Isabell Novakov – PlainsCapital Corporation – Investor Relations Jeremy Ford – Hilltop Holdings – President, CEO Darren Parmenter – Hilltop Holdings – Principal Financial Officer Alan White – PlainsCapital Corporation – CEO John Martin – PlainsCapital – CFO.

Brady Gailey – Keefe, Bruyette & Woods Enrique Aced – Raymond James Matt Olney – Stephens.

Good evening and welcome to the Hilltop Holdings Third Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [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 afternoon. Joining me on the call 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 this presentation and statements made by representatives of Hilltop Holdings during the course of this presentation include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company's actual results, performance, or achievements to be materially different from any future results, performance, or achievement anticipated in such statements.

Forward-looking statements speak only as of the date they are made and except as required by law the Company does not assume any duty to update forward-looking statements.

Such forward-looking statements include but are not limited to statements concerning acquisitions, including our pending acquisition of SWS Group Inc., integration of the assets and operations acquired in the First National Bank transaction, mortgage loan origination volume, market trends, organic growth, commitment utilization, exposure management in our insurance operations, loan performance, the Company's other plans, objectives, strategies, expectations, and intentions and other statements that are not statements of historical fact and may be identified by words such as anticipates, believes, could, estimates, expects, forecasts, goal, intends, may, might, probable, project, seek, should, view, or would or the negative of these words and phrases or similar words and phrases.

For further discussion of such factors, see the risk factors described in the Hilltop annual report on form 10K for the year ended December 31, 2013, quarterly report on form 10Q for the 3 and 9 months ended September 30, 2014, and other reports filed with the Securities and Exchange Commission.

All forward-looking statements are qualified in their entirety by this cautionary statement. And now I would like to hand the presentation over to Jeremy Ford..

Thank you, Isabell. And good afternoon. For the third quarter of 2014, net income to common stockholders of Hilltop was $23.4 million or $0.26 earnings per diluted share.

Our quarter results were favorable with the exception of write-downs on FNB covered OREO that decreased Hilltop's earnings by approximately $9.6 million which we will discuss in more detail. Of note, Q3 2013 included a $12.6 million pre-tax bargain purchase gain from the FNB acquisition which distorts certain year over year comparisons.

PlainsCapital Corp. subsidiaries reported pre-tax income of $37.0 million for the quarter. PlainsCapital Bank contributed $24.6 million, as the Bank continues to profitably work through acquired FNB loans and has undertaken plans to divest of certain FNB legacy branches.

PrimeLending contributed $11 million with year over year growth in mortgage volume. The First Southwest contributed $1.2 million. National Lloyds reported pre-tax income of $8 million for the quarter, resulting from an 85% combined ratio. Total stockholders' equity increased by $27 million in the quarter to $1.4 billion.

Hilltop remains well-capitalized with a 13.6% tier 1 leverage ratio and a 19.3% total risk based capital ratio. Hilltop retains $153 million of freely usable cash, as well as excess capital at its subsidiaries. On October 2, 2014, we exercised 100% of its warrant and now own 21% of SWS outstanding common stock.

SWS shareholder meeting to vote on the pending merger will be held on November 21, 2014. Moving forward, again we earned $23.4 million of income common for the quarter versus $38 million in the prior year which included the bargain purchase gain from the FNB acquisition. Our book value per share has increased to $14.50 from $13 at the prior year.

Our net interest margin declined to 4.38% in Q3 2014 from 5.2% in Q2 2014. Q2 2014 had significant purchase accounting benefit. To note, our core net interest margin held constant. At Q3 2014, we had $9.2 billion in total assets, $4.5 billion in gross loans and $6.2 billion of deposits.

Finally, our credit quality remains strong with a non-performing assets ratio of 29 basis points. I'd now like to hand the presentation over to Darren Parmenter to discuss our consolidated financial results..

Thank you, Jeremy. The net interest margin contracted by 8 basis points to 4.38% in the third quarter 2014 compared to the third quarter 2013. The yield on earning assets was 4.74% driven by gross loans as average balances increased and average yields declined by 20 basis points.

