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 four. 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 10-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 eight. 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.
As noted previously, given our current interest rate outlook, we do expect that interest-bearing deposit yields have reached their trough levels for the cycle and will likely trend higher with short-term market interest rates over time. Turning to page nine. Total non-interest income for the third quarter of 2026 equated to $187 million. Versus the same period in the prior year, mortgage revenues declined by $9 million, which includes the impact of mark-to-market losses on the pipeline during the quarter. These market valuation impacts were driven by higher market rates, causing hedge ineffectiveness and lower rate lock volumes, which declined 18% to $2.2 billion from the prior year period. In addition, gain on sale margins for loans sold to third parties declined 26 basis points to 200 basis points as softness in demand has led to continued margin compression.
With mortgage rates remaining near 7%, overall home affordability remains a challenge across the country, and we believe that these issues will negatively impact mortgage sales activity into 2027. With that market perspective as the backdrop, the leadership team at PrimeLending is focused on continuing to optimize cost and productivity across the middle and back office functions, selectively expanding our client-facing sales team across the country, and optimizing our pricing to support sustainable, profitable growth in the future. Principal transactions, commissions, and fees declined from lower overall trading activity in municipals, derivatives, and MBS during the quarter and includes $6.6 million in pre-tax mark-to-market valuation losses for the third quarter related to our mortgage trading pipeline.
While the trading market was volatile and generated significant swings in value throughout the quarter, the hedging program operated within our risk management framework, and if market conditions improve, we remain well-positioned to benefit in future periods. Turning to page 10. Non-interest expenses declined from the same period in the prior year by $7.8 million to $264 million. The decline in expenses versus the prior year third quarter was driven by decreases in variable compensation, largely related to lower non-interest revenue production at the broker-dealer and in the mortgage origination segment. 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 efficiencies across our middle and back office functions. I'm turning to page 11. Third quarter average HFI loans equated to $8.7 billion.
On a period-ending basis, HFI loans increased versus the second quarter of 2026 by $134 million, driven largely by new origination volume and the funding of prior commitments in commercial real estate. On an ending balance basis, loans have grown versus third quarter 2025 by $580 million or 7%. While commercial loans have maintained a positive growth trend, the market for funded loans remains intense, with competitive pressures coming from both pricing and structure. Based on performance year- to- date, our current pipeline levels, and giving consideration to expected payoffs during the fourth quarter, we expect full year average total bank loans to increase by 7%-8% from 2025 levels, excluding mortgage warehouse lending and any retained mortgages from PrimeLending. Turning to page 12.
Starting in the upper right chart, NPA levels have declined from the second quarter of 2026 by $2 million to $60 million and continues to reflect generally positive trends in our HFI loan portfolio. Moving to the bottom left chart, net charge-offs for the quarter equated to $1.2 million, or 6 basis points of the overall loan portfolio. As I remarked earlier, we do not anticipate any systemic exposure across our portfolio, but we remain vigilant in our assessment of risk, negative credit migration, and are focused on early detection and aggressive workout when necessary. As is shown on the graph at the bottom right of the page, the allowance for credit loss coverage at the bank into the third quarter at 1.11%, including mortgage warehouse lending. Turning to page 13.
As we enter the fourth quarter of 2026, there continues to be a lot of uncertainty in the market regarding interest rates, inflation, and the overall health of the economy. Given these uncertainties, our teams remain focused on controlling what we can with a focus on producing quality outcomes for our clients, associates, and the communities we serve. As is noted in the table, our outlook for 2026 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, and we'll turn the call back to you for the Q&A section of the call.
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Hannah Wynn with KBW. Your line is open. Please go ahead.
Hi. Good morning, guys.
Good morning.
Morning.
I wanted to start on mortgage. I know you talked a lot in your prepared remarks about the weaker activity and pipelines that you saw this quarter related to the rate environment, and that you expect this business to be under pressure through 2027. Just curious how we should think about the puts and takes for this business, and if you could give a little more color on how you are seeing the pipelines from here. Also on the expense side, if we should expect to see continued losses, or if there is room to lower that expense base and move closer to a break even.
Morning, Hannah. I think as we will address the last part there first. From a non-interest expense perspective, we remain focused on productivity and adjusting the business to the current market environment. While we do expect the origination market to remain challenged, given where rates are and where affordability stands across the country, objectively, we are going to focus on managing expenses to a level appropriate given where we believe the market conditions are headed. On the pipeline side, again, we have seen as rates moved higher, we saw a pretty marked pullback in overall activity, as I noted in my comments around lock volume there, specifically later part of the third quarter. We expect, as we noted, we expect that to continue. That said, the team at PrimeLending continues to be focused on recruiting top-performing LOs across the country.
We are looking to grow the business very thoughtfully in a profitable way as we go forward. Again, it is a challenging environment, and again, we are going to do everything in our power to drive toward profitability, but also support our LOs across the country to help them generate as much volume as they can.
Great. That is very helpful. Thank you. On the margin side, we saw the margin take a nice step up this quarter, which was great to see. Can you just talk about how much runway you still see from loan repricing and where you expect the margin to trend with here? I know you mentioned there was increased deposit competition, and you expect those to go up. Just curious where you expect the overall NIM to go.
