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Edited Transcript of HTH earnings conference call or presentation 26-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hilltop Holdings Inc Earnings Call

DALLAS Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Hilltop Holdings Inc earnings conference call or presentation Wednesday, April 26, 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

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Conference Call Participants

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* Brady Gailey

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

* Christopher Whitbread Nolan

FBR Capital Markets & Co., Research Division - Analyst

* Manuel Jesus Bueno

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

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Hilltop Holdings First Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Isabell Novakov, Senior Vice President and Investor Relations. Please go ahead.

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Isabell Novakov, [2]

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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, 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 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 first quarter of 2017, net income was $26.4 million or $0.27 per share. For the first quarter of 2016, net income was $27.6 million or $0.28 per share. The ROAA was 90 basis points in the quarter versus 96 basis points in the prior year, and our ROAE was 5.7% in the quarter versus 6.3% in the prior year.

Hilltop's 4 operating businesses were all profitable and reported $53 million in pretax income. PlainsCapital contributed $32 million, PrimeLending contributed $10 million, HilltopSecurities contributed $10 million and National Lloyds contributed $2 million.

Hilltop common equity increased to $1.9 billion, up $15.5 million from year-end. Hilltop remains well capitalized with a 14% Tier 1 leverage ratio and a 19% common equity Tier 1 capital ratio. Notably, we declared a quarterly cash dividend of $0.06 per share and repurchased $7.2 million of outstanding stock in the quarter.

Moving forward, I'll speak to the items not already mentioned. Our net interest margin in the quarter was 3.54%, down 28 basis points from the prior quarter, though our core net interest margin was 3.05%, which was relatively stable to the prior quarter and prior year. Our total assets declined by $400 million quarter-over-quarter to $12.3 billion, and our gross loans declined by $80 million quarter-over-quarter, though we're up $340 million from the prior year. Our total deposits grew by $266 million to $7.3 billion. Our NPA ratio remained low at 28 basis points, and our allowance held flat at 95 basis points.

I'll now turn the call 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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Thank you, Jeremy. Let me report on our operating report for the 4 companies. The bank had an ROAA of 0.94%, driven by a stable core NIM of 3.56% prepurchase accounting. It's down just a little bit from the fourth quarter of 3.63%, but certainly in the range that we expected.

We have very sound credit quality, and we continue to be conservative on our underwriting. And when we -- especially in a real estate market that we think is very hot, our loan-to-cost percentages are down, and we certainly watch our structure. So I think that conservative underwriting is going to pay off for us going forward.

Our non-covered held-for-investment loans remained relatively flat in the first quarter. What happened to us in the first quarter was what we thought would happen to us in the fourth quarter. We had -- the payouts we thought would come down in the fourth quarter, they really came in the first quarter. So we had a lot of large paydowns, and -- but we were able to hold the quarter flat. We still believe that we're still lined up to -- for an 8% to 10% organic growth for the year.

Year-over-year, we had a 9.2% growth. We have a very favorable pipeline of $1.9 billion of unfunded commitments. $700 million of that is real estate projects that we'll fund up and that are in process, and we have $250 million in loans that we have committed. 80% of those are going to be real estate, again referring back to the hot real estate market that we have -- committed to and are in the process of closing. Our loan quality remains healthy with 0.41% non-covered ratio, which Jeremy mentioned, so we feel very good about that.

Our energy exposure continues to decline to 2.7%, down from 3.3%, and our classified loans in energy declined $2.2 million in the quarter to $26.5 million. But we have a strong reserve of 7.1%, a little over $11 million, and about 18% of our energy loans are classified. Our deposits continue to stay in a positive range at 31% noninterest-bearing deposits.

