Hilltop Holdings Inc (HTH) 2016 Q1 法說會逐字稿

Good day, and welcome to the Hilltop Holdings Q1 2016 Conference Call and Webcast. Participants will be in a 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 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, Hilltop Holdings; Alan White, CEO, PlainsCapital Corporation; Darren Parmenter, Principal Financial Officer, Hilltop Holdings; and John Martin, CFO, 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 statement.

These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties. Our actual results, capital, and financial condition may differ materially from these statements due to a variety of factors, including precautionary statements referenced in our discussion today and those included in our most recent Annual Report and Quarterly Reports 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.

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 stockholders 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 costs of the SWS merger. In connection with the SWS merger, Hilltop incurred $4.8 million in pre-tax transaction and integration costs consisting of $4 million in the broker dealer segment and $800,000 within corporate.

For the first quarter of 2015, net income to common stockholders was $112 million or $1.11 per share, which included recognition of a bargain purchase gain related to the SWS merger of $81 million or $0.81 per share. ROA was 96 basis points for the quarter and ROE was 6.3%. Hilltop's four operating segments reported $50 million in pre-tax income. PlainsCapital contributed $31 million, PrimeLending contributed $9.1 million, HilltopSecurities contributed $3.8 million, and National Lloyds contributed $6.2 million. Hilltop's common equity increased to $1.8 billion in March 2016, up $21.7 million from December. And we remained well capitalized with 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 the core fundamental trending positively.

Now moving forward. This page 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 our earnings. Our net interest margin declined to 3.7% from 3.73%, a modest 3-basis point decline. Our total assets increased by $136 million -- excuse me, our total assets decreased by $136 million, though our gross loans increased by $113 million and our deposits increased by $33 million. Our NPAs 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 3 basis points in the quarter to 3.70% compared to 3.73% in the fourth quarter. Lower loan yields and other earning assets balances were partially offset by a 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 discount on loans was $16.6 million and the amortization of premium on acquired securities was $800,000.

Hilltop's net interest margin was reduced by the broker dealer securities lending business with the 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 non-interest income, our non-interest income in the first quarter was $277.7 million, up 2.3% versus first quarter 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 to $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 non-interest expense. Our non-interest expense for the quarter was $325.2 million, up 3.4% from prior year. Compensation was relatively flat at $182.7 million representing 56% of our non-interest 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% of our non-interest expense. Occupancy and equipment expenses decreased $1.4 million or 4.8% from prior year and our other expenses increased $9.3 million or 12.9% year-over-year. During the first quarter we did incur $3.1 million in transaction and integration-related costs, excluding compensation compared to $6 million in the first quarter of 2015.

Moving on to our balance sheet highlight. Assets were slightly down as growth in our non-covered loans and securities were more than offset by a decline in our covered loans and loans held for sale. Our gross non-covered loans held for investment increased to $146 million or 2.8% from the fourth quarter. Our gross covered loans decreased $32.6 million or 8.6% from the fourth quarter as we continue to work out our troubled loans acquired in the First National Bank transaction.

Our cash declined to $142 million, while our securities were up $125 million. Our gross loans held for investment covered to non-covered deposit rates -- to deposit ratio grew to 81.8% in the quarter compared to 80.5% in the fourth quarter. Total deposits increased $31.5 million or 50 basis points in the quarter. Our short-term borrowings declined to $114.5 million or 12.1% and our common equity increased $21.7 million or 1.2% primarily due to our earnings.

With that I'd like to turn the call over to Alan White.

Good morning. Let me report on the operating subsidiaries. First of all the bank in the first quarter of 2016 had an ROI of 0.98 driven by a strong net interest margin of 3.70% without accretion and with accretion 4.73%, that continues to hold; that's about six quarters in a row. We've been at the 3.70% level or better, we are really very pleased with that. Our non-covered held for investment loan growth was a 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're seeing some of that start to fund because of our real estate commitments. Our credit quality continues to remain sound. Our NPAs are $27.7 million or 0.24% of assets. We're just not seeing any migration at this point because of the economy. Our energy exposure actually increased in the quarter to 4.5% and we still feel very good about where we are and we're all over that portfolio. Our reserve is 4.3% on energy portfolio. We have 16.4% of our loans are classified mainly in the service area, and we have no shared national credits, so we have no SNCs at all in our organization.

