Press Release

JONESBORO, Ga., Jan. 21, 2021 (GLOBE NEWSWIRE) -- Heritage Southeast Bancorporation, Inc. (“Company”) (OTCQX: HSBI) today announced quarterly net income of $977,000 or $0.14 per diluted share for the fourth quarter ended December 31, 2020 compared to $901,000 or $0.13 per diluted share for the prior quarter. Fourth quarter earnings included a higher net interest margin, increased gains on the sale of SBA loans offset by higher salaries and employee benefit expenses related to employee restructuring and continued elevated loan loss provisions.

Highlights of the Company’s performance and results for the quarter ended December 31, 2020 include the following:

• Pre-tax core earnings (excluding any impact from the Paycheck Protection Program (PPP), credit charges, restructuring costs and securities gains) improved to $4.2 million for the quarter ended December 31, 2020 compared to $3.1 million, the previous quarter (see GAAP to Non-GAAP Reconciliation).
• Significant reductions to the legacy problem assets portfolio occurred during the period as total classified assets declined to $13.3 million at December 31, 2020 from $17.6 million at September 30, 2020 and $28.0 million at December 31, 2019.
• Salary and employee benefit expenses increased $1.8 million during the quarter ended December 31, 2020 from the previous quarter due to an accrual of $1.3 million for employee restructuring, higher commissions related to SBA loan originations and incentive accruals.
• Loan loss provisions remain elevated during the quarter ended December 31, 2020 as reserves were established related to an uncertain economic climate and higher new loan originations.
• The net interest margin increased to 3.53% during the quarter ended December 31, 2020 from 3.43% the previous quarter. The improved margin was primarily due to accelerated recognition of PPP loan fees resulting from forgiveness of approximately $16 million in loans during the fourth quarter.
• The Company realized an expense of approximately $800,000 related to a sublease arrangement on a previously closed administrative facility.
• The COVID-19 loan modifications declined in the fourth quarter as approximately 94% of loans granted payment deferrals related to the pandemic have returned to original terms. This portfolio decreased from $165 million at June 30, 2020 to $10 million at December 31, 2020 which represents 1.0% of the total portfolio (excluding PPP loans) and consists of 13 loans.
• In December, the Company consolidated two coastal division branches located in Fort Stewart and Midway into our Hinesville location.  These actions will have minimal customer impact and provide improved efficiency to the region.

Commenting on the announcement, Leonard Moreland, Chief Executive Officer of HSBI, said, “The fourth quarter reflected continued traction in the consolidation of our bank operations and clean up in our legacy portfolio. We believe the actions taken in the fourth quarter, including restructuring expenses and moving non-performing assets off the books, will translate to better earnings in 2021. We expect to consolidate the final core processor system in February 2021 which will reduce redundant positions and improve our efficiencies.   Our strategy has been to establish a scalable platform designed to support multi-bank brands. It is our belief this platform will be appealing to other community banks in Georgia and North Florida that desire the feel and look of an independent bank with the support of a partner that can provide larger lending capacity and expanded products and services without the burden of increased regulatory compliance costs.”

Net Interest Income

The Company’s net interest income increased to $12.5 million during the fourth quarter of 2020 from $11.9 million during the third quarter of 2020. The Company’s reported net interest margin increased 10 basis points to 3.53% for the fourth quarter of 2020 from 3.43% for the third quarter of 2020. The fourth quarter net interest margin was positively impacted by the additional accretion of PPP related fees of approximately $347,000. The earning asset yield increased 2 basis points to 4.05% during the quarter ended December 31, 2020 while the cost of funds decreased 8 basis points to 0.52% over the same time frame. The net interest margin excluding PPP loans decreased to 3.50% for the fourth quarter from 3.67% one quarter earlier.

Non-interest Income

During the quarter ended December 31, 2020, non-interest income increased to $4.6 million from $3.9 million for the third quarter ended September 30, 2020. Larger gains on the sale of SBA loans made up the majority of the increase for the current quarter.

