Hilltop Holdings Inc.

Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings Second Quarter 2025 earnings conference call and webcast. At this time, note that all participant lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require needed assistance, please press star zero for the operator. Also note that this call is being recorded on Friday, July 25th, 2025. And I would like to turn the conference over to Matt Dunn. Please go ahead.

Thank you. 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, credit risks and trends in credit, allowance for credit losses, liquidity and sources of funding, funding costs, evidence, stock repurchases, subsequent events 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 risks 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 the preference of 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. 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 .Hilltop.com. Thank you. I'll now turn the presentation over to Jeremy Ford.

Thank you, Matt, and good morning. For the second quarter, Hilltop reported net income of approximately $36 million, or $0.57 per diluted share. Return on average assets for the period was 1% and return on average equity was 6.6%. During the quarter, Plains Capital Bank realized a meaningful increase in net interest margin and was able to further grow its loan pipeline as customer demand remained strong in Texas. The broker dealer continued to see a strong issuance market in its foundational public finance business and was benefited from a healthy market for its wealth management business. Time lending's results continue to be negatively impacted by a highly competitive and challenging mortgage origination market. From a capital management perspective, Hilltop was able to return over $46 million to stockholders through dividends and share repurchases. In the second quarter, Plains Capital Bank generated $55 million of pre-tax income on $12.7 billion of average assets, which resulted in a return on average assets of 1.35%. Net interest margin at the bank increased by 19 basis points, as the blended cost of deposits declined during the quarter by 9 basis points, due to expected outflows primarily in our highest yielding products. Loan yields increased by 5 basis points due to repricing of the loan portfolio into a higher rate environment. Further, the bank's balance sheet realized a mixed shift out of cash and into higher earnings assets, as seasonal mortgage-related loan balances increased throughout the quarter. The bank generated positive growth in its loan portfolio and pipeline. However, we expect stiff competition within our markets to have a dampening effect on near-term loan growth. Average total deposit balances at Plains Capital declined during the quarter as certain large balance customers reallocated their surplus liquidity. We do expect to recapture a material portion of these deposits through the remainder of the year, as seasonal inflows occurred during the second half of 2025. Core deposits within our markets did continue the trend of strong -over-year growth by ending the period approximately $275 million higher. Results in the quarter included a $7.3 million reversal of credit losses. This was primarily driven by an improvement in the underlying asset quality within the collective portfolio. And further impacted by a change in the economic scenario utilized in our Cecil modeling assumptions. Will is going to provide further commentary on credit in his prepared remarks. Overall, the bank benefited from actively managing deposit costs and expanding lending activity, which resulted from our talented bankers' efforts. Moving to prime lending, where the company reported a free tax gain of $3 million during the quarter. Notably, prime lending's results include a non-recurring legal settlement of $9.5 million that positively impacted results. While the second quarter typically starts the seasonal uptrend in home buying volumes, which somewhat materialized with an increase in origination volume on a link quarter and -over-year basis, the industry-wide headwinds of elevated home prices, persistently high interest rates, and overall affordability challenges have not alleviated. Accordingly, competition within the mortgage origination market for muted volumes continue to put pressure on overall margins. The market has experienced some relief for home buyers as existing home listings have increased across the country. However, this has not coincided with improvement in the market's affordability. Regarding margins, prime lending's reported gain on sale of 228 basis points was up four basis points versus the prior quarter and flat on a -over-year basis. However, industry competition continues to put pressure on mortgage origination fees and other related income, where the margin decreased by 11 basis points on a link quarter basis. Prime lending's management team continues to focus on reducing expenses in order to ensure efficient operations within the context of the overall mortgage market. For the second quarter, fixed expenses were reduced by 11% on a -over-year basis. We will continue to look for ways to achieve efficiencies while providing value-enhancing services to our customers. During the quarter, Hilltop Securities generated pre-tax income of $6 million on net revenues of $110 million, or a pre-tax margin of 6%. Speaking to the business lines at Hilltop Securities, public finance services produced a 36% -over-year increase in net revenues as the business line realized strong increases in both advisory and underwriting fees. Structured finance net revenues declined by $1 million from the second quarter of 2024, primarily due to softer market demand for call-protected mortgage products. In wealth management, net revenues increased by $2.5 million to $47.3 million when compared to the second quarter of 2024. This increase in performance is primarily due to an increase in advisory fees on improved asset balances and strong market conditions within the securities lending business. Finally, fixed income showed a 43% increase in net revenues on a link quarter basis, in part due to an increase in demand for municipal bond products. Overall, Hilltop Securities continues to see strong results from public finance and wealth management. However, material interest rate volatility negatively impacted other parts of the business and weighed on the firm's blended pre-tax margin. Moving to page 4. Hilltop maintains strong capital levels with a common equity tier 1 capital ratio of 20.8%. Additionally, our tangible book value per share increased over the prior quarter's level by $0.54 to $30.56. During the period, we returned $12 million to stockholders through dividends and repurchased $35 million in shares. Thank you. I will now turn the presentation over to Will to discuss our financials in more detail.

