Isabell Novakov - IR Jeremy Ford - President and co-CEO Alan White - Vice Chairman and co-CEO Will Furr - CFO John Martin - Chief Accounting Officer.

Brady Gailey - KBW Matt Olney - Stephens Michael Rose - Raymond James Brett Rabatin - Piper Jaffray John Moran - Macquarie Michael Young - SunTrust Christopher Nolan - FBR Jesus Bueno - Compass Point.

Good day, and welcome to the Hilltop Holdings Third Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

Good morning. Joining me on the call are Jeremy Ford, President and co-CEO; Alan White, Vice Chairman and co-CEO; 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 facts including statements concerning such items as our business strategy, future plans and financial condition are forward-looking statements.

These statements are based on management's current expectations concerning future events that by their nature are subject to risks and 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 statement as a result of new information. And now, I would like to hand the presentation over to Jeremy Ford..

Thank you, Isabell, and good morning. For the third quarter of 2016, net income was $51.9 million or $0.53 per share. Third quarter adjusted net income was $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 pre-tax 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 pre-tax income.

PlainsCapital contributed $37.5 million, PrimeLending contributed $31.2 million, Hilltop Securities 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 of 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 to 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 I previously mentioned. Our book value per share increased by $0.53 due to earnings to 18,573 [ph].

Our stated net interest margin declined from 3.77% in the prior quarter to 3.65%. Our per-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 NPAs to 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 five. 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 [ph] included a significant accelerated loan pay down, which impacted loan purchase accretion by $14 million. The decline in net interest income versus the prior year was somewhat offset by core net interest 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 the 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 five 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 six; 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 REIT lost $5.2 billion in loans representing an increase of approximately $1 billion or 25% versus the prior year.

Net trading gains in Hilltop Securities' fixed income businesses including structured finance in capital markets improved $14.9 million versus the prior year, and public banking reported 24.6 [ph] million in net fees, which represents a growth of $3.1 million or 14% versus the prior year. I'm moving to page seven.

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 and integration-related expenses related to the ongoing integration of Southwest Securities.

Integration-related expenses included in the second quarter of '16 and third quarter of '15 included a $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 in variable compensation, and an increase 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 evaluation adjustments and disposition charges related to OREO properties principally related to the FNB acquired loans.

Moving to page eight, 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 the 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 increased $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. Well, Happy Halloween everybody. We're close to that day. And we are working on our theme on to go places man has never gone. So, it ought to be a good time. We had a excellent quarter in our operating companies, and I am pleased to report that the bank had a solid quarter.

We grow 109 ROA that came with solid loan growth and core [indiscernible] that held to offset declining purchase of loan accounting. We had stable deposit goes and it contributed to the taxable equivalent net interest margin of 453 and after purchase accounting about 363. That's pretty much in the range of what we've been doing throughout the year.

Our loan growth is 4.7% or 20% on annualized basis. That was pretty good. I'll still come back and say that we are still anticipating annualized 10% loan growth for the year on a conservative basis for quarter four and entire year. We have a loan pipeline that's very favorable.

It's 1.9 billion in unused commitments and continued to hire new loan officers. So, we have hired few more in the quarter, 16 year-to-date.

I will tell you that 9 million, probably 300 million add is the prime line, 700 million that's going to be constructions, loans that will firmed up, and the balance of those loans are going to be to C&I type borrowers have the availability to ease that credit.

Outside the loan quality and outside the second quarter charge-off that we had on a board basis, our loan quality continues to be sound. Our current NPLs were 25.2 million or 34.34 basis points of total loan covered cost or total non-covered loans -- excuse me, at quarter three is 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. There is -- it is in the course. We are doing discovery. And we will begin depositions soon. And we feel very good about position on this case. And we are going to pursue that vigorously.

So, probably so maybe some things will happen here in the near future. A good sign is our energy portfolio the climb down is around 3% that's off some $55 million in the quarter. We are down about $165 million outstanding in our exposure and that bodes well for us.

And our classified and criticized energy loans declined actually 2.1 million for the quarter. I will have to say that our classified loans are mainly service related. Those credits deal -- they are watching. They still struggle.

And I think if anybody thinks that we are through the oil crisis, sitting here $50, I think you need to continue to hold on and be patient because I think we've got 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's primarily because our loans went down. We didn't 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 have got about $11 million up against that, but we feel like we are in a good shape on our energy portfolio.

