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Press Release

Heritage Southeast Bancorporation, Inc. Announces Second Quarter Results

Company Release - 7/21/2020 7:00 AM ET

JONESBORO, Ga.--(BUSINESS WIRE)-- Heritage Southeast Bancorporation, Inc. (“Company”) (OTCQX: HSBI) a $1.5 billion bank holding company headquartered in Jonesboro, Georgia today announced quarterly net income of $948,000 or $0.13 per diluted share for the second quarter of 2020 compared to $1.6 million or $0.23 per diluted share for the quarter ended March 31, 2020.

Highlights of the Company’s performance and results for the quarter ended June 30, 2020 include the following:

  • Net interest income exclusive of any impact of the Paycheck Protection Program (PPP) declined approximately $816,000 in the period primarily due to the March Fed actions.
  • As in the first quarter, we provided an additional $1.5 million to the allowance for loan losses directly related to the economic uncertainty created by COVID-19.
  • The Company’s participation in the PPP resulted in the income statement being positively impacted by approximately $1.5 million from increases in interest income and fees along with deferred salaries and benefit costs.
  • Completed the private placement of $20 million of 6.00% fixed-to-floating rate subordinated notes due 2030.

Commenting on the announcement, Leonard Moreland, Chief Executive Officer of HSBI, said, “We are pleased with our second quarter results as we continue to navigate through an unprecedented period. The efficient response to our customers and communities via the PPP or through payment deferrals was well received and securely positions us for the second half of the year and beyond. We anticipate earnings pressure for the remainder of this year which we believe could be mitigated through opportunities identified within the footprint and internal efficiencies. The loan portfolio is well diversified and monitored continuously in order to react swiftly to potential stress points.”

As of June 30, 2020, the Company has granted deferrals of approximately $164.7 million or 17% of the portfolio directly related to the pandemic. HSBI is also participating in the PPP loans administered by the Small Business Administration which totaled approximately $105 million at the end of the quarter. The Company does not currently plan to utilize the Federal Reserve’s Paycheck Protection Program Liquidity Fund to fund these loans.

Net Interest Income

The Company’s net interest income decreased from $12.4 million during the first quarter of 2020 to $11.8 million during the second quarter of 2020. The Company’s reported net interest margin decreased 50 basis points from 4.21% for the first quarter of 2020 to 3.71% for the second quarter of 2020. Earning asset yield and cost of funds decreased during the period 69 basis points and 19 basis points, respectively.

Asset Quality

Classified assets, which include nonperforming assets, totaled $29.1 million at June 30, 2020, compared with $25.7 million at March 31, 2020 and $28.0 million at December 31, 2019. The increase during the second quarter was centered around legacy portfolio loans and unrelated to COVID-19. The entire classified portfolio is appropriately valued with specific resolution plans in place. Classified assets adjusted for SBA guarantees to tier one capital plus allowance for loan losses ratio was 18.1% at June 30, 2020 versus 18.5% at March 31, 2020 and 22.0% at December 31, 2019. Past due loans decreased from $4.8 million, or 0.52% of total loans outstanding (exclusive of PPP), at March 31, 2020 to $3.5 million, or 0.37% of total loans outstanding (exclusive of PPP), at June 30, 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 $2.6 million in the second quarter of 2020, equal to the amount recorded for the first quarter of 2020. The elevated provision for credit losses recorded in the first six months of 2020 reflects the uncertain economic impact from the COVID-19 pandemic. In the second quarter of 2020, net loan charge-offs were $108,000 or 0.04% of average loans compared with $166,000 or 0.07% of average loans in the first quarter of 2020. Lastly, the Company recorded a valuation adjustment of $535,000 on the largest other real estate owned property that is under contract and scheduled to close in the third quarter 2020.

