Isabell Novakov - IR Jeremy Ford - President and Co-CEO Alan White - Vice Chairman and Co-CEO Will Furr - CFO.

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

Good morning and welcome to the Hilltop Holdings Q4 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 this morning are Jeremy Ford, President and co-CEO, Hilltop Holdings; Alan White, Vice Chairman and co-CEO, Hilltop Holdings and Will Furr, Chief Financial Officer, Hilltop Holding.

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 conditions 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 report filed with the SEC.

Except to the extent required by law; we expressly disclaim any obligation to update earlier statements as a result of new information.

Additionally, this presentation includes non-GAAP measures including adjusted net income, adjusted income before taxes, taxable equivalent net interest margin and taxable equivalent net interest margin before purchase accounting adjustments.

A reconciliation of these measures to the nearest GAAP measure maybe found on our website at ir.hilltop-holdings.com. And now, I would like to hand the presentation over to Jeremy Ford..

Thank you, Isabell, and good morning. For the fourth quarter of 2016, net income was $35.3 or $0.36 per share. During the quarter, results included a specific legal reserve of $16 million, pre-tax related to one matter involving Hilltop security.

About that, this specific legal reserve relates to the lawsuit filed by the Rhode Island Economic Development Corporation in 2012 that's named First Southwest Company. First Southwest served as financial advisor in connection with the issuance of $75 million in bonds by the Economic Development Board to finance a loan to 38 Studios LLC.

38 Studios failed to repay the loan and the Economic Development Board is seeking recovery to repay the bonds issued. For the fourth quarter of 2015, net income was $20.7 million or $0.21 per share. Our ROAA in the quarter was 1.13%, relative to 68 basis points in the prior year and our ROAE with 7.56% relative to 4.7% in the prior year.

Hilltop's four operating businesses reported $62.6 million in pretax income. PlainsCapital contributed $40 million. PlainsCapital contributed $9 million. HilltopSecurities recorded a $24,000 pretax loss and National Lloyds contributed $13 million. Our common equity increased to $1.9 billion up $25 million from the prior quarter.

Hilltop remains well capitalized with the 13.5% Tier 1 leverage ratio and 18.3% common equity Tier 1 capital ratio. Notably Hilltop's Board declared a quarterly cash dividend of $0.06 per common share and reauthorized the stock purchase program to repurchase up to $50 million of its outstanding common stock.

Moving forward, I'll focus on the items for the quarter not previously mentioned, our taxable equivalent net interest margin increased to 3.82% from 3.67% and our pre-purchase accounting net interest margin increased to 3.11% from 3.03%. Our assets grew to $12.7 billion, our loan portfolio grew to $6.1 billion and our deposits grew to $7.1 billion.

Our credit quality remains solid and our net NPAs to total assets held flat at 24 basis points. And with that, I'll turn the presentation over Alan White..

Thanks Jeremy and good morning to everybody. Our bank had double-digit loan growth, Prime had a record volume year and the HilltopSecurities had shown great progress since the integration and provided excellent return and our insurance company had a very good underwriting year, solid performance and profit.

At the bank quarter four, ROA was 1.09% driven by our loan growth, a stable NIM and very sound credit quality. Quarterly HTH consolidated non-held for investment loan growth excluding the broker-dealer margin loans was 2.7% or 11.4% annually and for quarter -- that's for quarter four 2016.

Favorable loan pipeline is $1.9 billion in total used commitments. Full year 2016 HTH consolidated non-held for investment loan growth excluding the broker-dealer was 16%. We're very pleased with that number.

Accretion loan growth and stable deposit cost have contributed to a strong taxable equivalent net interest margin of 4.59%, 3.69% if you're looking after the purchase accounting. Loan quality continued to improve as non-covered NPLs were $24.4 million or 0.32% of total noncovered loans.

At quarter four 2016 we're 20.5% or 0.34% of noncovered loans at quarter three '16. Our energy exposure declined to approximately 3% of total loans. Classified and criticized loans declined $10.7 million to $28.7 million for the quarter. We have a 6.5% energy portfolio reserve.

