Hilltop Holdings Third Quarter 2026 Earnings Conference Call and Webcast - HILLTOP HOLDINGS INC

Financial Performance:

• Reported third quarter 2026 net income of $24.9 million (44 cents per diluted share); ROA was 0.67% and ROE was 4.7%.
• Consolidated net interest income rose 9% year-over-year to $122 million, driven by commercial loan growth and stable deposit costs.
• Net interest margin (NIM) expanded to 3.33% (a 12 basis point increase from Q2 2026), though management anticipates a potential modest decline from this peak as deposit costs rise.
• Total non-interest income was $187 million; however, mortgage revenues declined $9 million and principal transactions decreased due to lower trading activity and $6.6 million in mark-to-market losses on the mortgage pipeline.
• Non-interest expenses decreased 7.8% year-over-year to $264 million, primarily due to reduced variable compensation linked to lower revenue in the broker-dealer and mortgage segments.
• Provision for credit losses was $10.1 million at Plains Capital Bank, bringing the Allowance for Credit Losses (ACL) to $94 million with a coverage ratio of 1.07% against Held-for-Investment (HFI) loans.
• Tangible book value per share declined modestly to $32.20; Common Equity Tier 1 (CET1) capital ratio remained strong at 18.3%.
• Returned $33 million to shareholders via $12.6 million in dividends and $20 million in share repurchases; $85 million of share repurchase authorization remains.

Guidance and Future Outlook:

• Full-year 2026 bank loan growth is projected to increase by 7-8% compared to 2025, excluding mortgage warehouse lending.
• Prime Lending faces continued headwinds through 2027 due to elevated mortgage rates near 7% and affordability challenges regarding insurance and taxes.
• Management expects deposit costs to trend higher as they have likely reached their trough, anticipating intense competition for funds in future rate hike cycles.
• NII is expected to continue a positive trajectory driven by loan growth, even if NIM levels potentially stabilize or dip slightly.
• Q4 2026 is anticipated to remain challenging for Prime Lending due to seasonal slowness and persistently high long-term rates.
• Deposit growth is expected to continue seasonally into Q4 and maintain a positive trajectory into 2027, focused on low-cost commercial and granular deposits.

Business Segments and Product Lines:

• Plains Capital Bank: Pre-tax income of $44 million; core loans and deposits grew, with deposit balances increasing by $500 million including $100 million swept from Hilltop Securities.
• Prime Lending: Reported a pre-tax loss of $10.8 million; mortgage rates jumped 70 basis points in September, reducing rate lock volumes by 18% to $2.2 billion and compressing gain-on-sale margins by 26 basis points.
• Hilltop Securities: Generated $7 million in pre-tax income on $117 million in revenue (5.9% margin); Public Finance Services showed strength with $37 million in revenue, while Wealth Management revenue exceeded prior year levels.
• Structured Finance & Fixed Income: Experienced volatility and pressure due to elevated market volatility and hedge ineffectiveness; demand for prepayment-protected collateral weakened.

Market and Competitive Landscape:

• The Texas economy continues to expand, providing a favorable operating environment for commercial banking activities.
• Mortgage market activity is severely impacted by a "drastic intra-quarter increase in mortgage rates" and affordability headwinds (insurance, taxes, inventory).
• Municipal issuance market remains robust, supporting Public Finance Services growth.
• Competition for deposits has intensified, particularly from new entrants offering special rates and teaser rates, though core retention remains strong.
• The commercial loan market remains competitive with pressure on pricing and structure, yet the bank's pipeline remains robust.

Risks and Challenges:

• Significant interest rate volatility in September caused hedge ineffectiveness and substantial valuation losses ($16 million pre-tax marks) in trading and mortgage pipeline assets.
• AOCI (Accumulated Other Comprehensive Income) faced negative impacts of approximately $21 million due to market-to-market adjustments in the AFS securities portfolio.
• Credit risk remains a focus with the ACL building by $9 million to cover loan growth and risk rating adjustments; while no systemic risk is anticipated, idiosyncratic client events could occur.
• Future credit risk factors include potential volatility from economic activity, inflation, interest rates, employment, and geopolitical issues such as the Middle East conflict.
• Variable compensation expenses are directly tied to revenue performance, creating volatility in cost structures during revenue downturns.

Management Commentary and Tone:

• Management expressed confidence in the resilience of Hilltop's diversified model, highlighting solid foundational growth despite market turbulence.
• Tone was cautious yet pragmatic regarding the mortgage segment, acknowledging a "persistently difficult market" and focusing on right-sizing the business to achieve profitability.
• There was optimism regarding the bank's long-term growth, recruitment success, and the robust municipal market.
• Management emphasized a disciplined approach to capital allocation, citing the decision to limit buybacks in Q3 due to elevated stock prices and potential AOCI volatility.

Analyst Questions and Answers:

• Mortgage Outlook: Analyst Hannah Nguyen asked about mortgage pressure; management confirmed expectations of continued challenges through 2027, with a focus on optimizing expenses and productively growing the business.
• Net Interest Margin: Questioned on NIM runway; management stated NII growth is driven by asset growth while NIM may trend slightly lower from 3.33% as deposit costs rise, trading income for volume.
• Commercial Loan Growth: Analyst Matt Olney inquired about loan drivers; management attributed the 7% growth to CRE and CNI portfolios, robust pipelines, and successful banker recruiting.
• Share Repurchases: Regarding buyback pace, management clarified the $20M spend was prudent given market conditions, with $85M remaining to be utilized over time.
• Expense Management: Analyst Evan Yee asked about expense trends; management cited productivity gains, technology leverage, and stable variable compensation as key drivers for expense control.
• Deposit Strategy: Questions on 2027 deposit growth were met with assurance of continued focus on low-cost commercial and granular deposits despite competitive pressures.

Other Key Points:

• The company reported a $4.6 million net valuation gain in the Hilltop Merchant Banking portfolio, partially offsetting trading losses.
• Non-performing assets (NPA) declined by $2 million to $60 million, reflecting a healthy investment loan portfolio with net charge-offs of only 6 basis points.
• Management reiterated that the allowance for credit losses is a volatile metric dependent on economic assumptions and risk rating adjustments.
• The presentation included preliminary data and forward-looking statements subject to risks, including interest rate changes and credit trends.