Hingham Institution For Savings: Why It's One Of My Favorite Banks In The U.S.

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Hingham Institution for Savings is one of my favorite financial institutions, defined by outstanding asset quality and a dedication to risk management.The bank has historically outperformed industry ...

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In The U.S.\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-02 22:11 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4688455-hingham-institution-for-savings-one-of-my-favorite-banks-in-the-us><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Hingham Institution for Savings is one of my favorite financial institutions, defined by outstanding asset quality and a dedication to risk management.The bank has historically outperformed industry ...</p>\n\n<a href=\"https://seekingalpha.com/article/4688455-hingham-institution-for-savings-one-of-my-favorite-banks-in-the-us\">Source 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of my favorite financial institutions, defined by outstanding asset quality and a dedication to risk management.The bank has historically outperformed industry giants like Bank of America in terms of returns, NIM and NPAs.While profitability has declined in recent years, it is likely due to the tough macro environment rather than inherent weaknesses at HIFS.Current valuations suggest shares are trading around a fair valuation despite a heavy discount relative to historic prices.Strong Buy rating issued.   Pgiam Investment Thesis Hingham Institution for Savings (NASDAQ:HIFS) is in my opinion one of the finest financial establishments in the U.S. The bank has outstanding asset quality thanks to a laser focused approach to risk management and mitigation. The bank has also historically been one of the best performing financial institutions in the U.S. with 5Y average returns handily outperforming industry giants like Bank of America (BAC). While profitability has taken a hit over the last two years, I believe this is mainly due to a tough macro environment rather than inherent weaknesses at HIFS. The current valuation is much more discounted than previously with shares now trading at below book value. Therefore, I rate HIFS a Strong Buy at present time. Bank Overview HIFS is one of the oldest banks in America having been founded all the way back in 1834 in Hingham, Massachusetts. Expansion across the U.S. has seen Hingham develop a strong position both within their home state of Massachusetts as well as nationwide with offices now located in Boston, Nantucket, Washington D.C. as well as San Francisco. In the 190-odd years of operation, HIFS has passed through three generations of family leadership with the bank now handling over $4.5 billion in assets. Indeed, the bank continues to be one of the very last family-run publicly traded banks in operation. Hingham Institution for Savings primarily focuses on originating real estate loans both of the residential and commercial variety. The bank also has a traditional deposit business which sees the institution offer personal and business checking, savings and cash management services. The current team at HIFS sees Robert H Gaughen Jr. continue to head the bank as Chairman and CEO with son Patrick R Gaughen as the President and COO. Robert has been CEO since 1993 and currently has over 40 years of experience in the banking industry alone. His son Patrick joined HIFS in 2012 and has been tasked with implementing long-term growth and profitability initiatives at the bank. I really like that the two key figure heads at HIFS continue to be members of the original family and rate these two individuals highly based on the astute characters I believe they have as evidenced by their refreshingly honest and transparent earnings calls. Economic Moat – In-Depth Analysis HIFS is a relatively small-scale regional bank with a strong orientation towards community banking services. This includes the origination of loans and the provision of checking and deposit services to both consumers and businesses alike. From a moat perspective, Hingham Institution for Savings is only really able to differentiate themselves from the competition with their customer service. Ultimately, the provision of savings and deposits on such a small geographic scale as HIFS simply cannot compete against nationwide players such as Bank of America or JPMorgan Chase (JPM). HIFS does do a few things quite differently than most regional banks, however, which is worth highlighting in my opinion. Firstly, HIFS is almost entirely focused on the origination of commercial and residential real estate loans, which the bank funds by their retail and commercial deposits business. I really like their almost exclusive focus on commercial and residential real estate loans, due to the ability for these loans to produce greater and more stable returns than other retail and commercial lending. While market downturns can present real risks for CRE and residential properties, the sectors tend to in the long-term produce very consistent and stable income for their owners. This translates to what should be relatively consistent and high-quality borrowers for the bank. On the other hand, Hingham’s deposit business is quite homogenous in my opinion and presents no competitive advantages for the firm. This is evidenced by the quite volatile interest expense present at the bank, which suggests HIFS is unable to dictate their cost of deposits (i.e. the interest they must pay to attract customers) away from the prevailing market trends. Nevertheless, I do believe that product cross-selling and the propensity for current deposit customers to take-out loans with the bank (and vice versa) generates a meaningful set of loyal customers for the bank. This is amplified by what appears to be a superb level of customer service and attention to detail across HIFS’ client base. I also want to quickly highlight what I have perceived to be a business culture centered