Hilltop Holdings Inc (HTH) 2016 Q3 法說會逐字稿

Good day, and welcome to the Hilltop Holdings' third-quarter 2016 earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Isabell Novakov. Please go ahead.

Good morning. Joining me on the call are Jeremy Ford, President and co-CEO; Alan White, Vice Chairman and co-CEO; Will Furr, Chief Financial Officer; and John Martin, Chief Accounting Officer.

Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our business strategy, future plans, and financial conditions, are forward-looking statements. These statements are based on Management's current expectations, concerning future events that by their nature are subject to risk and uncertainty.

Our actual results, capital and financial condition 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 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. Good morning. For the third quarter of 2016, net income was $51.9 million or $0.53 per share.

Third-quarter adjusted net income was to $57 million or $0.58 per share, excluding transaction and integration costs related to the SWS merger. In connection with the SWS merger, Hilltop incurred $5.4 million in pretax transaction and integration costs, consisting of $1 million in the broker-dealer segment and $4.4 million within corporate. For the third quarter of 2015 net income was $46.9 million or $0.47 per share. Return on average assets was 1.69% in the quarter, relative to 1.49% in the prior year. Return on average equity was 11.4% in the quarter, relative to 10.97% in the prior year.

Hilltop's four operating segments all were profitable and reported $98 million in pretax income. PlainsCapital contributed $37.5 million, PrimeLending contributed $31.2 million, HilltopSecurities contributed $17.4 million, and National Lloyds contributed $11.5 million. Hilltop common equity increased to $1.8 billion up $53 million from the prior quarter. Hilltop remains well-capitalized with a 13.4% tier 1 leverage ratio and a 17.8% common equity tier 1 leverage ratio.

Notably, Hilltop will now start paying a quarterly dividend for the first time in its history. Our Board has authorized a dividend program and declared a quarterly cash dividend of $0.06 per common share. We also announced key leadership and organizational changes.

Alan White and I were named co-CEOs at Hilltop, William Furr was hired as CFO of Hilltop, and PlainsCapital Corporation will be fully integrated into the Hilltop Holdings parent to create a single unified holding company. The goal of our organizational changes is the best position Hilltop for future growth and M&A. Alan and I are excited to introduce Will Furr as CFO and fortunate he is on our team.

Moving forward. I will now speak to highlights not previously mentioned. Our book value per share increased by $0.53 due to earnings to $18.73. Our stated net interest margin declined from 3.77% in the prior quarter to 3.65%. Our pre-purchase accounting taxable equivalent net interest margin remained relatively flat from 3.08% in the prior quarter to 3.03% in this quarter.

Our assets declined from $13.1 billion to $12.4 billion, while our loans grew from $5.8 billion to $6 billion. And our deposits declined modestly from $7.1 billion to $7 billion. Our non-covered NPA as the total assets increased modestly from 20 basis points to 24 basis points. I will now hand over the presentation to Will, who will speak to our consolidated results.

Thanks, Jeremy. I'll start on page 5. Net interest income for the third quarter equated to $99 million, down $1 million from the prior quarter and $15 million from the prior year.

Net interest income in the third quarter of 2016 included $16 million of purchase loan accretion, and was down versus the prior year by $20 million. The third quarter of 2015 included a significant accelerated loan pay down, which impacted loan purchase accretion by $14 million. Decline in net interest income versus the prior year was somewhat offset by core net interest income growth of $4 million, resulting from 11% average non-FDIC covered loan growth in our bank portfolio.

Reported net interest margin for the third quarter came in at 3.67%, down 13 basis points from the prior quarter and 53 basis points from the prior year. Excluding the impact of purchase loan accretion across all periods, Hilltop's net interest margin in the third quarter was 3.03%, down five basis points versus the prior quarter, and up 20 basis points from the prior year. The increase versus the prior year is driven by a decline in broker-dealer clearing receivables, which has declined from $2.1 billion in the third quarter of 2015 to $1.34 billion in the third quarter of 2016.

The 5 basis-point reduction versus the prior quarter was driven by a recovery of interest recognized on a previously charged-off loan during the second quarter of 2016. Excluding both purchase accounting and the one-time item in the second quarter, net interest margin was stable quarter to quarter. Beginning at the end of the second quarter and continuing into the third quarter, Hilltop received accelerated redemptions for approximately $279 million of certain higher yielding callable agency step-up securities in the investment portfolio.

This impact coupled with normal cash flows reduced the investment portfolio's average taxable equivalent yield by 16 basis points versus the prior quarter. As of September 30, we maintained $17 million of additional step-up securities in our portfolio. The current taxable equivalent yield on the $806 million investment portfolio was 2.18%, as of September 30.

Moving to page 6. Total non-interest income of $354.5 million increased by $58 million or 19.6% versus the prior year. The mortgage company's non-interest income increased by $43 million or 19.7%.