Thank you, Jeremy. I'll start on page 5. As Jeremy noted, for the second quarter of 2025, Hilltop reported consolidated income attributable to common stockholders of $36.1 million, equating to $0.57 per polluted share. The quarter's results included a -over-year increase in net interest income of 7%, stable non-interest revenues, which did include the benefit of the $9.5 million legal recovery noted during our first quarter call, and a modest increase in non-interest expenses. Further, Hilltop recorded a net reversal in the provision for credit losses of $7.3 million, which I'll review in more detail as I move to page 6. Hilltop's allowance for credit losses declined during the quarter by $8.2 million to $98 million. As is noted in the graph, Hilltop recorded net charge-offs of approximately $900,000 and increased specific reserves by $1.8 million. In addition, certain upgrades in the portfolio occurred during the quarter, resulting in a lowering of the allowance assigned to those credits of $4.9 million. Of note, the Office of Property Loan that was downgraded last quarter due to the non-renewal of a lease by a large tenant was upgraded this quarter as our client was successful in getting new tenant lease agreements in place during the period. Lastly, the economic factors leveraged for the second quarter analysis improved as we adopted the Moody's baseline forecast scenario, a change from the Moody's slower-growth trend alternative forecast scenario used during the first quarter of 2025. Lastly, it remains of note that we continue to believe that the ACL can be volatile as it's impacted by changes in the mix and make-up of the credit portfolio, net loan growth, credit migration trends, and changes to the macroeconomic assumptions and outlook over time. I'm turning to page 7. Net interest income in the second quarter equated to $110.7 million, including $600,000 of purchase accounting accretion, which declined at $1.4 million versus the second quarter of 2024. Versus the prior year's second quarter, net interest income increased by $7 million, or 7%, primarily driven by lower interest-bearing deposit costs coupled with lower borrowing costs resulting from a redemption of $200 million of debt in 2025. During the second quarter, net interest margin increased versus the first quarter of 2025 by 17 basis points to 301 basis points. The improvement in NEM was largely driven by higher loan yields, lower interest-bearing deposit costs, and one additional day in the quarter. Our current rate outlook includes two rate reductions, one in the third quarter, and one during the fourth quarter. Based on this rate scenario, we expect that NEM levels will moderate at current levels and that net interest income will likely stabilize at a few million dollars per quarter lower than what we recorded during the second quarter. I'm turning to page 8. Second quarter averaged total deposits for approximately $10.6 billion and reflected an increase of $212 million versus the second quarter of 2024. During the quarter, we did experience a decline in deposits on an ending balance basis. This decline was expected as it reflects normal seasonal flows related to tax payments, scheduled distributions from certain of our public fund depositors, and business flows and distributions from some large C&I clients. We do expect that deposits will begin growing again during the second half of the year. As a result of our ongoing pricing efforts, interest-bearing deposit costs declined from the first quarter levels to 291 basis points during the second quarter. During the first 100 basis points of this down rate cycle, Banks Capital Bank has been able to achieve a 72% interest-bearing deposit beta. As we've noted in the past, we expect that with additional rate reductions from the Federal Reserve, that we would see our beta levels decline towards our historically modeled betas of 50 to 55%. We will continue to balance fostering our long-term customer relationships with prudently managing net interest income over time. Moving to page 9. Total non-interest income for the second quarter of 2025 equated to $193 million. Versus the same period in the prior year, mortgage revenues declined by $12 million driven primarily by lower valuation marks on the pipeline and lower loan origination fees paid by customers. Second quarter origination volumes increased by 2% versus the prior