Non-interest Expense

Non-interest expense increased $2.3 million to $14.4 million for the quarter ended December 31, 2020 from $12.1 million the prior quarter. Salaries and employee benefits increased $1.8 million to $8.3 million from $6.5 million due primarily to an accrual for employee restructuring charges of $1.3 million, commissions associated with elevated SBA loan originations and incentive accruals.   Other expenses increased to $4.3 million for the quarter ended December 31, 2020 from $4.1 million the prior quarter as the loss recognized on a sublease of $800,000 was partially offset by lower problem loan costs of approximately $300,000 and general efficiency initiatives being realized.

Balance Sheet

Total assets increased to $1.57 billion at December 31, 2020 from $1.53 billion one quarter earlier. Liquidity levels remained elevated as cash and cash equivalents increased $17.2 million to $218.6 million from $201.5 million and securities available for sale increased $12.3 million to $169.3 million from $157.0 million. Loans, excluding PPP loans, increased $30.8 million to $980.3 million at December 31, 2020 from $949.5 million at September 30, 2020. Meanwhile, PPP loans decreased to $87.9 million at December 31, 2020 from $103.4 million one quarter earlier.

Total deposits increased $51.6 million to $1.36 billion at December 31, 2020 from $1.31 billion at September 30, 2020. A portion of the increase was due to the addition of $22.5 million related to seasonal municipal deposits. Non-interest bearing deposits remain the largest component of the deposit portfolio representing 30.5% of total deposits followed by money market and savings deposits at 28.3%, interest-bearing demand deposits at 20.8% and time deposits at 20.4%.

In December 2020, the Company paid down $10 million of the revolving senior debt facility and retained availability should an opportunity materialize in the future.  

Asset Quality

Classified assets, which include nonperforming assets and accruing classified loans, totaled $13.3 million at December 31, 2020, compared with $17.6 million at September 30, 2020 and $28.0 million at December 31, 2019. The decrease during the fourth quarter reflected a reduction of $1.0 million in nonperforming loans, a $2.5 million reduction in other real estate owned and $746,000 reduction in accruing classified loans. Nonperforming assets, which exclude accruing classified loans, totaled $12.5 million at December 31, 2021, or 0.79% of total assets compared to $15.9 million, or 1.04% during the prior quarter.

The allowance for loan losses increased to $14.1 million, or 1.32% of total loans at December 31, 2020 from $12.9 million, or 1.23% of total loans at September 30, 2020. Excluding PPP loans, which are supported by guarantees from the SBA, the allowance for loans losses were 1.44% of total loans at December 31, 2020. As a result of the Company’s quarterly analysis of the adequacy of the allowance for loan losses, the Company recorded a provision for loan losses of $1.7 million in the fourth quarter of 2020, compared to $2.6 million the prior three quarters. The provision remained elevated in the most recent quarter reflecting the uncertain economic impact from the COVID-19 pandemic and net charge-offs related to legacy problem assets. In the fourth quarter of 2020, net loan charge-offs were $508,000 or 0.19% of average loans compared with $397,000 or 0.15% of average loans in the third quarter of 2020.

Capital

Total shareholder equity increased to $142.8 million at December 31, 2020 from $141.9 million one quarter earlier. Shareholder equity relative to total assets was 9.09% at December 31, 2020 and tangible shareholder equity relative to tangible assets was 6.93%. Tangible book value per share was $14.71 at December 31, 2020, an increase of 8.2% from December 31, 2019. At December 31, 2020, the Bank’s Leverage Ratio was 8.98%, its Common Equity Tier I and Tier 1 Capital ratios were 11.95%, and its Total Risk-Based Capital ratio was 13.19%. 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 Information

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.

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.

⁽¹⁾ Includes restricted stock and shares yet to be issued under a supplemental executive retirement plan.

* The 2019 results include the impact of acquired institutions, Heritage Bancorporation, Inc. and Providence Bank, from date of merger (September 1, 2019).