But on the positive side, because there is so much transition in the mortgage business, and if you're not related to a bank entity or a stronger facility, a lot of these mortgage companies are starting to not able to make it. There are a lot of good mortgage lenders out there that are looking for a safe environment, a place to move to, to be able to do business.
Prime Lending offers that, one, because we have a $2,000,000,000 warehouse line. It helps fund loans and it is supported by a strong bank and a strong holding company that allows them to be able to do business. So with that in mind, we've been out recruiting and we've been able to attract about 250 new quality loan officers that we feel that can help us gain market share. At the same line with that 250 that we've gotten, we've released about 200 of those 200 of our loan officers that weren't meeting the standards that we require. So we've been able to upgrade our staff.
We've added 15 new branches and we're out there in the business to compete and to position ourselves as we continue to go through this. We continue to try to raise our fees. We try to cut our costs and pass as much as long as this as we can. I feel good about what we're doing. I feel good about the people that we have doing it.
They're seasoned professionals who've been through this before. And as this thing continues to shake out, I feel comfortable that prime lending will take advantage of the opportunities that that does provide. We also right now are operating with 5 major joint ventures with builders, which helps generate volume for us as we go forward. At Hilltop Securities, Q3, I think it was a lot better than the Q2. We did have a 10% pre tax margin, which is something we were shooting for.
We continue to struggle in the public finance arena. That market nationally is off about 9%, but we're off about 25%. Primarily that big jump is because we did lose a group of producing public finance people out of Houston. They were actually the municipal utility district people. They went off and opened up their own office and that hurt from an income standpoint.
So that's one of the reasons that we're down considerably. We're normally moving now into the season where public finance picks up and I think we will certainly come back from that as we do. We're seeing good improvement in our structured finance area as Will said. Clearing remains strong. Securities lending is strong.
And then we're managing about $30,000,000,000 worth of cash, which as rates move, it certainly helps us. And I think one thing you've got to keep in mind, Hilltop Securities provides funding for the bank and core funding for the bank. Right now, the bank is using about $1,300,000,000 of that core funding. I think it got up to $2,500,000,000 we could use. We're using $1,300,000,000 of that line.
That helps us fund the prime lending line. That's why we call it a 3 legged stool. So it is very important to us that funding that we get and the liquidity that it provides the company. At the insurance company, we had a good quarter. Jeremy mentioned that our ratios look good, completely different than last year because of Hurricane Harvey, which we took a $6,500,000 loss.
So all avenues there look good. We did make a profit. And as we move into the 4th quarter, we just hope Mother Nature stays away and it proves to be what it has in the past and be a good quarter for us and an earnings quarter. So with that, that is my report. And I guess I'll turn it over to Isabelle.
This concludes our prepared remarks. We'll now take questions.
We will now begin the question and answer session. First question comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning guys.
Good morning, Brady. How's it
going? Good. So we didn't see any buybacks in the Q3. You look at your stock now at one times tangible, I've got to imagine you all will be aggressive this quarter on the buyback front?
So this is Jeremy. Yes, we're obviously very cognizant of where we are trading and we're actively considering given the sell off what we want to do for the quarter as far as share repurchases. And then for the last quarter without doing share repurchases, we had some corporate actions that precluded us from doing some share repurchases as well as we were cautious about the environment.
Okay. Is there are there any reasons that you would not be buying EMEKRE stock at one times tangible?
Mean, no, I don't I can't no. There's no reason we wouldn't be other than we buy that in the open window, we have to abide by securities laws. Okay. All right.
And then, Jeremy, you started by talking about kind of the company bigger picture. It sounds like you're focused on cost saves, this shared services model. So it sounds like there are some efficiencies coming outside of just what's going on with mortgage. Is there any way quantify that, whether it's a number of how much expenses you think will come out or whether you think about the efficiency ratio in certain ranges over time? Is there any way to give us
a little more color on what that could produce?
This quarter we're not in a position to do that or we're not planning to do that and we do plan to next quarter articulate what we're laying out here today.
All right. And then I think I heard Will say that loan growth for the company should be 7% this year and that's including the Bank of River Oaks. So I think if you back out the Bank of River Oaks, that means organic loan growth was closer to like 2% or 3%. And I know we've talked about a I think it was 6% to 8% range in the past. So do you think that 6% to 8% range is still the right way to think about like next year 2019?
I think as we look at it, I think you're correct. So the 7% is right. We are seeing, as I mentioned in my comments, higher net pay downs than we've seen historically and some of that's driven by projects closing, some of that kind of tied up with some of our construction lending and some of the funding timing that is natural in that business. And then the other part of it is our conservative approach to underwriting. And so I think as we look out next year, we will provide kind of full year 2019 guidance at our January call and that will include, as Jeremy mentioned, expenses, expense outlook as well as loan outlook.
