Hilltop Holdings Inc. Q3 FY2026 earnings call

• Plains Capital Bank Growth: Strong core loan and deposit growth driven by commercial banking relationships and aggressive banker recruiting. Deposit costs remained stable despite competitive pressures, and the bank anticipates seasonal deposit expansion in Q4.
• Interest Rate Environment Impact: Turbulent interest rate markets caused significant valuation adjustments. Total mark-to-market losses were approximately $16 million pre-tax across broker-dealer and mortgage segments, with an additional $21 million negative impact on Accumulated Other Comprehensive Income (AOCI).
• Hilltop Securities Resilience: Public Finance Services delivered strong results with $37 million in net revenue, benefiting from a robust municipal issuance market. Wealth Management also showed strength in retail and clearing segments.
• Credit Portfolio Health: The Allowance for Credit Losses (ACL) increased by $9 million to $94 million, resulting in a coverage ratio of 1.07%. Management does not anticipate systemic risk but remains vigilant regarding credit migration and idiosyncratic client events.
• Capital Return: Hilltop returned $33 million to stockholders via dividends ($12.6 million) and share repurchases ($20 million), maintaining a Common Equity Tier 1 ratio of 18.3%.

• Plains Capital Bank: Generated $44 million in pre-tax income. Net interest margin expanded 25 basis points year-over-year to 3.49%. Core loans and deposits grew, with deposit balances increasing by $500 million quarter-over-quarter. Return on average assets was 1.06%.
• Prime Lending: Reported a pre-tax loss of $11 million (specifically $10.8 million in detailed remarks). The segment faced headwinds from a drastic increase in mortgage rates and affordability issues, leading to lower lock volumes ($2.2 billion, down 18% year-over-year) and compressed gain-on-sale margins.

• Loan Growth: Full-year average total bank loans are expected to increase by 7% to 8% from 2025 levels, excluding mortgage warehouse lending and retained mortgages.
• Net Interest Margin (NIM): NIM is expected to level out or potentially decline modestly from the current 333 basis points as interest-bearing deposit costs rise due to competition and higher Fed funds rates. However, Net Interest Income (NII) is expected to continue moving modestly higher driven by loan growth.
• Mortgage Market Challenges: Prime Lending expects continued pressure through 2027 due to elevated long-term rates and affordability headwinds. The fourth quarter is anticipated to remain challenged due to seasonality and high rates.
• Expense Stability: Non-variable expenses are expected to remain relatively stable at current levels as the company focuses on operational efficiencies and prudent revenue producer growth.
• Deposit Costs: Interest-bearing deposit betas are expected to revert to model betas of 55% to 60% during prolonged rate increases, implying higher deposit costs going forward.

• Interest Rate Volatility: Significant volatility in short-term and long-term rates negatively impacted hedging effectiveness in both the mortgage pipeline and trading books, leading to substantial mark-to-market losses.
• Credit Risk Uncertainty: Potential risks from ongoing geopolitical conflicts (Middle East), midterm elections, and inflation could contribute to credit risk, though no systemic exposure is currently anticipated.
• Mortgage Affordability Headwinds: High mortgage rates near 7%, combined with homeowners insurance and property tax costs, stress homebuyer affordability, negatively impacting purchase activity and sales volumes.
• Deposit Competition: Intense competition for deposits may drive up interest-bearing deposit costs, potentially compressing net interest margins even as volume grows.

Q: Hannah Nguyen asked about the outlook for Prime Lending's pipeline and expense base given the challenging rate environment.

A: Will stated that while origination activity remains weak due to high rates and affordability issues, the team is focusing on productivity and managing expenses to match market conditions. They are selectively recruiting top performers to grow profitably rather than aggressively expanding, aiming to move toward profitability despite the difficult market.

Q: Hannah Nguyen inquired about the runway for loan repricing and the future trend of the Net Interest Margin (NIM) given rising deposit costs.

A: Will explained that NII will likely continue its positive trajectory due to asset-side loan growth. However, he noted that deposit costs have reached their trough and will likely rise with short-term rates. Consequently, NIM is expected to level out or travel slightly lower from 333 basis points, trading off some margin percentage for higher overall NII.

Q: Matt Olney asked about the drivers of the bank's strong loan growth trends and the pace of share repurchases.

A: Will attributed loan growth to positive commercial loan trends, transaction activity, and successful banker recruiting. Regarding capital returns, management cited prudence in slowing buybacks to $20 million in Q3 due to elevated stock prices and AOCI implications from climbing rates. They still have $85 million in authorization remaining and will transact when windows open.

Q: Evan Yee sought details on the improvement in non-variable expense outlook and how deposit growth should be viewed heading into 2027.

A: Will clarified that non-variable expenses remain stable due to foundational efforts driving efficiency and prudent management of productive resources. On deposits, he emphasized a focus on growing low-cost, granular commercial deposits. While competition remains intense, especially regarding teaser rates, the trajectory for deposits into 2027 remains positive.