17.2% of our loans in the energy are classified and we continue to have no national shared credits in that portfolio. Our non-interest-bearing deposits continued to remain strong 31.1% of total deposits at quarter four. We're operating 63 branches and we opened two new branches, one in Dallas at our Baylor medical offices we just financed.

We opened a new branch there and we've moved our Austin Headquarters in Colorado into a new facility that we are proud of there. We also in the quarter sold our branches, those were two branches of which we exited the Laredo market.

At prime lending, results improved significantly relative to quarter four '15 with funded loans up 26.8% to $3.9 billion. That was a very nice surprise and we really outperformed what we expected to do in quarter four. Purchase volume of 71% in quarter four drove the industry volume of 49%.

So it remained a remind us from a strong purchase volume company. Net gain on sale continue to improve with our margin in quarter four higher than both quarter three '16 and quarter four '15. Our improved margin and higher volumes drove improved gain on sale revenue.

Our overall market share is 0.83% in quarter four '16 with the purchase volume market share of 1.19%. We have 312 branches and 1,328 loan offers and we rank number six in the country in the purchase of volume business.

As far as Hilltopsecurities is concerned, fourth quarter 2016, Hilltopsecurities at a pretax loss of $24,000 and a $67,000 of pretax income after adjusting for integration costs. Quarter four 2016 results included a pretax legal reserve of $16 million, which Jeremy mentioned earlier.

Year-over-year net revenue growth was 7.8% in quarter four '16 compensation net revenue ratio of 58.6%. This is a significant improvement as we go through the integration process.

We're driven by balanced sources of revenue coming to various sections of our business and we're proud what we've been able to accomplish through the integration initiatives. National Lloyd had a combined ratio for the quarter of 69.8% which drove the pretax income of $13.3 million for the quarter, but had an excellent quarter.

Direct premium written decreased year-over-year to decline in policy in force, but that was due to management's initiatives to diversify our concentration. We did offset that slightly by increased premium rates.

The strong quarter for our result to both seasonal decline in frequency and severity of storms and the continued reduction in risk within the National Lloyd book of business. This has resulted in a loan LAE ratio of 36.6% during 2016. If you look at the combined ratio of 69.8% was excellent.

Our fixed expense declined in lower variable expenses drove 33.26% of underwriting expense ratio, which gets you to the 69.8%. I will also mention that we had our rating with Fitch renewed at BBB stable, which we're very pleased to receive that information. So, with that I'll turn it over to Will..

Thanks Alan. I'll start on Page 7. Net interest income for the fourth quarter equated to $104 million, an increase of $5 million from both the prior quarter and from the prior year. Net interest income in the fourth quarter of 2016 included $18 million of purchase loan accretion.

During the fourth quarter, the bank did receive certain accelerated paydowns that resulted in additional purchase loan accretion. Reportable taxable equivalent net interest margin for the fourth quarter was 3.82% up 15 basis points from the prior quarter and 9 basis points from the same period prior year.

excluding the impact of purchase loan accretion across all periods, Hilltop's net interest margin in the fourth quarter was 3.11% up 8 basis points versus the prior quarter and up 17 basis points from the prior year. Reported loan yields on gross loans have declined 31 basis points from the fourth quarter of 2015.

Loan yields excluding the impact of purchase loan accretion have declined 10 basis points to approximately 4.25% during the quarter compared to the fourth quarter of '15. At the bank, net interest margin excluding purchase loan accretion equated to 3.63% stable with the prior quarter.

After the Presidential Election, market interest rates have increased significantly. This increase in rates impact Hilltop's yield on taxable and nontaxable investment that has improved our current reinvestment rate in the bank’s investment portfolio to 2.25%.

PlainsCapital bank's investment portfolio remains the most significant investment portfolio across the franchise with the balance of $848 million at December 31. The taxable equivalent book yield on the bank’s portfolio equates to 2.07% down 11 basis points from the third quarter of 2016.

