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Edited Transcript of HTH earnings conference call or presentation 28-Jul-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Hilltop Holdings Inc Earnings Call

DALLAS Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Hilltop Holdings Inc earnings conference call or presentation Friday, July 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan B. White

Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank

* Isabell Novakov

* Jeremy B. Ford

Hilltop Holdings Inc. - Co-CEO, President and Director

* William B. Furr

Hilltop Holdings Inc. - CFO and EVP

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Matthew Michael Sealy

Stephens Inc., Research Division - Research Associate

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD, Equity Research

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Hilltop Holdings' Second Quarter 2017 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would like to now turn the conference over to Isabell Novakov. Please go ahead.

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Isabell Novakov, [2]

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Good morning. Joining me on the call 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, future plans and financial conditions 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 and taxable equivalent net interest margin before purchase accounting adjustments. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix of this presentation, which is posted on our website at ir.hilltop-holdings.com.

And now, I would like to hand the presentation over to Jeremy Ford.

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [3]

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Thank you, Isabell, and good morning. For the second quarter of 2017, net income was $62.5 million or $0.63 per diluted share. Results included 2 positive and significant items: first, $11.6 million pretax related to the resolution of the SWS merger appraisal proceedings. Resolution of this matter resulted in 1.9 million shares of HTH common stock being retired. Second, $15 million pretax related to the recording of an insurance receivable associated with a single large loan previously charged-off. For the second quarter of 2016, net income was $31.1 million or $0.32 per share, which included the provision of related to the single large loan charge-off in the second quarter of 2016.

Our ROA was 1.94% in the quarter relative to 1.05% in the prior year. Our ROE was 13.2% in the quarter relative to 7.1% in the prior year. Hilltop's 4 operating businesses reported $84.4 million in pretax income: PlainsCapital contributed $60 million; PrimeLending contributed $19 million; HilltopSecurities contributed $16 million; and National Lloyds had a $10 million pretax loss due to the elevated storms related to losses that we expect in the second quarter.

Common equity increased to $1.9 billion, up $4 million from the prior quarter. We remain well capitalized with a 13% Tier 1 leverage ratio and a 17.5% common equity Tier 1 capital ratio. Importantly, Hilltop announced its board declared a third quarter cash dividend of $0.06 per common share, and that we repurchased an aggregate $8.8 million of outstanding common stock in the second quarter.

Moving forward. I'll hit on items not previously discussed. Our book value per share increased to 19.62%. Our net interest margin increased to 4.05% from 3.54%, and excluding the effects of purchased accounting, it increased to 3.23% from 3.05%. Our assets grew by nearly $1 billion to $13.3 billion, our loans grew by -- grew to $6.3 billion, and our deposits increased to $7.6 billion. Our noncovered NPAs to total assets remained sound at point -- excuse me, 26 basis points and our allowance to covered -- noncovered loans ended at 97 basis points.

And I'll now turn the presentation over to Alan White.

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [4]

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Thanks, Jeremy. Good morning, everybody. The bank in the second quarter had an ROAA of 1.63% that was driven by a strong loan growth. We had a strong NIM, and our credit quality continues to be very sound, and we did have a one-time increase in noninterest income related to an insurance receivable that we got of $15 million. Quarterly, the bank's noncovered held-for-investment loan growth was 5.8% or 25% annually. That's very strong, and we're very pleased with that number. That's also favorable. We have a loan pipeline of about $2 billion, of which $700 million of that are construction loans that are continuing to fund up, so that's favorable from our side. Loan growth accretion and stable deposit costs continue to help our margin, and we feel like we are very well positioned at this point as we continue to see rising interest rates that we will be able to expand that margin, so we feel good about that. We recorded an insurance receivable related to a loss that we had a year ago for this quarter on [FR3] $24.5 million fraud deal, and the receivable that we got was based on a forgery on that. We continue to pursue actively legal remedies against the guarantors, and we feel confident in our position, and I'm hopeful we'll see more to that. As far as the energy goes, about the same story -- 2.7% of the total loans, not much change there. We're well reserved. 17% of that portfolio is classified but we see no change in it, and we do not have any shared national credits. Our noninterest bearing deposit of 30% was down just a little bit, but that's kind of a seasonal deal, and we've been able to hold those deposit costs in line with the rising rates. We're operating 62 branches, and we've recently sold the branch in El Paso, which was a small branch in a market that, honestly is a long ways away, and it just wasn't a place for us to be. We hopefully will be able to close that some time in September. So I want to remind you at the bank, we had solid loan growth, and we're operating in a very vibrant economy in Texas. Our net interest margin is positioning to take advantage of any rising rates that come long. And we've been able to do that, and we've been able to do it using strong underwriting criteria. We've not given on that, so we feel really good about where we are and where we're going.