Our non-interest bearing deposits are still strong at 32%, which is really good. We're operating 65 branches and we just recently sold the branch in The Woodlands up in the far north Houston and we hope to close that transaction hopefully in June and [also a nice game for us]. When you look at where we are from a growth standpoint, you look at where we are from a quality standpoint, our loan portfolio and you look at our net interest margin in the markets that we're in, we feel very comfortable about where we are at this point and really poised to continue to do well in the Bank.

PrimeLending, gosh, had a great first quarter. Traditionally, first quarters are not too good, but we did have one. Our volume was $2.9 billion, that was up 4% from last year. And you remember last year it was a refi quarter. This year writes-down, you thought remained a refi quarter too, but 70% of our volume in the first quarter was a purchase side, which was surprising. But I guess with the rates, they've already got a lot of people trying to take advantage of those low rates, so they're buying houses. So 70% of our volume was purchase, national percentage on that is about 53%. So again, we continue to outperform or outpace the national average in the purchase side of our business.

As part of our gain on sale, we continue to hold the line pretty much where we are, we're down just slightly in the first quarter and that would be because of the 30% refi that we have, it will have a tendency to drive the writes-down a little bit. Overall market share increased in the first quarter to 0.84% versus 0.82% in Q1, 2015. And our purchase side of the business is at 1.11% market share in Q1, 2016. And we just recently announced a new joint venture with Mutual of Omaha Bank from Mutual of Omaha Mortgage. We're excited about this. This is a joint venture. This is our second joint venture and it's a 51:49 joint venture, where we have control of 51%, they have 49%. They do the originations, we do the underwriting. We split the profits 51%, 49%. We think this has got a chance to present some large volumes for us, but we think it'll take us a little while to get going and really don't expect anything big from this until first quarter of next year. Between the bank and Prime, made 73% of the pre-tax income of the Hilltop. When we look at the Securities -- Hilltop Securities -- we had a pleasant surprise with a profit, as Jeremy said, after adjusting integration cost of $4 million HilltopSecurities made $7.8 million pre-tax during Q1. Our pre-tax margin after adjustments for pre-tax integration-related costs steadily improved over the last five quarters. So, we continue to see improvement since the first quarter of 2015.

Our business in that area clearing is becoming to be a lot stronger. We continue to have strong profitability in our TBA housing business. It is just really doing well and municipal finance business is doing well. And we've really been able to reduce our compensation and benefits, it was a big area that we targeted and it's had a big impact on our pre-tax income since Q1. Our compensation net revenue ratio was 65.7% in Q1, 2016, and it used to be 73.5% in Q1, 2015. So, you can see that has a big effect and we continue to work hard on that. And the thing you need to understand about the broker-dealer, we just merged these two things in January. So, we've made a significant amount of progress, Hill Feinberg and his people are working diligently as they integrate this and we continue to be on the (inaudible) trying to grow our business. National Lloyds, we had a darn spring storm that came early in March, resulted in a severity of severe weather that cost us a little bit. We had a loss and LAE ratio of 55.3% in Q1, 2016 versus 47.7% in Q1, 2015. We're still profitable but we weren't expecting a storm in December, now we weren't expecting a storm in early March.

The increase in loss and LAE was partially offset by a slight increase in net premiums earned due to our lower reinsurance costs and we had a decline in the expense ratio to 33.2% for Q1, 2016 versus 34.1% in Q1, 2015. Our premiums written continue to decline year-over-year were $39.1 million in Q1, 2016 versus $42.7 million. And this is really due to the effect that management's initiatives to get out of some geographic concentrations that we were in and lessen our risk and so we also increased our premium, so we've seen that decline. So I think, we had a good quarter in the operating companies and you'll learn more detail as Jeremy and the rest and John Martin give that. So that's in our report. So I'll turn it over, I think, to John.

