Hilltop Holdings (HTH) Rides on High Rates, Asset Quality Weak

Hilltop Holdings, Inc. HTH continues its efforts to boost revenues and strengthen its balance sheet. Modest loan demand and sustained emphasis on increasing fee income are likely to aid the top line. However, high funding costs, weak asset quality and low mortgage origination remain concerns.

Hilltop Holdings remains committed to improving net interest income (NII). The metric witnessed a 1.5% compounded annual growth rate (CAGR) over the five-year period ended 2023. The increase was attributed to high interest rates and acquisitions completed during that period. Further, net interest margin (NIM) increased to 3.09% in 2023 from 2.88% in 2022 and 2.57% in 2021 on the back of high interest rates.

Given the current high interest rate environment, the company expects NII and NIM to improve, whereas high deposit costs and funding costs will weigh on both. We project NII to dip 4.3% in 2024, while the same is expected to rebound with an increase of 3.2% and 4.4% in 2025 and 2026, respectively. Per our estimates, NIM (FTE) is expected to be 2.94% in 2024, 2.98% in 2025 and 3.06% in 2026.

The balance sheet remains a strong aspect for Hilltop. As of Dec 31, 2023, the total debt was $1.28 billion, and cash and debt due from banks were $1.86 billion. HTH’s accessibility to debt markets remains favorable in light of stable outlook and investment grade ratings of BBB+/Baa2 from Fitch Ratings and Moody’s Investors Service, respectively. The company’s earnings strength and robust credit standing suggest it will remain capable of addressing near-term debt obligations, even in a deteriorating macroeconomic environment.

Given the strong balance sheet, Hilltop Holdings has been consistently increasing dividends since 2016, with the most recent dividend announced this January. Moreover, it announced a stock repurchase program through January 2025, under which the company is authorized to repurchase up to $75 million of its outstanding common stock. Supported by its robust earnings and solid capital and liquidity position, the company is expected to sustain its current capital distribution activities.

Nonetheless, Hilltop Holdings’ asset quality has been deteriorating over the past few years. Though the bank recorded a provision benefit in 2021, provision for credit losses jumped in 2022 and 2023. Due to a challenging macroeconomic outlook, the company’s provisions are expected to remain elevated in the near term. Although we project a decrease in the metric this year, the same is expected to witness a year-over-year rise of 49.3% in 2025 and 2.1% in 2026.

HTH’s Mortgage Origination segment prospects remain concerning. Mortgage volumes began declining since the fourth quarter of 2016 primarily due to high interest rates. Mortgage loan origination volumes declined 6.5% in 2017 and 5.3% in 2018. While the same witnessed an increase in 2019 and 2020 driven by lower rates, it dipped again by 1.3% in 2021, 44.2% in 2022 and 34.9% in 2023.

Hilltop Holdings took several measures to deal with reduced loan volumes and pressure on profitability. Headcount reduction, consolidation of unprofitable branches, and adjustments in targeted fixed costs were some of the measures undertaken. However, high mortgage rates will likely put pressure on origination volumes in the upcoming quarters, which, in turn, would contract margins for the segment. We expect a marginal decline in Mortgage Origination segment’s non-interest income this year.

Over the past six months, shares of HTH have gained 3.7% compared with the industry’s growth of 6.9%. Currently, the stock carries a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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