JONESBORO, Ga.--(BUSINESS WIRE)--Heritage Southeast Bancorporation, Inc. (OTCQX: HSBI) a $1.5 billion bank holding company headquartered in Jonesboro, Georgia today announced quarterly net income of $901,000 or $0.13 per diluted share for the third quarter of 2020 compared to $948,000 or $0.13 per diluted share for the quarter ended June 30, 2020.

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

• Pre-tax core earnings (excluding any impact from the Paycheck Protection Program (PPP), credit charges and securities gains) improved 42% when compared to previous quarter (see GAAP to Non-GAAP Reconciliation).
• Significant reductions to the legacy problem assets portfolio occurred during the period as total classified assets were down $11.5 million, or 40%.
• The COVID-19 loan modifications declined in the third quarter as 90% 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 $16 million at September 30, 2020 and now represents less than 2% of loans outstanding (excluding PPP loans).
• Successfully completed the first of two core processing conversions which will ultimately create the infrastructure for full backroom consolidation and overall efficiency.
• Purchased two parcels in Cumming and Carrollton for future branch expansion. These markets are natural extensions to our existing footprint and anticipate the new locations to open in the first half of 2021.

Commenting on the announcement, Leonard Moreland, Chief Executive Officer of HSBI, said, “Our performance in the third quarter demonstrates our team’s ability to remain committed to the business plan despite on-going disruptions created by the COVID-19 pandemic. Although the first full year under the new operating model was challenging, we are pleased with our plan execution and the continued development of a common culture and purpose. This foundation has us well positioned to take advantage of current market opportunities, enhance the customer experience, support our communities and deliver an acceptable return to our shareholders.”

Net Interest Income

The Company’s net interest income increased from $11.8 million during the second quarter of 2020 to $11.9 million during the third quarter of 2020. The Company’s reported net interest margin decreased 28 basis points from 3.71% for the second quarter of 2020 to 3.43% for the third quarter of 2020. The net interest margin was negatively impacted by the subordinated debt issuance on June 30, 2020 and the expansion of our revolving senior debt facility. Earning asset yield and cost of funds decreased during the period 29 basis points and one basis point, respectively.

Asset Quality

Classified assets, which include nonperforming assets, totaled $17.6 million at September 30, 2020, compared with $29.1 million at June 30, 2020 and $28.0 million at December 31, 2019. The decrease during the third quarter was due to the execution of specific resolution plans on the legacy portfolio. These assets were resolved without any additional losses being recorded. Classified assets (adjusted for SBA guarantees) to tier one capital plus allowance for loan losses was 11.9% at September 30, 2020 versus 18.1% at June 30, 2020 and 22.0% at December 31, 2019. Past due loans decreased from $3.5 million, or 0.37% of total loans outstanding (exclusive of PPP), at June 30, 2020 to $2.2 million, or 0.23% of total loans outstanding (exclusive of PPP), at September 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 third quarter of 2020, equal to the amount recorded in each of the first two quarters of 2020. The elevated provision for credit losses recorded in the first nine months of 2020 reflects the uncertain economic impact from the COVID-19 pandemic. In the third quarter of 2020, net loan charge-offs were $397,000 or 0.15% of average loans compared with $108,000 or 0.04% of average loans in the second quarter of 2020. For the nine months ended September 30, 2020, net charge-offs were $671,000 or 0.09% of average loans.

Non-interest Income

During the quarter ended September 30, 2020, non-interest income decreased from $4.1 million for the second quarter of 2020 to $3.9 million for the third quarter of 2020. Lower gains on sale of securities were partially offset by improved activity-based account service charges of $215,000, higher debit / ATM card fees of $97,000 and increased gains on sales of SBA loans of $214,000.

Non-interest Expense

Non-interest expense increased $77,000, from $12.0 million in the second quarter of 2020 to $12.1 million in the third quarter of 2020. Salaries and employee benefits increased $600,000 due primarily to deferred PPP costs recorded in the second quarter. The increase was partly offset by lower other real estate owned costs and other operating expenses to secure the work environment during the pandemic.

Balance Sheet

Loans, excluding PPP, decreased $1.4 million from $950.9 million at June 30, 2020 to $949.5 million at September 30, 2020. Excluding reductions related to previously mentioned problem loan workouts, the loan portfolio grew $7.1 million in the period.

Total deposits increased $29.2 million, or 2.3%, from the quarter ended June 30, 2020 to the quarter ended September 30, 2020. Demand deposits increased $22.1 million and money market and savings deposits increased $18.1 million. These increases were partially offset by a reduction in time deposits of $11.0 million in the period. Overall, the increases to the deposit base associated with PPP and other consumer-based stimulus programs remain on the balance sheet at September 30, 2020 and is estimated to be $150 million.

Capital

The Company continues to remain well capitalized. The issuance of subordinated notes in the second quarter 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 September 30, 2020, the Bank’s Leverage Ratio was 9.08%, its Common Equity Tier I and Tier 1 Capital ratios were 12.10%, and its Total Risk-Based Capital ratio was 13.26%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized”, which is the highest possible regulatory designation. Additionally, excluding the 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 the HSBI website.