Isabel Novakov - SVP, IR Jeremy Ford - President and CEO Darren Parmenter - EVP and Principal Financial Officer Alan White - CEO, PlainsCapital John Martin - EVO and CFO, PlainsCapital.

Brady Gailey - KBW Matt Oltney - Stephens Brett Robinson - Piper Jaffray Michel Young - SunTrust Robinson John Moran - Macquarie Michael Rose - Raymond James.

Good day, and welcome to the Hilltop Holdings Incorporated Q2 2015 Earnings Conference Call and Webcast. All 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, today's call is being recorded.

I would now like to turn the conference over to Ms. Isabel Novakov, Senior Vice President, Investor Relations. Please go ahead..

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 Inc. 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 our actual results, performance, or achievements to be materially different from any future results, performance or achievements anticipated in such statements.

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

Such forward-looking statements include, but are not limited to, statements concerning such things as our business strategy, our financial condition, our litigation, our effort to make strategic acquisitions, our recent acquisition of SWS Group Inc.

and integration thereof, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation, projected losses on mortgage loans originated, anticipated changes in our revenue or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, the collectability of loans, or other plans, objectives, strategies, expectations, and intentions, and other statements that are not statements of historical fact and may be identified by such words as anticipate, believe, could, estimate, expect, forecast, goal, intend, 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 10-K for the year ended December 31, 2014; quarterly report on Form 10-Q for the three months ended June 30, 2015; 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, Isabel, and good morning. For the second quarter of 2015, net income was $29.6 million, or $0.30 per diluted share. Our second quarter 2015 adjusted net income was $32.4 million, or $0.32 per diluted share, when excluding the transaction and integration-related costs for the SWS merger.

For the second quarter of 2014, our net income was $27.1 million, or $0.30 per diluted share. Our ROA for the quarter was 97 basis points relative to 1.24% in the prior year. Our ROE was 7.12% in the quarter relative to 8% in the prior year. Hilltop's four operating segments reported $51.6 million in pre-tax income in the quarter.

PlainsCapital Bank contributed $45 million, Prime Lending contributed $21 million, while Hilltop Securities Holdings reported a $1.9 million pre-tax loss and National Lloyds Corporation recorded a $12.5 million pre-tax loss. Hilltop's common equity increased to $1.7 billion, up $8 million from the prior quarter.

Hilltop remains well capitalized, with 11.9% tier-one leverage ratio and a 19.3% total risk-based capital ratio. As well, Hilltop has $79 million of freely usable cash at the parent and retains excess capital at its subsidiaries. On April 9, 2015, Hilltop issued $150 million of 10-year senior debt at a 5% rate.

On April 28, 2015, Hilltop used the proceeds of the debt offering to redeem all of its outstanding SBLF preferred stock. As well, in the quarter Hilltop repurchased 774,000 shares, representing a notional amount of $17 million and an average price of $21.89.

The bank and the mortgage company drove strong results, and the broker dealer integration remains on track and Hilltop continues to be well positioned for future bank M&A opportunities. Moving forward, I'll just speak to the items not previously mentioned. Our book value per share increased from $16.60 to $16.82 at quarter end.

Our net interest margin increased from 3.53% to 3.75% at quarter end and our assets remained relatively flat at $12.5 billion. Our loans held for investment gross increased $65 million, from $5.4 billion to $5.45 billion. And our deposits decreased by $330 million to [indiscernible].

Our NPAs to total assets had slight improvement in the quarter, down to 25 basis points. I'll now turn the presentation over to Darren Parmenter to discuss the Hilltop consolidated results..

Thank you, Jeremy. Hilltop Holdings' net interest income and margin, our stated net interest margin increased 22 basis points in the second quarter to 3.75%, compared to 3.53% in the first quarter. This is primarily due to an increase in balance and yield of gross loans, while the cost of liabilities remained relatively flat.

The costs of our interest-bearing deposits were flat to first quarter, while our notes payable costs declined 8 basis points.

For the second quarter, the tax-equivalent net interest margin for Hilltop was 96 basis points greater due to purchase accounting, driven by the accretion on discounted loans for $23.6 million, amortization of premium on acquired securities of $1 million.

Hilltop's net interest margin was adversely affected by the broker dealers' securities financing business, with taxable equivalent net interest margin negatively impacted by 84 basis points. The bank's net interest margin for the quarter improved to 5.02% from 4.59% in the first quarter.

Hilltop's non-interest income for the second quarter was $301.4 million, up 48.3% from prior year. Net gains from the sale of loans, other mortgage production income, mortgage loan origination fees increased $45.1 million, or 36.7%, from prior year to $168.1 million, representing 56% of our non-interest income for the quarter.

Investment advisory fees and commissions increased $48.5 million, or 218%, from prior year to $70.8 million, representing 23% of our non-interest income in the quarter. Our net insurance premiums earned were $40.3 million in the quarter, representing 13% of our non-interest income for the quarter.