We're operating 62 branches as we speak. We have opened new branches in Weslaco. We opened our new headquarter's branch and had our opening in Houston. We've opened a new branch at our Baylor medical here, the building -- office building we financed, by the hospital. We have in process a new branch in Lubbock, a new branch in Arlington, a new branch in Corpus and also a new branch in Frisco at The Star. So we're excited about that. All branches are working well. And we had a new -- we opened a new branch last night in Austin, and that's our new headquarters that we moved to, 5th and Colorado. It's an excellent facility, and we had a great attendance.

PrimeLending, for the quarter, had an excellent quarter. Income pretax increased by 9% for the quarter relative to quarter 1 in 2016. You've got to remember that the last 2 years in the first quarter, we had a lot of refinance, which really drove a big bottom line for us. That refinance has virtually gone away, and we're back to the normal course of business. And the mortgage business first quarter is slow. But -- however, we had very strong purchase activity and a very strong gain on sales.

So first quarter appears to be -- what was not appears to. It was an excellent quarter for a mortgage company. Our purchase volume is 80.3%, which is well above the industry average of 58.7%. That leads to a good gain on sale, primarily due to increase in volume and loan -- total loans that were sold. So we feel good about that. We're getting some premium pricing on sale of our loans and things seem to go well there. Our overall market share is 0.78% for quarter 1, and our purchase market share is 1.07%. So very pleased with the operation at Prime, things look positive for the second quarter. As we go into our busy time of the year, things look good.

At HilltopSecurities, we had pretax income of $9.5 million compared to $3.8 million last year. The pretax margin increased to 10.5% quarter 1 versus 4.3% quarter 1, 2016. Our year-over-year improvement results primarily driven by increase in revenue and from higher short-term interest rates, as rates go up, we benefit from that, as well as the decrease in integration cost that we had.

Net revenue increased 3.5% to $91 million in quarter 1 '17 compared to the same quarter a year ago. Movement in the short-term interest rates provided for additional $2.6 million year-over-year increase from the money market and FDIC-insured deposits. Noninterest expense decreased about 3.1% to 81.7% compared to the same quarter last year, and it was primarily a decrease in the integration cost of approximately $4 million that are not with us anymore, that we eliminated.

Compensation ratio continues to come down from 65.8% to 62.9%. We continue to manage that down, and the people at HilltopSecurities are doing a good job doing that. And our noncompensation-related expense -- noninterest expense declined 7.8% year-over-year. So everything is on track and moving in the right direction at HilltopSecurities, and they had a good quarter.

National Lloyds had a combined ratio of 98.4%, which drove a pretax income of $1.8 million. Seasonally high frequency of storms resulted in elevated loss and LAE ratio of 60% versus 55.3% quarter 1 2016. The decrease in premiums earned decreased from $39.7 million in '16 to $36.1 million. Those are continuing to be results of position in our portfolio and getting away from concentrations, but there's also a very competitive insurance market in Texas, which we're battling. But I think we're gaining on it and beginning to build momentum. So I think things are well there. We just need to keep the weather away. We're entering into the second quarter, which is a tough quarter. But I think all things are in line, and we should be okay.

So that is the operating report of the subsidiaries, and I will turn it over to Will Furr now to talk about the numbers.

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

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Thanks, Alan. I'll start on Page 7. Net interest income for the first quarter equated to $92 million, a decrease of $12 million from the prior quarter and $2 million from the prior year. Net interest income in the first quarter of 2017 included $12 million of purchased loan accretion. Purchased loan accretion declined versus the fourth quarter by approximately $6 million and $4.5 million from the first quarter of 2016. Core net interest income, excluding purchased loan accretion, improved by $2.5 million or 3%, including the impact of 1 fewer day in the first quarter of 2017.

Reported taxable equivalent net interest margin for the first quarter was 3.54%, down 28 basis points from the prior quarter and 16 basis points from the same period prior year. Excluding the impact of purchased loan accretion across all periods, Hilltop's net interest margin in the fourth quarter was 3.05%, down 6 basis points versus the prior quarter and up 9 basis points from the prior year. Reported loan yields on gross loans have declined 31 basis points from the first quarter of 2016, driven principally by the impact of lower purchase loan accretion. Loan yields at PlainsCapital Bank, excluding the impact of purchased loan accretion, have remained relatively stable from the first quarter of 2016 levels, ending the first quarter of '17 at 4.34%. At the bank, net interest margin excluding purchased loan accretion equated to 3.56%, down 7 basis points from the prior quarter, driven by lower recoveries from previously charged-off loan interest.

