KBRA Affirms Ratings for Hilltop Holdings Inc. and Publishes Rating for Hilltop Securities Inc.

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, and the short-term debt rating of K2 for Dallas, Texas based Hilltop Holdings Inc. (NYSE: HTH) (“Hilltop” or “the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A, the subordinated debt rating of A-, and the short-term deposit and debt ratings of K1 for lead bank subsidiary, PlainsCapital Bank (“PCB” or “the bank”). The Outlook for all long-term ratings is Stable.

KBRA also affirms and publishes the short-term debt rating of K1 for Hilltop Securities Inc.'s ("HTS") Secured Commercial Paper Notes, Series 2019-1 and assigns a rating of K1 to Hilltop Securities Inc.'s Secured Commercial Paper Notes, Series 2024-1. On April 14, 2020, KBRA assigned a short-term debt rating of K1 to Hilltop Securities Inc.'s Secured Commercial Paper Notes, Series 2019-1 on an unpublished basis. On September 29, 2023, KBRA affirmed the short-term debt rating of K1 for Hilltop Securities Inc.'s Secured Commercial Paper Notes, Series 2019-1 on an unpublished basis.

Key Credit Considerations

The ratings of Hilltop Holdings Inc. are supported by Hilltop's banking franchise (PCB), which maintains strong core capital levels (including bank level CET1 of 15.6% as of 2Q24), and benefits from the revenue diversification contributed by the Hilltop Securities Inc. business and the PrimeLending mortgage unit that is part of the bank's legal structure. In addition, Hilltop's ratings also benefit from the continued maintenance of the company’s strong consolidated capital position (CET1 of 19.5% as of 2Q24), which is among the highest in KBRA’s rated universe. Given the company’s capital levels, coupled with minimal balance sheet growth and lower, though positive, capital generation through retained earnings, KBRA expects the prospective capital profile to remain at similar levels. Also, KBRA views Hilltop's management as a core strength of the organization supported by capable executives within the operating subsidiaries. Executive and business line management are well tenured and have a positive track record. KBRA also considers positively the synergies between the various business lines, both in the context of efficiencies and the overall risk profile, as well as a degree of countercyclicality within the revenue streams of the business segments under normal operating conditions historically. We also view the company's liquidity position beneficial to the credit profile, which includes a defensible deposit franchise and substantial access to contingent sources, though not without cost. Ratings are constrained by the current headwinds to earnings performance, particularly those generated out of PrimeLending, which has more recently operated near break-even levels. Hilltop's NIM is likely to remain under pressure as a function of funding considerations, in common with the broader industry, though we recognize NIM reached an inflection point in 2Q24. We consider HTH's current earning power to be comparatively weaker than its rated peers and to the company's historic trends. Notable credit deterioration has occurred more recently reflected in the elevated NPAs primarily driven by the auto note program, which has been negatively impacted by higher interest rates and lower used car values. KBRA expects PCB’s conservative underwriting and proactive nature to act as offsets to reduce potential loss content while a weakened earnings profile is offset by solid loss absorption capacity in the LLR and capital.

The ratings for Hilltop Securities Inc. are primarily driven by the conservative positioning of the CP program with respect to collateral haircuts which provide security for prospective noteholders, as well as an implied liquidity backstop (over and above collateral) through issuance out of, and guarantee by, Hilltop Securities Inc. Further consideration is given to the ownership structure of the issuer by Hilltop Holdings Inc., a regulated bank holding company, which contributes to redundancy in key risk management areas through the parent's enterprise risk management program. Additionally, as Hilltop Holdings Inc. is a federally regulated bank holding company, HTS is subject to greater regulatory oversight. Also, given the strategic importance of Hilltop Securities Inc. to the Hilltop family of operating companies, as well as the capacity of the parent, particularly in light of capital optimization of HTS, whereby excess capital was effectively swapped for debt with the parent. KBRA has a high degree of confidence that the parent would provide support to HTS in the event of need. Hilltop Securities Inc. is recognized nationally as a leading franchise in the public bank/municipal finance space, a core competency which the company has coalesced around its leadership. The firm has a relatively low-risk balance sheet, with a focus on liquid assets. To this end, the firm carries an adequate amount of leverage and very minimal long-term debt. The rating is constrained by the lack of an explicit guarantee for the program by the parent, Hilltop Holdings Inc., though KBRA notes the likelihood of implicit corporate support for the issuer given its strategic importance. Additionally, outside of its national public banking business (and, to a lesser degree its clearing business), HTS is a comparatively smaller firm with regional focus on its legacy, Texas markets. Hilltop Securities Inc.'s earnings are subject to a higher degree of volatility driven by the firm's greater reliance upon interest rate-sensitive transaction-oriented business lines.

Rating Sensitivities

Given that HTH is currently at the upper end of KBRA’s rated bank universe, the likelihood of positive momentum in HTH’s ratings is remote through the medium term. However, a meaningful increase in diversification and scale of the banking franchise and broker-dealer could provide positive momentum for ratings over time. Outsized weakness in asset quality, inability to be offset by strong earnings, could put downward pressure on ratings. Further, a more aggressive capital posture, beyond our expectations, could also pressure ratings as this represents one of the primary considerations for HTH’s above average ratings.

The ratings profile for HTS is largely limited by the ratings profile of its parent, HTH. Given the strategic importantce of HTS to the Hilltop family of operating companies, KBRA has a high degree of confidence that the parent would provide support to HTS in the event of need. Should that stance change, it could negatively impact the rating.

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