Prepared by Stephanie, Analyst at BAD BEAT Investing
For the last few weeks, we have been encouraging our members and followers to put money into financials, and specifically regional banks. This was a contrarian set of calls the last few weeks, and now shares in the space are moving sizably higher after lagging the market rebound from the COVID-19 lows. Our contrarian advice worked to generate rapid returns. One name that is a hidden gem is Hingham Institution for Savings (HIFS). Truthfully, we wish we spotted this undercovered name sooner for our BAD BEAT Investing members because it is a winner. While the stock has rallied tremendously, we believe it is a buy on any pullback and will head substantially higher. The bank’s management took advantage of opportunity in this COVID-10 impacted market, and drove nice gains. This all comes despite the painful interest rate environment. In this column, we introduce our followers to this bank with our customary review of the key metrics that we as a firm like to examine for regional banks. With the prospects of a COVID-19 vaccine, banks stand to do well. Hingham recently reported Q3 earnings which were impressive. In addition, the bank is a serial dividend raiser and we love that. The only downside is that the yield is low, but this is offset by the big capital gains in the name. Wait for a pullback then buy this name. Let us discuss the key metrics you should be aware of on this name.
Performance on the headline figures
Similar to the range of other names in the space we have covered, the bank’s operational results were better than expected in Q3. Hingham saw revenues and earnings grow on the back of continued loan growth and deposit strength. With Q3 2020 revenues of $26.7 million, the bank saw a huge 26.7% increase in this metric year over year. This was driven by loan and deposit growth which we will discuss.
We saw a respectable performance on earnings, and it needs to be stated. We were pleased to see revenues grow which helped fuel earnings power. Net income was solid. Net income was $15.2 million or $7.12 per share. This compares to a net income of $9.0 million, or $4.23 per share, in Q3 2020. There was a mixed set of results for regional banks in Q3 2020. The result for Hingham was quite welcomed. Well, we know that performance got hit earlier this year as COVID-19 ravaged the economy, but things are improving. We think 2021 will be even better based on the trends we are seeing for banks, and now, with a possible COVID-19 vaccine, we see rates moving. That bodes well for banks, and Hingham is a total winner.
Book value suggests shares are at a major premium, but that premium is deserved
We would really like the stock if it gave back some of the gains seen the last two weeks so that you could get a better price before entering the stock. This is especially true when we look at the price relative to book value.
Investors should wait, in our opinion, though we are bullish. The bank’s stock is somewhat expensive at $222.21 relative to the book value per share at September 30, 2020. Book value per share was $130.24 as of September 30, 2020, representing 17% annualized growth year-to-date and 17% growth from September 30, 2019. It should be noted that much of this premium is new, as just a few weeks ago, shares were well under $200, and a few months ago were just above book value. If shares fall, they would be more attractive, but momentum is positive here.
Loans and deposit growth
No matter which bank we analyze, growth in loans and deposits is a key metric for any bank, small or large. That’s how you make money as a traditional bank. Bank stocks rise when rates rise because the idea is that they should make more money on the margin. The net interest margin for the quarter ended September 30, 2020 increased 69 basis points to 3.46%, as compared to 2.77% for the same period last year. This is one of the few banks that saw a massive rise here. Winning.
Net loans totaled $2.359 billion at September 30, 2020, representing 8% annualized growth year-to-date and 10% growth from September 30, 2019. Growth was concentrated in the bank’s commercial real estate portfolio. Interestingly, commercial real estate has been a terrible place to be, but Hingham has made it work. This is truly impressive.
Total deposits, including wholesale deposits, increased to $2.027 billion at September 30, 2020, representing 15% annualized growth year-to-date and 19% growth from September 30, 2019. Total retail and business deposits increased to $1.532 billion at September 30, 2020, representing 10% annualized growth year-date and 8% growth from September 30, 2019. Non-interest bearing deposits, included in retail and business deposits, increased to $303.8 million at September 30, 2020, representing 37% annualized growth year-to-date and 31% growth from September 30, 2019.
Simply put, these are some of the best metrics we have seen in a regional bank. That said, every time you look at a bank of any size, you should have a look at asset health.
Comment on asset health
Hingham maintained strong asset quality metrics in Q3 2020. The provisions for loan losses did increase from last year to $0.35 million, versus $0.30 million last year. What you should note is that the provisions for loan losses were down tremendously from the sequential quarter. Q2 2020 saw provisions for loan losses at $0.56 million, so this trend is very positive. Non-performing assets improved from Q2 2020. Non-performing assets at September 30, 2020 totaled 0.23% of total assets, compared to 0.22% at December 31, 2019 and 0.05% at September 30, 2019, but down from 0.24% at the end of Q2 2020. Non-performing loans as a percentage of the total loan portfolio totaled 0.10% at September 30, 2020, compared to 0.25% at December 31, 2019 and 0.06% at September 30, 2019. They were down, however, from 0.11% at the end of Q2 2020.
We need to also point out that COVID-19 has not been a major impediment versus many other regional banks. At September 30, 2020, the bank had modified less than 1% of its total loan portfolio by number and less than 3% by dollar in response to COVID-19.
Final thoughts on Hingham
This is a hidden gem of a bank. It is crushing the average regional bank on key metric performance that we care about. This is why it is trading at a massive premium-to-book. Still, it is a winner. The stock is getting a big boost on the back of positive prospects for a COVID-19 vaccine. We think that 2021 is when the real improvement comes in. We believe that if rates improve, earnings will improve, and the stock will sustain gains. If the market knocks this stock back toward $200, buy this tremendous company.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HIFS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.