Good morning, and welcome to the Hilltop Holdings' Quarter Three 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 now like to 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. The reconciliation of these measures to the nearest GAAP measure may be found in the appendix of this presentation, which is posted on our Web site 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 third quarter of 2017, net income was $30.2 million or $0.31 per diluted share. During the quarter hurricanes Harvey, and to a lesser extent Irma, adversely impacted on earnings by $6.4 million or $0.07 per diluted share. While the third quarter presented some challenges for Hilltop, we remain committed to delivering diversified growth across our businesses, maximizing value for our shareholders, and proactively managing risk. Delivering value to our shareholders remains top priority. Year-to-date, we have returned $45 million to shareholders through a combination of dividends and share repurchases, including the SWS settlement in Q2, 2017, capital distributions equate to $92 million. Despite these capital distributions, Hilltop has grown tangible book value by 7% year-over-year. We also announced that Hilltop's Board of Directors declared a quarterly cash dividend of $0.06 per common share payable on November 30, 2017. Additionally, this quarter's results highlight our risk management efforts. Hurricane Harvey devastated the Texas coast and certain areas of Houston. In our insurance business, our actuarial estimate of gross losses were $19 million, while our estimated retained losses are only $6.1 million. This reflects the exposure management actions over the past several years and the effectiveness of our reinsurance coverage. Our other businesses were also impacted by the hurricane, and have collectively recognized $3.7 million for certain exposures, which Will can in his more detailed comments. Moving forward to the next side, now I'll discuss the results of our operating businesses. The modest pretax decline from PlainsCapital Bank was driven by a reduction in purchase accounting benefit of $8.6 million. Excluding the impact of purchase accounting, the bank's core results increased due to solid loan growth, with non-covered loans ended at $5.6 billion. The mortgage business continues to transition towards a purchase mortgage market. During the quarter, refinance volumes declined by 51%, while purchase volume increased by 4%. PrimeLending's business model remains focused on purchase originations, while the market continues to become more competitive. We are particularly pleased with the results of Hilltop Securities as the business generated a 19.5% pretax profit margin, up from 16% last year. Included in these positive results, our retail and clearing business showed strong performance from our integration efforts as well as higher short-term interest rates. Finally, our insurance business has experienced a challenging environment throughout 2017, including the two hurricanes that occurred in the second and third quarter. We expect overall storm losses to be more seasonally balanced during the fourth quarter. I'll now turn the presentation over to Will to walk through the financials.

Thank you, Jeremy. I'll start on page five. Hilltop's income before taxes for the quarter equated to $48.4 million, [technical difficulty] from the third quarter of 2016 of $37.1 million. The quarter's result reflects the impact of both Hurricane Harvey and Irma which affected results by $9.8 million pretax. Also during the third quarter of 2017, provision expense declined to $1.3 million driven by lower linked quarter loan growth, and less than $1 million in net charge-offs during the quarter. This quarter, we have added a supplemental table on page five to provide details regarding the impact of purchase accounting adjustments, FDIC indemnification, and clawback on the current and prior period results. For the third quarter of 2017, the pretax impact of purchase accounting adjustments, FDIC indemnification, and clawback positively impacted pretax income by $2.8 million. The positive net impact of these items has declined by $8.6 million from the prior year, and $12.3 million from the second quarter of 2017. Hilltop remains very well capitalized, and maintained a common equity Tier 1 ratio of 17.66% at the end of the third quarter of '17. Moving to page six, net interest margin equated to 3.5% in the third quarter of 2017, excluding the impact of purchase accounting, taxable equivalent net interest margin equated to 3.15%, reflecting improving loan yields, managed deposit costs, and improving yields in the investment portfolios across Hilltop. The pre-purchase accounting taxable equivalent net interest margin declined by eight basis points versus the second quarter of 2017, this decline reflects a lower level of interest recapture previously charged off loans than in the second quarter of 2017. Earning assets increased by $1.3 billion from the third quarter of 2016, reflecting growth in non-covered loans, and excluding margin loans of $474 million, which was somewhat offset by runoff…