year period while mortgage gain on sale margins for loans sold to third parties were stable versus the prior year period at 223 basis points. It remains important to note, the ongoing challenges in mortgage making continue as a combination of the current level of mortgage rates, lower home affordability, and lower consumer confidence combine to create an environment that remains restrictive and continues to push back a recovery in margins and production volumes across the industry. Growth and securities investment advisory fees and commissions were driven by strong public finance revenue growth as the MA franchise continues to develop and our underwriting business gains further momentum. Other income declined versus the prior year driven by lower revenues and structured finance at hilltop securities. Of note, the decline at hilltop securities was significantly offset by the inclusion of the recorded legal recovery of prime lending of $9.5 million. As we've noted in the past, revenues from structured finance and fixed income capital markets can be volatile from period to period as they're impacted by market volatility, interest rates, market liquidity, and production volumes. Turning to page 10. Non-interest expenses increased from the same period in the prior year by $5 million to .8% to $261 million. The increase in expenses versus the prior year second quarter was driven by increases in variable compensation largely hilltop securities and reflect the impact of higher revenue in public finance. In addition, step up in expenses other than variable compensation from the first quarter of this year to the second quarter reflects the previously noted legal recovery that was reported in the first quarter at the bank and equated to $6.5 million. Looking forward, we expect that expenses other than variable compensation will remain relatively stable at current levels as we remain diligently focused on prudent growth of revenue producers while continuing to gain efficiency across our middle and back office functions. Moving to page 11. Second quarter average HFI loans equated to $8.1 billion. On a period ending basis, HFI loans grew versus the first quarter of 2025 by $94 million, driven by $74 million of growth in CRE lending, and $48 million of seasonal growth in our mortgage warehouse lending business. Growth in these portfolios was somewhat offset by declines in C&I lending, which continues to maintain loans in certain segments that are being managed to lower balance levels, including the auto note portfolio that has been reviewed over time. Related to lending activity, we're pleased with both our commercial lending pipelines, which have continued to expand throughout the year, and our first half commitment bookings. We recognize that this improved activity will take time to fund and be represented on the balance sheet, and as a result, we are adjusting our expected full year average loan growth rate to -2% for 2025. Turning to page 12. Starting in the upper right chart, NPA levels have declined consistently over the last 12 months as we continue to see steady improvement and solid workout in this portfolio. Additionally, in the chart in the upper left, classified and criticized loans as a percentage of bank loans has improved versus the prior year levels to 301 basis points, down 59 basis points. During the quarter, net charge-offs equated to 896,000, or five basis points of average loans. As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended the second quarter at 1.27%, including mortgage warehouse lending. Moving to page 13. As we move into the third quarter of 2025, there continues to be a lot of uncertainty in the market regarding interest rates, the impact of ongoing higher than Fed target inflation, as well as the resilience of the overall economy. In the face of these uncertainties, we're pleased with the work that our teams are doing each day to support our customers and the communities we serve. We believe that this work is helping us build momentum in the bank and the broker-dealer businesses and supporting our focus on returning our mortgage business to profitability. As is noted in the table, our current outlook for 2025 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on our future quarterly calls. Operator, that concludes our prepared comments. We'll turn the call back to you for the Q&A section of the call.

