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Despite a high interest rate environment making it harder for banks to turn a profit, Hingham Institution for Savings surprised stakeholders with a positive second quarter net income on repriced loans and strength in serving new clients in its focused areas according to earnings released Friday.
HFIS’s net income from April to June was $8.25 million or $3.76 per share diluted, which was 159-percent higher than the $3.19 million or $1.45 per share diluted for the same period last year. Net income for the first six months of 2023 totaled to $16.76 million or $7.63 per share diluted – a 12-percent increase from the $15.05 million or $6.83 per share diluted from the same period in 2022.
This was evidenced by the growth in its total assets and net loans, while non-interest-bearing deposits declined. Total assets reached $4.31 billion by end-June, which is 8 percent higher than the same period in 2022 and represents a 6 percent annualized growth year-to-date. Net loans also increased by 7 percent to $3.76 billion in the first half of 2023, representing a 6 percent annualized growth YTD.
While the retail and business deposits increased 9 percent to $1.92 billion during the six-month period, non-interest bearing deposits (included in the retail and business deposits) went down by 9 percent to $363.8 million compared to the same time last year, representing a YTD annualized decline of 12 percent.
“The bank continued to work to capitalize on the market disruption generated by the failure or instability of larger regional banks to develop new relationships with commercial, non-profit, and existing customers,” HFIS said in a statement. “The stability of the bank’s balance sheet, as well as full and unlimited deposit insurance through the bank’s participation in the Massachusetts Depositors Insurance Fund, has historically been appealing to customers in times of uncertainty.”
The bank concentrated on multifamily commercial real estate loan origination in its home market of Boston and in Washington D.C., where it recently opened a branch. HFIS recorded higher yield on loans due to new loan originations at higher rates and the repricing of existing adjustable rate loans, while benefiting from the modest decline in cost of borrowed funds, driven by the use of Federal Home Loan Bank option advances.
Net interest margin for the second quarter ended at 1.28 percent, which was 193 basis points less than the 3.2 percent for the same period last year, and 18 basis points lower than the 1.46 percent in the first quarter of 2023. Net interest margin on the first six months of 2023 also decreased by 188 basis points to 1.37 percent from the 3.25 percent at the same time last year.
Net interest margin was lower due to the “continued and significant increase in the cost of interest-bearing liabilities, driven primarily by an increase in the cost of wholesale deposits,” the bank said. But the losses were slightly cushioned by the increase in interest from reserve balances held at the Federal Reserve Bank of Boston, as well as the higher yield of loans and a Federal Home Loan Bank of Boston stock dividend.
Annualized return on average equity for the second quarter was at 8.27 percent, higher than the 3.43 percent the same quarter last year. For the first half of 2023, the annualized return on average equity was up slightly to 8.47 percent from 8.20 percent for the same period last year.
The second quarter annualized return on average assets went up to 0.80 percent versus the 0.34 percent same quarter the previous year, while first six months result for 2023 ended at 0.81 percent which was slightly lower from the 0.83 percent in the same period in 2022.
“Returns on equity and assets in the second quarter remained significantly lower than our long-term performance, reflecting the challenge from the increase in short-term interest rates over the last twelve months. Although the current market environment is particularly challenging, the bank’s business model has been built over time to compound shareholder capital over an economic cycle,” HIFS Chairman Robert H. Gaughen Jr. said a statement released along with the earnings.
He said the bank remains focused and constant on “careful capital allocation, defensive underwriting and disciplined cost control – the building blocks for compounding shareholder capital through all stages of the economic cycle,” regardless of the macroeconomic environment in which they operate.
The bank’s efficiency ratio – a measure of how efficient a bank is in deploying resources to make a profit – significantly increased to 55.03 percent versus the 21.30 percent the same quarter last year. Operating expenses as a percentage of average assets increased slightly to 0.71 percent from 0.68 percent from the same quarter in 2022.
“As the efficiency ratio can be significantly influenced by the level of net interest income, the bank utilizes these paired figures together to assess its operational efficiency over time,” HFIS said. “During periods of significant net interest income volatility, the efficiency ratio in isolation may over or understate the underlying operational efficiency of the bank. The bank remains focused on reducing waste through an ongoing process of continuous improvement and standard work that supports operational leverage.”
HFIS’s increased efficiency ratio and operational metrics reflect its disciplined focus on credit quality and expense management, Gaughen said.
“Although we are in the midst of a historic inversion in the yield curve, it is important that we prioritize long-term investments, despite the temporary but significant pressure on margins and lower net income. This means working to attract new core deposit and loan customers, as well as talented staff that can help us continue to build our business well into the future,” he said.
