KBRA Affirms Ratings for Hilltop Holdings Inc. and 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) (“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”). The Outlook for all long-term ratings is Stable.

KBRA also affirms the short-term debt rating of K1 for Hilltop Securities Inc.'s ("HTS") Secured Commercial Paper Notes, Series 2019-1 and Secured Commercial Paper Notes, Series 2024-1 ("CP Programs").

Key Credit Considerations

The ratings are supported by the company’s diversified revenue streams with fee revenue accounting for over 60% of total revenue and HTH’s strong consolidated capital position, which is among the highest in the rated category. Going forward, KBRA expects the prospective capital profile to remain at similar levels in excess of peers. In addition, management’s conservative balance sheet management with GDP-like organic growth and historically solid credit performance, which has limited the impact of provision expense due to disciplined underwriting has further contributed to a track record of consistent earnings. KBRA also considers positively the synergies between the various business lines, both in the context of efficiencies as well as the overall risk profile, as well as a degree of counter-cyclicality 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 from the impact of higher relative interest rates on the earnings performance of HTH, particularly those generated out of PrimeLending ("PL") and to a lesser degree, Hilltop Securities. However, PL has been restructured to near break-even levels, and the Federal Reserve’s lowering of interest rates should benefit HTS’ interest rate sensitive segments. That said, we consider HTH's earning power to be comparatively weaker than its rated peers. Credit quality has experienced some negative trends in 2024 reflected by elevated NPAs primarily driven by the auto note program, which has subsequently been reduced to 1% of total loans and has a 5% ACL reserve. KBRA expects PCB’s conservative underwriting and proactive nature as potential offsets to reduce possible loss content while a weakened earnings profile is offset by solid loss absorption capacity in the LLR and the strong capital position.

The ratings are primarily driven by the conservative positioning of the CP programs 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 HTS to the Hilltop family of operating companies, as well as the capacity of the parent, particularly in light of capital optimization at 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. HTS is recognized nationally as a leading franchise in the public bank/municipal finance space, a core competency which the company has coalesced around its new 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 in its legacy markets. HTS’ earnings are subject to higher degrees of volatility driven by the firm’s greater reliance upon interest rate-sensitive transaction-oriented business lines.

Rating Sensitivities

At the upper end of KBRA’s rated bank universe, the likelihood of positive rating movement 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 the longer term. Outsized weakness in asset quality, inability to be offset by strong earnings, or 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 Hilltop Securities is largely limited by the ratings profile of its parent, Hilltop Holdings Inc. Given the strategic importance 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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Methodologies