Hilltop Hldgs achieves $46 million net income with strong loan growth, but faces pressure in prime lending amid competitive mortgage market

OPERATOR - (00:00:59)

This is Sam. Good morning ladies and gentlemen, and welcome to Hilltop Holdings third quarter 2025 earnings conference call and webcast. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star-zero for the operator. Please be advised that this call is being recorded today, Friday, October 24, 2025. I would now like to turn the conference over to Matt Dunn. Please go ahead.

Matt Dunn - (00:03:14)

Thank you. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact may including statements concerning such items as our outlook, business strategy, future plans, financial condition, credit risks and trends in credit allowance for credit losses, liquidity and sources of funding, funding costs, dividends, stock repurchases, subsequent events and impacts of interest rate changes. As well as such, other items referenced in the preface of our presentation 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 uncertainties. Our actual results, capital liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time. 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 certain non-GAAP measures including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation which is posted on our websiteir.hilltop.com I will now turn the presentation over to Jeremy Ford.

Jeremy Ford - (00:04:48)

Thank you Matt and good morning. For the third quarter, Hilltop reported net income of approximately $46 million or $0.74 per diluted share. Return on average assets for the period was 1.2% and return on average equity was 8.35%. To summarize, the quarter, PlainsCapital Bank realized a continued expansion in net interest margin while generating strong growth in both core loan and deposit. PrimeLending's results reflect a dampened summer home buying market where both volumes and margins remained under pressure and Hilltop Securities produced a strong pre tax margin from robust net revenue growth across all four of its business lines. Speaking to the results of each operating business in the third quarter, PlainsCapital Bank generated $55 million of pre tax income on $12.6 billion of average assets which resulted in a return on average assets of 1.34%. Net interest margin at the bank increased by 7 basis points as we continued to actively manage down the cost of interest bearing deposits. Loan yields at the bank increased 4 basis points on a linked quarter basis as the portfolio further repriced into a higher rate environment. Despite the highly competitive market in Texas, the bank produced strong core loan growth and saw a continued expansion within the loan pipeline. We expect competition to remain elevated in the coming quarters as we work to increase our market share and absorb modestly higher anticipated payoffs within the loan portfolio. Total core deposits within our markets at Plains capital increased by 6% on a linked quarter basis. This growth was partially attributable to seasonal cash inflows from select large balance customers. Further, Plains Capital did return $225 million of broker dealer suite deposits during the quarter. Results in the quarter included a $2.6 million reversal of credit losses. This was primarily driven by improvement in asset quality and stronger underlying economic conditions on the collective portfolio. Will is going to provide further commentary on credit in his prepared remarks. Overall, the bank showed continued healthy trends in loan growth and pipeline development, core deposit growth and interest expense management and credit metrics that illustrate the quality of our loan portfolio. Moving to prime lending, the company reported a pretax loss of $7 million during the quarter. The second quarter subdued mortgage origination volumes persisted into the third quarter and as the industry did not experience the increase in home buying activity that typically occurs during the summer months. Notably, existing home sales across the country reached their lowest level in over 30 years while gain on sale margins did increase on a linked quarter basis. This was more than offset by a decline in origination fees. However, there were positive developments from the quarter as mortgage rates did modestly subside and home inventories saw a further reversion back towards more normal normalized levels. Home buyers do continue to face affordability challenges and we expect heightened competition for mortgage origination volume to keep margins and fee under pressure as we enter the seasonally slower fourth and first quarters of the year, we will continue to focus on reducing fixed expenses while recruiting talented mortgage originators in order to restore standalone profitability at prime lending. During the quarter, Hilltop Securities generated pre tax income of $26.5 million on net revenues of $144.5 million for a pre tax margin of 18%. Speaking to the business lines at Hilltop Securities, Public Finance services produced a 28% year over year increase in net revenues as the business continued to realize strong annual increases in both advisory and underwriting fees. Structured finance net revenues increased by $4 million from the third quarter of 2024 primarily due to a decline in market rates which increased buy side appetite for call protected mortgage product. In wealth management net revenues increased by $7 million to $50 million when compared to the third quarter of 2024. The strong year over year increase is due to higher advisory and transaction fee revenue within the retail segment and an increase in stock loan revenues due to wider spreads. Finally, the fixed income business showed a 13% increase in net revenues on a year over year basis as industry volumes remained robust within its municipal products segment. Overall, Hilltop Securities produced a very strong quarter with where both the breadth and depth of offerings within the broker dealer performed well. Hilltop Securities continues to invest in core areas of expertise as we leverage our national brand that is built on trust and a long term focus on serving our clients. Moving to page four. Hilltop maintains strong capital levels with a common equity tier 1 capital ratio of 20%. Additionally, tangible book value per share increased over the prior quarter by $0.67 to $31.23. During the period, we returned $11 million to stockholders through dividends and repurchased $55 million in shares. Now I'd like to give a brief update on an important transition of the bank's leadership team. In November, PlainsCapital Bank's Chief Credit Officer Darrell Adams plans to retire. Darrell has been with the bank for over 37 years and his leadership has created the credit culture that we have today. I want to thank Darrell for his partnership and his friendship as well his incredible contribution. Fortunately, the bank has strong depth, so we promoted Brent Randall to become our new Chief Credit Officer. Brent has been with the bank for over 26 years, formerly serving as the Dallas Region Chairman. Coinciding with this transition, Thomas Ricks, who has been with the bank for over 22 years, will become the new Dallas Region Chairman. This is an exciting time for PlainsCapital Bank as we elevate proven leaders from within. With a solid team in place, we believe that we are poised for continued growth and success while staying true to the bank's legacy and credit culture. Thank you. I'll now turn the presentation over to Will to discuss our financials in more detail.

