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. 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
	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	%