Thank you, Will. Good morning. The bank had a solid quarter in the third quarter net purchase accounting adjustments we made 0.94 ROA, and our net interest margin continues to operate within the range that we said, at 354 net purchase accounting. And as Will said, our loans continue to -- continue to fall out, and with another rate increase it should have a very positive effect on us. Our loan growth continues at 9% year-to-date, that's in line with what we said, the 8% to 10% that we talked about on growth for the year. Our strongest markets are Dallas, and Fort Worth, and Austin. They continue to be very viable. The big focus us -- or the big result is commercial real estate loans, we're seeing less and less C&I at the time, and we continue to compete fiercely for those. We have $2 billion in unfunded commitments with $750 million of that are real estate construction loans which will continue to fund up. And our pipeline looks very favorable for the fourth quarter, so I think we'll be able to hold that 8% to 10% of loan growth that we have talked about. When we look at our net charge-offs for the quarter, that were $900,000, year-to-date, they are 2.5 million. I am pretty proud of that figure. Two and half million on a $5.5 billion loan portfolio, that shows the loan quality that we have been able to hold. However, we did put a loan on non-accrual, $246 million oil and gas loan that we have classified for quite awhile. It is a machinery and parts distribution company that distributes things to service companies. Of course, it's been slow. Their cash flow has declined, and we caution put this on non-accrual. We do feel good about…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brady Gailey with KBW. Please go ahead.

Hi, good morning guys.

Good morning.

So maybe one question on the gain on sale and mortgage, I mean, as you said, it was up around 13 basis points linked quarter, it's now 375. Going forward, would you expect a continued increase there or is the right way to think about that you're just being kind of stable at the 375 level?

Yes, Brady, this is Will. I think as you think about it, it had some seasonal variability related to kind of how volumes flow, and I would expect it to continue that. As Alan noted, the competitive pressure is there. It continues, and we expect it to continue for a period of time. So stable to slightly down, notwithstanding the seasonal outlook would be the way we would think about it.

All right. And then, Will, I know last quarter that you guided to a core margin of around 310, plus or minus a few basis points. You came at 350 and maybe a smidge better. But is the right way to think about the core margin still kind of in the 310 range, or has that improved?

I think we are drifting higher as we sit here. But I'd keep the guidance at 310 plus or minus three. But again, we are watching deposit cost, as I noted in my comments. We continue to test rates and terms, but we are seeing the market become more competitive for deposits. Not aggressively so from a rate perspective, but we are seeing that, so the guidance for 310, plus or minus three.

And then finally, Will, you mentioned some growth in the bond book this quarter. Do you think that will continue? How should we think about the size of the bond book going forward?

My expectation is that it's stable from here generally. So we continue to look for opportunities to put cash to work, and capital to work. And that's been one way we've done that here the last couple of quarter, but I'd expect it to be reasonably stable for the rest of the year.

Okay, and maybe one more, just an update on M&A, either Alan or Jeremy.

Yes, we -- I think right now we have over $550 million of excess capital. And we are looking to deploy that, as always, with M&A transactions. Year-to-date there's been six deals announced in Texas, over $250 million in assets, only two greater than $1 billion. And I think that most of these are kind of 90% stock deals. But we're looking for platforms that are the right fit for us. And both kind of personalities and strategically, and we keep pursuing those.

Great, thanks guys.

Thank you.

The next question comes from Michael Young with SunTrust. Please go ahead.

Hi, good morning.

Good morning.

Maybe could we start just on the purchase account accretion, obviously kind of a reset to a little lower run rate this quarter. Do you expect any pops back up from here or should we continue to expect that on a sort of steady decline from here?

I mean, I think as we've guided in the past $10 million to $12 million is our quarterly run rate. Obviously on a scheduled basis you'd expect it to decline over time from here. That said, we still have a number of loans, still got a number of pools. And so you could see quarterly increases from here. However, on a scheduled basis, again, you would expect it to decline through the end of the loan pool.

