HILLTOP HOLDINGS INC. 2026 Q3 Earnings Call

may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that certain information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop.com. I'll now turn the presentation over to Jeremy Ford.

Thank you, Matt, and good morning. For the third quarter, Hilltop reported net income of $24.9 million, or $0.44 per diluted share. Return on average assets for the period was 0.67%, and return on average equity was 4.7%. To summarize the lines of business, PlainsCapital Bank further realized growth in core loans and deposits while expanding net interest margin to deliver $44 million in pre-tax income. PrimeLending reported a pre-tax loss of $11 million as the mortgage market worked through a drastic intra-quarter increase in mortgage rates. HilltopSecurities delivered $7 million of pre-tax income as material interest rate volatility in the quarter pressured the trading business lines at the firm. At PlainsCapital Bank, strong growth across our markets in both core loans and deposits drove an increase in net interest income and a resulting increase in pre-provision net revenue on a quarter-over-quarter and year-over-year basis.

Offsetting this increase in pre-provision earnings was a $10.1 million provision for credit loss, which brought the bank's return on average assets to 1.06% for the quarter. The continued growth in core loans at the bank was accompanied by a healthy expansion in the loan pipeline during the third quarter as our markets continued to execute on banker recruiting and focused growth initiatives. Net interest margin also expanded, increasing over 25 basis points on a year-over-year basis to 3.49%, driven by stable deposit costs and upward repricing of our loan portfolio. September's increase in the effective fed funds rate did have an immediate impact on the yield generated on cash, but only marginally impacted the bank's results in the quarter. We expect there to be upward pressure on deposit costs going forward, which Will is going to speak to later in this presentation.

During the quarter, PlainsCapital Bank saw an increase in deposit balances of $500 million as both large balance customers and new granular depositors provided net growth. In the fourth quarter, we anticipate deposit balance to continue to seasonally expand. Notably, PlainsCapital Bank increased deposits swept over from HilltopSecurities during the third quarter by $100 million. While the bank did realize a $10.1 million provision expense during the quarter, we remain positively inclined on the overall health of the loan portfolio. Will is going to provide further commentary on credit in his prepared remarks. The Texas economy continues to expand and provides a great operating environment for our bank. We believe our longstanding relationship-based approach to commercial banking will continue to allow us to drive long-term growth while maintaining strong credit standards. Moving to PrimeLending, where the company reported a pre-tax loss of $10.8 million during the third quarter.

The dramatic increase in interest rates, specifically during the month of September, when 30-year average mortgage rates increased by nearly 70 basis points, put downward pressure on purchase activity across the market. Further, the sudden increase in rates negatively impacted the fair market value of loans within PrimeLending's existing pipeline. While we actively manage a hedge book against this pipeline, the effectiveness of those hedges deteriorates when the size and velocity of an interest rate move mirrors that which occurred in the third quarter. Additionally, the affordability headwinds faced by homebuyers, such as homeowners insurance, property taxes, and entry priced inventory, continue to stress volumes. We remain focused on the controllable aspects of PrimeLending's business, namely achieving operating, recruiting, and productivity goals as we work diligently to right size the business to best fit this persistently difficult market.

We do expect the fourth quarter to remain challenged given the combination of the typically seasonally slow period and elevated long-term rates. During the quarter, HilltopSecurities generated pre-tax income of $7 million on net revenue of $117 million for a pre-tax margin of 5.9%. Speaking to the business lines at HilltopSecurities, Public Finance Services realized another strong quarter of top-line results with $37 million of net revenue, which is in line with the third quarter of 2025. As we articulated during last quarter's call, we continue to see a robust municipal issuance market. As a market leader within the public entity advisory world, we will continue to look for ways to expand our product offerings and function as a full-service solution provider to our valued clients.

Both Structured Finance and Fixed Income Services faced a very challenging market due to elevated volatility, specifically in September, in long duration bonds. The size and speed of this move reduced the effectiveness of our hedging programs. Within Structured Finance, demand for prepayment protected collateral weakened as the market's rate expectations shifted. Finally, Wealth Management showed continued strength across the retail and clearing segments as top-line revenue was ahead of prior year third quarter. Given the expectation for higher fed funds rate, we anticipate results will remain robust through the end of the year. The volatile interest rate market that HilltopSecurities faced during the third quarter pressured both top-line and bottom-line results and weighed on the firm's pre-tax margin. We do expect to see continued strength in the coming quarters from Public Finance and Wealth Management as customer activity within those segments remains healthy.

