Hilltop Holdings Inc.

Hello and welcome to the Hilltop Holdings third quarter 2022 earnings conference call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. I'll now hand over to your host, Eric Yohi from Hilltop Holdings. Eric, please go ahead.

Thank you, operator. Before we get started, Please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition, allowance for credit losses, the impact and potential impacts of inflation, stock repurchases and dividends, and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation are forward-looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties. Our actual results, capital, liquidity, and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that the 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. The 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-holdings.com. With that, I will now turn the presentation over to President and CEO, Jeremy Ford.

Thank you, Eric, and good morning. For the third quarter, Hilltop reported net income of $32 million, or 50 cents per diluted share. Return on average assets for the period was 0.8%, and return on average equity was 6.3%. This was an excellent quarter for Plains Capital Bank. The bank generated $64 million in pre-tax income driven primarily by a 44 basis point increase in net interest margin from Q3 2021. In the quarter, average bank loans grew by an annualized rate of 8% as growth in commercial, our core commercial loans and retainment of prime lending originated mortgages more than offset elevated pay downs and the expected decline in our mortgage warehouse business. In talking with our bankers this quarter, our overall sentiment remains positive. because they believe the economy is strong and are continuing to invest and finance new projects. As such, our pipelines remain elevated and above pre-COVID levels across almost all products in geographic markets. However, we are beginning to see the impact of elevated rates and inflation on new deals. In particular, elevated costs and rates are often leading to higher relative equity requirements in new construction projects. And the area where we are starting to see pullback among clients is in single family residential. As home builder clients have appropriately slowed lot takedowns and look to move inventory quickly as demand flows. Overall, there is still high level of competition in major Texas markets. And as a result, yields and structure are under pressure. Although asset quality remains strong, we will continue to maintain our high credit standards and ensure our lenders are putting their best foot forward on quality opportunities. Total average deposits decreased by $852 million, or 7% quarter over quarter. Our non-interest-bearing deposits, which tend to be stickier operating accounts, declined by only 2% linked quarter and remained elevated compared to Q3 2021. In our correspondent and money market accounts, we have seen some runoff as more rate sensitive clients have reacted to the sharp rise in rates. We expected this runoff and are continuing to be on track to our 50% through the cycle beta, which Will is going to address later in the presentation. Overall, our strong excess core funding position has allowed us to remain disciplined on pricing and realize strong margin expansion. Importantly, at the end of the third quarter, the bank's loans held for investment to deposit ratio remained favorable at approximately 67%. We believe we have ample liquidity and core funding to support continued loan growth. Also, our ability to utilize sweep deposits from Hilltop Securities as core funding would provide further liquidity to the bank, which we believe is a differentiator in this environment where liquidity and funding potentially become more scarce. Moving to prime lending. While rising interest rates have been accretive for the net interest margin at the bank, they have adversely impacted our mortgage operations. Rising mortgage rates in conjunction with declining housing affordability and current inventory challenges continue to negatively impact mortgage volumes. As a result, mortgage origination volumes declined by 46% from Q3 2021. While gain on sale of loans sold to third parties has declined by 37%, down to 227 basis points. For perspective, volumes for the industry are expected to decline approximately 55% over the same period per the Mortgage Bankers Association. The current mortgage market has shifted dramatically towards a pure purchase market. Refinance volumes in the third quarter made up only 7% of originations compared to 29% in Q3 last year. While our business model is more purchase-oriented, the shrinking pool of purchase homebuyers and the immediate need of competitors to generate mortgage volume will continue to put pressure on the organization. After two consecutive years of originating $23 billion in mortgages, the business has started to reset towards a lower volume market for the foreseeable future. Expense initiatives underway include better aligning production support, operations, and back office headcount towards lower volumes. Over the past 12 months, we have reduced headcount in the business by 23%, and we will continue to monitor closely to ensure we are aligning production targets with appropriate staff levels. Additionally, the business is assessing real estate, business development, professional services, and all other fixed costs as we prepare for sustained higher mortgage rates and lower volumes in 2023. This is a challenging time in the mortgage industry, and it has come suddenly following multiple record years. That said, we feel good about the leadership and overall team we have at Prime Lending and their ability to navigate us through this cycle so that we come out a stronger, growing, and more profitable organization on the other side. During the quarter, Hilltop Securities generated $17.5 million of pre-tax income on net revenues of $114 million for a pre-tax margin of 15%. Pre-tax profit improved slightly compared to last year's third quarter, despite a 10% decline in revenues. The pre-tax contribution mix shifted as public finance and structured finance both declined versus the prior year, but were largely offset by improvement in wealth management and fixed income. Revenues within fixed income services increased by 2% over prior year as trading activity within the securitized products picked up. So the overall fixed income trading environment continues to struggle due to the expectation of rising rates. Wealth management improved compared to prior year despite lower fees from a decline in the equity markets. High margin revenues from sweet deposits continue to move up with Fed rate increases, and we continue to add strong advisors in this business. While we feel positive about the momentum Hilltop Securities made in the quarter and the position they are in across our lines of business, we do believe the trading environment remains volatile. and expect to maintain lower levels of trading inventory until the market stabilizes. Moving to page four. During the quarter, Hilltop returned $10 million of capital to shareholders through dividends. At this time, we do not have a new share repurchase authorization to report. And as of now, the plan is to evaluate this as part of our annual planning process with our board at year end. Despite earnings pressure in our mortgage origination business and a decline in the value of our available for sale securities portfolio from rising rates, consolidated profitability from our diverse business model and significant share repurchases over the past two years has supported our tangible book value per share and drove it to increase modestly in the third quarter. In summary, this is a challenging market, but we remain focused on delivering profitable growth every quarter. We have strong, experienced leaders in each business who have been through cycles and tough times. We are continuing to work with our clients and employees and in every market to understand the evolving dynamics and how we best can support and partner with them. As we anticipate a higher rate environment through 2023, we plan to rely on the strengths of Plains Capital Bank and Hilltop Securities while Prime Lending realigns its business to weather this mortgage cycle. With that, I will now turn the presentation over to Will to discuss the financials.