I find this whole discussion annoying. HIFS posts a good efficiency ratio because its deposit franchise is tiny and it funds loans with wholesale borrowing. Any idiot can create a bank that borrows short term wholesale and lends out of area on national credits and post a terrific efficiency ratio. In fact, tons of idiots that run M-REITs have done precisely that. And that’s what HIFS is, an M-REIT. This is not a quality bank. You are evaluating it based on an historically favorable interest rate period.
Heres a reply from Gwen, ""Hingham has operated through several yield-curve inversions since the 90s, and has optimized their balance sheet to endure them. Hingham would have been just fine had rates remained at historical norms pre-GFC. I understand Hingham's model is a bit confusing for people, but an M-REIT can't self-fund up to >60% of its book without wholesale deposits, which Hingham can through FHLB and Fed funds, as well as non-loan assets thanks to the quality of its balance sheet. A traditional deposit-seeking model is much more limited in that capacity unless it runs an extremely conservative loan book, which is very unlikely without a strong incentive structure that encourages cross-cycle thinking and a likely big sacrifice re efficiency and profitability. An M-REIT is similarly constrained. Quality commercial relationships also take time to build, and efficiency takes a long time to scale. If it was something banks could just, "switch on," then why aren't more banks doing it, if not because the marketability and behavioral discomfort of Hingham's model is less saleable, and the associated assets are less profitable in the immediate-term?"
Your (Gwen's) response doesn't make a lot of sense to me. FHLB loan rates ARE wholesale funding. Current short term FHLB rates are 5.55% and 1 year term is 5.2%, in both cases ignoring the cost of FHLB equity required to borrow. In contrast, even banks with below average deposit franchises can sell CDs at 3-4%. I am sorry, but this is a bank with virtually no franchise value on either the asset or liability side, with a serious duration gap problem. You can like it as a rates trade, you can think they are reasonably good purchasers of syndicated loans, but there's nothing else positive you can say about this bank. It has zero franchise value.
Gwen here. In my report, there's a discussion of interest rates and Hingham's wholesale flexibility that might answer your questions. The report is also not just about Hingham, so I hope you find value in other areas of the report.
To make a comment on franchise value: Hingham's wholesale is focused on HLB-Options at present, which is a function of the quality of their collateral. Those rates are similar to the franchisee CD rates you cite. There's a bias that views a classic deposit-seeking model as the best way to access low-cost funds, but they're mistaken. A high quality loan portfolio can access highly efficient funds at rates far below wholesale averages in rising rate environments, which gives the management of such banks significant control over their balance sheets that traditional franchisee models do not have.
I don't want to make a big deal out of this and if you are done responding to me, I'm happy to leave it be, but HIFS paid a blended average of 437 bps on its non-deposit borrowings, even using FHLB's option advance facilities. For the benefit of those not familiar, HLB option advance is a term loan where the borrower grants the HLB the option to call the loan early. Meaning the HLB advance rate has the effect of understating the rate at which HIFS is borrowing and has to be adjusted for the option written. This is an act of desperation and HIFS' NIM has fallen under 1% even with with change to HLB option borrowing. But you don't have to take my word for it: HIFS knows their lack of price-advantaged deposits is a mistake and not a competitive advantage. They are telling you exactly that:
"In the first quarter of 2024, the Bank continued to focus on developing and deepening deposit relationships with new and existing commercial and non-profit customers, retaining maturing time deposit balances, and managing its wholesale funding mix between wholesale time deposits and FHLB advances in order to mitigate the negative impact of increasing short term rates in the cost of funds."
If they were smart, they'd start looking at buying small banks with 60-70% LDRs and using their overpriced stock as an acquisition currency.
If you want to read an explanation of why HIFS is a short (unless you are convinced of big short term rate cuts), you can read Aurelius' write-up of HIFS here:
He's saying what I am saying with a lot more patience and grace. If you want to hear someone saying it with even less patience and grace, talk to @thebankhzar.
