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

Explicit Guidance:

• FY 2026 Revenue: Net interest income (NII) expected to move "modestly higher," driven by loan growth; current internal outlook assumes one additional 25 basis point (bps) rate increase in 2026.
• FY 2026 Loan Growth: Expect full-year average total bank loans (excluding mortgage warehouse and retained mortgages) to increase 7–8% from 2025 levels.
• FY 2027 Mortgage Outlook: Mortgage sales activity expected to remain negatively impacted into 2027 due to sustained mortgage rates near 7% and affordability headwinds (insurance, taxes, inventory).
• NIM & Deposit Costs: Interest-bearing deposit costs expected to trend higher as short-term rates rise; NIM expected to "level out and potentially travel a little lower" from current 333 bps due to competition for deposits.
• Deposit Runway: Expect deposit balances to seasonally expand in Q4 2026; positive trajectory in low-cost/core granular deposits anticipated for 2027.
• Capital/Share Count: $85 million remaining in stock repurchase authorization (expires January); company to transact when window opens but no specific quarterly buyback guidance provided given valuation sensitivity.

Business-Segment Outlook:

• Plains Capital Bank: Continued "strong growth" in core loans and deposits; loan pipeline described as "robust" with active recruiting of new bankers; credit portfolio remains healthy with no anticipated systemic risk.
• Prime Lending: Business to remain "challenged" in Q4 2026 due to elevated long-term rates and seasonality; focus on "right-sizing" the business, optimizing cost/productivity in middle/back office, and selectively expanding sales teams for "sustainable, profitable growth."
• Hilltop Securities:
  • Public Finance: Expect "continued strength" and robust municipal issuance market; plan to expand product offerings to become a full-service solution provider.
  • Wealth Management: Anticipate "continued strength" and robust results through year-end driven by higher Fed funds rate expectations.
  • Structured Finance & Fixed Income: Will "execute with prudence" in coming quarters due to sensitivity to interest rate volatility and hedging ineffectiveness; demand for prepayment-protected collateral expected to remain weak.

Market and Competitive Outlook:

• Mortgage Market: Purchase activity pressured by near-7% mortgage rates; "lock volume" declined 18% YoY to $2.2 billion; gain-on-sale margins declined 26 bps to 200 bps; headwinds from affordability (insurance, taxes, entry-priced inventory) expected to persist into 2027.
• Banking Competition: Intense competition for deposits expected as rates rise, with new entrants offering special rates/teasers; deposit costs expected to revert from recent trough.
• Commercial Lending: Market for funded loans remains "intense" with competitive pressure on pricing and structure; CRE and CNI driving growth.
• Trading/Volatility: High volatility and rapid rate shifts (e.g., September) continue to impair hedging effectiveness in trading and mortgage pipeline segments.

Macro / Industry Outlook:

• Interest Rates: Market sentiment shifted from declining to higher short-term rates; Fed funds rate expected to rise 25 bps in 2026; 10-year yields at multi-year highs; deposit yield betas expected to revert to model levels of 55–60% during prolonged rate increase cycles (up from recent 74%).
• Economy: Texas economy "continues to expand" providing a favorable operating environment; broader economy faces uncertainty regarding inflation and overall health.
• Credit Risk: Monitoring risks from ongoing Middle East conflict, midterm elections, and economic activity; no anticipated systemic risk across portfolio, though ACL remains sensitive to assumptions on inflation, employment, and interest rates.

Strategic Initiatives:

• Talent Acquisition: Aggressive recruiting of top-performing loan officers (LOs) across country for Prime Lending; active and successful recruitment of new bankers for Plains Capital Bank.
• Cost Optimization: Continued focus on "productivity" and "prudent growth of revenue producers"; optimizing pricing; enhancing technology leverage and process improvements to drive non-variable expense stability.
• Business Model: Transitioning Prime Lending to a "right-sized" model to fit persistently difficult market conditions.

Risks and Headwinds to Outlook:

• Interest Rate Sensitivity: Valuation marks on mortgage pipelines and trading assets due to rate volatility; potential deterioration of hedge effectiveness during rapid rate moves.
• Credit Risk: Volatility in ACL estimates driven by economic assumptions (inflation, rates, employment); potential for idiosyncratic client events despite low systemic risk outlook.
• Market Headwinds: Sustained high mortgage rates negatively impacting affordability and volume into 2027; compressed gain-on-sale margins.
• Liquidity/Competition: Upward pressure on deposit costs could compress Net Interest Margins (NIM) despite higher NII volume.

Management Tone on the Future:

• Cautiously Optimistic on Bank: Confident in loan/deposit growth trends and Texas economy ("positive trajectory").
• Prudent on Volatile Segments: "Execute with prudence" on interest-rate-sensitive lines; "right-sizing" mortgage business acknowledges current market difficulty.
• Steady on Capital: Demonstrating prudence in buybacks (reduced from $50M to $20M in Q3) due to stock price elevation and rate-driven AOCI volatility.
• Tone Summary: Focus on "controlling what we can" amidst uncertainty; emphasis on "sustainable, profitable growth" over volume in a tough market.

Miscellaneous:

• Valuation Adjustments: Q3 included $16 million pre-tax mark-to-market losses on mortgage pipeline/trading assets and $21 million negative AOCI impact from AFS securities.
• Provision Expense: ACL increased $9 million to $94 million (coverage ratio 1.07%); driven by loan growth and risk rating adjustments.
• Non-Interest Expenses: Expected to remain "relatively stable" excluding variable compensation, which is tied to revenue production.