HIFS - Hingham Institution For Savings Stock Crushed Creating Opportunity

2023-10-16 15:31:19 ET

Summary

• Late Friday's release by Hingham Institution for Savings of its Q3 results showed a horrendous quarter.
• Hingham stock is down for a reason.
• Now trading at a discount, still pricey on earnings.
• Serial dividend raiser.
• Expect Hingham Institution for Savings margins to trough in Q4 and recover in 2024, along with the stock.

In today's financial services ongoing coverage, we are turning out sights back Hingham Institution for Savings ( HIFS ). This was a stock we recommended a few years ago, and shares doubled in two years. Those were massive gains, but that seems like a faded memory now as the stock has completely round tripped, losing 60% of its value since the Federal Reserve began its rate hiking campaign.

In our opinion, this retracement is now an opportunity to start to enter the stock for a rally in 2024. However, it is definitely expensive given earnings have fallen, just under 30X FWD earnings. The pressure will be on in Q4, but from there we see improvement. Take a look at the fall here of the stock:

Today we are recommending Hingham shares again here for a trade as the stock falls lower.

The play

Target entry 1 $155-$157 (40% of position)

Target entry 2 $145-$146 (60% of position)

Target exit: $175

Stop loss: $129.

Note: Options considerations come with most recommendations and are not shared on public columns

Discussion

This was a great winner for our traders. We think the time is approaching to reenter HIFS stock. All of the bad news that has pressed the company's earnings potential appears priced in. This stock has been beaten down badly, despite continuing to raise its dividend.

Make no mistake, we love a growing dividend, but Hingham stock is down for a reason. Its fiscal performance has been crushed in the last two years with rate hikes. The company is facing near-term challenges with its interest bearing liabilities. Revenues have taken a hit, and book value has fallen, but the stock is on sale in our opinion. We are of the belief that the negativity is priced in.

In this column, take another look at the key metrics that we as a firm like to examine for regional banks. The bank remains a consistent dividend raiser , and we love that, but the yield is low. We are entering for the capital appreciation likely to come as the rate hike campaign comes to an end. Let us discuss the key metrics you should be aware of on this name and why we think the stock has fallen too far and will snapback.

Headline performance

The bank's operational results were mixed in Q3, and the earnings were pretty horrible on the surface. It was a quiet late night release on a Friday. Hingham saw revenues and earnings get crushed, despite continued loan growth and deposit strength. With Q3 2023 revenues of $11.8 million, the bank saw a huge 47% decrease in this metric year-over-year. This was driven by margins which were crushed in loan and deposit growth, which we will discuss.

Folks, it needs to be stated, Hingham stock is down because earnings power has suffered immensely. Net income was $3.3 million or $1.53 per share. This compares to a net income figure of $10.5 million, or $4.89 per share, in Q3 2022. This is devastating on the surface. So, the stock is down for good reason. But there is reason to be positive going forward. The rate hikes are likely coming to an end, and the yield curve is stabilizing. While still inverted - and Hingham employed strategies to account for his - the curve is starting to normalize.

Book value suggests sale

For many quarters, this stock traded at a premium-to-book value. Now that has inverted and we are at a discount. At the present share price of $159, HIFS stock is trading at a 15% discount-to-book. Book value at the end of Q3 was $186.74. We like to buy banks at a discount to book value.

Now here is the thing. Despite all of the carnage in the stock in the last year, and the hit to earnings, book value is up from last year. Yes, it has increased. The book value of $186.74 represents 5% annualized growth year-to-date, and was 6% growth from Q3 2022.

Loan and deposit growth

As we have discussed in many other banking columns, in early 2023, we have seen peak margins. The costs of funds/deposits has simply skyrocketed as institutions fight for deposit dollars. There is a lot of competition. So, this is the main reason earnings are down. But not only is book value up, both loans and deposits have grown as well from last year. That is a very positive sign. No matter which bank we analyze, growth in loans and deposits is a key metric for any bank, small or large.

Net loans totaled $3.809 billion at September 30, 2023, and this is 5% annualized growth year-to-date and 7% growth from September 30, 2022. So folks, the bank is issuing more loans, and those loans are at higher rates too. That is a good sign for the future. Growth was concentrated in the bank’s commercial real estate portfolio, but it is not office space, it is multifamily rentals. That seems a safe bet. However, San Francisco operations have been slow, one overhang given market conditions for customers. That said, despite the competition for deposits, Hingham grew deposits.

Total deposits, including wholesale deposits, increased to $2.588 billion at September 30, 2023, representing 7.5% growth from September 30, 2022. Total retail and business deposits increased to $1.022 billion at September 30, 2022, representing 2% annualized growth year-date and 2% growth from September 30, 2022. Non-interest bearing deposits, included in retail and business deposits, increased to $418 million at September 30, 2022, representing 8% growth from a year ago. This is quite strong. But, as we said, what the company is making on the loans relative to what it is paying to acquire capital has decreased.

The net interest margin has been crushed, and is why earnings have fallen off a cliff. Net interest margin cratered 171 basis points to 1.05%, as compared to 2.76% for the same period last year. Management noted :

"The Bank experienced a substantial increase in the cost of interest-bearing liabilities when compared to the prior year. This was driven primarily by the repricing of the Bank’s wholesale borrowings, wholesale deposits and higher rates on the Bank’s retail and commercial deposits. During this period, the increase in the cost of funds was partially offset by a higher yield on interest-earning assets, driven primarily by an increase in the yield on loans, an increase in the interest on reserves held at the Federal Reserve Bank of Boston and a higher Federal Home Loan Bank of Boston stock dividend."

We believe however that with rates normalizing, margins will stabilize. Future loans will be at higher rates, and we expect margins to begin expanding again in 2024. This is a reason we suggest the stock.

Hingham Institution for Savings asset health

So here is the thing. Despite the pain on margins, Hingham maintained strong asset quality metrics in 2023. In fact, the asset quality here is among the best we have seen when covering specialty regional financial institutions. At the end of the quarter, non-performing assets totaled < 0.009% of total assets, compared to 0.03% at December 31, 2022, and 0.02% at September 30, 2022. Non-performing loans as a percentage of the total loan portfolio totaled 0.01% at September 30, 2023, compared to 0.03% at December 31, 2022, and 0.02% at September 30, 2022.

Now, commercial real estate has been a fear in the sector, right? Well, Hingham had no non-performing commercial real estate loans in Q3. Further, Hingham did not record any charge-offs at all in 2023.

Final thoughts

We would like to end with one more comment from management which supports our thesis that margins, and subsequently earnings, will start to expand again. This is our thesis, but Chairman Robert H Gaughen Jr. stated:

"As the Federal Reserve approaches the level of short-term rates that is sufficiently restrictive to return inflation to its target, the yield curve has started to steepen again. This will eventually allow us to achieve more satisfactory returns as we obtain higher rates on new and adjusting loans and incremental funding pressure abate."

The stock was crushed because margins fell and so did earnings. Our thesis is that margins are troughing out and will rise in 2024, and this comment clearly supports this thesis. Hingham Institution for Savings stock is at a significant discount-to-book, and has exceptional asset quality.

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