During the third quarter of 2016, the mortgage business rate locked $5.2 billion in loans representing an increase of approximately $1 billion or 25% versus the prior year. Net trading gains in HilltopSecurities fixed income businesses, including structured finance and capital markets, improved $14.9 million versus the prior year, and public banking reported $24.6 million in net fees, which represents a growth of $3.1 million or 14% versus the prior year.

I'm moving to page 7. Non-interest expenses came in at $364 million for the third quarter, down $3 million versus the prior quarter and up $31 million versus the prior year. The third quarter of 2016 expenses included $5.4 million of transition integration-related expenses, related to the ongoing integration of Southwest Securities. Integration-related expenses included in the second quarter of 2016 and third quarter of 2015 equated to $2.4 million and $2.8 million, respectively.

Versus the prior year, mortgage-related expenses increased by $23 million. Including $10.7 million of increased expense and variable compensation and an increased of $12.5 million in operating costs, primarily related to middle office, closing and processing support to execute against significant volumes, as well as expenses related to closing and servicing cost. Other expenses increased by $10 million versus the prior year, driven primarily by ongoing valuation adjustments and disposition charges related to OREO properties, principally related to the S&B acquired loans.

Moving to page 8. Total assets of $12.4 billion declined $655 million or 5%, driven by a $917 million reduction in broker-dealer and clearing receivables. A commensurate offset is reflected in broker-dealer and clearing payables, reporting in liabilities.

In the period loans, excluding FDIC-covered loans, increased $202 million versus the prior quarter, and $675 million versus the prior year. Average non-FDIC covered loans have grown 11% versus the prior year. Total deposits have grown 3% versus the prior year to $7 billion.

Allowance for non-FDIC covered loans decreased $1.6 million to $52.6 million in September 30, 2016. The allowance to total non-FDIC covered loans, as of September 30, was 0.93%. Capital levels grew in the third quarter as common equity tier 1 increased versus the prior quarter at both the parent and bank levels.

Parent common equity tier 1 equated to $1.57 billion or 17.8%, and 15.15% at the bank, as of September 30. I'll now turn it to Alan.

Okay, thank you. Happy Halloween, everybody.

We are close to that day, and we're working on our theme on to go places man has never gone. This ought to be a good time.

We had an excellent quarter in our operating companies. I'm pleased to report that the bank had a solid quarter. We drove a 1.09% ROA that came from a solid loan growth and a core NIM that was helped to offset declining purchase at loan accounting.

We had stable deposit costs and it contributed to a taxable equivalent net interest margin of 4.53%, and after purchase accounting about 3.63%. That is pretty much in the range of what we've been doing throughout the year. Our loan growth is 4.7% or 20% on an annualized basis, that was pretty good.

I still come back and say that we are still anticipating annualized 10% loan growth for the year on the conservative basis for quarter four and the entire year. We had a loan pipeline that is very favorable, it's $1.9 billion in unused commitments and continue to hire new loan officers. We've hired two more in the quarter, 16 year to date.

I will tell you that $1.9 billion, probably $300 million of that is the prime line. $700 million of that is going to be construction loans that will fund up, and then the balance of those loans are going to be to C&I-type borrowers that have the availability to use that credit. Outside the loan quality and outside the second quarter charge-off that we had on the fraud basis, our loan quality continues to be sound.

Our covered MPLs were $25.2 million or 34.34 basis point of total loan covered cost. Or total non-covered loans, excuse me, at quarter three. It's 0.224% of assets.

I will tell you on that loan that we took in the second quarter, we continued to vigorously pursue the guarantors on that. It is in the courts.

We are doing discovery and will begin depositions soon, and we feel very good about our position on this case, and we are going to pursue it vigorously. Hopefully, so maybe some things will happen here in the near future.

A good sign is our energy portfolio declined down to around 3%. That is off some $55 million in the quarter.

We're down to about $165 million outstanding in our exposure. And that bodes well for us. In our classified accrual size energy loans declined actually $2.1 million for the quarter.

I would have to say that in our classified loans are mainly service related. Those credits still bear watching, they still struggle, and I think if anybody thinks that we're through the oil crisis sitting here at $50, I think you need to continue to hold on and be patient, because I think we've got a ways to go before we can really get out of this, and for those companies to be able to pick back up and start back.

You'll notice our energy reserve portfolio went up. But that is primarily because our loans went down. We did not put any additional funds in there, it's just the fact that our loan volume went down, but we feel we are very secured, we've got about $11 million up against that, but we feel like we're in good shape on our energy portfolio. And I think we will see some more downturn.

We've had some things happen since the first of the quarter or end of the quarter that have been very positive for us. Our non-interest-bearing deposits are running about 32%, we have got 63 branches, we added a new one, it's an LPL office that we put at Preston and Sherry, and we've combined some space with HilltopSecurities, great space, great visibility. We moved our premier service operation in there with the HilltopSecurities office.

When you look at our markets, Dallas-Fort Worth is our strongest market, Austin is our second strongest market. They both are very well-diversified economies. And the question you always ask is what does Houston look like?