around superb adversity to risk, which seems to emanate from the bank’s management team. In their most recent earnings call, multiple references to managing credit risk and only originating highly risk-averse loans illustrate just how serious the bank is about risk management. HIFS 2024 Shareholder Meeting Perhaps my favorite reference was to Warren Buffett’s famous quote, “Banking is a very good business unless you do dumb things”. Their strategy of never originating risky loans in the first place is a refreshing attitude which HIFS appears to be enacting actively. Considering these factors, I am unable to award Hingham Institution for Savings anything more than a no-moat rating. Nevertheless, I really like the fundamental business strategy being pursued at the bank and believe management’s dedication towards risk mitigation and cost efficiency is industry leading. HIFS Financial Analysis Hingham Institution for Savings has historically been a wonderfully profitable regional bank. Their 5Y average ROA and ROEs of 1.55% and 16% are truly industry leading and handily outpace those of much larger and diversified rivals such as Bank of America (same 5Y average ROA and ROE of 0.89% and 10%). However, it is important to consider that a portion of these results were generated during the zero-interest-rate-environment pursued by the FED until 2022. Their most recent Q1 earnings report released on March 31, 2024 paints a pretty good picture of the current profitability at the bank, which is slightly degraded relative to their historic achievements. HIFS Q1 FY24 Earnings Release First quarter 2024 saw HIFS generate ROA of just 0.63% along with a ROE of 6.63%. These returns were both 0.19pp and 2.05pp down respectively YoY. HIFS’ efficiency ratio also increased from 45.96% in Q1 FY23 to a less than ideal 77.24% in Q1 FY24. HIFS Q1 FY24 Earnings Release This drop in both operating efficiency and returns generated from their banking business came as a result of a solid 16% increase in total interest and dividend income being offset by a whopping 48% increase in the bank’s total interest expense. HIFS Q1 FY24 Earnings Release The significant increase in their cost of deposits supports my earlier thesis that HIFS does not particularly enjoy a rate setting power in this business, hence the impact higher baseline interest rates have had on their cost of funds. This left net interest income (NII) down 60% YoY to just $8.98 million for Q1 FY24. The bank makes very little revenue from fees but did see their equity securities increase in value significantly by almost 70% to just under $5.98 million. HIFS’ inability to control deposit costs has also taken a hit on their NIM with the current margin of 0.85% being less than stellar and down 0.61pp YoY. Nevertheless, I would much prefer to take a hit on NIM than sacrifice asset quality in the name of riskier yet higher yielding loans.   HIFS Q1 FY24 Slide Pack The most recent earnings call (and supplemental slide pack) saw management discuss their strategy of capital allocation, which involves investment into financial securities equities rather than fixed-income opportunities.   HIFS Q1 FY24 Earnings Release In doing so, HIFS takes a slightly different approach towards their securities portfolio compared to most banks with the institution actually treating these equities as an investment portfolio much akin to a retail or hedge fund-style of management. This portfolio of equity securities was worth just over $78.5 million at the end of Q1 up handsomely from $59.1 million in the previous year. I personally like this approach and while it may produce more volatility in the short term, it should allow HIFS to produce much greater returns on their equity portfolio than competing regional banks. Furthermore, Hingham's focus on financial service and technology equities once again illustrates the management teams acute desire to mitigate risk and remain involved only in equities they fully understand and can value. Overall, net GAAP income was down around 20% YoY to just $6.87 million in Q1 FY24. Net income per diluted share was just $3.87 for the first quarter, also down 20% YoY. While this contraction in bottom line earnings is a disappointment, I believe the current situation at the bank is merely reflective of the current business environment rather than any inherent flaws present at the institutions. The solid 7% YoY growth in net loans illustrates just how actively HIFS is originating loans, particularly in the CRE segment. Management reported that the bank has seen particularly solid activity in the Boston and Washington, D.C. area. HIFS Q1 FY24 Earnings Release A quick look at Hingham’s balance sheets reveals that the bank remains wonderfully capitalized all the while deposits have continued to grow soundly. Interest-bearing deposits have increased 1.74% YoY as a result of solid retail and business activity all the while HIFS’ total loan book expanded by 0.61% YoY. While some regional banks have been originating new loans at higher rates much faster than HIFS did in Q1, the bank remains very critical of asset quality and aims to maintain delinquencies and NPA to a minimum. HIFS Q1 FY24 Earnings Release Asset quality in Q1 was very solid with ACLs at just 0.67% of total loans, actually down 0.02pp YoY. NPAs relative to total loans were also incredibly low at just 0.04%. HIFS Q1 FY24 Earnings Release This absolutely superb asset quality is in my opinion a wonderful proxy for the quality of management and strategy present at HIFS. HIFS FY23 10-K  HIFS also continues to be an incredibly soundly capitalized bank with their CET1 ratio at the end of FY23 being 12.51% relative to the minimum 10.50% regulatory requirement. The bank also has a wonderful Tier 1 capital to average assets ratio of 9.50%, well above the 4% minimum requirement. Overall, I really like the profitability profile of HIFS. While the current situation is certainly less stellar than in previous years and even relative to a 5Y average, the bank remains