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Edited Transcript of HTH earnings conference call or presentation 27-Jan-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Hilltop Holdings Inc Earnings Call

DALLAS Jan 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Hilltop Holdings Inc earnings conference call or presentation Friday, January 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Isabell Novakov

Hilltop Holdings Inc - IR

* Jeremy Ford

Hilltop Holdings Inc - President & Co-CEO

* Alan White

Hilltop Holdings Inc - Vice Chairman & Co-CEO

* Will Furr

Hilltop Holdings Inc - CFO

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Conference Call Participants

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* Brady Gailey

Keefe, Bruyette & Woods - Analyst

* Michael Young

SunTrust Robinson Humphrey - Analyst

* Matt Olney

Stephens Inc - Analyst

* Michael Rose

Raymond James - Analyst

* Brett Rabatin

Piper Jaffray - Analyst

* John Moran

Macquarie Research Equities - Analyst

* Jesus Bueno

Compass Point Research & Trading - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Hilltop Holdings Q4 2016 earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Isabell Novakov. Please go ahead.

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Isabell Novakov, Hilltop Holdings Inc - IR [2]

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Good morning. Joining me on the call this morning are Jeremy Ford, President and Co-CEO, Hilltop Holdings; Alan White, Vice Chairman and Co-CEO, Hilltop Holdings; and Will Furr, Chief Financial Officer, Hilltop Holdings.

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 conditions 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 SEC. Except for 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 adjusted net income, adjusted income before taxes, 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 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 Ford, Hilltop Holdings Inc - President & Co-CEO [3]

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Thank you, Isabell, and good morning. The fourth quarter of 2016 net income was $35.3 million or $0.36 per share. During the quarter, results included a specific legal reserve of $16 million pretax related to one matter involving Hilltop Securities.

About that, this specific legal reserve relates to the lawsuit filed by the Rhode Island Economic Development Corporation in 2012 that named First Southwest Company. First Southwest served as financial advisor in connection with the issuance of $75 million in bonds by the Economic Development Board to finance a loan to 38 Studios LLC. 38 Studios failed to repay the loan, and the Economic Development Board is seeking recovery to repay the bond issue.

For the fourth quarter of 2015, net income was $20.7 million or $0.21 per share. Our ROAA in the quarter was 1.13% relative to 68 basis points in the prior year, and our ROAE was 7.56% relevant to 4.7% in the prior year. Hilltop's four operating businesses reported $62.6 million in pretax income. PlainsCapital contributed $40 million, PrimeLending contributed $9 million, Hilltop Securities recorded a $24,000 pretax loss, and National Lloyds contributed $13 million.

Our common equity increased to $1.9 billion, up $25 million from the prior quarter. Hilltop remains well-capitalized, with a 13.5% Tier 1 Leverage Ratio and 18.3% Common Equity Tier 1 Capital ratio. Notably, Hilltop's Board declared a quarterly cash dividend of $0.06 per common share and reauthorized the stock purchase program to repurchase up to $50 million of its outstanding common stock.

Moving forward, I will focus on the items for the quarter not previously mentioned. Our taxable equivalent net interest margin increased to 3.82% from 3.67%. And our pre-purchase accounting net interest margin increased to 3.11% from 3.03%. Our assets grew to $12.7 billion, our loan portfolio grew to $6.1 billion, and our deposits grew to $7.1 billion. Our credit quality remains solid and our net NPAs to total assets held flat at 24 basis points. And with that, I will turn the presentation over to Alan White.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [4]

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Thanks, Jeremy. Good morning to everybody. All our businesses generated impressive financial results for the year. The [BICAD] double-digit loan growth prime had a record volume year. And Hilltop Securities has shown great progress since the integration and it provided an excellent return. And our insurance company had a very good underwriting year of solid performance and profit.

At the bi-quarter-four, ROA was 1.09%, driven by our loan growth, a stable NIM and very sound credit quality. Quarterly at HTH consolidated non-held for investment loan growth, excluding the broker-dealer margin loans, was 2.7% or 11.4% annually. And for -- that's for quarter-four 2016. [Fiber] loan pipeline is $1.9 billion in total unused commitments. Full-year 2016 HTH consolidated non-held for investment loan growth, excluding the broker-dealer, was 16%. We are very pleased with that number.

