Q2 2025 Hilltop Holdings Inc Earnings Call
Good morning, ladies and gentlemen and welcome to the hilltop Holdings. Second quarter 2025 earnings conference call and webcast. At the time note that all participant lines are Nelson only mode following the presentation, we will conduct a question and answer session and if at any time during this call, you require me to assistance please press star zero for the operator. Also note that this call is being recorded on Friday, July 25th, 2025
Speaker Change: And I would like to turn the conference over to Matt Dunn. Please go ahead.
You.
Speaker Change: 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 conditions credit risks and Trends in credit allowance for credit losses. Liquidity and sources of funding funding costs dividends 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,
Speaker Change: 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 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 followed with the SEC.
Speaker Change: 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. Our reconciliation of these measures to the nearest Gap measure. May be found in the appendix to this presentation, which is
Posted on our website at irp.com.
Jeremy Ford: Thank you. I'll now turn the presentation over to Jeremy Ford.
Thank you, Matt, and good morning.
Speaker Change: For the second quarter, Hilltop reported net income of approximately 36 million or 57 cents per diluted share.
Speaker Change: Return on average assets for the period was 1% and return on average Equity was 6.6%.
Speaker Change: During the quarter planes, Capital Bank realized a meaningful increase in net interest margin and was able to further, grow its loan pipeline as customer demand remains strong in Texas.
Speaker Change: 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.
I'm 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.
Speaker Change: In the second quarter, Plains Capital Bank, generated 55 million of pre-tax income on 12.7 billion dollars of average assets which resulted in a return on average assets of 1.35%.
Speaker Change: 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.
Speaker Change: Loan yields across, excuse me, loan yields. Increase by 5 basis points due to repricing of the loan portfolio into a higher rate environment.
Speaker Change: Further the bank's, balance sheet realized the mixed shift out of cash and into higher earning assets as seasonal mortgage related loan balances increase throughout the quarter.
The bank generated positive growth in its loan portfolio and pipeline.
Speaker Change: Dampening effect on near-term loan growth.
Speaker Change: Average total deposit balance is at planes Capital declined, during the quarter as certain large balance, customers reallocated their Surplus liquidity.
Speaker Change: 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.
Speaker Change: Core deposits. Within our markets, did continue the trend of strong year-over-year growth by ending the period, approximately 275 million higher.
Speaker Change: Results in the quarter included, a 7.3 million reversal of credit losses.
Speaker Change: This was primarily driven by an improvement in the underlying asset quality within the collective portfolio in further impacted by a change. In the economic scenario, utilized in our Cecil modeling assumptions.
Speaker Change: Will is going to provide further commentary on credit in his prepared remarks.
Speaker Change: Overall, the bank benefited from actively managing deposit costs and expanding lending activity, which resulted from our talented bankers.
Speaker Change: Moving to prime lending for the company. Reported a pre-tax, gain of 3 million during the quarter.
Speaker Change: Notably prime lending 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 year-over-year basis.
Speaker Change: The industry-wide headwinds of elevated home, prices persistently, High interest, rates, and overall affordability. Challenges have not alleviated
Speaker Change: accordingly competition within the mortgage origination market for muted. Volumes continue to put pressure on overall margins.
Speaker Change: The market has experienced some relief for our home buyers as existing home listings have increased the country.
Speaker Change: However, this is not coincided with Improvement in affordability.
Speaker Change: Regarding margins. Prime lending is reported gain on sale of 228. Basis points was up 4 basis points, versus the prior quarter and flat on a year-over-year basis.
Speaker Change: However, industry competition continues to put pressure on mortgage origination fees and other related income for the margin decreased by 11 basis points on a link quarter basis.
Speaker Change: Prime lending management team continues to focus on reducing expenses. In order to ensure efficient operations, within the context of the overall mortgage Market.
Speaker Change: For the second quarter, fixed expenses were reduced by 11% on a year-over-year basis.
We will continue to look for ways to achieve efficiencies while providing value enhancing services to our customers.
Speaker Change: During the quarter Hilltop Securities. Generated pre-tax income of 6 million on net revenues of 110 million
for a pre-tax margin of 6%.
