Good day. And welcome to the Hilltop Holdings Q1, 2016 Conference Call and Webcast. Participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Ms. Isabell Novakov. Senior Vice President of Investor Relations. Please go ahead.

Good morning. Joining me on the call this morning are Jeremy Ford, President and CEO of Hilltop Holdings; Alan White, CEO of PlainsCapital Corporation; Darren Parmenter, Principal Financial Officer of Hilltop Holdings; and John Martin, CFO of PlainsCapital Corporation. Before we get started, please note that certain statements during today's presentation that are not statements of historical facts including statements concerning such items as our business strategy, future plans and financial condition are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainty. Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors including precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. Except as required by law; we expressly disclaim any obligation to update earlier statement as a result of new information. And now, I would like to hand the presentation over to Jeremy Ford.

Thank you, Isabell, and good morning. For the first quarter of 2016 net income to common stockholder was $27.6 million or $0.28 per diluted share. Adjusted net income was $30.9 million or $0.31 per diluted share when excluding the transaction and integration-related cost of SWS merger. In connection with the SWS merger, Hilltop incurred $4.8 million in pretax transaction and integration cost consisting of $4 million in the broker dealer segment and $800,000 within corporate. For the first quarter of 2016, net income to common stockholder was $112 million or $1.11 per diluted share, which included recognition of a bargain purchase gain related to the SWS Merger of $81 million, or $0.81 per share. Our ROAA was 96 basis points for the quarter and ROAE was 6.3%. Hilltop's four operating segments reported $50 million in pretax income and its capital contributed $31 million, PrimeLending contributed $9.1 million, Hilltop Securities contributed $3.8 million, and National Lloyds contributed $6.2 million. Hilltop common equity increased to $1.8 billion at March 2016, up $21.7 million from December. And we remain well-capitalized with a 13.35% Tier 1 Leverage Ratio and 18.6% total risk based capital ratio. We continue to be well positioned as all of our operating subsidiaries had another profitable quarter with their core fundamentals trending positively. Now moving forward. This pages has the highlights, I'll touch on the items not previously mentioned. Our book value per share increased to 17.84 from 17.56 due to earnings. Our net interest margin declined to 3.7% from 3.73%, a modest three basis points decline. Our total assets decreased by $136 million, though our gross loans increased by $113 million, and our deposits increased by $33 million. Our NPA to total assets remain sound at 24 basis points. And now I'll turn the presentation over to Darren Parmenter

Thank you, Jeremy. Moving to page 5. Our net interest margin declined by three basis points in the quarter to 3.70% compared to 3.73% in the fourth quarter. Lower loan yields and other earnings assets balances were partially offset by decline in notes payable and other borrowings. The cost of our interest bearing deposits rose slightly during the quarter. In the first quarter, the tax equivalent net interest margin for Hilltop was 74 basis points greater due to purchase accounting. The accretion of discounted loans was $16.6 million and the amortization of premium on acquired securities was $100,000. Hilltop’s net interest margin was reduced by the broker-dealer’s securities lending business, with a tax equivalent net interest margin impact of 54 basis points. The bank’s net interest margin declined to 4.73% from 4.92% in the quarter. Moving to noninterest income. Our noninterest income in first quarter was $277.7 million, up 2.3% versus first quarter of 2015. This is after excluding the $81.3 million bargain purchase gain as a result of the Southwest Securities transaction in the first quarter of 2015. Net gains from the sale of loans, other mortgage production income and mortgage loan origination fees increased $11 million, or 8.1% year-over-year. Investment advisory fees and commissions decreased $5.3 million or 7.8%. And net insurance premiums earned remained relatively flat at $39.7 million year-over-year. Moving to noninterest expense. Our noninterest expense for the quarter was $325.2 million, up 3.4% from prior year. Compensation was relatively flat at a $182.7 million representing 56% of our noninterest expense. During the quarter, we did incur $1.7 million in employee comp expense related to the SWS merger compared to $4 million in the first quarter of 2015. Our loss in LAE, policy acquisition and other underwriting expenses was $33.2 million in the quarter representing 10%…

