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Heritage Southeast Bancorporation, Inc. Reports 1st Quarter Earnings of $4.3 million, or $0.60 Per Share; Substantial Improvement in Asset Quality

JONESBORO, Ga., April 22, 2021 (GLOBE NEWSWIRE) -- Heritage Southeast Bancorporation, Inc. (“Company”) (OTCQX: HSBI) today announced quarterly net income of $4.3 million or $0.60 per diluted share for the first quarter ended March 31, 2021, compared to $977,000 or $0.14 per diluted share for the prior quarter. First quarter earnings included a higher net interest income, net loan loss recoveries which contributed to no loan loss provision and lower salary and employee benefit expenses compared to the prior quarter.

Highlights of the Company’s performance and results for the quarter ended March 31, 2021 include the following:

  • In March, HSBI entered into an agreement with VyStar Credit Union. Under the terms of the agreement, VyStar will acquire the assets and assume the liabilities of Heritage Southeast Bank in an all-cash transaction. Upon closing, it is anticipated HSBI shareholders will receive $27.00 per share. The Company has filed all regulatory applications and is preparing proxy materials for shareholder approval.  
  • Significant reductions to the legacy problem assets portfolio occurred during the period as total classified assets declined to $4.8 million at March 31, 2021 from $13.3 million at December 31, 2020 and $25.7 million at March 31, 2020.   
  • Loan loss provisions were zero for the quarter ended March 31, 2021 compared to $1.7 million the prior quarter reflecting net recoveries recorded in the period and the overall improved credit outlook.
  • The net interest margin expanded five basis points to 3.58% during the quarter ended March 31, 2021 from 3.53% the previous quarter. The improved margin was primarily due to accelerated recognition of PPP loan fees resulting from forgiveness of approximately $29 million in loans during the first quarter and reductions to the cost of funds.
  • Data processing conversion was successfully completed in February which will provide a more efficient operational model and customer delivery platform.
  • COVID-19 loan modifications declined in the first quarter as approximately 99% of loans granted payment deferrals related to the pandemic have returned to original terms. This portfolio decreased from a peak of $165 million at June 30, 2020 to $1.3 million at March 31, 2021 and consists of 7 loans.

“We are pleased with our first quarter performance as the actions taken in 2020 along with market opportunities identified for 2021 will provide a stronger sustainable earnings stream. This coupled with improvements in asset quality and efficiencies to be gained from our recent data processing conversion has us very optimistic for the remainder of this year,” stated Leonard Moreland, Chief Executive Officer. “Meanwhile, in late March we negotiated an agreement to be acquired by VyStar Credit Union, headquartered in Jacksonville, Florida. The unique structure of this acquisition will benefit our customers, employees, shareholders and the communities we serve. Our HSBI team continues to work with VyStar as we anticipate closing the transaction sometime in the fourth quarter of 2021.”

Net Interest Income

The Company’s net interest income increased to $12.8 million during the first quarter of 2021 from $12.5 million in the fourth quarter of 2020. The Company’s reported net interest margin increased 5 basis points to 3.58% for the first quarter of 2021 from 3.53% for the fourth quarter of 2020. First quarter net interest margin was positively impacted by the additional accretion of PPP related fees of approximately $855,000. The earning asset yield decreased 5 basis points to 4.00% during the first quarter of 2021 while the cost of funds decreased 10 basis points to 0.42% over the same time frame. The net interest margin excluding PPP loans decreased to 3.48% for the first quarter from 3.50% one quarter earlier primarily due to changes in earning asset mix.

Loan Loss Provisions

The Company did not recognize any loan loss provisions for the first quarter, compared to provisions totaling $1.7 million the prior quarter. During the first quarter, the Company realized net loan loss recoveries of $1.1 million which contributed to building the reserve against loans losses. Management believes the improved economic and pandemic climate has provided better clarity on the ability of borrowers to meet their loan obligations. As such, the current level of reserves is believed to be sufficient.

Non-interest Income

First quarter non-interest income decreased to $4.5 million from $4.6 million for the fourth quarter of 2020. Lower service charges and fees during the current quarter were partially offset by higher interchange and ATM fees.   

Non-interest Expense

Non-interest expense decreased $2.6 million to $11.8 million for the first quarter of 2021 from $14.4 million the prior quarter. Salaries and employee benefits decreased $1.8 million to $6.5 million in the first quarter from $8.3 million in the preceding quarter due primarily to elevated expenses in the prior quarter from employee restructuring charges. Other expenses decreased to $3.9 million for the first quarter from $4.3 million the prior quarter, which was elevated due to a loss recognized on a sublease of $800,000.