At PrimeLending, our funded loan volume declined 2.2% in quarter 2 compared to the industry of 9.2% decline. So really what you're seeing here as the refinance goes way, you're seeing the purchase side pick it up and so our business model with a purchase model -- we only had a 2% decline, so that purchase business is picking up [from] what we're losing on the refinance side, so the type of business-type model we have we're fitting right in. For the first -- second quarter, we were 86% purchase volume and the industry is 68%, again, that fits right into our model. Our net gain on loans decreased in the second quarter due to increased -- our loan volumes were down. And then what I have been saying in previous times that we have seen before, as you switch from a refi market to a purchase market, you see people who were not in the purchase business are out cutting rates, and so we've gotten squeezed a little bit and that is going to be one of the reasons that you see our net interest -- our net gain on sales is going to decrease, so that's pretty natural. We think this will probably go away in another quarter or so. We continue to have a 0.88% market share, and we 1.11% market share of the purchase business. So even though the business is down some, we feel very good about where we are and very good about the performance. Right now, the big issue in the mortgage business is lack of inventory. We have mortgage producers out there that may have 10 or 15 people who have been approved for loans, but there are no houses, there is no inventory, and so that's kind of a unique situation and that is totally around the country. One thing that is helping us pick up some of this volume is renovation loans because since there is not any houses, people are now deciding to renovate and we do renovation loans, so we're seeing a nice increase in that even though they are smaller-type loans.

As far as HilltopSecurities goes, they had pretax income of $15.8 million compared to $18.3 million last year. Their pretax margin is very good at 15.3%, down a little bit from last year but very respectable. Year-over-year results are kind of -- or driven by a decrease in revenue associated with public finance, more of a seasonal-type deal. The last 2 quarters were stronger than the first 2 and then capital markets is off right now. We're offset by a positive impact on higher short-term rates in both the retail and the clearing business. So as rates move up, we are going to benefit significantly from that and that is becoming true. Our net revenue decreased 6.5% to $103 million compared to our quarter 2 last year. Public finance and capital markets revenue declined $10.8 million primarily to reductions, as I said, in revenues associated with bond sales, trading and underwriting, which is that time of the year.

Moving to short-term rates, provided for 2.5 year -- $2.5 million year-over-year revenue increase and that will continue to grow as rates continue to move up and as we continue to grow the business. We have $25 million assets under management through our municipalities. So those are things we take advantage of, and we have big balances in both our retail and our clearing areas of over $2.5 billion that certainly helps with the bottom line.

We had no integration costs this time as -- versus last year we had $800,000. Comp ratio was up a little bit in quarter 2 '17 compared to quarter 2 '16. And our noncompensation-related noninterest expense declined 13.5% year-over-year, a lot of that's commission, but there is a lot of expense there that has been cut through the consolidation. So I think they had a very respectable quarter and anticipate better things.