Good morning. Let me report on the operating subsidiaries. And first of all the bank -- the bank in the first quarter of 2016 had a ROAE of 0.98 driven by strong net interest margin of 3.70% without accretion, with accretion 4.73%. That continues to hold that about six quarters in a row. We've been at that 3.70% or better. We are very pleased with that. Our non-covered held for investment loan growth was whopping 6% for the quarter which we are very pleased with that. And we have a very favorable pipeline of $1.6 billion in unused commitments. And we are seeing some of that start to fund because of our real estate commitments. Our credit quality continues to remains sound, our NPAs are $27.7 million, or 0.24% assets. We are not seeing any migration at this point because of economy. Our energy exposure actually increased in the quarter to 4.5%, and we still feel very good about where we are and we are all over that portfolio. Our reserve is 4.3% on energy portfolio. We have 16.4% of loans are classified mainly in the service area. And we have no share national credit so we hear no snakes at all in organization. Our noninterest bank deposits are still strong at 32% which is really good. We operate 65 branches and we just recently sold the branch in the Woodlands up in the far north Houston and we hope to finally close that transaction hopefully in June. So now it is a gain for us. When you look at where we are from a grow standpoint, you look at where we are from quality standpoint in our loan portfolio, and you look at our net interest margin in the market so we are -- we feel very comfortable about…

Thank you, Alan. I am started on page 11. PlainsCapital Bank had pretax income of $31.2 million for the first quarter of 2016 compared to $41.7 million for the same quarter last year. Our higher noninterest income in 2016 was offset primarily by lower noninterest income in higher noninterest expense. The higher net interest income resulted from growth in the portfolio in the non-covered loan portfolio and stable net interest margin. Noninterest income decreased compared to the first quarter 2015 due to a $4.4 million gain that we recorded in 2015 on securities acquired in the SWS Merger which was sold in the first quarter of 2015. And it also lower trust fees and real estate -- income from real estate we acquired in the SMB transactions. Noninterest expense increased due to the write-down of the large ORE properties that we discussed a few moments ago. The bank continues to provide PrimeLending a warehouse loan. It was $1.2 billion outstanding on the $1.5 billion authorized at March 31, 2016. The consolidated loans were $5.7 billion at March 31, 2016. 50% of that was real estate, 13% construction and development and 28% was C&I. 54% of the loan portfolio was in Dallas, Fort-Worth and Austin. Our consolidated deposits end of March was $7 billion, Alan mentioned a moment ago 32% of those deposits were noninterest bearing. We discussed our energy portfolio increasing to $234 million at March 31, 2016, 13% of it is in exploration and production, 37% in services and 44% what we call midstream. The increase in our energy exposure during first quarter was primarily result of one large revolving line of credit to an existing customer. And that loan as we mentioned a moment ago is secured by cash and AAA rated short -term securities held at the…

Thank you, John. For Hilltop Securities, the pretax income for the quarter was $3.8 million versus the loss of $3.5 million in the prior year. The first quarter of 2016 results included a pretax integration related cost of $4 million. After adjusting for those costs, the pretax income for Hilltop Securities was $7.8 million. Hilltop Securities net revenue remain flat at $88 million. And this is primarily due to $6.1 million increase in income earned from derivative and trading portfolio activities offset by lower securities commissions and investment banking fees. Hilltop Securities noninterest expense decreased $6.5 million resulting in comp ratios 65.7% in the quarter compared to 73.5% in prior year quarter. The broker-dealer segment provided the banking segment with $800 million of core deposits at the quarter end representing 35% of total available FDIC insured balances. Moving forward to talk about National Lloyd. National Lloyds' pretax income was $6.2 million in Q1 relative to $9.1 million in Q1, 2015. Its written premium sale was a full impact of management initiatives to reduce concentration and to increase premium rates in select markets is now being realized. Though premium is slightly down, the risk profile of the book has improved. Net premium earned increased slightly due to decrease cost of reinsurance. Unseasonably frequent and severe weather drove the loss and LAE ratio to 55% for the quarter relative to 48% for the prior year. And underwriting expenses were down year-over-year resulting in a 33% expense ratio. And that concludes our prepared remarks.

