{"id":23002,"date":"2023-06-15T10:36:27","date_gmt":"2023-06-15T14:36:27","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/heritage-commerce-over-6-dividend-yield-but-risks-are-also-elevated-nasdaqhtbk\/"},"modified":"2023-06-15T10:36:29","modified_gmt":"2023-06-15T14:36:29","slug":"heritage-commerce-over-6-dividend-yield-but-risks-are-also-elevated-nasdaqhtbk","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=23002","title":{"rendered":"Heritage Commerce: Over 6% Dividend Yield But Risks Are Also Elevated (NASDAQ:HTBK)"},"content":{"rendered":"
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Earnings of Heritage Commerce Corp (NASDAQ:HTBK<\/span>) will most probably continue on an uptrend this year thanks to decent loan growth. I\u2019m expecting the company to report earnings of $1.25 per share for 2023, up 14.8% year-over-year. Compared to my last report on the company, I haven\u2019t changed my earnings estimate much. The company is offering an attractive dividend yield and a high price upside. As a result, I\u2019m maintaining a buy rating on Heritage Commerce Corp.<\/span><\/p>\n

Margin to Fare Better in the Year Ahead Compared to the First Quarter<\/h2>\n

Heritage Commerce\u2019s net interest margin dipped by a basis point during the first quarter after expanding by more than 30 basis points in each of the last three quarters of 2022. This sudden trend reversal is attributable to the significant deterioration of the funding mix. Heritage took on $300 million worth of short-term debt during the quarter which pushed up interest expenses due to their high cost. As mentioned in the <\/span>annual shareholder presentation, Heritage repaid these borrowings on April 20, 2023; therefore, some of the pressure on the margin will ease in the second quarter.<\/span><\/p>\n

The margin will also benefit from past Fed funds rate hikes as it is somewhat rate sensitive. The results of the management\u2019s rate-sensitivity analysis given in the 10-Q filing show that a 200-basis points hike in rates could increase the net interest income by 3.5% over twelve months.<\/p>\n

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1Q 2023 10-Q Filing<\/span><\/p>\n<\/figcaption><\/figure>\n

Considering these factors, I\u2019m expecting the margin to remain mostly stable in the last nine months of 2023.<\/p>\n

Loan Growth to Improve from the First Quarter\u2019s Level but Remain Below the Historical Average<\/h2>\n

Heritage\u2019s loan portfolio disappointingly contracted by 1.1% during the first quarter of the year after managing to achieve healthy growth last year. I\u2019m expecting loan growth to improve from the first quarter\u2019s level in the year ahead because of a strong local economy. Heritage Commerce mostly operates in California with a focus on the San Francisco Bay area. The unemployment rate in San Francisco has risen over the last few months, but it is still very low when compared to previous years and the national average.<\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n

On the other hand, the high-rate environment will put a damper on credit demand. Overall, I\u2019m expecting the loan portfolio to grow by 3.4% in 2023. My estimate is below the past five-year CAGR of 15.8% because interest rates are higher now. I\u2019m expecting deposits and other balance sheet items to grow somewhat in line with loans for the last nine months of this year. The following table shows my balance sheet estimates.<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n<\/colgroup>\n\n\n\n\n\n\n\n\n\n
Financial Position<\/td>\nFY18<\/td>\nFY19<\/td>\nFY20<\/td>\nFY21<\/td>\nFY22<\/td>\nFY23E<\/td>\n<\/tr>\n<\/thead>\n
Net Loans<\/td>\n1,859<\/td>\n2,511<\/td>\n2,575<\/td>\n3,044<\/td>\n3,251<\/td>\n3,361<\/td>\n<\/tr>\n
Growth of Net Loans<\/em><\/td>\n18.9%<\/em><\/td>\n35.1%<\/em><\/td>\n2.6%<\/em><\/td>\n18.2%<\/em><\/td>\n6.8%<\/em><\/td>\n3.4%<\/em><\/td>\n<\/tr>\n
Other Earning Assets<\/td>\n973<\/td>\n1,180<\/td>\n1,635<\/td>\n2,054<\/td>\n1,486<\/td>\n1,949<\/td>\n<\/tr>\n
Deposits<\/td>\n2,638<\/td>\n3,415<\/td>\n3,914<\/td>\n4,759<\/td>\n4,390<\/td>\n4,613<\/td>\n<\/tr>\n
Borrowings and Sub-Debt<\/td>\n39<\/td>\n40<\/td>\n40<\/td>\n40<\/td>\n39<\/td>\n352<\/td>\n<\/tr>\n
Common equity<\/td>\n367<\/td>\n577<\/td>\n578<\/td>\n598<\/td>\n632<\/td>\n681<\/td>\n<\/tr>\n
Book Value Per Share ($)<\/td>\n8.7<\/td>\n12.0<\/td>\n9.6<\/td>\n9.9<\/td>\n10.4<\/td>\n11.1<\/td>\n<\/tr>\n
Tangible BVPS ($)<\/td>\n6.4<\/td>\n8.1<\/td>\n6.5<\/td>\n6.9<\/td>\n7.4<\/td>\n8.2<\/td>\n<\/tr>\n
Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD million unless otherwise specified)<\/td>\n<\/tr>\n<\/table>\n

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