2026 Third Quarter Earnings Conference Call and Webcast - HERITAGE SOUTHEAST BANCORPORATION INC

Financial Performance:

• Adjusted EPS for Q3 2026 was $0.86, a 12% year-over-year increase.
• Adjusted return on average assets (ROAA) improved to 1.16% (from 1.09%); adjusted return on average tangible common equity (ROTCE) rose to 14.5% (from 14.2%).
• Efficiency ratio improved to 57.7%.
• Loan balances grew $555.9 million (11.5% annualized); core deposits grew approximately 8% annualized, though total deposits declined 1.3% due to public fund outflows.
• Net interest margin (reported) was 3.77% (down 6 bps); adjusted margin was 3.58% (down 2 bps); core net interest margin (adjusted for bond accretion) increased 2 bps.
• Average loan yield increased 5 bps to 6.08%; cost of deposits rose 1 bp to 1.97%.
• Credit loss provision was $13.3 million ($10.1M funded, $3.2M unfunded), driving a quarterly EPS decline despite revenue growth; net charge-offs were $10 million.
• Allowance for credit losses (ACL) as a percentage of total loans declined to 1.50%.
• Pre-provisioned net revenue was $112.6 million; non-interest income was $49.3 million (down due to mortgage banking weakness); non-interest expense was $160.3 million (down due to deferred compensation reversals).
• Total accretable yield estimated at $10 million for Q4, with ~$1.5 million accelerated.

Guidance and Future Outlook:

• Management targets mid-single-digit balance sheet growth for 2027, avoiding forced growth that compromises yield or credit standards.
• Model assumes 2-3 interest rate hikes in 2027, projecting modest upside potential for core net interest margin.
• Expense outlook for Q4 anticipates a slight increase driven by new hires and merger integration costs.
• Non-interest income (specifically mortgage) expected to face softness in Q4 due to high rates and seasonality; wealth management expected to grow at low single-digits.
• Interest-bearing deposit beta modeled in the upper 40s to low 50s near-term, graduating to mid-50s over the cycle.

Business Segments and Product Lines:

• Announced merger with Commercial Bank and Trust, valued at ~$140 million (75% stock, 25% cash), expected to close Q1 2027.
• Merger is projected to be 4% EPS accretive, 1.5% dilutive to tangible book value, with an earnback period under two years and ~70 bps accretive impact on ROTCE upon full integration.
• Added 11 revenue producers in Q3, focusing on wealth management, treasury management, and core banking talent.
• New loan production yields in September reached 6.35%, up from the quarterly average of 6.08% (revised from previous 6.11% statement).
• Specialty lending lines (asset-based, SBA, factoring) expected to expand across the Commercial Bank client base following the merger.
• Wealth management division of target bank holds over $1 billion in AUM, largely in trust, with growth rates slightly above Renaissance's own.

Market and Competitive Landscape:

• Market conditions remain highly competitive, particularly for funding, with tight spreads and elevated deposit costs.
• Competition for deposits has intensified; Renaissance is actively remixing funding by replacing higher-cost public funds with lower-cost core deposits.
• Pipeline remains healthy despite a minor pullback from Q3 start; commercial real estate pipeline showing some impact from higher rates.
• Industry-wide funding tightening and rate volatility are driving the current competitive environment.
• Management views the current environment as a "middle innings" opportunity for talent acquisition amidst industry disruption.

Risks and Challenges:

• Forward-looking statements carry risks including funding mix changes, interest rate fluctuations, regulatory shifts, and integration risks from the Commercial Bank merger.
• Macro uncertainty may limit the ability to exceed mid-single-digit growth targets without sacrificing credit quality or margins.
• Asset quality monitoring: A specific single credit in the CNI space was charged down in Q3 to realizable value after Q1 impairment recognition.
• Potential distraction from the Commercial Bank merger integration, though management believes its size and geographic focus will limit this impact.
• Mortgage banking and capital markets revenue lines remain soft due to the high-rate environment.

Management Commentary and Tone:

• Tone is confident yet cautious, emphasizing disciplined growth, capital preservation, and credit quality over aggressive expansion.
• Management expresses strong belief in the "great position" of the company to capitalize on consolidation opportunities while maintaining organic momentum.
• Kevin Chapman emphasized the strategic focus on growing a stable core deposit base, viewing M&A as a complementary tool rather than a primary driver.
• Jim (CFO) provided granular corrections on yield data and clarified the timeline for accretable yield decay, demonstrating attention to detail.

Analyst Questions and Answers:

• Funding Growth: Management clarified that core deposit growth (8% annualized) is robust but masked by public fund outflows; expects public funds to reverse to a tailwind by year-end/early 2027.
• Merger Synergies: While no explicit revenue synergies were modeled, management sees opportunities in expanding trust/wealth capabilities and cross-selling specialty lines to the acquired commercial client base.
• Share Repurchases: Buybacks remain active (board reauthorized $175M) but may be slightly tempered in the next 12 months due to cash requirements for the merger deal.
• Asset Quality: Reserve levels are declining commensurate with improved asset quality (criticized classifieds and NPLs down for consecutive quarters); no material hidden risks identified beyond the one-off CNI charge-off.
• Margin Outlook: Core NIM behavior is viewed as positive, with modest upside expected if the modeled rate hike scenario materializes.

Other Key Points:

• The Commercial Bank merger is geographically isolated to Memphis with an overlap that management believes can be managed without significant internal friction.
• Management reiterated a preference for operating with zero balances in FHLB advances and broker deposits, aiming to fund growth organically through core deposits.
• Expense management remains a focus, with the expense line trending down organically despite necessary increases for hiring and merger costs.
• The company has not dismissed future M&A opportunities, noting that the hurdle for deals is now higher due to improved baseline ROTCE, requiring distinct strategic value or cost savings.