Hilltop's non-interest expense was $353 million in the second quarter, up 40.6% from the prior year. During the quarter, we incurred $4.5 million in transaction and integration costs related to the Southwest Securities merger.

Compensation increased $75.9 million, or 61%, year over year, to $200.4 million in the quarter, representing 57% of our non-interest expense. Loss in LAE, policy acquisition, and other underwriting expenses were $53 million in the quarter, representing 15% of our non-interest expense.

Occupancy and equipment expense increased $5.1 million year over year to $30.8 million in the quarter, representing 9% of our non-interest expense. Other expenses increased $15 million, or 27.8%, from prior year. Amortization of identifiable and tangible purchase accounting were $2.6 million in the second quarter.

Moving to the Hilltop Holdings balance sheet highlights, loans held for sale grew by $182.3 million from the first quarter, primarily due to higher-than-average seasonal volume. Gross non-covered loans held for investment increased a $122.3 million, or 2.5%, from the first quarter to $5 billion.

Gross covered loans decreased by $57.8 million, or 10.5%, from the first quarter to $494.2 million. This is due to our successful ongoing efforts to resolve our troubled loans acquired in the First National Bank transaction. Our gross covered loans have decreased $350.8 million, or 41.5%, since the second quarter of 2014.

Gross loans held for investment, covered or non-covered, to deposit ratio increased to 80.2% in the quarter from 75.6% in the first quarter. Total deposits decreased $332.8 million, or 4.7%, to $6.8 billion. Our second quarter decline in deposits is primarily due to seasonality and, to a lesser degree, the sale of our Eagle Pass branch.

31.4% of our total deposits are non-interest-bearing. Our notes payable increased due to $150 million senior notes issuance, while our SBLF preferred stock was fully redeemed with proceeds from the issuance.

Our short-term borrowings grew by $100 million in the second quarter as a result of higher funding needs associated with the increase in loans held for sale, a decrease in deposit, and growth [indiscernible] in our loans.

Our common equity increased $8.3 million in the quarter to $1.7 billion due to earnings offset by $17 million in our share repurchase program and a decrease in our AOCI. With that, I'd like to turn the call over to Alan White..

Thank you, Darren. Good morning. I'm going to report on the four operating entities for you this morning.

First of all, I want to start out by saying that the bank and Prime had record quarters, operated well over budget and better than we expected, and has for the first quarter and the second quarter, so we're certainly off to a good start at the bank. Pre-tax net income was $45 million, -- and Prime was $21 million.

That's $66 million worth of pre-tax income, which very strong. The securities company, we did have a loss of $1.9 million. However, First Southwest had a good quarter, making $4.6 million versus a loss at Southwest Securities as we do our integration of $6.5 million.

But if you adjust it for integration costs, we had a positive $3.1 million pre-tax profit, and at the insurance company, we had a $12.5 million pre-tax loss due to the storms and some litigation costs, which are expected normally in the second quarter.

When you really look at the bank and kind of where we are and where it's come from, we have an annualized loan growth of about 10%, which we're pleased with in this market. Our top line is $1.7 billion -- that's up from $1.6 billion.

The only issue we had there was -- we've got about $600 million worth of construction loans in this deal and in May I guess it rained every day and a lot of those things were slowed down and a lot of draws weren't made, so we're hoping they'll be able to catch up on that and that will fund up some more.

Our efficiency ratio, we're very pleased with it at 57%. It came down from 61%. We feel like that's very much in line and we're pleased with that. When you look at our credit quality, very good. We think we're doing a really good job with credit quality. We're doing a really good job with our underwriting.

We're holding a line with our guidelines and it's proven to be, by looking at our loan portfolio. Our nonperforming assets to total consolidated assets is 0.25, which is very low. Very pleased with that. When we look at the margin, as Darren said, it's 5.02% -- that's with accretion.

If you knock out accretion, we were at 3.57%, which is actually 7 basis points up over the first quarter, and very pleased that the net interest margin is up.

Now, that's held in there for the last five quarters so we're feeling very good about how we're managing that and how our people are -- the job they're doing to keep that margin up in times where everybody else seems to be losing ground and our ROA at the bank was 141, which we think is very strong. Currently we have 67 branches through June 30.

We're continuing to right-size our company, we're continuing to look at First National Bank and we'll continue to look at SSB on staff and branches. So far, since we took FNB over, we've closed 21 branches. We sold nine, we have three under contract, and we have the rest for sale and we're very pleased about how that's going.

We integrated Southwest Securities in April. We did that rapidly; we were able to go in and close seven of their branches and eliminate staff, and it's about a $10 million annual savings that we're beginning to feel so we feel good about that and how that goes. We continue to look for areas of reduction in expenses in those areas and will continue to.

We've opened up three new branches in the second quarter, one in Victoria, one in alike, and one in Corpus. We'll open up our flagship branch in Houston towards the end of the year, which we're excited to be able to get that going. We've been able to hire eight new loan officers in the second quarter.

