Courtesy photo

It isn’t the largest community bank in Massachusetts, and it isn’t racking up acquisitions, but down on the South Shore, Hingham Institution for Savings has managed to do something incredible: It has lowered its efficiency ratio to slightly below 30 percent at the end of 2018. 

The efficiency ratio is used to analyze how well a company uses its assets and liabilities internally and is calculated by dividing a bank’s operating expenses by net revenue. 

To put in perspective what Hingham is doing, industry experts consider a 50 percent efficiency ratio as the maximum optimal ratio. Massachusetts’ state-chartered banks averaged a roughly 67 percent efficiency ratio at the end of the third quarter of 2018, according to the FDIC, the most recent period for which complete data is available. Nationally the average efficiency ratio among all banks was 56 percent. 

Among all banks in New England, New York and New Jersey, Hingham ranks second in efficiency ratio only behind Morgan Stanley, according to data compiled by The Navis Group. 

“We’ve been focused on efficiency for a long time … Just a lot of good people and baby steps every year,” Patrick R. Gaughen, president and COO at Hingham Institution for Savings, said in an email. He declined to comment further. 

How Does Hingham Do It? 

The efficiency ratio is largely based on expense control, which mostly consists of costs associated with employees, occupancy, data processing and professional fees, said Giuseppe “Joe” Femia, vice president and director at the Milton-based CPA firm G.T. Reilly & Co. 

“In general, for a bank to be more efficient, how many bodies do you need to do the same amount of work?” he said. “Some banks might own branches that may be fully depreciated. How much costs are you incurring for your operating facilities and what are your IT costs?” 

The roughly $2.4 billion-asset Hingham Institution for Savings at the end of the third quarter of 2018 had 100 employees, and spent about $9.5 million on salary and employee benefits, according to its call report. 

In comparison, the similarly sized Holyoke-based PeoplesBank had 271 employees and spent $22.3 million on salary and employee benefits, while the slightly smaller Needham Bank had 193 employees and spent about $20.1 million on salary and employee benefits. 

Hingham Institution also spent less on data processing than Needham Bank and PeoplesBank, and less on premises and equipment than other similarly sized banks that disclosed this number, such as PeoplesBank and Blue Hills Bank. 

Because it boosts revenue, a bank’s loan portfolio is also part of the efficiency ratio calculation. 

Hingham had grown its total loan volume to more than $2 billion at the end of 2018, up more than $170 million from the year before. Its loan-to-deposit ratio sat at roughly 127 percent at the end of 2018.  

Perhaps even more impressive is the bank’s asset quality, which is nearly perfect. 

The bank’s non-performing loans as a percentage of total loans and non-performing assets as a percentage of total assets were both a mere 2 basis points at the end of 2018. Even in a time when credit across the board is good, this is far cleaner than most community bank’s balance sheets. 

 Can the Efficiency Ratio Be Too Low? 

While shareholders and analysts value low efficiency ratios, it can at times mean a bank is not investing enough in its business. 

For instance, there might not be enough staff to adequately run the bank, or perhaps the bank is not updating its technology or renovating its branches. Banks that are publicly traded like Hingham also have more regulatory requirements than mutual banks such as Needham Bank. 

“The risk is that there is so much regulatory compliance, if you use less people, you could miss something,” Femia said. “A lot of times, banks will be more cautious and say, ‘We need that extra risk person.’” 

Femia added that in general, banks also may be ignoring needed investments in technology and branches. 

Bram Berkowitz

Hingham has acknowledged in reports that it needs to keep an eye on technology. 

In a recent regulatory filing, the bank said its ability to compete might be hampered if it is not able to make technological advances. 

However, there is nothing to suggest that Hingham is not fully aware of its position and the challenges ahead.  

The bank has managed to keep its efficiency ratio low despite operating 12 branches spanning from Boston to Nantucket; its stock price on the NASDAQ was hovering around $183 at the end of January and the company also seems to be keenly aware of the role technology will play moving forward. 

“We must balance improving near-term efficiency with ensuring that we have the people, products and technology necessary to serve our customers and manage risk as we grow,” Hingham’s board chairman Robert Gaughen said in the company’s 2017 annual report. “We made significant investments this year in digital banking capabilities – from our new consumer website to payments and cash management tools for businesses – that support our relationship-focused approach.”