Balance Sheet

Total assets increased to $1.65 billion at March 31, 2021 from $1.57 billion one quarter earlier. Liquidity levels remained elevated as cash and cash equivalents increased $52.1 million to $270.7 million from $218.6 million three months earlier, and securities available for sale increased $5.5 million to $174.8 million from $169.3 million. Loans, excluding PPP loans, increased $14.0 million to $994.3 million at March 31, 2021 from $980.3 million at December 31, 2020. Meanwhile, PPP loans increased slightly to $88.2 million at March 31, 2021 from $87.8 million three months earlier. Approximately $29.1 million in PPP loans were funded in 2021.

Total deposits increased $71.2 million to $1.43 billion at March 31, 2021 from $1.36 billion at December 31, 2020. The impact of the various government stimulus programs and organic transaction account growth more than offset reductions to municipal and time deposits. The largest portion of the deposit increase consisted of non-interest bearing deposits which grew $64.2 million. Non-interest bearing deposits remain the largest component of the deposit portfolio representing 33.5% of total deposits followed by money market and savings deposits at 29.5%, interest-bearing demand deposits at 18.8% and time deposits at 18.2%.

Asset Quality

Classified assets, which include nonperforming assets and accruing classified loans, totaled $4.8 million at March 31, 2021, compared with $13.3 million at December 31, 2020. The decrease during the first quarter reflected a reduction of $7.8 million in nonperforming loans and $754,000 reduction in other real estate owned. Nonperforming assets, which exclude accruing classified loans, totaled $3.9 million at March 31, 2021, or 0.24% of total assets compared to $12.5 million, or 0.79% during the prior quarter. During the quarter, the Company sold approximately $3.8 million in non-performing loans above carrying value. Additionally, $4.6 million of non-performing loans were upgraded or paid off and $755,000 of other real estate owned was sold.

The allowance for loan losses increased to $15.3 million, or 1.41% of total loans at March 31, 2021 from $14.1 million, or 1.32% of total loans at December 31, 2020. Excluding PPP loans, which are supported by guarantees from the SBA, the allowance for loans losses were 1.53% of total loans at March 31, 2021. During the first quarter of 2021, the Company realized loan loss recoveries of $1.3 million and loan charge-offs of $198,000, resulting in net recoveries of $1.1 million, or 0.43% of average loans, compared with net charge-offs of $508,000, or 0.19% of average loans, in the fourth quarter of 2020.

Capital

Total shareholder equity increased to $145.8 million at March 31, 2021 from $142.8 million one quarter earlier. Shareholder equity relative to total assets was 8.86% and tangible shareholder equity relative to tangible assets was 6.81% at March 31, 2021. Tangible book value per share was $15.16 at March 31, 2021, an increase of 7.2% from March 31, 2020. At March 31, 2021, the Bank’s Leverage Ratio was 9.10%, its Common Equity Tier I and Tier 1 Capital ratios were 12.02%, and its Total Risk-Based Capital ratio was 13.27%. 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 $1.6 billion in assets, the Bank provides a well-rounded offering of commercial and consumer products through its 22 locations. For additional information, visit the HSBI website at www.myhsbi.com.

Forward Looking Statements: 
This press release contains forward-looking statements. These forward-looking statements include, but are not limited to, statements about the benefits of the proposed acquisition of HSBI by VyStar, statements related to the expected timing of the completion of the acquisition, the combined company's plans, objectives, expectations and intentions, and other statements that are not historical facts. Forward-looking statements may be identified by terminology such as "may," "will," "should," "scheduled," "plans," "intends," "anticipates," "expects," "believes," estimates," "potential," or "continue" or negatives of such terms or other comparable terminology. All forward-looking statements in this press release, or in any other written or oral communication that relates to the proposed acquisition or to matters that may affect such proposed acquisition are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of HSBI or VyStar to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, among others, (1) disruption from the proposed acquisition with customers, suppliers, employees or other business partners, (2) the occurrence of any event, change or other circumstances that could give rise to the termination of the agreement, (3) the failure to obtain the necessary approvals by the shareholders of HSBI, (4) the ability by the parties to obtain required governmental approvals of the acquisition (5) the failure of the closing conditions in the agreement to be satisfied, or any unexpected delay in closing the acquisition, and (6) general competitive, economic, political and market conditions.

