Heritage Southeast Bancorporation, Inc. Reports Second Quarter 2022 Earnings of $3.3 Million, or $0.46 Per Diluted Share; Loans Up 3%

Heritage Southeast Bancorporation, Inc.

JONESBORO, Ga., July 27, 2022 (GLOBE NEWSWIRE) -- Heritage Southeast Bancorporation, Inc. (“Company”) (OTCQX: HSBI) today announced second quarter 2022 earnings of $3.3 million, or $0.46 per diluted share compared to $3.8 million, or $0.53 per diluted share in the prior quarter ended March 31, 2022. Second quarter earnings reflected higher operating expenses related to employee separation costs partly offset by higher net interest income.  

Highlights of the Company’s results for the quarter ended June 30, 2022 include the following:

• On June 15, 2022, HSBI, Heritage Southeast Bank and VyStar Credit Union mutually agreed to terminate the proposed purchase agreement and HSBI engaged Piper Sandler to review strategic alternatives to enhance shareholder value.

• Earnings per share excluding employee separation and VyStar transaction costs was $0.61 per diluted share for the second quarter ended June 30, 2022 compared to $0.59 per share for the prior quarter and $0.57 one year earlier (see GAAP to non-GAAP reconciliation).

• The net interest margin, exclusive of PPP loans, increased to 3.31% for the quarter ended June 30, 2022 compared to 3.20% for the prior quarter and 3.26% one year earlier.

• Total loans, excluding PPP loans, increased $32.3 million during the second quarter, or 3.0%. Relative to one year earlier, total loans, excluding PPP loans, increased $112.0 million, or 11.2%.

• Return on tangible equity excluding employee separation and VyStar transaction costs was 15.56% for the second quarter ended June 30, 2022 compared to 14.76% the previous quarter.
  

“We continue to see a strong loan pipeline in our Georgia and North Florida markets. As we redeploy our elevated level of liquid investments into higher yielding loans, we expect our net interest margin will continue to increase in the current interest rate environment,” said Leonard Moreland, Chief Executive Officer.  “The economic environment surrounding the markets we serve remains strong and we expect new and existing banking opportunities to remain robust throughout the remainder of 2022,” Moreland added.

Net Interest Income

The Company’s net interest income increased to $13.2 million during the second quarter of 2022 from $12.3 million in the first quarter ended March 31, 2022. The higher net interest income was a direct result of continued loan growth and the increase in interest rates.    The Company’s reported net interest margin increased 9 basis points to 3.34% for the second quarter of 2022 from 3.25% for the preceding quarter. Net interest income and net interest margin was less impacted by revenue on the PPP portfolio and more influenced by higher yields on other earning asset categories.

Loan Loss Provision

The Company did not recognize any loan loss provision for the second quarter. Management believes the improved economic and pandemic climate has provided better clarity on the ability for borrowers to meet their loan obligations. Additionally, non-performing assets continued to remain low. As such, the current level of reserves is believed to be sufficient as of June 30, 2022.

Non-interest Income

Second quarter non-interest income increased to $4.3 million from $4.1 million for the first quarter of 2022. Interchange and ATM fees increased slightly as well as gains on the sale of SBA loans relative to the previous quarter. As indicated during the previous earnings release, gains on the sale of SBA loans have returned to more traditional levels.

Non-interest Expense

Non-interest expense increased $1.4 million to $13.2 million for the second quarter of 2022 from $11.7 million the prior quarter. The current quarter reflected $1.2 million in employee separation costs as well as $315,000 in transaction related expenses. The efficiency ratio exclusive of transaction and employee separation costs improved to 65.3% for the quarter ended June 30, 2022 from 66.3% in the previous quarter and 67.2% one year earlier.

Balance Sheet

Total assets increased slightly to $1.71 billion at June 30, 2022, relative to $1.70 billion at the previous quarter end. Liquidity levels continued to remain elevated and will be used to fund future loan originations. At June 30, 2022, cash and cash equivalents totaled $298.4 million relative to $313.0 million three months earlier. Securities available for sale increased by $4.0 million to $193.0 million at June 30, 2022 from $189.0 million three months earlier. Loans, excluding PPP loans, increased 3.0% to $1.11 billion at June 30, 2022 from $1.08 billion at March 31, 2022. Meanwhile, PPP loans decreased to one loan totaling $180,000 at June 30, 2022.

Total deposits increased to $1.49 billion at June 30, 2022 from $1.47 billion three months earlier. Non-interest-bearing deposits remain the largest component of the deposit portfolio, representing 35.5% of total deposits, followed by money market and savings deposits at 31.3%, interest-bearing demand deposits at 18.9% and time deposits at 14.3%.