Moving to Page 8, Hilltop reported total non-interest income of $309 million in the fourth quarter of 2016. Total non-interest income increased by $32 million or 12% versus the prior year. During the fourth quarter the mortgage business originated $3.9 billion in loans representing an increase of $820 million or 27% versus the prior year.

These strong results coupled with a four basis point improvement in secondary market gain on sale margins resulted in an increase in mortgage related non-interest revenues of $29 million or 21% versus the fourth quarter of 2015. Insurance revenues and our securities businesses remain relatively stable with the fourth quarter of 2015.

Moving to Page 9, fourth quarter non-interest expenses came in at $356 million up $17 million or 5% versus the fourth quarter of 2015. Note, the fourth quarter 2015 included $14.4 million of transaction integration related cost related to the SWS acquisition.

The fourth quarter of 2016 non-interest expenses included a $16 million specific legal reserve related to one matter involving Hilltop Securities. This expense is reflected in other non-interest expense. Compensation and benefits expense increased from the fourth quarter of 2015 by $26 million.

Mortgage banking compensation increased in the fourth quarter by $18 million versus the prior year $16 million related to variable compensation including commissions. Other compensation related increases relate to strategic hiring and normal inflationary increases including annual merit and healthcare related cost.

Insurance related expenses declined from the prior year -- prior year quarter by $9 million driven by lower storm activity across Texas in 2016. Moving to the Page 10. Total assets of $12.7 billion increased $871 million or 7% versus the fourth quarter of 2015. The growth in assets is driven by an increase of $636 million or 12% in non-covered loans.

Loans held for sale related directly to our mortgage banking unit increased approximately $260 million driven by stronger mortgage production during the fourth quarter. Broker-dealer and clearing receivables increased $157 million from the third quarter reflecting normal business flows during the fourth quarter.

These balances while variable on a quarterly basis are being managed to a target $1.5 billion level. Total deposits have grown 1.6% versus the prior year to $7 billion. And allowance for non-FDIC covered loans equates to $54 million at December 31, 2016. The allowance to total non-FDIC covered loans as of December 31 was 93 basis points.

During the last week of December, we increased our FHLB borrowings to approximately $1.2 billion, noted in short-term borrowings to support higher mortgage production in the quarter. Capital levels in the fourth quarter improved as common equity increased by $25 million versus the prior quarter. Hilltop's common equity Tier 1 ratio equated to 18.3%.

At the bank the common equity Tier 1 ratio equated to 14.64% as of December 31, 2016. Turning to Page 11, PlainsCapital reflected strong fourth quarter pretax earnings of $39.9 million. Pretax earnings increased $5.6 million or 17% versus the fourth quarter of 2015. Loans grew by $605 million to $5.5 billion as of December 31.

This growth supported core net income growth of $8 million, which was somewhat offset by lower purchase loan accretion of $1.6 million. Net interest margin at the bank excluding purchase loan accretion equated to 3.63%, again stable with third quarter's 2016 level.

Provision of $4.4 million remained stable with prior quarter as credit quality remained solid. PlainsCapital’s annualized net charge-offs to total loan ratio for the quarter ended at 21 basis points and non-covered NPAs to Hilltop assets remained stable at 24 basis points.

During the third quarter of 2016, PlainsCapital Bank was subject to the Durbin Amendment of the Dodd-Frank Rules. The resulting reduction interchange income equates to approximately $800,000 per quarter.

For the fourth quarter and versus the fourth quarter of 2015 the bank generated positive operating leverage of 6% supporting a reduction in the efficiency ratio of 378 basis points versus the fourth quarter of 2015. Now moving to Page 12. PlainsCapital continues to make solid progress in managing down our overall exposure in energy-related credits.

As of December 2016, energy loans to total loans equated to 3% and classified and criticized loans continue to decline in the energy book to $28.7 million. Allowance for loan loss coverage of energy loans remained stable versus the prior quarter at 6.5%. Moving to Page 14.

Prime lending reported pretax income of $9.4 million during the fourth quarter of 2016. This increased $5.6 million or 145% versus the fourth quarter of 2015. Income in the quarter was driven by strong origination volumes, which equated to $3.9 billion, an increase of approximately $100 million or 27% from the fourth quarter.