As far as our oil and gas portfolio, we've gone from 5.8% of loans down to 4.9%. Those classified loans that we have in the oil and gas portfolio were down $3 million in the second quarter and they're down $7 million since the first of the year. So we're relatively low in oil and gas -- feel good about the portfolio.

The portfolio's broken down into production about 30%, fuel services 18%, pipeline construction 12%, equipment rental 18%, distribution 12%, and then miscellaneous 10%. So for those of you who want to know the breakdown in the portfolio, that is the breakdown, which I think you -- would be of interest.

Prime Lending has exceeded their budget for the year in the first six months. They've had a great first six months. Their volume is $3.8 billion, up 35% over quarter 2 2014. And they've done that with the same number of originators.

We don't have any additional originators -- we had the same number as we did in 2014 quarter 2 as we did in quarter 2 2015, but our volume is up 35%. So I think that's significant. Our purchase volume has gone from 60% in the first quarter to 76% in the second quarter, and I will tell you now we're in the 80%s.

And of course, as you know Prime Lending is a real purchase lending company -- that's where we focus and that's where our bread and butter is. Our gain in sale is up. We would anticipate that it will continue to be strong and continue to move up some. And primarily the reason for that's going to be the execution, how we do that.

Our lock [ph] volume's up 28% to $4.7 billion. When you look at our market share, we're at 0.97% of the market. We've been able to gain; I think we can continue to hold that, continue to gain.

The NBA has just come out this week and said that the purchase volume for 2015 is going to be higher than what they anticipated and they also think the same in 2016. So that plays right into our hand as being a strong purchase money lender.

So we should be able to get our percentage of that, if not more, and that should continue to help Prime in the direction it's going. So we're really pleased with Prime and where it is and how it's positioned and its performance. As far as Hilltop, as I mentioned, First Southwest had a good second quarter.

The public finance revenues are up almost $9 million over this time last year. The issuance is kind of doubled year over year, so you can see the activity's really picked up and the aggregate offerings are up 85%. So that business is starting to pick up.

We have about 10% market share of that business and that's very important to us because that's a large part of that business. Our TBA business, dealing with mortgages and stuff in the broker dealer, has really been a great source of business for us on the income side. It continues to be.

We continue to see growth; we still have lots of states coming to us and wanting us to participate with them in that, and there's a real growth factor there that I think is important. As Jeremy and I have discussed with you on numerous times, the integration at Southwest Securities and FSB continues.

We hoped it will be completed -- it will be completed by December 31 and we’ll begin to see cost savings. We made some real milestones in getting things done with -- vendor decisions have been finalized and we've communicated those back to the back office and general ledger and trading systems.

Departmental leadership decisions have been finalized and communicated. We made the decisions on the real estate and finalized. Year to date, we've had $8.2 million in transaction integration costs through June. $5.1 million of that are employees, $1.5 million is contracts, $1.6 million are professional services and others.

We'll continue to address the regulatory approval from -- to be able to put these two deals together. We'll continue to work really hard on the systems conversion, which has a great impact on what all we're talking about.

And we'll continue to look at employee and producer retention and we hope all this will start to come together in December and you can start to see these cost savings that we've been talking about starting then and begin to see this thing turn.

When we turn to National Lloyds, quarter 2 traditionally in that business is not a good quarter because of weather. This year was no exception. In Texas we had a lot of weather. We didn't have a lot of tornadoes, we just had a lot of rain.

By the way, we don't insure floods so this wasn't flood losses, these were just hail, rain, and windstorm damage, but we hit a $12.5 million pre-tax loss, a little bit more than what we'd anticipated. But we also had some litigation issues in there that we had to reserve for.

But when you look at our LAE, over four years in the second quarter, you'd be surprised that this is about the number that is each second quarter. So even though it is high and even though where it is, this isn't unusual and not normal, this is what is to be expected. We do expect the balance of the year, the third and fourth quarters, will be good.

We think we'll get back to our target by the year end. This is kind of how that business has gone over the years, just like the mortgage business kind of starts out, gets strong, and then tails off. This is no different. So we're okay with this and we think third and fourth quarters will be well.

Our non-cat loss ratio is improved versus our prior year, which is a positive for underlying business. Our revenues are flat versus prior quarter and our premiums in force are down, but that's an initiative we've taken to try to get out of some areas that we didn't want to be in, and that's more purposely driven than anything.

We are increasing premium rates as we can and I think Bob Otis and his people are doing a good job running this company. So those are the operating companies. I feel really good about where we are; I think we've got our hands on all this. I think Prime and the bank are kicking ass and taking names.

And I think brokerage business will be there when we said it would be. This isn't anything new for you; you know it. And the insurance company will bounce back in this next quarter. So from an operating standpoint, I think everything's under control and I feel good. And I hear the word consensus all the time.