[Operator Instructions] Our first question will come from Brady Gailey of KBW. Please go ahead.

Hey, good morning, guys. So I think last quarter we talked about loan growth for the year 8% to 10%. Do you think that still on an appropriate level?

Yes. Brady, we had sometime that kind of fruition in the first quarter we've been working on. So the 6% is really kind of looks good but we are not going to hold that up. So it's still going to be 8% to 10%. We might win big on there, talking about $50 million against cash and AAA bond so that kind of shot up but our goal is still 8% to 10%.

Okay. All right. And then I noticed you all transferred to $50 million a capital from the bank to the holding company. What was the reasoning behind that shift? Why would you like to keep more capital at the whole curve versus the bank?

Well, the reason for it was with the Hilltop Securities merger of the two broker-dealers we were merging a lot of balances on the specify day so we wanted to -- so that $50 million went to Hilltop's parent and Hilltop's parent provided liquidity line to the broker -dealer to make sure everything went well through that merger integration. And since then that money has been paid back from broker-dealer back to Hilltop parent and I think the banks got significant -- still has significant excess capital and but for the most part we've historically left the excess capital in the bank.

All right. And then I know we've asked about a buyback for you guys for you guys before but it is during -- I mean the stock has done well for last two or three months. But what are your updated thoughts on starting a buyback?

That something that's we are evaluating and we may consider.

Okay. And then lastly for me the average earnings assets came in a little less than I thought it. It looks like the stock lending business was down a little bit. Is that -- or you still interested in that space or will that -- I realized it's low margin business but do you think those balances will continue to fall?

Well, I think that they are pretty consistent with where they were the prior quarter. We brought broker-dealer and clearing order receivable down to $1.4 billion at the end of the year. And lot of that was related to the merging broker-dealer. But I think that's about where we will keep that balance for now.

The next question will come from Michael Young of SunTrust. Please go ahead.

Hey, good morning. Just wanted to start off with broker-dealer segment. Obviously the pretax margin contribution improved sequentially and your guidance I think for the year was around 6% with the target of getting to 10% longer term. We seemed to be on pretty good early run rate. Do you think it will be better than that this year or there are things that you are seeing in kind of later on, are going away on that?

Well, I think that the guidance I gave before was $350 million net revenue for the year and I stick to that. And I think that where we are probably marginally ahead on cost saves as far as recognizing them. So that's where I have seen kind of acceleration and the improvement. And we've also had in this first quarter is kind of mix shift of business where a higher margin business really outperformed and also in part of that mix shift is some seasonality. So net-net I would say I probably still kind of model -- excuse me I probably I still think kind of at a 6% pretax margin. But I think that will hopefully and should build to greater than 8% if by the fourth quarter.

Okay. And shifting gears little bit to the mortgage business. The JV with Mutual of Omaha, Alan, it sounds like higher volumes but maybe lower gain on sale. Can you maybe provide any sort of color around timing and overall size where you hope that gets to longer term?

So obviously Mutual of Omaha was a big company, the bank is about $6 billion but the insurance can't be received. So they can draw from both sides to that. They got to get geared up to handle it. And that's why it's going to take probably the first or next year before we are going to start seeing some volume. It won't affect our gain on sale at all. It really has nothing to do with it. That is it does affect our volume. And I like -- we could forecast in 2017 we could be looking into billion dollar sort of volume next year. If I get banks going from that standpoint. We are doing one another joint venture and it's really a good one. Based at Dallas and it doesn't affect our gain on sale, detailed for volume and helps our bottom line. So we are looking forward to it. And we hope it will meet our expectations, they are great company and certainly have a great source of referrals that their people can use and we can certainly gain the volume from.

Okay. And do you need sort of ramp up maybe back office or any other aspects --

Last year, first quarter last year we really work our people hard because we didn't add any people and that's why you may see we got a little bit better profit in the first quarter last year because we didn't have that many bodies, we said work an over time so we ended up second and third quarters hiring people to ramp up to handle volume. We kept those people unfortunately is worked out here now. We have enough overhead within the operational side of probably had $3 million to $4 million for the volume and that haven't make a whole lot of adjustments. So we should be really good shape. And that been is continuous to be good. And I guess I said that every time I talked to you guys. It continuous to be good and nobody ever believes me but we are headed for a good year at PrimeLending.