Secondary gain margins as noted earlier increased to 388 basis points in the quarter, 4 basis point improvement versus third quarter of 2016. I'll now turn it back to Jeremy to cover Hilltop Securities and National Lloyds..

Thank you, Will. Hilltop Securities reported a $24,000 pretax loss in the quarter. Included in the quarter was the aforementioned $16 million pretax specific legal reserve associated with the Rhone Island matter.

On a positive note, net revenue increased 7.8% from Q4 2015 and the compensation ratio decreased to 58.6% from 63.2% in the prior year quarter. Notably the broker-dealer segment reported -- provided the banking segment was $1 billion of core deposits, which represented 40% of total available FDIC insured balances. Moving on the National Lloyds.

National Lloyds had a strong quarter with pretax income of $13.3 million versus pretax income of $7 million in the prior year. Importantly, Q4 2015 results included the impact of severe storms in North Texas.

The seasonal decline in severe storms resulted in an improved loss in LOE ratio of 36.6% and the management of underwriting expenses resulted in an improved expense ratio of 33%.

We are excited about National Lloyds' results for the year and are also excited to announce that we are branding National Lloyds with our Buffalo to be consistent with each company in our family. And that concludes our prepared remarks..

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

Hey, good morning, guys. .

Good morning..

Good morning, Brady..

So you know that there is a lot of focus on mortgage as we head into 2017, if you look at originations we all did around $15.5 billion last year in 2016, how do you think that will trend in 2017? Do you think that you can hire new people and try to keep that flat or do you think that there is some downside to the origination volume?.

We've gone from the refi volume and it's gone to no refi and that refi business first quarter of last year first quarter of '15 led us to have a good quarter. That's gone, so we're back to the purchase side. So, we're back to more of the cyclical way of things. Now we're not going to be able hire enough people to make up for that loss of refi.

Our purchase business will pick up and we should get our market share, hopefully better which will help make up for some of that loss, but I don’t think we can make up for all of that loss, but it's yet to be seen as it depends on what the economy does and how everybody reacts to the new day in Washington..

All right. And then the $50 million buyback, I think I remember in the past you all just repurchased shares that offset some of the shares issued as a part of rewards and incentives. I think that's how you all looked at them in past.

Looking where the stock is now, little under $30, is that something that you think you'll continue or is this more just something to have out there in cases stock gets hit?.

I think as you said, the primary purpose that we're going to have for this is to minimize the dilution back associated with any equity awards and I do expect for those repurchases to occur this year. So, that’s how we're feeling and it’s not really a view on the stock price.

If we did have a view on the stock price, I want to be opportunistic, we may repurchase more..

That’s helpful. And then lastly, just an update on M&A, it seems like we're seeing more activity. We’ve seen couple of Texas deals recently.

What’s the take on M&A? Are you having more conversations now that the stock is up or what’s the latest?.

Well, I think 2016 was relatively slow in Texas with only 18 deals announced a side but '17 looks to be off to a faster start obviously the Southwest Bank deal that was just announced. I would say that for us we continue to focus in M&A a core thing that we are going to do and to deploy our excess capital.

As I've discussed we've certainly been involved with working on a lot of M&A. There is nothing to report at this time. But I guess I would say maybe that some of the just kind of general activity might be picked up, but we’re also going to be patient and do our process..

Okay. Great. Thanks guys..

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

Hey, good morning everyone..

Hey Michael..

I wanted to start with the broker-dealer segment, had a really good year this year and far exceeded initial expectations.

Do you think from here I know it’s kind of more of a shift maybe to revenue growth, but do you think you can sustain this level or do you expect improvement from the current pretax margins and revenue outlook?.

Yeah, I think that’s -- first to your point and for others this past year we’ve reported all the SWS transaction and integration costs. We expect those to be not great in 2017. So to the extent they're not, we don’t plan to continue on the normalization of that.

And with that, I think that the company is getting to a place and is doing well that I don't expect to give the quarterly type guidance.

