HIFS - Hingham Institution: Strong Loan Growth To Drive Core Earnings

• Loan growth will likely decelerate after the second quarter's remarkable performance but remain at a decent level.
• As the deposit beta is greater than the loan beta, the net interest income will suffer from hikes in interest rates.
• The December 2022 target price suggests a small downside from the current market price. Further, HIFS is offering a low dividend yield.

Core earnings of Hingham Institution for Savings ( HIFS ) will likely continue to surge in the next year and a half thanks to moderate loan growth. On the other hand, the top line will suffer from rising interest rates as the margin is inversely proportional to interest rate changes. Overall, I'm expecting Hingham Institution to report core earnings of $28.47 per share for 2022, up 11% year-over-year. On a GAAP basis, earnings will likely decline 30% this year due to hefty losses on sales of equities reported in the first half of the year. The year-end target price is quite close to the current market price. Therefore, I’m maintaining a hold rating on Hingham Institution for Savings.

Economic Factors to Slow Down Loan Growth

Hingham Institution’s loan portfolio grew by a hefty 10.4% in the second quarter of 2022 (42% annualized), which beat my expectations. Growth will likely slow down as the second quarter’s unusually high growth is unsustainable, in my opinion. Moreover, certain economic factors will weigh down loan growth.

Almost all of Hingham’s loans are real estate-backed loans. Residential loans made up 15% of total loans, while commercial real estate loans (including construction) made up 85% of total loans at the end of June 2022, according to details given in the 10-Q filing . As a result, the number of housing starts is a good gauge of product demand. Further, Hingham has a presence in Massachusetts, Washington D.C., and California. As these regions are very different from each other, the national average is appropriate for Hingham Institution. As shown below, housing starts have dropped so far this year after doing quite well in the last few years.

High mortgage rates will likely further slowdown loan growth in the year ahead. Mortgage rates have recently softened but they're still quite high compared to a year ago period.

A steeper uptrend than usual for home prices also bodes ill for loan growth. First-time home purchasers will get discouraged by the high home prices and borrowing costs and therefore put off their home purchases until a more feasible time.

The only macroeconomic factor in favor of loan growth is the unemployment rate. The job market hasn't been this strong in decades.

Considering these factors, I'm expecting loan growth to slow down to 3% in the third quarter of 2022 from 10% in the second quarter of the year. For full-year 2022, I'm expecting the loan portfolio to grow by 24%. For 2023, I'm expecting loan growth to continue at the same level as the latter part of 2022. Meanwhile, I'm expecting other balance sheet items to grow somewhat in line with loans. The following table shows my balance sheet estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Current Market Price is Above the Year-End Target Price

Hingham has increased its dividend almost every quarter since early 2018. Given the earnings outlook, this trend will likely be maintained through the end of 2023. Hingham also usually pays a special dividend annually. I'm expecting the company to pay a total cash dividend of $3.47 per share, which suggests a payout ratio of 11%. This payout ratio is in line with the five-year average of 12%. My dividend estimates for 2023 suggest a dividend yield of 1.2%.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Hingham Institution. The stock has traded at an average P/TB ratio of 1.79 in the past, as shown below.

The stock has traded at an average P/E ratio of around 11.0x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $278.4 , which implies a 5.9% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 4.8%. Hence, I’m adopting a hold rating on Hingham Institution for Savings.

For further details see: