Good day everyone and welcome to today’s Hilltop Holdings Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Matt Dunn.

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 cost, 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 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 preface 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 ir.hilltop.com. I will now turn the presentation over to Hilltop President and CEO, Jeremy Ford.

Thank you, Matt, and good morning. For the third quarter, Hilltop reported net income of approximately $30 million, or $0.46 per diluted share. Return on average assets for the period was 0.8% and return on average equity was 5.5%. Favorable operating results from the banking and broker dealer business units helped to produce a quarter-over-quarter increase in pre-provision net revenue and net income. While maintaining the balance between our consolidated earnings profile and strong liquidity position, Hilltop realized a quarter-over-quarter improvement in net interest income primarily due to a growth in average earning assets though consolidated net interest margin at Hilltop and net interest margin at the bank did experience modest compression in the quarter. We will comment further on the bank’s NIM later in our prepared remarks. During the quarter, PlainsCapital Bank generated $48 million of pre-tax income on $12.8 billion of average assets, representing a return on average assets of 1.14%. Average loans at the bank declined by $40 million in the quarter primarily due to elevated levels of loan payoffs and a lower pull-through rate on the bank’s loan pipeline from heightened competition across our footprint. However, as borrowers expectations of declining interest rates grew, the bank saw an increase in client activity throughout the quarter and a corresponding growth in our loan pipeline. We expect it will take several quarters for increased borrower activity to materialize into an increase in funded loans held for investment. Our average deposit balance increased by 1% during the quarter, which was driven by an increase in core interest-bearing deposits for the third straight quarter. This growth was partially offset by a modest decline in noninterest-bearing deposits. Results in the quarter at PlainsCapital Bank included a reversal of credit losses of $1.4 million. This recapture primarily due to positive credit migration…

Thank you, Jeremy. I’ll start on Page 5. As Jeremy noted, for the third quarter of 2024, Hilltop reported consolidated income attributable to common stockholders of $29.7 million, equating to $0.46 per diluted share. The quarter’s results included the impact of a $4.2 million valuation adjustment related to the signing of an LOI fell approximately $43 million of the remaining MSR assets at PrimeLending, largely offsetting the MSR charge for gains and positive valuation adjustments in our merchant banking unit, Hilltop Opportunity Partners, lower healthcare related costs during the period and a modest reduction in the allowance for credit losses. To discuss the allowance in more detail, I am moving to Page 6. Hilltop’s allowance for credit losses declined during the quarter by $4 million to $111 million. As is noted in the graph, specific reserves increased in the period by $1.2 million impacted by the ongoing evaluation and related adjustments for the two large auto lending credits we discussed last quarter and various small adjustments to other specifically reserved credits. For additional reference materials regarding our auto lending portfolio, we provided a slide on Page 21 of this presentation that outlines the size of this portfolio, including recent trends and the allowance coverage maintained on this portfolio as of September 30. Offsetting the additions to the specific reserves were positive migrations in the collectively assessed portfolio which reduced the allowance for credit losses by $2.2 million. This reflects the modest improvement of certain clients’ cash flow and operating results. Lastly, during the third quarter, management decided it was appropriate to move away from the Moody’s S7 scenario and move to the Moody’s S5 scenario, which provides for slow economic growth into the future and does not include an immediate recession. Further, the S5 scenario more closely aligns to management’s…

[Operator Instructions] And we’ll take our first question from Woody Lay with KBW. Your line is open.

Hey, good morning, guys.

Good morning.

Good morning.

Wanted to start on Structured Finance, so as you mentioned, the business benefited from the Down Payment Assistance programs. We’ve seen it spike in prior quarters from similar trends. Does it feel like these programs have more legs to them which could lead to a more prolonged opportunity in the Structured Finance space?

Well, good morning, Woody. Our – it’s a – it’s not in our control, I think is the short answer from each of the states budgetary concerns considerations. We’ve been pleased to see reasonably consistent support provided certainly by certain states. We’d like to think that will continue. But again, it is in the state’s control and those legislatures will have to make decisions as to whether they continue to appropriate funds in that way or not. So they are somewhat episodic from our perspective.