But for the year, Michael I would say that consistent with what we've talked about last quarter is we're looking for and expecting about $400 million in net revenue, which is about on pace or little bit less and where it is today.

First quarter of '17, the first quarter of any year is always a little slow and then I think on the pretax margins, we’re looking for probably the low double-digits 10% to 12% to be conservative because we have different businesses that have different varying pretax margin..

Okay. Great.

And one small and just on the mortgage side with the higher gain on the sale, was there some offset though maybe in MSR or the hedging on the MSR fair value marks in that line?.

So, this is Will. During the fourth quarter, we had about $17 million of markup if you will in the MSR value related valuation adjustments due to our prepayment speed assumptions. That said, we are fully hedged on interest rates in the four MSR and so by virtue of the 100% hedge we see a very small income over the course of the year for MSR.

So, what you'll see is roughly a $4 million net pretax income for the MSR gross year again. You'll see the value of the MSR increase to roughly $62 million in the fourth quarter, but you'll also see again we took mark-to-mark losses on the hedge to offset that..

Okay.

And then maybe just a last one for Alan, just curious what you're seeing in terms of customer demand and appetite? Have you seen sort of a resurgence potentially in loan volumes for the pipeline building as we enter this year?.

Well, I was really pleasantly surprised with the growth we had last year, 16% and gains on total loan related to 10%. We exceeded that and I am really pleased that we are heading for a healthy number this year. The economy is still strong. It's very competitive out there.

We got a 160 loan officers out there beating down the door and knocking on doors feeding out of other dogs bowls and I believe that we're going to have a good year and we're going to continue be able to grow at a good pace, even though when you start to hop in that 10% on the size of our loan portfolio is pretty big numbers.

I am optimistic that we can do that. I am optimistic as long as the economy stays strong and if it get stronger, we're going to see even more of that and if the economy gets stronger, we're going to see those unfunded balance that we're sitting there to be in that are going to find out.

So, I am going to be optimistic and I was really pleased with last year. So, I can't help but think this year is going to be good..

Okay. Thank you..

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

Hey, thanks. Good morning, guys. .

Hey Matt..

Hey, I was going to go back to the mortgage discussion and Will you mentioned that $17 million mark-up on the MSR evaluation. Did you also say that the hedge position offset that.

I didn't get the dollar amount or the hedged position on that?.

Yes, the hedge which we settled daily, so you don’t see your corresponding liability on the balance sheet. But the hedge position offset that we hedged interest rate, our interest rate position in MSR to approximately 100%..

Okay.

And then as far as the -- I saw the commentary that gain on sale margin, but I didn’t see specific numbers in the fourth quarter, can you guys give us a number as to what that gain on sale margin was?.

3.88%..

And Matt, that continues to go up and did all year. So I don’t know if we can expect that go into this year because we're going to see a lot of people that did -- all they did was refi.

Now they got to start scratching to do the purchase business and we'll see how long that can last, but I am just going to make it a little more preparatory bonus until they go away, but we had a strong gain on sale a year and we expect to be a little softer start now, but we think it was gain speed as these guys go about it..

Okay.

And then as far as the accretion expectation, Will, what are your thoughts for next few quarters for purchase accounting accretion?.

As we've gone through -- as we've gone through our quarterly recast for this year again I think we provided last quarter whole, I think it's $10 million to $12 million that it reflects kind of the current model view per quarter. And again it is almost impossible to predict early redemption, early pay downs or otherwise recovery.

So, I would from recap perspective $10 million to $12 million per quarter for 2017..

Okay. Thank you..

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

Hey, good morning, everyone. Maybe one for Alan. Alan, I think you've been a little bit more cautious on the energy cycle, with the election and the rise in oil prices.

So, has your view changed at all? I know the portfolio has stood up really well, but you've definitely been a little bit more cautious I think in some of the areas of the bank, so any commentary?.

My view is modest as optimistic as Raymond James. I wish I was right on your projection. I expect a lot..

Me too..