Thank you Alan. I'm starting on page 11. PlainsCapital Bank had pre-tax income of $31.2 million for the first quarter of 2016 compared to $41.7 million for the same quarter of last year. Our higher non-interest income in 2016 was offset primarily by lower non-interest income and higher non-interest expense. The higher net interest income resulted from growth in the non-covered loan portfolio and a stable net interest margin.

Non-interest income decreased compared to the Q1, 2015 due to a $4.4 million gain that we recorded in 2015 on securities required in the SWS merger, which were sold in the Q1, 2015. And also lower trust fees in real estate -- income from real estate we acquired in FNB transaction. Non-interest expense increased due to the write-down of the large ORE property that we discussed a few moments ago. The Bank continues to provide PrimeLending a warehouse loan, it was at $1.2 billion outstanding on $1.5 billion authorized on 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 at end of the March was $7 billion, Alan mentioned a moment ago 32% of those deposits are non-interest bearing.

We've 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 the first quarter was primarily the 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 Bank. We have no energy SNCs in our portfolio, and we continue to have a relatively small exposure in Houston.

Our unfunded commitments of $103 million at the end of the quarter are all subject to borrowing base in credit review prior to drawdown. Our credit quality remained strong, non-covered, nonperforming assets were almost $28 million at the end of the quarter or 24 basis points in the total HTH assets. Our capital ratios remain high, leverage ratio of 12.7%, our Tier 1 risk-based ratio of 15.12% and risk-based capital ratio of 15.87%.

The portfolio includes covered and non-covered loans and it is further divided into purchase credit impaired and non-purchase credit impaired loans. The covered portfolio had $198 million of purchase credit impaired loans and $150 million of non-purchase credit impaired loans. The non-covered portfolio includes $68 million in purchase credit impaired loans and the balance of portfolio, which is newly originated or renewed loans of $5.3 billion. The covered portfolios have concentrations in real estate to cover PCI loans were 89% real estate and the covered non-PCI loans were 95% real estate. While our non-covered, non-PCI portfolio is only 47% real estate and 30% C&I.

PCI loans have a total discount of $193 million, the carried amount of the PCI portfolio was $260 million, which was 56.7% of the outstanding balance of the PCI loans. Non-PCI loans had a total discount of $32 million, the carrying amount of the non-PCI portfolio was $5.4 billion, which is 98% of the outstanding balance.

Moving now to PrimeLending. Pre-tax income for first quarter of 2016 was $9.1 million compared to $10 million in the first quarter of 2015. Although origination volume was higher in the first quarter of 2016 due to growth in the purchase business, the 2016 fixed and semi-fixed expenses reflect headcount additions that were made beginning in the second quarter of 2015 to address the higher origination volumes that we experienced. The purchase volume was 70% in the first quarter of 2016 compared to 60% in 2015.

Non-interest income of $146 million increased to $11 million or 8.2% compared to the same period of 2015 and $12.4 million increase in non-interest expense reflects the higher headcount referred to a moment ago as well as costs associated with additional branches in technology initiatives. Mortgage servicing right was $40 million at March31, 2016, on $5 billion of mortgage loans serviced for others. PrimeLending retained servicing of approximately 6% of the loans sold in the first quarter of 2016.

With that, I'll turn it back over to Jeremy.

Thank you John. For HilltopSecurities the pre-tax income for the quarter was $3.8 million versus a loss of $3.5 million in the prior year. The first quarter of 2016 results included a pre-tax integration-related costs of $4 million. After adjusting for those costs, the pre-tax income of HilltopSecurities was $7.8 million. HilltopSecurities' net revenue remained flat at $88 million, and this is primarily due to $6.1 million increase in income earned from derivatives and trading portfolio activity offset by lower securities commissions and investment banking fees.

