Hilltop Holdings Inc.

Good day and welcome to Hilltop Holdings' first quarter 2020 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Eric Yohe. Please go ahead, sir.

Thank you, and good morning. 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 the impact and potential impacts of COVID-19 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 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 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'd like to turn the presentation over to our president and CEO, Jeremy Ford.

Thank you, Eric, and good morning. My, how the world has changed since our last earnings call. We hope that you and your families are healthy and handling the current COVID-19 pandemic as best you can. Before getting into the results for the quarter, I would like to spend a few minutes going through our organization's approach to the pandemic and some of the actions we have taken. Since the onset, We have worked hard to ensure the business continuity of Hilltop and our operating company. Our highest priorities have been to ensure the safety of our employees and their families and to ensure our customers have the access and resources they need during this unique and challenging period. Of our nearly 5,000 employees, approximately 65% are currently working from home. with the remainder still coming into offices and branches to meet with customers on an appointment basis and to execute critical functions. We have extended our health benefits to cover COVID-19 testing for all employees and their families, have enhanced cleaning and maintenance procedures across all locations, and are monitoring any positive or presumptive positive COVID-19 cases across our organization in any shared office locations. We are facing a lot of uncharted territory with the current situation, but I am proud of how our business leaders and their teams have responded. As well, I would like to commend our employees for their courage and commitment during this stressful time. Moving to slide four. Currently, 58 of our 61 Plains Capital Bank branches are open for appointment. along with 130 of our 300 prime lending mortgage branches. Though certain branches are not open, almost all of the employees associated with those branches are still able to fully service their clients remotely. Bank ATMs and drive-through capabilities are still functioning at 100%, and we have introduced fee relief for multiple situations. We are supporting customers on a case-by-case basis with different loan modification and deferment programs. As of April 23rd, we have worked with over 300 clients to help with deferments or restructurings equating to $253 million in loans, with more in the pipeline. Notably, all payment deferral requests must be needs-based and require at least a senior credit officer approval. We are working with the SBA to execute the Paycheck Protection Program and have registered over 3,100 applications equating to $770 million. $7 million in loans. Our bank employees have been working around the clock to get these loans processed and funded. And as of last Friday, we have funded nearly 2,000 loans for $585 million. Given an average loan size of $282,000 for the funded loans, our bankers are truly supporting the small businesses that drive our local communities. With the newly approved funds for the program, we have an additional pipeline of close to $60 million that we aim to process as well. Although the economy has entered into a recession, we believe the prior decisions and recent preparations made to strengthen our capital and liquidity alongside our conservative lending approach puts us in a strong position to weather even a severe economic scenario. Hilltop Consolidated and Plains Capital Bank are well capitalized with approximately $513 million and $167 million, respectively, of excess capital as of March 31, 2020. This equates to $740 million and $357 million, respectively, of capital above regulatory-defined, well-capitalized levels, including the conservation buffer. From a liquidity perspective, Management began evaluating actions to further strengthen our bank's liquidity position starting in February, and since then has raised additional funds through broker deposits and by increasing the availability of our Hilltop Security Suite deposits. The bank is primarily funded by deposits, which is reflected in our loan-to-deposit ratio of 98%, including loan sale for sales. Additionally, we maintain just under $3.9 billion of borrowing capacity at the federal home loan bank, of which $3.6 billion was available with a utilization of only 6% as of March 31, 2020. We are in a stronger liquidity position today than when the pandemic began impacting markets late in the first quarter. From a credit perspective, no bank is going to be immune from the impact of this pandemic and the shelter-in-place orders issued around Texas and the rest of the country. Additionally, the decline in oil prices has created another set of economic challenges in Texas. While we are unable to accurately forecast the impact these will have on our business and future earnings, we do anticipate a higher level of credit losses and a reduction in overall lending. and the potential for negative impacts to our mortgage purchase volumes and trading portfolios. Our response to the current pandemic has been quick and well coordinated across all of our businesses. We are focused on taking care of our people and our customers and will continue to make those our top priorities. Financially, we are well positioned with excess capital and sources of funds that are diversified and accessible. From a risk management perspective, We have scoped our at-risk industries and are actively monitoring and mitigating them as we work with our borrowers during this challenging environment. Will is going to provide additional details on our impacted and interview loan portfolios later in this presentation. Now moving to slide five, I'll provide an overview for the first quarter. Notwithstanding