Good morning and welcome to the Hilltop Holdings Second Quarter 2017 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like to now turn the conference over to Isabell Novakov. Please go ahead.

Good morning. Joining me on the call are Jeremy Ford, President and Co-CEO; Alan White, Vice Chairman and Co-CEO, and Will Furr, CFO. Before we get started, please note that certain statements during today's presentation that are not statements of historical facts, 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 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 maybe 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.

Thank you, Isabell and good morning. For the second quarter of 2017, net income was $62.5 million or $0.63 per diluted share. Results included two positive and significant items. First, $11.6 million pre-tax related to the resolution of the SWS Merger appraisal proceedings. Resolution of this matter resulted in 1.9 million shares of HTH common stock being retired. Second, $15 million pre-tax related to the recording of an insurance receivable associated with the single large loan previously charged-off. For the second quarter 2016, net income was $31.1 million or $0.32 per share, which included the provision related to the single large loan charged off in the second quarter of 2016. Our ROA was 1.94% in the quarter, relative to 1.05% in the prior year. Our ROE was 13.2% in the quarter, relative to 7.1% in the prior year. Hilltop's four operating businesses reported $84.4 million in pre-tax income. PlainsCapital contributed $60 million, PrimeLending contributed $19 million, Hilltop Securities contributed $16 million, and National Lloyds had a $10 million pre-tax loss, due to the elevated storms related to losses that we expect in the second quarter. Common equity increased to $1.9 billion, up $4 million from the prior quarter. We remain well-capitalized with a 13% Tier 1 leverage ratio and 17.5% common equity Tier 1 capital ratio. Importantly, Hilltop announced its Board declared a third quarter cash dividend of $0.06 per common share and that we repurchased an aggregate $8.8 million of outstanding common stock in the second quarter. Moving forward, I’ll hit on items not previously discussed. Our book value per share increased to 19.62. Our net interest margin increased to 4.05% from 3.54%, and excluding the effects of purchase accounting it increased to 3.23% from 3.05%. Our assets grew by nearly $1 billion to $13.3 billion. Our loans grew to $6.3 billion, and our deposits increased to $7.6 billion. Our non-covered NPAs to total assets remain sound at 26 basis points, and our allowance to non-covered loans ended at 97 basis points. And I’ll now turn the presentation over to Alan White.

Thanks Jeremy and good morning everybody. The bank in the second quarter had an ROA of 1.63% that was driven by strong loan growth. We had a strong NIM and our credit quality continues to be very sound, and we did have a one-time increase in non-interest income related to an insurance receivable that we got, $15 million. Quarterly the banks non-covered held for investment loan growth was 5.8% or 25% annually; that’s very strong, and we’re very pleased with that number. That’s also favorable, we have a loan pipeline of about $2 billion of which $700 million of that are construction loans that are continuing to fund up, so that’s favorable from our side. Loan growth accretion and stable deposit cost continue to help our margin and we feel like we’re very well positioned at this point as we continue to see rising interest rates that we will be able to expand that margin. So, we feel good about that. We recorded an insurance receivable related to a loss that we had a year ago this quarter on FR3 #24.5 million fraud deal, and the receivable that we got was based on a forgery on that. We continued to pursue actively legal remedies against the guarantors and we feel confident in our position, and I’m hopeful we will see more to that. As far as the energy goes, but same story 2.8% for total loans, not much change there. We are well reserved, 17% of that portfolio is classified, we see no change in it and we do not have any shared national credits. Our non-interest bearing deposits of 30% was down just a little bit, but that’s kind of a seasonal deal, and we’ve been able to hold those deposit cost in-line with the rising rates. We’re operating…

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

[Operator Instructions] The first question comes from Michael Young with SunTrust. Please go ahead.

Hi, good morning.

Good morning

Good morning.

Wanted to start just with capital, obviously the share buyback this quarter being used a little bit and you've got the $0.06 dividend now, any other additional capital actions or things we should anticipate in the interim until M&A comes to fruition?

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

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

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

And Alan maybe switching gears just to Houston, have you guys started to grow that portfolio at all and maybe just [indiscernible]?

