Earnings Call Transcript - HTH Q3 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings Third Quarter 2025 Earnings Conference Call and Webcast. 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.

Matthew Dunn, Speaker

Thank you. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, 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 purpose 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 website.

Jeremy Ford, CEO

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 balances. PrimeLending's results reflect a dampened summer home buying markets where both volumes and margins remained under pressure, and HilltopSecurities produced a strong pretax margin from robust net revenue growth across all 4 of its business lines. Speaking to the results of each operating business in the third quarter. PlainsCapital Bank generated $55 million of pretax 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 continue 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 PlainsCapital increased by 6% on a linked-quarter basis. This growth was partially attributable to seasonal cash inflows from select large balance customers. Further, PlainsCapital 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 PrimeLending, where the company reported a pretax loss of $7 million during the quarter. The second quarter's subdued mortgage origination volumes persisted into the third quarter 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 inventory saw a further reversion back towards more normalized levels. Homebuyers do continue to face affordability challenges, and we expect heightened competition for mortgage origination volume to keep margins and fees 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 stand-alone profitability at PrimeLending. During the quarter, HilltopSecurities generated pretax income of $26.5 million on net revenues of $144.5 million for a pretax margin of 18%. Speaking to the business lines at HilltopSecurities. 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 products. 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, HilltopSecurities produced a very strong quarter for both the breadth and depth of offerings within the broker-dealer performed well. HilltopSecurities 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 4. Hilltop maintained 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 as 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.

William Furr, CFO

Thank you, Jeremy. I'll start on Page 5. 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. Quarter's results, including 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 the provision for credit losses and a $1.3 million reduction in the allowance for unfunded reserves, which is reflected in other noninterest expenses. To discuss the allowance in more detail, I'm moving to Page 6. Hilltop's allowance for credit losses declined during the quarter by $2.8 million to $95 million, resulting in a coverage ratio of ACL to loans 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 risks 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 nondepository 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 30. Lastly, as we've stated over time, the allowance for credit losses estimates can be volatile as the computations and assessment include but are not limited to the following: 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 beta 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 booked throughout the first 3 quarters of 2025 and improving margin lending yields at HilltopSecurities. Our current internal rate outlook anticipates 1 additional 25 basis point rate cut in 2025 and followed by 2 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 reduction 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 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 HilltopSecurities broader suite program. These suite deposits do remain a valuable source of continued liquidity for Hilltop should the need arise. Over the last year, we have grown bank customer deposits, principally in the interest-bearing products by focusing on providing consistent and competitive prices. In addition, we're very pleased with the retention of our noninterest-bearing deposits over the last year, and the work in 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 9. Total noninterest 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 provide a combination of higher interest rates, home prices, insurance and taxes remain constructive 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. The leadership team at PrimeLending is focused on continuing to optimize costs and productivity across the 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 HilltopSecurities experienced solid growth versus the prior year period. Driving the growth was significant improvement from 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. Structured Finance benefited from improved secondary margins, while Wealth Management has experienced consistent AUM growth over the last year. Turning to Page 10. Noninterest 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 noninterest 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. We are on the Page 11. Third quarter average HFI loans equated to $8.1 billion. On 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 PrimeLending. 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. 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 in 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. I'm 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, 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 and 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, Operator

Our first question is from Michael Rose at Raymond James.

Michael Rose, Analyst

Well, just wanted to start on the NII guide. I was a little surprised to see that it wasn't increased 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 could just kind of discuss the near-term puts and takes and if I'm missing anything?

William Furr, CFO

Thanks for the question. 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. Also, we’ve kind of gone through our balanced 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 paydowns. So that's part of it. The other part that kind of comes into play there is when we do get a Federal Reserve rate reduction, we have the immediate step-down impact of both our cash level balances, which will remain well over $1 billion as well as the adjustable rate loan portfolio. So that step occurs almost immediately, while again, the deposit beta activity and reductions blend in over time just as we saw here during the third quarter. So those are all the factors that we have in place. We also, we're currently at an interesting spot from a loan yield perspective, where we've got a pool of loans that are resetting higher. We've got from that were originated at different points earlier years earlier. We also have loans that are, 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 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, Analyst

That's helpful, thank you for that information. As a follow-up, I noticed that your stock buyback this quarter was more significant than we've seen outside of previous accelerated programs and tender offers. I understand you increased the buyback potential. Are you indicating that buybacks will be a bigger focus moving forward? It seems logical considering the current stock price and your available capital. Additionally, Jeremy, could you provide some insight into your M&A outlook? We've seen a few recent deals in Texas, and I know you evaluate many opportunities, so an update on both topics would be appreciated.