And I think we'll see some more downturn. We have some things happen since the first quarter -- end of the quarter that have been very positive for us. Our non-interest bearing deposits were around about 32%. We've got 63 branches. We added a new one. It's an LPO office.

We put it [indiscernible] and we combined some space with Hill Top Security, great space, great visibility. And we moved our premier service operation in there with the Hill Top Security's office. So, when you look at our markets, Dalfour 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 Huston look like? We continue to be patient in Huston. We have $165 million loan debt there, 67% of it be OREO 31% will it be CNI. And I will tell you on our loan production at this point we're seeing about 75% CRE and about 25% is CNI.

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. So that's pretty much the bank. I'll look for more of the same going into the fourth quarter and I was pleased with the operation in the third quarter.

Farm lending had a 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.

As they're approaching $15 billion in lot volume so far purchase volume is 71% compared to the industry at 53% and our net gain on sale margin continues to improve and we maintain a margin higher than about quarter two and quarter three at 15. 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's so important. Our overall market share total refi and purchases 0.80% on the national basis in our market share and purchase is 107.

Do you know we're the number six purchaser in the country and purchase money loans that we do so we're a large player in that market and we're proud of that and I think something else that we're really proud of is that Forbes came out and named us the number one place for women to work in the United States and so I think that speaks very highly of the culture at prime lending and what we do have going on out there.

So I'm really pleased with Prime. Fourth quarter traditionally drops off and we look at kind of flattening out on the fourth quarter but I think it'll be a little bit better than what 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 when we think.

Normally what happens in the fourth quarter by December 15th everybody is gone to vacations, gone skiing, getting ready for Christmas so there's not a whole lot that goes on the last couple of weeks which always hurts your production, but anyway we're really doing well at Prime.

Hilltop Securities, there's been a tremendous amount of work that's gone on there through the integration and building the platform for the future and I'm proud to say that we've got 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 it. Pretty good net income figure for the third quarter and our pre-tax margin of 15-16% is way above what we projected or thought we could do. And 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 had one of the top public finance companies in the country from the number of volume. We lead taxes; 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 business this 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 [indiscernible] Securities. It is our clearing business and we're the number three largest clearing company in the country. And that is profitable.

And it not only is profitable it brings a lot of deposits to us that we can use in the buying for core deposits. So I think the platforms there, I think we're getting ourselves in a position and we're going to really start focusing on revenue and I'm pleased with where we're 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're getting there and might be as a result [indiscernible] stronger performance. National Lloyds had a good quarter, you know there was no severe weather and there's no severe weather. This company performs really well.

Management has made all kinds of efforts to reduce the risk profile and increase the profitability to book.

I think that is come to light with our sales of -- a lot of, I mean, bad practices and improved those practices in our risk, assessment and coverage, and we have seen a decline in force, because we've increased policies, we've got another regions that we shouldn't have been in. And overall it looks good.

We are simple and going to have started growing the book because you can't just keep raising premium drive in our business. At some point, you got to start creating more revenue and we realize that. Our loss and LOE ratio was 41.4%. Our underwriting expense was 33.6%.

This is pretty much in line with year-over-year of 2015, which equates to good numbers. So we'll continue to monitor this. We'll continue to watch our experiences and continue to look what we need to do to progress with this business.

I would anticipate the four quarter being a strong four quarter for the insurance company borrowing any strong, another nature, but history will tell us that fourth quarter will be good. So the insurance company will end up with the good year.

So those are the reports that operating companies, I think they are all solid, and with somebody's article said that we got everything to click and we got everybody to click; so pretty proud of that. So that's 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, we break out a strong pre-tax income of $37.5 million. This was lower than our third quarter of 2015 that was due to a lower accretion on loan and that was about $20 million difference.

This was offset by growth in our non-covered loan portfolio and increase 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 headed up $800,000 effect on our non-interest income.

Also the ORE income was -- on our FNB assets continue to wind down, so it was a little bit lower than the same period of 2015. Non-interest expense was slightly high compared to the same quarter in 2015 and that was increased headcount at the bank and professional fees as well as lower ORE recovered.

The bank continues to provide the mortgage company and warehouse line of which $1.5 billion was drawn at September 30, 2016.