We continue to be patient with Houston. We have $165 million of loans out there, 67% of it would be OREO, 31% would be C&I. And I will tell you on our loan production at this point we are seeing about 75% CRE, and about 25% is C&I.

It is very competitive on a rate standpoint and it's very competitive on a structure standpoint. I will tell you, we're not giving in on structure, we will be competitive on the rate. That is pretty much the bank.

I look for more of the same going into the fourth quarter, and I was pleased with the operation in the first quarter -- in the third quarter. PrimeLending had the best quarter they've ever had. They continue just to be able to knock it out of the park.

They're up about 23% year over year on their volume. They're approaching $15 billion in lot volume so far. Purchase volume is 71% compared to the industry of 53%.

Our net gain on sale margin continues to improve. We maintain a margin higher than both quarter two and quarter three of 2015. I think these improved margins are because of higher volumes and execution, and our people are really doing a good job of being able to drive that, and that is so important.

Our overall market share total refi and purchase is 0.80% on the national basis and our market share in purchase is 1.07%. As you know, we're the number six purchaser in the country in purchase million loans that we do, so we're a large player in that market, and we are proud of that. And I think something else that we are really proud of is that Forbes came out and called us a number one place for women to work in the United States.

I think that speaks very highly of the culture at PrimeLending and what we do have going on out there. I'm really pleased with Prime. Fourth quarter traditionally drops off and we look at flattening out on the fourth quarter.

I think it will be a little bit better than we thought, because we've seen volumes in October still hanging in there, so maybe we can have a little bit better fourth quarter than we think. Normally what happens in the fourth quarter by December 15, everybody has gone to vacations and gone skiing. Getting ready for Christmas. There's not a whole lot goes on the last couple weeks, which always hurts your production. But anyway, we're really doing well at Prime.

With HilltopSecurities, there's been a tremendous amount of work that has gone on there through the integration and building the platform for the future. And I'm proud to say that we have gotten most of that done, we still have a few more projects that we will continue to bring along, but for the most part, the focus now is on generating revenue, and as you can see, we've earned a pretty good net income figure for the third quarter. And our pretax margin of 15% to 16% is way above what we projected or thought we could do. I think a lot of this is primarily due because of the industry and the market.

Our public finance division is really doing well. We're having one of the top public finance companies in the country from the number of volume. We lead Texas, we may be number one or two, just depending on the day.

The number of issues we have in the country. And this equates to good businesses equates to more underwriting and more underwriting equates to better capital markets. And we're seeing our capital markets do a lot better and provide a good bottom line.

And then the third thing, which is a great result of what bringing the two companies together FirstSouthwest and Southwest Securities, is our clearing business. We're the number three largest clearing company in the country. And that is profitable.

It not only is profitable, it brings a lot of deposits to us that we can use in the bank for core deposits. I think the platform is there. I think we're getting ourselves in a position, and we are going to really start focusing on revenue, and I am pleased with where we are headed and excited about the future that it can bring. I think the people there are focusing on getting the compensation in line, and I think we are getting there. I think as a result will be a convenient, even stronger performance.

National Lloyds had a good quarter. There was no severe weather. When there's no severe weather, this company performs real well. Management has made all kinds of efforts to reduce the risk profile and increase the profitability of the book.

I think that has come to light. We've rid ourselves of a lot of maybe bad practices and improved those practices in our risk assessment and coverage. We have seen a decline in force, because we've increased policies, we've gotten out of regions that we shouldn't have been in.

And overall, it looks good. We are at some point going to have to start growing the book, because you cannot just keep raising premium and driving off business, at some point, you have got to start creating more revenue, and we realize that. Our loss and LAU ratio was for 41.4%, our underwriting expense was 33.6%.

This is pretty much in line year over year with 2015, which equates to good numbers. We will continue to monitor this, we'll continue to watch our expenses and continue to look at what we need to do to progress with this business. I would anticipate the fourth quarter being a strong fourth quarter for the insurance company, barring any freak storms or mother nature. But history will tell us if fourth quarter will be good so that the insurance company will end up with a good year.

Those are the reports of the operating companies. I think they're all solid, and I read somebody's article that said that we've got everything to click, and we got everything to click.

I'm pretty proud of that. That is my report, and I will turn it over to whoever else is speaking. John Martin. Okay.

Thank you, Alan. Good morning. As we previously stated, the bank had a strong pretax income of $37.5 million.

This was lower than our third quarter of 2015, but that was due to lower accretion on loans, and that was about $20 million difference. This was offset by growth in our non-covered loan portfolio, and increased utilization of the warehouse line that we extend to the mortgage company. Lower non-interest income compared to the third quarter of 2015 was principally a result of the impact of the Durbin amendment, which went into effect on July 1, and we estimate that had about an $800,000 effect on our non-interest income.

Also the ORE income on our FMB assets continue to wind down, so it was a little bit lower than the same period of 2015. Non-interest expense was slightly higher, compared to the same quarter in 2015, and that was increased headcount at the bank and professional fees, as well as lower ORE recoveries. The bank continues to provide the mortgage company a warehouse line, of which $1.5 billion was drawn at September 30, 2016.

