Based into Greater Boston MSA, the community bank analyzed within this article is also among the best financial stocks in the last decades, beating well known names as Wells Fargo, Bank of America, PNC or JPMorgan Chase among others: the explanation is simple, the Hingham based bank grew its deposits annually during all the years just before and after the 2007 financial crisis. An effective management (working to fix costs and focusing only on the commercial and housing markets) made the bank an incredible value creator in the last decades and more exactly, in the last few years. With the stock currently trading around $230 per share level, the potential to break the recent highs ($242 per share) depends on the next few factors to watch:
1) Continuously improving economics and efficiency model:
As we can see, the total assets recorded by the company had been going up yearly (the company also gained net assets even during the hardest times of the 2007 financial crisis, making one of the best small performing banks not only in Massachusetts but nationally). With an amazing, fast growing asset portfolio, the company has been able to double its asset base just in the six year period, an amazing growth within the industry. That growth is maybe more impressive when we compare it to its natural operating area: mostly the Greater Boston area (the company is classified by FDIC into Southern Boston Area), where the global deposits had fallen in the last few years ad we can see in the fourth point of the current analysis.
At December 31, 2016, approximately 99.9% of the Bank’s loan portfolio consisted of real estate related loans, including mortgages on developed commercial properties (49%), residential mortgages (43%) and construction loans (8%).
The company focuses its efforts on simple saving and loan products (the previous sentence was extracted from company’s 2016 annual report), not offering investment or hard to understand financial products. The bank prefers to only focus its strategy offering one of the best interest rates in Eastern Massachusetts and Greater Boston, where HIFS operates. That focus and a well defined strategy made the Hingham based corporation one of the top thrift in a national scale ranking elaborated by SNL Financial in the recent decade. Is common to see a familiar treat with companies and individuals (the company dedicates around half of the annual report to explain some successful cases made within the area where the bank operates: from local restaurants to real estate companies) at the annually published annual reports, showing again its simplicity operating and its well focused strategy, a focus that translates into one of the fastest growing book value per share annually (recording almost a fourteen increase per year during some recent years) among all financial stocks traded nationally.
2) Ownership among Board of Directors:
The bank’s share capital is well distributed among some executive members that remain within the ownership after decades of ownership, being an excellent sign about the confidence that the management has in the future of the bank:
-Mr. Julio Hernando (Director in the company since 1994) is the largest shareholder, controlling directly 303,309 shares of the bank, or 14,4% of the total outstanding shares.
-The second largest shareholder of the bank is Mr. Robert Gaughen, the current Chairman, President and CEO since 1991. Mr. Gaughen owns directly 269,519 shares of the company, or 12,80% of the total outstanding shares.
-The third largest shareholder of the company is Blackrock with around 3% of the shares, and just after Blackrock we can find another two directors related to the bank since 1993: Mr. Ronald Falcione owns 54,989 shares (2,61% of the bank), and Mr. Robert Lane owns 50,736 shares (2,41%). Finally, with 32,556 shares owned directly (1,55% of the company) we find Mr. Scott Moser (independent director at Hingham since 2008).
As we can see, the controlling interest of the management clearly surpasses the 30 percent mark, being maybe the greater sign of the confidence that the executive board has on the future of the bank. That confidence is a long-term success history (most of the Board of Directors maintains its job within the Massachusetts based bank since at least two decades or more). Investors can also see this relationship as a positive sign in order to know that the management interests are totally aligned with management ones in the long term in order to create value. That well aligned strategy with investors translated into a dividend increase since the company started paying dividends in 1994 (going on that period from 11 cents per share annually to around 1.65 dollars per share today, or fifteen times higher amount distributed among shareholders).
3) Shares outstanding and well managed cash flow from operations:
As we can see in the previous chart, the company’s net income doubled (EPS, earnings per share) in the last six years, making it a hard to replicate example among local financial companies nationally. As explained before, the company paid around 1.65 dollars per share in dividend concept in 2016, making HIFS a stock with room to increase its dividend in the upcoming years not only because of improving net income annually but because of its low payout ratio (around fifteen percent, compared to 28 percent payout ratio for JPMorgan Chase, 30 percent for Bank of America or 34 percent for Wells Fargo). That low payout ratio can also seen as a positive sign for the company, that find better places to invest that extra money, increasing its loan base annually and generating higher annual net income for its shareholder, a net income that is finally reflected in a brilliant balance sheet that compounds at a higher pace compared to its competitors. Probably the strategy that the company is following in this dividend policy is the best in class, increasing its dividend annually since 1994 but investing a considerable amount in new loans, increasing its commercial activity and as a result, increasing the bank book value for its shareholders.
