It has been about a month since the last earnings report for Hilltop Holdings (HTH). Shares have added about 7.2% 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 its most recent earnings report in order to get a better handle on the important drivers.
Hilltop Holdings Q3 Earnings & Revenues Beat Estimates
Hilltop Holdings’ third-quarter 2020 earnings from continuing operations of $1.69 per share comfortably beat the Zacks Consensus Estimate of 89 cents. Also, the bottom line compares favorably with the prior-year quarter’s earnings of 81 cents.
Results reflect an improvement in revenues aided by growth in non-interest income and a healthy balance-sheet position. Further, provision benefit was a tailwind. However, fall in net interest income and higher expenses were major headwinds.
Net income applicable to common stockholders was $153.3 million, up 93.1% from the prior-year quarter.
Revenues Improve, Costs Rise
Net revenues came in at $604.6 million, increasing 44.3% year over year. Moreover, the revenue figure surpassed the Zacks Consensus Estimate of $469.6 million.
Net interest income was $101.9 million, down 9.5% from the prior-year quarter. Net interest margin (taxable equivalent basis) came in at 2.57%, contracting 89 basis points (bps) from the prior-year quarter.
Non-interest income surged 64% from the year-ago quarter to $502.7 million. This was largely driven by a rise in all fee income components, except securities commissions and fees.
Non-interest expenses flared up 24.3% from the year-ago quarter to $399.3 million. This upswing mainly resulted from rise in employees' compensation and benefits costs and other costs.
Credit Quality Improves
Provision for loan losses witnessed a reversal of $602,000 compared with the provision of credit losses of $47,000 in the prior-year quarter. The reversal of credit losses mainly reflected changes in reserves on margin loans within the broker-dealer segment.
Non-performing assets as a percentage of total assets were 0.64%, down 27 bps. Also, non-performing loans were $82.1 million as of Sep 30, 2020, up significantly from the $35.5 million recorded in the comparable period of 2019.
Balance Sheet: A Mixed Bag
As of Sep 30, 2020, Hilltop Holdings’ cash and due from banks was $1.3 billion, down 22.3% from the prior quarter. Total shareholders’ equity was $2.4 billion, up 6.4% sequentially.
As of Sep 30, 2020, net loans held for investment inched up 1.3% sequentially to $7.8 billion. However, total deposits were $11.3 billion, down 3.3% from the prior quarter.
Profitability & Capital Ratio Improve
Return on average assets at the end of the reported quarter was 3.71%, up from the prior-year quarter’s 2.26%. Also, return on average equity was 25.94%, up from the year-earlier quarter’s 15.55%.
Common equity tier 1 capital ratio was 19.85% as of Sep 30, 2020, up from 16.15% in the corresponding period of 2019. Moreover, total capital ratio was 23.22%, reflecting a rise from the prior-year quarter’s 16.95%.
Management expects average loans held for investment (HFI) to grow, mainly driven by Payment Protection Program (PPP) loans. Construction & industrial (C&I) and commercial real estate (CRE) loan demand expected to remain soft into 2021.
Customer deposit inflows are likely to continue, though at a slower pace than third-quarter 2020. Further, brokered deposits are expected to decline $300-$500 million by year-end.
Purchase account accretion (PAA) is expected to decline 25-35% on a year-over-year basis. The company expects revenues from purchase loan accretion to decline as the previously purchased portfolio continue to run off. Further, the same will average $2-$4 million per quarter over the coming quarters.
Further, NII is expected to decline due to fall in interest rates, weak loan demand and a relatively flat yield curve.
Mortgage volumes are anticipated to stabilize gradually in the remainder of 2020. The gain on sale margins in mortgage business will remain elevated during the fourth quarter and likely be within the 430-450 bps range through year end.
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?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 85.07% due to these changes.
At this time, Hilltop Holdings has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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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