Accretion loan growth and stable deposit costs have contributed to a strong taxable equivalent net interest margin of 4.59% -- 3.69% if you're looking at for the purchase accounting. Loan quality continued to improve. Its non-covered NPLs were $24.4 million or 0.32% of total non-covered loans. At quarter-four 2016, relative to $20.5 million or 0.34% of non-covered loans at quarter-three 2016. Our energy exposure declined to approximately 3% of total loans.

Classified and criticized loans declined $10.7 million to $28.7 million for the quarter. We have a 6.5% energy portfolio reserve. 17.2% of our loans in the energy are classified, and we continue to have no national shared credits in that portfolio.

Our non-interest-bearing deposits continue to remain strong at 31.1% of total deposits at quarter-four. We are operating 63 branches, and we opened two new branches, one in Dallas at our Baylor medical office facility we just financed -- we opened a new branch there.

And we have moved our Austin headquarters at 5th and Colorado into a new facility that we are proud of there. We also in the quarter sold our branches in Laredo. Those were two branches, of which we exited the Laredo market.

At PrimeLending, results improved significantly relative to quarter-four 2015, with funded loans up 26.8% to $3.9 billion. That was a very nice surprise, and we really outperformed what we expected to do in quarter-four. Purchase volume of 71% in quarter-four [readied] the industry volume of 49%. So we remain this strong purchase-volume Company.

Net gain on sale continued to improve, with our margin in quarter-four higher than both quarter-three 2016 and quarter-four 2015. Our improved margin and higher volumes drove improved gain on sale revenue. Our overall market share is 0.83% in quarter-four 2016, with a purchase volume market share of 1.19%. We have 312 branches and 1,328 loan officers, and we rank number six in the country in the purchase of volume business.

As far as Hilltop Securities is concerned, fourth quarter of 2016, Hilltop Securities had a pretax loss of $24,000, and $67,000 of pretax income after adjusting for integration costs. Quarter-four 2016 results included a pretax legal reserve of $16 million, which Jeremy mentioned earlier.

Year-over-year net revenue growth was 7.8%, and quarter-four 2016 compensation net revenue ratio of 58.6%. This is a significant improvement as we go through that integration process. We are driven by balanced sources of revenue coming to various sections of our business, and we are proud that -- what we have been able to accomplish through the integration initiatives.

National Lloyds had a combined ratio for the quarter of 69.8%, which drove a pretax income of $13.3 million for the quarter. They had an excellent quarter. Direct premium written decreased year over year to a decline in policy [forced]. But that was due to management's initiatives to diversify our concentrations. We did offset that slightly by increased premium rates.

The strong quarter-four our results of both seasonal decline in frequency, as severity of storms, and the continued reduction in risk within the National Lloyd book of business. This has resulted in a loan LAE ratio of 36.6% during 2016. If you look at the combined ratio of 69.8%, was excellent.

Our fixed expense decline in lower variable expenses drove 33.2% of underwriting expense ratios, which gets you to the 69.8%. I will also mention that we had our rating with Fitch renewed at BBB stable, which, we're very pleased to receive that information. So with that, I will turn it over to Will.

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Will Furr, Hilltop Holdings Inc - CFO [5]

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Thanks, Alan. I'll start on page 7. Net interest income for the fourth quarter equated to $104 million, an increase of $5 million from both the prior quarter and from the prior year. Net interest income in the fourth quarter of 2016 included $18 million of purchase loan accretion. During the fourth quarter, the Bank did receive certain accelerated pay-downs that resulted in additional purchase loan accretion.

Reportable taxable equivalent net interest margin for the fourth quarter was 3.82%, up 15 basis points from the prior quarter, and 9 basis points from the same period prior year. Excluding the impact of purchase loan accretion across all periods, Hilltop's net interest margin in the fourth quarter was 3.11%, up 8 basis points versus the prior quarter, and up 17 basis points from the prior year.

Reported loan yields on gross loans has declined 31 basis points from the fourth quarter of 2015. Loan yields excluding the impact of purchase loan accretion have declined 10 basis points to approximately 4.25% during the quarter compared to the fourth quarter of 2015. At the Bank, net interest margin, excluding purchase loan accretion, equated to 3.63%, stable with the prior quarter.