Non-interest Income

During the quarter ended June 30, 2020, non-interest income decreased from $4.7 million for the first quarter of 2020 to $4.1 million for the second quarter of 2020. This decrease was largely attributable to lower activity-based account service charges (related to COVID- 19) of $480,000 and reduced gains on sales of SBA loans of $490,000. These declines were partially offset by higher debit / ATM card fees of $159,000 and increased gains on sales of securities of $169,000.

Non-interest Expense

Non-interest expense decreased $282,000, or 2.3%, from $12.3 million in the first quarter of 2020 to $12.0 million in the second quarter of 2020. Salaries and employee benefits decreased $979,000 due primarily to deferred PPP costs and lower incentive expense. The reductions were partly offset by the previously mentioned other real estate owned valuation adjustment and higher costs to secure the work environment during the pandemic.

Balance Sheet

Loans, excluding PPP, increased $21.6 million from $929.3 million at March 31, 2020 to $950.9 million at June 30, 2020. Well-structured non COVID-19 impacted commercial real estate loans principally accounted for the increase.

Total deposits increased $152.4 million, or 13.5%, from the quarter ended March 31, 2020 to the quarter ended June 30, 2020. Demand deposits increased $131.2 million and money market and savings deposits increased $37.3 million. The increases were primarily the result of PPP and other consumer based stimulus programs which were partially offset by lower time deposits of $16.0 million.

Capital

The Company continues to remain well capitalized. The issuance of the subordinated notes provided support for its wholly owned subsidiary, Heritage Southeast Bank (“Bank”). This coupled with an enhanced revolving senior debt facility creates needed flexibility going forward. At June 30, 2020, the Bank’s Leverage Ratio was 9.55%, its Common Equity Tier I and Tier 1 Capital ratios were 11.99%, and its Total Risk-Based Capital ratio was 12.97%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized”, which is the highest possible regulatory designation. Additionally, excluding the recent balance sheet growth associated with government stimulus programs, the Bank’s Leverage Ratio would be in excess of 10%.

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 $1.5 billion in assets, the Bank provides a well-rounded offering of commercial and consumer products through its 24 locations. For additional information, visit one of the banks’ websites and select the Investor Relations link.

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.

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Financial Highlights
(Unaudited) (in thousands, except per share data)
 

Three Months Ended

June 30,

March 31,

December 31,

2020

2020

2019

Earnings:
Net Interest Income

$

11,769

 

$

12,213

 

$

12,477

 

Net Income

 

948

 

 

1,616

 

 

2,740

 

 
Per Share Data:
Earnings per share:
Basic

$

0.14

 

$

0.23

 

$

0.40

 

Diluted

$

0.13

 

$

0.23

 

$

0.38

 

Weighted average number of shares:
Basic

 

6,908

 

 

6,893

 

 

6,877

 

Diluted

 

7,131

 

 

7,117

 

 

7,204

 

Period-end number of shares (1)

 

7,227

 

 

7,231

 

 

7,242

 

Book value per share (period-end)

$

19.45

 

$

19.29

 

$

18.71

 

Tangible book value per share (period-end)

$

14.34

 

$

14.14

 

$

13.60

 

 
Key Ratios (percent):
Return on average assets

 

0.27

%

 

0.49

%

 

0.83

%

Return on average tangible equity

 

3.70

%

 

6.45

%

 

10.74

%

Yield on interest earning assets

 

4.32

%

 

5.01

%

 

5.13

%

Cost of interest bearing liabilities

 

0.87

%

 

1.07

%

 

1.14

%

Net interest margin

 

3.71

%

 

4.21

%

 

4.29

%

Net interest margin, excluding PPP loans

 

3.78

%

 

4.21

%

 

4.29

%

Non-interest income as a percent of total revenue

 

26.0

%

 

27.9

%

 

23.6

%

Efficiency Ratio

 

75.6

%

 

72.7

%

 

72.7

%

 
Asset Quality (period-end):
Allowance for loan losses to total loans

 

1.02

%

 

0.90

%

 

0.65

%

Allowance for loan losses to loans, excluding PPP loans

 

1.13

%

 

0.90

%

 