The tier 1 leverage ratio declined to 12.65% from 12.72% in the second quarter of 2016, as a result of growth in our average assets. The composition of our loan portfolio, we had $6 billion in loans held for investment, 49% would be real estate, 13% construction and development, and 29% C&I. As we previously stated, our non-interest-bearing deposits amounted to 32% of the $7 billion in deposits we had outstanding.

On the energy exposure, energy loans outstanding at the end of the quarter were $169 million or 3.1% of total loans. EMP and services accounted for 13% and 47%, respectively. We have no shared national credits in the energy space, and as Alan mentioned a moment ago, we continue to have relatively low exposure in the Houston and surrounding region. All of our unfunded energy commitments are subject to borrowing basis and credit review prior to drawdown.

Moving to prime on page -- credit quality on page 13. We had approximately $30 million in nonperforming assets at the end of the quarter, or 24 basis points. Our capital ratios have continued to be well above the regulatory requirements.

On page 14, the prime lending. Prime lending enjoyed a strong quarter. The pretax income increased to $31.2 million, compared to $12.1 million in the third quarter of 2015. This was a result of origination volume increasing to $4.5 billion in the third quarter of this year, and that was a $854 million increase over the same period last year.

Our purchase volume was 71%, re-finance volume increased $607 million to $1.3 billion for the quarter. As a result of these higher volumes, non-interest income increased $42.8 million or 26.8% compared to third quarter of 2015, and non-interest expense also increased $23.2 million or 16% compared to the same period last year, and this increase in salaries and benefits partially was driven by the higher volumes.

Prime lending retained approximately 22% of the loans that originated during the quarter, ended the quarter with a mortgage servicing asset of approximately $44 million on $5.5 billion of service loans. With that, I'll turn it over to Jeremy.

Thank you, John. I'll now speak to HilltopSecurities quarter, and as Alan said, it was a strong one. Pretax income was $17.4 million in the quarter versus $1.5 million in the prior year.

End of quarter, we had pretax integration and related costs of $1 million. After adjusting for those integration costs, the pretaxed income would have been $18.4 million. Our net revenue increased by 20.9% to $111 million, and resulted in a pretax margin of 15.7%.

Our non-interest expense increased by nearly 4% to $94 million, as compared to prior year, and in this is a compensation ratio of 61.1%, which was partially due to execution of integration initiatives, as well as operating leverage we're seeing from increased revenue. Our broker-dealer segment provided the bank with $950 million of core deposits, which represented only 40% of the total available FDIC-insured balances.

Moving forward to National Lloyds. National Lloyds pretax income was $11.5 million in the quarter, relative to $12 million in the prior year. We had seasonal decline and severe weather in the second and third quarter, which resulted in loss in LAU ratio of 41%. Our direct premiums written decline relative to Q3 2015, due to the continued effects of our efforts to reduce concentrations due geographically, and within specific product lines, as well as our agent-management initiatives.

That concludes our prepared remarks.

We will now begin the question-and-answer session.

(Operator Instructions)

Brady Gailey, KBW

Good morning, guys. Looking at mortgage, mortgages had a great year so far. With a lot of growth.

If I look at mortgage revenue as a percentage of total revenue, that continues to tick up, it was 38% last year, 41% in the first half of 2016 and now up to 44% this quarter. I'm wondering, it's nice growth, but does there come a point where you want to slow mortgage fees down just because they get to be too big of a percentage of the Company's overall revenue or earnings?

I don't know. Is that for you or me? I don't know why you would want to slow it down.

Earnings is earnings. That is a relative thing, because it will go up and down. So, take advantage of it while you can.

Yes, it was 44% of our income this quarter. The bank and the mortgage company were 80% of the income. And we have that three-legged stool, Brady, we've always talked about.

And we kind of counterbalance all of these things with each other. The broker-dealer adds deposits, add the ability for us to be able to have that line and Prime has the ability to be able to go out there and make the business. It kind of all works together.

If we can just keep it all working together, we're going to do fine. I'm very pleased with the operation of the mortgage company. Not only do we have outstanding people to work in that company, we also got outstanding loan officers and we continue to grow that and we continued to grow that purchase market, and maybe we won't make as much money next year, but I bet we come pretty close.

It all depends on how the market settles out. But I say you just keep making money where you can make money, and make hay where the hay shines. And it will shift to something else here, but taking advantage of it.

Okay. That is helpful. Hilltop has excess capital right now.

Maybe in a little bit, you have more excess capital, depending on what you do with the insurance company. But can you just give us an update on bank M&A in Texas as a means to deploy some of this excess capital?

Sure. Brady, right now we believe we have an excess of $500 million in capital and the primary purpose of that is bank M&A. And we continue to pursue, as we said, acquisition opportunities.

