Summary
- PrimeLending is one the nations largest mortgage originators which is likely to continue to produce record-breaking results.
- The recently announced Dutch-Auction should account for nearly 20% of the company to be repurchased below tangible book value per share.
- Capital growth is likely to continue and will add to an already strong balance sheet.
Investment Thesis
Headquartered in Dallas, Texas, Hilltop Holdings Inc. (HTH) is a $15 billion in assets holding company with three main operating subsidiaries. The first being PlainsCapital Bank, a Texas-based retail and commercial bank. Second, PrimeLending, a national mortgage originator. Finally, Hilltop Securities Holdings, a nationally recognized broker-dealer which specializes in mortgage bond trading. It previously held a fourth division, National Lloyds Corporation, which was a P&C insurance company, but that was sold off earlier this year.
Over the past couple years, Hilltop has been a bit of a restructuring story. The lack of business simplification has led many investors to stay on the sidelines because over-complexity. With respect over regional banks, HTH has one of the highest non-spread income revenue concentrations in the country, with most of it coming from mortgage. The bank actually generates stronger and more robust earnings as rates decline because of its mortgage and brokerage operations than it would if rates rise.
Over the past few years, Hilltop’s management has kept a tight leash on its excess capital for recession driven, compressed valuation prices. While this strategy of letting capital continue to build had be frustrating, it's very clear that this patient management team has turned the page and looking to buy when others are fearful.
While this might be difficult to fathom, I think of HTH as being one of the only banks that is likely to see both EPS and tangible book value per share not only grow, but accelerate in this recession. Its significant levels of excess capital not only creates an economic buffer, it also provides a meaningful catalyst as economic conditions remain challenging.
Putting Capital To Work
A couple weeks ago, Hilltop announced that it commences the start of a modified “Dutch Auction” share repurchase plan for up to $350.0 million of its common stock. While the stock had recently been trading in the high-teens, the Dutch Auction parameters set the purchase amount at greater than $18.25 but less than $21.00 per share. In my mind, it is likely to be fully subscribed, and if so Hilltop will end up repurchasing roughly 18.5% to 21% of its outstanding shares (depending on the price used).
By my math, if the mid-point of $19.63 were used, not only would the tangible book value per share increase but also next years earnings per share. Since the bank was already trading under its $21.85 tangible book value per share, any share repurchase below this level would be accretive to the future earnings profile.
Secondly, should the mid-point of $19.63 be used and the total $350 million allocation be enacted, it would increase FY21 EPS by more than 23% from previous levels. While the bank has obviously trade higher, it is still trading at roughly 9.8x FY21 earnings (pre-announcement), should this Dutch Auction be fully executed, it would indicate that HTH is would be trading at 8.0x, which is actually cheaper than where it was when the Dutch was announced.