So you are seeing the benefits of kind of MBA origination forecast growing pretty heavily in 2Q?

Yes, sure. When you got market share, we are going to get our percentage of that market share if not better. And we got a good company so I think we are like number five in the purchase side of the market share in the country now. So we are enjoying that and of course people enjoying lot of rides, going and buying houses. So that's good. And people are still refinancing. However, I guess everyone is me; we are not refinance company so we are not at -- that matter much so we did to the purchase side.

Our next question will come from Matt Olney of Stephens. Please go ahead.

Hi. Thanks. Good morning, guys. Hey, Alan, I believe you said you've not seen any real credit contagion at the bank and overall our credit looks really good but remind me of your exposure in the Houston market.

We got $130 million worth of volume down there. Now we did have one credit in Houston in oil and gas that we took sub-stand because of cash flow. It's a coordinate deal, well secured by the equipment but they are not selling it so the cash flow is meager. Other than that any spillover or contagion in to any other type of credit issues, we've not seen this -- we are not seeing in other portfolio really deteriorated all. Our actual quest in oil and gas went from my $29 million to $38 million. And this was a $12 million credit. So we actually had some pie down in that class of case scenario. And most of those are all service related which you would expect. And so we are really see any spillover at this point. And we are watching it and I expect there will be some but at this point there hasn't been.

Well, strategically I guess some other Texas banks have signal that they think now is the time to get more aggressive in Houston and some of the larger national players pull out. So strategically how are you guys thinking about Houston at this point?

There is partially Houston that is good and there is partially Houston that isn't good. There are businesses down there they are good and there are businesses down they aren't. I think our attitude and our direction is we are going to look for those that are good and strategically fit us. And we are going to stay away from everything else. So we are going to go put in 25 branches and start no. We are going to take it easy, we are going to watch it and we are going to be careful. But there are parts of Houston that are fine. I wouldn't throw Houston off the cliff but they were the fastest growing city in Texas last year as far as population is concerned when everyone is going to hell. So I think we are just going to be real careful and we are going to take advantage or opportunities and we are going to be real careful about our underwriting when that standpoint. So I don't think we are going to do -- in fact advantage I think we just kind of kind do what we do hit singles and doubles and be satisfied with that right now.

Okay. That's helpful. Thank you for that. And then you also reported this quarter a large write down in the covered ORE property. I think it has stubborn issue of last two quarters. Any more color you can give us on that.

Well, that's covered transaction, it came out in -- deal and we have a bar on the property so we decided to go and sell it. And we took an $8 million hit on the covered transaction which affects our bottom line $5 million. That hurt but it is covered transaction and you know we do have lost here. So if I were you and if I was an analyst I would be adding that back to where we are look at that that was something that is really out of our control.

As you look at the portfolio of a member or other --

I think I'd say that you, we are down; there is not lot of large credits left. This was one that kind of sweet box in the beginning and we kind of got it down and we need to get out of it. And we made a decision to get out of it. And again it is a covered transaction; again it got lot of shares. So I hided it, Jeremy hided it but it would come back in the balance sheet.

Okay, thanks for Alan. And then John, what's the outlook on accretion levels from here going forward.

Matt, we are sticking and I'd say the range we talked about last time, I would drop it down to the $16 million for the rest of the year or may be a little under that for each quarter.

The next question will come from Brett Rabatin of Piper Jaffray. Please go ahead.

Hi guys, good morning, wanted to first ask about the covered or re-write down, can you guys walk through that a little bit more in terms of what transpired there?

Well, this was as Alan said this was an asset that we acquired through the SMB transaction and it originally was a loan, there was a tough situation and we were closed on it and took in ORE and we have been working in the process and it's kind of come down to this. I think it was one of the -- probably the most difficult -- one of the most difficult asset that we acquired.