Speaker Change: Seeking to the business lines at Hilltop securities.
Speaker Change: Public Finance services, produced a 36% year-over-year, increase in net revenues as the business line realized strong increases in both advisory and underwriting fees.
Speaker Change: Structured Finance, net revenues declined by 1 million. From the second quarter of 2024, primarily due to software market demand for call protected mortgage products.
Speaker Change: In wealth management, net revenues increased by 2.5 million to 47.3 million when compared to the second quarter of 2024.
Speaker Change: 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.
Speaker Change: 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 product.
Speaker Change: 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.
Speaker Change: Moving to page 4.
Speaker Change: Hilltop maintains, strong Capital levels, with the common Equity, Tier 1, Capital ratio of 20.8%. Additionally, our tangible book value per share, increase over the prior quarter's level by 54 cents to $30.56.
Speaker Change: During the period, we returned 12 million dollars to stockholders through dividends and repurchased, 35 million in shares.
Speaker Change: Thank you. I will now turn the presentation over to will to discuss our financials in more detail.
Will: Thank you, Jeremy. I'll start on page 5.
Will: Equating the 57 cents per diluted share.
Will: The quarters results, included a year-over-year increase in net, interest income of 7%.
Will: stable, non-interest revenues, which did include the benefit of the 9 and a half million dollar, legal recovery noted during our first quarter call
Will: And a modest increase in non-interest expenses.
Will: 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.
Will: Hilltops allowance for credit losses declined. During the quarter by 8.2 million to 98 million.
Will: As is noted in the graph, the top recorded, net charge offs will approximately 900,000 dollars and increase specific reserves by 1.8 million.
Will: In addition certain upgrades in the portfolio occurred during the quarter, resulting in a lowering of the allowance sign of those credits before 0.9 million.
Will: Of note, the office 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.
Will: Lastly, the economic factors leveraged for the second quarter analysis improved.
Will: 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
Will: Lastly, it remains of note that we continue to believe that the ACL can be volatile as its 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.
Will: I'm turning to page 7 and that interest income and the second quarter, equated to 110.7 million including 600,000 dollars of purchase accounting accretion which declined by 1.4 million versus the second quarter of 2024.
Will: Versus the prior Year's second quarter and that interest income increased by 7 million or 7%, primarily driven by lower interest-bearing deposit costs, coupled with lower borrowing costs.
Will: Resulting from our Redemption of 200 million of debt in 2025.
Will: During the second quarter, that interest margin increased versus the first quarter of 2025 by 17 basis points, to 31 basis points, the Improvement in Nim was largely driven by higher loan yields lower interest bearing deposit cost and 1 additional day in the quarter.
Our current rate Outlook includes 2 rate reductions 1 in the third quarter and 1 during the fourth quarter, based on this rate scenario, we expected. Nim levels will moderate at current levels and that net interest income will likely stabilized at a few million dollars per quarter lower than what we recorded during the second quarter.
Will: I'm turning the page 8.
Will: Second quarter, average total deposits for approximately 10.6 billion dollars and reflect an increase of 212. Million versus the second quarter of 2024.
Will: During the quarter, we did experience a decline in deposits on any new balance basis.
Will: 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 cni clients.
Will: We do expect that deposits will begin growing again, during the second half of the year.
Will: As a result of our ongoing pricing interest, bearing deposit cost decline from the first quarter levels to 291 basis points. During the second quarter,
during the first 100 basis points of this Downer 8 cycle Lane Capital Bank has been able to achieve a 72% interest bearing deposit made up
Will: 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, datos of 50 to 55%
Will: We will continue to balance fostering, our long-term customer relationships with prudently managing that interest income over time.
Will: Moving to page 9.
Will: Total 9 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 dollars driven primarily by lower valuation marks on the pipeline and lower loan origination fees paid by customers.
Will: 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.
Will: Es and Mortgage Banking continue as a combination of the current level of mortgage rates, lower home affordability, and lower consumer confidence, combined and created environment that remains restrictive and continues to push back. A recovery in margins and production volumes across the industry.