solid and well capitalized. Valuation Seeking Alpha | HIFS | Valuation Seeking Alpha’s Quant doesn't assign HIFS with a letter Valuation grade. Nevertheless, let’s take a quick look at the data available so we can begin understanding what value may lie in HIFS stock. The current P/E GAAP (TTM) ratio of 14.98x is quite elevated for my liking. I believe the appreciation in P/E ratios at present time has occurred due to the sharp decrease in profitability at the bank and not due to the stock being overbought by markets. The current P/B (TTM) ratio of 0.89x also catches my eye. Such a low valuation of the stock relative to the underlying book value at the bank is very surprising to me given how stable and solid HIFS’ loan book is. While it is heavily skewed to the CRE sector, they have truly outstanding asset quality and therefore, I find such a pessimistic valuation quite surprising. The current book value per share is $190.07 according to HIFS Q1 press release. Seeking Alpha | HIFS | 5Y Advanced Chart vs KRE The last 5Y shows us that HIFS has not performed particularly well for shareholders with the stock generating negative 9.6% returns over the period. This has roughly matched the performance of the popular regional banking ETF KRE (KRE). While the bank initially outperformed during a COVID-boom, shares have fallen a huge distance from highs back in 2022. Currently, shares trade essentially at a 52-week low with the current share price of $168.90 being last seen in 2017.   The Value Corner The Value Corner’s Intrinsic Valuation Calculation can allow us to better understand what value exists in the bank stock from a quantitative perspective. Using the current share price of $168.90 an estimated 2024 EPS of $8.80, a realistic “r” value of 0.7 (7%) and the current Moody’s Seasoned AAA Corporate Bond Yield ratio of 5.01x, I derive a base-case IV of $173.90. This represents a fair valuation in shares relative to current prices. When using a more pessimistic CAGR value for r of 0.06 (6%) to model how a more bearish macroeconomic environment may impact overall business activity and loan origination, shares are still valued at around $158.40 representing a modest 6% overvaluation in shares. Considering both the book value, absolute comparison and my IV calculations, I believe that HIFS is trading at a fair valuation given their current profitability levels. However, it is important to note that any decrease in interest rates along with an increase in the proportion of higher interest rate loans over time should boost profitability significantly. While the short-term (1-12 months) could present almost any outcome for HIFS, I believe the bank continues to be one of the finest financial institutions in the U.S. Therefore, I see the bank as having a very positive long-term (2-10 year) outlook with significant opportunity to grow deposits, loans and profitability once a more favourable macroeconomic environment emerges. HIFS Risk Profile HIFS faces some real risks with competitive pressures and market cyclicality being the primary threats. Indeed, while HIFS may have superb asset quality and a wonderful loan book, the bank clearly struggles to compete when it comes to attracting deposits. While not surprising given how commoditized the regional banking industry is, it presents some challenges to HIFS. The primary threats arising from competitive pressures are an inability for HIFS to continue growing their operations sustainably along with the fiscal costs associated with competing for deposits. These two factors could degrade the bank’s overall operating efficiency and result in rising interest expenses relative to other competitors. I also see HIFS currently facing some real headwinds arising from the tricky stagflationary macroeconomic environment. Soft business activity along with higher interest rates may continue to degrade HIFS’ efficiency ratio and NIM which could result in a further degradation in profitability at the bank. This market cyclicality has another impact on HIFS' extensive equity securities portfolio which would undoubtedly fall in value should the wider market suffer from a cyclical selloff. While this is a real threat, I do, however, believe the bank is very strongly capitalized and do not foresee any material risk arising from their equity securities portfolio at the present time. From an ESG perspective, I do not believe HIFS faces any real threats at present time. Overall, I rate HIFS as having a low risk profile thanks to their conservative approach to asset allocation and the prevalence of cyclical, external threats over systemic business challenges. Risk analysis is however an inherently subjective task and I strongly urge you to conduct your own research into the firm’s risk profile should it be of concern to you. Conclusion Hingham Institution for Savings is perhaps one of the finest financial institutions currently in operation in the United States. A wonderfully engaged management team continues to steer HIFS in a positive direction with conservative asset allocation underpinning their entire business strategy. While the most recent earnings results were disappointing, HIFS continues to fundamentally be a solid and well run bank. I believe the current degradation in profitability is merely attributable to a weak business environment rather than an inherent weakness at the bank. Current valuations suggest shares are trading around a fair valuation, although at a massive discount relative to historic share prices. Given how stable the bank’s loan portfolio is, I am willing to accept this fair valuation as a rare opportunity to suggest building a position in the stock, as I believe earnings will rebound by up to 20% over the coming three years.  Therefore, I rate HIFS as a Strong Buy and believe it makes for a unique GARP opportunity. After an initial rebound in profitability, HIFS stock could make for a great long-term buy-and-hold banking stock, in my opinion.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432841607"}