HilltopSecurities' non-interest expense decreased $6.5 million resulting in a comp ratio of 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 Lloyds. National Lloyds' pre-tax income was $6.2 million in Q1 relative to the $9.1 million in Q1, 2015. It's written premium sell is the full impact of management's initiatives to reduce concentrations 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) Brady Gailey, KBW.

So, I think last quarter we talked about loan growth for the year of 8% to 10%. Do you think that's still an appropriate level?

Yes, Brady we had some times that kind of revision in the first quarter we've been working on. So, the 6% really kind of was good, but we're not going to hold that up. So, it is still going to be 8% to 10%. We made one big [ARM] there totaling about $50 million against cash in AAA bonds. So, that kind of (inaudible) but our goal is still 8% to 10%.

Okay, alright and then I noticed -- so you all transferred $50 million of 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 HilltopSecurities merger of the two broker-dealers, we were merging a lot of balances on a specified day. So, we wanted to -- so that $50 million went to Hilltop's parent and Hilltop's parent provided a 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 the broker-dealer back to Hilltop's parent. And I think the banks got significant -- still had significant excess capital and -- but for the most part we've historically left excess capital in the Bank.

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

Well, that's something that we're evaluating and we may consider.

Okay and then lastly from me, the average earning assets came in a little less than I thought. It looks like the stock lending business was down a little bit, is that, or are you all still interested in that space? I realize that's a low margin business, but do you think those balances will continue to fall?

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

Michael Young, SunTrust.

Just wanted to start off with the broker-dealer segment. Obviously, the pre-tax margin contribution improved sequentially and your guidance, I think, for the year was around 6% with a target of getting to 10% longer-term, but we seem 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're seeing kind of later on that are going to weigh on that?

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

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

Obviously Mutual of Ohama is a big company to bank, it's about $6 billion, but the insurance company is huge. So, they can draw from both sides of that. They got to get geared up to handle it and that's why it's going to take probably the first of next year before we're going to start seeing some volume. It won't affect our gain on sale at all. It really has nothing to do with that, it does affect our volume and I like -- we could forecast in 2017, we could be looking at billion dollars worth of volume next year, (inaudible)going from that standpoint. We're doing one other joint venture and it's really a good one, buys at Dallas and it doesn't affect our gain on sale, detailed for volume and helps our bottom line. So, we're looking forward to it and we hope it we'll meet our expectations, they're a great company and certainly have a great source of referrals that people can use and we can certainly gain the volume.

Okay and do you need to sort of ramp up maybe back office or any other aspects (inaudible).

Last year, first quarter last year we really worked 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 many bodies. We've just had (inaudible)working overtime. So we ended up the second and third quarter (inaudible) to ramp up to handle volume. We kept those people on and fortunately it's worked out here now, but we've enough overhead within the operational side to probably add $3 billion to $4 billion of worth volume without having to make a whole lot of adjustments. So, we should be in really good shape and (inaudible) continues to be good and I guess I say that every time I talk to you guys. It continues to be good and nobody ever believes me, but we are headed for a good year, PrimeLending.

So you're seeing the benefits of kind of MBA origination forecast growing pretty heavily in Q2?

Yes, sure. When you got market share we're going to get our percentage to that market share, if not better. And we've got a good company. So, I would (inaudible) number five in the purchase side of the market share in the country now, so we're enjoying that, of course people are enjoying lower rates. They are going out and buying houses. So, that's good and people are still refinancing. However, I guess (inaudible), we're not a refinancing company, so we are not (inaudible) as much as we do the purchase side.

Matt Olney, Stephens.