National Lloyds. Seasonal spring storms during quarter 2 drove a loss in LAE ratio of 92.1% in improvement versus quarter 2 of '16 when we had an LAE ratio of 96.1%. The second quarter is seasonally the heaviest weather for National Lloyds, but the loss in LAE ratio is below historical 3-year averages for the second quarter, and we're pleased with that. Quarter 2, our expense ratio was 39.7%, an increase over quarter 2 '16 of 33.9% and a lot of that's due to decline in net premiums earned. The decline in premiums -- written and net premiums earned as a result of increased competitive pressures in the National Lloyds market especially in Texas, and that has kind of been offset by rate increases that we have instigated. So policies are dropping off and rates are going up, and so we've got to concentrate on selling more insurance as we go forward. But weather wise, we had a good quarter. Hopefully now we're into the third and fourth quarters, which normalize somewhat and we'll see better results.

So that is the operating statement, and I will now turn it over to Will Furr.

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [5]

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Thanks, Alan. I'll start on Page 7. Net interest income for the second quarter of 2017 equated to $116 million, an increase of $24 million from the prior quarter and $16 million from the same period prior year. Net interest income in the second quarter of 2017 included $23 million of purchased loans accretion. Purchased loan accretion increased versus the first quarter by approximately $11 million and $6 million from the second quarter of 2016. Second quarter 2017 accretion results reflect the accelerated resolution of several loans in our covered loan portfolio. Net interest income growth, excluding the impact of purchased loan accretion, improved by approximately $10 million driven by solid loan growth, improving loan yields and improving yields across our securities portfolios. Reported taxable equivalent net interest margin for the second quarter was 4.05%, an increase from the prior quarter of 51 basis points and 25 basis points from the same period prior year. Excluding the impact of purchased loan accretion across all periods, Hilltop's taxable equivalent net interest margin in the second quarter was 3.23%, up 18 basis points versus the prior quarter and up 15 basis points from the same period prior year. At the bank, taxable equivalent net interest margin, excluding purchased loan accretion, equated to 3.69%. Interest-bearing deposit costs increased by 9 basis points versus the second quarter of 2016. This increase is driven by growth in money market deposit balances and our testing of new rates and terms across our deposit products as we focus on attracting new core deposit relationships. The bank's investment portfolio, which represents approximately $1 billion in securities, maintained a taxable equivalent book yield 2.12%, which was relatively stable with the first quarter of 2017. Given the current market conditions and our securities redemption mix, the reinvestment rate in the portfolio is approximately 2.25%.

Moving to Page 8. Hilltop reported total noninterest income of $345 million in the second quarter of 2017. As Jeremy discussed, second quarter 2017 results included items related to the resolution of the Southwest Securities appraisal proceedings and the recognition of an insurance receivable related to a significant charge-off that occurred during the second quarter of 2016. These items are reflected in other noninterest income and equate to $26.6 million.

During the second quarter, mortgage-related noninterest income declined by $13 million or 7%, while mortgage rate lock volume declined 6% versus the same period prior year. Insurance revenues declined versus the same period prior year by approximately $3 million, driven by business, competition and the ongoing optimization of our book of business. The securities business improved on a linked-quarter basis, but declined by $6.5 million compared to the second quarter of 2016. The decline in net revenues versus the prior year relates to lower market activity in our capital markets and public finance businesses.

Moving to Page 9. We reported second quarter noninterest expenses of $366 million, relatively stable with the same period prior year. The second quarter included $4.2 million of FDIC indemnification asset amortization and approximately $1 million related to the FDIC loss share agreements. These expenses are reflected in other noninterest expense. Compensation and benefits expense decreased from the second quarter of '16 by $3 million as a result of lower commission-based compensation across the Hilltop businesses.

Moving to Page 10. Total assets of $13.3 billion increased by $950 million or 8% versus the first quarter of 2017. The growth in assets was driven by an increase of $334 million or 6% in noncovered loans, and loans held for sale increased by $670 million as a result of seasonal volume improvement in the mortgage business. Broker-deal -- broker-dealer clearing receivables remained relatively stable versus the prior quarter and are being managed to a target of approximately $1.5 billion. During the quarter, the FDIC indemnification asset declined $7 million or 16%. This decline reflects $4.2 million of asset amortization during the quarter. We do expect to continue amortizing the FDIC indemnification asset throughout 2017.