The decrease in the cost of interest bearing liabilities was driven by a decrease in both the cost of interest bearing deposits and the cost of notes payable and borrowing.

The lower net interest margin in the third quarter 2014 relative to the second quarter 2014 was due to a lower yield on gross loans, higher cost of interest, and a higher cost of interest bearing deposits. For the third quarter 2014, the tax equivalent net interest margin for Hilltop was 87 basis points greater due to purchase accounting.

The accretion of discount on loans was $15.6 million, the amortization of premium on acquired securities was $0.9 million and the amortization of premium on acquisition time deposits was $1.1 million. Moving forward, our non-interest income was $212.1 million in the third quarter 2014, down 1.4% from prior year.

We had a bargain purchase gain of $12.6 million in the third quarter 2013 related to the First National Bank transaction.

Net gains from the sale of loans, other mortgage production income, and mortgage loan origination fees declined $1.2 million from the third quarter 2013 to $126.2 million in the third quarter 2014, representing 59% of total noninterest income for the quarter.

Net insurance premiums earned increased $1.8 million from the third quarter 2013 to $41.8 million in the third quarter 2014, representing 20% of total noninterest income for the quarter.

Our financial advisory fees and commissions increased $1.7 million from the third quarter 2013 to $24.1 million in the third quarter 2014, representing 11% of the total noninterest income for the quarter. Moving forward, our non-interest expense was $254.7 million in the third quarter 2014, up 17.6% from prior year.

Compensation increased $7.2 million, or 6.1% in the third quarter 2013 to $126.4 million primarily resulting from the First National Bank transaction. Loss and LAE declined to $22.6 million in the third quarter 2014 from $24.6 million in the third quarter 2013.

Occupancy and equipment increased to $25.3 million in the third quarter from $21 million in the prior year, primarily resulting from the First National Bank transaction. The amortization of identifiable intangibles from purchase accounting was $2.6 million in the third quarter 2014.

We had an OREO write-down of $14.4 million pre-tax in the third quarter 2014 on certain covered assets acquired in the First National Bank transaction.

The downward valuation adjustments reflect changes in assumptions regarding the fair value of the OREO, including in some cases the intended use of the OREO due to the availability of more information as well as the passage of time.

Moving forward to the balance sheet, loans held for sale declined $138.1 million from the second quarter of 2014 to the third quarter 2014 primarily due to changes in seasonal volume. Gross non-covered loans held for investment increased 1.5% from the second quarter 2014.

Gross covered loans declined by 11.1% as we continue to work through acquired First National Bank loans. Our covered OREO declined by $15.4 million primarily due to write-downs resulting from new appraisals.

Gross loans held for investment, covered and non-covered, to deposit ratio declined to 72.5% in the third quarter 2014 down from 74.1% in the second quarter 2014, however this is up from 67.2% in the fourth quarter 2013.

Total deposits increased $81 million in the quarter as the increase of non-interest bearing deposits outpaced the run off of interest bearing deposits With that I'd like to turn the presentation over to Alan White..

Thank you, Darren. As an update on PlainsCapital Corporation, we finished the first year since the purchase and assumption of First National Bank of Edinburg.

We're now focusing on our performance of both our new markets and our existing markets and addressing the expense platform at the bank, we're in the process of divesting ourselves of 11 branches in the Rio Grande Valley. That's actually the upper Rio Grande Valley which accounts for about $1.4 million of noninterest expense in quarter 3.

We're also real pleased to have Robert Norman, Bobby Norman, back in the Valley. Bobby just got through spending a year up here with us on a non-compete he had in the Valley. That was a great time for him to be able to learn our systems and learn our organization. He is now back in the Valley as our Regional Chairman.

He's lived there all his life and he's back in the saddle. I talked to him today and he's excited and he's been very well received back, so we're expecting good things from Bobby.

