Fitch Ratings has published long-term Issuer Default Ratings (IDRs) of 'BBB' and short-term IDRs of 'F2' for Hilltop Holdings Inc. (Hilltop) and PlainsCapital Bank. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS - IDRS, VRs, AND SENIOR DEBT
The ratings are supported by Hilltop's experienced and consistent management team, diverse business model for a bank of its size, 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 community bank peers.
Fitch believes Hilltop has an excellent 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.
Hilltop's business model and revenue mix are considerably more diverse than community banking peers, which Fitch views as a positive ratings factor. Hilltop is atypical for a financial institution its size in that it holds, in addition to its core banking business, a niche investment bank (First Southwest), a national mortgage banking platform (PrimeLending), and a property and casualty insurance subsidiary (National Lloyds). Specifically, Fitch sees the presence of First Southwest 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 rating owing to its rather lackluster performance relative to the rest of the group, and sees no discernible strategic fit within the Hilltop family of companies.
Hilltop's ratings are also supported by solid capital levels. Regulatory capital ratios are above well-capitalized standards and peer averages with tangible common equity and Tier 1 risk based capital ratios at 11.22% and 18.57%, respectively, at 3Q. Fitch views Hilltop's current levels of capital as a ratings strength given the bank's relatively low risk profile, high reserves relative to legacy impaired assets, and historical net charge off trends.
Hilltop's ratings are further supported by strong asset quality trends. PlainsCapital Bank's nonperforming asset and net charge-off ratios have historically remained below community bank peer group averages, which Fitch attributes to the company's generally conservative underwriting standards. Excluding assets covered by FDIC loss-sharing agreements, nonperforming asset levels have steadily decreased in recent years and are now near all-time lows. PlainsCapital's loan book is also fairly well-diversified across both product and industry, but Hilltop's asset quality profile is somewhat limited by concentrated geographic exposure to Texas.
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. In 2013, gains from the sale of originated loans represented roughly 40% of Hilltop's consolidated revenues. Considering both the variability of loan sale gains as well as their substantial contribution to the company's total revenues, Fitch sees Hilltop's reliance on mortgage banking as a key ratings constraint and a limitation to the company's earnings profile.
Fitch considers Hilltop's liquidity profile to be weak relative to community banking peers. Its loan-to-deposit and wholesale funding ratios are noticeably higher than comparably sized banks. While Fitch recognizes that these characteristics are largely explained by the company's substantial mortgage banking activities and that Hilltop's funding structure would appear stronger if adjusted to remove loans held for sale, Fitch believes Hilltop's liquidity is nevertheless constrained by the bank's origination-heavy business model.
RATING SENSITIVITIES - IDRS, VRs, AND SENIOR DEBT
Given the emphasis Fitch places on senior management at Hilltop and PlainsCapital Bank, the ratings are highly sensitive to key man risk. Unexpected departures or changes in senior management at either the holding company or bank could prompt a review of the ratings. However, Fitch acknowledges that key man risk is partially mitigated by a deep bench of seasoned executives at the bank level as well as a strongly established culture that has resulted in historically very low managerial turnover.
The ratings are also sensitive to Hilltop's overall operating performance. A substantial increase in nonperforming assets or net charge-offs 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. While Fitch recognizes that PlainsCapital's direct exposure to energy only represents approximately 6% of the bank's loan book and does not expect a substantial increase in nonperforming assets as a result of the recent downturn in oil and natural gas prices, material and unexpected asset quality deterioration due to secondary impacts of energy sector distress on the Texas economy may prompt Fitch to review the ratings.
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 within Hilltop's corporate group, could prompt a review of the ratings.
Fitch's ratings also specifically incorporate Hilltop's plans to successfully integrate SWS Group, which it acquired on Jan. 1, 2015. Although not anticipated, significant and/or unexpected costs or problems arising from the acquisition of SWS Group may prompt Fitch to undertake a review of the ratings.
KEY RATING DRIVERS - LONG AND SHORT TERM DEPOSIT RATINGS
PlainsCapital Bank's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. Fitch believes U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
KEY RATING SENSITIVITIES - LONG AND SHORT TERM DEPOSIT RATINGS
The ratings of long and short-term deposits issued by PlainsCapital Bank are primarily sensitive to any change in the company's IDR. Should the long-term IDR be downgraded, deposit ratings could be similarly impacted.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's view that Hilltop and PlainsCapital Bank are not considered systemically important and therefore, the probability of support is unlikely.
KEY RATING DRIVERS - HOLDING COMPANY
The IDR and VR of Hilltop are equalized with those of its chief operating company, 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.
KEY RATING SENSITIVITIES - HOLDING COMPANY
If Hilltop became undercapitalized or had regulatory prohibitions between upstreaming dividends from the bank, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the PlainsCapital Bank.
COMPANY PROFILE
Hilltop Holdings is a Texas-based financial holding company with two primary operating business units, PlainsCapital Bank and National Lloyds. In addition to providing traditional banking services, PlainsCapital Bank also provides investment banking, public finance advisory, fixed income sales, and clearing services. 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, 2014, the company had $9.2 billion in assets. The company's stock is listed on the NYSE under the ticker HTH.
Fitch publishes the following ratings with a Stable Outlook:
Hilltop Holdings
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Senior Debt 'BBB';
--Viability Rating 'bbb'.
--Support Rating '5';
--Support Rating Floor 'NF';
PlainsCapital Corporation
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Viability Rating 'bbb';
--Support Rating '5';
--Support Rating Floor 'NF';
PlainsCapital Bank
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Viability Rating 'bbb';
--Long-term Deposits 'BBB+';
--Short-term Deposits 'F2'.
--Support Rating '5';
--Support Rating Floor 'NF';
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=968935
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