Business Overview
Heritage Commerce Corp is a commercial bank serving customers primarily located in the San Francisco Bay Area of California. The company operates through two segments: Banking and Factoring. The Banking segment offers a range of commercial and personal banking services, including deposit accounts, loans, and other financial products. The Factoring segment, operated through the company's subsidiary Bay View Funding, provides business-essential working capital factoring financing to various industries throughout the United States.Financial Performance
For the second quarter of 2024, Heritage Commerce Corp reported net income of $10.2 million, or $0.17 per diluted share, compared to $18.9 million, or $0.31 per diluted share, in the same period of the previous year. The company's annual net income for the fiscal year 2023 was $64.4 million.The company's total revenue for the second quarter of 2024 was $41.7 million, a decrease of 13.7% compared to $48.4 million in the same quarter of the previous year. The company's annual revenue for the fiscal year 2023 was $243.3 million. The decrease in revenue was primarily due to lower net interest income and noninterest income.
Net interest income for the second quarter of 2024 was $39.5 million, down 19.8% from $49.3 million in the same quarter of the previous year. The company's net interest margin (FTE) contracted by 75 basis points to 3.34% in the second quarter of 2024, compared to 4.09% in the same quarter of the previous year. This was primarily due to higher rates paid on customer deposits, a decrease in the average balances of noninterest-bearing demand deposits, a decrease in average interest-earning assets, and decreases in average balances of higher-yielding asset-based loans and Bay View Funding factored receivables, partially offset by an increase in the rate on overnight funds.
Noninterest income for the second quarter of 2024 was $2.0 million, a decrease of 26.0% from $2.8 million in the same quarter of the previous year. This was primarily due to lower service charges and fees on deposit accounts.
Noninterest expense for the second quarter of 2024 was $27.5 million, an increase of 8.4% from $25.4 million in the same quarter of the previous year. This was primarily due to higher salaries and employee benefits, which are seasonal in nature, as well as higher marketing-related expenses, insurance costs, regulatory assessments, information technology-related expenses, and ICS/CDARS fee expense included in other noninterest expense.
The company's efficiency ratio, a measure of how much it costs to produce one dollar of revenue, increased to 65.34% in the second quarter of 2024, compared to 48.83% in the same quarter of the previous year, primarily due to the lower total revenue and higher noninterest expense.
The company's annual operating cash flow for the fiscal year 2023 was $72.3 million, and its annual free cash flow was $70.6 million.
Loan Portfolio and Asset Quality
As of June 30, 2024, the company's total loans, excluding loans held-for-sale, were $3.34 billion, an increase of 2.3% compared to $3.26 billion as of June 30, 2023. Core loans, excluding residential mortgages, increased 4.1% to $2.85 billion as of June 30, 2024, compared to $2.73 billion as of June 30, 2023.The company's nonperforming assets (NPAs), which include nonperforming loans and other real estate owned, were $7.9 million, or 0.15% of total assets, as of June 30, 2024, compared to $2.2 million, or 0.04% of total assets, as of June 30, 2023. The increase in NPAs was primarily due to the downgrade of one commercial real estate investor loan, which is well-collateralized, fully leased, cash-flowing, and personally guaranteed by the principals.
The company's allowance for credit losses on loans was $47.9 million, or 1.44% of total loans, as of June 30, 2024, representing 608.41% of total nonperforming loans. This compares to an allowance for credit losses on loans of $47.3 million, or 1.45% of total loans, representing 2,110.40% of total nonperforming loans, as of June 30, 2023.
Liquidity
As of June 30, 2024, the company's total liquidity and borrowing capacity was $3.00 billion, all of which remained available. The available liquidity and borrowing capacity was 67% of the company's total deposits and approximately 149% of the Bank's estimated uninsured deposits.The company's consolidated capital ratios exceeded regulatory guidelines, and the Bank's capital ratios exceeded the prompt corrective action (PCA) regulatory guidelines for a well-capitalized financial institution and the Basel III minimum regulatory requirements as of June 30, 2024.