0.65

%

Allowance for loan losses to total nonperforming loans

 

54.9

%

 

54.4

%

 

36.9

%

Nonperforming assets to total assets

 

1.9

%

 

1.8

%

 

1.9

%

Net charge-offs (annualized) to average loans

 

0.04

%

 

0.07

%

 

0.06

%

Net charge-offs (annualized) to average loans, excluding PPP loans

 

0.05

%

 

0.07

%

 

0.06

%

 
Capital (period-end):
Heritage Southeast Bank risk based capital ratios:
CET1

 

11.99

%

 

10.58

%

 

10.24

%

Tier 1

 

11.99

%

 

10.58

%

 

10.24

%

Total

 

12.97

%

 

11.36

%

 

10.81

%

Leverage

 

9.55

%

 

8.92

%

 

8.54

%

 
Other (period-end):
Branches

 

24

 

 

24

 

 

23

 

FTE

 

302

 

 

309

 

 

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

 

Six Months Ended

June 30,

 

March 31,

 

December 31,

 

June 30,

2020

 

2020

 

2019

 

2020

Interest and dividend revenue:
Loans, including fees

$

12,748

$

13,564

$

13,903

$

26,312

PPP loans, including fees

 

523

 

-

 

-

 

523

Investment securities

 

394

 

618

 

606

 

1,012

Fed funds sold, deposits in banks and other

40

347

 

406

387

Total interest and dividend revenue

 

13,705

 

14,529

 

14,915

 

28,234

 
Interest expense:
Deposits

 

1,673

 

2,022

 

2,116

 

3,695

Fed funds purchased and repurchase agreements

 

20

 

50

 

54

 

70

Federal Home Loan Bank advances

 

14

 

23

 

25

 

37

Junior subordinated debentures

 

94

 

121

 

143

 

215

Other borrowings

 

135

 

100

 

100

 

235

Total interest expense

 

1,936

 

2,316

 

2,438

 

4,252

 
Net interest income

 

11,769

 

12,213

 

12,477

 

23,982

Provision for loan losses

 

2,550

 

2,550

 

560

 

5,100

Net interest revenue after provision for loan losses

 

9,219

 

9,663

 

11,917

 

18,882

 
Noninterest revenue:
Service charges and fees

 

1,218

 

1,698

 

1,727

 

2,916

Interchange and ATM fees

 

1,427

 

1,268

 

1,315

 

2,695

Securities gains, net

 

741

 

572

 

-

 

1,313

Gain on sale of loans

 

61

 

551

 

184

 

612

Other

 

696

 

639

 

628

 

1,335

Total noninterest revenue

 

4,143

 

4,728

 

3,854

 

8,871

 
Operating expenses:
Salaries and employee benefits

 

5,877

 

6,856

 

6,125

 

12,733

Occupancy and equipment

 

1,382

 

1,292

 

1,376

 

2,674

Other real estate expenses, including losses
on sales and impairments, net

 

619

 

73

 

44

 

692

Other

 

4,159

 

4,098

 

4,324

 

8,257

Total other operating expenses

 

12,037

 

12,319

 

11,869

 

24,356

Income before income tax expense

 

1,325

 

2,072

 

3,902

 

3,397

Income tax expense

 

377

 

456

 

1,162

 

833

Net income

$

948

$

1,616

$

2,740

$

2,564

 
Average common shares outstanding

 

6,908

 

6,893

 

6,877

 

6,900

Shares for diluted earnings per share

 

7,131

 

7,117

 

7,204

 

7,124

 
Basic earnings per common share

$

0.14

$

0.23

$

0.40

$

0.37

Diluted earnings per common share

$

0.13

$

0.23

$

0.38

$

0.36

 
HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
 

(Unaudited)

 

(Unaudited)

 

 

 

(Unaudited)

June 30,

 

March 31,

 

December 31,

 

September 30,

2020

 

2020

 

2019

 

2019

Assets
Cash and due from banks

$

26,767

 