Okay. And then the process for integrating the two broker-dealer as kind of in thought as more robust as an event, do we still have some noise to expect in 2Q or when do we get to clear quarter all from them and then just I know I had asked about kind of you had a good quarter in 4Q and I think 1Q was pretty solid. Is the municipal business or is there some business within the broker-dealer that you should kind of worried about having a pull back given your commentary earlier?

Well, I think that first is the integration charges. I still think we'll have some integration charges but it should --we should be through most of those by the third quarter. And it's just kind of integrating people and system. So there will be some more noise. As far as the business is I guess the first is the public finance business is such a strong business for the broker-dealer and seasonally it always has weak first quarter. So that we see, other part is there is what we call public housing TBA business that is really done well and that is resulted in about $6 million of year-over-year increase in revenue. And I know lot of that is tie to the interest rate environment like the mortgage market and so I think there could be a pull back in that volume with interest rate changes. But it won't be as correlated as a broader mortgage market.

Okay. That's a great color. And then you've been shrinking assets obviously the securities line of business is a part of that for past year and your capital ratios are very robust and you get after all your buybacks. Can you maybe give us an update on kind of how you see capital in terms of the right number for -- I know expect us versus core and then are you seeing any books any M&A thoughts that you guys might have in the various market especially Houston?

Sure. Well, I think right now we feel like we have excess of $400 million of capital, excess capital $400 million. And of over $400 million, excuse me, and is part of that our primary purpose is to use that for M&A. And at the same time though we are mindful and we do consider in our sintering over other utilization of that capital whether share buyback or something of that nature. So that's kind of that piece of it. Speaking to M&A market, we are -- we continue to focus on that and as we always been. I think the market has been very slow in Texas in 2016 just because some of the dislocation and value. And but that's where we want to focus and we want to be in Texas and we want to be opportunistic or situational.

Our next question will come from Michael Rose of Raymond James. Please go ahead.

Hey, good morning, guys. How are you? I just wanted to get your thoughts -- I think one of the only energy expose banks that actually saw the reserve allocation go down kind of slightly this quarter. Obviously understand that you have a higher service portfolio so there could be a lag there. But how should we be thinking about that reserve assuming that oil stabilizes near current level maybe moves higher over next couple of quarters? Could we expect to see that go down as you work the exposure down or have changes in the OCC's guideline, will that kick in a little bit later because of higher service component? Any color would be helpful. Thanks.

Well, if the price comes down I guess we look at and bringing it down, I don't think we have any intention of bringing it down. And if I change the guideline or policies we got to do what they got to do. But other than that Michael I think we feel very comfortable where we are. We watch it very closely; the Fed watches it very closely. With this we got about $10 million up. We feel that's more than adequate at this point as we monitor these credits. So there is really no reason to put more on there. And there is certainly no reason to put any back in our pocket. So I think we feel pretty comfortable where we are and we look at it very closely every quarter. And our auditors look where we at with this, regulators look at where this and so we are very much on top as you say it is not big part of our business. Obviously we jumped up this quarter which alarmed everybody. But we made a $50 million loan against cash and AAA securities which we got a count because it is an oil and gas company. So that comment is not fair but anyway it is what it is. So I don't know if I answered your question but we just know the rules.

That's helpful. And then John thanks for giving the expectations for the accretion. And just on the core margin side obviously is an up a couple basis points quarter-to-quarter. I assume some of that from the rate hike in December. How should we think about the core margin going forward? Are there any other balance sheet management initiatives you undertake here to maybe support that core margin? Thanks.

Michael, we think it's going to be under slight pressure going forward not significant but we see some slight pressure. A lot of that is going to be the competitive loan environment that we are in. And so as we move forward we are expecting some slight pressure.

Our next question will come from Christopher Nolan of FBR. Please go ahead.

Hi. Thank you for taking my questions. Alan, geographically where you are seeing the best mortgage origination growth late?