We have grown on loan portfolio about 20%, of course that’s from 150 million to $180 million, but that is progress. We’re seeing more deals. Even though oil prices are kind of flat, there is pockets that economy is pretty good. So, I think we finally know. We’ve hired a couple of new people, and then we’ve hired a couple of new people in our wealth management area that we think are going to be able to help us not only a wealth management area, but introduce us to other banking relationships. So, we’re making some progress down there little bit at a time, but it’s progress and I’m a little bit more optimistic. We still have to buy something, but till we do, we’ll keep [indiscernible] one bite at a time.

Okay. Thanks for that color, I will step back for now.

You like that color of that [indiscernible].

The next question comes from Brady Gailey with KBW. Please go ahead.

Good morning guys.

Hey, how is it going?

Good. So, if you look at the core margin, as you said it was up notable on a linked quarter basis linked quarter basis. I know we've talked about the 305 level is kind of being a good level plus or minus some, but just any color on why the core margin expanded so much and where do you think that will trend going forward?

Hi Brady, it’s Will here. I think, again, we obviously a good quarter from an accretion perspective, but also we - the NIM and NII kind of reflect strong recoveries from previously charged off interest and so as we kind of look forward we’re going to update our guidance for net interest margin, previously 305 plus or minus three and we are going to move that to 310 plus or minus three. Again, we’re keeping a focus on asset prices, I would give you guys the update that from a loan perspective, we’ve noted over the last couple of quarters that we’ve got a portfolio of our adjustable rate loans that are currently below their floors that has declined from what was previously about $1.8 billion to $1 billion as of the end of June. So we have only $1 billion of loans that are remaining kind of the below floors, and so we are starting to see the benefit of rates and the impact of resetting. I will say, with the June increase, we do expect to see rates or our loans again reset over the next 30 and 90 days to help drive NIM forward. So, again guidance for NIM at the Hilltop level 310 plus or minus three.

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

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

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

I would expect it to be closer to 96.3 [ph] to 96.4 [ph], again that Southwest securities appraisal proceedings effectively closed in the third week of June. So from an average share perspective it had little impact on the second quarter.

All right and then finally from me, it was a big loan growth quarter, it sounds like some of that is construction-related, but can I just talk about what pushed growth up so notably?

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

Got you. Thank you.

Next question comes from Matt Olney with Stephens. Please go ahead.

Hi good morning guys. This is Matt Sealy on for Olney. Want to circle back on the margin, the accretion ticked up in 2Q, wonder if you have any updated outlook going forward?

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

Okay, makes sense and back on the core NIM guidance of 310, plus or minus 3 bips, does that include any expectations for further non-accrual recoveries or is that ex-those?

It assumes a normal level of non-accrual recovers.

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

Yes, what said that leading into the year, and I think it is consistent as we are expecting about $400 million of net revenue for the year. And it typically builds; the first quarter is your weaker quarter and it typically builds through the year.

Okay, and just one last one in the bank, mentioned something about lower Durban interchange impacting fee income during the quarter, is this a good run rate, and how should we be thinking about that going forward?

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

Okay, great. That does it for me guys. Thanks.

Next question comes from Scott Valentin with Compass Point. Please go ahead.

Thanks. Thank you for taking my questions. You guys mentioned, I guess testing new rates in terms on your deposit products, I am just wondering if you could give some more detail there, may be what those programs might entail is it new customer targets or is it balance driven, just trying to get some more color on what you are trying to test for?

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

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

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

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

Okay. Thanks for that. And on the Lloyd subsidiary, I know the second quarter is always a challenge because of the weather, the seasonality, but anything kind of non-recurring there that you call out or are they just typical seasonality and expect to recover in the back half of the year?

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

Okay, thanks very much.

Thank you.

Next question comes from Michael Rose with Raymond James. Please go ahead.

Hi, good morning guys, how are you?

Very good, Michael.

Just wanted to follow-up on the deposit question, we saw one of the other banks in Texas yesterday, you know go out with some decently higher deposit rates from where they were, so just wanted to get your longer-term thoughts about how you think, your deposit pricing strategy plays out and if you feel a need in the near term to raise rates?

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

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

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

Okay. I think that does it for me. Thanks guys.

Thank you.

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