Will - (00:11:46)

Thank you, Jeremy. I'll start on page five. As Jeremy noted, for the third quarter. Of 2025, Hilltop reported consolidated income attributable. To common stockholders of $45.8 million, equating to $0.74 per diluted share. The quarter's results include an increase in net interest income supported by growth in commercial loans and the ongoing work to optimize our deposit cost as the Federal Reserve has continued lowering short term interest rates. In addition, the quarter includes a $2.5 million reversal of provision for credit losses and a $1.3 million reduction in the allowance for unfunded reserves which is reflected in other non interest expenses. To discuss the allowance in more detail, I'm Moving to page six. Hilltop's allowance for credit losses declined during the quarter of $2.8 million to $95 million, resulting in a coverage ratio of ACL to loans held-for-investment (HFI) of 1.16%. As is noted in the graph, specific reserves increased in the period by $4.7 million. This increase was offset by an improvement of 5.2 million in the collective reserves reflecting ongoing upgrades in our portfolio and a $2 million improvement in the economic scenario outlook which reflects Moody's September baseline scenario. While we recognize there's been a flurry of recent credit news in the marketplace, we continue to monitor the portfolio closely, focusing on areas that we believe may pose future risk to the bank. While at any point we could have an idiosyncratic event with an existing client, we do not anticipate any significant systemic risk across the portfolio at this time. In addition, we have evaluated our loans to non depository financial institutions and those totaled $195 million or approximately 2.4% of the outstanding loans HFI excluding loans in our mortgage warehouse lending business at September 30th. Lastly, as we've stated over time the allowance for credit losses estimate can be volatile as the computations and assessment include, but are not limited to, the assumptions related to economic activity, inflation, interest rates, employment levels and specific credit activities within our portfolio. All of these can be volatile from period to period. Turning to Page 7, net interest income in the third quarter equated to $112 million including approximately $600,000 of purchase accounting accretion versus the prior year. Third quarter net interest income increased by $7.4 million or 7%, primarily driven by improving deposit costs resulting from our ability to realize higher deposit data levels than previously estimated coupled with the growth in new higher yielding commercial loans during the third quarter, net interest margin increased versus the second quarter of 2025 by 5 basis points to 306 basis points. The increase in NIM was largely driven by stability in deposit costs from period to period and improving loan yields reflecting the positive impact of new business both throughout the first three quarters of 2025 and improving margin lending yields at Hilltop Securities. Our current internal rate outlook anticipates one additional 25 basis point rate cut in 2025 followed by two additional rate reductions in the first half of 2026. Under this rate scenario, we expect that NII levels will remain relatively stable over the coming quarters with modest downward pressure during the seasonally weaker mortgage production period that typically occurs in the first quarter of 2026. Additionally, we anticipate that interest bearing deposit betas, which have averaged approximately 70% through the current rate cut cycle, will gradually decline but remain above 60% for the duration of the cycle, assuming rate reductions align with our current projections. Turning to page 8, third quarter average total deposits are approximately $10.5 billion stable with prior year levels. I would note that while average deposit balances are flat year over year, we have intentionally reduced broker dealer sweep deposits held at the bank as they can be deployed through Hilltop Security's broader sweep program. These sweep deposits do remain a valuable source of contingent liquidity for Hilltop should the need arise. Over the last year we have grown bank customer deposits principally in the interest bearing products but focusing on providing consistent and competitive prices. In addition, very pleased with the retention of our non interest bearing deposits over the last year and the work that. Our Treasury Services team continues to do. To serve our customers and support the growth in our customer deposit base each day. Related to deposit rates, both interest bearing deposit costs and the cost of total deposits remained relatively stable versus the second quarter 2025 levels. We do expect the deposit rates will decline further as the timing of the most recent rate reduction caused the rate movements to be executed late in the third quarter. I'm moving to page nine. Total non interest income for the third quarter of 2025 equated to $218 million versus the same period in the prior year. Mortgage revenues declined by $3.4 