$

37,192

 

$

30,458

 

$

26,633

 

Interest-bearing deposits with banks

 

172,961

 

 

95,446

 

 

142,552

 

 

113,293

 

Cash and cash equivalents

 

199,728

 

 

132,638

 

 

173,010

 

 

139,926

 

Securities available for sale, at fair value

 

131,429

 

 

133,520

 

 

125,479

 

 

104,265

 

Other investments

 

1,451

 

 

1,451

 

 

1,322

 

 

1,322

 

Loans:
Loans, excluding PPP loans

 

950,920

 

 

929,295

 

 

911,850

 

 

913,306

 

PPP loans

 

103,074

 

 

-

 

 

-

 

 

-

 

Allowance for loan losses

 

(10,772

)

 

(8,330

)

 

(5,946

)

 

(5,523

)

Loans, net

 

1,043,222

 

 

920,965

 

 

905,904

 

 

907,783

 

 
Premises and equipment, net

 

34,375

 

 

34,537

 

 

34,443

 

 

34,192

 

Bank owned life insurance

 

28,334

 

 

28,129

 

 

26,802

 

 

26,617

 

Other real estate owned

 

8,496

 

 

9,029

 

 

9,293

 

 

11,838

 

Goodwill

 

28,275

 

 

28,275

 

 

28,275

 

 

28,275

 

Core deposit intangible, net

 

8,707

 

 

8,944

 

 

9,182

 

 

9,498

 

Deferred tax asset, net

 

15,276

 

 

15,660

 

 

16,598

 

 

19,300

 

Other assets

 

6,156

 

 

5,807

 

 

5,743

 

 

3,140

 

Total Assets

$

1,505,449

 

$

1,318,955

 

$

1,336,051

 

$

1,286,156

 

 
Liabilities
Deposits:
Noninterest-bearing

$

417,690

 

$

312,203

 

$

296,851

 

$

304,342

 

Interest-bearing demand

 

225,292

 

 

199,585

 

 

234,334

 

 

189,500

 

Money market and savings

 

337,169

 

 

299,901

 

 

291,778

 

 

284,047

 

Time

 

301,532

 

 

317,571

 

 

331,515

 

 

328,830

 

Total deposits

 

1,281,683

 

 

1,129,260

 

 

1,154,478

 

 

1,106,719

 

 
Securities sold under agreements to repurchase

 

17,194

 

 

13,310

 

 

12,295

 

 

11,418

 

Federal Home Loan Bank advances

 

4,167

 

 

4,667

 

 

5,167

 

 

5,667

 

Line of credit

 

24,688

 

 

14,688

 

 

9,088

 

 

9,088

 

Subordinated debt

 

19,653

 

 

-

 

 

-

 

 

-

 

Junior subordinated debentures

 

9,173

 

 

9,135

 

 

9,096

 

 

9,045

 

Accrued expenses and other liabilities

 

8,267

 

 

8,443

 

 

9,992

 

 

10,746

 

Total liabilities

 

1,364,825

 

 

1,179,503

 

 

1,200,116

 

 

1,152,683

 

 
Shareholders' Equity
Common stock

 

701

 

 

702

 

 

703

 

 

702

 

Additional paid in capital

 

116,396

 

 

116,201

 

 

116,234

 

 

116,089

 

Retained earnings

 

22,105

 

 

21,157

 

 

19,541

 

 

16,914

 

Other comprehensive income (loss)

 

1,422

 

 

1,392

 

 

(543

)

 

(232

)

Total Shareholders' Equity

 

140,624

 

 

139,452

 

 

135,935

 

 

133,473

 

Total Liabilities and Shareholders' Equity

$

1,505,449

 

$

1,318,955

 

$

1,336,051

 

$

1,286,156

 

 
HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Loan Portfolio
(Unaudited) (in thousands)
 

June 30,

 

March 31,

 

December 31,

 

September 30,

2020

 

2020

 

2019

 

2019

Real estate loans:
Construction and land development

$

148,158

 