Interest-bearing deposit cost increased 5 basis points versus the first 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 relationship deposits. During the quarter, market interest rates remained volatile. The bank's investment portfolio, which represented $990 million in total securities, maintained a taxable equivalent book yield of 2.13%, up 6 basis points from the fourth quarter of '16. Given the current market conditions and our securities redemption mix, the reinvestment rate in the portfolio is approximately 2%.

Moving to Page 8. Hilltop reported total noninterest income of $271 million in the first quarter of 2017. Total noninterest income declined by $6 million or 2% versus the prior year. During the first quarter, mortgage-related noninterest income declined by $2.4 million or 2% while lock mortgage volume declined 7%. Gross secondary mortgage gain on sale margins remained relatively stable versus the first quarter of 2016. The focus on purchased mortgage loans and debt execution at our mortgage business continue to provide support and strong gain on sale levels. Insurance revenues declined versus the prior year by $3.6 million, driven by competition and the ongoing optimization of our book of business. The securities businesses remained relatively stable with the first quarter of 2016.

Moving to Page 9. We reported first quarter noninterest expenses of $320 million, down $5 million or 2% from the first quarter of 2016. The first quarter of 2016 included $4.5 million of transaction and integration-related cost related directly to the SWS acquisition and integration. They also included a significant write-down of a specific REO property. The first quarter of 2017 noninterest expenses included $4 million of FDIC indemnification asset amortization. These expenses are reflected in the other noninterest expense bucket. Compensation and benefits expense increased from the first quarter of 2016 by $4 million. Annual compensation increases reflect strategic hiring, middle office supporting our mortgage business to support higher volumes and normal inflation area increases, including annual salary merit and health-care-related cost.

Moving to Page 10. Total assets of $12.3 billion increased by $606 million or 5% for the first quarter of 2016. The growth in assets is driven by an increase of $448 million or 8% in non-covered loans. Broker-dealer clearing receivables increased by $204 million, driven by stronger market activity in the business. An increase of similar impact is noted on the liability side of the balance sheet in broker-dealer clearing payables. These balances, while variable on a quarterly basis, are being managed to a target $1.5 billion level. During the quarter, Hilltop's FDIC indemnification asset declined $23 million or 33%. This decline is driven by 2 items, a significant reimbursement related to a previously charged-off loan and the $4 million of asset amortization. We do expect to continue amortizing the FDIC indemnification asset throughout 2017.

Total deposits have grown 5% versus the prior year of $7.3 billion. Versus the fourth quarter of 2016, we experienced strong growth in money market deposits and a stabilization of CD balances. We are actively assessing the competitive environment and continue to test new rates and promotions to attract core relationship deposit. Capital levels grew in the first quarter as common equity increased by $15 million versus the prior quarter. Hilltop's common equity Tier 1 ratio equated to 19.03% at March 31, and PlainsCapital Bank's common equity Tier 1 ratio equated to 15.5% for the current period.

Moving to Page 11. PlainsCapital Bank's pretax income increased to $31.8 million in the first quarter 2017 versus $31.2 million in the first quarter of 2016, primarily driven due to a lower provision expense and lower noninterest expenses, partially offset by lower net interest income. Net interest income declined as a result of lower purchase loan accretion versus the first quarter of 2016. Noninterest income decreased compared to the first quarter of 2016, mainly as a result of year-over-year declines in interchange fees due to the impact of the Durbin amendment. Noninterest expenses declined versus the prior year driven by lower losses related to REO properties, somewhat offset by amortization of the FDIC indemnification asset.