million as origination volumes were relatively stable with the prior year and gain on sale margins for those loans sold to third parties. Improved by 8 basis points to 226 basis points. While we believe revenues and production from the mortgage segment have begun to stabilize at this lower level, we also feel that it remains important to note the ongoing challenges in mortgage banking whereby a combination of higher interest rates, home prices, insurance and taxes remain constrictive to overall market demand. That said, even in the face of these challenges, we do believe that the overall mortgage market is slowly improving and we expect that this improvement could continue into 2026. To that end, the leadership team at Brian Lending is focused on continuing to optimize cost and productivity across the middle and back office functions, growing our client facing sales team across the country and optimizing our pricing to support profitable growth in the future. Securities and investment advisory fees largely represented at Hilltop securities experienced solid growth versus the prior year period, driving the growth with significant improvement in Public finance whereby net revenues increased by $8.3 million and growth in Structured Finance and Wealth Management in which each business grew net revenues by approximately $5 million versus the third quarter of 2024. Structure Finance benefited from improved secondary margins while Wealth Management has experienced consistent AUM growth over the last year. Turning to page 10, non interest expenses increased from the same period in the prior year by $7.6 million to $272 million. The increase in expenses versus the prior year third quarter was driven by increases in variable compensation largely related to higher non interest revenue production at the broker dealer. Looking forward, we expect that expenses other than variable compensation will remain relatively stable at current levels as we remain diligently focused on prudent growth of revenue producers while continuing to gain efficiencies across our middle and back office functions. Turning to page 11 Third quarter average HFI loans equated to $8.1 billion . A period ending basis, HFI loans increased. Versus the second quarter 2025 by $166 million, driven largely by new origination volume and the funding of prior commitments in commercial real estate. On an ending balance basis, loans have grown versus the third quarter of 2024 by $248 million or 3.1%, again largely driven by growth across our commercial real estate products of 8% or $338 million. In addition, commercial lending pipelines continue to expand during the third quarter, increasing by over $750 million versus the second quarter of 2025. While this remains a positive trend, the market for funded loans remains intense with competitive pressures coming from both pricing and structure. In the face of this competition, our leadership team remains diligent in maintaining our conservative credit culture and adhering to our credit policies. Based on performance year to date, coupled with our current pipeline and expectation for payoffs during the fourth quarter, we expect full year average total loans to increase 0 to 2% from 2024 levels, excluding mortgage warehouse lending and any retained mortgages from prime lending. Turning to page 12. Starting in the. Upper right chart, NPA levels have declined from the second quarter of 2025 by $5.3 million to $76.5 million and continues to reflect generally positive trends in our held for investment loan portfolio. Moving to the bottom left chart Net charge offs for the quarter equated to $$282,000, or 1 basis point of the overall loan portfolio. As I remarked earlier, we do not anticipate any systemic exposures across our portfolio, but we remain vigilant in our assessment of risk and negative credit migration and are focused on early detection and aggressive workout when necessary. As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended the third quarter at 1.2%, including mortgage warehouse lending. Moving to page 13 as we move into the fourth quarter of 2025, there. Continues to be a lot of uncertainty. In the market regarding interest rates, inflation and the overall health of the economy. Given these uncertainties, we remain focused on controlling what we can to produce quality outcomes for our clients, associates and the communities we serve. As is noted in the table, our. Current outlook for 2025 reflects our current assessment of the economy in the markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on our future quarterly calls. Operator that concludes our prepared comments and we'll turn the call back to you for the Q and A section of the call.

OPERATOR - (00:22:25)

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the 1. On your touchtone phone you will hear a prompt that your hand has been raised. Should you wish to withdraw the question, please press the star followed by the two One moment please for your first question. Our first question is from Michael Rose, Raymond James. Please go ahead.