Total deposits have grown 3% or $245 million versus the prior quarter to $7.6 billion. We are actively assessing the competitive environment and continue to test new rates and promotions to attract core relationship deposits. Capital levels in the -- grew in the second quarter as common equity increased by $4 million versus the prior quarter. Common equity was impacted during the quarter by approximately $15 million due to common stock dividends and share repurchases, as well as by approximately $47 million due to retirement of shares related to the Southwest Securities appraisal rights proceedings.

Hilltop's common equity Tier 1 ratio equated to 17.53% at June 30, and PlainsCapital Bank's common equity Tier 1 ratio equated to 13.95% for the current period.

Moving to Page 11. PlainsCapital Bank's pretax income increased to $59.8 million in the second quarter versus 2017 -- in 2017 versus $21.6 million in the second quarter 2016 primarily due to lower provision expense. Note that the second quarter of 2016 included a large loan charge-off of approximately $24.5 million. Second quarter also included higher purchase loan accretion in the quarter and the $15 million insurance receivable noted earlier. Noninterest expenses increased compared to the second quarter of 2016 due to the increases in net expenses related to covered assets for repossession and foreclosure and include legal expenses.

Briefly touching on pages 12 and 13. At PlainsCapital, exposure to energy continues to moderate. As of June 30, our energy loans remained at 2.7% of total loans while reserves against our energy exposures has also remained stable at 7.1%. Overall, credit quality remained strong as noncovered NPAs to total loan as of June 30 was 26 basis points.

Moving to Page 14. PrimeLending's pretax income equated to $19.3 million in the second quarter of 2017. During the second quarter, the mortgage business originated $4.1 billion in loans, representing a decrease of approximately $92 million or 2% versus the same period prior year. The second quarter of 2017 [mainly] included $556 million of loans originated to refinance existing mortgages. Versus the prior year, refinance volume declined 37% or $333 million consistent with expectations, while purchased mortgage volume increased by $241 million or 7% from the same period prior year. Consistent with our ongoing strategy, the mix of purchase volume increased to 86.3% in the second quarter of 2017 from 78.6% in the second quarter of 2016 and is in line with our expectations, given current market conditions.

Noninterest income declined $13 million or 7% from the second quarter of 2016 to $180 million in the second quarter of '17, driven by a decline in net gain on sale margins and lower mortgage rate locks, which declined 6% versus the same period prior year. Noninterest expenses were relatively stable versus the same period prior year as variable compensation costs declined in line with sales volumes. Second quarter expenses do include a net increase in the indemnification reserve related to loans sold in prior periods, an increase in occupancy expenses that relate to growth in the sales franchise and additional mortgage origination branches.

Moving to Page 15. HilltopSecurities pretax income equated to $15.8 million in the second quarter of 2017, a decrease of $2.5 million versus the same period prior year. Pretax margin equated to 15% reflecting improving impact of short-term rates, ongoing costs savings related to the business integration as well as lower legal fees, partially offset by lower net revenues in capital markets and public finance. The securities compensation ratio equated to 60.9% in the second quarter of 2017 compared to 58% in the same period prior year. HilltopSecurities provided PlainsCapital Bank with approximately $1.3 billion of core deposits as of June 30, representing 52% of the available $2.4 billion of the FDIC-insured balances.

Moving to Page 16. National Lloyds reported a pretax loss in the quarter of $10.41 million. While storm activity can be unpredictable, Texas did experience the expected seasonal uptick in storm activity during the quarter. This storm activity resulted in a loss ratio of 92% and a combined ratio of 132%. The increase in the expense ratio to 40% is driven -- primarily driven by the decline in net premiums earned.