I'll briefly touch on Pages 12 and 13. At PlainsCapital, our exposure to energy continues to moderate. As of March 31, our energy loans have fallen below 3% of total loans to 2.7% while the reserves against our energy exposures has increased to 7.1%. Overall, credit quality remained strong as non-covered NPAs to total loans is reported at 28 basis points for the period.

I'm now on page 14. PrimeLending's pretax income increased to $9.9 million in the first quarter of 2017 versus $9.1 million during the prior year. During the first quarter, the mortgage business originated $2.8 billion in loans, representing a decrease of approximately $105 million or 4% versus the prior year. The first quarter of 2017 included $555 million of loans originated to refinance existing mortgages. Versus the prior year, refinance volume declined 37% or $323 million, consistent with expectations, while purchased mortgage volume increased by $218 million or 11% from the prior year. Consistent with our ongoing strategy, the mix of purchase volume increased to 80.3% in the first quarter of 2017 from 70% in the first quarter of 2016 and is in line with our expectations, given current market conditions.

Noninterest income declined $2.7 million or 1.8% from the first quarter 2016 to $144 million in the first quarter of 2017 due to a decline in value of interest rate lock commitments, which was partially offset by higher net gains from sale of loans and higher mortgage loan origination fees. Noninterest expenses decreased $2.8 million or 2.1% from the first quarter 2016 to $132 million in the first quarter 2017, due primarily to a decline in variable compensation expenses associated with lower total origination volume partially offset by increased salaries and benefits related to middle office support.

Moving to Page 15. At HilltopSecurities, pretax income equated to $9.5 million in the first quarter of 2017, an increase of $5.7 million versus the prior year. Pretax margin improved to 10.5% versus the prior year, reflecting a $4 million in integration-related costs directly attributable to the acquisition of Southwest Securities and improving net revenues that benefited from the higher short-term interest rates. Securities compensation ratio of 62.9% in the first quarter compared to 65.8% in the first quarter of 2016. As has been the case, HilltopSecurities provided PlainsCapital Bank with approximately $1.1 billion of core deposits, representing 44% of the total available FDIC insured funds.

Moving to Page 16. National Lloyds earned pretax income of $1.8 million in the first quarter of 2017. Pretax income declined versus the prior year by $4.4 million. First quarter of 2017 results reflect an elevated frequency of storms above seasonal norms for the first quarter of the calendar year, including a set of storms that developed in the last week of March. The decline in net premiums earned is a reflection of management's continued efforts to reduce concentrations in high-risk areas as well as a moderate increase in pricing competition across the footprint. The increase in the expense ratio is primarily driven by the decline in net premiums earned and elevated compensation expense.

With that, I'll now turn the call back 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) And our first question comes from Brady Gailey with KBW.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So maybe I missed it. But the increase in the expense base from the amortization of the FDIC asset, what were the -- I know it was up, but what were those dollars in the first quarter?

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William B. Furr, Hilltop Holdings Inc. - CFO [3]

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The FDIC indemnification was approximately $4 million in the first quarter.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay. And do you feel like that will be a good run rate going forward? Or will that amortization grow?

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

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Well, as you know, it's contingent upon our quarterly reforecast process. But we expect it to be between $2 million and $4 million per quarter.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. And is that -- that's just located in other expenses.

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William B. Furr, Hilltop Holdings Inc. - CFO [7]

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Yes, sir.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Okay, okay. Then in the core margin, it was 3.05%. That's pretty consistent with where it was last year on a full year basis. Do you expect the core margin to grow at all over the course of '17? Or is it going to be more stable?