We'd like greater than $1 billion in Texas. I think the environment has clearly been slow. But we have been working hard on several opportunities and we will continue to do so.

Okay. There is no meaningful tick up or tick down in the conversations you're having with targets?

No, it's the same. We're always working hard to find the right opportunities.

Okay. And last one for me. You now have the dividend out there, it's pretty modest payout of around 15% or so.

Is there a targeted payout you would like to get to over time? Or are you happy with the 15%?

I think we're happy with, we're excited and happy to initiate the dividend that approximates the 15%. And we're going to evaluate it over time.

Gosh, Brady, you've been after us for years about this, we finally give it to you, and now you're criticizing us.

No, it's not a criticism. I'm just wondering how --

We're trying to make you look good after your projections of the first of the year. Now you're coming back wanting more, you are never satisfied.

No, I appreciate that

We were pretty excited we get a dividend, golly. We were hoping we would not even have to answer that.

I appreciate it, I'm just wondering if we will anticipate seeing that grow much over time. No, that is a good call. Thank you, all.

Matt Olney, Stephens.

Good morning. I want to start on the broker-dealer. Really impressive results in the third quarter.

Pretax margin, as you said, it was 15%, 16%. I think in the past, you've talked about maintaining that over 10%, but at this point, are we resetting to newer levels, given the recent performance? Or are Q2 and Q3 seasonally very strong, and we could see some weaker margins over the next few quarters?

I would not say that the quarters themselves are seasonally stronger in this business. But I think that there has been some market opportunities that have prevailed or us. I guess today what we think is our net revenue run rate is probably about $100 million a quarter, and we're looking at about 12% pretax margin.

And that 12% --

Matt, if I could say something in this, we've gone through all of this integration, and that is taking away from our focus on generating revenue. We've been able now to start focusing on revenue, and now we are seeing the results of what we hoped would happen.

And it'll build over a period of time, but we have got a great platform set, and we've got really good people, and of course public finances are a big deal, public and structure finances. We're really starting to focus on that, so I think we've got a lot of opportunities going ahead, how quick they will take place or what, but I'm optimistic about the business and the people that we have and being able to execute. And time will tell to see how far we can go with it.

And what the market will absorb. But we have done remarkable as well, a lot better than what we expected. But I don't know if you can expect that 15% every quarter

That's what we have said in the past is that the Company has done exceptionally well. And great credit to them.

But we have -- that margin is going to depend on the mix shift of the business. We have had some of our higher-margin business have the revenue growth.

Okay. That is helpful, thank you for that commentary. And also I was going to ask about expenses in the quarter.

Other expenses. Looks like there was a jump sequentially in the other expense line item. Any more color you can give us as to what's going on there?

This is Will. As you look at our other expense again, as I noted in my comments, a lot of that is driven by the FMB portfolio and kind of the variability in OREO gains marks and other kind of valuation adjustments, that will continue to be a little bit more variable than you otherwise might expect it to be on a go-forward basis. But this quarter, third quarter had fewer gains then it did not really have any losses of materiality, of material note, but had fewer gains in the prior quarter.

And Will, do you have those net amounts in front of you, as far as 2Q and 3Q?

I don't want to walk through very specific numbers, but again, it's at a high level, that was the principal driver of the change.

Okay. And then lastly, deposits.

Looks like deposits declined sequentially. Any more color on the deposits?

From a deposit perspective, I think we continue to see good flows, and, as Alan mentioned, our securities business and growth in that deposit base. We also continue to see reasonably strong deposit trends in our commercial businesses. But we also saw -- we had a large depositor take funds out and pay down a loan.

So again, in the context of normal flows of deposits, I would call them pretty stable quarter to quarter. But again, we are always subject to one-off large items that move around quarter to quarter.

Thank you.

Michael Rose, Raymond James.

Good morning, guys. Alan, just wanted to dig into the loan growth a little bit. I appreciate the 10% outlook.

What is going to be the impact of pay downs for you guys? I guess, obviously, we can see the energy piece, but maybe outside of energy and into production, you know, stronger.

Normally, when you've got to grow 10%, you have probably got to really get out there and grow at 15% to be able to offset the pay-downs. We are having pay-downs, but we're having to produce enough to offset that.

The 10% figure I give you is net of those pay downs, so, 10% roughly on our portfolio is a $500 million increase. We are probably having an equal amount that we are having to replace. We are probably having to generate $1 billion in loans to be able to get to that 10% growth in our loan portfolio.

We do have pay-downs and, but we are out there having to hustle new loans. The markets in Texas, Austin is a strong market, Dallas-Fort Worth is a strong market. Those economies are diversified.

We're seeing good production out of that, we're seeing good production out of Fort Worth. We're still saying low or light in Houston. We're at about $165 million, we're not doing much, and kind of waiting to see what happens.

But the bulk of our stuff is coming out of those markets that I'm mention to you. And they are still prolific, there's a lot of growth going on and a lot of diversification. But I will tell you the balance of the book of business right now is about 75%, 25% real estate versus C&I, and it is very competitive, rate wise, and it's competitive structure wise.

