Hilltop Holdings Inc. Q1 FY2025 earnings call

• PlainsCapital Bank maintained core customer balances while repricing deposits, resulting in stable net interest income despite compression in earning assets. - PrimeLending continued to face challenges from elevated interest rates and affordability issues in the mortgage market. - Hilltop Securities' wealth and public finance units had strong results, but fixed income was challenged. - Hilltop Holdings had robust capital and liquidity, enabling compounding of tangible book value per share and returning capital to stockholders. - PlainsCapital Bank had a one-time insurance recovery reducing noninterest expense by $6.5 million. - Mortgage origination segment weighed down by ongoing mortgage market constraints.

PlainsCapital Bank: For the first quarter, PlainsCapital Bank generated $40 million pretax income on $13 billion of average assets, with a return on average assets of 0.96%. Average loans were relatively stable, with construction and non-owner occupied CRE loans increasing but offset by a decline in C&I lending. Average total deposit balances decreased due to seasonal outflows and large customers repositioning liquidity, but core deposits increased by nearly $300 million. Pretax provision for credit losses was $9 million. Net interest margin compressed by one basis point to 2.97%. PrimeLending: Reported a pretax loss of $8 million in the first quarter. Origination volumes remained under pressure due to elevated interest rates and affordability challenges, but had a modest year-over-year increase in origination volume to $1.7 billion. Gain on sale of loans increased 6 basis points, but origination fees decreased. Hilltop Securities: Generated pretax income of $9 million on net revenue of $109 million. Public Finance Services had a 34% year-over-year increase in net revenues. Structured finance net revenues declined $8 million. Wealth management net revenues increased $1 million. Fixed income business had a $7 million net revenue decline.

• Mortgage production volume expectation for 2025 reduced to $8 to $9.5 billion. - Loan growth guidance is 0 to 3% for full-year average loans. - Expect to retain between $10 and $30 million per month in mortgages. - Deposit beta outlook remains at 55%. - NII guide is up 0 to 2%.

• Volatility in the fixed income market impacting Hilltop Securities' results. - Ongoing constraints in the mortgage market affecting PrimeLending. - Tariff uncertainties and potential reciprocal tariffs causing clients to pause projects, impacting loan growth. - Credit risk from negative migration of certain credits in the portfolio. - Volatility in economic outlook affecting allowance for credit losses.

Q: How big was the office credit that was downgraded in the quarter and what drove classified improvement?

A: The office credit referenced was about $18 million. Positive migration in classifieds was from smaller credits migrating.

Q: On deposit costs, do you think there's capacity to move lower and can NIM see improvement?

A: We've taken advantage of the hundred basis points reduction from the Fed, but balancing with growing customer deposits. Expect interest-bearing deposit rates to trend modestly lower, and NII/NIM stabilized at current levels but are market dependent.

Q: Should we expect reversal of seasonal commercial outflows of deposits in 2Q '25?

A: There's a seasonal outflow in Q1 due to tax season, but after April 15, core customer deposits start to build.

Q: How were Hilltop Securities' businesses impacted by bond market volatility and expectations?

A: Municipal portfolio impacted by volatility, with trading results challenged in the first part of Q2. Fixed income business continues to be volatile due to interest rates and market liquidity.

Q: On loan growth outlook and mortgage retention, talk about pipelines and monthly retention range?

A: Pipelines are strong but pull-through rates challenged. Mortgage retention expected to be closer to the higher end of $20 to $30 million per month, leading to modest growth in the one to four family portfolio.

Q: On expenses, how much was from the insurance recovery and fixed expense run rate?

A: Insurance recovery impact on expenses is not significant. Expenses excluding variable compensation have been stable, operating in the $181 to $190 range.