The Tier 1 leverage ratio decline 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 29% C&I.

As we previously stated, our non-interest bearing deposits amounted to 32% of the $7 billion in deposit 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. E&P and services accounted for 13% and 47% respectively.

We have no share national credits in the energy space and as Alan mentioned a moment ago, we continue to have ultimately low exposure in the Houston and the surrounding region. All of our unfunded energy commitments are subject to borrowing basis and credit review prior to draw downs.

Moving to credit quality on page 13, we had approximately $13 million in non-performing assets at the end of the quarter on 24 basis points and our capital ratios continue to be well above the regulatory environments. Moving to slide -- on page 14, PrimeLending; PrimeLending enjoyed the strong quarter.

The pre-tax income increased to $31.2 million compared to $12.1 million in the 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 $854 million increase over the same period last year.

Our purchase volume was 71%, refinance 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 the third quarter of '15, 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. PrimeLending 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 the service loans. With that I'll turn it over to Jeremy..

Thank you, John. I'll now speak to Hilltop Securities' 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. In the quarter we had pretax integration and related costs of $1 million. After adjusting for those integration costs the pretax income would've 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 the execution of the integration initiative as well as the 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 LAE ratio of 41%. Our direct premium's written decline relative to Q3 2015 due to the continued effects of our efforts to reduce concentrations geographically, and within specific product lines, as well as our agent management initiatives.

And that concludes our prepared remarks..

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

Hi, good morning guys..

Good morning, Brady..

So looking at mortgage, mortgage has 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; it was 41% in the first half of 2016, now up to 44% this quarter.

So I'm just 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?.

Is that for you or me? I don't know why he would want to slow it down, I mean, earnings is earnings, and that's a relative thing because it'll 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, was always talked about. And we kind of counterbalance all these things with each other, the broker-dealer asset deposits that add the ability to us to be able to have that line, and Prime has the ability to be able to go up there and make business. So it kind of all works together.

So when you keep it all working together we're going to do fine. I'm very pleased with the operation of the mortgage company. Well, not only do we have outstanding people that work in that company, we also got outstanding loan officers, and we continue to grow that. We continue to grow that purchase market.

And maybe we won't make as much money next year, but I bet we come pretty close. And 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'll shift to something else here, but taking advantage of it..

Okay. All right, that's helpful. And then 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 that we have an excess of $500 million 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've been working hard on several opportunities, and we'll continue to do so..

Okay.

So there's no meaningful tick up or tick down in the conversations you're having with targets?.

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

Okay. And then last one from me, you now have the dividend out there. It's a pretty modest payout of around 15% or so.

Is there a targeted payout you'd like to get to over time or are you happy with the 15%?.

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

Gosh, Brady, well you've been after us for years about this. We finally gave it to you, 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 year. Now you're coming back wanting more, and you're never satisfied..

No, appreciate that….

Pretty excited we get a dividend, golly. We were hoping we wouldn't even have to answer that..

No, no, I appreciate. I'm just wondering if we'll anticipate seeing that grow much over time. And no, that's a good call. Thank you all..

Okay, thank you..

Our next question comes from Matt Olney of Stephens. Please go ahead..

Hi guys, good morning..

Hi, Matt..

I wanted 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 2Q and 3Q just seasonally very strong, and we could see some weaker margins in the next few quarters?.

I wouldn't say that the quarters themselves are seasonally stronger in this business. But I think that there's been some market opportunities that have prevailed for us. So 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 a 12% pretax margin..

And that 12%....

Matt, if I could say something in this. We've gone through all this integration, and that's taken away from our focus on generating revenue. We've been able now to start focusing on revenue. And now we're seeing the results of what we hoped would happen. And it'll build over a period of time, but we've got a great platform set.

And we've got really good people and of course, public finances are a big deal, public [indiscernible] and finance. And so 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, you see, how far we can go with it, and what the market will absorb, but we've done remarkably well, a lot better than what we expected, but I don't know if you can expect that 15% every quarter..

Well, and that's what we've 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. And we've had some of our higher margin business really have the revenue growth..

Okay, that's helpful. Thank you for that commentary. And then also going to ask about expenses in the quarter, just other expenses, in fact there was jump up sequentially in the other expense line item.

Any more color you can give us as to what going on there?.