After the presidential election, market interest rates have increased significantly. This increase in rates did impact Hilltop's yield on taxable and non-taxable investments, and has improved our current reinvestment rate in the Bank's investment portfolio to 2.25%. PlainsCapital Bank's investment portfolio remains the most significant investment portfolio across the franchise, with a balance of $848 million at December 31. The taxable equivalent book yield on the Bank's portfolio equates to 2.07%, down 11 basis points from the third quarter of 2016.

Moving to page 8, Hilltop reported total noninterest income of $309 million in the fourth quarter of 2016. Total noninterest income increased by $32 million or 12% versus the prior year. During the fourth quarter, the mortgage business originated $3.9 billion in loans, representing an increase of $820 million or 27% versus the prior year. These strong results, coupled with a 4-basis point improvement in secondary market gain-on-sale margins, resulted in an increase in mortgage-related noninterest revenues of $29 million or 21% versus the fourth quarter of 2015. Insurance revenues and our securities businesses remained relatively stable with the fourth quarter of 2015.

Moving to page 9, fourth-quarter noninterest expenses came in at $356 million, up $17 million or 5% versus the fourth quarter of 2015. Note, the fourth quarter of 2015 included $14.4 million of transaction integration-related costs related to the SWS acquisition. The fourth quarter of 2016 noninterest expenses included a $16 million specific legal reserve related to one matter involving Hilltop Securities. This expense is reflected in other noninterest expense.

Compensation and benefits expense increased from the fourth quarter of 2015 by $26 million. Mortgage banking compensation increased in the fourth quarter by $18 million versus the prior year, $16 million related to variable compensation, including commissions. Other compensation-related increases relate to strategic hiring and normal inflationary increases, including annual merit and healthcare-related costs. Insurance-related expenses declined from the prior-year quarter by $9 million, driven by lower storm activity across Texas in 2016.

Moving to page 10, total assets of $12.7 billion increased $871 million or 7% versus the fourth quarter of 2015. The growth in assets is driven by an increase of $636 million or 12% in non-covered loans. Loan sales for sale related directly to our mortgage banking unit increased approximately $260 million, driven by stronger mortgage production during the fourth quarter. Broker-dealer and clearing receivables increased $157 million from the third quarter, reflecting normal business flows during the fourth quarter. These balances, while variable on a quarterly basis, are being managed to a target $1.5 billion level.

Total deposits have grown 1.6% versus the prior year, to $7 billion. And allowance for non-FDIC-covered loans equates to $54 million at December 31, 2016. The allowance to total non-FDIC-covered loans as of December 31 was 93 basis points. During the last week of December, we increased our FHLB borrowing to approximately $1.2 billion, noted in short-term borrowings, to support higher mortgage production in the quarter.

Capital levels in the fourth quarter improved as common equity increased by $25 million versus the prior quarter. Hilltop's Common Equity Tier 1 ratio equated to 18.3%. At the Bank, the Common Equity Tier 1 ratio equated to 14.64% as of December 31, 2016.

Turning to page 11, PlainsCapital reflected strong fourth-quarter pretax earnings of $39.9 million. Pretax earnings increased $5.6 million or 17% versus the fourth quarter of 2015. Loans grew by $605 million to $5.5 billion as of December 31. This growth supported core net interest growth of $8 million, which was somewhat offset by lower purchase loan accretion of $1.6 million.

Net interest margin at the Bank excluding purchase loan accretion equated to 3.63%, again stable with third-quarter 2016 levels. Provision of $4.4 million remained stable with prior quarters, as credit quality remained solid. PlainsCapital's annualized net charge-offs to total loan ratio for the quarter ended at 21 basis points. And non-covered NPAs to Hilltop assets remained stable at 24 basis points.

During the third quarter of 2016, PlainsCapital Bank was subject to the Durbin Amendment of the Dodd-Frank rule. The resulting reduction interchange income equates to approximately $800,000 per quarter. For the fourth quarter, and versus the fourth-quarter 2015, the bank generated positive operating leverage of 6%, supporting a reduction in the efficiency ratio of 378 basis points versus the fourth quarter of 2015.