We don't give guidance so I don't know where the consensus comes from, but Prime and the bank are way above consensus, in my opinion. So I'll stop right there and turn it over to John Martin.

Thank you, Alan. Good morning. As we said previously, the banking segment generated $45.1 million in pre-tax income in the second quarter based on flat non-interest expense and a lower provision for the loan losses.

If you adjust the second quarter for transaction integration costs of $1.2 million related to the SWS merger, pre-tax income would have been $36.3 million.

Non-covered loan growth and accretion drove our net interest income, while non-interest income was comparable to the first quarter if you remove the volume [ph] purchase gain that we recorded in the first quarter.

Non-interest expense comparable to the first quarter reflects cost-savings initiatives related to the closing of certain FNB branches offset by termination and branch closure costs related to the SWS merger.

The bank continues to provide Prime Lending with a warehouse line of credit which has had an authorized amount of $1.5 billion at June 30, of which $1.3 billion was outstanding. The banking segment assets were $8.5 billion at June 30. ROA for the banking segment was 1.41.

Our loan portfolio continues to be balanced, with about 41% of our loans classified as C&I and 48% classified as real estate. 31% of our consolidated deposits were non-interest-bearing.

Credit quality remains strong at the bank, with non-covered non-performing assets standing at $31.2 million at the end of the second quarter, and our capital ratios are strong, with a leverage ratio of 12.17%. Tier one risk base at 16.46% and a total risk-weighted asset ratio of 17.17%.

Our covered loan portfolio are loans we acquired in the FNB transaction and are subject to a loss share agreement -- over 90% of those loans are real estate. As I mentioned a moment ago, the non-covered, non-purchase credit impaired portfolio had a good balance of construction -- or, C&I and real estate.

At June 30, our PCI loans were carried at about $400 million. Over 75% of that amount is covered under the loss share agreement with the FDIC. The discount on the PCI loans was $257 million, of which 88% was related to the covered portfolio.

Non-covered non-PCI loans were carried at just over $5 billion, with a discount of $43 million and allowance of $35 million. Prime had a strong second quarter, as Alan said. Pre-tax income increased to $21 million, compared to $9.2 million in the same quarter of 2014.

Origination volume increased $995 million to $3.8 billion for the quarter, with growth coming from both purchase and refi. As a percent of total volume, purchase volume decreased to 76%, with the dollar volume increasing by $517 million. Refi volume increased by $478 million.

Non-interest income increased to $168 million due to the high volumes and improved margins and higher non-interest expense was related to the revenue because -- the compensation related to volumes.

Prime lending has retained about 20% of the -- or, servicing on 20% of the loans it sold in the second quarter and the net MSR value at the end of the quarter was $45 million, with a fair value change of the MSR value of $5.8 million. With that, I'll turn it back over to Jeremy to talk about Hilltop Securities..

Thank you, John. Again, on Hilltop Securities, for the quarter, this quarter includes the SWS operations so prior year only includes First Southwest. As we mentioned before, Hilltop Securities had a pre-tax loss in the quarter of $1.9 million. When adjusted for the SWS transaction integration costs, we had a pre-tax gain of $3 million.

And this was on the public finance investment banking advisory fees increase of 60% year over year to $23.6 million as well as the U.S. agency [ph] to be announced, or TBA, business that had fair value changes on the derivatives and provided a net gain of $9 million for the quarter.

Our non-interest expense increased $62 million from Q2 2014 to $90 million and is primarily due to the inclusion of SWS as well as compensation in those areas with non-interest income.

And lastly, the broker dealer segment provided the bank with $675 million of core deposits, which represented only 38% of the total available FDIC insured deposits that we could sweep to the bank.

Moving forward, and to close on the insurance company, as we mentioned we had a pre-tax loss in the insurance company of $12.5 million in the quarter relative to a loss of $5.5 million in the prior-year quarter.

We had severe weather events throughout Texas in Q2 2015 as well as prior period adverse development that drove the loss in LE ratio to 102%. All the while, we are continuing to invest in personnel and operations to really enhance the underlying fundamentals of this business. And with that, it closes our prepared remarks..

We will now take questions..

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

Good. I heard the comments on the deposit shrinkage. You sold a branch and then it sounds like some seasonal issues.

Was there anything else that drove the deposit balances down that was notable?.

Nothing notable, Brady. It's more of a seasonal decline in deposits that we always experience in the second quarter..

Okay.

Okay and then to make sure I'm thinking about the remaining cost saves that are left that are going to come out of the broker dealer once the integration is done by end of the year, so that's -- in total what's left is $10 million and we should see that starting -- will all that kind of be out of the run rate starting in January 1 of next year?.

No, I think what Alan's comments were that with the bank, integration efforts that have already been essentially complete through the prior quarter, that from a historical Southwest Securities Bank perspective, which I guess -- you kind of look at Q1 -- we'll have, for the bank's perspective, $10 million of less cost.