Got it. And then maybe shifting over to fixed income fees, I mean, it was a good quarter in that business as well. Just given some of the rate volatility towards the end of the quarter, do you think that business can continue to trend higher in the fourth quarter?

I think our view on fixed income, certainly, we were pleased with the third quarter results. I think as we look forward, lower rates generally an upward sloping yield curve as a practical matter are beneficial to that business. So we do expect to continue to see it continue to improve. But again, as I’ve said with each call, the results both in Structured Finance and fixed income services can be volatile as it relates to kind of all the market rates. But again, an upward sloping yield curve as well as generally speaking, lower rates is net beneficial to that business.

Got it. And then lastly, just shifting over to mortgage expenses, the fixed mortgage expenses continue to move lower in the third quarter, but it sounds like trends are slowly improving and you’re looking to make some hires in the business. Do you think the fixed expenses have troughed and we begin to see it modestly increase from here?

Yes. I think our expectation is they’re going to remain reasonably stable. They may start to tick up slowly into the first half of next year. But again, as you noted and as we noted in our comments, we are fundamentally out in the market looking for quality loan originators and producers, client-facing associates and we’ll continue to do that. But we’re also continuing to be very focused on middle and back office costs. So we recognize while we say the mortgage business we believe in mortgage industry is improving. We recognize this could be a slow and steady path. We are focused on kind of maintaining those expenses and our overall productivity levels to try to manage toward profitability in the future.

Got it. All right, thanks for taking my questions.

Thank you.

Thank you. We’ll take our next question from Michael Rose with Raymond James. Your line is open.

Hey, good morning guys. Thanks for taking my questions. Just wanted to start on some of the comments around the margin. Having a little bit more pressure as we move forward and just wanted to get some thoughts on loan yields and also deposit costs. It looks like loans held for investment, the yield was down 16 or 17 basis points Q-on-Q. Just what drove that? And then from a deposit pricing standpoint, do you think we’re nearing a peak and do you have a sense for kind of what spot rates were at the end of the quarter? Thanks.

Yes. So we’ll start with loan yields. We did see some average balance movement in our Hilltop Holdings level kind of HFI yield. But I’d focus you on the annualized bank HFI loan yield, which I think more indicative of kind of where the trends are. You saw that bank loan HFI yields dropped from 6.11% to 6.07% in the period about 3 basis points of that accretion. So that explains a portion of it. We did see and have continued to see customers with the expectation of rates going lower preemptively starting the process of kind of negotiating rates lower. And so that’s out there. And we also had the September 18th Fed reduction and as we noted in the interest rate sensitivity tables and loan reset tables, our variable rate loans are going to reset quickly within kind of that one month period of a rate change. So not surprising from where loan rates, loan yields went. I think the next piece of that is as rates continue to move lower, if the Fed does reduce rates, we are expecting bank loan yields to continue to decline from here at a pace similar to what we saw during the up rate cycle in terms of overall loan beta, which the loan beta for that up rate cycle is about 40%. If you go to – if you think about deposits, we’ve kind of talked at some length now about deposits and deposit yields and the overall interest bearing deposit cost increased to 3.62% from 3.59% and then our total deposit cost increased by 5 basis points to 2.67%. So there’s two things that were happening. First, a lot of the inflows of deposits went into our higher cost money market products and we’ve got a CD product out there that’s also got a pretty attractive rate on it. And then our – from a total deposit cost, the difference between that interest bearing and total deposit cost is the fact that we continue to see some migration from NIB into our interest bearing products. So we expect to continue to see NIB trend into interest bearing deposits over time as customers continue to seek yield for those excess deposits. And but we do expect that interest bearing deposit cost again at 3.62% has peaked and will start to move lower to some extent in step with the Fed rate reductions. For the current – for the first rate reduction, our target is to have a 50% to 55% beta. I think the rate reduction actions we’ve taken post that first 50 basis point action by the Fed put us in a position to achieve that.