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William B. Furr, Hilltop Holdings Inc. - CFO [9]

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I think the -- we provided previous guidance of 3.05%, plus or minus 3 basis points. We do expect it will continue to -- it will expand as market interest rates increase over time. As we've noted previously, we do -- our loan portfolio -- certain portions of loan portfolio have a -- have floors, in them, interest rate floors. And with each rate increase, we are moving more and more loans above their floor level. So they reset to overall higher yields. As we've noted, those floors have been extremely valuable through the cycle. But as we continue to work through, you'll see more of the interest rate increases pull through to our net interest margin.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

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Okay, great. And then finally for me, financial advisory revenue was down linked quarter. I think some of that might be seasonality. But just any comment on the decrease there.

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [11]

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On that line item, I'd say that's probably going to be in the public finance business, which on a linked quarter, the first quarter is usually slower for the public finance business -- public banking.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [12]

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So just seasonality, and it should pop back in 2Q.

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [13]

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Yes. I think I would look at it kind of year-over-year, and we think it's going to be pretty similar.

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Operator [14]

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Our next question comes from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [15]

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I wanted to start on the average loan volumes being down quarter-over-quarter pretty significantly. I assume that was mostly mortgage warehouse-related. I apologize if I missed that. But could you give me a feel for how much of it was driven by that?

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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, the big deal, it is the mortgage warehouse and also the national mortgage warehouse we have because the volumes were down. I think Prime loan volume was $1.2 billion, down from about $1.4 billion. So it's down $200 million. The big thing -- and we handled that fine. The big thing was we had a bunch of payoffs that happened to us the first quarter that we really thought we're going to have in the last quarter. And that -- they did, and that's what drew that 13% growth figure. And of course, we got them in the first quarter so we were flat. But we still feel that, Michael, we can get to the 8% to 10% that we talked about. We've got a lot of things in the pipeline, a lot of things we're trying to get closed, and I think the second quarter will look a lot better.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [17]

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And the $1.2 billion and $1.4 billion, those are average balances. Or is that period-end?

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [18]

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No, that's average balances.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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And then maybe just -- also, could you talk about just what you're seeing in the pipeline thus far into 2Q not -- just on the mortgage side, kind of how originations are trending?

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [20]

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Well, as I told you, we have $250 million that we committed on. 80% of that's real estate. And it's a hot market in real estate, maybe getting too hot, which concerns us a little bit. That's why we stay conservative on our underwriting. You're seeing a little C&I, but not a whole lot. And what you do see, everything is very competitive. And what you're seeing in a lot of this stuff is you're seeing a lot of gills on underwriting and crazy terms. I saw one the other day a 10-year interest-only loan. I mean, these things are -- I wouldn't do that. But -- so the competition is tough, but we're hanging in there with our customers. And we've got $700 million of construction loans out there that are going to fund up. So we're holding our own and doing okay. It was just those big paydowns that we got. When you loan people money, you expect them to pay it back. And we got to replace that, and that's what we're doing. But the market is competitive, and the market -- real estate market is hot. There's a lot of growth and we'll see if all these buildings fill up, so.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

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And one last one, if I could. Just -- you talked about the branch build-out and all of the new branches you're adding. Is that because maybe the M&A environment isn't sort of coming to fruition in the way that you...

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [22]

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This is just a normal course of business. We try to put branches in opportune places, one, so that our brand can be seen, and another is that we got people there to put them in and make them work. Some of those branches are -- we might be closing one or updating one, like the one in Austin. We closed our original branch in 8th and Congress, and we moved to 5th and Colorado, including a new branch. Some of it's an upgrade, some of it is an addition, like in Arlington, where we're building a new branch over there, a really nice facility. And it's going to replace 2 branches we have in Arlington. We'll be consolidating. The one at The Star in Frisco is a hot place out there. It's a place where you want to be. So that's why we went there in Lubbock. Lubbock continues to grow west, and so we're putting a new branch in further west in Lubbock to be able to control our market share. So I don't think it has anything to do with M&A. I think it has -- just continue to try to take care of our business and be in the right places at the right times. And we got -- we want to be sure we have the right people in those branches also. We don't just build branches and then find people. We get people and then build branches.