There are a lot of people giving on structure. We won't give on structure. But we're still getting our share of the business.

Just a follow-up. Your CRE and construction concentration is a lot lower than some of your peers, obviously because you have pretty high capital levels. But is there a thought process that can maybe be a little bit more aggressive and grow those categories and take some share?

I don't think there's an element, we're just looking for good loans. I would tell you this. If a good oil and gas loan came in that we feel good and comfortable with, we would make it.

We're not going to take a good loan and look at it and not make it. We're not particularly necessarily looking at any industry, it just happens to be that the opportunities right now are really in the real estate side. C&I is kind of slow. I think people are kind of waiting to see what happens in November.

When you do have a C&I deal, it's competitive, because everybody wants C&I. But that is why I say our annual growth is probably going to be about 10%. And not these 20% annualized figures you see that come out because maybe we had a good month or maybe we didn't.

And maybe just one more for me, Jeremy. In terms of potential bank M&A, you said over $1 billion.

Are you looking for something that has a little hair on it or are you looking for a clean bank, does it matter? And what is your optimal cash versus stock mix in the deal?

We've always been situational buyers. If that means hair or just a different type of opportunity, we like that than just a market deal. We've got a lot of cash, so we would like to have that be a meaningful amount, a portion of the consideration.

Great, thank you for taking my questions.

Brett Rabatin, Piper Jaffray

Good morning, everyone.

Did you change your name?

No, it's still Brett Rabatin. I wanted to go back to, I guess, mortgage first. If you look at the MBA forecast, it's for volumes to be down 14% next year.

You guys have done a good job taking a market share. You made some comments about doing what you can while it is good. If we're thinking about next year, can you give us maybe some color on how you think about the market in terms of --

While we're looking at next year, you know. Our refinance business isn't that much. And there isn't going to be any refinance business, in our opinion.

The market actually comes down 14%, but if you look at the purchase market, it goes up. Because of our market share in the purchase side of it with the purchase market going up, and if we can get our market share plus some, that will be more than enough to cover what we had on the refinance side. Just because the market is coming down, the good thing about that is the purchase market is going up, and if we get our part of that purchase market, then we should be okay.

Okay. And then I want to go back to expenses, as well. One, will there be any additional charges in 4Q, or are we sort of through those restructuring charges?

And secondly, if we're thinking about corporate leverage or leverage at the bank or broker-dealer, how should we think about expense leverage potential as we go into 2017? I know you were spending some money on the core bank, but any thoughts on that?

On the first one, I think that as far as the integration-related costs, we should have -- we've got last-minute integration fees that the system left out, and that's going to take some time. I don't foresee any imminent additional integration costs to be, hopefully, as meaningful.

As far as the second question, maybe if you can clarify that. I did not understand the operating leverage question.

Jeremy, just trying to think about the expense level that you've had the past two quarters. There's some noise, obviously, but I guess the question is, outside of what might happen with variable costs related to mortgages, especially, if we are thinking about the core commercial bank, the Holdco, the broker-dealer, are we going to see any kind of benefit from what you've been doing the past few quarters, or is this spend, so to speak, going to absorb all of that as we think about 2017?

This is Will. A couple of things to think about. One, you hit on the mortgage business, obviously the variable expenses as I discussed were up right at $11 million on a compensation basis, and then another $10 million roughly to deal with volume. Our mortgage business is acutely aware of managing a variable expense based on the volumes in place.

As you think about your view on mortgage production, based on what we've given you here as well as your own internal view, mortgage variable expenses will come with that. As we think about the organization in total, we're focused on positive operating leverage, and if you think about this quarter on a reported basis, it was 1% if you exclude the $5.4 million of transition-related expense, it would've been 2.6%,

Again, our objective here is, as Alan's noted, is to position the organization for strong growth. We're focused on growing revenue, and we're going to manage expenses tightly around that. But again, the objective will be an improving efficiency ratio and positive operating leverage as we look into the future years.

Okay. And then just last, the clearing business has been volatile on balance sheet at quarter end. Maybe, Jeremy, if you want to give us any thoughts on that business and what impact it might have on the core margin as you think about the coming quarters.

You are talking about the stock-loan business, and we took that down. It went up to $2-plus billion in the second quarter, and that has come down.

We're going to manage that at about an area around $1.5 billion, but with market fluctuations I think you could see that being $1.25 billion to $1.5 billion. So, I wouldn't expect it to be $2 billion again.

Okay. Great, I appreciate the color.

John Moran, Macquarie,

Hi, guys. Real quick, I want to circle back to broker-dealer.

Jeremy, I think you said $100 million in revs at pretax at 12%. Did I get that down right, and is that what you're looking for in 2017?

I would say in the near term, so, I'm not trying to go out that far, but I just think in the next quarter or so that's what it's trending.

Got you. So, you would exit 4Q at like a $100 million annual run rate in terms of revenue. Okay.

That's where it is trending.

