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A month has gone by since the last earnings report for Hilltop Holdings (HTH). Shares have added about 4.3% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Hilltop Holdings Q2 Earnings Beat Estimates, Provisions Surge
Hilltop Holdings’ second-quarter 2020 earnings continuing operations of $1.08 per share beat the Zacks Consensus Estimate of 45 cents. Also, the bottom line compares favorably with the prior-year quarter’s earnings of 64 cents.
Results reflect an improvement in revenues aided by growth in non-interest income and a strong balance-sheet position. However, declining net interest income and higher provisions were major headwinds.
Net income applicable to common stockholders was $128.5 million or $1.42 per share, up from $57.8 million or 62 cents per share in the prior-year quarter.
Revenues Improve, Costs Flare Up
Net revenues came in at $572.7 million, increasing 49% year over year.
Net interest income was $104.6 million, down 2.5% from the prior-year quarter. Net interest margin (taxable equivalent basis) came in at 2.81%, contracting 68 basis points (bps) from the prior-year quarter.
Non-interest income jumped 69.1% from the year-ago quarter to $468.1 million. This was largely driven by a rise in all fee income components, except securities commissions and fees.
Non-interest expenses flared up 21.7% from the year-ago quarter to $370.2 million. This upswing mainly resulted from rise in employees' compensation and benefits costs.
Credit Quality Worsens
Provision for loan losses was $66 million compared with the reversal of credit losses of $672,000 in the prior-year quarter. The company built a significant reserve amid the pandemic-related economic uncertainty.
Non-performing assets as a percentage of total assets were 0.56%, up 19 bps. Also, non-performing loans were $68.3 million as of Jun 30, 2020, up significantly from the $32 million recorded in the comparable period of 2019.
Strong Balance Sheet
As of Jun 30, 2020, Hilltop Holdings’ cash and due from banks was $1.7 billion, up significantly from the prior quarter. Total shareholders’ equity was $2.3 billion, up 6% sequentially. As of Jun 30, 2020, net loans held for investment increased 6.3% sequentially to $7.7 billion. Moreover, total deposits were $11.6 billion, up 17.2% from the prior quarter.
Profitability & Capital Ratio Improve
Return on average assets at the end of the reported quarter was 3.30%, up from the prior-year quarter’s 1.74%. Also, return on average equity was 23.32%, up from the year-earlier quarter’s 11.63%. Common equity tier 1 capital ratio was 18.46% as of Jun 30, 2020, up from 16.32% in the corresponding period of 2019. Moreover, total capital ratio was 21.82%, reflecting a fall from the prior-year quarter’s 17.14%.
Management expects average loans held for investment (HFI) to grow, mainly driven by Payment Protection Program (PPP) loans and the commercial loan portfolio.
Customer deposit inflows are likely to continue, though at a slower pace than second-quarter 2020. Further, brokered deposits are expected to decline $700-$800 million by year-end.
Purchase account accretion (PAA) is expected to decline 25-35% on a year-over-year basis. Further, NII is expected to decline due to fall in interest rates and a relatively flat yield curve.
Mortgage volumes are anticipated to stabilize gradually in the third and fourth quarters of 2020.
In terms of non-interest expenses, non-variable expenses are expected to be stable, while variable expenses will depend on the revenues generated from fee businesses.
The company expects a further increase in credit reserves given the changes in the economic backdrop.
Effective tax rate (GAAP basis) is anticipated to be 22-24%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 22.22% due to these changes.
At this time, Hilltop Holdings has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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