Heritage Southeast Bancorporation : Quarterly Report 06.30.22

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY

Financial Highlights

(Unaudited) (in thousands, except per share data)

				Three Months Ended
		June 30,		March 31,	December 31,	September 30,		June 30,
		2022		2022		2021		2021		2021
Earnings:
Net Interest Income	$	13,205	$	12,325	$	12,633	$	13,152	$	12,727
Net Income		3,329		3,840		3,108		3,503		2,869
Net Income excluding transaction and employee
separation costs		4,443		4,288		4,809		4,368		4,146
Per Share Data:
Earnings per share:
Basic	$	0.47	$	0.55	$	0.45	$	0.50	$	0.41
Diluted	$	0.46	$	0.53	$	0.43	$	0.49	$	0.40
Diluted excluding transaction and employee separation
costs	$	0.61	$	0.59	$	0.67	$	0.60	$	0.57
Weighted average number of shares:
Basic		7,012		7,008		6,979		6,976		6,967
Diluted		7,225		7,225		7,218		7,222		7,212
Period-end number of shares (1)		7,215		7,212		7,220		7,220		7,220
Book value per share (period-end)	$	20.79	$	20.92	$	21.32	$	21.09	$	20.65
Tangible book value per share (period-end)	$	15.93	$	16.02	$	16.40	$	16.13	$	15.65
Key Ratios (percent):
Return on average assets		0.78%		0.93%		0.75%		0.84%		0.69%
Return on average assets excluding transaction and
employee separation costs		1.04%		1.04%		1.16%		1.05%		1.00%
Return on average tangible equity		11.66%		13.21%		10.61%		12.15%		10.34%
Return on average tangible equity excluding transaction
and employee separation costs		15.56%		14.76%		16.41%		15.15%		14.95%
Yield on interest earning assets		3.62%		3.52%		3.60%		3.78%		3.72%
Cost of funds		0.28%		0.27%		0.29%		0.33%		0.36%
Net interest margin		3.34%		3.25%		3.31%		3.45%		3.36%
Net interest margin, excluding PPP loans		3.31%		3.20%		3.23%		3.28%		3.26%
Non-interest income as a percent of total revenue		24.7%		25.1%		29.9%		25.4%		26.6%
Efficiency ratio		73.8%		69.9%		77.4%		72.0%		76.5%
Efficiency ratio excluding transaction and employee
separation costs		65.3%		66.3%		63.7%		65.9%		67.2%
Tangible common equity to tangible assets		6.85%		6.95%		7.31%		7.26%		6.99%
Asset Quality (period-end):
Allowance for loan losses to total loans		1.38%		1.42%		1.44%		1.39%		1.43%
Allowance for loan losses to loans, excluding PPP loans		1.38%		1.43%		1.46%		1.42%		1.52%
Allowance for loan losses to total nonperforming loans		736.1%		811.6%		877.7%		692.3%		1113.0%
Nonperforming assets to total assets		0.17%		0.16%		0.16%		0.20%		0.18%
Net charge-offs (annualized) to average loans		0.04%		-0.06%		-0.15%		0.12%		0.04%
Capital (period-end):
Heritage Southeast Bank (HSB) risk based capital ratios:
CET1		12.58%		12.50%		12.67%		12.29%		12.32%
Tier 1		12.58%		12.50%		12.67%		12.29%		12.32%
Total		13.73%		13.69%		13.90%		13.50%		13.57%
Leverage		9.89%		9.89%		9.81%		9.40%		9.01%
Other (period-end):
Branches		23		23		23		23		22
FTE		270		275		280		278		276