Also, in dealing with the First National Bank transaction, we have a lot of higher cost deposits that we'll hope to be replacing with cheaper funds that's going to show some significant saving for us as we go forward. We're going to continue to focus on our profitability, continue to look at our organic growth from our robust loan pipeline.

We have about $1.4 billion in unfunded commitments. Our pipeline on loans is about $1.3 billion, about $400 million committed that hasn't been funded. We've added a new branch in Aledo, Willow Park which is just West of Fort Worth. It opened in September and we've hired 7 new loan people in the quarter.

Our credit quality for the overall bank remains very strong, our NPAs to total consolidated assets declined to 0.29% in quarter 3 2014 which we were very proud of. PrimeLending continues to focus on growing market share while controlling its expense base. PrimeLending's estimated industry market share in quarter 3 was 0.98%.

Our year over year growth in home purchase volume, represents about 82% of quarter 3 of our funding mix. So, 82% of our business is home purchases. Job growth and historical low mortgage rates hopefully we expect to result in better home sales and more purchase originations as we go forward.

Due to declines in mortgage rates recently, we have seen and anticipated more refinancing. We hope that will increase. Cost initiatives were put in place in 2013 when we saw the market change. Those cost initiatives have certainly helped migrate the margin compression from our pricing competition.

First Southwest has had positive revenue and net income growth for the quarter compared to quarter 3 2013 due in part to the increase in public finance revenue. However ongoing, the industry continues to be under pressure and we have mute results. With that I'll turn the financial side over to John..

Thank you, Alan. Let's talk about the banking segment first. The banking segment's income before tax for the third quarter of 2014 was $24.6 million. Net interest income increased to $70.6 million, a 10.9% increase over the third quarter of 2013.

Approximately 91% of our noninterest expense which increased $33.1 million was attributable to the FNB transaction and approximately 52% of that amount was attributable to OREO write-down that we took during the quarter and the FNB branches that are slated to close. The bank provides a warehouse line to PrimeLending to fund originations.

At March 31 we had committed under that line $1.5 million of which $1.2 million was drawn. The tier 1 leverage ratio was 9.95% and the tier 1 risk based capital ratio of the bank was 14.21%. Total loans were $4.5 billion, 50% real estate and 30% CNI, total deposits were $6.2 billion of which 32% were non-interest bearing.

Our covered loan portfolio of PCI loans at the end of the quarter was $527 million and our covered non-PCI loans at the end of the quarter were $223 million. Our non-covered PCI loans amounted to $53.4 million and our non-covered rest of the portfolio was $3.7 billion.

PCI Loans are loans for which there is evidence of credit quality deterioration at acquisition that we do not expect to receive all the contractually required payments. PCI loans include both covered and non-covered loans. PCI loans had a total discount at September 30 of $290 million. $270 million of that discount was related to covered loans.

We had an increase in expected cash flows in the third quarter of $25.0 million related to PCI loans and $4.3 million related to non-covered PCI loans. The weighted average expected loss on our PCI loans associated with each of the PlainsCapital and FNB transaction was 24%.

Non-PCI loans include our newly originated loans and loans acquired without credit impairment and loans that were non-PCI that have been renewed. Non-PCI loans include covered loans and non-covered loans. The portfolio balance was 98% of the unpaid principal balance with a total discount of $43.3 million at September 30.

$27.3 million of that discount was related to non-covered loans, while covered loans had a $16 million discount. Moving to our mortgage segment, income before taxes was $11.1 million for the third quarter of 2014, an increased – the increase was primarily due to lower net interest expense, higher fee income, and flat expenses.

Our origination volume for the third quarter of 2014 was $2.9 million. Purchase volume was up 2.8% and refinance volume continues to make up approximately 18% of our origination volume.

We had a decrease in the fair value of our interest rate lock commitment and loans held for sale which is included in noninterest income and reduced income by $8.6 million in the third quarter of 2014 and $14.5 million in the third quarter of 2013 respectively.