Yes, but I am a little more optimistic. I think we're starting to see some more activity even though it's hovering in the $50, $52, $53 range. I think we're starting to see more activity out there.

I can sense a little more optimism in Houston and of course Permian Basin that there is little more drilling activity going on and I think there is a flurry that starting. So yes, I think there is a little more optimism as far as our trade is concern. We see them go away and so yes I am a little more positive.

I am little more positive about Houston and I don’t know if we're there yet, the term of the corner, but I think we're getting close..

Okay. And then maybe just one other question on the margin. I appreciate the accretion outlook. How should we expect the core margin to trend in the first quarter given the rate hike and then what's the outlook for the rest of the year with and without rate hike in June, which is where the curve is at this point? Thanks..

So again we think about it core. So, 3.11% is the core number pre-purchase accounting. As we noted, that’s up from 3.03% in the prior quarter. We through the normal course have had in the fourth quarter outsized recoveries of non-interest from -- from interest from non-accrued loans.

And so, our current her target is 3.05% plus or minus three basis points. So relatively stable to the 3.05% level across 2017 and again, we'll adjust that to the extent we see the fed move further, but at the current rate environment, that's what we would expect to target..

Okay.

And what was the excess secretion from the payoffs this quarter in terms of dollars?.

About $6 million..

Okay. Thanks for taking my question..

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

Hey, good morning..

Hey Brett..

Wanted to make sure on this legal issue in Rhode Island the $16 million reserve that you've set up, does that take into account any ongoing litigation that might be occurring with that specific issue?.

No. That should be it. That should be the conclusion of it..

Okay.

So, this is -- there’s you don't see any other actions that might cause some additional noise related to that?.

That’s not my expectation..

Okay.

And then just wanted to go back to thinking about the insurance this year and you 4Q was nicer there's been some activity already in 1Q can you maybe just give us some thoughts and what understanding from that piece in the first quarter so far?.

Its early we haven’t really seen a lot of weather here in Texas that’s been unusual.

And I think the company we got and the way we managed the last three years about what I would expect this year for performance first quarter should be typically is milder quarter, second quarter when you the tornado and hail and then you know fourth quarters really strong. So I don't – I think that -- that’s kind of where we are at.

I think the top line is been drifting down and that’s not alarming to us, but something that we’re hoping to turn and have some modest growth at some point this year..

Okay. Thank you. Everything else has been addressed. Thank you so much..

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

Hey, good morning guys.

The purchase we're in, if I caught it right 72% or so in the fourth quarter in terms of volume at prime, do you happen to know what that was for the year?.

Yes 73%..

Okay.

So pretty consistent with 4Q?.

Yeah. 70 it was right, actually 71% 4Q, 73% for the year, it’s a little bit different from '15 because we had such a strong refinance year normally and we ran closer to 80%. We're going to look at about 85% this year and I hope we’ll be able to pick up market share..

Okay. That's helpful. And then just two quick ones on the broker-dealer side.

I'm wondering if the move in rate if you could provide a quick outlook or update in terms of what you're seeing in terms of public finance in the TBA business?.

Okay. I think on the public finance side, well the public finance side we're expecting that to be the first quarter is going to be a little bit slower as it typically is. And I think that we're expecting to see some modest probably volume decline this year in that.

And on the TBA side, it does have a tie with the mortgage business and it could be impacted somewhat by interest rates. We actually think that that will be probably this year, because homebuyer assistance and for first time both homeowners and so that should be sticker but we could see that the spreads could tighten a little bit.

So I think that we're expecting good years from both the loan book. The revenue might not be at the level of 2017..

I think you're going to see in public demand, the refund is going to go away and so we're not going to be able to experience those this year because of other rates, but if we get this infrastructure deal gets going, probably later in the year, we're going to see a good chance to make up for that..

Okay. Understood. So may be a little bit slower for us have pick up in the second half if we get some infrastructure deals going, but correct me if I am wrong, but the comps that would be tied to that revenues is largely variable any how correct.

So there will be an offset in OpEx?.

Yes, very much so..