I find this whole discussion annoying. HIFS posts a good efficiency ratio because its deposit franchise is tiny and it funds loans with wholesale borrowing. Any idiot can create a bank that borrows short term wholesale and lends out of area on national credits and post a terrific efficiency ratio. In fact, tons of idiots that run M-REITs have done precisely that. And that’s what HIFS is, an M-REIT. This is not a quality bank. You are evaluating it based on an historically favorable interest rate period.
Heres a reply from Gwen, ""Hingham has operated through several yield-curve inversions since the 90s, and has optimized their balance sheet to endure them. Hingham would have been just fine had rates remained at historical norms pre-GFC. I understand Hingham's model is a bit confusing for people, but an M-REIT can't self-fund up to >60% of its book without wholesale deposits, which Hingham can through FHLB and Fed funds, as well as non-loan assets thanks to the quality of its balance sheet. A traditional deposit-seeking model is much more limited in that capacity unless it runs an extremely conservative loan book, which is very unlikely without a strong incentive structure that encourages cross-cycle thinking and a likely big sacrifice re efficiency and profitability. An M-REIT is similarly constrained. Quality commercial relationships also take time to build, and efficiency takes a long time to scale. If it was something banks could just, "switch on," then why aren't more banks doing it, if not because the marketability and behavioral discomfort of Hingham's model is less saleable, and the associated assets are less profitable in the immediate-term?"
Your (Gwen's) response doesn't make a lot of sense to me. FHLB loan rates ARE wholesale funding. Current short term FHLB rates are 5.55% and 1 year term is 5.2%, in both cases ignoring the cost of FHLB equity required to borrow. In contrast, even banks with below average deposit franchises can sell CDs at 3-4%. I am sorry, but this is a bank with virtually no franchise value on either the asset or liability side, with a serious duration gap problem. You can like it as a rates trade, you can think they are reasonably good purchasers of syndicated loans, but there's nothing else positive you can say about this bank. It has zero franchise value.
Gwen here. In my report, there's a discussion of interest rates and Hingham's wholesale flexibility that might answer your questions. The report is also not just about Hingham, so I hope you find value in other areas of the report.
To make a comment on franchise value: Hingham's wholesale is focused on HLB-Options at present, which is a function of the quality of their collateral. Those rates are similar to the franchisee CD rates you cite. There's a bias that views a classic deposit-seeking model as the best way to access low-cost funds, but they're mistaken. A high quality loan portfolio can access highly efficient funds at rates far below wholesale averages in rising rate environments, which gives the management of such banks significant control over their balance sheets that traditional franchisee models do not have.
I don't want to make a big deal out of this and if you are done responding to me, I'm happy to leave it be, but HIFS paid a blended average of 437 bps on its non-deposit borrowings, even using FHLB's option advance facilities. For the benefit of those not familiar, HLB option advance is a term loan where the borrower grants the HLB the option to call the loan early. Meaning the HLB advance rate has the effect of understating the rate at which HIFS is borrowing and has to be adjusted for the option written. This is an act of desperation and HIFS' NIM has fallen under 1% even with with change to HLB option borrowing. But you don't have to take my word for it: HIFS knows their lack of price-advantaged deposits is a mistake and not a competitive advantage. They are telling you exactly that:
"In the first quarter of 2024, the Bank continued to focus on developing and deepening deposit relationships with new and existing commercial and non-profit customers, retaining maturing time deposit balances, and managing its wholesale funding mix between wholesale time deposits and FHLB advances in order to mitigate the negative impact of increasing short term rates in the cost of funds."
If they were smart, they'd start looking at buying small banks with 60-70% LDRs and using their overpriced stock as an acquisition currency.
If you want to read an explanation of why HIFS is a short (unless you are convinced of big short term rate cuts), you can read Aurelius' write-up of HIFS here:
https://victaurs.substack.com/p/whats-a-cult-ish-bank-stock-worth
He's saying what I am saying with a lot more patience and grace. If you want to hear someone saying it with even less patience and grace, talk to @thebankhzar.