That concludes our comments. I'll turn the call over to the operator for the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

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Wanted to start just with capital. Obviously, the share buyback this quarter being used a little bit and you got the $0.6 dividend. Any other additional capital actions or things we should anticipate in the interim until M&A comes to a fruition?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [3]

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No. I think we're paying the dividend now, and it's equated to about [15] % payout ratio and then share repurchases, which is up similar to that, so I think it's up 30% year-to-date. And we're going to evaluate the dividend every quarter, but most likely first quarter in 2018. And one other thing with this SWS appraisal rights settlement is, effectively a capital transaction and that we effectively repurchased 1.9 million shares that were pegged for the petitioners.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [4]

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Great. And, Jeremy, maybe as well just if you could update us on just what you're seeing in the M&A pipeline? Have you seen more conversations as we have seen a little more stock price stability here or any updates there?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [5]

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I think there has been 2 deals greater than $250 million in assets that have been announced this year in Texas. And I think going into the year, we would have expected more. And those deals' average or median price has been like 2.4x tangible book value and they've been high-stock deals. So I don't think much has changed since last quarter. We remain active in pursuing opportunities and have the capital and that's what we think our primary use for that capital will be.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [6]

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And, Alan, maybe switching gears just to Houston. Have you guys started to grow that portfolio at all? And maybe just (inaudible).

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [7]

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Yes, we made a little progress this quarter. We've grown our loan portfolio about 20%, of course, that's from $150 million to $180 million but that's progress. We're seeing more deals. Even though oil prices are kind of flat, there's pockets of that economy are pretty good. So I think we're finding those. We've hired a couple of new people and then we've hired a couple of new people in our wealth management area that we think are going to be able to help us not only in the wealth management area, but introduce us to other relationships -- banking relationships. So we're making some progress down there little bit at a time, but it's progress. And I'm a little more optimistic. We'd still like to buy something, but until we do, we'll keep [chopping the monkey's tail] off one bite at a time.

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Operator [8]

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The next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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So if you look at the core margin, as you guys said, it was up notable on a linked-quarter basis. I know we've talked about the 3.05% level as kind of being a good level plus or minus some, but just any color on why the core margin expanded so much? And where you think that will trend going forward?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [10]

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Brady, it's Will. Yes, I think, again, we had a -- obviously had a good quarter from an accretion perspective, but also we -- the NIM and the NII kind of reflect strong recoveries from previously charged-off interest. And so as we kind of look forward, we're going to update our guidance for net interest margin. Previously, 3.05%, plus or minus 3%, and we're going move that to 3.10%, plus or minus 0.3%. Again, we're keeping a focus on asset prices. I'd give you guys the update that from a loan perspective, we've noted over the last couple of quarters that we've got a portfolio of our adjustable rate loans that are currently below their floors. That has declined from what was previously about $1.8 billion to $1 billion as of the end of June. So we have only $1 billion of loans that are remaining, kind of, below floors. And so we are starting to see the benefit of rates and the impact of resetting. We'll say, with the June increase, we do expect to see rates on our loans again reset over the next 30 and 90 days to help drive NIM forward. So, again, guidance for NIM at the Hilltop level 3.10%, plus or minus 0.3%.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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All right. So I thought the $15 million insurance payment was in fee income, but did some of that show up in spread?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [12]

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No. No. So when you -- I mean, what I'm talking about previously charged-off loans, not related to the significant loan charge-off, the $24.5 million loan charge-off last year same period, but just normal course recoveries of previously charged-off loans you will also recapture interest, which flows back through net interest income.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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Got it. Okay. And then if you look at the end-of-period share count, you saw the buyback there, you also saw the shares you got back from the SWS deal. How will that impact the diluted share count in the third quarter? Can we expect to see that come down to 97 million shares-ish.

