Hilltop Holdings Inc. Q3 FY2025 earnings call

• PlainsCapital Bank: Net interest margin up 7bps, core loan growth, core deposits up 6% linked-quarter, $225M broker-dealer deposits returned, $2.6M credit loss reversal.
• PrimeLending: Pretax loss $7M due to dampened summer home buying, ongoing affordability challenges for homebuyers.
• HilltopSecurities: Strong pretax margin, public finance net revenues up 28% YOY, structured finance up $4M, wealth management up $7M, fixed income up 13% YOY.
• Leadership transition: PlainsCapital Bank's Chief Credit Officer Darrell Adams to retire, Brent Randall promoted to Chief Credit Officer, Thomas Ricks becomes Dallas Region Chairman.
• Allowance for credit losses: Declined by $2.8 million to $95 million, specific reserves up $4.7M offset by collective reserves improvement and economic scenario outlook upgrade.
• Net interest income: $112 million in Q3, up $7.4M or 7% YOY, net interest margin 306bps, expecting 1 rate cut in 2025 and 2 in 2026 first half.
• Deposits: Average total deposits ~$10.5B, reduced broker-dealer sweep deposits, grew bank customer deposits.
• Noninterest income: $218M in Q3, mortgage revenues down $3.4M but gain on sale margins up, securities and investment advisory fees up.
• Noninterest expenses: Up $7.6M to $272M YOY, driven by variable compensation, expect expenses other than variable to stabilize.
• Loans: Average HFI loans $8.1B, ended Q3 up $166M from Q2, grew 3.1% YOY, commercial real estate loans up 8%.

PlainsCapital Bank generated $55 million of pretax income on $12.6 billion of average assets, with net interest margin increasing by 7 basis points, core loan growth, and total core deposits up 6% linked-quarter. PrimeLending reported a pretax loss of $7 million due to dampened summer home buying markets. HilltopSecurities had pretax income of $26.5 million on net revenues of $144.5 million, with a 18% pretax margin, including public finance up 28% year-over-year, structured finance up $4 million, wealth management up $7 million, and fixed income up 13% year-over-year. PlainsCapital's net interest margin increase was due to managing down interest-bearing deposits, loan yields up 4 basis points. PrimeLending faced pressure from low home buying volumes. HilltopSecurities saw strong growth across business lines.

• NII guide: Asset-sensitive balance sheet, expecting additional rate cut in Q4 2025 and 2 in 2026 H1, NII levels stable with modest downward pressure in Q1 2026.
• Loan growth: Full year average total loans expected to increase 0%-2% from 2024 levels excluding mortgage warehouse lending and retained mortgages.
• Loan yield mix: Pool of loans resetting higher, some lower from variable rate comp, new commercial loans at ~690 basis points.

• Competitive market: Elevated competition in Texas for PlainsCapital Bank, expected to remain in coming quarters.
• Mortgage market: Continued pressure on PrimeLending from low home buying volumes and affordability challenges.
• Economic uncertainty: Uncertainty in interest rates, inflation, and economy impacting financials.
• Auto portfolio: Rundown of auto portfolio with subprime exposure, managed through workout program but monitored closely.
• Government shutdown: Impact on SBA and mortgage processing, but public finance group not directly affected by federal government shutdown.

Q: 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?

A: 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 additional -- an additional rate cut in the fourth quarter expected. Also, we are -- 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 [indiscernible] 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 -- 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 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.

Q: You guys bought back more stock this quarter than I think we've really seen outside of 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 buyback potential. Are you trying to signal that buybacks are going to be more leaned into a little bit more here? I mean, it would make sense given where the stock is trading and how much capital you have. And then separately, Jeremy, if you can just discuss kind of the M&A outlook for you guys. We've seen a couple of deals here in Texas as of late. I know you guys look at a lot of things. So would just love an update on both those areas.

A: 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.

Q: 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?

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

Q: 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?

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

Q: Just as a quick follow-up on 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 I could maybe 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, a one-quarter benefit?

A: I mean I think we saw very solid activity 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 -- I'd say there is some recurring nature, but also some episodic items in there that 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 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.

Q: 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?

A: 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 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. 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.