Yeah, I get this a lot, especially from non-southern in-laws who think it's a hoot that they've "cracked the code" and can "speak southern". Being repeatedpy stereotyped to your face gets old pretty quick.

For folks who don't know, here's the best explanation I can offer from growing up in the Atlanta area (but well outside the perimeter):

"Bless your heart" is most commonly an expression of sympathy.

Sometimes, it's sympathetic towards the hardship someone's going through (e.g. "and right after his grandma passed, bless his heart.")

Sometimes it's sympathetic to the trouble someone went through (e.g. "oh bless your heart, you didn't have to go out of your way to bring extra! Thank you so much!")

And yes, sometimes it's an expression of sympathy for the fact that life must be hard for you because of your ignorance, stubbornness, stupidity, or arrogance (or some other such stunting quality) (e.g. "and he thinks he can graduate from Tech with those grades, bless his heart," or "bless his heart, I just don't think he's ever had anyone tell him no in his entire life.")