Asset Quality

Classified assets, which include nonperforming assets and accruing classified loans, increased slightly to $3.2 million at June 30, 2022, compared with $3.1 million at March 31, 2022. The increase during the second quarter reflected an increase of $181,000 in nonperforming loans offset by a decrease in accruing classified loans of $43,000. Nonperforming assets, which exclude accruing classified loans, totaled $2.9 million at June 30, 2022, or 0.17% of total assets.

The allowance for loan losses decreased slightly to $15.3 million, or 1.38% of total loans at June 30, 2022 from $15.4 million, or 1.42% of total loans at March 31, 2022. The decrease was due to net loan charge-offs totaling $100,000 during the period as no loan loss provision was required.

Capital

Total shareholder equity was $150.0 million at June 30, 2022. Tangible shareholder equity relative to total assets was 6.85% at June 30, 2022 (down from 6.95% at March 31, 2022). Tangible book value per share was $15.93 at June 30, 2022 as compared to $16.02 at the end of the first quarter and $16.40 at year end 2021. The decrease in the period was the result of continued declines in accumulated other comprehensive income related to the impact of rising interest rates on our investment portfolio. At June 30, 2022, the Bank’s Leverage Ratio was 9.89%, its Common Equity Tier I and Tier 1 Capital ratios were 12.58%, and its Total Risk-Based Capital ratio was 13.73%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

About Heritage Southeast Bancorporation, Inc.

Heritage Southeast Bancorporation, Inc. serves as the holding company for Heritage Southeast Bank, which is headquartered in Jonesboro, GA and operates under the names “Heritage Bank,” “The Heritage Bank,” and “Providence Bank” in its various markets. With approximately $1.7 billion in assets, the Bank provides a well-rounded offering of commercial and consumer products through its 23 locations. For additional information, visit the HSBI website at www.myhsbi.com.

Forward Looking Statements:

Statements included in this press release, which are not historical in nature, are intended to be, and hereby are identified as, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “may,” “anticipate,” “create,” “plan,” “expect,” “should,” and “could” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:
• the possibility that the anticipated benefits of the transaction, including anticipated improved product and service offerings, efficiencies and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the three companies or as a result of the strength of the economy, competitive factors in the areas where the combined company does business, or as a result of other unexpected factors or events;
• the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
• the integration of the businesses and operations of the three companies, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to the combined company’s business; and
• other factors that may affect future results of the combined company, including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; actions of the Federal Reserve Board; and other legislative and regulatory actions and reforms.

HSBI disclaims any obligation to update or revise any forward-looking statements contained in this communication (which statements speak only as of the date hereof), or in any other written or oral communication that relates to the proposed combination or to matters that may affect such proposed combination, whether as a result of new information, future events or otherwise.

CONTACT
Leonard A. Moreland		Philip F. Resch
Chief Executive Officer		Chief Financial Officer
Heritage Southeast Bancorporation, Inc.
101 North Main Street
P.O. Box 935
Jonesboro, GA 30236
(770) 824-9934