But I think your assessment of kind of where the core portfolio is appropriate given where we are going into the Q4. All right. And then
just one more on the expense side. Alan, I heard all your comments about what you've done with mortgage as far as upgrading the talent and then closing some branches and getting rid of some non producers. Is there still work left to be done on the efficiency side in mortgage?
Well, I think that's the first level, first shot. If it continues to deteriorate or we don't see light at the end of the tunnel, we can always do more. So I'd say that's the first shot. We'll wait to see kind of what happens before we take the second shot.
Okay, great. Thanks guys.
Thank you.
Thanks. Okay. The next question comes from Michael Young with SunTrust. Please go ahead.
Hey, good morning. Hey, Michael. Good morning.
Just wanted to see if we could put
a little bit of a finer point on kind of all the subsequent events and one time kind of items that occurred in the quarter. Just trying to understand how much was captured this quarter with like the DOJ settlement versus the gains on the termination of the loss share, the Hilltop Opportunity Partners gain on that investment and then the settlement with the HUD as well? Just trying to put all those pieces together a little bit.
Hey, Michael, this is Will. I'll we'll go through it. So the Bank River Oaks transaction and kind of integration related expenses were included in the quarter. That's $6,600,000 pretax and then tax affected, impacted earnings by $5,200,000 The DOJ HUD settlement impacted pretax by 3.3% and net income by 1.1%. And the impact there is that we had previously accrued for a potential settlement over time.
We had a position in terms of overall tax deductibility. As we've reached settlement, our opinion on that deductibility has changed. So the impact there on a net income basis does reflect our position on deductibility. The FDIC indemnification asset amortization for settlement. So as Jeremy mentioned, we did exit all of our FDIC loss share agreed during the Q3 and actual the actual settlement occurred final settlement occurred in the Q4.
So it was a subsequent event very similar to the DOJ HUD, but we obviously accrued for all of the known activity and expected outcome, which yielded approximately $700,000 of pretax impact or 500,000 dollars after tax. So all of the items we've called out on Page 3 in our investor highlights were booked and or recorded during the Q3. And as I said in my comments, we don't expect for the DOJ and HUD as well as the FDIC any future financial costs related to those going forward. I do think it's worth noting on the indemnification amortization that had been an item that we were recognizing on a quarterly basis in prior quarters. And as such, that has been recorded in noninterest expense.
And for reference, approximately $6,000,000 of expense of amortization and clawback expense related to the FDIC agreements have been booked through the first and second quarters. And then again, we booked the approximate $700,000 in Q3. So year to date, approximately $7,000,000 booked related to the indemnification, amortization and clawback, which will not exist on a go forward basis.
Okay. And that's included in other expense on the consolidated financials? Yes. Okay. And then the last one, just the opportunities fund and that gain, was that is that going to
be booked in the Q4? It was a subsequent event and will be booked in the 4th quarter.
Okay. Got it. And then Will, one other one just on kind of the fair value adjustment in mortgage this quarter, the interest rate lock commitments, it was like a $20,000,000 charge. Any color you can provide there on kind of what were the drivers? And then also in structured finance, I know that's been an area that's been impacted by the move in rates in the past.
So any color you can provide on kind of how rates have played into the results this quarter? Yes. So as we look at
interest rate locks, we had about a $19,200,000 charge in the quarter. And again, as I look at as you look at kind of value versus volume, the values of the rate lock didn't move markedly a couple of basis points. But the real driver there is a volume based one. So rate lock declined in the period. And so the overall UPB, if you will, of the pipeline declined in line with the overall rate lock volume for the quarter decline.
And so that's really a volume decline given that particular area that it's just an asset and it's an asset roll forward and that decline in value is really more volume driven than rate driven. And then on structured finance. Structured finance, we did see an improvement linked quarter in the secondary spreads. But I would say, as I mentioned in my comments, that's volatile and can be market driven. We have seen the 10 year move over the last couple of weeks more aggressively.
And so, albeit, it pulled back off the highs. That said, on any kind of quarter to quarter, it's difficult to predict. We do think that they have stabilized and we are seeing kind of seeing that at a high level of stability, but it can be volatile quarter to quarter. So it'd be difficult to put a fine point on that.
Okay. And I guess just lastly, we saw a nice kind of rebound in Hilltop Securities this quarter, obviously still kind of trying to pick up for the decline in public finance on a year over year basis. But is the outlook still for kind of a seasonally stronger 4Q as is normally the case at least in public finance? And then, Jeremy, does that still give you confidence in kind of the full year outlook that
you provided previously? To answer the end there, yes, I would just stick with what we've given previously, which is for the year $350,000,000 in net revenue and 8% to 10% -ish high single digit pre tax margin for the year. So I think that the 4th quarter will be moderately more favorable than the Q3 and a lot of that is due to the seasonality of the public finance business.