Okay, great. And Alan, just wanted to follow-up on your comments on the insurance business. You mentioned specifically that maybe some of the other insurers might be more impacted. Do you think that this could be sort of a catalyst increasing net premiums written from here and or -- given just better pricing going forward?

I guess what I'm saying is Houston was devastated. Obviously we don't insure on flood, but there was a lot of insurance coming down. And I don't know how they had to book cover or not. We had ours covered, if they didn't have that CAT in the back they're going to be second wind. And some of them one, may not be around, two, they may pull out of there, and when they do that provides less competition and more opportunity. I think that will true in the bank. The same way people pull back, and we're here. So you would hope that it would help our marketing in that part of the world from that standpoint. I guess that's what I'm saying, and that's purely from what I think, not anybody else. But when you have bad things, some people don't make it and some do. And the ones that do and can hold on will end up being the ones that do all right. And I think we're -- obviously we're in that position as an organization, as strong as we are.

And maybe just following up on the insurance business, Will, I think you mentioned in your remarks that you expect a return to the kind of normal loss rates in the fourth quarter. I guess, that pretend that you guys…

The sky is clear outside today, Michael, that's what I was…

So, the fourth quarter is typically the most mild weather that you have in North Texas and in Texas, so that's typically the most profitable quarter. So we expect a return to that weather pattern. We do have a lower top line, but we're expecting to have a decent quarter.

Okay, so you feel confident that you got all the Harvey-related impacts in this quarter?

Yes, we feel confident and are reserving for it.

Okay, perfect. I'll step back for now. Thanks.

Thanks.

The next question comes from Matt Olney with Stephens Inc. Please go ahead.

Hi, thanks. Good morning.

Hi, how it going?

It's going well, thanks. Wanted to start on mortgage business, and Alan, I'm curious about the mortgage volumes in 3Q, looks like there were some good year-over-year gains on the purchase side. But could you just speak to kind of the month-to-month variability. Was anything unusual or just the normal seasonal patterns you've seen before?

Well, I think it dropped off in the third quarter probably more than we expected because that's really refi business went away. And the purchase business being out there everybody's business is down. And if you talk to the NBA or look at their stats, third quarter wasn't as strong as it normally is. So I think that was a little bit of a surprise. We're running at about 84% purchase, and not much refi. But if you look at our gain in market share we're up for the year like 7%, and the market is down 2%. So we'll continue to do that. But there isn't as much volume. And that is the same story. There's not a lot of inventory out there. We got loan officers with lots of people that are approved and can't find houses. And so that creates a problem. But on the other side, you've got these guys that were in the refinancing market and didn't have the purchase side, but are out there trying to scratch and scrape to stay alive. And that's where the processing into play. And we've been through this before, and it'll last a couple of quarters, and then it'll go away. But we're going to hang in there and we're going to take care of our customers, and we're going to take care of our loan officers and our people. And I guess the real plus I see in this whole deal, we're up 65 loan officers for the year. And that's pretty significant in the market we're in. So you can see some of these people are leaving places they're at because they're not confident they're going to be there. So we feel like we're in a good position, but obviously we need more growth in the mortgage business, so the mortgage industry in the country, we need more inventory. And we need probably something to settle down up in Washington and something be decided that I think would help drive our business.

Yes, Alan, I want to drill down on the inventory issue that you mentioned. And since you guys have a national footprint I'm curious if you're seeing any more inventory pressures in certain regions or states and…

No, I think it's pretty much all over the country where you're having inventory problems. I think these hurricanes has slowed down some of that -- wiped out Houston and the Gulf Coast, from Corpus up, we did some production through there. And everything's kind of died for the quarter, and I think it'll probably be slow this quarter. But I think you pretty well see it across the country, the inventory. I know -- we were just up East, and there's not enough inventory up there. And they're building like crazy down here in our area, and I think as fast as they can get a house built somebody's in it. Or as fast as somebody wants to sell one there's seven or eight contracts right on top of it. Now those are in the busy areas, like Austin, and Dallas, and Fort Worth. But when you look out at last year, Florida is our third largest producer, Texas is our first largest producer, and California is our second. And those three states have kind of been devastated by some sort of madness from Mother Nature. So it affects us a little bit.