I'm moving to page 12. PlainsCapital continues to make solid progress in managing down our overall exposure in energy-related credits. As of December 2016, energy loans to total loans equated to 3%, and classified and criticized loans continued to decline in the energy book to $28.7 million. Allowance for loan loss coverage of energy loans remained stable versus the prior quarter, at 6.5%.

Moving to page 14, PrimeLending reported pretax income of $9.4 million during the fourth quarter of 2016. This increased $5.6 million or 145% versus the fourth quarter of 2015. Income in the quarter was driven by strong origination volumes, which equated to $3.9 billion, an increase of approximately $800 million or 27% from the fourth quarter. Secondary gain margins, as noted earlier, increased to 388 basis points in the quarter, 4 basis points improvement versus third quarter of 2016. I will now turn it back to Jeremy to cover Hilltop Securities and National Lloyds.

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [6]

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Thank you, Will. Hilltop Securities reported a $24,000 pretax loss in the quarter. Included in the quarter was the aforementioned $16 million pretax specific legal reserve associated with the Rhode Island matter. On a positive note, net revenue increased 7.8% from Q4 2015, and the compensation ratio decreased to 58.6% from 63.2% in the prior-year quarter. Notably, the broker-dealer segment provided the banking segment with $1 billion of core deposits, which represented 40% of total available FDIC-insured balances.

Moving on to National Lloyds. National Lloyds had a strong quarter, with pretax income of $13.3 million versus pretax income of $7 million in the prior year. Importantly, Q4 2015 results included the impact of severe storms in North Texas. The seasonal decline in severe storms resulted in an improved loss in LAE ratio of 36.6%. And the management of underwriting expenses resulted in an improved expense ratio of 33%.

We are excited about National Lloyds' results for the year, and also excited to announce that we are branding National Lloyds with our buffalo, to be consistent with each Company and in our family. And that concludes our prepared remarks.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Brady Gailey, KBW.

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Brady Gailey, Keefe, Bruyette & Woods - Analyst [2]

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Good morning, guys.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [3]

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Good morning.

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Brady Gailey, Keefe, Bruyette & Woods - Analyst [4]

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There is a lot of focus on mortgage as we head into 2017. If you look at originations, you all did around $15.5 billion last year in 2016. How do you think that will trend in 2017? Do you think that you can hire new people and try to keep that flat? Or do you think there is some downside to the origination and volume?

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [5]

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We have gone from the refi boom, and it's gone to no refi. And that refi business, first quarter of last year, fourth quarter of 2015, allowed us to have a good quarter. That's gone, so we are back to the purchase side. We're back to more of the cyclical wave of things.

No, we are not going to be able to hire enough people to make up for that loss of refi. Our purchase business will pick up, and we should get our market share, and hopefully better, which will help make up for some of that loss. But I don't think we can make up for all of that loss. But it's yet to be seen, and it depends of what the economy does and how everybody reacts to the new guy in Washington.

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Brady Gailey, Keefe, Bruyette & Woods - Analyst [6]

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All right. And then the $50 million buyback. I think I remember in the past, you all have just repurchased shares that offset some of the shares issued as a part of rewards and incentives. I think that's how you all looked at it in the past. Looking where the stock is now, a little under $30, is that something that you think you will continue? Or is this more just something to have out there in case the stock gets hit?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [7]

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I think, as you said, the primary purpose that we're going to have for this is to minimize the dilution in fact associated with any equity awards. And I do expect for those repurchases to occur this year. That's how I feel. And it's not really a view on the stock price. If we did have a view on the stock price and want to be opportunistic, we may repurchase more.

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Brady Gailey, Keefe, Bruyette & Woods - Analyst [8]

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All right, that's helpful.

And then lastly, just an update on M&A. It seems like we are seeing more activity; we've seen a couple Texas deals recently. What's the take on M&A? Are you having more conversations now that the stock is up, or what is the latest?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [9]

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I think 2016 was relatively slow in Texas, with only 18 deals announced, of size. But 2017 looks to be off to a faster start, obviously, with the Southwest Bank deal that was just announced. I would say that for us, we continue to focus, and M&A is a core thing that we're going to do to deploy our excess capital. I've been having discussions. We've certainly been involved with working on a lot of M&A. There's nothing to report at this time. But I guess I would say that some of the general activity might be picked up. But we are also going to be patient and do our process.