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Financial Highlights
(Unaudited) (in thousands, except per share data)
	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2022			2021			2021			2021
Earnings:
Net Interest Income	$	13,205		$	12,325		$	12,633		$	13,152		$	12,727
Net Income		3,329			3,840			3,108			3,503			2,869
Net Income excluding transaction and employee separation costs		4,443			4,288			4,809			4,368			4,146
Per Share Data:
Earnings per share:
Basic	$	0.47		$	0.55		$	0.45		$	0.50		$	0.41
Diluted	$	0.46		$	0.53		$	0.43		$	0.49		$	0.40
Diluted excluding transaction and employee separation costs	$	0.61		$	0.59		$	0.67		$	0.60		$	0.57
Weighted average number of shares:
Basic		7,012			7,008			6,979			6,976			6,967
Diluted		7,225			7,225			7,218			7,222			7,212
Period-end number of shares (1)		7,215			7,212			7,220			7,220			7,220
Book value per share (period-end)	$	20.79		$	20.92		$	21.32		$	21.09		$	20.65
Tangible book value per share (period-end)	$	15.93		$	16.02		$	16.40		$	16.13		$	15.65
Key Ratios (percent):
Return on average assets		0.78	%		0.93	%		0.75	%		0.84	%		0.69	%
Return on average assets excluding transaction and employee separation costs		1.04	%		1.04	%		1.16	%		1.05	%		1.00	%
Return on average tangible equity		11.66	%		13.21	%		10.61	%		12.15	%		10.34	%
Return on average tangible equity excluding transaction and employee separation costs		15.56	%		14.76	%		16.41	%		15.15	%		14.95	%
Yield on interest earning assets		3.62	%		3.52	%		3.60	%		3.78	%		3.72	%
Cost of funds		0.28	%		0.27	%		0.29	%		0.33	%		0.36	%
Net interest margin		3.34	%		3.25	%		3.31	%		3.45	%		3.36	%
Net interest margin, excluding PPP loans		3.31	%		3.20	%		3.23	%		3.28	%		3.26	%
Non-interest income as a percent of total revenue		24.7	%		25.1	%		29.9	%		25.4	%		26.6	%
Efficiency ratio		73.8	%		69.9	%		77.4	%		72.0	%		76.5	%
Efficiency ratio excluding transaction and employee separation costs		65.3	%		66.3	%		63.7	%		65.9	%		67.2	%
Tangible common equity to tangible assets		6.85	%		6.95	%		7.31	%		7.26	%		6.99	%
Asset Quality (period-end):
Allowance for loan losses to total loans		1.38	%		1.42	%		1.44	%		1.39	%		1.43	%
Allowance for loan losses to loans, excluding PPP loans		1.38	%		1.43	%		1.46	%		1.42	%		1.52	%
Allowance for loan losses to total nonperforming loans		736.1	%		811.6	%		877.7	%		692.3	%		1113.0	%
Nonperforming assets to total assets		0.17	%		0.16	%		0.16	%		0.20	%		0.18	%
Net charge-offs (annualized) to average loans		0.04	%		-0.06	%		-0.15	%		0.12	%		0.04	%
Capital (period-end):
Heritage Southeast Bank (HSB) risk based capital ratios:
CET1		12.58	%		12.50	%		12.67	%		12.29	%		12.32	%
Tier 1		12.58	%		12.50	%		12.67	%		12.29	%		12.32	%
Total		13.73	%		13.69	%		13.90	%		13.50	%		13.57	%
Leverage		9.89	%		9.89	%		9.81	%		9.40	%		9.01	%
Other (period-end):
Branches		23			23			23			23			22
FTE		270			275			280			278			276
(1) Includes restricted stock and shares yet to be issued under a supplemental executive retirement plan.

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited) (in thousands, except per share data)
	Three Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,
	2022		2022		2021		2021		2021
Interest and dividend revenue:
Loans, including fees	$	12,939	$	12,247	$	12,666	$	12,705	$	12,592
PPP loans, including fees		114		235		428		1,014		1,024
Investment securities		654		756		518		564		376
Fed funds sold, deposits in banks and other		593		113		113		107		79
Total interest and dividend revenue		14,300		13,351		13,725		14,390		14,071
Interest expense:
Deposits		665		656		703		760		843
Repurchase agreements		9		14		8		8		6
Line of credit		318		271		253		192		124
Subordinated notes		-		-		47		198		290
Junior subordinated debentures		103		85		81		80		81
Total interest expense		1,095		1,026		1,092		1,238		1,344
Net interest income		13,205		12,325		12,633		13,152		12,727
Provision for loan losses		-		-		-		-		-
Net interest revenue after provision for loan losses		13,205		12,325		12,633		13,152		12,727
Noninterest revenue:
Service charges and fees		1,482		1,476		1,608		1,571		1,291
Interchange and ATM fees		1,548		1,453		1,506		1,517		1,665
Gain on sale of SBA loans		430		419		1,521		652		738
Other		865		779		759		741		913
Total noninterest revenue		4,325		4,127		5,394		4,481		4,607
Operating expenses:
Salaries and employee benefits		7,977		6,341		6,692		6,760		6,551
Occupancy and equipment		1,425		1,350		1,394		1,434		1,443
Other real estate expenses, including losses
on sales and impairments, net		6		7		93		27		165
Transaction costs		315		604		2,480		1,069		1,612
Other		3,459		3,441		3,538		3,634		3,720
Total other operating expenses		13,182		11,743		14,197		12,924		13,491
Income before income tax expense		4,348		4,709		3,830		4,709		3,843
Income tax expense		1,019		869		722		1,206		974
Net income	$	3,329	$	3,840	$	3,108	$	3,503	$	2,869
Weighted-average number of shares outstanding:
Basic		7,012		7,008		6,979		6,976		6,967
Diluted		7,225		7,225		7,218		7,222		7,212
Earnings per share:
Basic	$	0.47	$	0.55	$	0.45	$	0.50	$	0.41
Diluted	$	0.46	$	0.53	$	0.43	$	0.49	$	0.40