Will: growth and securities investment advisory fees and commissions were driven by strong Public Finance, Revenue growth as the ma franchise continues to develop and are underwriting business gains further momentum
Other income declined versus the prior year, driven by lower revenues and structured Finance at Hilltop securities.
Will: Of note, the decline at Hilltop Securities was significantly offset by the inclusion of the recorded legal recovery at 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 their impacted by market volatility interest rates Market, liquidity, and production volumes.
Will: Turning to the page 10.
Will: Non-interest expenses increase from the same period in the prior year by million dollars to 1.8% to 261 million.
Will: 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.
Will: In addition, Step Up in expenses other than variable compensation from the first quarter of this year, 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.
Will: Looking forward, we expected expenses of 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.
Will: I'm moving to page 11.
Will: Second quarter average, age of our 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 CRA lending and 48 million of seasonal growth in our mortgage Warehouse lending business.
Will: Growth in these portfolios was somewhat offset by declines in cni 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 will continue to expand throughout the year. And our first half commitment bookings,
Will: We recognize that this improved activity will take time to fund and be represented on the balance sheet.
Will: And as a result, we are adjusting our expected full year average loan growth rate to 0 to 2% for 2025.
Will: Turning to page 12.
Will: Starting in the upper right chart, NPA levels have declined, consistently consistently over the last 12 months, as we continue to see steady Improvement in solid workout in this portfolio.
Will: Additionally, in the chart, in the upper left classified and criticized loans. As a percentage of bank loans has improved versus the priority of your levels to 301 basis points. Now, 59 basis points,
Will: during the quarter, net charge offs, equated, to 896,000 or 5 basis points of average loans,
as is shown on the graph, the bottom right of the page, the allowance for credit loss coverage of the bank into the second quarter at 1.27% including mortgage Warehouse Lending
I'm moving to page 13.
Will: As we move into the third quarter of 2025 there continues to be a lot of uncertainty in the market regarding interest rates.
Will: The impact of ongoing higher than fed target inflation, as well as a resilience of the overall economy.
Will: 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,
Will: 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.
Will: As is noted in the table, our current outlook for 2025 reflects our current assessment of the economy and the markets where we participate,
Will: Further as the market changes and we adjust our business to respond. We will provide updates to our outlook on our future quarterly calls.
Will: Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.
Speaker Change: We do ask that you please lift the hands up first, before pressing any keys, please go ahead and press star 1. Now, if you do have a question,
Woody: And your first question will be from Woody at KBW. Please go ahead.
Hey, good morning guys morning.
Speaker Change: Um 1 of the third on the, on the broker dealer business, it it looks like the efficiency ratio of the segments been running a little um elevated relative to last year. It is that just for a reflection of the mix shift in the revenue and the business. Or is there another Dynamic impacting that
Speaker Change: Largely a reflection of the uh, of the makeup of the revenue of the business as you see. Uh, Public Finance Services is up structured, finances is kind of flat to down a little. Uh, those are the, those are the principal drivers but it's uh, the profitability or pre-tax margin, there will always uh, move in concert with kind of the makeup of the revenues of the business.
Speaker Change: And we also had about a million and a half of uh additional Severance costs that we had in in the quarter um that that pinched the margin more
Speaker Change: Got it. I all right, that's helpful. Um and then maybe on the 6th expense guide, um it looks like the 6th expenses in the march in the mortgage segment took a nice step down but I'm looking at the guidance, it looks like non-variable, expense growth was guided up could you just sort of um talk about what's
Speaker Change: Driving that incremental pickup in the expense Outlook.
Speaker Change: Yeah, so we're you know, as as we've said before, we're kind of continuing to see uh inflation and Personnel, expenses, healthcare costs and related. Those kind of structural costs from a Personnel perspective, but we're also seeing kind of ongoing inflation in software expense and kind of other Computing related expenses, really principally related to, uh, contract escalators and the like, so we have to, we got to reflect that in our guide. And that's that's kind of what's driving, those are 2, pretty significant items and that's what's driving. Uh, the guy's a little higher.
