KBRA Affirms Ratings for Heritage Commerce Corp
May 10 2024 - 1:45PM
Business Wire
KBRA affirms the senior unsecured debt rating of BBB+, the
subordinated debt rating of BBB, and the short-term debt rating of
K2 for San Jose, California-based Heritage Commerce Corp (NASDAQ:
HTBK) ("Heritage" or "the company"). In addition, KBRA affirms the
deposit and senior unsecured debt ratings of A-, the subordinated
debt rating of BBB+, and the short-term deposit and debt ratings of
K2 for its subsidiary, Heritage Bank of Commerce. The Outlook for
all long-term ratings is Stable.
Key Credit Considerations
The ratings are supported by HTBK’s conservative approach to
liquidity and capital management, which has been displayed for a
long period of time, with a loan-to-core deposit ratio averaging
just below 75% and a CET1 ratio that has averaged 13% over the last
five years (13.4% as of 1Q24). The discipline within those
respective categories has left the company well positioned entering
a more uncertain credit and liquidity environment within the
banking industry. Despite being situated in Silicon Valley,
Heritage’s deposit base has performed admirably since the bank
failures in early 2023, with core balances largely flat since 1Q23,
which demonstrates the resilience and strength of the relationships
in our view. Moreover, the company has been able to capture some
quality deposit and lending relationships from the failed
institutions in footprint, which puts HTBK in a solid position for
future growth. As of 1Q24, Heritage remains entirely core deposit
funded when excluding relationship-based jumbo time deposits (4% of
deposits) and subordinated debt, with no reliance on higher-cost
brokered deposits or borrowings. With that said, we acknowledge
that HTBK reflects a higher level of confidence-sensitive deposits,
with uninsured deposits representing 45% of total deposits as of
1Q24. This marks a meaningful decline from 65% entering 2023, which
has been reduced from the utilization of the reciprocal network.
While this measure remains above peers, it is offset by ample
liquidity sources, notably a higher level of cash on-balance sheet
($541 million or 10% of assets). Despite reflecting an asset
sensitive balance sheet, which provided benefits at the start of
the Fed’s rate hiking regime (NIM grew 111 bps during 2022 and
peaked at 4.12% in 4Q22), the company has experienced considerable
NIM headwinds throughout 2023/ 2024 due to the acceleration of
deposit costs, in part, due to the continued mix shift (NIB down to
28% of total compared to 43% pre-pandemic) as the higher for longer
rate environment has persisted. However, HTBK’s deposit beta
remains among the lowest in the rating group (total cost of 1.56%
during 1Q24). Moving forward, NIM is expected to stabilize around
current levels (3.34% for 1Q24) with the potential for expansion
later in the year as securities mature and loan growth
opportunities arise. Given the reliance on spread revenues (fee
income of ~5% of revenues in recent periods) the maintenance of
healthy NIM is paramount. Altogether, earnings remain adequate in
the context of the rating group, especially on a risk-adjusted
basis when factoring in the company's lower risk balance sheet.
Credit quality in recent years has been pristine, which we believe
is partially attributable to management’s prudent underwriting and
robust monitoring, which is illustrated in the investor CRE
portfolio, that is slightly above average (nearly 300% of total
risk-based capital), with an average LTV and DSCR of 41% and 2.0x,
respectively. Heritage's exposure to the investor office sector is
higher than peers at 9% of total loans, though the portfolio is
granular, largely operated in suburban markets, and also reflects
conservative underwriting criteria. Nonetheless, HTBK has
consistently held loan loss reserves in excess of peers (1.44% of
loans as of 1Q24). In addition to robust reserves, loss absorbing
capacity continues to be bolstered by the company's strong core
capitalization and sound earnings capacity.
Rating Sensitivities
An upgrade is not expected, though increased scale/market share
in the current footprint, combined with a higher level of revenue
diversity, while maintaining a conservative stance with capital and
liquidity management could facilitate positive rating momentum over
time. Conversely, a downgrade is unlikely, though any material
deterioration among key financial ratios, specifically credit or
liquidity issues, or more aggressive capital management, could
potentially pressure the ratings.
To access rating and relevant documents, click here.
Methodologies
■ Financial Institutions: Bank & Bank Holding Company Global
Rating Methodology
■ ESG Global Rating Methodology
Disclosures
A description of all substantially material sources that were
used to prepare the credit rating and information on the
methodology(ies) (inclusive of any material models and sensitivity
analyses of the relevant key rating assumptions, as applicable)
used in determining the credit rating is available in the
Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be
located here.
Further disclosures relating to this rating action are available
in the Information Disclosure Form(s) referenced above. Additional
information regarding KBRA policies, methodologies, rating scales
and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit
rating agency registered with the U.S. Securities and Exchange
Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is
registered as a CRA with the European Securities and Markets
Authority. Kroll Bond Rating Agency UK Limited is registered as a
CRA with the UK Financial Conduct Authority. In addition, KBRA is
designated as a designated rating organization by the Ontario
Securities Commission for issuers of asset-backed securities to
file a short form prospectus or shelf prospectus. KBRA is also
recognized by the National Association of Insurance Commissioners
as a Credit Rating Provider.
1 Doc ID: 1004249
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Analytical John Rempe, Senior Director (Lead
Analyst) +1 301-969-3045 john.rempe@kbra.com
Hunter Chadwick, Analyst +1 301-960-7042
hunter.chadwick@kbra.com
Ashley Phillips, Managing Director (Rating Committee
Chair) +1 301-969-3185 ashley.phillips@kbra.com Business
Development Justin Fuller, Managing Director +1
312-680-4163 justin.fuller@kbra.com