Michael Rose - Equity Analyst - (00:22:55)

Hey, good morning guys. Thanks for taking my questions. Well, just wanted to start on the NII guide. I was a little surprised to see that it wasn't increase because it would imply, I think a pretty decent step down in margin in the fourth quarter and maybe some earning asset contraction. Maybe if you can just kind of discuss the near term puts and takes and , if I'm missing anything, thanks.

Will - (00:23:21)

For the, thanks for the question. You know, a few things going on. We are and remain asset sensitive on the balance sheet, certainly from an NII perspective. And as we noted, we do have an additional rate cut in the fourth quarter expected. You know, also we are, we've kind of gone through our balance outlook and we didn't increase our overall loan growth profile either, largely based on again what. We'Re seeing in terms of production, but. Also what we're expecting in terms of pay down. So that's, that's, that's Part of it. The other part that kind of comes into play there is when we do get a, a Federal Reserve rate reduction, we have the immediate step down impact of both our cash level balances which will remain well over a billion dollars as well as the adjustable rate loan portfolio. So that step occurs almost immediately while again the deposit, the deposit data activity and reductions blend their self in over time just as we saw here during third quarter. So those are, those are all the factors that we have in place. We also, you know, we're currently at an interesting spot from a, from a loan yield perspective where we've got a. Pool of loans that are resetting higher. We've got from you know, that were originated at different points earlier, years earlier. We also have loans that are, that as I just noted would reset lower from a variable rate comp perspective given a rate reduction. And then we've got new business going. On our new, our new business. Our commercial loans going on the books right now are at about 690 basis points overall total loans. And so we continue to feel good about that. But again, the guide really reflects a confluence of a series of inputs as we evaluate the portfolio going into the balance of the year.

Michael Rose - Equity Analyst - (00:25:15)

Okay, that's helpful. I appreciate that. Color. And then maybe just as a follow up, you guys brought back more stock this quarter than I think we've really seen outside of, you know, some of the accelerated programs you guys have, some of the tender offers you guys have done in the past. And I know you raised the, the buyback potential. Are you trying to signal that, you know, buybacks are going to be more, you know, leaned into a little bit more here. I mean it would make sense given where the, the stock is trading and how much capital you have. And then, you know, separately, Jeremy, if you can just discuss kind of the, you know, the M and A outlook for you guys. You know, we've seen a couple deals here in Texas as of late. I know you guys look at a lot of things. So we just love an update on both those areas. Thanks.

Jeremy Ford - (00:26:01)

Okay, thanks. So yeah, I think that's correct. You know, as from where we're trading right now and given our excess capital position, we are trying to be, you know, more consistent with our share repurchases. And so that's why we have done what we've done this year, which we're happy about and also why we've asked for the increase in authorization on the M and A front. You know, we've really seen as everybody knows, a lot of out of Market entrance into Texas, which seems to be, you know, a targeted growth state for a lot of banks. And you know, certainly we're familiar with most of the targets. I would say that we're viewing this as where can we find the opportunity in this dislocation both in clients and in bankers and how do we use this as a means for us to be able to grow?

Michael Rose - Equity Analyst - (00:27:04)

Okay, helpful. Maybe just one last one for me. You know, I know your auto portfolio is in rundown mode, but we have seen, you know, some, some issues in that sector. So just wanted to address that. And I believe you guys recently showed up in a, in a credit that was publicized as well as having some exposure. So we'd just love any thoughts or color there. Thanks.

Will - (00:27:30)

Yeah, I think your, your point is appropriate for the auto and open Ancient. You know, we ended, we ended year 21 at about $290 million of commitments. That's down to 77 million. So to your point, we've been working our way through that portfolio as we've noted. Really almost 18 months ago, we did have two auto note clients that we moved into non-accrual and we've been aggressively working with those customers to kind of recoup and repay over time and again, continue to continue that workout effort to today. So we feel like we saw some of the implications early and we were able to kind of get on top of those and so nothing else to report and kind of any additional incremental exposure there as it relates to the name you're referring to, where it showed up in a press release there, I think we would say we've got no direct exposure, lending exposure to that, to that entity.

Michael Rose - Equity Analyst - (00:28:36)

Okay, great. Thanks for taking my questions, guys.

Will - (00:28:39)

Thank you.

OPERATOR - (00:28:44)

Our next question comes from Woody Lay, kbw. Please go ahead.

Woody Lay - Equity Analyst - (00:28:50)

Hey, good morning, guys.

Will - (00:28:53)

Morning.

Woody Lay - Equity Analyst - (00:28:54)

Just as a quick follow up on the auto and maybe specifically those two relationships on non accrual, is there any exposure to subprime auto there?