(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
		June 30,		March 31,	December 31,	September 30,		June 30,
		2022		2022		2021		2021		2021
Interest and dividend revenue:
Loans, including fees	$	12,939	$	12,247	$	12,666	$	12,705	$	12,592
PPP loans, including fees		114		235		428		1,014		1,024
Investment securities		654		756		518		564		376
Fed funds sold, deposits in banks and other		593		113		113		107		79
Total interest and dividend revenue		14,300		13,351		13,725		14,390		14,071
Interest expense:
Deposits		665		656		703		760		843
Repurchase agreements		9		14		8		8		6
Line of credit		318		271		253		192		124
Subordinated notes		-		-		47		198		290
Junior subordinated debentures		103		85		81		80		81
Total interest expense		1,095		1,026		1,092		1,238		1,344
Net interest income		13,205		12,325		12,633		13,152		12,727
Provision for loan losses		-		-		-		-		-
Net interest revenue after provision for loan losses		13,205		12,325		12,633		13,152		12,727
Noninterest revenue:
Service charges and fees		1,482		1,476		1,608		1,571		1,291
Interchange and ATM fees		1,548		1,453		1,506		1,517		1,665
Gain on sale of SBA loans		430		419		1,521		652		738
Other		865		779		759		741		913
Total noninterest revenue		4,325		4,127		5,394		4,481		4,607
Operating expenses:
Salaries and employee benefits		7,977		6,341		6,692		6,760		6,551
Occupancy and equipment		1,425		1,350		1,394		1,434		1,443
Other real estate expenses, including losses
on sales and impairments, net		6		7		93		27		165
Transaction costs		315		604		2,480		1,069		1,612
Other		3,459		3,441		3,538		3,634		3,720
Total other operating expenses		13,182		11,743		14,197		12,924		13,491
Income before income tax expense		4,348		4,709		3,830		4,709		3,843
Income tax expense		1,019		869		722		1,206		974
Net income	$	3,329	$	3,840	$	3,108	$	3,503	$	2,869
Weighted-average number of shares outstanding:
Basic		7,012		7,008		6,979		6,976		6,967
Diluted		7,225		7,225		7,218		7,222		7,212
Earnings per share:
Basic	$	0.47	$	0.55	$	0.45	$	0.50	$	0.41
Diluted	$	0.46	$	0.53	$	0.43	$	0.49	$	0.40

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited) (in thousands, except per share data)

Six Months Ended

June 30, June 30,

20222021

Interest and dividend revenue:

Loans, including fees

1. loans, including fees Investment securities
   Fed funds sold, deposits in banks and other Total interest and dividend revenue

Interest expense:

Deposits

Repurchase agreements

Line of credit

Subordinated debt

Junior subordinated debentures

Total interest expense

Net interest income

Provision for loan losses

Net interest revenue after provision for loan losses

Noninterest revenue:

Service charges and fees

Interchange and ATM fees

Gain on sale of SBA loans

Other

Total noninterest revenue

Operating expenses:

Salaries and employee benefits

Occupancy and equipment

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

Other

Total other operating expenses

Income before income tax expense

Income tax expense

Net income

Weighted-average number of shares outstanding: Basic

Diluted

Earnings per share:

Basic

Diluted

$	25,186	$	25,217
	350		2,095
	1,410		892
	705		134
	27,651		28,338
	1,320		1,829
	24		16
	589		234
	-		600
	188		163
	2,121		2,842
	25,530		25,496
	-		-
	25,530		25,496
	2,959		2,574
	3,001		3,201
	849		1,644
	1,643		1,684
	8,452		9,103
	14,318		13,079
	2,775		2,845
	13		172
	919		1,612
	6,900		7,628
	24,925		25,336
	9,057		9,263
	1,888		2,061
$	7,169	$	7,202
	7,010		6,964
	7,223		7,209
$	1.02	$	1.03
$	0.99	$	1.00

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY Consolidated Balance Sheets

(in thousands)