Okay, that's helpful, Alan. And then switching gears, I want to go back to the disclosures around the purchase accounting, on slide five. I think it was mentioned in that slide that there are some expenses associated with that, the $7.4 million in the third quarter. Is that just the indemnification and the clawback, or are there other expenses associated in that $7.4 million number in 3Q?

There are some small amortization-related expenses in there, but it's principally -- the amortization is the largest number embedded in the $7.4 million, and it equates to approximately $5.3 million of the total.

And, Will, what kind of visibility do you have on that? Any kind of guidance you can give us as to what that part of the equation will look like the next few quarters?

Well, what I can say is our losses have continued to outperform across the portfolios; that has been consistent over time. And we, this year, have been amortizing the overall asset. The asset is down to $33 million as of the end of the third quarter. And we would expect for the remainder of this year and potentially early in the next year to continue seeing amortization be at the elevated levels.

Okay, that's helpful. And then lastly on the stock repurchase plan, you guys have been active this year. Are you guys committed to remaining active in that repurchase plan, and how much more dry powder do you have under the current authorization?

We got authorization to do $50 million, and that expires in January of '18. And to date, we've done $27 million. So we're -- the plan here has been to kind of spread out and do more normal course repurchases throughout the year. And we may be doing that in the fourth quarter. And so that's kind of where we're at. Not enough to really try to move the market by any means anytime.

Thank you, guys.

Thank you.

The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

Hi, good morning everyone.

Morning.

Wanted to ask, I guess first, Alan, you talked about loan growth and the challenges in C&I, and it seems like commercial real estate is also seeing some movement to the permanent market. Maybe just now look, as you see it, I know it's a little early for '18, but construction was your grower this quarter. Can you grow C&I over the next 12 months, do you think? And they maybe just what you're seeing in commercial real estate, will that continue to be a headwind or maybe some thoughts on that?

I think going into next year, I think we'll continue to see the level of growth that we've had, both in commercial real estate and C&I. C&I is very competitive. And we're going to compete. I think we've got some markets that we think we can do a lot better in and will as we focus next year. And we have some players in place that are going to help us do that. We have some strong relationships that they continue grow. As they continue to grow we'll grow. So I feel confident we can stay in the 8% range in growth next year. And on a pretty big portfolio that's a lot of growth on an organic basis. And main thing, Brett, is we're going to keep our loan quality. We're not going in to the loan quality issues that we think that's imperative. And $2.5 million worth of losses so far through three quarters, and I have to knock on wood, pretty good.

Okay. And then just wanted to ask about the broker dealer, if you look at the pretax margin it was the highest it's been. And I know there are some pieces to that that are going to affect every quarter. But I guess I'm just curious. Jeremy, are you more optimistic on the pretax margin ongoing level or maybe give us some thoughts on the pieces that might move that up or down?

Yes, I mean, I would say, overall, we've guided in the past to 10% to 12%-ish pretax margin. And I think we're comfortable that it should be in the mid-teens now is how I would look at it. The quarter was very strong. And I think we've really seen the benefit of our integration efforts and the rise in short-term interest rates. So I'm looking in the future for -- the fourth quarter is usually, revenue-wise, the strongest quarter, with just kind of the seasonality in public finance. And I could see our margins being in the mid-teens.

Okay. And then just lastly, Alan, back on mortgage, can you talk about the fair value marks, the interest rate lock commitments that impact in this quarter. And then if you're doing anything differently to mitigate that going forward?