Speaker Change: All right, got it. And, and then just last, um, for me, the Nim took a, uh, a nice step up in the quarter and as you called out, I think it's you've achieved the 72%, um, beta 3 cycle, which is, which has come in above expectations. I, I guess what is sort of looking back on that allowed you to achieve this a higher than expected beta?
I think, I think a couple things 1, I think we've we've continued to improve, uh, our overall, uh, analytic capability. We've improved kind of our, our analysis of customer customer sensitivity, and the like we've also, uh, candidly seen. I think a more rational Marketplace, uh, versus when rates were going higher, uh, and and in the upright cycle. And so, by virtue of those 2 things, it Still Remains, uh, really competitive out there. But again, uh, our team is
Speaker Change: Is is focused on making sure we're positioning our overall deposit base and the rates. We're paying customers, uh, in concert with kind of the competitive environment, and we feel like that's we feel like we've been able to do that, uh, to this point.
Speaker Change: As I think, uh, other financial institutions are also trying to improve uh management and knee given given some of the challenges we saw in the upgrade environment.
Speaker Change: All right, thanks for taking my question.
Speaker Change: Thanks, thank you.
Tim Mitchell: Next question will be from Tim Mitchell at Raymond James. Please go ahead.
Hey, good morning everyone. Uh thanks for taking my question.
Just want to start on the the loan growth commentary on some of the puts and takes their. So it sounds like, you know, 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 you know, that that may be weighing on loan growth. Um just kind of curious if you could kind of walk through the puts and takes their and just the way you're thinking about growing the balance sheet right now versus versus protecting the margin. If uh, you have competition starts to pick up on the
Tim Mitchell: Um so if you if you think about kind of where where loan growth is and you you just look at our our kind of page 11. You can see uh, 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 in our piece part. So we look at mortgage Warehouse, lending, that's seasonally elevated here. In the second quarter generally
To 4 hambley, positioned. So, then that leaves largely, uh, our commercial real estate and then cni portfolios. And again, in commercial real estate we've seen growth as I noted in, in some of my, uh, commentary. Uh, but in our cni portfolio, as we've got, uh, we've got a few portfolios, most notably, the auto note portfolio, which is, uh, been in Decline and we've been intentionally kind of moving that lower, uh, and so, you know, that's, that's, that's offsetting some of the overall growth. So that's really what's capturing, uh, kind of what's driving the average balance. As, as Jeremy, noted as we've noted, we've seen material increases in our Pipeline and strength across across the businesses, our Bankers continue to do, good work with our clients in that regard. Uh, and we've also seen uh, improvements in what we call credit approved. So those credits that we've already gone through the underwriting and and our credit approved, we still got to win that business, but we've seen material increases and that as well. Uh, the book fundings, uh, are up year-on-year substantially. Uh, but as as
Tim Mitchell: As I noted in my comments, it will take, you know, somewhere between 90 and 180 day, generally for those to start to start to build on the balance sheet. So all of those things are factored into, uh, the 0 to 2% loan growth outlook for the, for the balance of this year on. That's a full year average basis.
Tim Mitchell: Yeah, I would just add on you know, we are seeing a lot of activity. Um and um,
Tim Mitchell: You know, being able to be successful commercial, particularly in the commercial real estate side. Uh, and we're also uh, on the competitive side losing deals. Not so much due to rate. But due to, you know, structure and other terms,
Tim Mitchell: Okay, very helpful. Um, and then just to follow up on the margin.
