I was looking at HIFS for some years and wanted to buy shares cheaper. With all the recent developments in the economy and the banking sector I got the chance to buy into a quality bank. A perceived quality bank with issues!
This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time. I might transact in any securities at any time.
We all dream about buying into high quality businesses cheaply and we are all too certain about pulling the trigger if hte opportunity would only present itself one last more time. We all would instantly do it. Truth is, they become cheap or prices decline if there are some issues recognized by many participants (if it indeed traded cheap is much clearer with benefit of hindsight). Currently there are obvious issues! (i looked at HIFS before)
HIFS is known as a higher quality bank with the capable involved management/owner family, the Gaughens, since 1993 and good insider ownership (c. 20%?). Hingham Institution for Savings (HIFS) funds its real estate loans with shorter-term deposits, hopefully sticky deposits at rather low rates due to good personal relationships and, not unimportant, easy processes valued by customers. In their AR 2022, and prior releases, they write all the right words for a bank focused on value creation. Though, HIFS is hurt by rising rates on deposits funding costs, and generates profits from term-structure transformation in times of normal yield curves.
Below pictures highlight this. In this sense, buying HIFS here is a bet on yield curve normalization. This should happen after a recession or when fear of coming recession abides, either way, it should happen (or can this stay for longer?). Further one bets on prudent profitable credit underwriting and growing business over time through healthy real estate market they are present already and a slow carefully executed expansion strategy into new regions applying their profitable business model.
- Hingham Savings goes big and goes it alone (patriotledger.com)
- Four Interesting Insights from Two Very Interesting Bankers | Bank Director
(extended family owned 40%+ of HIFS) - How to think about good personal relationships: Well, i currently changed my family name and address, and got a new mobile phone on top, and well, one of my banks made it way more complicated. All others had a very smooth online process, and apps functioned on the new mobile. Not the other one. How handy would come a bank brnache close by, where I know a bank teller for many years who just knows my face and who I am, irrespective of address and names. Since time is money, and well off people tend to value their dear time, I guess HIFS’ good personal relationships and easy processes have something going for it.
HIFS currently trades at the lower end of its valuation range over the last decade (1.2-2.7x P/B) with profitability measured as ROE currently at a low (10%) and thus shares trade at 1.5 1.4 1.35x BVPS ($179.74 as of Dec’22) accordingly, vs being mostly around 15% and sometimes reaching 20%-levels during the decade. HIFS had ROE below 10% once in the last 20yrs during 2007 (falling to 8%) and fell to a P/B below 1 in late 2008. Loan quality in GFC: provisions doubled (few years time lag) relative to total loans, but from a consistently low level.
The balance sheet as of December 2022 (10-k): the Bank’s net loan portfolio totaled $3,658m, representing 87% of its total assets. The Bank’s principal focus is real estate mortgage lending, with well over 99% of the loan portfolio secured by real estate mortgage loans. Deposit levels did not show dramatic declines.
- Real estate price developments (MA-Boston Home Price Index)
- Loans often come with initial fixed-rate period of usually 5yrs.
- HTM securities of 3.5m nominla value, bought in Q2’21 with maturity between 3-5yrs are currently, as of Dec’22 worth 3.09m (-12%).
Risks within banks’ business models are all over the media currently. HIFS also funds ist loan business (partially fixed rates, some floors) with shorter-term deposits. This structure benefits from falling interest rates (fixed loan rates, floors) resulting in cheaper deposits. Rising rates do not benefit the whole loan book and make deposits more expensive. On top, rising rates, might results in worse business environments and ultimately in higher provisions for, and actual loan losses.
- Deposits are getting more expensive for HIFS and NIM is shrinking, but, the worst case like customers pulling deposits out of fear or panic is very unlikely (Massachusetts DIF).
- Loan losses are hard to judge but the best hint might be historic data and this looks absolutely stellar.
Bought a small starting position of 1.7% Monday 13th March at $225 or 1.25x BVPS. Higher rates and loan losses would hurt their earnings and capital ratios, but if interest rates are lowered again (or term structure normalizes) and HIFS performs with low credit losses (as has historically been the case) this might be a great entry point.
> You might want to read why I sold it again: Puking out HIFS after the nibbling (re-thinking HIFS).
- Appendix (pdf)
- The US FHLB system, a key source of cash for regional banks, advanced $304 bn in the week march 13-19. That’s almost double the $165bn that lenders tapped from the Fed.
searching 4 value 
I keep checking it but hasn’t dropped that much. It really should be at covid lows with this amount of stress? Currently I like DFIN, ISV.TO, HQI but getting greedy hoping prices will drop further.
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