Heritage Southeast Bancorporation, Inc. Reports Third Quarter 2022 Earnings up 68% From Prior Quarter to $5.6 Million, or $0.77 Per Diluted Share

Heritage Southeast Bancorporation, Inc.

JONESBORO, Ga., Oct. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Southeast Bancorporation, Inc. (“Company”) (OTCQX: HSBI) today announced third quarter 2022 earnings of $5.6 million, or $0.77 per diluted share compared to $3.3 million, or $0.46 per diluted share in the prior quarter ended June 30, 2022. Third quarter earnings reflected net interest margin expansion and lower operating expenses relative to the prior quarter.

Highlights of the Company’s results for the third quarter of 2022 include the following:

• On July 27, 2022, The First Bancshares, Inc. and Heritage Southeast Bancorporation, Inc, announced an execution of a definitive merger agreement pursuant to which The First Bancshares, Inc. has agreed to acquire HSBI. Subject to the terms of the definitive merger agreement, HSBI shareholders will receive 0.965 shares of First Bancshares common stock for each share of HSBI common stock upon the closing of the transaction.
  
  

• Earnings per share excluding transaction costs associated with the merger with The First Bancshares, Inc. was $0.83 per diluted share for the third quarter ended September 30, 2022 compared to $0.61 per diluted share for the prior quarter and $0.60 per diluted share for the third quarter a year earlier (see GAAP to non-GAAP reconciliation).

• The net interest margin increased 51 basis points to 3.85% for the third quarter of 2022 compared to 3.34% for the prior quarter and 3.45% for the third quarter one year earlier.

• The yield on interest earning assets increased 59 basis points during the third quarter of 2022 to 4.21% while the cost of funds increased only 8 basis points to 0.36%.

• Total loans increased $31.0 million during the third quarter and $97.7 million, or 9.4% for the nine months ended September 30, 2022. The increases excluded PPP loans in prior periods as all remaining loans were resolved in the current quarter.
  

“Our pending merger with The First Bancshares is progressing nicely and on schedule. We look forward to delivering a strong franchise with strong earnings to our union,” said Leonard Moreland, Chief Executive Officer. “Our third quarter results better reflect efforts taken to improve our efficiency. We continue to experience strong loan growth in our Atlanta market and believe growth will continue with the strong backing of The First Bancshares. During the quarter, we added $31.9 million in commercial real estate and C&I loans to our portfolio which was supported by a $28.2 million increase in noninterest bearing deposit accounts. Our team of seasoned bankers is focused on providing complete financial solutions to our loyal client base along with value-added services to assist our clients in navigating the changing economic environment. Our ability to fund our loan growth with low cost deposits continues to contribute to an improved net interest margin. With expanded deposit products and broader loan services after the merger with The First Bancshares, we aim to continue to expand our relationships with our customer base, particularly in the Atlanta, Savannah and Jacksonville metropolitan areas.”

Net Interest Income

The Company’s net interest income increased to $15.6 million during the third quarter of 2022 from $13.2 million in the second quarter of 2022. The higher net interest income was a direct result of continued loan growth and the increase in interest rates, partially offset by an increase in deposit and borrowing costs. The Company’s reported net interest margin increased 51 basis points to 3.85% for the third quarter of 2022 from 3.34% for the preceding quarter. Net interest income and net interest margin was influenced by higher yields on earning asset categories and a larger balance of noninterest bearing deposits.

Loan Loss Provision

The Company did not recognize any loan loss provision for the third quarter. Management believes that while economic conditions are changing, we are not seeing signs of credit deterioration at this time. Current loan loss reserves stand at 1.33% of loans outstanding. Additionally, non-performing assets continued to remain low at 0.17% of assets. As such, the current level of reserves is believed to be sufficient as of September 30, 2022.

Non-interest Income

Third quarter non-interest income remained flat at $4.3 million for the third quarter ended September 30, 2022. Gains on the sale of SBA loans increased slightly to $491,000 for the third quarter 2022 from $430,000 during the second quarter of 2022 while interchange and ATM fees decreased to $1.4 million for the most recent quarter from $1.5 million the prior quarter. Meanwhile, service charges and fees increased slightly to $1.6 million for the quarter ended September 20, 2022 from $1.5 million during the prior quarter.

