“You can do a lot of dumb things in banking as long as you don’t write bad loans”
Bob Wilmers, Former CEO M&T Bank
Hingham Institution For Savings has been run by the Gaughen family for 30 years. The management switched hands in 1992-93 through a shareholder takeover/vote. At the time of the take over 10% of the assets were non-performing, today it is 0.01% (one home loan). That’s a pretty amazing turnaround. The history of the bank’s prior mismanagement is crucial to understanding why they strive for excellence in every part of the bank and why the bank is so intentional with everything they do (and don’t do).
This year Hingham added to their list of things they don’t do. The new additions included notably crypto as well as other fields. Meanwhile, the list of things they do has only gone down as they don’t have any more PPP loans.
Looking forward they want to optimize areas they deem as attractive. These include organic growth, minority equity investments, dividends, and buybacks. They find acquisitions of other banks unattractive. Buybacks are difficult because Hingham doesn’t trade within a holding company it is a public bank. This means the approval process for buybacks is more cumbersome and they do not currently have board approval to do so.
One problem that we will continue to see in small and/or regional banks (Hingham included) is a discrepancy between the loans and deposits. Local loan opportunities continue to exist and increase, but the deposit growth is decreasing. For the most part, the approach to deposits and loans has remained unchanged. Overall the bank is working to be higher quality and more efficient.
The bank listed some key learnings which included not falling victim to hindsight bias. This is the problem of connecting decisions made to outcomes. They also emphasized as they do every year the importance of key people. Hingham’s history has made it what it is today. It is made or broken by the people that it is made up of.
Hingham likes to talk about the difference between structural and operational activities. Structural they describe as “Game Selection” and Operational they describe as “Game Play.” For example, choosing to play in the geographic and socio-economic regions they do is structural. However, the types of loans (multifamily) and their parameters (50% down payment) are operational.
One point I wanted to emphasize that has been debated ferociously on Twitter is office loans. Hingham has a larger office portfolio than most realize coming in at $550m but the majority of the loans are not the typical offices. Most think of a Dunder Mifflin-type office building in an industrial park, but for Hingham’s office loans, this is simply not the case. Instead, their loans are on the local accountant, lawyer, or doctor’s office in affluent suburbs like Wellesley, MA. These are much more safe loans for the bank compared to the stereotype. The only more stereotypical office loans that Hingham participates in are with a labor union which management feels very secure about. These loans make Hingham the largest creditor of labor unions in the US.
Hingham increased deposits by 20% in Q1 of this year. The First Republic (FRC) and Silicon Valley Bank (SVB) disasters happened at the end of the quarter. This means we haven’t seen most of the network effects in financial results yet. Hingham has scooped up multiple former FRC and Boston Private (owned by SVB) employees. Boston Private is an important competitor of Hingham on their home turf. The exodus of Boston Private and FRC customers is a prime opportunity for growth for Hingham especially as new loan deals are attractive. We will have to wait for Q2 results to see how Hingham capitalized (if at all) during this opportunity.
“You cannot overtake 15 cars in sunny weather…but you can when it’s raining.”
Ayrton Senna, 3-Time Formula One World Champion
This is the rain and the competition is crashing and sliding off the track. This means Hingham is under more pressure, but they have prepared for tough times. COO Patrick Gaughen said that there is no point and can often be harmful to try and get better returns (from riskier loans) in key moments. Hingham has performed well historically and isn’t trying to do anything crazy now. They simply are trying to be consistent and capitalize on the organic growth from the greater banking ecosystem.
Until Tuesday,
Soren
Disclaimer: Soren Peterson and Pillars And Profits Newsletter are not responsible for any financial results. Always do your own research.
Good stuff, thanks Soren