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touchtone phone. You will then hear a prompt that your hand has been raised. And should you decide to withdraw from the polling process, please press star followed by 2. And if you're using your speakerphone, we do ask that you please list the handsets first before pressing any keys. So, go ahead and press star 1 now if you do have a question. And your first question will be from Woodie Lee at KBW. Please go ahead.

Hey, good morning, guys. Morning. I wanted to start on the broker-dealer business. It looks like the efficiency ratio of the segment has been running a little elevated relative to last year. Is that just a reflection of some mixed shifts in the revenues in the business or is there another dynamic impacting that?

Largely a reflection of the makeup of the revenue of the business, as you see. Public finance services is up, structured finance is kind of flattened down a little. Those are the principal drivers. But the profitability or pre-tax margin there will always move in concert with kind of the makeup of the revenues of that business.

And we also had about a million and a half of additional severance costs that we had in the quarter that pinched the margin more. Got it. All

right. That's helpful. And then maybe on the fixed expense guide, it looks like the fixed expenses in the mortgage segment took a nice step down. But looking at the guidance, it looks like non-variable expense growth was guided up. Could you just sort of talk about what's driving that incremental pickup in the expense outlook?

Yeah, so we're, you know, as we've said before, we're kind of continuing to see inflation in personnel expenses, health care costs, and related those kind of structural costs from a personnel perspective. So we're seeing a lot of inflation in personnel expenses, particularly in the financial sector, but we're also seeing kind of ongoing inflation in software expense and kind of other computing related expenses really principally related to contract escalators and the like. So we have to kind of reflect that in our guide. And that's kind of what's driving. Those are two pretty significant items. That's what's driving the guide a little higher.

All right, got it. And then just last for me, the NIM took a nice step up in the quarter. And as you called out, I think you've achieved the 72% beta through cycle, which has come in above expectations. I guess what is sort of looking back on that allowed you to achieve this a higher than expected beta?

I think a couple of things. One, I think we've continued to improve our overall analytic capability. We've improved kind of our analysis of customer sensitivity and the like. We've also can you at least seen, I think, a more rational marketplace versus when rates were going higher in the upgrade cycle. And so a virtue of those two things, it still remains really competitive out there. But again, our team is focused on making sure we're positioning our overall deposit base and the rates for paying customers in concert with kind of the competitive environment. And we feel like that's we've been able to do that to this point, as I think other financial institutions are also trying to improve net interest margin and I given given some of the challenges we saw in the upgrade environment. All right, thanks for

taking my questions. Thank you.

Next question will be from Tim Mitchell at Raymond James. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. I want to start on the loan growth commentary and some of the puts and takes there. So it sounds like pipelines are strong and growing and it'll take some time to fund some of these commitments. But I think Jeremy made some comments about competition, you know, picking up in the markets and that may be weighing on loan growth. I'm just kind of curious, we can kind of walk through the puts and takes there and just the way you're thinking about growing the balance sheet right now versus protecting the margin if competition starts to pick up on one side.

So if you think about kind of where where loan growth is and you just look at our kind of page 11, you can see loans have been pretty stable here over the last last 12 months. And, you know, as I think about a few things, we look at our mortgage warehouse lending, we'll just break it down into piece parts. So we look at mortgage warehouse lending that's seasonally elevated here in the second quarter generally kind of carries into the third quarter, but obviously starts to starts to wind lower in the fourth quarter. From a one to four family retention perspective, as you can see there in the in the graph, we maintain those balances. So the retention levels have been consistent with kind of keeping balances reasonably stable. And again, that's that's been our goal. We're not looking to meaningfully grow that one to four family position. So then that leaves largely our commercial real estate and then C and I portfolios. And again, in commercial real estate, we've seen growth as I noted in some of my commentary. But in our C and I portfolios, we've got we've got a few portfolios, most notably the auto portfolio, which is been in decline and we've been intentionally kind of moving that lower. And so that's offsetting some of the overall growth. So that's really what's capturing kind of what's driving the average balance. As Jeremy noted, as we've noted, we've seen material increases in our pipeline and strength across the businesses. Our bankers continue to do good work with our clients in that regard. And we've also seen improvements in what we call credit approved. So those credits that we've already gone through the underwriting and are credit approved, we still got to win that business. We've seen material increases in that as well. The book fundings are up year on year substantially. But as I noted in my comments, it will take somewhere between 90 and 180 days generally for those to start to start to build on the balance sheet. So all of those things are factored into the zero to two percent long growth outlook for the balance of this year on that the full year average basis.

I would just add on, we are seeing a lot of activity and being able to be successful commercial, particularly on the commercial real estate side. And we're also on the competitive side losing deals, not so much due to rate, but due to structure and other terms. Okay, very

helpful. And then just follow up on the margin. Just kind of with that two to four percent range and the two rate cuts in your outlook, given your asset sensitivity is kind of the higher end of that range reflected. And if we don't get that cuts and then kind of, if we don't see those cuts. You just kind of walk us through the puts the takes around and I in the margin.