Well, thanks for walking through that. That was very thorough. I guess to put a finer point on it, it would seem that you would have probably some continued modest at the consolidated level, some continued modest margin pressure as we move through at least the next couple quarters before hopefully reaching stabilization. Is that the way putting all those pieces together, the way we should conceptually think about it?

Yeah, that’s in alignment with my comments and I think we’ll drift a little lower. And again, it’s – some of it’s timing and then some of it’s the betas that are impacted. So our deposit actions will be timely and prudent, but also reflect kind of market pressures and competition. The loan resets as well as – and I’d highlight this, the cash balances which increase to $1.7 billion, $1.8 billion in the period at the end, those cash balances reset immediately. So when the Fed makes the rate change the next morning, they are earning less in the context of them moving rates lower. So the cash balances, the variable rate loan resets and we do expect the deposit benefits of our rate reduction actions will lag that. So to your point, we would expect to see, I’d say, modest but ongoing pressure in the NIM for the coming quarters until we reach a more stable interest rate scenario.

Very helpful. And then maybe just one follow-up. Loan growth has been fairly anemic for you in the industry. Just as it relates to the willingness to continue to portfolio, mortgage loans. Any thought process on bringing that number higher, particularly as activity picks up just to spur some loan and balance sheet growth as we move through the year just to get some momentum on the NII front. Thanks.

I think good question and certainly in my comments tried to address some of that. So we are going to be and continue to retain loans from PrimeLending. They’re principally going to be the hybrid arm product. And we’re doing that for two reasons, both to bolster earning assets, but also to kind of move or replace some of the cash. So we’re trying to move out of some of our cash position into what I call more loan assets, which we believe provides us a better net return here as the rate environment kind of plays out, if it plays out to our expectations. So while the guidance is zero to $20 million per month, so somewhere between zero and $60 million balance sheet at per period, we’ll stick to that guidance as we sit here. But understand we’ll likely be more aggressive closer to the middle top end of that over the coming quarters versus kind of at the lower end.

Very helpful. Thanks for taking my questions.

Thank you.

Thank you. We’ll take our next question from Stephen Scouten with Piper Sandler. Your line is open.

Yes, thanks guys. Appreciate it. The movement in NPLs is pretty positive this quarter and obviously you guys lowered the guidance for the loan loss provision moving forward and the Moody’s scenario. So it feels like you’re seeing more positive around credit. What are you seeing that leads to some of this positivity and do you think you can kind of see continued improvement in the non-performers from here?

Well, a lot of the improvement in what I’d call non-accrual loans was driven again as I said in my notes, by about $12 million of paydowns we received in that auto note portfolio related to the two large credits we talked about. So we saw improvement of $14 million, $12 million of that was from those two in terms of paydowns and we certainly had some charge off. So I think overall we are cautious on credit. We are seeing and did see during the period improved financial results come in from some of our clients and that caused some positive migration across the portfolio. Nothing I’d call that was systemic or otherwise substantial but nonetheless some positive trends on some of the customers that were rescored in the period. But that – our cautiousness continues because with higher rates, rates are still materially higher than in certain cases our customers have existing loans. And so as those loans reset, cash flows are going to be pressured, inflation still exists, prices aren’t coming down. And so their input costs still remain elevated on construction deals and the other. And the impact of kind of needing higher equity in transactions also continues to pressure new deals. So from our perspective, we see, I’d say favorable, but we are cautious on how credit will trend here over the coming quarters. And what we’ve seen and what we expect is there will continue to be episodic items that come along that cause us to have to react in the – in the reserves and or with charge offs.