Jeremy Ford, CEO

Okay. Thanks. So yes, I think that's correct. From where we're trading right now and given our excess capital position, we are trying to be 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&A front, we've really seen, as everybody knows, a lot of out-of-market entrants into Texas, which seems to be a targeted growth state for a lot of banks. And 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 bankers and how do we use this as a means for us to be able to grow.

Michael Rose, Analyst

Okay. Helpful. Maybe just one last one for me. I know your auto portfolio is in rundown mobile, we have seen some issues in that sector. So I just wanted to address that, and I believe you guys recently showed up in intercredit that was publicized as well as having some exposure. So I would just love any thoughts or color there.

William Furr, CFO

Yes, your point about auto financing is valid. We closed 2021 with around $290 million in commitments, which has now decreased to $77 million. We've been actively managing that portfolio. As we mentioned almost 18 months ago, we moved two auto note clients into nonaccrual status and have been working diligently with those clients to recover and repay over time, and we continue those efforts today. We recognized some of the challenges early on and managed to address them. There is nothing else to report regarding any additional exposure related to the entity mentioned in the press release, and we have no direct lending exposure to that entity.

Michael Rose, Analyst

Okay. Great.

Operator, Operator

Our next question comes from Woody Lay, KBW.

Wood Lay, Analyst

Just as a quick follow-up on the auto and maybe specifically those 2 relationships on nonaccrual. Is there any exposure to subprime auto there?

William Furr, CFO

They do have some subprime exposure related to the nature of certain loans. However, through our workout program and oversight, we are closely monitoring that. We believe we have it appropriately reserved and managed on a daily basis.

Wood Lay, Analyst

Understood. Now, moving on to the broker dealer, it was a strong quarter for fee income. If we analyze the broker dealer guidance, it suggests that those fees are likely to decrease back to the levels seen in the first and second quarters. Could you provide more details about what contributed to the higher fees in the third quarter and whether this increase was possibly a one-time occurrence?

William Furr, CFO

Yes, we observed very strong activity in our public finance sector year-over-year and that trend has continued. We've also noticed some improvements in structured finance and wealth management. There are some recurring elements, but there are also occasional factors that we don't expect to last. With the rate reductions we've been discussing, we anticipate a gradual decrease in overall sweep revenues from excess sweep deposits. We're keeping track of that along with the pipelines and overall business activity in our portfolio. There’s nothing systemic to indicate a significant decline. The third quarter showed robust performance across nearly all areas of the broker-dealer. Typically, we see one or two business units perform well while others may lag, but this quarter truly showcased the overall strength of the business operating effectively across all segments.

Wood Lay, Analyst

Yes. In that business, the efficiency ratio was lower than what it has been in the past couple of quarters. Are any of those expenses being delayed to the fourth quarter, or was it simply lower efficiency in some businesses contributing to that fee growth?

William Furr, CFO

Yes, it was largely a mixed bag. The pretax margin was 18.3% in the quarter, up from 13.7% in the previous year. The mix of where some business is conducted, particularly Hilltop Securities, can significantly influence the pretax margin each quarter. Overall, all the businesses performed strongly, but we anticipate a return to what we consider more typical pretax margins in the low teens, around 12% to 13%, for that business.

Jeremy Ford, CEO

I agree with Will. The efficiency is reflected in our higher revenue. Our non-comp expense remained relatively flat and showed slight improvement. I'm very optimistic about our public finance business, which is the core of HilltopSecurities, supported by a dedicated team. This year has been strong for our municipal advisory sector, and we anticipate continued strength through 2026. We have a well-rounded approach in public finance, backed by a solid underwriting team that had an excellent quarter. Additionally, we have several supplementary products, like asset management, which contributed positively. Everything came together nicely. On another note, our Wealth Management business has significantly improved over the years, with year-over-year growth attributed to fees and advisory services, not just reliant on sweep revenue. We're feeling positive about that.

Wood Lay, Analyst

All right. That's really helpful color.

Operator, Operator

Our next question comes from Jordan Ghent from Stephens.

Jordan Ghent, Analyst

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?

William Furr, CFO

Yes.

Jeremy Ford, CEO

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. As far as the 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.

William Furr, CFO

I think that's right. I mean we've got also in the mortgage space, USDA and 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 and slowing down and processing as it relates to kind of mortgages, 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.

Operator, Operator

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