And then one more on Prime, maybe for Alan. I think gain-on-sale margins have probably held in better than you would've guessed. I wonder if you could give a quick outlook on where you might see that kind of heading, and maybe some of the reasons why it's going to get better?

Honestly, John, it is up. It keeps going up, and been up for the last seven or eight quarters.

It deals with volume and execution, and our people have done a great job with it. Are we surprised? Maybe a little bit.

But, do we think it's going to hang in there? It's going to hang in there pretty close. Because I don't see how that's going to change.

We've really have been pleased with it, and it obviously has a good effect on our business. We've got a good team there and they know how to execute, and we have the volume to do it with. I think it will continue.

Got you. If I'm putting all the pieces together on Prime, you've got purchase expected to go up next year, you guys are mostly a purchase shop where you're taking share, you got gain on sales that is stable. I guess just to kind of underscore the answer to one of the other questions, just because the forecast is down 14%, you guys ought to be able to hang in much better than that

I think we'll be able to hang in there. Whether we can perform at the level we have this year because it's really been extremely unusual year, I don't know, but I don't think we're going to be -- it's not going to be whipsawed. I think we're going to come close, because I think we can pick up our market share gain in that purchase side if it continues and we'll be able to drive that line.

And a lot of things that happened here, too, there's a lot of expense management you can do in some of this stuff, because some of it goes away, but all that cost and everything in that part of it goes away. So, I feel optimistic. Our people feel optimistic, we're seeing the fourth quarter be a lot better than what we anticipated.

And it's still carrying over. These millennials are starting to drive some of this.

You all have always sold us short of the mortgage business, but it's getting to be where it's an every-year occurrence, and it ought to be getting them 12-multiple versus the eight you give it.

The only other one I have was just -- (Multiple speakers) The only other housekeeping one I had was on the [amount] outlook, maybe for Will. It sounds like in the securities book, there was more compression on some prepays and pre-NIM. Do you expect that pressure -- I mean, we've heard from others that that's kind of continuing the fourth quarter here, and then X sort of accretion which can be noisy. What is sort of the outlook on the core NIM?

So, as I think about it, I will put it at the HTH level again. This quarter 3.03%. I'm going to call it relatively stable into the fourth quarter, plus or minus 3 basis points. I mentioned the pressure on the pressure in the investment portfolio, and I think that will continue the reinvestment rates, just given where absolute market rates are, we will continue as cash flows in the portfolio continue.

Again, as Alan said, the market for loans and loan origination on the yield side is under pressure and has been that way. As we look at both the portfolio and our asset generating businesses, I would say relatively stable going into the fourth quarter, and then when we get through our fourth-quarter call, we'll have a better perspective of full-year 2017.

Perfect. Thanks for taking the questions.

Michael Young, SunTrust

Good morning, everyone. Wanted to start off on the capital front.

You guys announced a share repurchase authorization earlier this year, but did not use it this quarter. Was there anything that precluded you from acting on that this quarter, and should expect any activity on that going forward?

You are correct. We did not repurchase any shares in the quarter. And I think that I wouldn't say there is any bright line reason.

I think as we look at share repurchase in the future, we've, as we've said before, primary purpose of it will be to mitigate any dilution from equity awards, so you could see that from that. And then we'll look at our stock and see if there's any opportunistic reason to do it.

Okay. If you were to have maybe lighter revenue if you exited a business line, et cetera, would you look to deploy that into share buyback, or do you still want to hold that capital, even with $500 million in excess capital to do bank M&A?

Principally for bank M&A.

Okay. Lastly, Jeremy, just in the broker-dealer segment, a lot of the outperformance this year has been from the TVA business. Is the outlook for next year pretty dependent on that, or do think that you can grow the securities business and the investment banking advisory businesses enough to offset any lower volume in that business?

I think that in general the Company is really coming together and we're seeing a leverage from the cost saves. I think we will see it.

I think from our primary businesses, we have four business lines in that business that represent about 20% to 25% of revenue. We are pretty well balanced from a revenue perspective.

Okay, thanks, that's all for me.

Christopher Nolan, FBR.

Thanks for taking my question. On the non-interest expense, Will, loss and loss-adjustment expenses declined.

I think you might have went over it a little bit in your comments. Could you go over it again, please?

I will speak to the loss and loss-adjustments side. That's related to the insurance business. And it's declined linked quarter, it's really seasonally driven.

The second quarter of the year is when you have all of the tornado and hail in Texas, and that's when we expect to have an underwriting loss driven by our claims-related losses. Third quarter is typically a stronger quarter and it's pretty consistent with what it was last year.

Great. And then as a follow-up, given the co-CEO structure, is there an intent over a period of time, in terms of to consolidate that into one person, or what are the thoughts there?

Let me start with that, and then hand over to Alan. I think for most of you all that know us, Alan and I are what we think to be a strong team and have really complementary strengths. I think we view this as a formalization of really what we've been doing for the last four years.