Some of that phased in in Q2 but not much of it because we had a lot -.

That's all bank and then -- broker deal..

Okay.

So how should we think about the amount of cost saves left to be stripped off kind of in total when you look at the bank and the broker dealer?.

I would say first we plan to come, after next quarter, and we're getting closer, to really be able to spell that out. But if you look at the quarter for the broker dealer's perspective it had net revenues of approximately $88 million and an adjusted pre-tax of $3 million, which gives you a pre-tax margin of 4%.

And we're going to have a goal to get to 10% in 2016. .

Okay, okay. And then finally, Jeremy, I know you guys -- now that SWS is done and kind of humming along nicely, you all would like to focus your efforts on some bank M&A and growing the bank M&A.

Could you give us just your updated thoughts on how that's going?.

Well, right now 8.5% tier one leverage ratio -- we think we have over $400 million of excess capital. And we are still opportunistically searching for M&A opportunities. And those have to be the right strategic fit for us. So we've talked about being in Texas or some logical extension like Oklahoma.

We would like a quality franchise that's north of $1 billion in assets and could go a lot higher. As far as what we're seeing, we have been active but we just haven't been able to -- we continue to be active so we have nothing to announce right now..

The next question comes from Matt Oltney with Stephens..

Hey Jeremy, going back to the integration of Hilltop Securities, how should we be thinking about the pace of the integration and cost saves the next few quarters? Is it going to be kind of a steady drift the next few quarters or is it going to be more -- the impact will be in late December so we'll see a pretty big jump in profitability, but it won't be until 1Q of next year?.

I think it'll be more in 2016. Because where the process is we're obtaining Fender approval and we're also undergoing a systems integration. And we can't really get to the level of combination costs of personnel and contracts and everything else, and real estate, until we're able to do that.

And that's really an early Q4 event of when we're really going to try to be putting it together. .

And how should we be thinking about the one-time integration cost? How much is remaining and when should we see that?.

Well, we had about $3 million in the broker dealer in the first quarter and about $5 million in the second quarter. And I'd say it's probably going to be somewhere around that the next two quarters. .

Okay, that's helpful. And then, Alan, at the bank loan growth looked pretty solid here.

What's the outlook for loan growth from here?.

Well, we've got 10% down. I think last time I talked to your I thought it would be about 7% or 8%. And I think when I started the year out, I thought it was going to be 13% so I guess I'm all over the board. It's pretty tough. Even though the economy remains pretty strong in Dallas Fort Worth and San Antonio and Austin, it's softened up in Houston.

So I'm hoping we can hit that 10%; that's certainly going to be our goal and that's what we're working for. But we're not going to stretch our underwriting and we're not going to try to make a bunch of bad loans to get there. But that's going to be a goal and it's going to be a stretch goal to get to that 10% on an annualized basis.

But we're going to sure try; we've got everybody out working. Hopefully some of these unfunded commitments, now that things are starting to dry up and the mosquitoes have started to die, maybe some of these underfunded commitments on these real estate deals will start funding up, which will help us some..

And Alan, you gave us some good details on the energy front in your prepared remarks.

But do you have a dollar amount of the classified and criticized -- in 2Q?.

Well, $26 million is the classified number -- what else do you want?.

Criticize..

116 [ph] is the classified number. .

I am sorry. .

Fast [indiscernible] are $2.4 million, portfolio [ph] of $234 million.

What else do you want?.

That's great. Well, and then, Alan, I think there were two energy downgrades last quarter that we talked about in the call.

Is there any update on those two credits?.

I think we're fine. We're comfortable with where we are. I will tell you that, in our formula for our loan loss, we did adjust it -- we do ours off of a formula. We did add $2.5 million to that form on our loan loss for energy just because, but not because we feel like we've got anything there; it's just as a precaution. But everything looks all right.

But now -- I'm probably going to say too much here, but now, what's happening is you're starting to see financial segments come in on these companies that reflect what's happened in the past, and they're not looking really good. I read all these analysts' reports that everybody's energy portfolio's okay.

Well, I guess all they do are reserve-based loans; they don't do anything else. But they're starting to come in and are not looking really great. So you might see a little bit of a downturn in these things that aren't necessarily just reserve-based because of the fact these companies aren't making any money.

But we don't have much of that and I don't expect much and I'm not concerned about it. But it's definitely -- they're feeling a pinch out there, these service companies and these companies that are related to the oil and gas field. I don't know if you've heard that from anybody else, but it doesn't look like it when I read what you're writing..

And then, Alan, on the mortgage side -- what are you seeing so far in the third quarter for the first?.

Third quarter still looks good. Refi has gone away; volumes won't be as high. But the purchase volume's jumped up. And since we're strong in the purchase volume, we're going to do good. I think the third quarter will be pretty good for us. And then typically as it moves into the fourth quarter it'll wane down.

I don't think we'll have as good a second half of the year as we did the first half, but that's pretty normal.

