Thread by @frankinvesting

Thread/ $HIFS - A high quality, small-cap bank with exceptional management.

1/ Hingham Institution for Savings was founded in 1834 as a mutual savings bank in Boston, Massachusetts. It eventually listed in 1988.

2/ $HIFS currently have 11 locations, 8 of which are in the South Shore of Massachusetts. The have also recently expanded into Washington D.C in which management recognise as a similar market and a growth opportunity.

3/ Currently $HIFS has a market cap of $680M. Since 1993 when the Gaughen family took full control of the bank, the stock has returned 100-1 for shareholders. Pretty impressive considering how small the company still is.

4/ The history of the bank is worth looking into, but too detailed for a Twitter thread. There is only one write-up by ladera838 on Value Investors Club if you are interested. A great read!

5/ the most important detail of the banks history is since the Gaughen family took over, the bank completely changed and has performed exceptionally. Book value per share improved from $7.33 to $137.02 between 1990-2020. The family currently own ~30% of shares outstanding

6/ maybe more impressive than the BV per share growth is the improvement of their efficiency ratio from 145% in 1990 to 25% today. Management have been obsessed with cutting unnecessary costs and reluctant to increase any overhead.

7/ $HIFS do not make any acquisitions, don’t dilute shares (besides small amounts from options packages), they haven’t bought back shares and only payout ~15% of earnings. Which is much lower than a typical bank.

Instead, management reinvest almost all retained profits.

8/ compared to a usual bank $HIFS keeps operations very simple. They only do three things;

1.Residential real estate lending
2.Commercial real estate lending
3.Deposit banking

All of which takes place in Massachusetts & now Washington D.C

9/ Warren Buffett once said “Banking is very good business if you don't do anything dumb.” $HIFS seems to live by that mantra and are laser focused on being extremely efficient and effective with their simple operations.

10/ the chart below shows just how efficient $HIFS are compared to other banks. Their net charge-offs are almost unnoticeable compared to other FDIC insured banks. Even during tough economic times such as 08-09

11/ so it’s clear to me that’s $HIFS is a high quality bank with great management, now for a simple look at valuation.

Book value has increased at ~12% CAGR over the past 20 years. The average P/B multiple over this period has been 1.6x and they currently trade ~2x book.

12/ It is likely that they continue to compound BV per share at 12% over the next 5-10yrs, potentially higher with expansion into Washington. So let’s be generous and assume 14% plus the 1% dividend yield..

13/ that’s a ~15% annual shareholder return if the P/B multiple doesn’t revert towards the historical mean. Assuming it does re-rate down then annual returns are maybe closer to 10-12%.. which is good, but not great.

14/ for me this is a watch and wait.. I’m sold on the business and management. But valuation isn’t quite there. If this ever traded below 1.5x book it’s extremely appealing. Below 1.0-1.2x (like during covid) and it’s a big swing, load the truck situation.