It has been about a month since the last earnings report for Hilltop Holdings (HTH - Free Report) . Shares have added about 1.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Hilltop Holdings due for a pullback? 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 drivers.
Hilltop Holdings Beats on Q1 Earnings as Revenues Rise
Hilltop Holdings’ first-quarter 2019 earnings per share of 41 cents easily surpassed the Zacks Consensus Estimate of 26 cents. Moreover, the figure compared favorably with the prior-year quarter’s earnings of 25 cents per share. The reported quarter’s results included the impact of certain costs associated with significant leadership changes and other efficiency initiative-related charges.
Results were primarily driven by an increase in revenues. Moreover, loans and deposit balances remained strong. However, higher expenses hurt results to some extent. Also, the company recorded an increase in provisions during the quarter.
Net income applicable to common stockholders was $38.8 million, up from $24.4 million registered in the prior-year quarter.
Revenues Improve, Costs Rise
Net revenues were $361.4 million, increasing 6.7% year over year. The reported figure surpassed the Zacks Consensus Estimate of $338.9 million.
Net interest income was $108.9 million, reflecting rise of 5.3% year over year. Net interest margin (taxable equivalent basis) was 3.70%, up 17 basis points (bps) from the prior-year quarter.
Non-interest income increased 7.4% from the year-ago quarter to $252.5 million. This rise was due to an increase in mortgage loan origination fees, investment and securities advisory fees and commissions, and other income.
Non-interest expenses increased marginally to $309.1 million. This upside can be attributed to rise in employees' compensation and benefits costs, and net occupancy and equipment costs.
Credit Quality: A Mixed Bag
During the reported quarter, the company recorded provision for loan losses of nearly $1 million against recovery for loan losses of $1.8 million reported in the prior-year quarter.
However, non-performing assets as a percentage of total assets was 0.40% at the end of the quarter, down 23 bps from the year-ago quarter. Furthermore, non-performing loans were nearly $30.9 million as of Mar 31, 2019, down from $45.2 million as of Mar 31, 2018.
Strong Balance Sheet
As of Mar 31, 2019, Hilltop Holdings’ cash and due from banks was $313.2 million compared with $644.1 million at the prior-quarter end. Total shareholders’ equity was nearly $2 billion, marginally up from the end of the fourth quarter of 2018.
Net loans held for investment were $6.9 billion as of Mar 31, 2019, up 1.2% from the prior quarter end. Total deposits were $8.3 billion, down 2.8% from the prior-quarter end figure.
Profitability Ratios Improve, Capital Ratios Deteriorate
Return on average assets at the end of the reported quarter was 1.21%, up from 0.77% witnessed in the prior-year quarter. Additionally, return on average equity was 8.04%, up from 5.19% in the year-earlier quarter.
Common equity tier 1 capital ratio was 16.75% as of Mar 31, 2019, down from 18.60% as of Mar 31, 2018. Moreover, total capital ratio was 17.64%, reflecting a decline from 19.63% recorded in the prior-year quarter.
Management expects both average loans held for investments (HFI) and average deposits to grow 4-6%.
NII is projected to increase 1-3%. Growth is expected to be partially offset by decline in purchase account accretion (PAA) income.
Notably, interest income related to PAA is expected to be in the range of $4-$6 million per quarter in 2019.
Further, pre-PAA NIM (tax equivalent basis) is expected to be 3.22-3.28%.
Non-interest income is expected to grow 1-3%, with improving capital markets and public finance market. Mortgage origination volumes are expected to be inline with the 2018 production levels.
Non-interest expenses are expected to decline 1% or increase 2%. The company continues to target positive operating leverage and improvement in efficiency.
Provisions expenses are anticipated to be 20-30 bps of total HFI loans on the assumptions of loan growth and normalization of credit costs.
The company expects GAAP effective tax rate to be nearly 22-24%.
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. The consensus estimate has shifted -6.19% due to these changes.
At this time, Hilltop Holdings has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Hilltop Holdings has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.