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

Explicit Guidance:

• FY2027 EPS & Margins: Anticipate a modest increase in expenses in Q4, primarily driven by new hires and merger integration costs.
• FY2027 Financial Metrics: Expect full-year 2027 results to include approximately $10 million in total accretable yield, with roughly $1.5 million in accelerated accretion; accelerated accretion is projected to decline throughout 2027.
• FY2028 Financial Metrics: Plan for 100% realization of cost synergies (expense savings) by 2028, which are fully phased-in to deliver 70 basis points accretive impact to Return on Tangible Common Equity (ROTE) and 5 basis points accretive impact to Net Interest Margin (NIM) and Return on Assets (ROA).
• Q4 2026 Outlook: Foresee modest softness in non-interest income, specifically driven by mortgage banking fees due to a challenging interest rate environment and seasonal headwinds; wealth management fees expected to continue with low single-digit growth.
• Q1 2027 Closing: Anticipate the merger with Commercial Bank and Trust to close in the first quarter of 2027.

Business-Segment Outlook:

• Balance Sheet Growth: Maintain a long-term target for mid-single-digit annualized growth for both loans and core deposits, contingent on maintaining proper spreads and underwriting standards.
• Loan Growth Drivers: Attribute recent record loan production to investments in talent (adding 11 revenue producers in Q3) and the integration of prior hires; pipeline remains healthy despite a slight pullback, though holiday seasonality may slow Q4 volume.
• Deposit Strategy: Focus on remixing the funding mix to reduce reliance on higher-cost public funds; target for deposit growth to match loan growth as public fund seasonality reverses into a tailwind by early 2027.
• Core Deposit Growth: Core deposits grew at an 8% annualized rate in Q3, with nearly 60% of that growth coming from new customers; this momentum is expected to support continued market share gains.
• Acquisition Synergies: Expect the Commercial Bank and Trust acquisition to be accretive to EPS (approx. 4%) and provide low-cost core deposits; wealth management assets under management (AUM) exceed $1 billion, with a specific opportunity to expand trust capabilities.
• Expense Trends: While core expense behavior remains solid, Q4 will see an incremental increase due to hiring and merger-related noise.

Market and Competitive Outlook:

• Competitive Pressure: Face intense competition in both loan and deposit markets, particularly regarding pricing; competition has intensified on the deposit side as "everybody's searching for funding."
• Pricing & Spreads: Loan spreads remain tight with limited expansion despite recent yield curve shifts; core deposit costs remained relatively flat (up 1 basis point), allowing the bank to capture new customers at mid-two rates (1% below wholesale rates).
• Market Share: Management sees ongoing market share opportunities across their footprint and believes they can continue to grow without forcing balance sheet expansion at the expense of yield or credit quality.
• M&A Environment: M&A activity faces a higher hurdle given current ROTE levels (14-16%) and the risk of distraction; the firm remains open to opportunities that complement the core deposit base and wealth management franchise but will not pursue deals broadly across the footprint.

Macro / Industry Outlook:

• Interest Rate Assumptions: Modeling for two additional rate hikes in December and potentially later in 2027; assumes interest-bearing deposit betas in the upper 40s to low 50s near-term, graduating to mid-50s over time.
• Macro Uncertainty: Cautious on the broader macroeconomic backdrop; hesitation to raise balance sheet growth guidance beyond mid-single digits until clarity on the macro environment improves.
• Talent Cycle: Believes the market for banking talent displacement is in the "middle innings," offering continued opportunities to upgrade talent, particularly in wealth management, treasury/cash management, and relationship banking.
• Credit Environment: Credit quality continues to improve (criticized assets and NPLs down for 4+ quarters); loan loss reserves (as a % of loans) are expected to decline commensurate with asset quality improvements, currently trending down to 150 basis points.

Strategic Initiatives:

• Commercial Acquisition: Closing expected Q1 2027; deal valued at approx. $140 million (75% stock, 25% cash); will enhance presence in Memphis and provide low-cost core deposits and wealth management relationships in western Tennessee.
• Integration & Talent: Focus on successful integration of Commercial Bank and Trust employees; continue hiring revenue producers to drive organic growth.
• Capital Allocation: Reauthorized share repurchase program at $175 million; buybacks will remain active but may be tempered in the next 12 months due to cash usage for the acquisition.
• Balance Sheet Optimization: Goal to operate with zero balances at FHLB and with broker deposits; aiming to replace wholesale funding with organic deposit growth to achieve a loan-to-deposit ratio near 90-91%.

Risks and Headwinds to Outlook:

• Deposit Competition: High competition for funding and rising costs of public funds could impede the ability to fund loan growth organically without increasing wholesale reliance.
• Macro Volatility: Uncertainty regarding the macroeconomic outlook could force a deviation from the mid-single-digit growth targets or impact loan yield and credit quality.
• Merger Execution: Integration risks and potential distraction from organic growth opportunities; expected modest diminution to capital ratios (CET1 approx. 11%) at close.
• Credit Quality: A single one-off credit in the CNI space was charged down in Q3; while viewed as isolated, the need for continued reserve adequacy based on model dictates remains a factor.
• Fee Income Volatility: Mortgage banking income expected to remain soft in Q4 due to high interest rates, impacting total non-interest income.

Management Tone on the Future:

• Confidence: "Very set" on mid-single-digit balance sheet growth; "very good" about the behavior of core NIM and deposit growth.
• Prudence: Explicitly states unwillingness to "force" balance sheet growth or sacrifice credit quality/yield to meet higher expectations; emphasizes "solidifying" the outlook rather than expanding it prematurely.
• M&A Discipline: Notes a "higher bar" for future deals to ensure they do not distract from organic growth, though the Commercial acquisition was deemed acceptable due to its isolated footprint and strategic fit.
• Operational Focus: Optimistic about the "engine" working well on the deposit side and sees momentum carrying over to the loan side; views the talent acquisition cycle as still having significant upside.

Miscellaneous:

• One-Time Items: Q3 results included a specific charge-off for a single CNI credit; Q2 NIM was unusually high due to accelerated bond discount accretion, which is not expected to recur at the same level.
• Geographic Focus: While Memphis markets overlap with the acquired Commercial Bank, management anticipates sufficient non-overlapping market share to avoid internal cannibalization.
• Specialty Lines: Anticipate leveraging Commercial's C&I book into Renaissance's specialty lines (asset-based lending, SBA, factoring) similar to previous mergers.