Tim Mitchell: Um, just kind of with that 2 to 4% and a high range and the the 2 range Cuts in your outlook, giving your assets sensitivity. Um, it's kind of the higher end of that range reflected and if if we don't get that cut, so then kind of, you know, if if we don't see those cuts you just kind of walk us through the push that takes around, and I in the margin,
Yeah. So uh, we as we noted we had 111 million dollar uh quarter. As I as I noted in my uh comments. We expect that to to kind of trend a few million dollars a quarter below that I want to go forward basis. We've been at 105 for the last 3 quarters. We'll be, we'll be certainly be higher than that, uh, we expect and so, um, you know, the, the real, the real kind of puts and takes there is, and we had a in, the 1111, we had, uh, an improvement, uh, in our stock loan business, uh, as they, they were able to achieve kind of higher margins in that business. And so that, that will we don't expect that necessarily to be recurring, uh, or certainly to our each quarter. So that that's the largest driver of
Tim Mitchell: Um, uh of the reduction there from a uh, from a net interest income perspective, though. You know, obviously the deposit beta assumption that we make going forward is is the largest. So if we don't get rate Cuts, uh, obviously that helps us a little bit from a, from a, uh, asset sensitivity perspective. But I would say uh, relative to our modeled assets, sensitivity. Obviously not interested in comes 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 uh through maybe the first. The next, the the immediate next rate cut whenever that whenever that occurs, but we also do believe there's going to be, um, what, you know, points from a deposit cost perspective where customers become more sensitive and, uh, and, and that will cause us to to necessarily move closer to that 50 to 55% through the cycle, beta that we've historically modeled to, uh, secondly, is it relates to an interest income? If we, if we see those rate Cuts come through, we will see
Tim Mitchell: Uh, some of our more sensitive assets uh reprice immediately, whether that be variable rate loans that are linked to Prime uh or uh or our cash balances as well. So those are the things that would drive down uh nii uh 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 guys, we look forward.
Okay. Thanks. Thanks for checking my questions.
Tim Mitchell: Thank you. Thank you.
Speaker Change: Next question will be from Jordan gent at Stevens. Please go ahead.
Jordan Gent: Hey, good morning. Um, I just had a question on uh, 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, um, what's going to drive that and then also kind of maybe what you're hearing on m&a discussions.
Jordan Gent: Uh and so and I think you probably noticed our board just authorized increasing our share repurchase uh by 35 million. So that'll be 135 million of total authorization for the year 2025. So, you know, our anticipation is just to try to um,
Jordan Gent: Continue to to work towards that.
Uh and then as far as, you know, m&a obviously it's been a very active quarter uh, in year um with the Huntington deal and the prosperity deals uh kind of 2 different deals so um and and other things throughout the country. So
Jordan Gent: You know, I I guess that there's, you know, we we expect to see a lot of activity m&a. Uh, and um, you know, we'll continue to to evaluate things. I mean, I think clearly our stock is um,
Jordan Gent: Is is trades at a discount on a, on a tangible Book, value basis. Uh, so we'll be looking hopefully for more cash type deals.
Speaker Change: Got it. Thanks. And then, maybe just 1, more question, um, kind of going towards credit, can you? I think you talked about the office property that was upgraded. Um, but can you kind of talk more about what drove the Improvement within the classified loans?
Speaker Change: Yeah. So uh, as we, you know, looked at look at classified, um, you know, we had we had some, did some pay Downs, uh, then that was the largest driver of the overall decreases. And so, uh, we continue to see uh, the workout, the workout activities across across both our, our non-performing assets, as well as our classified and criticized portfolios. That need to be worked worked well across the credit by the credit team. And so uh, for the period pay downs and what we call refinances out uh where the largest drivers of the reduction,
Speaker Change: Okay, and then maybe just 1, more question, um, kind of going to the deposit cost in your opening. Comments, you talked about how uh, there's a a large outflow, more of your higher yielding deposit products. Kind of, where do you, do you still think you can um see more of that in the coming quarters or or does that kind of dried up?
Speaker Change: That is seasonal to some extent in nature and so some of those deposit flows were, uh, related to public fund customers. Others were, uh, what I'd called, uh, normal seasonal, operational flows from some of our cni clients. So we expect those will we expect those to go out in the late first quarter or second quarter every year? We also then expect them to kind of begin to rebuild, uh, in the second half of the year. So it wasn't an outflow or uh,
Speaker Change: In exit of a client or client, it was just their normal flows. We've benefited from it in the second quarter. Uh and we'll see uh we expect largely. Those deposits will come back. Uh in the in the third and fourth quarters.
Speaker Change: Okay, thanks for taking my questions.
Thank you.
Speaker Change: Thank you.
Speaker Change: We'll 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.