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.

Heritage Southeast Bancorporation, Inc. and its subsidiary disclaim any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law.

CONTACT 
Leonard A. MorelandPhilip F. Resch
Chief Executive OfficerChief 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
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
Earnings:     
Net Interest Income$12,769 $12,530 $11,901 $11,769 $12,213 
Net Income 4,333  977  901  948  1,616 
      
Per Share Data:     
Earnings per share:     
Basic$0.62 $0.14 $0.13 $0.14 $0.23 
Diluted$0.60 $0.14 $0.13 $0.13 $0.23 
Weighted average number of shares:     
Basic 6,956  6,924  6,921  6,908  6,893 
Diluted 7,179  7,139  7,139  7,131  7,117 
Period-end number of shares (1) 7,222  7,227  7,229  7,227  7,231 
Book value per share (period-end)$20.18 $19.76 $19.62 $19.45 $19.29 
Tangible book value per share (period-end)$15.16 $14.71 $14.54 $14.34 $14.14 
      
Key Ratios (percent):     
Return on average assets 1.10% 0.25% 0.24% 0.27% 0.49%
Return on average tangible equity 16.28% 3.66% 3.44% 3.70% 6.45%
Yield on interest earning assets 4.00% 4.05% 4.03% 4.32% 5.01%
Cost of funds 0.42% 0.52% 0.60% 0.61% 0.80%
Net interest margin 3.58% 3.53% 3.43% 3.71% 4.21%
Net interest margin, excluding PPP loans 3.48% 3.50% 3.67% 3.78% 4.21%
Non-interest income as a percent of total revenue 26.0% 26.7% 24.7% 26.0% 27.9%
Efficiency ratio 67.2% 83.1% 75.1% 77.8% 73.8%
Tangible common equity to tangible assets 6.81% 6.93% 7.04% 7.06% 7.98%
      
Asset Quality (period-end):     
Allowance for loan losses to total loans 1.41% 1.32% 1.23% 1.02% 0.90%
Allowance for loan losses to loans, excluding PPP loans 1.53% 1.44% 1.36% 1.13% 0.90%
Allowance for loan losses to total nonperforming loans 731.0% 143.1% 118.6% 54.9% 54.4%
Nonperforming assets to total assets 0.24% 0.79% 1.04% 1.87% 1.85%
Net charge-offs (annualized) to average loans -0.43% 0.19% 0.15% 0.04% 0.07%
Net charge-offs (annualized) to average loans, excluding PPP loans -0.47% 0.21% 0.17% 0.05% 0.07%
      
Capital (period-end):     
Heritage Southeast Bank (HSB) risk based capital ratios:    
CET1 12.02% 11.95% 12.10% 11.99% 10.58%
Tier 1 12.02% 11.95% 12.10% 11.99% 10.58%
Total 13.27% 13.19% 13.26% 12.97% 11.36%
Leverage 9.10% 8.98% 9.08% 9.55% 8.92%
      
Other (period-end):     
Branches 22  22  24  24  24 
FTE 278  288  289  302  309 
      
(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
 March 31,December 31,September 30,June 30,March 31,
  2021 2020  2020 2020 2020
Interest and dividend revenue:     
   Loans, including fees$12,625$12,938 $12,806$12,748$13,564
   PPP loans, including fees 1,071 984  666 523 -
   Investment securities 516 393  426 394 618
   Fed funds sold, deposits in banks and other 55 61  76 40 347
      Total interest and dividend revenue 14,267 14,376  13,974 13,705 14,529
      
Interest expense:     
   Deposits 986 1,256  1,457 1,673 2,022
   Fed funds purchased and repurchase agreements 10 15  21 20 50
   Federal Home Loan Bank advances - -  1 14 23
   Line of credit 110 181  196 135 100
   Subordinated notes 310 310  313 - -
   Junior subordinated debentures 82 84  85 94 121
Total interest expense 1,498 1,846  2,073 1,936 2,316
      
Net interest income 12,769 12,530  11,901 11,769 12,213
Provision for loan losses - 1,700  2,550 2,550 2,550
Net interest revenue after provision for loan losses 12,769 10,830  9,351 9,219 9,663
      
