December 15, 2017 / 9:06 PM / 6 months ago

Fitch Affirms Hilltop Holdings at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has affirmed Hilltop Holdings Inc.'s (HTH) ratings at 'BBB'/'F2'. The Rating Outlook is Stable. The affirmation reflects the company's diverse business model, experienced management team and solid capital position. A full list of rating actions follows at the end of this rating action commentary. The rating action follows a periodic review of the mid-tier regional banking group, which includes: BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled "Mid-tier Regional Bank Periodic Review," to be published shortly on www.fitchratings.com. KEY RATING DRIVERS IDRs, VRs, AND SENIOR DEBT HTH's business model and revenue mix are diverse, which Fitch views as a positive rating factor. HTH 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 HTH'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 HTH 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. HTH's ratings are also supported by solid capital levels. Regulatory capital ratios have been consistently well above peer medians over time, supported by internal capital generation and conservative capital management. At 3Q17, tangible common equity and common equity tier 1 (CET1) capital ratios were 11.8% and 17.7%, respectively. Fitch views HTH's current levels of capital as a ratings strength given the company's relatively low risk profile and historical net charge-off (NCO) trends. Fitch believes HTH's capital ratios may fall over the medium term as management has indicated a willingness to deploy some of its capital (approximately $550 million) for M&A. HTH's ratings are further supported by strong asset quality trends. PlainsCapital Bank's nonperforming asset (NPA) and NCO ratios have historically remained below mid-tier peer group averages, which Fitch attributes to the company's generally conservative underwriting standards. 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. However, HTH's energy exposure is modest (3% of total loans and 10% of tangible common equity as of 3Q17). 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. HTH's PrimeLending segment comprised roughly 40% of consolidated revenues and 24% of consolidated earnings through 3Q17. HTH's 'BBB' rating incorporates the company's reliance on mortgage banking and the inherent variability of gains from loan sales. Fitch views this reliance as both a limitation to the company's earnings profile as well as an overall ratings constraint. 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 The uninsured deposit ratings of PlainsCapital Bank are rated one notch higher than the bank'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 HTH's and PlainsCapital Corporation's VRs are equalized with those of PlainsCapital Bank, reflecting their roles as bank holding companies, which are 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 HTH has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs, VRs, AND SENIOR DEBT HTH's ratings are sensitive to Hilltop's level of mortgage banking income. Over time, should HTH's PrimeLending segment experience revenue declines that are not offset by expense reductions and create a drag on consolidated earnings, negative rating pressures could emerge. However, this risk is partially mitigated as a significant portion of PrimeLending's expenses are variable in nature and because the majority of originations are for 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. Fitch expects capital ratios to come down over time as HTH has communicated that it intends to utilize excess capital. However, given the potential variability of PrimeLending's and National Lloyds' earnings, coupled with PlainsCapital Bank's geographic concentrated exposure to Texas, Fitch would expect HTH to manage capital ratios at or above midtier bank peer averages over time. Should HTH manage capital ratios below peer averages, Fitch could take negative action. 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. Fitch would analyze any individual transaction for its strategic and financial implications with Hilltop's current business model, which may lead to rating changes. LONG- AND SHORT-TERM DEPOSIT RATINGS The Long- and Short-term deposit ratings are sensitive to any change to PlainsCapital Bank's Long- and Short-term IDR. HOLDING COMPANY Should HTH's holding company 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 potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since HTH's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. 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'. Contact: Primary Analyst Michael Shepherd, CPA Associate Director +1-212-908-9138 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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