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Brady Gailey, Keefe, Bruyette & Woods - Analyst [10]

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Okay, great. Thanks, guys.

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Operator [11]

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Michael Young, SunTrust.

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Michael Young, SunTrust Robinson Humphrey - Analyst [12]

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Good morning, everyone.

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [13]

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Hey, Michael.

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Michael Young, SunTrust Robinson Humphrey - Analyst [14]

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I wanted to start with, the broker-dealer segment had a really good year this year and far exceeded initial expectations. Do you think from here, I know it's more of a shift to revenue growth. But do you think you can sustain this level, or do you expect improvement from the current pre-tax margins and revenue outlook?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [15]

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Yes, I think that's -- first, to your point, and then for others, this past year, we reported all the SWS transaction and integration costs. We expect those to be not great in 2017. So to the extent that they are not, we don't plan to continue on the normalization of that. And with that, I think that the Company is getting to a place, and is doing well, that I don't expect to give the quarterly-type guidance.

For the year, Michael, I would say that, consistent with what we talked about last quarter, is, we are looking for and expecting about $400 million of net revenue, which is about on pace or a little bit less than where it is today. First quarter of 2017, or the first quarter of any year, is always a little slow. And then, I think on the pre-tax margins, we are looking for probably the low double digits, the 10% to 12%, to be conservative. Because we have different businesses that have different varying pretax margins.

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Michael Young, SunTrust Robinson Humphrey - Analyst [16]

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Okay, great. And one small one, just on the mortgage side. With a higher gain on sale, was there some offset maybe in that MSR, or the hedging on the MSR fair value marks on that loan?

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Will Furr, Hilltop Holdings Inc - CFO [17]

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This is Will.

During the fourth quarter, we had about $17 million of markup, if you will, in the MSR value, related to valuation adjustments due to our prepayments fee assumptions. That said, we are fully hedged on interest rates for our MSR. And so by virtue of the 100% hedge, we see a very small income over the course of the year for MSR. What you will see is roughly a $4 million net pretax income for the MSR across the year again. You will see the value of the MSR increase to roughly $62 million in the fourth quarter, but you will also see -- again, we took mark-to-mark losses on the hedge to offset that.

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Michael Young, SunTrust Robinson Humphrey - Analyst [18]

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Okay. And then maybe just a last one for Alan. Just curious what you are seeing in terms of customer demand and appetite? Have you seen a resurgence potentially in loan volumes for the pipeline building, as we enter this year?

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [19]

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Well, I was really pleasantly surprised with the growth we had last year, 16%. And I guess I told you all along it would be 8% to 10%. But we exceeded that, and I am really pleased. We're [exiting] for a healthy number this year.

The economy is still strong. It's very competitive out there. We've got 160 loan officers out there beating down the doors and knocking on doors and eating out of other dog's bowls. I believe we're going to have a good year, and we are going to continue to be able to grow at a good pace, even though when you start talking about 10% on the size of our loan portfolios, pretty big numbers. I am optimistic that we can do that. I am optimistic that as long as the economy stays strong -- and if it gets stronger, we're going to see even more of that. And if the economy gets stronger, we're going to see those unfunded balances. If we are sitting there at $1.9 billion, they are going to fund up. So I'm going to be optimistic. And I was really pleased with last year, so I can't help but think this year is going to be good.

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Michael Young, SunTrust Robinson Humphrey - Analyst [20]

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Okay, thank you.

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Operator [21]

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Matt Olney, Stephens Inc.

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Matt Olney, Stephens Inc - Analyst [22]

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Thanks, good morning, guys.

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [23]

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Matt.

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Matt Olney, Stephens Inc - Analyst [24]

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I was going to go back to the mortgage discussion, and Will, you mentioned that $17 million markup on the MSR valuation. Did you also say that the hedge position offset that? I didn't get the dollar amount of the hedge position on that.

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Will Furr, Hilltop Holdings Inc - CFO [25]

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Yes, the hedge, which we settle daily, so you don't see a corresponding liability on the balance sheet. But the hedge position offset. We hedge our interest rate position in the MSR to approximately 100%.