Noninterest revenue:     
   Service charges and fees 1,285 1,574  1,433 1,218 1,698
   Interchange and ATM fees 1,536 1,480  1,524 1,422 1,263
   Securities gains, net - -  - 741 572
   Gain on sale of SBA loans 906 924  275 61 551
   Other 765 579  678 701 644
      Total noninterest revenue 4,492 4,557  3,910 4,143 4,728
      
Operating expenses:     
   Salaries and employee benefits 6,528 8,309  6,477 5,877 6,856
   Occupancy and equipment 1,402 1,404  1,454 1,388 1,309
   Other real estate expenses, including losses on sales and impairments, net 7 391  113 619 73
   Other 3,904 4,335  4,070 4,153 4,081
      Total other operating expenses 11,841 14,439  12,114 12,037 12,319
      Income before income tax expense 5,420 948  1,147 1,325 2,072
Income tax expense 1,087 (29) 246 377 456
      Net income$4,333$977 $901$948$1,616
      
Weighted-average number of shares outstanding:     
   Basic 6,956 6,924  6,921 6,908 6,893
   Diluted 7,179 7,139  7,139 7,131 7,117
      
Earnings per share:     
   Basic$0.62$0.14 $0.13$0.14$0.23
   Diluted$0.60$0.14 $0.13$0.13$0.23
      



HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY   
Consolidated Balance Sheets     
(in thousands)     
      
 (Unaudited) (Unaudited)(Unaudited)(Unaudited)
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
Assets     
Cash and due from banks$23,851 $29,092 $23,001 $26,767 $37,192 
Interest-bearing deposits with banks 246,824  189,533  178,473  172,961  95,446 
   Cash and cash equivalents 270,675  218,625  201,474  199,728  132,638 
Securities available for sale, at fair value 174,785  169,329  157,045  131,429  133,520 
Other investments 786  1,203  1,203  1,451  1,451 
Loans:     
Loans, excluding PPP loans 994,251  980,257  949,473  950,920  929,295 
PPP loans 88,201  87,775  103,402  103,074  - 
Allowance for loan losses (15,256) (14,117) (12,925) (10,772) (8,330)
   Loans, net 1,067,196  1,053,915  1,039,950  1,043,222  920,965 
      
Premises and equipment, net 37,220  37,165  37,154  34,375  34,537 
Bank owned life insurance 33,925  28,734  28,536  28,334  28,129 
Other real estate owned 1,839  2,593  5,043  8,496  9,029 
Goodwill 28,275  28,275  28,275  28,275  28,275 
Core deposit intangible, net 7,995  8,232  8,470  8,707  8,944 
Deferred tax asset, net 14,362  14,900  14,989  15,276  15,660 
Other assets 8,140  8,219  8,058  6,156  5,807 
   Total Assets$1,645,198 $1,571,190 $1,530,197 $1,505,449 $1,318,955 
      
Liabilities     
Deposits:     
Noninterest-bearing$479,653 $415,476 $427,389 $417,690 $312,203 
Interest-bearing demand 269,517  283,009  237,710  225,292  199,585 
Money market and savings 422,904  385,246  355,308  337,169  299,901 
Time 261,710  278,825  290,521  301,532  317,571 
   Total deposits 1,433,784  1,362,556  1,310,928  1,281,683  1,129,260 
      
Securities sold under agreements to repurchase 13,413  13,187  15,407  17,194  13,310 
Federal Home Loan Bank advances -  -  -  4,167  4,667 
Line of credit 14,688  14,688  24,688  24,688  14,688 
Subordinated notes 19,656  19,646  19,637  19,653  - 
Junior subordinated debentures 9,288  9,250  9,211  9,173  9,135 
Accrued expenses and other liabilities 8,598  9,030  8,441  8,267  8,443 
   Total liabilities 1,499,427  1,428,357  1,388,312  1,364,825  1,179,503 
      
Shareholders' Equity     
Common stock 702  702  702  701  702 
Additional paid in capital 116,972  116,825  116,628  116,396  116,201 
Retained earnings 28,316  23,983  23,007  22,105  21,157 
Other comprehensive income (loss) (219) 1,323  1,548  1,422  1,392 
   Total Shareholders' Equity 145,771  142,833  141,885  140,624  139,452 
   Total Liabilities and Shareholders' Equity$1,645,198 $1,571,190 $1,530,197 $1,505,449 $1,318,955 
      



HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY   
GAAP to Non-GAAP Reconciliation     
(Unaudited) (in thousands)     
      
