Press Release

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 inform ation, future events or otherwise.