Okay. That's all for me and look forward to hearing some of the more details on the next quarter call.
Thank you. Thank you.
Okay. The next question comes from Chris Gamaitoni with Compass Point. Please go ahead. Good morning. Thanks for taking my call.
Hey, Chris.
Can you give us your thoughts on the bank obviously has a very high capital level and your stock price has underperformed. What keeps you from potentially deploying a larger buyback than you currently have
approved? I think as we look at capital and having the excess capital over the cycle we believe M and A is going to be the highest value and the market really hasn't been there for us over the last couple of years in a sizable way. We think that the market appears to be coming more towards our type of M and A market when our Board, our Chairman's view is that we want to have dry powder to deploy for those opportunities. And so in the interim, we are returning capital to shareholders and in the form of dividends and share repurchases and also through the transaction that we did with Bank of River Oaks this year. If you look here today, we've returned we've had 72% return to shareholders between the dividend and share repurchases.
And is there a way maybe it's too early for this, but it seems like loan growth is coming down a little bit, which just given your profitability, if ROE is above loan growth, you'll be building more capital. Is there like
a payout ratio you're thinking about if you were being more conservative on the loan growth side because of your underwriting caution?
Well, we factor in so when we evaluate our kind of capital spend on our current period earnings, we factor in what we think loan growth is going to be and what we think and that's the largest organic growth capital intensive endeavor. So certainly factor that in and that could lead us to kind of thinking that we're going to build excess capital. But I think then we turn around and look and say what's the timing to deploy the capital with the M and A environment. And we looked at ourselves and we said where are we trading and what our earnings forecast and what the pressure that we've had in the mortgage business and alike.
All right. Well, thank you very much for taking my call.
The next question comes from Matt Olney with Stephens. Please go ahead. Thanks. Good morning. Good morning.
I want to go back to the discussion on the broker dealer and for the Q4. I appreciate there's some seasonality there, which points to some stronger revenue in 4Q versus 3Q. But it also seems like there were some unusual items in the Q4 of last year around the tax code change. So looking at that segmented data, it looks like the revenue last year in that business increased about $10,000,000 from 3Q to 4Q. So I just want to make sure that's still a good way to look at this business year over year in Q4?
That's a good point and I don't think it's going to
be that great.
They had revenue in that business about $15,000,000 this past quarter. I think it can go up from that, but just in the Q4 with issuances, but that's it.
Okay. So you're saying a nice sequential increase, but not as much as we
saw last year. Is that fair?
I think that's fair.
Yes. I mean, I think the view is public finance offerings in general aren't going to rebound at the same rate. And again, last year, just to be really kind of fine point there, we saw a lot of issuers pull into the Q4 given the tax effect and Tax Act impacts.
Okay, understood. And then on the margin commentary, Will, it sounds like you expect deposit betas decline from here, but you still expect to have a flattish core NIM. So are you just assuming that the core loan yields keep up with the increased deposit costs? Or is there some kind of mix shift or something else we should consider? No, I think we do.
I think we are expecting betas and kind of the marginal betas are increasing towards our model levels. They're not at our model levels of 50 to 60 yet. They're climbing in that direction. And so we are seeing the impact of deposit betas increasing. We're also seeing the asset beta pull through that we would expect.
And as we look out, those virtually offset. But to your point, we do see and have seen, as I mentioned in my comments, some more appetite from clients for CDs shorter term and longer term candidly, as well as money market product versus kind of DDA or other lower yielding kind of savings products. So it's the late stages. What I generally think about is it's later stages of a rate cycle and clients becoming more aware of where cash rates are. So we do see both the beta increase as well as some portfolio shifting causing basically an offsetting impact to asset repricing.
Got it. Thanks for that, Will. And then going over to the mortgage business, it sounds like the margins are pressured, but guess there were some signs of stabilization in the Q3. Can you just elaborate on this? I'm curious if you see any positive signals in the competitive landscape in recent weeks compared to what you saw over the summer.
Yes. I think we are. We have indications that there's a lot of red ink being generated by companies out there their own national warehouse lending. We've had to eliminate several customers because of their financial performance. That's an indication, but we also have some comparisons against us versus some of the other companies our size.
We seem to be outperforming them. Some of them are red ink. But I think the Q4 is going to be kind of a telling quarter because traditionally the 4th quarter is not good. Volumes are off in the 4th quarter and of course everybody takes off in December for Christmas. So I think you're going to see maybe a little bigger fallout this quarter And then we're going to all be able to line up and see better where we are starting the year off.
