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Why Is Hilltop Holdings (HTH) Down 15.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Hilltop Holdings (HTH - Free Report) . Shares have lost about 15.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hilltop Holdings due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Hilltop Holdings Q4 Earnings Miss Estimates, Revenues Up Y/Y

Hilltop Holdings’ fourth-quarter 2019 earnings per share of 54 cents lagged the Zacks Consensus Estimate of 56 cents. However, the bottom line increased from the prior-year quarter’s earnings of 30 cents.

Fall in NII, due to lower interest rates, along with higher operating expenses hampered quarterly results. However, increase in non-interest income and slight decline in provision for loan losses acted as tailwinds.

Net income applicable to common stockholders was $49.3 million, up 75.4% from the prior-year quarter.

In 2019, earnings per share of $2.44 missed the consensus estimate by a penny. However, the figure was well above the prior-year figure of $1.28. Net income applicable to common stockholders was $225.3 million, surging 85.5%.

Revenues Improve, Costs Rise

Net revenues in the quarter were $410.6 million, increasing 15.3% year over year. The top line beat the Zacks Consensus Estimate of $400.6 million.

In 2019, net revenues increased 13.3% to $1.65 billion. It surpassed the Zacks Consensus Estimate of $1.64 billion.

NII was $111.3 million, down 5.5%. NIM (taxable equivalent basis) was 3.31%, down 45 basis points (bps) from the prior-year quarter.

Non-interest income jumped 25.5% from the year-ago quarter to $299.3 million. This rise was largely driven by higher mortgage loan origination fees, investment and securities advisory fees and commissions, net gains from sale of loans and other mortgage production income, and other income.

Non-interest expenses increased 8.4% to $336.9 million. The increase was due to rise in employees' compensation and benefits costs.

Credit Quality: Mixed Bag

Provision for loan losses was $6.9 million, down nearly 1% year over year. Furthermore, non-performing assets as a percentage of total assets was 0.36%, down 9 bps.

However, non-performing loans were $36.1 million as of Dec 31, 2019, up 6.4%.

Strong Balance Sheet

As of Dec 31, 2019, Hilltop Holdings’ cash and due from banks was $485 million, up 48.7% from the prior quarter. Total shareholders’ equity was $2.1 billion, up 2.2% sequentially.

As of Dec 31, 2019, net loans held for investment increased almost 1% to $7.4 billion. Further, total deposits were $9 billion, up 3.5% from the prior quarter.

Profitability & Capital Ratios Improve

Return on average assets at the end of the reported quarter was 1.40%, up from 0.86% in the prior-year quarter. Also, return on average equity was 9.43%, up from 5.76% in the year-earlier quarter.

Common equity tier 1 capital ratio was 16.69% as of Dec 31, 2019, up from 16.58% as of Dec 31, 2018. Moreover, total capital ratio was 17.55%, reflecting a rise from 17.47% in the prior-year quarter.

Share Repurchase Update

During 2019, Hilltop Holdings repurchased 3.4 million shares at an average price of $21.64 per share.

2020 Outlook

Management expects both average loans held for investment (HFI) and average deposits to grow 4-6%.

Purchase account accretion (PAA) is expected to decline 20-30% on a year-over-year basis.

Management is of the opinion that the mortgage markets will stabilize in 2020 and hence expect a lower level of mortgage related activity as compared with 2019. Thus, total non-interest revenue is expected to decline 6-8%.

Non-interest expenses are expected to decline 1-3% year over year.

Net charge-offs to average HFI loans are expected to increase on a year-over-year basis to 15-25 bps.

Owing to CECL, allowance for credit losses, plus the reserve for unfunded commitments is expected to be in the range of $80-$100 million.

In the Broker-Dealer segment, the company expects pre-tax margin of low-to-mid teens.

Cost Saving Program

Hilltop Holdings has started an initiative to enhance platform and streamline operations with the goal of lowering operating costs and building a foundation for future organic and acquisitive growth. The company plans to reach its goal through a combination of expense reduction efforts, including strategic sourcing program and revenue focused initiatives, including the core system implementation and prime lending and the rollout of a digital payment network at PlainsCapital Bank.

Management targets to achieve positive operating leverage of 6% and pre-tax pre-provision income of $250 million in 2021. This equals to an annual earnings growth of 10-15%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Hilltop Holdings has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Hilltop Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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