WHAT IS
SAFE AND SOUND?
Capital is an essential measurement of a bank's financial strength. It works as a cushion against losses and as protection for accountholders when a bank is experiencing financial instability. When it comes to safety and soundness, more capital is better.
On our test to measure capital adequacy, Heritage Bank racked up 24 out of a possible 30 points, beating out the national average of 13.13.
One widely used measure of this buffer is a bank's Tier 1 capital ratio. Heritage Bank's Tier 1 capital ratio was 29.78 percent, higher than the 6 percent level regulators consider adequate, and higher than the national average of 25.65 percent. A higher capital ratio suggests the bank will be better able to weather financial downturns.
Overall, Heritage Bank held equity amounting to 17.18 percent of its assets, which exceeded the national average of 12.03 percent.
Bankrate uses this test to estimate the effect of troubled assets, such as unpaid loans, on the bank's loan loss reserves and overall capitalization.
A bank with lots of these types of assets may eventually have to use capital to cover losses, shrinking its equity buffer. Many of those assets are also likely to be in non-accrual status and thus aren't earning money, diminishing earnings and elevating the chances of a failure in the future.
Heritage Bank beat out the national average of 37.49 on Bankrate's test of asset quality, racking up 40 out of a possible 40 points .
A helpful indicator of asset quality is the percentage of problem assets a bank holds compared to its total assets. As of December 31, 2017, 0.29 percent of Heritage Bank's loans were noncurrent, meaning they were more than 90 days past due or were in non-accrual status. That's below the national average of 1.01 percent.
Banks maintain a reserve to deal with troubled assets known as an "allowance for loan and lease losses." That reserve's size can be a useful indicator when evaluating a bank's ability to manage problem assets, especially when compared to the total amount of at-risk loans. Unfortunately, the FDIC did not provide information on Heritage Bank's loan loss allowance in its most recent filings.
A bank's profitability has an effect on its long-term survivability. Earnings can be retained by the bank, boosting its capital buffer, or be used to deal with problematic loans, likely making the bank more resilient in tough times. Conversely, losses reduce a bank's ability to do those things.
On Bankrate's earnings test, Heritage Bank scored 20 out of a possible 30, better than the national average of 15.12.
Return on equity, calculated by dividing net income (profit, basically) by the total amount of equity, is one widely used measure of a bank's earnings. The most recent annualized quarterly return on equity for Heritage Bank was 10.33 percent, above the national average of 8.10 percent.
The bank recorded net income of $10.3 million on total equity of $102.0 million for the twelve months ended December 31, 2017. The bank had an annualized return on average assets, or ROA, of 1.71 percent, above the 1 percent deemed satisfactory in accordance with industry standards, and above the average for U.S. banks of 1.00 percent.
Bankrate.com's Safe & Sound Ratings provide a star rating system to evaluate the current financial status of financial institutions. The information gathered about banks, credit unions and thrifts is updated as set forth in the Terms of Use of Safe & Sound Ratings and Reports. The Safe & Sound Ratings information is grouped by categories of banks, thrifts and credit unions.
Bankrate.com evaluates the financial condition of institutions and assigns a one- to five-star rating for each with five stars representing the highest rating. Institutions with satisfactory performance will generally receive a rating of three or more stars. The majority of institutions fall into the three- to four-star range. An institution with an "NR" rating may be too new to rate or may have limited the publicly available information in their regulatory filings. The "NR" is not an indication of financial strength or weakness. The Safe & Sound rating is believed to be reliable, but the information is not guaranteed. In addition, events since the information was collected may have altered the institution's financial condition.