$

133,592

 

$

134,864

 

$

134,669

 

Single-family residential

 

167,734

 

 

176,844

 

 

166,082

 

 

164,123

 

Commercial

 

435,033

 

 

420,317

 

 

416,235

 

 

417,072

 

Multifamily

 

11,669

 

 

11,748

 

 

19,247

 

 

20,741

 

Total real estate loans

 

762,594

 

 

742,501

 

 

736,428

 

 

736,605

 

 
Commercial loans (not secured by real estate)

 

172,134

 

 

170,252

 

 

158,332

 

 

159,407

 

Consumer loans (not secured by real estate)

 

17,117

 

 

17,477

 

 

17,928

 

 

18,098

 

Gross loans

 

951,845

 

 

930,230

 

 

912,688

 

 

914,110

 

Unearned income

 

(925

)

 

(935

)

 

(838

)

 

(804

)

Loans, net of unearned income

$

950,920

 

$

929,295

 

$

911,850

 

$

913,306

 

 
 

June 30,

 

March 31,

 

December 31,

 

September 30,

2020

 

2020

 

2019

 

2019

PPP loans:
Up to $150,000

$

40,136

 

$

-

 

$

-

 

$

-

 

$150,001 - $2 million

 

47,724

 

 

-

 

 

-

 

 

-

 

Greater than $2 million

 

17,953

 

 

-

 

 

-

 

 

-

 

Total PPP loans

 

105,813

 

 

-

 

 

-

 

 

-

 

Unearned income

 

(2,739

)

 

-

 

 

-

 

 

-

 

PPP loans, net of unearned income

$

103,074

 

$

-

 

$

-

 

$

-

 

 
HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Asset Quality Information
(Unaudited) (in thousands)
 

June 30,

 

March 31,

 

December 31,

2020

 

2020

 

2019

Classified assets:
Nonperforming loans

$

19,638

 

$

15,317

 

$

16,096

 

Other real estate owned

 

8,496

 

 

9,029

 

 

9,293

 

Total nonperforming assets

 

28,134

 

 

24,346

 

 

25,389

 

Accruing classified loans

 

970

 

 

1,378

 

 

2,632

 

Total classified assets

$

29,104

 

$

25,724

 

$

28,021

 

 
Classified assets to Tier 1 capital plus ALL

 

18.1

%

 

18.5

%

 

22.0

%

Nonperforming assets to total assets

 

1.9

%

 

1.8

%

 

1.9

%

 
Allowance for loan losses:
Balance at beginning of period

$

8,330

 

$

5,946

 

$

5,523

 

Provision for loan losses

 

2,550

 

 

2,550

 

 

560

 

Charge-offs

 

(170

)

 

(307

)

 

(701

)

Recoveries

 

62

 

 

141

 

 

564

 

Balance at end of period

$

10,772

 

$

8,330

 

$

5,946

 

 
Loans, excluding PPP loans

$

950,920

 

$

929,295

 

$

911,850

 

PPP loans

 

103,074

 

 

-

 

 

-

 

Allowance as % of Loans

 

1.02

%

 

0.90

%

 

0.65

%

Allowance as % of Loans, excluding PPP loans

 

1.13

%

 

0.90

%

 

0.65

%

Allowance as a % of nonperforming loans

 

54.9

%

 

54.4

%

 

36.9

%

Average loans outstanding

 

946,389

 

 

930,099

 

 

924,878

 

Average loans outstanding, excluding PPP loans

 

78,981

 

 

-

 

 

-

 

Net charge-offs (annualized) to average loans

 

0.04

%

 

0.07

%

 

0.06

%

Net charge-offs (annualized) to average loans, excluding PPP loans

 

0.05

%

 

0.07

%

 

0.06

%

 

Leonard A. Moreland
Chief Executive Officer

Philip F. Resch
Chief Financial Officer
(770) 824-9934

Source: Heritage Southeast Bancorporation, Inc.

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