Will - (00:29:08)

I mean, they are, yes. And in the regard of the nature of some of the notes that, you know, are loans backed by for certain, there's certainly some subprime exposure there. But again through our workout program and through our oversight, we're monitoring that very closely. So we feel like we've got it appropriately reserved and appropriately being managed on a daily basis.

Woody Lay - Equity Analyst - (00:29:37)

Got it. Okay, then maybe shifting over to the broker dealer was a really good fee income quarter there. I think if you look at the broker dealer guidance, it implies those fees sort of taking a step back to the, to the first quarter, second quarter level. So could maybe you just go into a little more detail on what drove those fees higher in the third quarter and maybe not maybe what was sort of a one quarter benefit?

Will - (00:30:12)

Yeah, I mean I think we saw very solid activity in our, in our public finance space year on year and have continued to see that. And we also are seeing some improvement in structured finance as well as wealth management. So there's, there's, I'd say there is some recurring nature but also some episodic items in there that you know, we wouldn't expect necessarily to continue. In addition, with the rate reductions we're seeing, we've talked about this in the past, we are expecting to see over time overall sweep revenues from those excess sweep deposits to kind of come down. So we're modeling that and monitoring that as well as well as the pipelines and just business activity we're seeing in the portfolio. So nothing systemic there to say it's going to meaningfully decline. But the third quarter was a very strong quarter across really all portions of the broker dealer which you know, as you've seen and as investors have seen over time, generally you have 1 or 2 of the business units there perform well and then others maybe not quite as strong, but third quarter really reflected the strength of kind of the business. Hitting on all cylinders.

Woody Lay - Equity Analyst - (00:31:26)

Yep. And then it looks like in that business the efficiency ratio was lower than what it has been in the past couple of quarters. Are any of those expenses getting pushed out to the fourth quarter or was it just lower efficiency businesses driving some of that fee growth?

Will - (00:31:47)

Yeah, largely mixed. So the pre tax margin was 18.3% in the quarter. That's you know, up from 13.7% in the prior year. And again the mix of where some of the business gets done and certainly at Hilltop securities can meaningfully impact pre tax margin on a quarterly basis. And so again, all the businesses really, really had strong performance. But we can see and expect to see a reversion back to, I think we've talked about low teens, 12 to 13%. 13% kind of pre tax margins is. A more normal, more normal level for. That business to operate.

Jeremy Ford - (00:32:28)

And I agree with Will, I would just say, you know, the efficiency also is coming through with just higher revenue. You know, so our non comp expense was relatively flat, a little bit better. You know, I feel really positive about our public finance business that's the mainstay of Hilltop securities and a lot of work. Great team. They've had a really strong year in our municipal advisory business which has been strong, and we think it will be strong into 2026. And we have a really comprehensive approach in public finance because they have a really strong underwriting team that did have a really good quarter. And then we have a lot of spoke products, including asset management that was additive. So everything really came together there. Another point I'd make, and it's kind of in consistent is our wealth management business has much improved over several years. And really the increase year over year is due to fees and advisory fees and the work we've done an advisory level and not just related to the sweep revenue. So we feel positive about that.

Woody Lay - Equity Analyst - (00:33:47)

All right, that's really helpful. Car. That's it for me. Thanks for taking my question. Thanks, Woody. Thank you.

OPERATOR - (00:33:55)

Thank you. Our next question comes from Jordan Gent Stevens. Go ahead.

Jordan Gent Stevens - (00:34:02)

Hey, good morning. I just had one question kind of about the broker dealer. Could you maybe remind us about the. Primary and secondary effects from the government. Shutdown that it might have on broker dealer and all the business line items?

Jeremy Ford - (00:34:20)

Yep. I think, like, as far as the broker dealer is concerned, we haven't had any primary effects of the government shutdown and anything of that nature. You know, we. As far as government shutdown, just across the board, we were concerned about some of the SBA processing, but other than that, really, I don't know of anything else that's risen to our attention.

Will - (00:34:47)

I think that's right. I mean, we've got also in the mortgage space, USDA and some of the other. Some of the other agencies there, government agencies that are being impacted, whether it be lower staffing or no staffing at the point. So that's just a processing implication in slowing down of processing as it relates to kind of mortgages, the SBA and some of those other groups. But to be clear, our public finance group really focuses on local municipalities, not. Kind of the federal government in that regard.

Jordan Gent Stevens - (00:35:17)

Got it. Thank you.

OPERATOR - (00:35:25)

There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.