Noninterest expense for the third quarter was flat compared to the prior year as cost initiatives were offset by higher unreimbursed closing costs. Our mortgage servicing right was valued at $41.9 million at September 30, 2014 compared to $35.9 million at June 30. Loans serviced for others amounted to $3.7 billion.

During the quarter PrimeLending sold a mortgage servicing right asset of $11.4 million, which represented about $1 billion in serviced loan volume. First Southwest had pre-tax income of $1.2 million in the third quarter of 2014 versus $176 thousand in the same quarter of the prior year.

Noninterest income increased $4 million due largely to growth in TBA business and a modest improvement in public finance. Noninterest expense increased of $3.6 million, mainly driven by increases in professional fees, as well as compensation that varies with revenue.

A substantial amount of the noninterest income is driven by public finance, capital markets, and clearing. The TBA business which provides interest rate protection for housing authorities, had fair value changes in derivatives that provided net gains of $5.3 million for the quarter. With that I'll turn it back over to Darren Parmenter..

Thank you, John. I'll speak about National Lloyds Corporation. The pre-tax income of $8.2 million for the third quarter 2014 was up $3.8 million compared to the third quarter 2013.

The positive results are primarily due to growth in earned premium and improved claims loss experience associated with significant decline in severity of severe weather-related events in 2014.

In 2013, we initiated rate filings, performed a review of business concentrations, which resulted in cancellation of agents, non-renewal of policies, and cessation of new business writing on certain problem areas, geographic areas. The actions reduced the written premium growth in 2014.

We will continue to manage and diversify business concentration and products to minimize the effects of future weather related events. With that, I'd like to turn it over to Jeremy Ford..

Thank you, Darren. We remain very excited about our pending merger with SWS and the opportunities this combination will bring. The transaction creates the largest full service brokerage firm headquartered in the Southwestern United States based on number of financial advisors.

It fortifies strong presence in Texas, while adding complementary offices throughout the United States. It provides significant opportunity to bolster market share and scale of complementary broker-dealer businesses. And a larger more diversified organization will benefit from synergies and a more efficient operating platform.

As for the bank, it will have a larger, more scalable deposit base given the ability to source additional deposits from the broker-dealer customers.

Following the acquisition, Hilltop will be well capitalized with excess capital, excess cash to deploy on future transactions as we continue to build the premier Texas bank and financial holding Company franchise. With that, I'll turn it back over to Isabell..

This concludes our prepared remarks. We will now take questions..

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

Hey. Good afternoon, guys. .

Hey, Brady. .

My first question is on the margin. I realize the decline in the margin on a linked quarter basis was partially driven by less accretion but it looks like even the core margin was down 25, 30 basis points. It looks like you kind of got hit on those lower loan yields and higher funding costs.

I just wonder if you could comment on why we saw the lower loan yield on higher funding costs in the quarter..

We're continuing to feel pressure on the loan portfolio pricing and so that was part of it and then lower yields in the investment portfolio also drove part of that decrease in the core margin..

And then the decrease in the funding cost, it looks like some of it was a mix shift as non-interest bearing deposits shrunk and interest bearing deposits increased. Is that a….

Brady, part of the purchase accounting for the FNB transaction was to mark their portfolio to market and part of that's just amortization of the premium that we had on that transaction starting to roll off..

I think I heard Alan say that if you look at the branch that you all are closing down in the Valley it was $1.4 million of expenses in Q3. So, to annualize that, it would be around $5.5 million of expenses that are coming out of the expense base once those branch closures are done.

Is that the right way to think about that?.

I guess so. That sounds like pretty good logic to me..

Okay. And then lastly, this quarter with energy, today it's down to $77 a barrel but there's a lot of focus on that.

Can you all just remind us if you have any exposure to the energy business?.

Let me answer that. Less than 5% of our loan base is energy. As you know we don't oil and gas lending and we do not do SNCs which a big part of SNCs are oil and gas. So, we do not have a whole lot of exposure in the energy side. It is starting to soften up.