Non-interest Expense

Non-interest expense decreased $705,000 to $12.5 million for the third quarter of 2022 from $13.2 million the prior quarter. The prior quarter reflected $1.2 million in employee separation costs as well as $315,000 in transaction related expenses while the current quarter reflected $514,000 in transaction related costs. Exclusive of these unusual expenses, non-interest expenses totaled $12.0 million for the quarter ended September 30, 2022, compared to $11.7 million the prior quarter. The efficiency ratio exclusive of transaction and employee separation costs improved to 59.0% for the third quarter 2022 from 65.3% in the previous quarter and 65.9% in the third quarter one year earlier.

Balance Sheet

Total assets increased slightly to $1.73 billion at September 30, 2022, relative to $1.71 billion at the previous quarter end. Liquidity levels continued to remain elevated and will be used to fund future loan originations. At September 30, 2022, cash and cash equivalents totaled $302.6 million relative to $298.4 million three months earlier. Securities available for sale decreased by $14.3 million to $178.7 million at September 30, 2022 from $193.0 million three months earlier. The decline was due to normal paydowns in the period of $7.9 million and valuation adjustments of $6.4 million related to the impact of rising interest rates. Loans increased 2.8% to $1.14 billion at September 30, 2022 from $1.11 billion at June 30, 2022.

Total deposits increased to $1.50 billion at September 30, 2022 from $1.49 billion three months earlier. Non-interest-bearing deposits remain the largest component of the deposit portfolio, representing 37.1% of total deposits and up from 35.5% the previous quarter, followed by money market and savings deposits at 31.8%, interest-bearing demand deposits at 17.9% and time deposits at 13.2%. Time deposits declined $14.8 million during the quarter.

Asset Quality

Classified assets, which include nonperforming assets and accruing classified loans, decreased $67,000 to $3.2 million at September 30, 2022. The decrease during the third quarter reflected a decrease of $50,000 in nonperforming loans and $17,000 in accruing classified loans. Nonperforming assets, which exclude accruing classified loans, totaled $2.9 million at September 30, 2022, or 0.17% of total assets.

The allowance for loan losses decreased slightly to $15.2 million, or 1.33% of total loans at September 30, 2022, from $15.3 million, or 1.38% of total loans at June 30, 2022. The decrease was due to net loan charge-offs totaling $127,000 during the period as no loan loss provision was required.

