Heritage merce p(HTBK) - 2025 Q1 - Quarterly Report

Cautionary Note on Forward-Looking Statements Forward-Looking Statements and Associated Risks Forward-looking statements are subject to risks including cybersecurity, personnel, geographic concentration, and interest rate fluctuations - The Company identifies several key risks that could impact its future performance, including but not limited to:[8] - Cybersecurity Risks: Threats such as ransomware, data breaches, and hacking affecting the company, its clients, and vendors[8] - Personnel Risks: Ability to attract and retain qualified officers and staff to implement strategic plans[8] - Geographic Concentration: Operating primarily in the San Francisco Bay Area exposes the Company to regional economic conditions and natural disasters like earthquakes and fires[8] - Interest Rate and Inflationary Risks: Pressures that could reduce margins, affect the fair value of financial instruments, and increase loan defaults[10] - Credit Risk: The ability to accurately estimate and establish adequate reserves for potential losses in the loan, lease, and factoring portfolios[10] Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Unaudited Q1 2025 statements show decreased assets from lower deposits, yet increased net income due to higher net interest income Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Total cash and cash equivalents | $745,050 | $968,123 | | Loans, net | $3,438,636 | $3,442,984 | | Total assets | $5,514,255 | $5,645,006 | | Liabilities & Equity | | | | Total deposits | $4,683,268 | $4,820,031 | | Total liabilities | $4,818,065 | $4,955,279 | | Total shareholders' equity | $696,190 | $689,727 | Income Statement Summary (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total interest income | $61,832 | $56,960 | | Total interest expense | $18,472 | $17,458 | | Net interest income | $43,360 | $39,502 | | Provision for credit losses | $274 | $184 | | Noninterest income | $2,696 | $2,638 | | Noninterest expense | $29,456 | $27,536 | | Net income | $11,626 | $10,166 | | Diluted EPS | $0.19 | $0.17 | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies, portfolio composition, credit loss methodology, capital adequacy, and segment performance, confirming the company is well-capitalized - The Company reports its results for two segments: banking and factoring. The banking segment serves clients primarily in several counties of California, while the factoring subsidiary (Bay View Funding) provides working capital financing throughout the United States[24] - The Company's Board of Directors adopted a share repurchase program authorizing up to $15.0 million in share repurchases, expiring July 31, 2025. No shares were repurchased during 2024 or the first quarter of 2025[34] - On April 24, 2025, the Board of Directors declared a quarterly cash dividend of $0.13 per share, payable on May 22, 2025[131] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights increased Q1 2025 profitability from improved net interest margin, expense control, and asset quality, maintaining strong capital and liquidity Q1 2025 Performance Highlights | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Income | $11.6 million | $10.2 million | | Diluted EPS | $0.19 | $0.17 | | Return on Average Assets (Annualized) | 0.85% | 0.79% | | Return on Average Equity (Annualized) | 6.81% | 6.08% | | FTE Net Interest Margin | 3.39% | 3.31% | - The company generated higher profitability due to positive trends in net interest margin, strong expense control, and an improvement in asset quality[137] - Excess liquidity was redeployed from cash to purchase new investment securities, which is expected to positively impact future net interest income and margin[137] Results of Operations Net interest income increased to $43.4 million in Q1 2025, driven by earning asset growth and margin expansion, while noninterest expenses also rose Volume and Rate Variances on Net Interest Income (Q1 2025 vs Q1 2024, in thousands) | Change Attributable to: | Amount | | :--- | :--- | | Increase in Average Volume | $3,104 | | Increase in Average Rate | $752 | | Total Net Interest Income Change | $3,856 | - Total noninterest expense increased by $1.9 million (7%) YoY, primarily due to a $1.1 million increase in salaries and employee benefits, a $253,000 increase in professional fees, and a $169,000 increase in software subscriptions[164][165] Financial Condition Total assets were $5.5 billion, with a growing loan portfolio and improved asset quality, while deposits also increased, maintaining a strong financial condition Loan Portfolio Distribution (March 31, 2025) | Loan Category | Balance (in thousands) | % of Total | | :--- | :--- | :--- | | Commercial | $489,241 | 14% | | CRE - non-owner occupied | $1,363,275 | 39% | | CRE - owner occupied | $616,825 | 18% | | Residential mortgages | $465,330 | 13% | | Multifamily | $284,510 | 8% | | Other | $267,985 | 8% | | Total Loans | $3,487,166 | 100% | Nonperforming Assets (in thousands) | Metric | Mar 31, 2025 | Dec 31, 2024 | Mar 31, 2024 | | :--- | :--- | :--- | :--- | | Total nonperforming assets | $6,312 | $7,667 | $7,871 | | as a % of total assets | 0.11% | 0.14% | 0.15% | - The allowance for credit losses on loans (ACLL) was $48.3 million, or 1.38% of total loans, representing 765% of total nonperforming loans at March 31, 2025[143] Liquidity and Capital Resources The company maintained strong liquidity and capital, with $3.2 billion in available capacity and all capital ratios exceeding 'well-capitalized' guidelines Available Liquidity and Borrowing Capacity (March 31, 2025, in thousands) | Source | Available Amount | | :--- | :--- | | FHLB collateralized borrowing capacity | $806,909 | | FRB discount window collateralized line | $1,347,908 | | Federal funds purchase arrangements | $90,000 | | Holding company line of credit | $25,000 | | Total Lines of Credit | $2,269,817 | Consolidated Capital Ratios (March 31, 2025) | Ratio | Actual | Well-Capitalized Guideline | | :--- | :--- | :--- | | Common Equity Tier 1 | 13.6% | 6.5% | | Tier 1 Capital | 13.6% | 8.0% | | Total Capital | 15.9% | 10.0% | | Tier 1 Leverage | 9.8% | 5.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company primarily manages interest rate risk through GAP analysis and simulation models, showing sensitivity of net interest income to rate changes Interest Rate Sensitivity Analysis (as of March 31, 2025) | Change in Interest Rates (bps) | Change in Estimated Net Interest Income | | :--- | :--- | | +200 | +4.5% | | +100 | +2.2% | | -100 | (3.4)% | | -200 | (8.3)% | Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal controls over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2025[280] - No material changes were made to internal controls over financial reporting during the quarter ended March 31, 2025[282] Part II. OTHER INFORMATION Item 1. Legal Proceedings The company is not party to material litigation, though it is defending a wage-and-hour lawsuit it believes is without merit - The Company is a defendant in a lawsuit alleging violations of California wage-and-hour laws, seeking unspecified damages under PAGA. The Company believes the claims are without merit[110] - Management believes that the final disposition of pending legal matters will not have a material adverse effect on the company's financial position or results[112][284] Item 1A. Risk Factors Significant risks include operational (cybersecurity), business (geographic concentration, real estate loans), financial (interest rates), and legal/competitive factors - Operational Risks: Include interruptions from cyberattacks, fraud, reliance on third-party providers, and failure to attract and retain key personnel[290] - Business & Loan Risks: Highlighted by geographic concentration in the Greater San Francisco Bay Area, significant exposure to real estate loans (85% of portfolio), and risks associated with commercial and construction lending[288][315][318] - Financial & Capital Risks: Include fluctuations in interest rates impacting net income and securities values, liquidity risks from deposit outflows, and the need to meet stringent capital requirements[289][291] - Legal & Competitive Risks: Stem from extensive and complex regulations, the cost of compliance, strong competition from larger financial institutions, and the need for technological advancement[292][293]