Good question, national company. So it is spread pretty much across country. And if you look at where our loan volumes that has concentration of our loan volumes are in Texas. And so we are seeing a lot of origination in Texas. We are number one in the Dallas, Fort-Worth market. We are number two in state. So we've got 24% of that market. It is not deteriorating because of oil and gas. It is staying hard in there. California is another strong market for us. And then you can move across the Midwest and come up to the Northeast and down the Atlantic Coast. So it is spread pretty much across the country and everybody seems to be taken advantage of lower rates. And we are very pleased with it. That continues, that's pretty much our bread and butter and that's why we stay.

Great. And then on the lower energy net charge off, is this mostly related to movement in energy prices or --

No. It was a small credit in the service side that just ran out of gas. Ran out of gas, ran out of oil and gas, and ran out of gas so we took it out.

Got it. And then final question on the deposits from the broker-dealer arm, should we sort of model that to be roughly bouncing around to $800 million and $900 million or is that going to be fluctuating or fairly steady do you think?

I would model this being fairly steady at that for right now.

Our next question will come from John Moran of Macquarie. Please go ahead.

Hi, good morning, guys. Only two left for me. One is just ticktack housekeeping on the tax rate which came in I think a little bit lower than where has been running. If you had an outlook on where you expect that to come in for the year or good one going forward?

John I use about 36%.

Okay. 36% and then I want to circle back earnings assets and I know that the stock lending you guys have been kind of running off a little bit but does that $500 million decline in other earnings assets? Is that where that was reflected linked quarter and I guess based on your commentary you would expect that to kind of stabilize here or is there some seasonality in that business that we are failing to capture?

The answer is that yes that's where it is on the balance sheet. And we are thinking it would be -- we will hold it that level.

Our next question will come from Jesus Bueno of Compass Point. Please go ahead.

Thank you and good morning. Starting off quick question on insurance. Obviously little -- also it shouldn't look as bad as we had heard from other insurers and reinsurers that loss rate have escalated in the first quarter. My question is just that given that timing of the storms, they were at the end of March and of course April didn't get off to a great start either but I guess would you say that the insurance losses are contained in the first quarter? Or is there a chance that we could see claims bleed into the second quarters coming from the storms in March?

Yes. I think that we do expect that the losses are contained in the first quarter. We do an actual IV&R reserve third party at the end of every quarter. So we feel like we have them contained in the first quarter.

Okay. And I guess in terms of how I guess so far the second quarter, I know it's a very early but you know the commentary so far the storm we've seen already in April that they have been service of year relative to prior quarters. So I guess what are your expectations in our seasonally second quarter is already one of the weaker quarter for a trade in terms of losses but if you could add any color to that. That would be great.

Well, I think we said storm season started early this year. And that's why we had the first quarter worse than last year. But we are in the heart of the season right now. We are hopeful that the storm season will end early this year as well. So we've taken a lot of rate and exposure management initiatives and we've adjusted our reinsurance so we are expecting and hoping improvement from prior year.

Okay. Great. And turning back to energy quickly just on the unfunded commitment. Have you seen any activity in terms of draw down or I guess is there anything you can add to kind of what's been going on within the energy portfolio?

We got better. $1 million with the unfunded commitment and all those commitments, we got to be base offer or sleeve holder or whatever and these companies don't have any time any basis to draw down on so we don't see any time being taken or we don't see any draw downs in the near future because business is off so there is no concern on the unfunded commitment on that part.

Okay. Great. And just the level of criticized that from the portfolio seems fairly low relative to other banks that we've heard with energy exposure. The question is I guess as you are working, understanding you are in the middle of your borrowing base for determination but I guess --

You got to understand we don't have a bunch -- piece so you are not going to be looking at borrowing basis on us. So only 13% of our portfolio is based on the borrowing basis. So it has really no effect. I think we have one credit of $9 million as against reserves and it is more than adequately reserved. So that's really not a question that affects us.

Okay. So we shouldn't expect to see criticize go up just from --

Not going to see based of that. No, and we don't do any syndicated credit. So you are not going to see come of that. The credits that we are having issues with are service related credit which you do expect because of all feel slow. And that's where our classifications are.

Ladies and gentlemen, this will conclude our question-and-answer session. And this will also conclude the Hilltop Holding's Q1 Conference Call. Thank you for attending today's presentation. You may now disconnect your line.