As we finish the year, the more interest rate sensitive segments of Structured Finance and Fixed Income Services will continue to execute with prudence. Moving to page 4. Hilltop maintains strong capital levels with a common equity tier one capital ratio of 18.3%. Additionally, our tangible book value per share realized a modest quarter-over-quarter decline to $32.20. During the quarter, we returned $33 million to stockholders, consisting of $12.6 million in dividends and $20 million in share repurchases. Thank you. I'll now turn the presentation over to Will to discuss our financials in more detail.

Thank you, Jeremy. I'll start on page five. As Jeremy noted, for the third quarter of 2026, Hilltop reported consolidated income attributable to common stockholders of $24.9 million, equating to $0.44 per diluted share. The quarter's results reflect both the impacts of the turbulent interest rate market and the resilience of Hilltop's diversified operating model. As it relates to interest rates, the directional shift in market perspective from potential declining short-term interest rates to a market decidedly pointing towards higher short-term interest rates occurred during July. This shift, combined with the rise in ten-year yields to multi-year highs in September, created a confluence of events that yielded substantial valuation adjustments during the third quarter period. In both the broker-dealer and mortgage segments, we realized valuation marks related largely to the mortgage pipelines and other trading assets.

In total, the mark-to-market losses capturing both rate and volume impacts that are reflected in the third quarter equated to approximately $16 million on a pre-tax basis. In addition, Hilltop's reported negative AOCI impact equated to approximately $21 million, which reflects the impact of mark-to-market adjustments in the AFS securities portfolio net of hedges. The quarter also included net valuation gains of $4.6 million related to Hilltop's merchant banking portfolio investments. Through the volatility in the markets, Hilltop's diversified model continued to produce solid foundational results, highlighted with growth in net interest income of $10 million or 9% versus the prior year period. This was driven by commercial loan and deposit growth at the bank. Lastly, the quarter was impacted by higher provision for credit loss expense, led by a build in the allowance, which I'll discuss as we turn to page six.

Hilltop's allowance for credit losses increased during the quarter by $9 million to $94 million, resulting in a coverage ratio of ACL to loans HFI of 1.07%. As is noted in the graph, collective reserves related to the portfolio changes increased by $8 million. This increase in the ACL reflected both the impact of net loan growth of $3.6 million and approximately $4.4 million related to the net impact of risk rating adjustments in the period. In addition to the ACL build, the allowance for unfunded reserves also increased in the period by $1.5 million. The expense for this change is reported in other non-interest expense.

While we recognize there continues to be volatility in the interest rate markets and ongoing conflict in the Middle East, midterm elections and other issues that could contribute to credit risk, we continue to monitor the portfolio closely, focusing on areas that we believe may pose future risk to the bank. While at any point we could have an idiosyncratic event with an existing client, we do not anticipate any significant systemic risk across the portfolio at this time. Lastly, and as we've stated over time, the allowance for credit losses estimate can be volatile as the computations and assessment include, but are not limited to, the following: assumptions related to economic activity, inflation, interest rates, employment levels, and specific credit activities within our portfolio, all of which can be volatile from period to period. I'm turning to page seven.

Net interest income in the third quarter equated to $122 million, including approximately $830,000 of purchase accounting accretion. Versus the prior year third quarter, net interest income increased by $10 million or 9%, driven by improving deposit cost coupled with growth in commercial loans. During the third quarter, net interest margin increased versus the second quarter of 2026 by 12 basis points to 333 basis points. The increase in NIM was largely driven by relatively stable deposit costs from period to period and improving loan yields reflecting the positive impact of new business booked throughout the first three quarters of 2026. Our current internal rate outlook anticipates one additional 25 basis point rate increase in 2026. Under this rate scenario, we expect that NII levels will continue to move modestly higher, largely driven by expected loan growth within our banking segment.

Additionally, we anticipate that interest-bearing deposit betas, which averaged approximately 74% through the most recent rate reduction cycle, will revert to our model betas of 55%-60% during any prolonged rate increase cycle. Turning to page 8. Third quarter average total deposits are approximately $10.7 billion, reflecting growth in customer deposits across both interest-bearing and non-interest-bearing deposits. In addition, we are very pleased with the retention of our non-interest-bearing deposits over the last year and the work that our treasury services team continues to do to serve our clients and support the growth in our commercial deposit base each day. Related to deposit rates, both interest-bearing deposit cost and the cost of total deposits remained relatively stable versus the second quarter of 2026 levels.