But I think it's going to be a banner year for the mortgage business, and when the NBA keeps coming out and adjusting the volumes, that's only good for us because of the market share and the fact that we're purchase -- it's kind of like the insurance business.

We always expect something to happening the second quarter and then the third and fourth quarters are big quarters for us. And so we've got a couple of businesses here that swing like that, but I think the third quarter will be good. I think fourth quarter will wane off some. But that's how I see it.

I think the bank will continue to do well; even with accretion we're doing very well. Without accretion, our net interest margin is really performing good and we're doing a good job of keeping that up. So that's encouraging. And our loan quality is really good.

I know people are going to want to know why we didn't put anything in the loan office [ph] reserve.

Based on our formula, based on the quality of loans we've got, based on the fact that we have had historical losses fall off that we had in the past, and the fact that we have $700,000 worth of net recoveries in the quarter, there wasn't a reason to put anything in there.

And if we did, we're going to get criticized by the regulators or the auditors for over-reserving. And you've got to remember one thing about our loan portfolio -- every one of our loans were marked. Every one of them had been acquired.

They acquired PlainsCapital, they acquired FNB, we acquired Southwest Securities, so every one of those had a chance to be marked. So a lot of that stuff's marked, too. So anyway, that's probably more than you want to know. I'm sure Michael Rose didn't want you to know that, but he's probably not on the line..

Our next question comes from Brett Robinson with Piper Jaffray..

Wanted to -- I guess first, on the buyback, you guys did some share buyback this quarter.

Any thoughts on the continuation of that and sort of what you guys want to do with capital ex the potential for an acquisition?.

Sure. We announced a $30 million share repurchase program this year and like we said, we purchased 775,000 shares, equating about $17 million of that. So we'll work through the rest of the year to see if we want to repurchase the rest of that. And the purpose for that is just to offset any kind of dilutive effects of equity grants to the employees.

So there's really no bearing, in our mind, of, like, the value of stock or the M&A landscape out there..

Okay.

And then, just going to insurance, any chance you guys might recover any of this stuff that's litigation-related that was reported in 2Q? And then, if I understood your comments correctly, it sounds like your kind of expecting that business to be -- aside from the usual 2Q seasonality with storms, sort of back to an $8 million to $10 million pre-tax run rate?.

Yes, I think -- well, on the first point we hope and expect that we contain the losses in the quarter and contained any prior development. So we hope and expect those losses don't bleed through to the second half of the year.

And I think I would look at the loss in LAE ratio of last year's third and fourth quarter for kind of an expectation of what we think we can make up for the remainder of the year and so that.

And then as far as specifically like litigation and other things, we are booking what we think to be conservative reserves and we're going to fight this litigation vigorously. It's -- in most cases every insurance company's going to get sued, but in a lot of these cases they're kind of baseless claims, and we're going to fight them vigorously..

Okay.

And then I guess just lastly, any thoughts around the pace of discount accretion for the back half of the year?.

Yes, I think look at this past year -- or this past quarter -- we had $23.6 million of accretion and I would look at the pace for the next several quarters to be at or about $20 million. The first quarter we had $17 million of accretion. So around $20 million a quarter is where we're kind of at.

And then, thinking about '16, would that drop off pretty quickly?.

I don't think it'll drop off quickly. It'll trend down but I don't think it'll be for -- I think it'll hold in there for the next four quarters, probably. .

The next question comes from Michel Young with SunTrust Robinson. .

Good morning. I wanted to ask about your asset sensitivity going into potentially rising rate environment.

Just maybe what you view will take place through the first one or two rate hikes, and how that might differ from your stated asset sensitivity?.

Well, I think it's going to put a little pressure on our NIM but I don't expect the first series of rate hikes to have a significant impact. But there will be some pressure on the NIM from a rate hike. .

And what about maybe in the other businesses -- mortgage, particularly? Do you think that volumes might fall off there or gain on sale compression or anything like that that'll have impacts from the first couple of rate hikes?.

I think volume is definitely going to fall off because you've lost the -- but because of the strong purchase side, we're going to be able to pick up some of that through the purchases. We do 80%-plus of the purchase market. As far as a compression in the gain on sale, actually we think it's going to continue to improve.

And the reason we do is because of our ability to execute. So we're hoping that our gain on sale's going to get stronger. And even though volumes come down, we're still thinking we're going to get our percentage of that market, which should leave us -- especially in the third quarter -- in a pretty good situation.

I think fourth quarter is when it normally drops off, kind of like first quarter..

Okay. And then, Jeremy, I think you mentioned last quarter that you were evaluating sort of the level of the broker dealer, clearing receivables that would be held. Any results from that? The levels came down a little bit this quarter.

Do you expect that to continue to trend down from here, or what's your thoughts there?.

You're talking about the stock loan business?.

Right. .