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Operator [23]

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Our next question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [24]

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Alan, I'll start with you on the mortgage piece. Any commentary on the gain on sale margins in the first quarter with softer industry volumes? And as you look towards 2Q, would you expect gain on sale margins to improve?

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [25]

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Well. Our gain on sales is excellent, and we've been able to find some place to sell as long as it's at a premium price, which are driving those gains on sales. And so Matt, you all write about these things, about the mortgage business not being very good in the first quarter. We had a great first quarter, far exceeded our expectations. And you got to realize, we moved from a refinance time for the last 2 years. In the first quarter, we didn't have any, but we did have a gain -- I mean, the purchase side of it, and we improved that $200 million first quarter. So not only did we have great quarter, we had a great quarter financially, a lot better than we expected. Second quarter, we're in the time of the year and how it plays out and I can tell you right now, it looks pretty good. And I think we anticipate a good second quarter. I think we continue to have a gain on sale margins that we've had. I think the biggest concern that we have or anybody else has in this industry is a lack of inventory. There's -- we need more homes to sell. We've got guys out there, originators, who have got 10 or 15 people approved for loans and they can't find houses. So I think that's the thing we're up against, but we're getting our share of it, if not more our share. But I was looking at the numbers this morning, they're excellent and I think second quarter is going to be good. So I hope you all heard the report on the mortgage business because the mortgage business is -- it carried a lot of weight in the first quarter.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [26]

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Yes, understood. And then within HilltopSecurities, I think Jeremy mentioned the seasonality. Can you talk more specifically about which businesses were soft in the first quarter? And remind me, which segments within HilltopSecurities? Can you talk about how those segments react to higher interest rate environment now versus 1 year or 2 ago?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [27]

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Okay, sure. I would say, overall, net revenue increased year-over-year, and so we're okay with the quarter. It's just the first quarter of every year, public finance, which is such a big business for us there, is just typically seasonally weaker, and then it builds throughout the year. And so -- and kind of trying to hit all your questions there, Matt, like -- but the main businesses we have in the broker-dealer are public banking. And overall, a significant rise in interest rates could slow down our issuance and refunding. But we think at these levels, that we don't really foresee that to be the case this year. Our capital markets business would generally improve in a rising rate environment, and our structured finance business is similar to the mortgage business. It could create headwinds, although this relates to first-time homebuyer down payment assistance. So it's a little bit stickier. But the real benefit, overall, to the broker-dealers in the retail and clearing business, to a rise in short-term interest rates. And as we stated, we had a $2.6 million year-over-year increase in income as a result of the rise in short-term interest rates in our retail and clearing business.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [28]

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Okay, got it. And then just lastly, as far as the outlook for purchase accounting accretion, any update you can give us for the next few quarters, expectations?

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William B. Furr, Hilltop Holdings Inc. - CFO [29]

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Yes. I think purchase accounting, we've stated $10 million to $12 million. We've also stated that is the -- that is kind of the forecast level. I would maintain the $10 million to $12 million per quarter, understanding that any early payments or recoveries over and above our expectations can create volatility there, as you all have seen over the quarters. But as a matter of kind of baseline, $10 million to $12 million per quarter for 2017.

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Operator [30]

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Our next question comes from Scott Valentin with Compass Point.

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Manuel Jesus Bueno, Compass Point Research & Trading, LLC, Research Division - VP and Research Analyst [31]

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It's Jesus Bueno for Scott. Just quickly on the insurance unit. Had -- just curious on the underwriting expense ratio. It looks like it ticked up. Was that the result of the higher frequency? And I guess going forward, can we expect that to kind of come back to that 33% to 34% range where you're running before?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [32]

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Well, the expense ratio is your policy and underwriting expenses divided by your net premiums earned. So it really doesn't have an impact from your losses. And it was elevated this past quarter at 38.5%, and that's driven by 2 things: one is our premium, so the denominator has been declining; and second, we had an increase in compensation that we view to be kind of a one-quarter item. If I was to look out -- or separate that, I think you're looking at expense ratio more like 35% to 37% with this kind of premium base.

