January 23, 2017 / 8:43 PM / 3 years ago

Fitch Affirms Hilltop Holdings Inc.'s IDRs at 'BBB/F2'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, January 23 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) at 'BBB' and Short-Term IDRs at 'F2' for Hilltop Holdings Inc. (Hilltop) and PlainsCapital Bank. The Rating Outlook is Stable. A full list of rating actions is provided at the end of this release. The ratings are supported by Hilltop's diverse business model for a bank of its size, experienced and consistent management team, solid capital position, and PlainsCapital Bank's historically stable operating performance. Key rating constraints include Hilltop's heavy reliance on income generated from mortgage banking and weak liquidity profile relative to Fitch-rated midtier bank peers. The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'U.S. Banks: Midtier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS VRs, IDRs, AND SENIOR DEBT Hilltop's business model and revenue mix are diverse, which Fitch views as a positive rating factor. Hilltop is atypical for a financial institution of its size in that it holds, in addition to its core banking business (PlainsCapital Bank), a niche investment bank (Hilltop Securities), a national mortgage banking platform (PrimeLending), and a property and casualty insurance subsidiary (National Lloyds). Specifically, Fitch sees the presence of Hilltop Securities and PrimeLending as positive influences on Hilltop's company profile, as both subsidiaries provide business and geographic diversity that complements the company's core banking business. Fitch considers National Lloyds to be neutral to the overall as Fitch sees no discernible strategic fit within the Hilltop group of companies. Fitch believes Hilltop has a good management team and considers it a key credit strength. The chairman and largest shareholder, Gerald Ford, is a well-known and well-respected figure in the industry. Fitch also considers the management team of PlainsCapital Bank to be deep and stable with a number of PlainsCapital's senior managers having worked at the bank almost since its inception in 1987. In September 2016, Hilltop moved to a Co-CEO leadership structure with Jeremy Ford overseeing corporate functions including mergers and acquisitions and Alan White overseeing the organization's revenue generating subsidiaries. Also, in August 2016, Hilltop appointed William Furr as CFO, a newly created position at Hilltop Holdings. Furr was previously community banking CFO at KeyCorp. Fitch views these changes positively as both succession-planning and overall management depth in the finance function has improved compared to prior years. Hilltop's ratings are also supported by solid capital levels. Regulatory capital ratios have been consistently above peer medians over time, supported by good organic capital growth and conservative capital management. At third quarter 2016 (3Q16), tangible common equity and common equity Tier 1 capital ratios were 12.8% and 17.8%, respectively. Fitch views Hilltop's current levels of capital as a ratings strength given the bank's relatively low risk profile and historical net charge-off (NCO) trends. Capital ratios, however, may fall over the medium term as management has indicated that Hilltop will likely deploy some of its capital (up to $500 million) for M&A. Still, we believe the company will maintain adequate levels of capital to support the bank's risk profile, net-charge offs trends, and nonperforming asset (NPA) levels. In October, the company announced that it would start paying a common stock dividend of $0.06 per share or $6 million quarterly, which we believe is modest relative to peers. Hilltop's ratings are further supported by strong asset quality trends. PlainsCapital Bank's NPA and NCO ratios have historically remained below midtier peer group averages, which Fitch attributes to the company's generally conservative underwriting standards. In 2Q16, Hilltop fully charged-off $24.5 million of the remaining balance of a single C&I loan where the borrower is under investigation for fraud. Although this caused a spike in realized losses, Fitch believes the charge-off is isolated, non-recurring and subject to potential recoveries. PlainsCapital's loan book is also fairly well-diversified across both product and industry, but overall asset quality profile is somewhat limited by concentrated geographic exposure to Texas. Although the loan book is concentrated in Texas, energy exposure is modest (3% of total loans and 11% of TCE as of 3Q16). The company has reserved for about 6.7% on its energy loans, which is generally in line with the industry. While Fitch recognizes that Hilltop's revenue mix is more diversified than that of a similarly sized bank, the bank's revenues are predominately driven by mortgage banking income, which Fitch believes is an inherently volatile revenue source. As of year-to-date (YTD) Sept. 30, 2016, gains from the sale of originated loans represented roughly 36% of Hilltop's consolidated revenues. In light of the variability of loan sale gains as well as their substantial