Okay, so that's the stock loan business that -- it functions from the clearing business but it's not solely the clearing business. And we had worth of $2 billion of average balances where the thing might have been at or about or a little bit up from the prior quarter. And right now, with our -- it's a little bit down. So I guess a little bit down.

But in essence, we evaluate it and right now, with our excess capital position we're comfortable with it. It generates a net spread, the thing in the quarter, of about 35 to 40 basis points, which is tough on the NIM. But it also generates a pre-tax margin of close to 40%. So it's a profitable business and had a good quarter..

Okay, great. And then, Alan, just one on the C&I loans -- looks like balances declined a little bit there.

Any color, anything to add? Maybe by specific markets or categories?.

Yes, I think right now the markets, there's just not a lot of C&I business out there, a lot of C&I business going on. The growth you're seeing is in real estate. We talked about this yesterday. Especially right now in the summer, we're just not seeing that many C&I deals. I think the market's kind of soft right now as far as C&I is concerned. .

The next question comes from John Moran with Macquarie..

Hey, just a couple of quick clarifications. Alan, I think I missed the classified number on the energy book -- was that $26 million on a $264 million.

A total of $26 million. It's about 11% of our total classifieds is the number, but it's $26 million and 11% of our total classifieds. .

Okay. And I guess, Jeremy, on the insurance business, and I think I may have missed this, too. It sounds like the adverse development on these hailstorms from a couple of years back, that's contained in 2Q.

We wouldn't expect that to kind of bleed into 3, 4Q here?.

That's our expectation, but for what's been -- for what we've received so far. Yes, I think that's our expectation..

Okay. And then, I guess broadly, was thinking about kind of core NIM at the bank, and you guys alluded to it's up 7 basis points in the quarter; it's hung in pretty good. Any color that you could give us in terms of pricing competition and a look forward on where you expect that to kind of trend would be helpful..

John, it's been tough for quite a while. There's a lot of predatory pricing out there but we've been able to hold our own with our customers and our relationships. And so that's how we've been able to keep it up. A lot of these people are not going to move the relationship for a quarter of a point -- it just isn't worth it. So it is tough out there.

We've been able to hold our own. Our attitude is, we're not going to let our good customers go; we're going to compete on that price. But if it's a deal that's just a deal, we don't want it. But I think it's going to continue to be tough.

I think the thing that concerns me more than the pricing is the underwriting standards that a lot of these guys are going to and a lot of the things and principles they're giving up that you just kind of hate to see because of what could happen if things got pretty bad.

So we're not giving up any underwriting policies that we have; we're sticking to them. We're being pretty conservative; we're being real conservative. And I think that'll pay off if the economy gets weaker. You're going to see some of these guys that -- I guess when the pigs get fat they get slaughtered, and they need to be careful.

It's tough out there and we're going to hold our own, but if we don't have any growth because of it, we're not going to have any growth because of it. But we're not going to trash up our loan portfolio..

Got it. And then, the last one for me is just by geography, and you had kind of alluded to it, I think, Alan. It sounds like Houston's slowing down a little bit. Any color that you could give us on the other kind of the major markets..

Let me -- Houston's getting soft. By no means is the economy shutting down in Houston, it's so big. But it is soft because of the oil and gas. Corpus's economy's still good. The valley's economy is going well.

I'm really pleased with what progress we're making in the valley, and we're beginning to gain some steam after we've done some changes down there, so that's good. Austin is really good -- a lot of growth in Austin. That's probably the strongest market in the state. San Antonio is good; Dallas Fort Worth is good.

There's a lot of diversification here, there's a lot of things happening. And even if you go out into Lubbock, Lubbock's economy is good. So I guess the softness is probably in the Houston area, but the rest of the state is pretty solid.

I think there are a lot of people waiting around to see what's going to happen, like they always do, and that's kind of where we sit. But it's not bad. But when you see oil prices go from $60 to $47, it starts to make people pucker and they do sit around a little bit. And I'm just being frank; it could slow down.

We're going to be cautiously optimistic, but we're going to watch it..

The next question comes from Michael Rose of Raymond James..

Just -- I wanted to touch back on the cost savings; I think Brady touched on it. I'm sorry, I got on the call a little bit late. Can you maybe just address the cost savings [ph] from the deal if you can.

And then, in terms of investments, where are you making investments? And what do you expect some of those investments, those continued investments that you guys have made, any of the lenders or hiring teams or things like that to offset some of the expected cost saves? If you can give any sort of color, that would be helpful. Thanks..

Well, I guess first, are you talking about -- so we've got two kind of levels here. One is at the bank, as we mentioned, we've already integrated Southwest Securities Bank into PlainsCapital Bank.

And we expect -- we didn't have a full quarter of -- we did it kind of early in the quarter so we have some charges and we haven't had a full quarter of saves. So I think we identified from those specific $8.2 million of future saves. That's on the bank front. So Alan, you might mention anything you want on the investment side on the bank front..