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Manuel Jesus Bueno, Compass Point Research & Trading, LLC, Research Division - VP and Research Analyst [33]

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That's helpful. And I guess turning over to the PrimeLending. I guess -- it looked like there was a small MSR sale there. So is that something that we can expect every year? I guess if you could provide any color on that, it'd be helpful.

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William B. Furr, Hilltop Holdings Inc. - CFO [34]

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Jesus, this is Will. We kind of monitor our MSR very closely. And given the valuation increases, given kind of where rates have gone through the market, we felt like it was prudent to execute a sale. That accounted for about $17.5 million worth of asset value at execution. And I would tell you as a matter of kind of maintenance, as a matter of kind of testing market pricing, we are -- we will be in the market, I would say, at least once per year from an MSR perspective, notwithstanding significant changes in kind of market values.

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Manuel Jesus Bueno, Compass Point Research & Trading, LLC, Research Division - VP and Research Analyst [35]

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Great, I appreciate that. And if I could just ask one more question. On the repurchase this quarter, is it correct to assume that, I guess, the stock repurchase was mainly to offset comp. Or I guess going forward, should we expect that to be kind of recurring theme quarter-to-quarter that you should be actively repurchasing shares?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [36]

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Yes, sure. So we repurchased $7.2 million of shares at an average price of $27.50 (sic) [ $27.52 ], and the primary purpose of that is to offset equity award dilution. And I -- so kind of to your point there, I mean, I think that our goal would be to do probably some amount of it on a quarterly basis so that we were not sensitive to share price of any given quarter.

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Operator [37]

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Our next question comes from Chris Nolan with FBR & Co.

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Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [38]

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On the broker-dealer deposits, how is that -- how do those deposits react to rising interest rates? What's the deposit beta for that?

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William B. Furr, Hilltop Holdings Inc. - CFO [39]

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Yes. So the deposit beta for those interest rates are, as we sit here today, on the client's side, it's in the 10% to 15% range. We'd expect that will go up. But again, it's consistent with kind of market pass-through.

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Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [40]

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Great. And then on the energy book, why are you building up reserves, I mean...

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Alan B. White, Hilltop Holdings Inc. - Co-CEO, Vice Chairman and Chairman of PlainsCapital Bank [41]

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Well, we're not building up. We just kind of left them there where they were all along this cycle. So I guess we're being conservative, if you want the answer to the question.

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Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [42]

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And then finally, your capital ratios continue to grow. Do you expect them to grow through the year?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [43]

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I think until we deploy a meaningful amount of our excess capital in M&A deal, that they will grow. I mean, we're -- so we're still looking at M&A. We've been actively looking at it and think that's the primary use of our excess capital. We feel like we're best in situation -- or situational opportunities. And we've been active and knowledgeable of the deals going out in the market.

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Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [44]

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Jeremy, do you think -- are you guys more interested in a geographic footprint in acquisition or an asset-generating franchise or deposit-generating franchise? What sort of characteristics are you looking for?

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Jeremy B. Ford, Hilltop Holdings Inc. - Co-CEO, President and Director [45]

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So we're looking at -- banks in Texas is what would be logical for us, the larger MSAs. Houston would be ideal in that we're not really there as much. Dallas, Fort Worth, Austin, San Antonio and Corpus are all good markets. We want to look for asset sizes of $1 billion to $5 billion. We think with our excess capital today, we could do excess of $5 billion target. And we're looking for commercial lending strategies, commercial traditional banks. As far as asset generators or deposit franchise, I mean, we just -- it just kind of depends. I think that an asset generator would be more immediately impactful to us, but we do think the deposit values will increase with time.

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Operator [46]

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And seeing no further questions, this will conclude today's conference call. We would like to thank the management team for their time today, and we thank you all for attending today's presentation. You may now disconnect.