This is will. I'll take it, and then turn it to Alan. On the interest rate lock commitments obviously we had lower volumes, which impacted us. We also had some rate movements through the period that caused valuations to move a little. And we're not doing anything different in terms of kind of how we're managing the overall pipeline, how we're managing the hedge. So again, we expect kind of to normalize as we go forward here understanding back to our volume outlook, understanding volumes are going to be under pressure.

I have nothing to add.

Okay. And then maybe I can just sneak one last one in. You talked about M&A, but I'm curious if expectations are high and you guys would prefer to be a cash buyer, a lot of stuff is done with stock. You're more of a franchise, buyer of things you can improve. I think what do you do if the expectations are high, and you feel like you're going to get outbid on stuff. Do you just sit on the capital or are you guys looking to do other stuff with the excess capital?

I think first and foremost, we're looking for opportunities that are the right fit for our organization and that are strategic. And we'll pay -- we got to pay a fair price to do that. So that's our goal. And we're definitely not sitting; we're looking at a lot of opportunities and ways to deploy our capital.

Okay, fair enough. Thanks for the color.

Thank you.

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

Hey, good morning guys. Most of my questions have been answered, but just one or two more. You guys talked about the 8 to 10% loan growth, obviously, this quarter a little bit softer. How much of that do you think was related to the impact of the storm? And do you think we could see a rebound? And then as we begin the fourth quarter, as we think about next year, you guys continue to talk about really strong pipeline, understand C&I is a tougher business, but just given the size of the pipeline, I mean why can that growth rate actually be stronger next year if the economy remains status quo? Thanks.

Well, the answer to question the 8 to 10% growth I feel is a good figure. I feel while this can be a good figure next year, it is very competitive. And yes, I think we could grow C&I and we could grow everything if the economy continues to grow. And we see some good results come out of Washington that helps drive that. We have got a couple of markets that we are in that we haven't done a lot and we think we maybe can capitalize on those as we go into next year and as we position ourselves with additional people. I will say about the hurricane and the situation, I think it's had an impact in this quarter. I think not only it had an impact on those markets that we are in but I think overall it had an impact on the state because I think everybody kind of stopped there for awhile and watch what went on. And it has been a slowdown in those markets. And I think it will continue to be a slowdown for a couple of quarters. The insurance money is slow coming. The money coming from the government is not flowing in as fast as everybody wants it. You still got people that haven't gone back to work. There are still out messing around with their houses and things and trying to get their life back together. And all these people haven't gone back to work. And it's going to hurt small businesses and things like that. And it's going to take a little while to get this out of system and be able to start back. So I don't think the fourth quarter is going to be strong in those markets. I think after that then I think…

That's good color. And maybe just one question from me, when I just look at the deposit composition, the growth over the past year has been in some higher cost categories like money market and time and obviously you guys have some pretty high beta deposits at the broker dealer. Can you just talk about what's embedded in your assumptions for that 310 plus or minus three basis points in terms of betas, particularly if we get another rate hike or two over the next year?

So we generally in the outlook we are assuming that we will see the Fed move, I mean, we are going to -- where the market is on Q4. And so as we model out any rate increases from here, we model them to a 50 to 60% aggregate beta. Again, we have been able to maintain here through this quarter roughly 20%, but again we are seeing pricing pressure there. On the deposit side, we continue to be prudent and judicious about how we execute against that. However, the market is moving higher.

I guess just a follow-up, I mean you guys said deposit ratio is relatively low, I mean, why the decision to continue to grow the time bucket? It just seems like you have the capacity to let some of that to flow out, so what's the impetus there?

Well, I think we just -- we continue to just manage a balance deposit funding. We are, as Alan has noted, seeing a lot of activity on the loan side and CRE space. And so, we continue to position the balance sheet with what we deem to be core deposits. We also think if you believe rates are moving higher, which we do, that time deposits at this point are at a pretty good level. Again, we are not going to be overly relying on it, but as we position we want to be balanced.

Okay, thanks for taking my questions.

Thank you.

The next question comes from Jesus Bueno with Compass Point. Please go ahead.