Okay, all right. That's helpful. And then one kind of last tech one for me, tax rate ran a little bit low this quarter, I am imaging that that's because there was just less pretax with the litigation reserve.

Is a good number going forward still 36 and what do you guys have that can offset that and does you are thinking around that change if we get some kind of corporate tax reform? Thanks..

So, our target is 37% for '17. We think about on a full year, full year '16 came in at 36. As we think about tax reform there is two components of that. You got to -- we'll have to revalue our DTA, but that will obviously accrete back through income, through the net income for growth, through the tax provision overtime.

Again, as we think we would be well positioned to receive the benefit from any tax reductions, we think that support the economy which is probably a larger benefit in absolute tax rate benefit all in, but again from a positioning perspective, we would be expecting to receive favorable kind of income trends around it understanding there would be a DTA impact day one..

Got you. Thanks very much..

Our next question comes from Scott Valentin with Compass Point. Please go ahead. .

Hi. Jesus Bueno for Scott Valentin. Good morning, everyone.

How it's going?.

We thought you dumped us..

I guess we could target out, obviously loan growth was pretty solid this quarter, but that was in spite of the fact that your energy balance actually it dipped down period end. I guess was that one large credit the secured credit that was in there? And I guess just going forward, how should we think about kind of the energy portfolio, are you….

Are you talking about the $10 million payoff?.

Yes..

There was one in there that moved that was about $6 million. The others are just small things that either pay down, moved or got upgraded from a classified. How do we see it going forward, it's stable. We got $28 million worth of classified loans in the energy portfolio and we got $11 million in reserve.

We're pretty well reserved but we see it getting better. We're starting to see a little bit of nudge in the service area slow but sure there is more drilling going on. There is a better atmosphere in the Permian Basin and in the Houston market.

So, I am a little more optimistic than I have been and if you see oil going up to 60 or so, I think you're going to see everybody start coming out of this. So, it doesn’t really affect us that much and it really hadn’t hit, we haven't spill over into our businesses at all.

One of things that's really positive in the energy business you want to call it that's the petrochemical business and there is a tremendous amount of activity going on in the Gulf in the matter of capital expenditure and construction in the petrochemical business especially maybe the Houston shift channel and the Corpus ship channel and all along the Gulf, the petrochemical businesses are really expanding and growing and doing well.

So, that helps to offset at lot of what we talked about..

That's great color. Thank you.

And just in terms of branch count going forward obviously you're stable quarter-over-quarter and I know you're still looking towards sourcing acquisitions, but I guess in terms of just organic expansion opening new branches, I guess what can we expect as we are move in that?.

We've gotten rid of some level because we're trying to fine tune, but once we got rid and we're right on time with the FMB transaction we did in 2013 we didn’t want to be in that market and we got out and we got out favorably.

We got out the Woodlands because we didn’t want to be there, but we've added a couple this year and we have on the draw boards several more. We have some upgrades at some of the branches we have. So we continue -- we're not going to blank at the state with the branches. That isn’t our kind of behavior.

We're putting them in opportune places to where not only does it help our business, but it also helps our people, the visibility of who we are and what we're doing. So there is some people that are more picking in the Dallas-Fort Worth Area. There is one in Labick. There's one in Corpus. We just finished one in -- an upgrade in McAllen.

So, we're kind of doing this. We're building a new one in Arlington. So, we're kind of upgrading and positioning our sales and our visibility..

Got it. And I was just going to ask one more question on the insurance unit. In December, we saw that FAA came out with -- they released their duty to serve rule and part of it was at the manufacturing and housing industry that was secured their pilot program for counting their loans towards duties served.

So given that you have healthy amount of exposure to manufactured housing or low valley dwellings, I guess do you this as an opportunity for that insurance unit going forward?.

You're talking about as far as like originations or policies on mobile homes?.

Correct. I guess the read will be that. It's positive for loan originations and support for that industry.

So is there any direct read to National Lloyds there?.

It could, but I think a lot of it for what we underwrite. I wouldn't really expect it to have like a demonstrative increase in volume or anything..

Got it. Thank you for taking my questions..

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