Yeah. I think it will be a story of two different metrics. I think from a net interest income perspective, we are seeing and we expect to continue to see positive trajectory in overall revenue there. We moved to $122 million in the quarter. Given where our loan growth trends have been, as well as where our pipeline for commercial activity currently sits, we do continue to feel comfortable and confident in the trajectory of NII. But the growth will be driven largely on the asset side as we think about overall loan growth. I did note that deposit costs likely have reached their trough for this point in the cycle. We believe that to be true, and as short-term rates start to move higher, we do expect there will be intense competition for deposits, and that will drive overall interest-bearing deposit costs likely higher.
Right now, currently from a competitive perspective, I think largely seeing rational activity, notwithstanding some new entrants in the market that have got some special offer rates. We are competing with that every day. But overall, from a NIM perspective, we would expect to see NIM level out and potentially travel a little lower from these levels, from the 333 level. But again, we will trade net interest income for a modestly lower NIM as we go forward.
Great. Thank you for that color. Thanks for taking my questions. I will step back.
Thank you.
Thank you.
Your next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.
Hey, thanks. Good morning, everybody. Good morning. Wanted to ask more about the loan growth trends that we saw at the bank. Look really strong. Any more color on the drivers of that loan growth? I know there's lots of disruption in your markets. I'm curious if this is benefiting some of your volumes. I think I heard Will mention expectations of some higher payoffs in the fourth quarter. Any more color there? I'm just curious if this momentum that we're seeing this year can continue into 2027. Thanks.
Well, thanks for the question. Yeah. We've seen a positive trajectory in our commercial loans. As we noted, we've seen about 7% overall growth. That's largely driven by our regions across the state of Texas and the good work the teams are doing there. We have seen a lot of our growth. About $300 million of growth come from our CRE portfolio and the balance from C&I. As we look forward, again, the pipelines remain robust. The activity the team's generating is robust. We do feel like we're benefiting from some of the transactional activity in the market, given some of the transactions that have executed. The team is actively and aggressively recruiting new bankers to the platform, and we're being successful in that endeavor.
We're very positive on where the bank is in terms of recruiting producers, as well as the activity that our bankers have been able to produce. On the payoff side, just to clean that up. While the outlook considers what we would call a standard level of payoffs in the quarter. Nothing outsized expected in the fourth quarter. Nonetheless, we always try to consider that in our outlook. Again, solid momentum, a lot of good activity. Pipelines remain very strong. Recruiting has been a positive lift, as well as the productivity of our bankers across the footprint. On the loan and deposit side of the bank, we're pretty confident about where the trends are pointing.
Okay. Thank you for all the detail there, Will. I guess shifting over towards capital, we saw the repurchase activity this quarter, a little bit slower. Is this valuation driven? Longer blackouts? Any color you can speak to as far as the buyback that we saw in the third quarter? I think you still have quite a bit remaining in the authorization before it expires in January. What is the appetite to complete this authorization before expiration? Thanks.
Yeah, the third quarter, I think, shows good prudence and execution by us, in that the stock price was elevated. Also we saw rates climbing and knew that that would have an implication on AOCI. So that is why we only did $20 million in the quarter versus $50 million in the two prior quarters. We are going to go back and look at this quarter as well. We have got $85 million of authorization left. I do not think we would be able to achieve that in one quarter. But we will be available to transact when the window opens.
Okay. Thanks for all the color. I will step back.
All right. Thanks, Matt.
Your next question comes from the line of Evan Yee with Raymond James. Your line is open. Please go ahead.
Hey, good morning. Thank you for taking our questions. Just real quick, I know you touched on expenses a little bit, but could you shed some more color on what drove the improvement in the non-variable expense outlook for the year and how we should think about that headed into next year? Just trying to appreciate the puts and takes there. Thanks.
Yeah. Again, as we've looked at expenses, and we've said this for a series of quarters, our priorities are these. We're looking to continue to grow our productive sales resources across all of our businesses, and that's the broker-dealer, the mortgage business, as well as the bank. I think each team and leadership team there is focused on doing that. But in that, we're also focused on driving productivity, both from enhanced leverage of some of the technology that's available to us, but also process improvement. I think the team has been very good and prudent in managing that over the last couple of years. We're very pleased we've been able to keep our expenses, other than variable compensation, stable now for a series of quarters.
Again, where we are is we continue to make progress on some initiatives that we've got across the organization, again, not named initiatives, but just the work the team's doing every day. We believe expenses will be a little lower. That is really what drove the change in the guidance. Again, it's kind of a foundational effort every day here to drive expenses and productivity while continuing to invest in productive resources for the organization.
Okay, great. Switching over to the balance sheet, you had solid deposit growth this quarter. I appreciate that you reiterated your outlook for 2026, but could you provide any color on how we should think about that growth going into 2027? Thanks.
Yeah, I think from a deposit growth perspective, we continue to be focused on growing low cost and core granular deposits across our business. We are principally a commercially oriented bank, so that starts with the treasury team and what I noted in my comments around their efforts to further provide quality services to our customers, therefore driving largely commercial deposits as well as being competitive from an interest rate perspective. We've got a number of initiatives across the footprint to grow and engage more customers and grow our customer base from a deposit perspective. But again, I think that will remain competitive and has been probably the place we've seen as much competition as anything for the new entrants as it relates to some of the M&A transactions that have occurred from offer rates and teaser rates and the like.
We see a positive trajectory in deposits, I think, going into 2027. But again, we'll update that guidance as we roll into the January meeting.
Okay, great. Thank you. I'll step back.
Thank you.
We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.