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [14]

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Yes, I would expect it to be closer to 96.3 million to 96.4 million. Again, that Southwest Securities appraisal proceeding effectively closed in the third week of June. So from a -- from an average perspective -- from an average share perspective, it had little impact on the second quarter.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [15]

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All right. And then finally for me. It was a big loan growth quarter. It sounds like some of that is construction related, but just talk about what pushed growth up so notably?

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [16]

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Well, one thing that pushed it up is we didn't have any payoffs, which helps. But about 80% to 85% of what we're doing right now is real estate. So some of it is construction, but it's other types of real estate loans. And I'm real pleased with that number. I don't think we're going to end up 25% loan growth for the year. I still think we're 8% to 10% like I've been saying all along, and I think that's what we're shooting for. But I'm pleased because our underwriting is tough, and we're -- our people are able to make deals, close deals based on the underwriting guidelines we have. So I'd say that's a pretty good number, and we are fortunate we didn't have the payoffs that we did in the first quarter, and that's why it looks good. And I think we'll be pretty good in the third quarter, too. So I'm positive about the loan area. We got 156 loan officers, and they're working their butts off. In most of the markets that we deal in, in Texas are in pretty good shape. Dallas-Fort Worth is strong; Austin is strong; Corpus is strong. We're making a little ground in Houston, Lubbock is always stable. So we're working in some good areas, and there is lots of opportunity, and we are out there shaking the bushes and beating on doors.

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Operator [17]

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Next question comes from Matt Olney with Stephens.

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Matthew Michael Sealy, Stephens Inc., Research Division - Research Associate [18]

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This is Matt Sealy on for Olney. I want to circle back on the margin. The accretion ticked up in 2Q. I wonder if you have any updated outlook going forward?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [19]

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Yes, I think, from an accretion perspective, obviously, we are winding into -- we are winding kind of through the overall process of the most significant deal. Obviously, the second quarter was very strong. So as we look out, I would put us at the low end of the prior range of $10 million to $12 million, is what we've guided previously, and I would put us at the low end of that on a recurring basis. That said, I would note, we are kind of to that point where individual workout can move the number. And as you see in the second quarter and so we do expect some variability in that quarter-to-quarter.

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Matthew Michael Sealy, Stephens Inc., Research Division - Research Associate [20]

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Okay. Makes sense. And back on the core NIM guidance, 3.10%, plus or minus 3 bps, does that include any expectations for further nonaccrual recoveries? Or is that just -- is that ex those?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [21]

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It assumes a normal level of nonaccrual recoveries.

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Matthew Michael Sealy, Stephens Inc., Research Division - Research Associate [22]

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And on the broker dealer, it looks like revenue improved sequentially, but it was down year-over-year. What's a reasonable goal going forward? And what's the year-over-year revenue outlook?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [23]

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Yes. You know what we said leading into the year, and I think it's consistent is we're expecting about $400 million of net revenue for the year. And it typically builds -- the first quarter's your weaker quarter and it typically builds through the year.

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Matthew Michael Sealy, Stephens Inc., Research Division - Research Associate [24]

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Okay. And just 1 last one on the bank. You mentioned something about the lower Durbin interchange impacting fee income during the quarter. Is this a good run that? And how should we be thinking about that going forward?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [25]

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So the Durbin impact started July 1 of last year. So this is the last quarter where a year-on-year comparison would cause, otherwise, it to be down. So I think the run rates in the current quarter are consistent, and I'd use those going forward.

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Operator [26]

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Next question comes from Scott Valentin with Compass Point.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [27]

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You guys mentioned, I guess, testing new rates and terms on your deposit products. I'm just wondering if you can give some more detail there, maybe what those programs might entail? Is it new customer targets or is it balance driven? Just trying to get some more color on what you're trying to test for.

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [28]

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Yes. I mean I'll start and then turn it to Alan. We're across the CD spectrum looking for kind of where the breakpoints in the market are as well as in our money market, money market suite as well, looking at places where it makes sense for us to enter from a pricing and cost perspective. And then testing that across the footprint in an effort to grow, again, grow core deposits and continue the momentum there.