Yeah, so we, as we noted, we had a hundred and eleven million dollar quarter. As I noted in my comments, we expect that to kind of trend a few million dollars a quarter below that. I want to go forward basis. We've been at a hundred and five for the last three quarters will be will be certainly be higher than that. We expect and so, you know, the, the real, the real kind of puts and takes there is, and we had a in the hundred eleven, we had an improvement in our stock loan business as they were able to achieve kind of higher margins in that business. And so that that will, we don't expect that necessarily be recurring or certainly to occur each quarter. So that that's the largest driver of of the reduction there from a, from a net interest income perspective. Though, you know, obviously, the deposit data assumption that we make going forward is the largest. So if we don't get rate cuts, obviously that helps us a little bit from a, from a asset sensitivity perspective. But I would say relative to our modeled asset sensitivity, obviously net interest income up. So we've been able to outperform kind of the model results and we feel like we'll be able to continue to do that through maybe the next the immediate next rate cut whenever that whenever that occurs. But we also do believe there's going to be points from a deposit cost perspective where customers become more sensitive and and that will cause us to necessarily move closer to fifty to fifty five percent through the cycle beta that we've historically modeled to. Secondly, it relates to an interest income. If we, if we see those rate cuts come through, we will see some of our more sensitive assets reprice immediately, whether that be variable rate loans that are linked to prime or or our cash balances as well. So those are the things that would drive down in the deposit beta and outperformance in that regard will help help mitigate some of that. And so that's that's really the basis of the guide as we look forward. Okay, thanks. Thanks for my question.

Thank you. Thank you.

Next question will be from Jordan Kent at Stevens. Please go ahead.

Hey, good morning. I just had a question on on the capital. So you guys bought back a decent amount of shares during the quarter and just kind of if you could talk about what's your appetite going forward for that and maybe what's going to drive that and then also kind of maybe what you're hearing on M&A discussions.

Sure, Jeremy, I, you know, we're really happy or pleased with the share repurchases that we've had year to date. We bought about sixty eight million dollars of our stock at about tangible book value. And so, and I think you probably noticed our board just authorized increasing our share repurchased by thirty five million dollars. So that'll be a hundred and thirty five million dollars of total authorization for year two thousand twenty five. So, you know, our anticipation is just to try to continue to to work towards that. And then as far as, you know, M&A, obviously, it's been a very active quarter in year with the Huntington deal and the prosperity deal kind of two different deals. So, and then other things throughout the country. So, you know, I guess there's, you know, we expect to see a lot of activity in M&A and, you know, we'll continue to evaluate things. I mean, I think clearly our stock is is trades at a discount on a on a tangible book value basis. So we'll be looking hopefully for more cash type deals.

Got it. Thanks. And then maybe just one more question kind of going towards credit. I think you talked about the office property that was upgraded, but can you kind of talk more about what drove the improvement within the classified loans?

Yeah, so, as we looked at look at classified, you know, we had we had some some pay downs and that was the largest driver of the overall decreases. And so we continue to see the workout, the workout activities across across both our non-performing assets as well as our classified and criticize portfolios. I continue to be worked work well across the credit by the credit team. And so for the period pay downs and what we call refinances out were the largest drivers of the reduction.

Okay, and then maybe just one more question of kind of going to the deposit cost in your opening comments. You talked about how there's a large outflow. More of your higher yielding deposit products can where do you do you still think you can see more of that in the coming quarters or or does that kind of dried up?

Well, that and Jeremy's note that is seasonal to some extent in nature. And so some of those deposit flows were related to public fund customers. Others were what I'd call normal seasonal operational flows from our CNI clients. So we expect those will we expect those to go out in the late first quarter, second quarter every year. We also then expect them to kind of begin to rebuild in the second half of the year. So it wasn't an outflow or an exit of a client or clients. It was just their normal flows. We've benefited from it in the second quarter and we'll see we expect largely those deposits will come back in the in the third and fourth quarters.

Okay, thanks for taking my questions.

Thanks. Thank you.

Thank you. And at this time, we have no other questions registered, which will conclude our conference call for today. We would like to thank you for taking the time to attend and ask that you please disconnect your lines. Have yourselves a good weekend.