Hi, Alan I believe you said you're not seeing any real credit contagion at the Bank and the overall credits looks really good, but remind me of your exposure in the Houston market --

Look we got $130 million worth of volume down there. Now, we did have one credit in Houston in oil and gas that we took a tough stand because of cash flow. It's an equipment deal, but we're well secured by the equipment, but they are not selling it. So, the cash flow is a negative. Other than that any spillover contagion into any other type of credit issues, we do not see (inaudible), we are not seeing in our other portfolio really deteriorate at all. I actually (inaudible) oil and gas, went from like $29 million to $38 million. This was a $12 million credit. So, we actually had some paydown in that class location area. And most of those are all service related, which you'd would expect. And so, we're really not seeing any spillover at this point. And we're watching it. And I expect there will be some, but at this point, there hasn't been.

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

Well, there are parts in Houston that are good and there are parts in Houston that aren't good. There are businesses down there that are good and there are businesses down there that aren't. I think our attitude and our direction is we're going to look for those that are good and strategically fit us, and we're going to stay away from everything else. So, we're going to go put in 25 branches and start now. We're going to take it easy. We're going to watch it and we're going to be careful, but there are parts of Houston in our plan. 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, everything is going to hell. So, I think we're just going to be real careful and we're going to take advantage of opportunities and we're going to be real careful about our underwriting on that standpoint. So, I don't think we're going to (inaudible) try to take advantage. I think we just kind of do what we do, hit singles and doubles and be satisfied with that run now.

Okay, that's helpful, thank you for that. And then you also reported this quarter a large write-down, the covered OREO property. It seems like that's been a stubborn issue over the last few quarters. Any more color you can give us on that?

Well, that's a clever transaction, they came out of the (inaudible) deal and we have a borrow on the property, so we decide to go ahead and sell it and we took an $8 million hit on the covered transaction, which affected our bottom line of $5 million. And that hurt, but it is a clever transaction and we do have a loss here. So, if I were you and if I was an analyst, I'd be in that back to, where we are because that was something that really is out of our control.

As you look at the portfolio from (inaudible) or other --

I'll say that's it. We're are down though. There are not a lot of large credits layout. This one was one that kind of (inaudible) in the beginning and we've kind of gotten it down and we need to get out of it and we made a decision to get out of it and again it's a cover transaction, again it has got a loss here against it. So, I hated it, Jeremy hated it. It will 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 in -- I'd say the range we talked about last time -- I would drop it down to the $16 million for the rest of year, or maybe a little under that so, for each quarter.

Brett Rabatin, Piper Jaffray.

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 FNB transaction and it originally was a loan, there is a tough situation and we foreclosed on it and took it in OREO. And we've just been working to process and it's kind of come down to this. I think it was one of the most difficult assets that we acquired.

Okay. And then the process for integrating the two broker-dealers as kind of been thought of as more of a process in an event. Do we still have some noise to expect in 2Q or when do we get a clean quarter from them. And then just, I know and asked about you had a good quarter in 4Q and I think 1Q was pretty solid. Is there municipal business, or is there some business within the broker-dealer that you're kind of worried about how you're going to 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 we should be through most of those by the third quarter. And it is just kind of integrating people with systems. 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 a weak first quarter. So, the other part is there is what we can call public housing TBA business that has really done well and that has resulted in about $6 million of year-over-year increase in revenue. And a lot of that is tied to the interest rate environment like the mortgage market, and so I think that 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 great color. And then you've been shrinking assets, obviously the security line of business as a part of that for the past year and your capital ratios are very robust, and you got asked earlier about buybacks. Can you maybe give us an update on can I see capital in terms of the right number for excess versus core? And then are you seeing any books, any M&A thoughts that you guys might have in the various markets, especially Houston?

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

Michael Rose, Raymond James.

Hi, good morning guys, how are you. I just wanted to get your thoughts, I think you are one of the only energy exposed banks that actually saw the reserve allocation go down, kind of slightly this quarter. Obviously I 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 in near current levels, maybe moves higher over the next couple quarters. Can we expect to see that go down as you work the exposure down or have changes in the OCC's guidelines? Will that kick in a little bit later because of a higher service component? That can be helpful, thanks.