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [29]

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Will hit it on the head. We're being able to hold those rates down at this point and [then] we test these new products. And you've got a lot of people out there in the marketplace that are starting to react and [rebound] especially the smaller places, it'll offer bigger rates. But right now, we're able to hold our sales, keep it down, and as we look at these products and stuff, we can throw some of them in there, it'd be very competitive. So we're prepared if and when we need to. We'd like to kind of ride the cycle as far as we can. So you've got to remember we still have a lot of liquidity that comes out of broker dealer, out of those [suite] deposits that we have over there. So we do have a comfort level there that we use. So we're going to do what's smart and what's cost effective that's going to help our bottom line and not go out and buy a bunch of money and pay too much for it, so we're going to watch this closely.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [30]

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Thanks for that. And then on the mortgage bank, the originations and, again, on sale margin are pretty much in line. But it looked like you guys sold fewer loans during the quarter, and I know you ended the quarter with a pretty big held for sale. I think it was $2 billion held for sale. I was just wondering if there was any timing issues during the quarter or if it just ended up that way?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [31]

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We are through the quarter, first point, and I think I made it in my comments is the second quarter is always going to have higher kind of volume levels and hold levels than the first quarter, and I think that's just normal seasonal activity. We do review as we disclose the hold period for loans and are currently [at], kind of, standard deliveries for the agencies -- standard delivery from an agency perspective, and again, we will -- as we kind of roll through the normal cycle, we don't time it again around the quarter. So you can see it move higher toward the end of the quarter and then it will be normalized as we work through the sale process early in the third quarter.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [32]

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Okay. And then on the Lloyds subsidiary. I know the second quarter is always a challenge because of the weather, the seasonality. But anything kind of nonrecurring there that [you]call out? Or is it just typically seasonality expect to recover in the back half of the year?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [33]

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Yes, I think it's the latter. Second quarter is always the worst weather pattern for us in Texas with tornado hail. This past quarter was similar to year prior, and my expectation is for a similar second half of the year as last year, albeit our top line is a little softer.

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Operator [34]

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Next question comes from Michael Rose with Raymond James .

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [35]

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Just want to follow up on the deposit question. We saw one of the other banks in Texas yesterday go out with some decently higher deposit rates from where they were. So I just wanted to get your, kind of, longer-term thoughts about how you think your deposit pricing strategy plays out? And if you feel a need in the nearer term to raise rates?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [36]

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I think as Alan said and I would reiterate, we feel very good about our current liquidity position and our liquidity position as we look forward. So we are being prudent around the way we're evaluating our -- all of our deposit prices and kind of all of our funding mix. We are always in the market, looking to grow core relationship deposits and, again, those -- that is, kind of, the foundation for the comment around pricing whether it be CDs, money markets or otherwise our core checking and other accounts. So -- but, again, the goal and objective for us is going to be to maintain pricing discipline. As Alan said, we're not going chase rate because we don't need to, at this point. And so we're watching it. We're watching all of our competitors. We are seeing some folks that are moving more aggressively, but at this point, we are being prudent in the way we're evaluating the overall cost of deposits.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [37]

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Just a follow-up to that, how should we think about where you would get uncomfortable from a loan-to-deposit ratio perspective? I guess, at the bank and then at the consolidated level, I mean, is there a certain threshold that you wouldn't want to breach?

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William B. Furr, Hilltop Holdings Inc. - CFO and EVP [38]

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I think if you evaluate our loan-to-deposit ratio, excluding the [loan] held for sale, which is driven against seasonally by the mortgage activity. I think if you saw it moving toward 90%, you'd start to move, but, again, we've got a lot of funding sources, we've got a lot of access across all of our channels. And so, again, we continue to manage liquidity very closely and very tightly, but are going to be prudent both in terms of pricing but also acquisition cost.

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Operator [39]

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This concludes our question-and-answer session. Thank you for attending today's presentation. You may now disconnect.