		(Unaudited)		(Unaudited)		(Audited)		(Unaudited)		(Unaudited)
		June 30,		March 31,	December 31,	September 30,		June 30,
Assets		2022		2022		2021		2021		2021
Cash and due from banks	$	32,404	$	30,191	$	29,689	$	28,201	$	27,722
Interest-bearing deposits with banks		266,020		282,852		261,513		259,342		278,360
Cash and cash equivalents		298,424		313,043		291,202		287,543		306,082
Securities available for sale, at fair value		192,982		188,954		197,309		171,804		173,606
Other investments		827		827		786		786		786
Loans:
Loans, excluding PPP loans		1,111,079		1,078,736		1,044,413		1,044,938		999,127
PPP loans		180		4,171		10,912		23,051		59,233
Allowance for loan losses		(15,296)		(15,396)		(15,228)		(14,837)		(15,159)
Loans, net		1,095,963		1,067,511		1,040,097		1,053,152		1,043,201
Premises and equipment, net		33,812		34,400		35,136		35,770		36,114
Bank owned life insurance		35,104		34,871		34,634		34,404		34,174
Other real estate owned		857		857		857		1,128		1,533
Goodwill		28,275		28,275		28,275		28,275		28,275
Core deposit intangible, net		6,809		7,046		7,283		7,521		7,758
Deferred tax asset, net		13,975		13,622		12,093		12,261		13,313
Other assets		6,004		7,280		6,893		7,366		7,423
Total Assets	$	1,713,032	$	1,696,686	$	1,654,565	$	1,640,010	$	1,652,265
Liabilities
Deposits:
Noninterest-bearing	$	527,023	$	519,305	$	485,754	$	490,341	$	488,877
Interest-bearing demand		280,387		271,545		275,115		259,811		270,380
Money market and savings		465,783		457,768		439,965		427,272		425,371
Time		213,255		220,349		226,604		237,292		250,839
Total deposits		1,486,448		1,468,967		1,427,438		1,414,716		1,435,467
Securities sold under agreements to repurchase		22,266		27,373		23,988		23,424		15,241
Line of credit		34,688		34,688		34,188		23,688		22,688
Subordinated notes		-		-		-		8,674		13,165
Junior subordinated debentures		9,480		9,442		9,403		9,365		9,327
Accrued expenses and other liabilities		10,163		5,377		5,588		7,862		7,312
Total liabilities		1,563,045		1,545,847		1,500,605		1,487,729		1,503,200
Shareholders' Equity
Common stock		702		702		703		702		702
Additional paid in capital		117,328		117,307		117,443		117,298		117,151
Retained earnings		44,966		41,637		37,798		34,689		31,186
Other comprehensive income (loss)		(13,009)		(8,807)		(1,984)		(408)		26
Total Shareholders' Equity		149,987		150,839		153,960		152,281		149,065
Total Liabilities and Shareholders' Equity	$	1,713,032	$	1,696,686	$	1,654,565	$	1,640,010	$	1,652,265

HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY GAAP to Non-GAAP Reconciliation

(Unaudited) (in thousands, except per share data)

Net income (GAAP) Transaction costs (TC) Employee separation costs (SC) Income tax benefit related to TC and SC Net income excluding TC and SC

			Three Months Ended
	June 30,		March 31,	December 31,	September 30,		June 30,
	2022		2022		2021		2021		2021
$	3,329	$	3,840	$	3,108	$	3,503	$	2,869
	315		604		2,480		1,069		1,612
	1,180		-		-		-		-
	(381)		(156)		(779)		(204)		(335)
$	4,443	$	4,288	$	4,809	$	4,368	$	4,146

Diluted earnings per share:
GAAP	$	0.46	$	0.53	$	0.43	$	0.49	$	0.40
Excluding TC and SC	$	0.61	$	0.59	$	0.67	$	0.60	$	0.57
Weighted average number of shares - diluted		7,225		7,225		7,218		7,222		7,212
HERITAGE SOUTHEAST BANCORPORATION, INC. AND SUBSIDIARY
Loan Portfolio
(Unaudited) (in thousands)
	June 30,		March 31,	December 31,	September 30,		June 30,
		2022			2022		2021		2021		2021
Real estate loans:
Construction and land development	$	182,601	$		173,066	$	159,630	$	154,487	$	144,263
Single-family residential		160,335			151,033		158,667		163,412		162,996
Commercial - owner occupied		274,555			267,815		265,900		275,220		260,186
Commercial - other		254,082			258,112		239,994		228,229		214,995
Multifamily		3,955			6,487		6,592		13,826		14,017
Total real estate loans		875,528			856,513		830,783		835,174		796,457
Commercial loans (not secured by real estate)		226,639			212,109		202,966		197,084		190,095
Consumer loans (not secured by real estate)		10,614			11,596		12,081		14,015		13,874
Gross loans		1,112,781			1,080,218		1,045,830		1,046,273		1,000,426
Unearned income		(1,702)			(1,482)		(1,417)		(1,335)		(1,299)
Loans, net of unearned income	$	1,111,079	$		1,078,736	$	1,044,413	$	1,044,938	$	999,127
	June 30,		March 31,	December 31,	September 30,		June 30,
PPP loans:		2022			2021		2021		2021		2021
Up to $50,000	$	-	$		209	$	644	$	2,344	$	7,033
$50,001 - $150,000		-			318		804		3,936		15,438
$150,001 - $2 million		180			3,754		9,788		15,328		26,384
Greater than $2 million		-			-		-		2,155		11,963
Total PPP loans		180			4,281		11,236		23,763		60,818
Unearned income		-			(110)		(324)		(712)		(1,585)
PPP loans, net of unearned income	$	180	$		4,171	$	10,912	$	23,051	$	59,233