4) Current deposit market share:
Recently, the bank has been able to grow its deposit base even when the Greater Boston MSA has decreased during the recent years as we can see in the following chart:
The company was able to grew its deposit market share in a highly competitive market as Boston MSA is, and the company has today around 0.50 percent of the total Greater Boston deposits, or around 1.4 billion dollars. According to FDIC data, the company beat every year the overall growth in deposits within the Boston MSA except for 2014 (when the overall deposit grew by 22,87 percent and HIFS “only” grew its deposit base by 10,02 for the same year). We can see that the strategy of focusing on simple loan and saving products attracted a high number of customers because of simplicity and convenience.
The bank is small (not being even among the twenty largest banks by deposits within the Greater Boston area, according to FDIC data) even after that amazing growth since their start of operations decades ago, so the room for growth still intact for a company that rarely opens a new branch if the previous ones are not generating considerable levels of revenue and net income. Probably, we are going to see some branch opening before 2020 within the Greater Boston area, so we can expect that the company revenue is going to continue trending up in the next upcoming years. Adding the analyzed efficiency that management wants in their current offices (reducing costs, analyzed in the next point), is easy to imagine that the bank is going to continue compounding at least at the same pace as they have been doing in the last decade.
5) Time-proved efficient model:
As of September 2017, the company has actually 94 employees (with longevity working within the company of around fifteen years in average) according to FDIC data, so we can see that the company continues the strategy to maximize its revenue (and net income) per office started a few years ago, reducing the worker number on its twelve offices while those offices break annually its previous deposit record levels, increasing the bank efficiency level to one of the highest within the United States. Probably, HIFS is going to continue with that cost-cutting strategy to maximize its margins and efficiency levels to new highs, translating it into a higher EPS and in consequence, a higher book value increase annually.
6) Portfolio focus in Eastern Massachusetts and Greater Boston Area:
One of the added advantages for the company is that the operating area is considered one of the most dynamic economic areas nationally, resulting in a highly competitive and fastest growing MSAs in all the United States. HIFS operates within few but high income counties within or around Boston city, being those counties not only among highest income counties within Massachusetts but within the entire United States. Boston is considered an alpha/global city, being considered one of the big financial centers worldwide, with a remarkable presence of a fast growing biotech industry. The company fits perfectly within the community they serve as worker longevity working in a specific branch is around fifteen years, creating a more convenient and closer relationship with customers in the long term (an old-feeling lost by biggest banks customers nationally and another great point for HIFS).
The company reflects annually on its annual report that among the risk factors is that the bank is entirely focused on Eastern Masachusetts and Greater Boston areas as they reflect in their 2016 annual report:
A downturn in the local economy or a decline in local real estate values could hurt our profits. Unlike larger financial institutions that are more geographically diversified, the concentration of the Bank’s loans directly or indirectly related to real estate in eastern Massachusetts, the Bank stands to be more severely impacted by adverse trends affecting real estate than if its loan portfolio had a larger component of non-real estate related commercial loans.
As we can see in the previous statement , the company depends entirely from the Greater Boston economic development: the vast majority of their loans are directly linked to this development, as the loans the bank generates are mainly secured by real estate located within this area (as we can read the following statement from their most recent annual report), so the bank is benefiting from the good development of the Boston MSA, but is also true that HIFS needs that Boston is able to continue being a world class city that attracts investments and generates economic activity within the area to continue being the dynamic area that today is:
The Bank’s commercial loans, with limited exceptions, are secured primarily by real estate (usually income producing residential and commercial properties). Substantially all of the Bank’s residential mortgage and home equity loans are secured by residential property in eastern Massachusetts.
We can conclude that 1834 established Hingham based bank feels comfortable producing top returns for their investors focusing only into simple and easy to understand consumer products, maintaining one of the highest returns and net income margins nationally. The company focuses maximizing its revenue and net income levels at their current offices more than with opening of new ones, being one of the banks with the highest net income per office in the entire country. All that can be added to well oriented and reinvested cash flow from operations, having only a fifteen percent payout ratio (with an annual growing dividend since 1994) that creates a faster than average revenue growth, that finally reflects in a compounding machine for long term investors, with an annual book value per share increasing at an average 12-14 percent per year.
Note: All the information reflected in the article is obtained from the company’s annual 10-K and annual report documents, published and available at https://www.hinghamsavings.com/investor-materials