Yes, I think -- 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 FNB 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, for the third quarter, had fewer gains, didn't have any losses of material note, but had fewer gains in the prior quarter..

Well, 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 principle driver of the change..

Okay. And then just lastly, deposits. It looked like deposits declined sequentially.

Any more color on the deposits?.

From a deposit perspective I think we continue to see good flows, 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 a -- we had a large depositor kind of take funds out, 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're always subject to kind of one-off large items that move around quarter-to-quarter..

Thank you..

Our next question comes from Michael Rose of Raymond James. Please go ahead..

Hi, good morning guys, how are you?.

Hi, Michael..

Alan, just wanted to kind of dig in to the loan growth a little bit. I appreciate the 10% outlook.

What's been the impact of pay downs for you guys, I guess? Obviously we can see the energy piece, but maybe outside energy in your production stronger?.

Normally when you've got to grow 10% you probably got to really get out there and grow it 15% to be able to offset the pay downs. We're having pay downs, but we're having to produce enough to offset that. So the 10% figure I give you is net of those pay downs. So 10% roughly on our portfolio is a $500 million increase.

And we're probably having an equal amount that we're having to replace, so we're probably having to generate $1 billion in loans to be able to get to that 10% growth in our loan portfolio. So we do have pay downs, but we're out there having to hustle, move loans.

And the markets in Texas, Austin is a strong market, Dallas, Fort Worth is a stronger market. Those economies are diversified, and we're seeing good production out there. We're seeing good production at Fort Worth.

We're still staying low or light in Houston, we are 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 am mentioning to you, and they're still prolific, and there's a lot of growth going on, and a lot of diversification.

But I will tell you, the balance of the book-to-business right now is about 75-25 real estate versus C&I. And it is very competitive, REIT-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, so….

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

No, I don't think there's an element. We're just looking for good loans. And I would tell you, yes, if a good oil and gas loan came in that we felt 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.

So 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. And then when you do have a C&I deal it's competitive, because everybody wants C&I.

But that's why I say our annual growth is probably going to be about 10%, not these 20% annualized figures you see that come out because maybe we had a good month of maybe we didn't..

Okay. And maybe just one more from 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, are you looking for a clean bank, does it matter? And what's your optimal cash versus stock mix in a deal?.

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

Great. Thanks for taking my questions, guys..

All right, Michael..

Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead..

Hi, good morning everyone..

Hi, Brett..

They change your name?.

No, it's Brett Rabatin. Wanted to go back to I guess mortgage first. If we look at the NBA forecast it's for volumes to be down 14% next year. And you guys have done a good job taking a market share. You made some comments about doing what you can while it's good.

We're thinking about next year, can you give us maybe some color on how you think about the market in terms of….

Yes, the way we're looking at next year our refinance business isn't that much. And there isn't going to be any refinance business in our opinion. So the market actually comes down 14%, but if you look at the purchase market, it goes up.

So 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. So 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 wanted 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 then secondly, 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 '17.

I know you're spending some money on the core bank, but any thoughts on that?.

So, Brett, on the first one, I think that as far as the integration-related costs, we should have -- we've got our last remaining integration piece is the system lift-out and that's going to take some time. So I don't foresee any eminent additional integration costs to be that hopefully is meaningful.

As far as the second question, maybe if you could clarify that. I'm trying to understand the operating leverage question..

Yes, just Jeremy, just trying to think about the expense level that you've had in the past two quarters. There's some noise obviously.

But I guess the question is, outside of what might happen with variable costs, what it's in mortgage especially if we're thinking about the core commercial banks, the [indiscernible], the broker-dealer are we going to see any kind of benefit from what you've been doing in the past few quarters, or is the spend, so to speak, going to absorb all of that as we think about '17?.

Hi, Brett, 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 kind of deal with volume.

So our mortgage business is acutely aware of managing a variable expense based on the volumes in place. So 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 are 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, as Alan has 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 in 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 the balance sheet at quarter end.

Maybe, Jeremy, if you want to give us any thoughts on that business and what impact that might have on the core margin as you think about the coming quarters?.

Well, you're talking about the stock loans business and we took that down, it went up to 2 billion in the second quarter plus, and that's 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 be 1.25 billion to 1.5 billion. So wouldn't expect it be 2 billion again..

Okay. Great, I appreciate all the color..

