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

Financial Performance:

• Adjusted EPS reached $0.86, a 12% year-over-year increase.
• Adjusted return on average assets (ROAA) improved to 1.16% (vs. 1.09% YoY); adjusted return on average tangible common equity (ROTCE) was 14.5% (vs. 14.2% YoY).
• Efficiency ratio improved to 57.7%.
• Total loans grew $555.9 million (11.5% annualized); core deposits grew 8% annualized, though total deposits declined 1.3% due to public fund outflows.
• Net interest income was $228.6 million; core net interest margin (NIM) increased 2 basis points to 3.58% (excl. accretion).
• Provision for credit losses was $13.3 million ($10.1M for funded loans, $3.2M for unfunded), primarily driven by a single one-off charge-off in the C&I space.
• Net charge-offs were $10 million; allowance for credit losses (ACL) declined to 1.50% of total loans.
• Total cost of deposits rose 1 basis point to 1.97%; loan yields increased 5 basis points to 6.08%.
• Pre-provision net revenue was $112.6 million; non-interest expense declined $1.2 million sequentially due to deferred compensation accruals.

Guidance and Future Outlook:

• Management targets mid-single-digit balance sheet growth (loans and deposits) for 2027, contingent on maintaining appropriate credit spreads and underwriting standards.
• Core NIM outlook suggests modest upside potential, modeling two additional rate hikes in 2027.
• Interest-bearing deposit beta is modeled in the upper 40s to low 50s near-term, graduating to mid-50s.
• Q4 outlook projects a slight increase in expenses due to new hires and merger-related costs; fee income (specifically mortgage) expected to soften.
• Accelerated bond discount accretion estimated at $1.5 million for Q4, with a trajectory to decline through 2027.
• Merger with Commercial Bank and Trust expected to be ~4% EPS accretive with an earnback period of just under two years.
• Full accretive impact on ROTCE expected to be 70 basis points, 5 basis points on NIM, and 5 basis points on ROA by 2028.

Business Segments and Product Lines:

• Loan Production: Achieved record levels driven by contributions across all geographies, specialty lines (secured lending), and credit channels (consumer, commercial, small business).
• Deposit Growth: Core deposit growth was strong at 8% annualized, with nearly 60% coming from new customers; however, total deposits were weighed down by higher-cost public fund outflows.
• M&A (Commercial Bank and Trust): $140 million transaction (75% stock, 25% cash) to strengthen Memphis presence and acquire low-cost core deposits and wealth management assets ($1B+ AUM).
• Wealth Management: New hires targeting wealth and treasury management capabilities; acquisition provides a growth complement to existing trust services.
• Talent Strategy: Added 11 new revenue producers in Q3; ongoing focus on acquiring wealth managers, treasury specialists, and core bankers to drive sticky revenue.
• Merger Integration: Expected to close Q1 2027; focus on converting Commercial Bank employees and customers without distracting from organic growth in other markets.

Market and Competitive Landscape:

• Competition: Market remains highly competitive on both loan and deposit pricing; loan spreads remain tight, and deposit competition for funding is intensified.
• Funding Costs: Public funds have become increasingly expensive; strategy focuses on "remixing" funding to lower costs and reduce reliance on wholesale funding (FHLB, broker deposits).
• Market Share: Management sees opportunities to gain market share through organic growth and the Commercial Bank acquisition, particularly in Western Tennessee.
• Yield Environment: 5-year and 10-year yield curves shifted up in Q3, allowing for loan yield increases, though spread compression persisted.

Risks and Challenges:

• Deposit Funding: Challenge of replacing higher-cost public funds while maintaining deposit growth; potential for deposit costs to remain elevated if market conditions persist.
• Credit Quality: A single one-off charge-off in the C&I space significantly impacted Q3 provisions; reserve levels continue to decline commensurate with improving asset quality (4 consecutive quarters of declining criticized assets).
• Macro Uncertainty: Macroeconomic ambiguity may limit the ability to accelerate growth beyond mid-single digits without compromising credit standards or yields.
• Merger Execution: Potential for short-term distraction and expense increases (merger costs) during the integration phase, though deemed isolated to Memphis.
• Regulatory/Capital: CET1 expected to be approximately 11% post-merger; all regulatory capital ratios remain well above minimums.

Management Commentary and Tone:

• Tone: Cautiously optimistic; management expresses confidence in momentum but emphasizes discipline regarding credit underwriting and yield maintenance.
• Strategy: Focus remains on "organic growth first" with M&A serving as a complementary tool to acquire low-cost deposits and specialized talent.
• Confidence: Strong conviction in the balance sheet strategy and the ability to fund loan growth through core deposit expansion over time.
• Capital Allocation: Buyback program reauthorized at $175 million; however, repurchases may be slightly tempered in the near term to fund the merger and organic growth.

Analyst Questions and Answers:

• Deposit Funding vs. Loan Growth: Management clarified that while total deposits dipped due to public funds, core deposits grew ~$300M; public fund seasonality is expected to reverse, turning headwinds into tailwinds by year-end.
• Merger Rationale: Deal selected for its stable, low-cost deposit base and wealth management synergies; no explicit revenue synergies modeled, but asset transfer and cross-selling opportunities are anticipated.
• Expense Outlook: Q4 expenses expected to rise slightly due to new hires and merger costs; core expense behavior remains solid.
• M&A Hurdles: Higher ROE baseline means M&A must clear a higher threshold to create incremental value and avoid distraction.
• Credit Provisions: The $13.3M provision was largely driven by a one-time resolution of a specific C&I credit; future provisions expected to decline as asset quality improves.
• New Loan Rates: Core loan yield was 6.08% for Q3, with new/renewed yields at 6.19%; September new yields reached 6.35%.
• Pipeline Health: Loan pipeline remains healthy despite a slight pullback; commercial real estate pipeline is stable.

Other Key Points:

• The merger with Commercial Bank and Trust is viewed as an opportunity to enter the Memphis market where they have an overlap, yet still offers significant non-overlapping growth potential.
• Management emphasized that they will not sacrifice credit quality or yield to force balance sheet growth.
• Asset-based lending, SBA, and factoring are being leveraged to expand the Commercial Bank's customer book, similar to prior acquisitions.
• The company expects to operate with zero balances at the FHLB and with broker deposits in the future.
• Mortgage banking income is expected to remain soft in Q4 due to the challenging rate environment.