But I think we're going to continue to make progress cost and be competitive. So I think we're trying to set our organization up to take advantage of this thing when it does turn and it will turn.
Thank you.
Thanks, Matt. The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, guys.
How are
you doing?
Hey, guys.
Good. Alan, just wanted to get your comments. So one of the other Texas banks announced a pretty large Houston strategy to expand yesterday. And I just wanted to see if that may impact you guys. I'm not sure from a deposit standpoint if you guys play in the same sandbox, but just wanted to get your thoughts on the Houston market.
You have the slide in there. It seems like you guys are pretty optimistic. Just wanted to see if that announcement would have any impact. Thanks.
It won't have any impact. I don't know if you've been to Houston lately, but there's 7,000,000 people that live down there. We've got 4 banks in an affluent area and we've got a pretty good chance to continue to grow that and look for opportunities. So I think Houston is an opportunity for us. There's been a lot of changes in the banking industry down there, a lot of people moving around, a lot of acquisitions and whatever you might want to call it.
And I think that creates opportunity for everybody. But As far as what was announced yesterday, that doesn't have any impact on us.
Got it. And then maybe just one more to circle back on the buyback, sorry to beat a dead horse, but is there any reason why you guys wouldn't actually finish out your authorization before it expires in January?
Well, first I think that will be positioned on our volume limitations and not wanting to obviously do a share repurchase that impacts the price. I mean that's the practical nature
of it. Okay. Thanks for taking my question.
Thank you.
Okay. The next question is a follow-up from Michael Young with SunTrust. Please go ahead. Just wanted to ask one follow-up
on the mortgage business, kind of the repositioning you did, Alan. I know previously you talked about kind of trying to trim the people who are generating volume, but not profit. And I'm curious with kind of the repositioning this quarter, maybe when that occurred during the quarter and how much of that benefit, I guess, we were already seeing in the numbers versus how much of that is still kind of yet to come?
I think it's yet to come. I don't think we've seen a lot of it. We really started this back into the Q2 and Q3 as you start planning what you're going to do and you start evaluating, you look at these people that are producing larger volume, we're not making any profit. And so we've gone through and called that out, but we haven't seen any benefit. As I say, we took an $800,000 charge this quarter by less bunch of non producers go.
We will see some benefit from that. But as far as the loan officers know and as far as bringing on new loan officers, it takes a little while before they start really being able to generate the volume that allows us to. The thing that we're pleased with is we've really been able to improve our stable of loan officers and the quality and the ability to do purchase business. We're doing 90% purchase business. You can't do any more than that.
So we're going to continue to try to gain market share and continue to build on that. And we're going to just have to wait and see how the market shakes out. We're going to see how the market does. And so I think that's kind of where we are, but we've not seen any financial impact yet on this, but we're putting the things into place that need to. Now we have seen an increase in fees and stuff that we've implemented from that standpoint, but as far as people know.
Okay. So the fixed non interest expense base in that business should still be coming down. There's still some tailwinds to that? Yes. Yes.
That's correct. Okay, perfect. And just on the loan side, Alan, obviously a little bit lower than probably where we had hoped at the beginning of the year, but obviously we've seen across the industry a lot more competition, particularly in the CRE space, which has been big for you guys. Can you just talk about maybe how much has been related to just heavier pay downs versus maybe just lower production due to the competitive landscape?
Well, I been trying to talk you all down from the 1st of the year. I thought I had you down to 6%, but I don't guess anybody was listening. It is competitive out there. And again, we're not going to give up our underwriting standards whereas maybe we're seeing some people that do. So we're sticking to our guns.
Now we've had some pay downs, but we've also come back in and made some pretty good sizable loans to replace those pay downs. The problem you've got is those are construction loans and they don't start funding until they use their own equity. And we've got about $850,000,000 worth of those loans out there and $100,000,000 of that has been probably been made in the last 60 days. But we're not going to see any really draw downs on those construction loans. So after the 1st of the year, we're going to have to take the they're going to pull down their equity first.
So we've been making some really good loans in some markets that are really good and the relationship loans to people that we do know. So we're going to see the benefit of it. Now I think what you're going to experience and I think what we're experiencing now and why maybe a 4% number may be better than a 6% number is we are seeing a lot of pay downs. And what's causing these pay downs is the fact that the interest rates are going up and these people are trying to get these projects finished and add into the secondary market where they can get a fixed rate and non recourse financing. So we are seeing some movement there, a lot more movement we would like, but got to understand what they're trying to do and we do and we just got to try to make it up somewhere else.
I just don't think we can make it up as quick as it's going to fail.
That makes sense. Thanks.
Okay. This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.