Capital

Total shareholder equity was $150.8 million at September 30, 2022. Tangible shareholder equity relative to total assets was 6.83% at September 30, 2022 (down from 6.85% at June 30, 2022). Tangible book value per share increased to $16.07 at September 30, 2022 as compared to $15.93 at the end of the second quarter and $16.40 at year end 2021. Tangible book value increased in the quarter despite continued declines in accumulated other comprehensive income related to the impact of rising interest rates on our investment portfolio. At September 30, 2022, the Bank’s Leverage Ratio was 10.22%, its Common Equity Tier I and Tier 1 Capital ratios were 12.82%, and its Total Risk-Based Capital ratio was 13.94%. 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
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Earnings:
Net Interest Income	$	15,557		$	13,205		$	12,325		$	12,633		$	13,152
Net Income		5,587			3,329			3,840			3,108			3,503
Net Income excluding transaction and employee separation costs		5,970			4,443			4,288			4,809			4,368
Per Share Data:
Earnings per share:
Basic	$	0.80		$	0.47		$	0.55		$	0.45		$	0.50
Diluted	$	0.77		$	0.46		$	0.53		$	0.43		$	0.49
Diluted excluding transaction and employee separation costs	$	0.83		$	0.61		$	0.59		$	0.67		$	0.60
Weighted average number of shares:
Basic		7,016			7,012			7,008			6,979			6,976
Diluted		7,232			7,225			7,225			7,218			7,222
Period-end number of shares (1)		7,216			7,215			7,212			7,220			7,220
Book value per share (period-end)	$	20.90		$	20.79		$	20.92		$	21.32		$	21.09
Tangible book value per share (period-end)	$	16.07		$	15.93		$	16.02		$	16.40		$	16.13
Key Ratios (percent):
Return on average assets		1.29	%		0.78	%		0.93	%		0.75	%		0.84	%
Return on average assets excluding transaction and employee separation costs		1.37	%		1.04	%		1.04	%		1.16	%		1.05	%
Return on average tangible equity		19.00	%		11.66	%		13.21	%		10.61	%		12.15	%
Return on average tangible equity excluding transaction and employee separation costs		20.31	%		15.56	%		14.76	%		16.41	%		15.15	%
Yield on interest earning assets		4.21	%		3.62	%		3.52	%		3.60	%		3.78	%
Cost of funds		0.36	%		0.28	%		0.27	%		0.29	%		0.33	%
Net interest margin		3.85	%		3.34	%		3.25	%		3.31	%		3.45	%
Net interest margin, excluding PPP loans		3.85	%		3.31	%		3.20	%		3.23	%		3.28	%
Non-interest income as a percent of total revenue		21.7	%		24.7	%		25.1	%		29.9	%		25.4	%
Efficiency ratio		61.6	%		73.8	%		69.9	%		77.4	%		72.0	%
Efficiency ratio excluding transaction and employee separation costs		59.0	%		65.3	%		66.3	%		63.7	%		65.9	%
Tangible common equity to tangible assets		6.83	%		6.85	%		6.95	%		7.31	%		7.26	%
Asset Quality (period-end):
Allowance for loan losses to total loans		1.33	%		1.38	%		1.42	%		1.44	%		1.39	%
Allowance for loan losses to loans, excluding PPP loans		1.33	%		1.38	%		1.43	%		1.46	%		1.42	%
Allowance for loan losses to total nonperforming loans		748.0	%		736.1	%		811.6	%		877.7	%		692.3	%
Nonperforming assets to total assets		0.17	%		0.17	%		0.16	%		0.16	%		0.20	%
Net charge-offs (annualized) to average loans		0.04	%		0.04	%		-0.06	%		-0.15	%		0.12	%
Capital (period-end):
Heritage Southeast Bank (HSB) risk based capital ratios:
CET1		12.82	%		12.58	%		12.50	%		12.67	%		12.29	%
Tier 1		12.82	%		12.58	%		12.50	%		12.67	%		12.29	%
Total		13.94	%		13.73	%		13.69	%		13.90	%		13.50	%
Leverage		10.22	%		9.89	%		9.89	%		9.81	%		9.40	%
Other (period-end):
Branches		23			23			23			23			23
FTE		265			270			275			280			278
(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
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Interest and dividend revenue:
Loans, including fees	$	14,641		$	12,939		$	12,247		$	12,666		$	12,705
PPP loans, including fees		12			114			235			428			1,014
Investment securities		870			654			756			518			564
Fed funds sold, deposits in banks and other		1,459			593			113			113			107
Total interest and dividend revenue		16,982			14,300			13,351			13,725			14,390
Interest expense:
Deposits		808			665			656			703			760
Repurchase agreements		18			9			14			8			8
Line of credit		467			318			271			253			192
Subordinated notes		-			-			-			47			198
Junior subordinated debentures		132			103			85			81			80
Total interest expense		1,425			1,095			1,026			1,092			1,238
Net interest income		15,557			13,205			12,325			12,633			13,152
Provision for loan losses		-			-			-			-			-
Net interest revenue after provision for loan losses		15,557			13,205			12,325			12,633			13,152
Noninterest revenue:
Service charges and fees		1,607			1,482			1,476			1,608			1,571
Interchange and ATM fees		1,430			1,548			1,453			1,506			1,517
Gain on sale of SBA loans		491			430			419			1,521			652
Other		790			865			779			759			741
Total noninterest revenue		4,318			4,325			4,127			5,394			4,481
Operating expenses:
Salaries and employee benefits		6,942			7,977			6,341			6,692			6,760
Occupancy and equipment		1,422			1,425			1,350			1,394			1,434
Other real estate expenses, including losses
on sales and impairments, net		6			6			7			93			27
Transaction costs		514			315			604			2,480			1,069
Other		3,593			3,459			3,441			3,538			3,634
Total other operating expenses		12,477			13,182			11,743			14,197			12,924
Income before income tax expense		7,398			4,348			4,709			3,830			4,709
Income tax expense		1,811			1,019			869			722			1,206
Net income	$	5,587		$	3,329		$	3,840		$	3,108		$	3,503
Weighted-average number of shares outstanding:
Basic		7,016			7,012			7,008			6,979			6,976
Diluted		7,232			7,225			7,225			7,218			7,222
Earnings per share:
Basic	$	0.80		$	0.47		$	0.55		$	0.45		$	0.50
Diluted	$	0.77		$	0.46		$	0.53		$	0.43		$	0.49