Thanks, Brett..

Our next question comes from John Moran of Macquarie. Please go ahead..

Hi, guys, how it's going?.

Hi, John..

Just real quick I want to circle back to broker dealer.

Jeremy I think you said a 100 million in reps pretax 12% so that's -- did I get that down right and is that kind of what you're looking for in '17?.

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

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

For the….

Okay, got it. And then just one more on Prime, maybe for Alan, I think gain on sale margins have probably held in better than you would have guessed.

I wondered if you could give us a quick sort of outlook on where you might see that kind of heading and maybe some of the reasons why it's hung in better?.

Honestly, John, it's up and 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. And are we surprised? Maybe a little bit but 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.

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

Got you. So if I am kind of putting all the pieces together on prime, I mean you've got purchase expected to go up next, you guys are mostly a purchase shop where you're taking share, you've got gain on sale that's stable.

I mean 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 if we could perform at the level we have this year because it's really been an 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 have happened here too.

There is a lot of expense management you do in some of this stuff because some of it goes away all that cost and everything that part of it goes away. So I feel optimistic. Our people feel optimistic. We're seeing the fourth be a lot better than what we anticipated. And it's still carrying over.

You know, these millennials are starting to drive some of these and it's a - I don't know you always sell the short on the mortgage business but it's getting a big horn, it's an every year occurrence and nit ought to be getting them 12 multiple versus the eight you're getting..

The only other one I have was just -- the only sort of housekeeping one I have is just on NIM outlook, maybe for Will. It sounds like it was curious book; there was more compression on some prepaids and some pre NIM. You expect that pressure -- I mean, we've heard from other that's kind of continuing in the fourth quarter here.

And then ex sort of accretion which can be noisy what's sort of the outlook on the core NIM?.

So as I think I'd put it at the HTH level again, this quarter 303, I am going to call it a relatively stable into the fourth quarter plus or minus three basis points.

I mentioned the pressure on the investment portfolio and I think that will continue the reinvestment rates just given where absolute market rates are will continue with cash flow in the portfolio will continue but again as Alan said the market for loans and loan origination on the yield side is under pressure and has been that way but as we look at both the portfolio and asset generating businesses I'd say relatively stable going in the fourth quarter and then when we get through our fourth quarter call we'll have a better perspective full year 2017.

.

Perfect. Thanks for taking the question..

Our next question comes from Michael Young of SunTrust. Please go ahead..

Good morning, everyone..

Hey, Michael..

I wanted to start up on the capital front you guys announced the share repurchase authorization earlier this year, but didn't use it this quarter, was there anything that precluded you from acting on that this quarter and should we expect many 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 buy 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 delusion from equity awards.

So you could see form that and then we'll look at our stock and see if there is any opportunistic reason to do it..

Okay.

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

Principally, for bank M&A..

Okay. And then lastly, Jeremy, just in the broker dealer segment lot of that I guess sort outperformance this year has been from the TDA business.

So is the outlook for next year pretty dependent on that or do you think that you can grow securities business and the investment banking advisory business is enough to offset any lower volume in that business?.

I think in general the company is really coming together and work in a leverage from the cost saved. So I think you'll see and I think from our primary businesses we have four business lines and that represent about a 20% to 25% of revenue. So we're pretty well-balanced from a revenue perspective..

Okay. It's all for me..

Thank you..

Our next question comes from Christopher Nolan of FBR and Company. Please go ahead..

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

I think am I went over little bit in your comment, can you go over again please?.

I'll speak loss and loss adjustment expenses that's related to the insurance business and as decline linked quarter it's really seasonally driven, the second quarter of the year is when you have all 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 intent over a period of time in terms of to consolidate and that into one person or what are your thoughts there?.

Well, I think let me start with that and hand over to Alan. I think for most of you all that know us, Alan and I, we think to be a strong team and have really complementary strengths. And so I think we view this is 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 I guess focused on holding company functions now and also M&A. So I don't foresee that to be and result of this, this is a partnership that we had for four years.

Alan?.

I think this is a prelude to a big event that we are going to have and promote and how we make a lot of money out of what's called WrestleMania. And so you know -- things aren't going so good, we'll have this WrestleMania event, and whoever at will get into the ring and whoever wins I guess will be the new CEO, but we haven't….

