Heritage Southeast Bancorp Inc. (fka HSBI)

[norweger1979]

CCFH $0.98

2014 annual report intro

Dear Stakeholder:
Another year has passed, spring is on the horizon (although not soon enough), and CCF Holding
Company and Heritage Bank are sending out another annual report. To the average reader it is full. of the
numbers and disclosures we are required to send you each year. But if you are like me, you search
through looking for the important items that tell you if the bank is moving in the right direction and
achieving your investment goals. Accountants and lawyers have a way of writing things that at times are
confusing in order to pass muster with our government regulatory agencies. So we always like to point
out items we feel are important and are indicators of the direction of our company. If you read this letter
in conjunction with the accompanying pages you should have a clearer picture of where we stand.
This year a lot has happened. Usually the bank (Heritage Bank) and the company (CCF Holding
Company) have very few differences in the financial reports since the bank is the primary asset of the
company. This year the differences are much larger and we will attempt to explain them in this letter.
The primary driver of this difference is the completed capital raise of $9.2 million and subsequent
repurchase of the company's Trust Preferred Securities. In last year's report, we mentioned the pending
completion of this transaction and the possible ramifications if it didn't close. Fortunately, the closing did
occur in July 2014 and the company has removed this obstacle permanently. Total Shareholder's Equity
increased $15.2 million as a result of the preferred stock issuance and aone-time gain of $5.5 million
through the discount we received on the repurchase. This gain is reflected in the consolidated financial
reports "Consolidated Statements of Income" and was a transaction that initially accrued to the benefit of
the company and not the bank. Because of this gain, the company would have incurred a federal and
state tax liability; however, the bank had prior year operating losses which offset the tax liability. The
ability to use the tax losses from the bank in prior years allowed the bank to recognize an income tax
credit of $1,696,000, which increased the earnings for the year and added to capital. So CCF Holding
Company shows a gain on the repurchase transaction and Heritage Bank shows a tax credit for the same
transaction. If you ask us, this is complicated. In the end, the bank benefitted from the transaction which
accelerated Heritage Bank's return to health. The company received the benefit of the gain, along with
some new and needed capital that it could share with the bank and removed the most significant threat it
faced. While there was significant dilution to legacy shareholders, the results of this new capital and the
subsequent repurchase of the Trust Preferred Securities has been extremely positive.
Lets discuss the year end results and we think you will see how much progress has been made since our
last report. We ended 2013 with Total Assets of $370.2 million. The 2014 year end assets were $365.2
million. Loans increased year over year $10.0 million, non-interest bearing deposits increased $18.5
million and most importantly "Total Shareholders' Equity" increased $15.2 million. Looking at earnings,
the company had positive earnings of $5,159,323 compared to a loss of ($214,092) in 2013. This
represents an improvement of $5,373,415, again primarily due to the gain recorded in the repurchase
transaction. As you look through all of the supporting pages and footnotes, we would like to point out
some very positive news. At December 31, 2013 the bank had $48.8 million in adversely classified
assets (problem loans and real estate owned) and this equaled 216% of capital and loan loss reserves.
When we closed out 2014 this number was $25.4 million and represented 87% of capital and loan loss
reserves. Obviously, the percentage change was contributed to by the,solid earnings for 2014 and the
new capital that was raised last summer, but the real story is in the 47% reduction or the $23.4 million of
problem loans and real estate that was either resolved or our customer was able to return to solid footing.
The exciting part of this is many of our long time customers that have struggled mightily during the great
recession have seen new signs of hope and have been able to regain their footing. We have always
viewed it in our best interest to work with borrowers when they are down and to try and find solutions and
not just contribute to their struggles. We feel in the long run this approach will pay strong returns to
Heritage Bank in our community. A couple of key metrics to summarize: Heritage Bank ended 2014 with a
tier one leverage capital ratio of 7.56% a full 1.56% above the statutory "well capitalized" level; a total risk
based capital ratio of 11.99% a full 1.99% above the statutory "well capitalized" level; a problem asset
coverage ratio of 87%; a "Texas Ratio" of 69%; a net interest margin of 3.96%; and a past due ratio of
1.65%- the best since 2007.
Numbers can tell a story and demonstrate trends, but sentiment in the community is often more indicative
of the near future. The three counties that make up our community are strong vibrant areas with
hardworking folks that want to live, work, play and pray close to home. Many suffered tremendously the
last six years, so we expect it will take a while longer before the entrepreneurs are comfortable sticking
their necks out too far. In all honesty, we feel the same way. Being the last community bank in most of
our markets has put a strain on our personnel to try and keep up with the demand and we are cautious
before adding new expenses. Time is a great healer and we are committed to serving our communities
through quality service and providing the working capital to support community growth.
As always, we feel blessed to have such a talented group of employees at Heritage Bank. We feel very
fortunate to have a dedicated hardworking board of directors. Our customers have been loyal and
supportive for what will be our 60th year this year. You, our shareholders, have made all of this possible
through your investment in CCF Holding Company. We do not take any of this for granted and we will
remain eternally grateful. Lastly, we lost a longtime director in 2014 in Mr. Charles Tucker. Mr. Tucker
went to be with the Lord on October 20, 2014. As a director for 37 years, he provided wisdom and a
rational common sense approach to our company and bank, even in the toughest of times. We will truly
miss Charlie.
Sincerely,

Leonard A. Moreland
President &CEO
Heritage Bank

David B. Turner
President &CEO
CCF Holding Company

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