The Hingham Institution for Savings (the company, Hingham) is a USD 400m market cap, regional US bank. It was founded in 1834 and is one of America’s oldest banks. With over $2.5 bn in assets, Hingham has nine locations in Massachusetts. They claim to be a partnership in spirit, with family leadership stretching back three generations, despite being a corporate in form. They take a long-term approach to investments, building relationships with customers, and developing the team — I did not copy that from Quicky #6 on Svenska Handelsbanken). (about-us)
Its share (HIFS US) traded at above $ 200 at the beginning of this year and did fall to a low of $ 130 in March. Currently, it trades at a modest trailing 10x P/E but on very low dividend yields of 1% after its share price did fully recover and is currently trading at pre-pandemic levels which I find a bit surprising. Basically that means, that (the market consensus thinks) business prospects are the same as pre-pandemic or that there is no negative net-effect (sure, lower rates support higher multiples, but comparing to other current situations). Can that be? The following questions come to my mind and I want to look into them
- no major credit losses due to covid?
- lower interest levels pressuring net interest income or NII?
- fortress balance sheet as enabler for taking advantage during current crisis?
This is another part of my series of Quickies on new companies.
The general underlying development looks very solid, at least that’s my first impression (see graphs below). My second impression was, they really seem to have a long-term business approach, since the first line of the annual report 2019 (AR 2019) does not read ‘to our shareholders‘ but it begins with ‘To Our Business Partners‘.
The book value per share shows a very nice long-term growth trend since 1993. But since 2008 the price per share (orange) rose stronger than book value (blue) with further accelerating since 2015.
The last five years show a solid development (AR 2019) with regard to several important KPIs. Total assets and loans grew strongly, mostly financed with deposits. The loan category ‘commercial mortgages’ grew strongest, doubling the volume during the last five years and is responsible for 60% of total loans volume, at the end of 2019 (potential for credit losses?). The company consistently generated Returns on Equity or ROE of ~15%. Equity to total assets grew consistently and make for a high equity ratio of 9.2% in Dec 2019. These trends mostly continued in Q3 (release), ending Sept 2020.
1) Credit losses are low, so far, despite the pandemic and a big commercial mortgage loan portfolio. But, less than 1% of loans got modified by number, or 3% by volume: indicating some underlying problems. The Q2 2020 Q-10, p33 provides some (reassuring) details on the matter. The below difference between non-performing assets/loans seems to come from a property acquired in January in an auction. Some pandemic related credit losses could materialize after some time lag, especially with potentially waves two and three underway.
2) Net interest income or NII is an important measure for banks resulting from interest income (interest bearing assets x interest rate) minus interest expenses (interest bearing liabilitites x funding rate). Globally, interest rate levels are at historic lows with tendencies to squeeze interest margins. Hinghams net interest margin or NIM decreased slowly but steady since 2015 (3.17%) and stood at 2.72% for 2019. During 2020 it inreased on the basis of much cheaper funding conditions (special factor). NIM was 3.46% for Q3 (+69 bps yoy). In the mid to long-term Hinghams NIM could well come down.
Hingham relys heavily on deposits. As of Sept 2020, Hingham had total deposits of $ 2bn, consisting of interest bearing (1.7bn) and non-interest-bearing deposits (0.3bn). In addition, Hingham has Federal Home Loan Bank advances of 400m, down from 520m in Sept 2019. It seems, Hingham is now paying higher interest rates for deposits (plus deposit insurance 212k in Q3, up from 22k in Q3 2019). Maybe that’s a tool for client retention, if an expensive one. If clients ever put their savings into another solution (many fintechs nowadays) would Hingham have a big problem?
3) Its strong balance sheet enables Hingham to ‘capitalize on opportunities’ (at least theoretically). Keeping a strong balance sheet (high equity ratio) while growing strongly (loans) means that earnings payouts (dividends) will probably stay low.
I clonclude, that Hingham is a solid regional bank offering an attractive growth profile. This growth is ultimately based on its local activity giving rise to both, a competitive advantage based on local specialisation and regionally concentrated economic risks. Additionally, I see the longer-term potential risk for technology disrupting its business (deposits) and NIM being squeezed.
From my point of view, they could share a bit more about the underlying business drivers: Why did numbers develop how they did, i.e. why is the interest rate on deposits that high? (note: I wrote a quicky, not doing the much more detailed research I do usually)
I hope you enjoyed this post. What is your take on Hingham?