Well, we continue to look at branches, we continue to close some, we continue to add some. We're looking at the staffing of the branches. We're overstaffed in some, we're going to see some reduction there from that standpoint. So it's an ongoing process to right-size and make things fit.

As far as our recruiting and doing things like that, we hired eight loan people in the second quarter. It's kind of tough. We want to be sure, when we hire somebody, that's going to fit our culture. Recruiting's tough because everybody's trying to do the same thing and everybody's trying to hold on.

We're trying to grow lot of our inside, and we've had the opportunity to promote several young people that have been around with us for a while into more responsible positions, which is good because they know our culture and they know our underwriting guidelines.

So a lot of the staffing we're doing is coming from the inside, from people that we've trained and brought up. But we have been able to bring some in from the outside. As we add branches, we only add them if we have the people to fit into them. We don't go build them and then try to figure out who's going to be in them from that standpoint.

But we're watching our costs and really trying to fine-tune our branch network and fine-tune our facilities where it makes sense and we get a return on our investment..

So just one follow-up to that.

Do you have any sort of efficiency goal for the bank specifically?.

We hit 57% and I would say that's pretty close to where we can operate with the number of branches that we have and all the regulations and things that we have to adhere to and the costs that that affects.

We have a lot of compliance costs, and you get into a lot of compliance costs when you have things in the valley just because of the nature of the business down there. So I think the 57% level, we've talked a lot about that. I think we're pretty pleased with that.

It may be a little high compared to some others, but if you look at the branch network, we've got 63 branches and somebody else only has 10, well that certainly makes a difference. So I think we're doing a pretty good job as far as the efficiency ratio goes at the bank level because of those things I just said..

Okay, that's really helpful. And then just one final one for me, actually. I don't know if you addressed this earlier, but can you talk about how big your SNC portfolio is in terms of energy -- what percentage of the SNCs are energy, and then any downgrades from the SNCs. .

Well, our sniff portfolio exists, and the number is zero. We don't do SNCs. So we have no SNCs. So therefore when they did the national deal, we got no ground berries [ph] because we don't have any money loaned out through SNCs on our energy portfolio.

I gave some facts -- I don't know if you heard them -- on how our portfolio broke down in the energy sector, but 30% of its production, 18% is field services, 12% is pipeline, 18% equipment, 12% distribution, and then miscellaneous of about 10%. That's how it breaks down. We're not seeing any deterioration.

We are seeing financial segments that come in that certainly are not what they were six months ago. And you're seeing a slowdown, no question, in a lot of these people who provide services to the oil field. And that could continue to soften.

Our classifieds dollar amount is $26 million and that's down $3 million from last quarter and it's down $7 million from year end. We're running about -- of our classifieds, oil and gas is about 11.7% of our total classifieds. So we're monitoring very closely.

I think one of the things I'm pleased with is to see a lot of our customers who are in these various deals are adjusting to what the marketplace is providing them now. So they're not sitting out there dreaming it's going to come back. They've made the cuts and necessary things to do.

And some of these people are still making money; they're just not making the kind of money they made before, but they've managed their business. Now, you're going to find one or two that can't catch up quick enough and you might have an issue or problem with them, but that's it.

And our portfolio is really low compared to most of our peer group as far as our exposure..

The next question is a follow up Michael Young of SunTrust Robinson. .

Hey, Alan, just wanted to follow up on the mortgage company. Any plans to hire any new producers? You mentioned that you've got -.

Yes, we're always looking to hire new producers. I think, Michael, what we try to do -- in that business you're constantly weeding out people, people that can't hit that target number that we want them to hit to be able to stay around. So we're constantly weeding people out and we're constantly bringing people in.

But we're always looking for A- and B-type players that fit our culture. So we're hopefully adding A and B and getting rid of C and D, and maybe that's why that number is staying where it is. It really kind of slowed down last year. We kind of went through a period where these companies started disappearing because there wasn't any refinance.

Then that kind of stabilized and when refinance came back, nobody was moving around because they were all doing good. Well, now that refinance is gone again, I think you're going to again see these companies that can't survive because they don't have a purchase book.

There are going to be good people leaving these companies and these companies are going to be going under, and I think there'll be an opportunity for us to pick up some good A and B players. We're not going to get them unless they fit our culture and fit our organization.

But I think what we've been doing is improving the quality of our originators versus increasing the number. We would like to increase the number, and I think we're going to get the opportunity as we go through in the next year or so and there's no refinance and these companies don't like it.

There's going to be people that are looking for opportunities and we're going to be looking for them. We have recruiters on staff. We're constantly out there in the marketplace trying to get people. And I will tell you, when we find somebody we bring them to Dallas and we interview them.

We don't just go out there and hire them and sign them up in the back, or the trunk of the car or something. We bring them in here and we interview them and make sure who we're getting and that they fit our culture and they understand how we do business and all the regulations and stuff that go with it. So we're pretty cautious about that..

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you for attending today's presentation. You may now disconnect. Take care..