If the credits come down, I guess we'll look at it and bring it down. I don't think that we have any intention to bringing it down and if they change the guidelines 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's really no reason to put more on there and there's 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 at it with us and our regulators look at it with us. So, we're very much on top, as you say, it's not a big part of our business. Obviously, we jumped up this quarter, which were a (inaudible) everybody, but we made a $50 million loan against cash and AAA securities, which we got account because it's an oil and gas company, so that kind of is not fair. But anyway, this is what it is. So, I don't know if I answered your question, but we just --

That's helpful. And then John, thanks for giving the expectations for the accretion, and just on the core margin side though obviously, is up a couple basis points quarter-to-quarter. I assume some of that's 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'll 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're in. And so as we move forward, we're expecting some slight pressure.

Christopher Nolan, FBR.

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

Of course, we're a national company. So, it is spread pretty much across country. And if you look at where our loan volumes -- the highest concentration of our loan volumes are in Texas. And so we're seeing a lot of origination in Texas. We're Number 1 in the Dallas-Fort Worth market. We're Number 2 in the state. So, we have about 24% of that market. It is not deteriorating because the oil and gas is staying right 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 to Atlantic coast. So, it is spread pretty much across the country and everybody seems to be taking advantage of lower rates. And we're very pleased with it if that continues, that's pretty much our bread and butter, and that's what we expect.

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

No, it was a small growth in the service side that just ran out of gas -- ran out of gas, ran out of oil and gas, ran out of gas though; we took it out.

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

I would model -- it did seem fairly steady at that for right now.

John Moran, Macquarie.

Only two left from me. One is just ticky-tack housekeeping on the tax rate, which came in I think a little bit lower than where it's been running, if you had an outlook on where you expect that to come in for the year or good one going forward?

John, it's about 36%.

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

The answer is that, yes that's where it is on the balance sheet and we're thinking it would be, we will hold it to that level

Jesus Bueno, Compass Point.

Thank you and good morning. Starting off a question on the insurance, how is (inaudible) shouldn't look as bad as we had heard from other insurers and reinsurers that loss rates have escalated in the first quarter. My question is just, given the 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 quarter stemming from those storms in March?

Yes, I think that we did expect that the losses are contained in the first quarter. We do an actual IBNR reserve third party at the end of every quarter. So, we feel like we have been contained in the first quarter.

Okay and I guess in terms of how -- I guess so far in the second quarter, I know it's a very early, but the commentary so far and the storms we've seen are in April, but they've been fairly severe relative to prior quarters. So, I guess what are your expectations, I know seasonally second quarter is already one of the weaker quarters for insurance in terms of losses? If you could add any color to that, that'd be great.

Well, I think as I said the 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're hopeful that the storm season will end early this year as well. But, we've taken a lot of [rate] and exposure management initiatives and we've adjusted our reinsurance. So, we're expecting and hoping improvement from prior year.

Okay, great. And turning back to energy quickly just on the unfunded commitments. Have you seen any activity in terms of drawdowns or is there anything you can add to kind of what's been going on within the energy portfolio?

We got about a [$100 million] worth of unfunded commitments, in all those commitments we got to be base off receivables or whatever. And these companies don't have any bases to draw down on, so we don't see anything being taken or we don't see any drawdowns in the near future because the businesses are off. So, there is no concern on the unfunded commitments on that part.

Okay, great, and just on the -- level of criticize within the portfolio seems fairly low relative to other banks that we refer with energy exposure. And my question is, I guess as you're working through, I understand you're in the middle of your borrowing base for determination, but I guess

So you got to understand, we don't have a (inaudible) so you are not going to be looking at borrowing bases on us, so only 13% of our portfolio is base off a borrowing basis. So it has really no effect. I think we have one credit of $9 million as against reserves and it's more than adequately reserve. So, that's really not a question that affects us.

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

You are not going to see it based off of that now. And we don't and do any syndicated credits, so you're not going to see it come off of that. The credits that we are having issues with are service related credits, which you'd expect because of (inaudible) is 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 Holdings Q1 conference call. Thank you for attending today's presentation. You may now disconnect your lines.