Those energy related type businesses or communities we're certainly watching as things seem to turn. But we're sitting in a pretty good position because we don't participate in that business necessarily..

Okay. Great. Thanks for the color, guys..

And the next question will come from Enrique Acedo of Raymond James. Please go ahead..

Hey. Good afternoon, guys. Thanks for taking my questions. Most of my questions have been asked and answered so maybe I'll stick to M&A on this one. Obviously you guys are confident you're going to close the SWS deal by year end and you're going to have plenty of cash on hand to continue acquiring other banks.

How quickly do you think you guys can return to the M&A game, maybe 2015? How comfortable would you be in that regard?.

We're focused right now over the next month, this quarter, to close SWS transaction but we don't see any reason that we can't be evaluating, looking at other bank opportunities even today..

Okay. And maybe just one follow up, kind of a housekeeping question. I just want to check whether I heard this correctly.

The OREO write-downs negatively impacted earnings after tax by $9.6 million, right?.

Yes..

Perfect. Thank you very much..

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

Hey. Thanks, guys. I wanted to go back to that OREO write-down. Pretty sizable amount.

Any many more color on why the write-down this quarter? Did you evaluate the entire SMB portfolio and could we see more write-downs here in the future?.

We have started to, we're in the process which began shortly after the acquisition of getting new appraisals on every one of the OREO assets and in that process we have identified or we identified certain assets that needed to be taken down by some amount.

We have looked at the larger assets in the portfolio and we feel pretty comfortable with that but there still could be things out there that we just haven't seen yet. But we think we have the big ones behind us..

John, what portion of the portfolio would you estimate that you've looked at by now?.

That's a tough question, Matt. We've look at the bigger assets in the portfolio which would be, would take us well over 50% of the portfolio..

And as far as the net accretion levels in the third quarter, a pretty big drop from the previous quarter.

Any color on that big drop? Was it from the SMB side?.

In the second quarter, we had some pretty big pops from some legacy PCI loans that were paid off. And that gave us a benefit in the second quarter. The accretion is holding there pretty steady and steadily increasing right now. So, it was just a pretty big increase. It was the result of some large payoffs in the second quarter of 2014..

Alright. It sounds like the $16 million is – I guess it's tough to say run rate when it comes to purchase accounting.

But is $16 million a more reasonable level to expect at least near-term compared to the previous quarter, the $27 million?.

Yes. I'd say that's fair..

Okay. And then on the insurance revenue and the investment banking revenue, both looked at pretty good sequential improvements.

Any more color there? Was that a seasonal benefit that might go away the next few quarters? Or are you getting more traction on your more recent initiatives within those 2 programs ?.

First on the insurance Company I would credit that to a lot of the initiatives we had, the profitability we put in place in 2013. That's a lot of increase in rate.

We do think due to the increase in rate and tightening of what we are underwriting that the pace of growth could subside as far as top line but we expect profitability to be there in the insurance Company. Nothing really seasonal as far as top line. And on the financial advisory business, they had a good year over year increase in revenue.

A lot of that – some of it's related to the public finance business and then a lot of it's related to the TBA business that they have that's grown..

Okay. Then on prime lending, I haven't looked at that gain on sale margin yet. Any commentary on that gain on sale margin in the third quarter….

It's held up pretty good, Matt, if you look at it, it's hanging in there..

When you guys sold that MSR asset, what was the income you booked off that? And did that flow through the $126.2 million fee income for mortgage?.

The MSR is marked to market every month. So, we sold it at a pretty good time. But it was marked to market..

That was actually second quarter. That we sold it. It closed at the end of the year in the second..

It closed in this quarter..

It was priced in the gain for that..

So, no real impact is what you're saying I guess in terms of the P&L?.

No..

No..

Okay. That's it for me. Thanks, guys..

Ladies and gentlemen, that will conclude the question and answer session. Ladies and gentlemen, the Hilltop Holdings conference call has now concluded. We thank you for attending today's presentation. You may disconnect your lines..