We haven't set that up yet, so….

I'll let Jeremy answered the question I'm just….

And Alan on the WrestleMania, what sort of tangible book dilution, what sort of threshold do you have as you look at deals, I mean….

Well, I'll let Jeremy answer that, deals are his deals..

Well, I mean it's situational-specific. As far as what kind of tangible book value dilution you have and symmetric to that's going to be all kind of EPS accretion you have. So we don't have any hard line standards. The deals that we have done has actually been extremely accretive to tangible book value and also earnings.

So -- but you know, if we are going to acquire a more quality franchise we would expect to pay a premium, we would expect to have tangible book value dilution and we would expect to have earnings accretion..

Final question on M&A, for potential target, are you guys more focused on the deposit franchise or given your securities business is generating decent deposit flow with less support?.

I think what we are focused on is situational opportunities and also where we see value.

So 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's got a little longer deposits, but I think as we look out in the long-term, we view those deposits as having high value..

Right. Thank you for taking my questions..

Our next question comes from Jesus Bueno of Compass Point. Please go ahead..

Good morning.

Just a quick question on PrimeLending again, your MSRs have been fairly stable lately, I guess, you have excess capital, have you ever considered perhaps to point some of that excess capital on buying MSRs, maybe building your servicing book there, and if so, I guess do you have excess capacity within that servicing book to take on additional servicing?.

We are really not interested in this..

Got it.

And as far as purchase accounting increasing goes, could you provide us I guess with a rough guide of what takes back as we move into the fourth quarter?.

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

That's great. And I appreciate the color around your exposure to purchase, and obviously you went heavier into refi this quarter, but I guess we've seen rates move up sharply kind of over the past three-four weeks, I guess, do you see any sensitivity on the refi side that I guess shows evidence of burnout and….

Our volumes honestly are still doing pretty good, they are not as hard as they were, but they are still doing pretty good, mostly as it's purchased. When you get back after the 170 or so tenure, you are not going to see much refi, and it's going to pretty much burnout.

And I don't think we really anticipate a whole lot next year unless we see rates taken above phase, which I don't think any of us think it will. So, our whole focus next year and our focus now as we head to next year is how that we get that purchase [indiscernible] and how do we increase our market share, and that's really where we are going.

We have increased our loan production staff by about same percent year-over-year, and we continue to recruit loan offers to bid our culture, that are good producers and that have experience and we continue to call out the ones that are not being able to produce.

So we keep improving our company, and improving our position, which we think is going to help improve our market shares, which will offset anytime that we head from the refi standpoint.

Now, there will be one saying as these people that live over refi as I start getting in trouble, they are going to reach out, they are trying to purchase and they will start try some crazy deals for little bit, which will put pressure on the margins, but it won't last long.

We saw that happen couple of years ago, it didn't last long, and we seemed to be able to just move around on fluid. So we are doing that, and we are ready for it, and our people are [indiscernible] on what's going on and very good about building that culture and building that [technical difficulty]..

Excellent, I appreciate the color.

If I could just squeeze in one more on the entrance unit, your net premium earned it's been -- have been declining and we finally saw some stability here quarter-over-quarter, I guess, would you consider -- I mean, is there sort of an inflection point where we can finally start to, I guess, expect to see growth there, or shall we just continue to see kind of more of what we have seen over the past year or so?.

Well, you know, with insurance business, you look at the premium written is a leading indicator of -- that's going to just drop down the premium earned, and we are still seeing decline, I can't say that that's going to change in the next quarter, but I do -- we will tell you that it is narrowing from year-over-year and kind of prior declines, and we have a lot of business that we wanted to carve out of the book and we have, and now we got to focus towards growth..

Got it.

And as far as the pricing changes that you had made to kind of call that business, that's all done with right now?.

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

That's great. Thanks for answering my questions..

Thank you..

We have a follow-up question from Michael Young of SunTrust. Please go ahead..

Hey, 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 save that may come there and any last sort of 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 -- or really kind of in the [indiscernible] of evaluating it..

Okay.

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

Well, just to be clear, what we did is when we merged the broker dealers, we put them all on [indiscernible] the SWS system. So, we are all operating on a system, and it's working, and everything is fine. The next step that we are hoping to achieve is a service bureau day system, where we list out that.

And that's -- I don't have 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..