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited) (in thousands, except per share data)
	Nine Months Ended
	September 30,			September 30,
		2022			2021
Interest and dividend revenue:
Loans, including fees	$	39,826		$	37,923
PPP loans, including fees		362			3,109
Investment securities		2,280			1,456
Fed funds sold, deposits in banks and other		2,165			241
Total interest and dividend revenue		44,633			42,729
Interest expense:
Deposits		2,128			2,589
Repurchase agreements		41			24
Line of credit		1,057			426
Subordinated debt		-			798
Junior subordinated debentures		320			244
Total interest expense		3,546			4,081
Net interest income		41,087			38,648
Provision for loan losses		-			-
Net interest revenue after provision for loan losses		41,087			38,648
Noninterest revenue:
Service charges and fees		4,566			4,147
Interchange and ATM fees		4,431			4,719
Gain on sale of SBA loans		1,340			2,296
Other		2,433			2,417
Total noninterest revenue		12,770			13,579
Operating expenses:
Salaries and employee benefits		21,261			19,839
Occupancy and equipment		4,197			4,279
Other real estate expenses, including losses
on sales and impairments, net		19			198
Transaction costs		1,433			2,681
Other		10,493			11,258
Total other operating expenses		37,403			38,255
Income before income tax expense		16,454			13,972
Income tax expense		3,699			3,267
Net income	$	12,755		$	10,705
Weighted-average number of shares outstanding:
Basic		7,012			6,968
Diluted		7,227			7,214
Earnings per share:
Basic	$	1.82		$	1.54
Diluted	$	1.76		$	1.48

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
	(Unaudited)			(Unaudited)			(Unaudited)			(Audited)			(Unaudited)
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Assets
Cash and due from banks	$	25,856		$	32,404		$	30,191		$	29,689		$	28,201
Interest-bearing deposits with banks		276,784			266,020			282,852			261,513			259,342
Cash and cash equivalents		302,640			298,424			313,043			291,202			287,543
Securities available for sale, at fair value		178,704			192,982			188,954			197,309			171,804
Other investments		827			827			827			786			786
Loans:
Loans		1,142,106			1,111,259			1,082,907			1,055,325			1,067,989
Allowance for loan losses		(15,169	)		(15,296	)		(15,396	)		(15,228	)		(14,837	)
Loans, net		1,126,937			1,095,963			1,067,511			1,040,097			1,053,152
Premises and equipment, net		33,323			33,812			34,400			35,136			35,770
Bank owned life insurance		35,342			35,104			34,871			34,634			34,404
Other real estate owned		857			857			857			857			1,128
Goodwill		28,275			28,275			28,275			28,275			28,275
Core deposit intangible, net		6,571			6,809			7,046			7,283			7,521
Deferred tax asset, net		13,814			13,975			13,622			12,093			12,261
Other assets		5,895			6,004			7,280			6,893			7,366
Total Assets	$	1,733,185		$	1,713,032		$	1,696,686		$	1,654,565		$	1,640,010
Liabilities
Deposits:
Noninterest-bearing	$	555,252		$	527,023		$	519,305		$	485,754		$	490,341
Interest-bearing demand		267,626			280,387			271,545			275,115			259,811
Money market and savings		475,656			465,783			457,768			439,965			427,272
Time		198,441			213,255			220,349			226,604			237,292
Total deposits		1,496,975			1,486,448			1,468,967			1,427,438			1,414,716
Securities sold under agreements to repurchase		32,574			22,266			27,373			23,988			23,424
Line of credit		34,688			34,688			34,688			34,188			23,688
Subordinated notes		-			-			-			-			8,674
Junior subordinated debentures		9,519			9,480			9,442			9,403			9,365
Accrued expenses and other liabilities		8,637			10,163			5,377			5,588			7,862
Total liabilities		1,582,393			1,563,045			1,545,847			1,500,605			1,487,729
Shareholders' Equity
Common stock		702			702			702			703			702
Additional paid in capital		117,337			117,328			117,307			117,443			117,298
Retained earnings		50,553			44,966			41,637			37,798			34,689
Other comprehensive income (loss)		(17,800	)		(13,009	)		(8,807	)		(1,984	)		(408	)
Total Shareholders' Equity		150,792			149,987			150,839			153,960			152,281
Total Liabilities and Shareholders' Equity	$	1,733,185		$	1,713,032		$	1,696,686		$	1,654,565		$	1,640,010

