It has been about a month since the last earnings report for Hilltop Holdings (HTH). Shares have added about 1.6% 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 Q2 Earnings as Revenues Rise
Hilltop Holdings’ second-quarter 2019 earnings per share of 62 cents easily surpassed the Zacks Consensus Estimate of 38 cents. Moreover, the figure compared favorably with the prior-year quarter’s earnings of 35 cents.
Results were primarily driven by an increase in revenues. Moreover, the company recorded provision benefits in the quarter, which was a tailwind. Further, deposit balances remained strong. However, rise in expenses hurt results to some extent.
Net income applicable to common stockholders was $57.8 million, up from $33.1 million registered in the prior-year quarter.
Revenues Improve, Costs Rise
Net revenues were $420.7 million, increasing 9.5% year over year. The reported figure surpassed the Zacks Consensus Estimate of $380.8 million.
Net interest income was $107.9 million, reflecting 2.9% year-over-year rise. Net interest margin (taxable equivalent basis) was 3.49%, up 2 basis points (bps) from the prior-year quarter.
Non-interest income grew 12% from the year-ago quarter to $312.9 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 1.5% to $343.7 million. This upside can be attributed to rise in employees' compensation and benefits costs, net occupancy and equipment costs, and loss and loss adjustment expenses.
Credit Quality Improves
In the reported quarter, the company recorded recovery for loan losses of nearly $0.7 million against provision for loan losses of $0.3 million reported in the prior-year quarter.
Moreover, non-performing assets as a percentage of total assets was 0.37% at the end of the quarter, down 25 bps from the year-ago quarter. Furthermore, non-performing loans were nearly $32 million as of Jun 30, 2019, down from $47.2 million as of Jun 30, 2018.
Strong Balance Sheet
As of Jun 30, 2019, Hilltop Holdings’ cash and due from banks was $342 million, up from $313.2 million at the prior quarter end. Total shareholders’ equity was nearly $2.1 billion, up 1.8% from the end of the first quarter of 2019.
Total deposits were $8.5 billion, up 2% from the prior quarter end figure.
Profitability Ratios Improve, Capital Ratios Deteriorate
Return on average assets at the end of the reported quarter was 1.74%, up from 1.03% witnessed in the prior-year quarter. Additionally, return on average equity was 11.63%, up from 6.95% in the year-earlier quarter.
Common equity tier 1 capital ratio was 16.32% as of Jun 30, 2019, down from 17.61% as of Jun 30, 2018. Moreover, total capital ratio was 17.14%, reflecting a decline from 18.58% 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 either decline 3% or remain stable. Purchase account accretion (PAA) income is expected to decline 30-40% on a year-over-year basis.
Notably, interest income related to PAA is expected to be $4-$6 million per quarter in 2019.
Further, pre-PAA NIM (tax-equivalent basis) is expected to be 3.22-3.28%. The company assumes two Fed Funds cuts during the year along with lower yields on loans held for sale (HFS).
Non-interest income is expected to grow 6-9%. Mortgage origination volumes are expected to be in line with the 2018 production levels.
Non-interest expenses are expected to remain stable or increase 2%. The company continues to target positive operating leverage and improvement in efficiency.
Provisions expenses are anticipated to be 5-15 bps of total average 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 an upward trend in fresh estimates. The consensus estimate has shifted 5.48% due to these changes.
Currently, Hilltop Holdings has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Hilltop Holdings has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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