contribution to the company's total revenues, Hilltop's 'BBB' rating incorporates the company's reliance on mortgage banking. Fitch views this reliance as both a limitation to the company's earnings profile as well as an overall ratings constraint. Given Hilltop's focus on home purchase mortgages rather than refinancings (the former is less sensitive to changes in the level of interest rates than the latter), we expect revenues to continue to be fairly buoyant in 2017, in spite of expectations for further interest rate increases, driven by good economic growth and low unemployment. Fitch considers Hilltop's liquidity profile to be weak relative to midtier peers evidenced by higher loan-to-deposit and wholesale funding ratios. Additionally, Hilltop's funding costs tend to be higher than its rated-peer group. Fitch recognizes that these characteristics are largely explained by the company's substantial mortgage banking and broker-dealer activities and that Hilltop's funding structure would appear stronger if adjusted for loans held for sale. Nevertheless, Fitch believes Hilltop's liquidity profile is constrained by the bank's origination-heavy business model. LONG- AND SHORT-TERM DEPOSIT RATINGS Hilltop's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY Hilltop's IDR and VR are equalized with those of PlainsCapital Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR Hilltop and PlainsCapital Bank have a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, Hilltop and PlainsCapital Bank are not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES VR, IDRs, AND SENIOR DEBT HTH's ratings are sensitive to Hilltop's level of mortgage banking income. All else equal, Fitch estimates that a 10% decline in mortgage sale revenue could lower consolidated earnings by up to 17%. However, this risk is partially mitigated because the mortgage bank originates primarily home purchases rather than refinancings. Fitch places great emphasis on the continuity of senior management at Hilltop and PlainsCapital Bank. As such, the ratings are sensitive to unexpected departures or changes in senior management (either at the holding company or the bank), especially if this could lead to material changes in such areas as strategy, risk appetite, and/or capital management. However, Fitch acknowledges that such risk is partially mitigated by the Co-CEO management structure, a deep bench of seasoned executives, and a culture that has resulted in historically very low managerial turnover, especially at the bank. The ratings are sensitive to Hilltop's overall operating performance. A substantial increase in NPAs or NCOs (excluding covered loans), relative to PlainsCapital Bank's historical averages could result in downward ratings pressure. Given Hilltop's concentrated exposure to Texas, unforeseen negative developments in the Texas economy leading to a material deterioration in asset quality could prompt a review of the ratings. Fitch recognizes that PlainsCapital's direct exposure to energy is limited, but its ratings would be sensitive to any second-order effects that low oil prices may have on the Texas economy. Fitch's ratings incorporate Hilltop's acquisitive growth strategy and the execution risk associated with that approach. Unforeseen and material problems arising from future acquisitions or acquisitions of businesses lacking an obvious strategic fit could prompt a review of the ratings. LONG- AND SHORT-TERM DEPOSIT RATINGS The long-and short-term deposit ratings are sensitive to any change to Hilltop's Long-and Short-Term IDR. HOLDING COMPANY Should Hilltop Holdings Inc. begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since Hilltop's and PlainsCapital Bank's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. COMPANY PROFILE Hilltop Holdings is a Texas-based financial holding company with four operating business units: PlainsCapital Bank, PrimeLending, Hilltop Securities and National Lloyds. In addition to providing traditional banking and mortgage banking services, Hilltop Holdings also provides investment banking, public finance advisory, fixed income sales, and clearing services through Hilltop Securities. National Lloyds is a property and casualty insurance holding company that provides, through its subsidiaries, fire and homeowners insurance to low-value dwellings and manufactured homes in Texas and other areas of the southern United States. As of Sept. 30, 2016, the company had $12.4 billion in total consolidated assets. The company's stock is listed on the NYSE under the ticker HTH. Fitch affirms the following ratings: Hilltop Holdings, Inc. --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Senior debt at 'BBB'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Rating Floor at 'NF'. PlainsCapital Corporation --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Rating Floor at 'NF'. PlainsCapital Bank --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Viability Rating at 'bbb'; --Long-term deposits at 'BBB+'; --Short-term deposits at 'F2'; --Support Rating at '5'; --Support Rating Floor at 'NF'. 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