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited) (in thousands, except per share data)
	Six Months Ended
	June 30,		June 30,
	2022		2021
Interest and dividend revenue:
Loans, including fees	$	25,186	$	25,217
PPP loans, including fees		350		2,095
Investment securities		1,410		892
Fed funds sold, deposits in banks and other		705		134
Total interest and dividend revenue		27,651		28,338
Interest expense:
Deposits		1,320		1,829
Repurchase agreements		24		16
Line of credit		589		234
Subordinated debt		-		600
Junior subordinated debentures		188		163
Total interest expense		2,121		2,842
Net interest income		25,530		25,496
Provision for loan losses		-		-
Net interest revenue after provision for loan losses		25,530		25,496
Noninterest revenue:
Service charges and fees		2,959		2,574
Interchange and ATM fees		3,001		3,201
Gain on sale of SBA loans		849		1,644
Other		1,643		1,684
Total noninterest revenue		8,452		9,103
Operating expenses:
Salaries and employee benefits		14,318		13,079
Occupancy and equipment		2,775		2,845
Other real estate expenses, including losses
on sales and impairments, net		13		172
Transaction costs		919		1,612
Other		6,900		7,628
Total other operating expenses		24,925		25,336
Income before income tax expense		9,057		9,263
Income tax expense		1,888		2,061
Net income	$	7,169	$	7,202
Weighted-average number of shares outstanding:
Basic		7,010		6,964
Diluted		7,223		7,209
Earnings per share:
Basic	$	1.02	$	1.03
Diluted	$	0.99	$	1.00

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
	(Unaudited)			(Unaudited)			(Audited)			(Unaudited)			(Unaudited)
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2022			2021			2021			2021
Assets
Cash and due from banks	$	32,404		$	30,191		$	29,689		$	28,201		$	27,722
Interest-bearing deposits with banks		266,020			282,852			261,513			259,342			278,360
Cash and cash equivalents		298,424			313,043			291,202			287,543			306,082
Securities available for sale, at fair value		192,982			188,954			197,309			171,804			173,606
Other investments		827			827			786			786			786
Loans:
Loans, excluding PPP loans		1,111,079			1,078,736			1,044,413			1,044,938			999,127
PPP loans		180			4,171			10,912			23,051			59,233
Allowance for loan losses		(15,296	)		(15,396	)		(15,228	)		(14,837	)		(15,159	)
Loans, net		1,095,963			1,067,511			1,040,097			1,053,152			1,043,201
Premises and equipment, net		33,812			34,400			35,136			35,770			36,114
Bank owned life insurance		35,104			34,871			34,634			34,404			34,174
Other real estate owned		857			857			857			1,128			1,533
Goodwill		28,275			28,275			28,275			28,275			28,275
Core deposit intangible, net		6,809			7,046			7,283			7,521			7,758
Deferred tax asset, net		13,975			13,622			12,093			12,261			13,313
Other assets		6,004			7,280			6,893			7,366			7,423
Total Assets	$	1,713,032		$	1,696,686		$	1,654,565		$	1,640,010		$	1,652,265
Liabilities
Deposits:
Noninterest-bearing	$	527,023		$	519,305		$	485,754		$	490,341		$	488,877
Interest-bearing demand		280,387			271,545			275,115			259,811			270,380
Money market and savings		465,783			457,768			439,965			427,272			425,371
Time		213,255			220,349			226,604			237,292			250,839
Total deposits		1,486,448			1,468,967			1,427,438			1,414,716			1,435,467
Securities sold under agreements to repurchase		22,266			27,373			23,988			23,424			15,241
Line of credit		34,688			34,688			34,188			23,688			22,688
Subordinated notes		-			-			-			8,674			13,165
Junior subordinated debentures		9,480			9,442			9,403			9,365			9,327
Accrued expenses and other liabilities		10,163			5,377			5,588			7,862			7,312
Total liabilities		1,563,045			1,545,847			1,500,605			1,487,729			1,503,200
Shareholders' Equity
Common stock		702			702			703			702			702
Additional paid in capital		117,328			117,307			117,443			117,298			117,151
Retained earnings		44,966			41,637			37,798			34,689			31,186
Other comprehensive income (loss)		(13,009	)		(8,807	)		(1,984	)		(408	)		26
Total Shareholders' Equity		149,987			150,839			153,960			152,281			149,065
Total Liabilities and Shareholders' Equity	$	1,713,032		$	1,696,686		$	1,654,565		$	1,640,010		$	1,652,265