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Matt Olney, Stephens Inc - Analyst [26]

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Okay. And then as far the -- I saw the commentary that the gain-on-sale margins, but I didn't see any specific numbers in the fourth quarter. Can you guys give us a number as to what that gain-on-sale margin was?

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Will Furr, Hilltop Holdings Inc - CFO [27]

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3.88%

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [28]

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And Matt, that continues to go up, and did all year. I don't know if we can expect that going into this year, because we're going to see a lot of people that, all they did was refi, and now they've got to start scratching to do the purchase business. And we will see how long they can last, but I imagine it will make it a little more competitive on us until they go away. But we had a strong gain-on-sale year. We expect it to be a little softer starting out, but we think it will gain speed as these guys go by the wayside.

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Matt Olney, Stephens Inc - Analyst [29]

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Okay. And then as far as the accretion expectations, Will, what are your thoughts the next few quarters for purchase accounting accretion?

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Will Furr, Hilltop Holdings Inc - CFO [30]

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Well, as we have gone through our quarterly recast for the rest of the year, again, I think the guidance we provided last quarter holds. I think it's $10 million to $12 million. That reflects the current model view per quarter. And again, it is almost impossible to predict early redemptions, early pay-downs or otherwise recoveries. From a recast perspective, $10 million to $12 million per quarter for 2017.

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Matt Olney, Stephens Inc - Analyst [31]

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Okay, thank you.

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Operator [32]

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Michael Rose, Raymond James.

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Michael Rose, Raymond James - Analyst [33]

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Hey, good morning, everyone. Maybe one for Alan.

Alan, I think you've been a little bit more cautious on the energy cycle, with the election and the rise in oil prices. Has your view changed at all? I know the portfolio has held up really well, but you've definitely been a little bit more cautious, I think, than some of the other Texas banks. So any commentary?

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [34]

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Maybe it's not as optimistic as Raymond James. I wish you all were right on your projections (laughter), it would make things a lot better.

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Michael Rose, Raymond James - Analyst [35]

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Me, too.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [36]

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Yes, I am a little more optimistic. I think we're starting to see some more activity, even though it's hovering in the $50, $52, $53 range. I think we are starting to see more activity out there. I can sense a little more optimism in Houston, and of course, the Permian Basin, there's a little more drilling activity going on. I think there is a flurry that's starting. So yes, I think there's a little more optimism as far as our credit is concerned. We have seen them go away. And so yes, I am a little more positive. I'm a little more positive about Houston. I don't know if we are there yet to turn the corner, but I think we are getting close.

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Michael Rose, Raymond James - Analyst [37]

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Okay. And then just one other question on the margin. Appreciate the accretion outlook. How should we expect the core margin to trend in the first quarter, given the rate hike? And then, what's the outlook for the rest of the year with and without a rate hike in June, which is where the current is at this point? Thanks.

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Will Furr, Hilltop Holdings Inc - CFO [38]

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So again, we think about it core, so 3.11% is the core number pre-purchase accounting. As we noted, that's up from 3.03% in the prior quarter. We, through the normal course, have had, in fourth quarter, outsized recoveries of noninterest -- from interest from non-accrued loans. And so our current target is 3.05%, plus or minus 3 basis points. So relatively stable to the 3.05% level across 2017. And again, we will adjust that to the extent we see the Fed move further. But at the current rate environment, that's where we would expect to target.

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Michael Rose, Raymond James - Analyst [39]

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Okay. And what was the excess accretion from the payoffs this quarter, in terms of dollars?

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Will Furr, Hilltop Holdings Inc - CFO [40]

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About $6 million.

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Michael Rose, Raymond James - Analyst [41]

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Okay. Thanks for taking my questions.

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Operator [42]

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Brett Rabatin, Piper Jaffray.

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Brett Rabatin, Piper Jaffray - Analyst [43]

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Hey, good morning.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [44]

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Hey, Brett.

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Brett Rabatin, Piper Jaffray - Analyst [45]

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Wanted to make sure on this legal issue in Rhode Island, the $16 million reserve that you have set up. Does that take into account any ongoing litigation that might be occurring with that specific issue?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [46]

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No, that should be it. That should be the conclusion of it.