the challenges in the economy and the market, our results for Q1 2020 were very positive and a good example of our diversified business model. We reported first quarter 2020 net income for Hilltop Consolidated of $49.6 million or 55 cents per diluted share. An increase from the first quarter 2019 of $10.9 million or 13 cents per diluted share. Return on average assets for the period was 1.5% and return on average equity was 9.4%. Please note, These are HGH's consolidated results, and we have called out the discontinued operations figures below. Discontinued operations include our insurance company, National Lloyds, which we believe remains on track to close in the second quarter. At prime lending, mortgage origination volume of $3.6 billion increased 48% compared to the first quarter of 2019, as the decline in rates pushed refinance volumes up. Having strong fee businesses like Prime Lending and Hilltop Securities in the current environment is a tremendous advantage for us from a diversification of risk and earnings standpoint. Average loan growth in the quarter of 6% compared to prior year was driven by national warehouse lending that was positively impacted by lower rates and the increase in the mortgage refinance market. Additionally, average deposits grew by $650 million or 8% from Q1 2019. Growth in deposits has been a mix of non-interest and interest-bearing deposits, with interest-bearing adding $440 million year-over-year and $164 million since Q4 2019. At Hilltop Securities, January and February were particularly strong from the impact of both the mortgage industry and high asset valuations in managed accounts. In March, As market uncertainty increased, we proactively reduced limits in positions across the businesses, but did experience a significant mark on the TBA pipeline. Overall, the fixed income and wealth management businesses had strong quarters that offset declines in the structured finance business. During the first quarter, Hilltop repurchased 700,000 shares for a total of $15 million of the board authorized $75 million for the full year 2020. However, Given the fallout from the COVID-19, we will be suspending buyback activity until further notice. That said, the dividend has been maintained at a prudent level, and while management is monitoring the credit and economic impact resulting from the virus, there is no recommended change to the dividend at this time. On January 1st of this year, we introduced CECL. Since the beginning of the year, we have been in a very volatile market where assumptions are changing rapidly and will continue to do so over the coming quarters. Our allowance for credit losses as of March 31, 2020, was $107 million, an increase of $33 million. We use this scenario, much like many others, to project a significant deterioration over the next few months with improvements coming later in the year. New assumptions are coming out, and we will continue to model accordingly. We will talk through our CECL process and provide further detail on credit and loan portfolios later in this presentation. Moving to slide six. Total pre-tax income for HHS consolidated was $70 million for the quarter, an increase of 35% over first quarter last year. The bank's decline in income can be primarily attributed to the $34 million loan loss provision. Aside from the provision expense, the bank had a nice quarter. Though NIM was under pressure, net interest income increased as asset balances increased, and the bank's efficiency ratio declined to 55.5% from 58.8% a year ago. Work being done within the bank around overhead and branch optimization continues to progress, and we are seeing meaningful improvements. As mentioned earlier, the introduction of the government's PPP program and the overall demands placed on our bankers from the pandemic has been very high. I'm very proud of Jerry and his leadership team and all the people working to support our customers during this stressful time. The volume of PPP applications over the past few weeks has been unprecedented for our bank, and our people have stepped up to support small businesses and communities across Texas. Compared to what is historically a slow mortgage quarter, prime lending started the year strong and volume increased as the 10-year decline throughout the quarter, accelerating into the end of March. Pre-tax income increased $37 million from the first quarter of 2019, driven by higher volume and relatively stable gain on sale margin of 325 basis points. From a risk standpoint, Our business model of selectively retaining loans is focused on enabling us to originate certain mortgage products as opposed to building a long-term mortgage servicing asset. As a result, our servicing portfolio is relatively small for our size and reflects approximately $1.5 billion, or 10% of our annual originated volume. The broker-dealer reported an 18% pre-tax margin for the period and an increase in the and income by $1.8 million from the prior year. Market volatility in the quarter drove higher revenues across multiple business lines. Our leadership team at Hilltop Securities continues to do a good job of managing the risk and daily liquidity needs that arise from a market that has been as dynamic as this has been over the past few months. National Lloyd's underwriting income improved year-over-year, as lower loss experience led to an improved loss in LAE ratio of 39.7%. However, NLC did take mark-to-market losses on its equity investment portfolio of $4.4 million, consistent with the broader market decline in March. Overall, we are pleased with our first quarter performance, considering the tough conditions facing everyone. We have a history of conservative lending and a strong balance sheet supported by a diversified and low-cost funding model. And we have a diversified business model with a strong foundation that we have continued to invest in for times such as these. With that, I will now turn the presentation over to Will to talk through the financials.