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
GAAP to Non-GAAP Reconciliation
(Unaudited) (in thousands, except per share data)
	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2022			2021			2021			2021
Net income (GAAP)	$	3,329		$	3,840		$	3,108		$	3,503		$	2,869
Transaction costs (TC)		315			604			2,480			1,069			1,612
Employee separation costs (SC)		1,180			-			-			-			-
Income tax benefit related to TC and SC		(381	)		(156	)		(779	)		(204	)		(335	)
Net income excluding TC and SC	$	4,443		$	4,288		$	4,809		$	4,368		$	4,146
Diluted earnings per share:
GAAP	$	0.46		$	0.53		$	0.43		$	0.49		$	0.40
Excluding TC and SC	$	0.61		$	0.59		$	0.67		$	0.60		$	0.57
Weighted average number of shares - diluted		7,225			7,225			7,218			7,222			7,212

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Loan Portfolio
(Unaudited) (in thousands)
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2022			2021			2021			2021
Real estate loans:
Construction and land development	$	182,601		$	173,066		$	159,630		$	154,487		$	144,263
Single-family residential		160,335			151,033			158,667			163,412			162,996
Commercial - owner occupied		274,555			267,815			265,900			275,220			260,186
Commercial - other		254,082			258,112			239,994			228,229			214,995
Multifamily		3,955			6,487			6,592			13,826			14,017
Total real estate loans		875,528			856,513			830,783			835,174			796,457
Commercial loans (not secured by real estate)		226,639			212,109			202,966			197,084			190,095
Consumer loans (not secured by real estate)		10,614			11,596			12,081			14,015			13,874
Gross loans		1,112,781			1,080,218			1,045,830			1,046,273			1,000,426
Unearned income		(1,702	)		(1,482	)		(1,417	)		(1,335	)		(1,299	)
Loans, net of unearned income	$	1,111,079		$	1,078,736		$	1,044,413		$	1,044,938		$	999,127
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2021			2021			2021			2021
PPP loans:
Up to $50,000	$	-		$	209		$	644		$	2,344		$	7,033
$50,001 - $150,000		-			318			804			3,936			15,438
$150,001 - $2 million		180			3,754			9,788			15,328			26,384
Greater than $2 million		-			-			-			2,155			11,963
Total PPP loans		180			4,281			11,236			23,763			60,818
Unearned income		-			(110	)		(324	)		(712	)		(1,585	)
PPP loans, net of unearned income	$	180		$	4,171		$	10,912		$	23,051		$	59,233

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Asset Quality Information
(Unaudited) (in thousands)
	June 30,			March 31,			December 31,			September 30,			June 30,
		2022			2022			2021			2021			2021
Classified assets:
Nonperforming loans	$	2,078		$	1,897		$	1,735		$	2,143		$	1,362
Other real estate owned		857			857			857			1,128			1,533
Total nonperforming assets		2,935			2,754			2,592			3,271			2,895
Accruing classified loans		284			327			676			804			811
Total classified assets	$	3,219		$	3,081		$	3,268		$	4,075		$	3,706
Classified assets to HSB Tier 1 capital plus ALL		1.8	%		1.7	%		1.9	%		2.5	%		2.3	%
Nonperforming assets to total assets		0.17	%		0.16	%		0.16	%		0.20	%		0.18	%
Allowance for loan losses:
Balance at beginning of period	$	15,396		$	15,228		$	14,837		$	15,159		$	15,256
Provision for loan losses		-			-			-			-			-
Charge-offs		(651	)		(99	)		(295	)		(403	)		(195	)
Recoveries		551			267			686			81			98
Balance at end of period	$	15,296		$	15,396		$	15,228		$	14,837		$	15,159
Loans, excluding PPP loans	$	1,111,079		$	1,078,736		$	1,044,413		$	1,044,938		$	999,127
PPP loans		180			4,171			10,912			23,051			59,233
Performing past due loans		995			1,638			1,277			3,541			1,464
Allowance as % of loans		1.38	%		1.42	%		1.44	%		1.39	%		1.43	%
Allowance as % of loans, excluding PPP loans		1.38	%		1.43	%		1.46	%		1.42	%		1.52	%
Allowance as a % of nonperforming loans		736.1	%		811.6	%		877.7	%		692.3	%		1113.0	%
Average loans, excluding PPP loans		1,092,048			1,056,269			1,044,492			1,017,213			993,346
Average PPP loans		1,520			8,075			15,164			40,910			77,325
Net charge-offs (annualized) to average loans		0.04	%		-0.06	%		-0.15	%		0.12	%		0.04	%