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Brett Rabatin, Piper Jaffray - Analyst [47]

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Okay. So you don't see any other actions that might cause some additional noise related to that?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [48]

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That's not my expectation.

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Brett Rabatin, Piper Jaffray - Analyst [49]

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Okay. And then just wanted to go back to thinking about the insurance this year. And 4Q was nice. So there has been some storm activity already in 1Q. Can you maybe just give us some thoughts on what you are seeing from that piece in the first quarter so far?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [50]

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It's early. We haven't really seen a lot of weather here in Texas that's been unusual. And I think that the Company we've got and the way we've managed it the last three years is about what I would expect. This year, for the performance, first quarter should be -- typically is a milder quarter. Second quarter is when you have the tornado and hail. And then, fourth quarter is really strong. I think that's where we are at. I think the top line has been drifting down. And that's not alarming to us, but something that we're hoping to turn and have some modest growth at some point this year.

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Brett Rabatin, Piper Jaffray - Analyst [51]

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Okay. I think everything else has been addressed. Thank you so much.

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Operator [52]

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John Moran, Macquarie.

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John Moran, Macquarie Research Equities - Analyst [53]

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Hey, good morning, guys.

The purchase ran, I think if I caught it right, 72% or so in the fourth quarter in terms of volume at prime. Do you happen to know what that was for the year?

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [54]

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Yes, 73%.

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John Moran, Macquarie Research Equities - Analyst [55]

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Okay. So pretty consistent with 4Q?

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Will Furr, Hilltop Holdings Inc - CFO [56]

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Yes.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [57]

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It was actually 71% in 4Q, 73% for the year. It's a little different from 2015 because we had such a strong refinance year. Normally, we run closer to 80%. We're going to look at about 85% this year, and hopefully be able to pick up market share.

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John Moran, Macquarie Research Equities - Analyst [58]

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Okay, that's helpful.

And then just two quick ones on the broker-dealer side. Wondering if the move-in rate, if you could provide a quick outlook or update in terms of what you are seeing, in terms of public finance in the TBA business?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [59]

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Okay. I think on the public finance side, we are expecting that to be -- the first quarter is going to be a little bit slower, as it typically is. I think that we are expecting to see some modest probably volume decline this year in that. And on the TBA side, it does have a tie to the mortgage business, and so it could be impacted somewhat by interest rates. We actually think that, that will be probably stickier because of homebuyer assistance for first-time homeowners. And so that should be stickier, but we could see that the spreads could tighten a little bit. So I think that we are expecting good years from both of them, but revenue might not be at the level of 2017.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [60]

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I think you're going to see in public finance, the refundings are going to go away. And so we're not going to be able to experience those this year because of the rates. But if this infrastructure deal gets going, probably later in the year, we're going to see a good chance to make up for that.

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John Moran, Macquarie Research Equities - Analyst [61]

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Okay, understood.

Maybe a little slower first-half, pick up in the second half if we get some infrastructure deals going. Correct me if I am wrong, but the comp that would be tied to that revenue is largely variable anyhow. Correct? So there would be an offset in OpEx?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [62]

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Very much so.

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John Moran, Macquarie Research Equities - Analyst [63]

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Okay, all right, that's helpful. And then one last kind of ticky-tack one for me.

Tax rate ran a little bit low this quarter. I'm imagining that, that's because there was just less pre-tax with the litigation reserve. Is a good number going forward still 36%? And what do you guys have that can offset that? And does your thinking around that change if we get some kind of corporate tax reform?

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Will Furr, Hilltop Holdings Inc - CFO [64]

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So I would target 37% for 2017. If we think of it on a full year; full-year 2016 came in at 36%. As we think about tax reform, there's two components of that. We will have to re-value our DTA, but that will obviously accrete back through income through the tax provision over time. Again, we think we would be well-positioned to receive the benefit from any tax reductions. We think that to help support the economy, which is probably a larger benefit than the absolute tax rate benefit, all in. But again, from a positioning perspective, we would be expecting to receive favorable income trends around it, understanding there would be a DTA impact day one.

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John Moran, Macquarie Research Equities - Analyst [65]

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Got you. Thanks very much.

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Will Furr, Hilltop Holdings Inc - CFO [66]

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Yes.

