Hingham Institution: Strong Loan Growth to Boost Basic Income (NASDAQ: HIFS)

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Denis Tangney Jr.

Hingham Institution for Savings Basic Income (NASDAQ:HIFS) will likely continue to rise over the next year and a half on the back of moderate loan growth. On the other hand, revenues will suffer from rising interest rates as the margin is inversely proportional to changes in interest rates. Overall, I expect the Hingham Institution to report basic earnings of $28.47 per share for 2022, up 11% year-over-year. On a GAAP basis, earnings are likely to decline 30% this year due to heavy losses on stock sales in the first half of the year. The year-end target price is quite close to the current market price. Therefore, I maintain a retainer rating on Hingham Institution for Savings.

Economic Factors to Slow Loan Growth

Hingham Institution’s loan portfolio grew 10.4% in Q2 2022 (42% annualized), which exceeded my expectations. Growth will likely slow as the unusually high second quarter growth is not sustainable, in my view. In addition, certain economic factors will weigh on loan growth.

Almost all of Hingham’s loans are home loans. Residential loans accounted for 15% of total loans, while commercial real estate loans (including construction) accounted for 85% of total loans at the end of June 2022, according to details given in the 10-Q filing. Therefore, the number of housing starts is a good indicator of product demand. Additionally, Hingham has a presence in Massachusetts, Washington DC 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 fallen so far this year after doing quite well over the past few years.

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US housing starts data by YCharts

High mortgage rates will likely further dampen loan growth in the coming year. Mortgage rates have softened recently, but are still quite high compared to a year ago.

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30-Year Mortgage Rate Data from YCharts

A stronger-than-usual upward trend in house prices also bodes ill for loan growth. First-time home buyers will be discouraged by high home prices and borrowing costs and will therefore postpone their home purchases until a more feasible time.

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Massachusetts House Price Index data by YCharts

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

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Massachusetts unemployment rate data from YCharts

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

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 2009 2,227 2,495 2,999 3,722 4,189
Net loan growth 9.6% 10.8% 12.0% 20.2% 24.1% 12.6%
Other productive assets 326 290 293 388 440 458
Deposits 1,573 1,821 2,139 2,393 2,618 2,947
Loans and sub-debts 615 514 417 674 1,163 1,187
Common equity 213 247 293 355 395 455
Book value per share ($) 97.2 113.2 134.2 161.1 179.5 206.7

Source: FDIC filings, author’s estimates

(In millions of dollars, unless otherwise indicated)

Room to take a hit from higher interest rates

Net interest income may suffer from rising interest rates, as the deposit portfolio is more rate sensitive than the loan portfolio. Since nearly the entire loan portfolio is comprised of home loans, which are mostly fixed rate, the average return on earning assets has low beta (rate sensitivity). At the same time, Hingham’s deposit portfolio is moderately sensitive to changes in interest rates due to its composition. Accounts that will revalue soon after a rate hike, namely regular, money market and NOW accounts, accounted for 36.6% of total deposits at the end of June 2022.

Management’s Rate Sensitivity Model estimates that net income would DECREASE by 10% year-over-year if rates increased by 200 basis points, as mentioned in the 10-K file for 2021. As mentioned in the last 10-K file Q, rate sensitivity has not changed much since the 10-K filing was released.

Given these factors, I expect the net interest margin to decline by 35 basis points in the second half of 2022 and an additional 10 basis points in the first quarter of 2023. Beyond the first quarter of the next year, I expect the margin to stabilize.

Probable normalized supply

The Hingham institution has remarkable asset quality, as non-accumulated loans were only 0.03% of total loans at the end of 2022. Provisions look quite high compared to non-accumulated loans. In June 2022, allocations represented 0.68% of total loans.

As yields are unlikely to rise much on loans, rising interest rates will have virtually no impact on the borrower’s ability to service their debt. Higher inflation and a possible recession, however, could lead to financial stress. Still, I’m not overly concerned as loan loss coverage currently seems excessive.

Overall, I expect provisioning to return to a normal level until the end of 2023. Therefore, I expect the annualized net provision charge to be 0.08% of the total of loans in each of the remaining quarters of 2022 and 2023. In comparison, the provision charge averaged 0.07% of total loans from 2017 to 2019 and 0.08% over the past five years.

Basic income expected to increase by 11%

The increase in the loan portfolio this year is likely to be the main driver of earnings. On the other hand, the contraction in margins will likely limit the increase in net interest income, and therefore net income. Overall, I expect the Hingham Institution to report basic earnings of $28.47 per share for 2022, up 11% year-over-year. On a GAAP basis, which includes equity gains and losses, I expect the company to report earnings of $21.53 per share for 2022, down 30% year over year. other. Earnings will decline on a GAAP basis due to heavy losses on equity sales in the first half of 2022.

For 2023, I expect the Hingham Institution to report earnings of $30.73 per share, up 8% year-over-year. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 66 67 85 102 115 119
Allowance for loan losses 1 2 2 3 5 3
Non-interest income (2) 9 9 15 (16) seven
Non-interest charges 20 21 22 22 27 30
Net income – Common Sh. 30 39 51 67 47 68
BPA – Diluted ($) 13.90 17.83 11:25 p.m. 30.65 21.53 30.73
Basic EPS – diluted ($) 14.99 15.12 8:43 p.m. 25.70 28.47 30.73

Source: FDIC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

The current market price is above the year-end target price

Hingham has increased its dividend nearly every quarter since the start of 2018. Given the earnings outlook, this trend will likely continue through the end of 2023. Hingham also typically pays a special dividend each year. I expect the company to pay a total cash dividend of $3.47 per share, which suggests a payout ratio of 11%. This payout rate is in line with the five-year average of 12%. My dividend estimates for 2023 suggest a dividend yield of 1.2%.

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

EX18 FY19 FY20 FY21 Medium
Book value per share ($) 97.2 113.2 133.8 161.1
Average market price ($) 212.4 188.6 184.6 308.7
Historical P/B 2.19x 1.67x 1.38x 1.92x 1.79x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $179.5 yields a target price of $320.6 for the end of 2022. This price target implies an upside of 8.4% compared to the closing price on August 12. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/B 1.69x 1.74x 1.79x 1.84x 1.89x
BVPS – Dec 2022 ($) 179.5 179.5 179.5 179.5 179.5
Target price ($) 302.7 311.6 320.6 329.6 338.6
Market price ($) 295.7 295.7 295.7 295.7 295.7
Up/(down) 2.4% 5.4% 8.4% 11.5% 14.5%
Source: Author’s estimates

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

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 13.9 17.8 23.3 30.6
Average market price ($) 212.4 188.6 184.6 308.7
Historical PER 15.3x 10.6x 7.9x 10.1x 11.0x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $21.5 yields a price target of $236.1 for the end of 2022. This price target implies a decline of 20.1% from at the closing price on August 12. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 10.9x 10.9x 11.0x 11.0x 11.1x
EPS – 2022 ($) 21.5 21.5 21.5 21.5 21.5
Target price ($) 234.0 235.0 236.1 237.2 238.3
Market price ($) 295.7 295.7 295.7 295.7 295.7
Up/(down) (20.9)% (20.5)% (20.1)% (19.8)% (19.4)%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $278.4, implying a 5.9% drop from the current market price. Adding the forward dividend yield gives an expected total return of minus 4.8%. Therefore, I adopt a note of restraint on Hingham Institution for Savings.

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