 Three Months Ended
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
Income before income tax expense (GAAP)$5,420 $948 $1,147 $1,325 $2,072 
Provision for loan losses -  1,700  2,550  2,550  2,550 
Other real estate expenses, including losses on sales and impairments, net 7  391  113  619  73 
Securities gains, net -  -  -  (741) (572)
Loss on sub-lease -  800  -  -  - 
Employee restructuring costs -  1,310  -  -  - 
PPP impact (1,396) (984) (666) (1,523) - 
Pre-tax core earnings$4,031 $4,165 $3,144 $2,230 $4,123 
      



HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY   
Loan Portfolio     
(Unaudited) (in thousands)     
   
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
Real estate loans:     
Construction and land development$152,889 $142,513 $136,313 $148,158 $133,592 
Single-family residential 165,362  171,153  166,673  167,734  176,844 
Commercial - owner occupied 266,258  259,592  255,277  248,001  248,102 
Commercial - other 198,965  192,808  191,313  187,032  172,215 
Multifamily 6,746  14,171  11,849  11,669  11,748 
Total real estate loans 790,220  780,237  761,425  762,594  742,501 
Commercial loans (not secured by real estate) 190,365  184,509  171,251  172,134  170,252 
Consumer loans (not secured by real estate) 14,861  16,677  17,844  17,117  17,477 
Gross loans 995,446  981,423  950,520  951,845  930,230 
Unearned income (1,195) (1,166) (1,047) (925) (935)
Loans, net of unearned income$994,251 $980,257 $949,473 $950,920 $929,295 
      
      
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
PPP loans:     
Up to $50,000$11,718 $11,701 $12,762 $12,765 $- 
$50,001 - $150,000 24,231  23,448  27,371  27,371  - 
$150,001 - $2 million 35,498  36,357  47,724  47,724  - 
Greater than $2 million 17,953  17,953  17,953  17,953  - 
Total PPP loans (2) 89,400  89,459  105,810  105,813  - 
Unearned income (1,199) (1,684) (2,408) (2,739) - 
PPP loans, net of unearned income$88,201 $87,775 $103,402 $103,074 $- 
      
(2) March 31, 2021 includes $60.3 million and $29.1 million of loans originated in 2020 and 2021, respectively.  



HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY   
Asset Quality Information     
(Unaudited) (in thousands)     
  
 March 31,December 31,September 30,June 30,March 31,
  2021  2020  2020  2020  2020 
Classified assets:     
Nonperforming loans$2,087 $9,866 $10,902 $19,638 $15,317 
Other real estate owned 1,839  2,593  5,043  8,496  9,029 
Total nonperforming assets 3,926  12,459  15,945  28,134  24,346 
Accruing classified loans 835  888  1,634  971  1,378 
Total classified assets$4,761 $13,347 $17,579 $29,105 $25,724 
      
Classified assets to HSB Tier 1 capital plus ALL 3.1% 8.9% 11.9% 18.1% 18.5%
Nonperforming assets to total assets 0.24% 0.79% 1.04% 1.87% 1.85%
      
Allowance for loan losses:     
Balance at beginning of period$14,117 $12,925 $10,772 $8,330 $5,946 
Provision for loan losses -  1,700  2,550  2,550  2,550 
Charge-offs (198) (860) (403) (170) (307)
Recoveries 1,337  352  6  62  141 
Balance at end of period$15,256 $14,117 $12,925 $10,772 $8,330 
      
Loans, excluding PPP loans$994,251 $980,257 $949,473 $950,920 $929,295 
PPP loans 88,201  87,775  103,402  103,074  - 
Performing past due loans 2,500  2,472  2,193  3,506  4,798 
Allowance as % of loans 1.41% 1.32% 1.23% 1.02% 0.90%
Allowance as % of loans, excluding PPP loans 1.53% 1.44% 1.36% 1.13% 0.90%
Allowance as a % of nonperforming loans 731.0% 143.1% 118.6% 54.9% 54.4%
Average loans, excluding PPP loans 988,173  960,808  947,177  946,389  930,099 
Average PPP loans 83,546  100,725  102,396  78,981  - 
Net charge-offs (annualized) to average loans -0.43% 0.19% 0.15% 0.04% 0.07%
Net charge-offs (annualized) to average loans, excluding PPP loans -0.47% 0.21% 0.17% 0.05% 0.07%



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