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Operator [67]

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Scott Valentin, Compass Point.

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Jesus Bueno, Compass Point Research & Trading - Analyst [68]

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It's Jesus Bueno for Scott Valentin. Good morning, everyone.

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [69]

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Hey, how is it going?

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Will Furr, Hilltop Holdings Inc - CFO [70]

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Hey, we thought you had dumped us.

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Jesus Bueno, Compass Point Research & Trading - Analyst [71]

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(Laughter) I guess we could start -- obviously loan growth was pretty solid this quarter, but that was in spite of the fact that your energy balance actually dipped down at period-end. Was that, that one large secured credit that was in there? And I guess, just going forward, how should we think about the energy portfolio (multiple speakers)

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [72]

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Are you talking about the $10 million in payoffs?

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Jesus Bueno, Compass Point Research & Trading - Analyst [73]

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Yes.

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [74]

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Yes, there was one in there that moved that was about $6 million. The others are just small things that either paid down or moved or got upgraded from the classifieds. How do we see it going forward? It's stable. We've got $28 million worth of classified loans in the energy portfolio, and we've got $11 million in reserves. I mean, we're pretty well-reserved.

But we see it getting better. We're starting to see a little bit of nudge in the service areas, slow but sure. There's more drilling going on. There's a better atmosphere in the areas like the Permian Basin and in the Houston market. So I am a little more optimistic than I have been. And if you see oil kick on up to $60 or so, I think you're going to see everybody start coming out of this. It doesn't really affect us that much, and it really hasn't spilled over into our businesses at all.

One of the things that's really positive in the energy business, if you want to call it that, is the petrochemical business. And there's a tremendous amount of activity going on in the Gulf in a matter of capital [expenditures] and construction, in the petrochemical business, especially in the Houston ship channel, in the Corpus ship channel, and all along the Gulf. The petrochemical businesses are really expanding and growing and doing well. So that helps offset a lot of what we talked about.

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Jesus Bueno, Compass Point Research & Trading - Analyst [75]

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That's great color, thank you.

And just in terms of the branch count going forward, it looks like you're stable quarter over quarter. And I know you're still looking towards sourcing acquisitions, but in terms of just organic expansion, opening new branches, what could we expect as we move into (multiple speakers)

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Alan White, Hilltop Holdings Inc - Vice Chairman & Co-CEO [76]

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We've gotten rid of some of them because we're trying to fine-tune. The ones we got rid of -- Laredo came with the FNB transaction we did in 2013. We didn't want to be in that market, and we got out and we got out favorably. We got out of The Woodlands because we didn't want to be there. But we have added a couple this year, and we have on the draw boards several more. We have some upgrades in some of the branches that we have. So we continue -- we are not going to blanket the state with branches. That isn't our kind of deal.

But we are putting them in opportune places to where, not only does it help our business, but it also helps our people, the visibility of who we are and what we are doing. There are some we are picking in the Dallas-Fort Worth area. There is one in Lubbock, there's one in Corpus. We just finished one in -- an upgrade in McAllen. We are doing this. We are building a new one in Arlington. So we are kind of upgrading and positioning ourselves and our visibility.

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Jesus Bueno, Compass Point Research & Trading - Analyst [77]

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Got it. I'll just ask one more question on the insurance unit. In December, we saw that the FHFA came out with -- they released their Duty to Serve rule. And part of it was at the manufacturing housing industry, and actually secured their pilot program for counting their loans toward Duty to Serve. And given that you have a healthy amount of exposure to manufactured housing or low-value dwellings, do you see this as an opportunity for the insurance unit going forward?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [78]

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You're talking about as far as originations of policies on mobile homes?

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Jesus Bueno, Compass Point Research & Trading - Analyst [79]

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Correct. I guess the read would be that it's positive for loan originations and support for that industry. Is there any [direct read] to [attend] National Lloyds there?

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Jeremy Ford, Hilltop Holdings Inc - President & Co-CEO [80]

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It could. But I think a lot of it is -- from what we underwrite, I wouldn't really expect it to have a demonstrative increase in volume or anything.

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Jesus Bueno, Compass Point Research & Trading - Analyst [81]

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Got it. Thank you for taking my questions.

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Operator [82]

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