And that Alan is really the day-to-day leader and revenue generator, and I'm more focused on Holding Company functions and also M&A. I don't foresee that to be an end result of this.

This is a partnership that we've had for four years. Alan?

I think this is a prelude to a big event we're going to have, and promote and hopefully we make a lot of money out of it, called WrestleMania. We get down here when things are not going so good, we'll have this WrestleMania event, and whoever will get into the ring and whoever wins, I guess will be the new CEO.

But we have not set that up yet.

(Laughter)

Jeremy answered the question, I'm just being silly.

Alan, on the WrestleMania, what sort of tangible book dilution -- what sort of a threshold you have as you look at deals?

Deals are his deal.

It's situational specific. As far as what kind of tangible book value dilution you have. And commensurate to that, it's going to be what kind of EPS accretion you have.

We don't have any hard-line standards. The deals that we've done have actually been extremely accretive at tangible book value and also earnings. But if we're going to acquire a more quality franchise, we'd expect to pay a premium, we'd expect to have tangible book value dilution, and we'd expect to have earnings accretion.

Final question on M&A. For a potential target, are you guys more focused on the deposit franchise or, given your securities business is generating decent deposit flows, it's less important?

I think what we're focused on is situational opportunities and also where we see value. In the near term, to have more of an asset generator would definitely be attractive and probably have some more immediate impact than a bank that has got a lower loan to deposits. But I think as we look out on the long term, we view those deposits as having high value.

Great, thank you for taking my questions.

Jesus Bueno, Compass Point.

Good morning. A quick question on PrimeLending again. Your MSRs have been fairly stable lately.

You have excess capital. Have you ever considered perhaps deploying some of that excess capital and buying MSRs, maybe building your servicing book there? And if so, do you have excess capacity within that servicing book to take on additional servicing?

We're not really interested in doing that.

Got it. As far as purchase accounting accretion goes, could you provide us with a rough guide of what to expect as we move into the fourth quarter?

As we look out across future quarters, $10 million to $12 million is our current estimate. Per quarter.

Great. And I appreciate the color around your exposure to purchase and obviously you went heavier into refi this quarter.

We have seen rates move up sharply over the past three or four weeks. Do you see any sensitivity on the refi side that shows evidence of burnout and perhaps --

Our volumes, honestly, are still doing pretty good. They're not as hot as they were, but they are still doing pretty good. But most of it is purchase.

When you get back up to the 170 or so tenure, you're not going to see much refi, and it's going to pretty much burn out. And I don't think we really anticipate a whole lot next year unless we see rates take an about face, which I don't think any of us think it will. Our whole focus next year and our focus now as we head to next year is how do we get that purchase business, and how do we increase our market share?

That is really where we are going. We've increased our loan production staff by about 7% year over year. And we continue to recruit loan officers that fit our culture that are good producers and that have experience. We continue to cull out the ones that are not being able to produce.

We keep improving our Company and improving our position, which we think is going to help improve our market share, which will offset anything that we have from a refi standpoint. There will be one thing as these people that live off of refi, as they start getting in trouble, they are going to reach out there trying to repurchase, and they will start cutting crazy deals for a little bit, which might put a little pressure on the margins.

But it won't last long. We saw that happen a couple of years ago, it did not last long, and we seem to be able to just move right on through it. We are gearing up for it, and we're ready for it, and our people are very astute in what's going on and very good about building that culture and building that company that allows (inaudible) to get that business.

Excellent, I appreciate that color. And if could just squeeze one more in on the insurance unit.

Your net premium earned, it has been declining, and we finally saw some stability here quarter over quarter. Would you consider -- is this an inflection point where we could finally start to, I guess, expect to see growth there, or should we just continue to see more of what we have seen over the past year or so?

With insurance business, you look at the premium written as a leading indicator of that's going to drop down the premium earned. And we've still seen decline, I cannot say that that's going to change in the next quarter, but I will tell you that it is narrowing from year over year and kind of prior declines. We had a lot of business that we wanted to carve out of the book and we have, and now we've got to focus towards growth.

As far as the pricing changes that you have made to cull that business, that's all done with right now?

I think we're substantially caught up. We will always want to be ahead of the curve on rate, but I think substantially caught up.

Great, thanks for answering my questions.

A follow-up question. Michael Young, SunTrust.

Just wanted to ask about the SWS system conversion. I think that was planned for 4Q.

Can you give us any sense of the magnitude of the expense, say, that may come there? And any last one-time charges that we should expect to clean up, maybe, in the fourth quarter?

Sure. We don't foresee that occurring in the fourth quarter.

And at this time, I don't have a good number to tell you what that will be. We're really in the bows of evaluating it.

Okay. So, it could push out further or you may keep that system around for a while?

Just to be clear, what we did is when we merged the broker-dealers, we put them all on effectively the SWS system. We are all operating on a system and it is working and everything is fine. The next step that we are hoping to achieve is a service-bureau based system where we lift out that, and that's -- I don't have an updated timeline on that today.

Okay, thanks.

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