Got it. Very helpful. And then just a couple of finer points on the – on the NIM trends. Looks like I know you said the drop in accretion obviously with more material this quarter, but indicative of the trends we should see. So, I mean, if we’re looking at, I don’t know, $4 million or $5 million in accretion this year, what’s the kind of pace of expected decline based on what you have remaining? Is that like a – does it get cut in half next year, which is kind of the incremental change we expect?

Yes. On a model basis it would fall somewhere between 15% and 25% a year.

Okay. And then...

That’s without any specific activity in the portfolio.

Sure. Makes sense. And then as we think about the floors that you laid out in the slide deck, it looks like maybe 49% of variable rate loans that are above floors. How many of those loans would have floors? And do you have any feel for like the degree of those that have floors, how soon we could get to them with incremental rate cuts, if that makes sense?

Yes. So say about 75% or 80% of our variable rate loans have got floors. Those floors are generally structured to be between 150 basis points and 300 basis points below the kind of starting rate for that customer. And so it’s going to take, I’d say a reasonable amount of kind of fed activity to cause those floors to be in the money.

Got it. Extremely helpful. And then maybe just last thing for me, kind of curious on like a talent acquisition update, I know you guys have talked about that could be the real driver of future growth and upside maybe especially in the middle market business bank. Just kind of wondering how aggressive you guys are on that path today, any progress there or anything worth noting on the hiring front?

So in the bank we have had positive recruiting in the quarter but it has, you know, with the bank we’re very selective on bankers that we hire and the right fit. So I think it’ll be – it’s not going to be a huge push increasing our total bankers but really just trying to fill out particularly some of the footprints that we are not as big in.

Okay, makes sense. Thank you all for the time this morning. I appreciate it.

Thank you.

Thank you. We’ll take our next question from Jordan Ghent with Stephens. Your line is open.

Hey, good morning. I just had a quick question and I think you kind of touched on it will with the overnight cash balances and the liquidity, right? Or as of recently they’ve been ranging from $1 billion to $2 billion. If you go back four years, it looks like you guys have kept it below that billion mark, and I was just wondering where you guys see it going forward. And I know you talked about maybe replacing that or kind of hinted about that of with balance sheeting, some of those mortgages. Maybe if you kind of talk about the range you’re expecting for those overnight liquidity balance?

Yes. So they – they had moved under a $1 billion. We’ve said that our target kind of operating range is $300 million to $750 million. With the paydowns we had in the quarter coupled with the strong deposit flows, customer deposit flows we had in the quarter, we obviously have seen that cash balance move higher and move to a level above where we would otherwise generally consider target operating. And so we do expect that we’ll continue to, we’ll work that down. We’d like to keep it under a $1 billion again in that operating range of $300 million to $750 million would be the target range. It’s going to take some time for us to get there. But as I noted, we are going to rotate and begin rotating both into the securities portfolio as well as – as well as the retained mortgages to start to just transition those dollars out of cash and into I’d say other earning assets that we believe better position the balance sheet long term.

Got it. Thanks for that. And then maybe just one other question about the loan growth; I know you talked about payoffs have been stronger and then also it’s going to take a few quarters for some of these new loans to fund up, projects to fund up. Is there any insight you could kind of give us as we look past the next few quarters of where you’re seeing loan growth and kind of like as far as originations and kind of what’s just coming down the pipe?

Could look out beyond the next few quarters and we’ll give full year guidance on our January update call. But as I noted, we are and have seen improved pipelines and largely that’s in commercial real estate. Those are commercial real estate loans, some construction projects. But we also continue to see a customer base that’s cautious as they are evaluating this political cycle, the interest rate environment, where the fed’s going and the overall economy in general, which I’d say for the state of Texas in particular remains reasonably robust. So our view is we’re going to continue to try to be aggressive on price. We’re going to hold our credit structures and maintain our credit quality and work to win as much business as we can. But again, largely the growth will come in the form of commercial real estate based on kind of where the pipelines sit today.

Got it. Thanks for taking my questions.

Thank you.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

No, we have none.

All right. Perfect. That concludes today’s teleconference. Thank you for your participation. You may now disconnect.