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
GAAP to Non-GAAP Reconciliation
(Unaudited) (in thousands, except per share data)
	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Net income (GAAP)	$	5,587		$	3,329		$	3,840		$	3,108		$	3,503
Transaction costs (TC)		514			315			604			2,480			1,069
Employee separation costs (SC)		-			1,180			-			-			-
Income tax benefit related to TC and SC		(131	)		(381	)		(156	)		(779	)		(204	)
Net income excluding TC and SC	$	5,970		$	4,443		$	4,288		$	4,809		$	4,368
Diluted earnings per share:
GAAP	$	0.77		$	0.46		$	0.53		$	0.43		$	0.49
Excluding TC and SC	$	0.83		$	0.61		$	0.59		$	0.67		$	0.60
Weighted average number of shares - diluted		7,232			7,225			7,225			7,218			7,222

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Loan Portfolio
(Unaudited) (in thousands)
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Real estate loans:
Construction and land development	$	172,359		$	182,601		$	173,066		$	159,630		$	154,487
Single-family residential		162,656			160,335			151,033			158,667			163,412
Commercial - owner occupied		273,813			274,555			267,815			265,900			275,220
Commercial - other		274,028			254,082			258,112			239,994			228,229
Multifamily		11,686			3,955			6,487			6,592			13,826
Total real estate loans		894,542			875,528			856,513			830,783			835,174
Commercial loans (not secured by real estate)		238,735			226,819			216,390			214,202			220,847
Consumer loans (not secured by real estate)		10,630			10,614			11,596			12,081			14,015
Gross loans		1,143,907			1,112,961			1,084,499			1,057,066			1,070,036
Unearned income		(1,801	)		(1,702	)		(1,592	)		(1,741	)		(2,047	)
Loans, net of unearned income	$	1,142,106		$	1,111,259		$	1,082,907		$	1,055,325		$	1,067,989

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Asset Quality Information
(Unaudited) (in thousands)
	September 30,			June 30,			March 31,			December 31,			September 30,
		2022			2022			2022			2021			2021
Classified assets:
Nonperforming loans	$	2,028		$	2,078		$	1,897		$	1,735		$	2,143
Other real estate owned		857			857			857			857			1,128
Total nonperforming assets		2,885			2,935			2,754			2,592			3,271
Accruing classified loans		267			284			327			676			804
Total classified assets	$	3,152		$	3,219		$	3,081		$	3,268		$	4,075
Classified assets to HSB Tier 1 capital plus ALL		1.7	%		1.8	%		1.7	%		1.9	%		2.5	%
Nonperforming assets to total assets		0.17	%		0.17	%		0.16	%		0.16	%		0.20	%
Allowance for loan losses:
Balance at beginning of period	$	15,296		$	15,396		$	15,228		$	14,837		$	15,159
Provision for loan losses		-			-			-			-			-
Charge-offs		(160	)		(651	)		(99	)		(295	)		(403	)
Recoveries		33			551			267			686			81
Balance at end of period	$	15,169		$	15,296		$	15,396		$	15,228		$	14,837
Loans, excluding PPP loans	$	1,142,106		$	1,111,079		$	1,078,736		$	1,044,413		$	1,044,938
PPP loans		-			180			4,171			10,912			23,051
Performing past due loans		1,476			995			1,638			1,277			3,541
Allowance as % of loans		1.33	%		1.38	%		1.42	%		1.44	%		1.39	%
Allowance as % of loans, excluding PPP loans		1.33	%		1.38	%		1.43	%		1.46	%		1.42	%
Allowance as a % of nonperforming loans		748.0	%		736.1	%		811.6	%		877.7	%		692.3	%
Average loans, excluding PPP loans		1,129,993			1,092,048			1,056,269			1,044,492			1,017,213
Average PPP loans		135			1,520			8,075			15,164			40,910
Net charge-offs (annualized) to average loans		0.04	%		0.04	%		-0.06	%		-0.15	%		0.12	%