Good morning and thanks for taking my questions. Just touch on the insurance unit again, can you provide some additional color on maybe what the Irma impact was or what your exposure to Florida is in the insurance segment?

Yes, we don't have any exposure in Florida, but we do have some policies in Georgia. And I believe that Irma really wasn't significant, but I believe it's about $0.5 million.

So it's more just higher frequency within kind of your core market?

No, I mean a lot of it was the Hurricane Harvey in our core market in Texas as well as we had Irma. Also we had some late storm, higher frequency in kind of July.

Okay. And just I guess, you had mentioned that you have of the 8 million in reinsurance coverage and the 4.5 million seem modest, so I guess is it correct to assume that $0.5 million from Irma, the other $4.5 in Harvey and of course you mentioned reinstatement of the reinsurance fee. I guess the remainder I guess the disparity between your normal losses that you see in this quarter that would all be associated with the storms that came late in the quarter?

Yes, it came early in the quarter, late in the season. But, you are on the right path there.

Got it. And it looks like earlier in the year you had upstreams in capital from the insurer to the whole, and it looks now you had put some back in. I guess what was the thought process there driving that?

Well, we had excess capital. And we put -- we took a dividend of $42 million out of our insurance companies. Twenty million of that went to pay off some insurance company related debt and 22 million with the Hilltop throughout the case. I don't foresee us needing the capital back at National.

Understood. And just on the provision you took or the allowance you established for the 701 million in loans you have in Harvey impacted areas, where is [indiscernible]? Was that just a reallocation of your reserves -- your current reserves?

It was. So we had during the quarter as I mentioned in my comments, we had lower linked quarter growth. And we also had a methodology adjustment in our allowance. And so, it was a reallocation of that -- the $2 million.

That's helpful. And if I can just slip one more, and I guess I appreciate the margin guidance, Jeremy, on the broker dealer. But in terms of kind of the net revenue outlook is 400 million annually still a good number to use there?

Yes, I would -- last year we made a 110 million in -- well, I don't have it right here, but I am still -- we are still kind of guiding towards the 400 million of net revenue. Year-to-date, we are at about 300 million little shy. It could come in a little higher than 400 but drive around there.

Got it. That's helpful. Thank you for taking my questions.

Thank you.

Thanks.

Next, comes a follow-up question from Michael Young SunTrust. Please go ahead.

Hey, thanks for the follow-up. Just wanted to ask on mortgage servicing, if there is any more than increased appetite whole servicing to kind of offset the decline in originations and/or is the capital if those were to change, would that change your appetite either?

So as we think about what kind of mortgage servicing, obviously we had to sale the year in the first quarter for $17 million. We continue to kind of work through normal flows there. I don't there is -- I don't think there is going to be an intentional short-term increase in our overall MSRs, and we continue to watch the capital impact. Obviously, they are some back and forth around the potential capital rules related to MSR. We watch those closely. But as they are currently affected, obviously MSRs and the capital implications of those get materially more punitive in the first quarter of 2018. So, we are watching the industry kind of watching the guidance and watching the rules around that, but we feel comfortable where our MSRs are today.

Yes. And I just would follow-up on that, the reason why we would have more MSRs is really related to best execution for the business, and what we think is strategically the best thing to do in the capital markets for that business, and not necessarily a bet on mortgage originations.

Okay, great. And maybe one last one if I could, Jeremy, just looking out from here, where do you see kind of the best opportunities within the business to continue to kind of rationalize the expense base? You know, just going forward, maybe in the next year?

Well, I mean, I think this was a tough quarter as far as our results, but I would say that -- I think that for the most part our businesses are positioned well, and the fundamentals are good, you know, particularly with the mortgage company focused on purchase originations, and the bank kind of coming out from this accretion, and growing loans. But as far as efficiencies, that's something that we are working heavily on, and in a lot of ways we are really looking at what we have as a holding company, and what we can leverage on across our businesses.

Okay, thanks.

Thank you.

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