Heritage Financial Group Inc (HBOS)

[Enterprising Investor]

HBOS Reports Higher Third Quarter Net Income of $2.0 Million or $0.25 Per Diluted Share (10/25/12)

Company Announces Shelf Offering and New Stock Repurchase Plan

ALBANY, Ga.--(BUSINESS WIRE)--Heritage Financial Group, Inc. (NASDAQ: HBOS), the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter ended September 30, 2012. Highlights of the Company's results for the third quarter of 2012 include:
• Net income of $2.0 million or $0.25 per diluted share, up 15% from net income of $1.7 million or $0.21 per diluted share for the third quarter of 2011 and up 47% from $1.4 million or $0.17 per diluted share for the second quarter of 2012;
• Excluding special items for each quarter, net income was $1.5 million or $0.19 per diluted share for 2012 versus net income of $422,000 or $0.05 per diluted share for 2011 and $1.4 million or $0.17 per diluted share from the second quarter of 2012 (see reconciliation of non-GAAP items);
• The completion of a previously announced early retirement program, which added $641,000 in additional expense for the quarter, but which is expected to save approximately $700,000 annually beginning in 2013;
• Loan growth for the quarter, excluding loans acquired through FDIC-assisted acquisitions, of $39.5 million or 8%;
• A decrease in loans acquired through FDIC-assisted acquisitions of $9.5 million or 9% for the quarter;
• A decrease in provision for loan losses, excluding FDIC-acquired loans, of $250,000 to $750,000 for the third quarter of 2012 compared with $1.0 million for the same quarter for 2011 and $750,000 for the second quarter of 2012;
• Provision for loan losses of $1.2 million for FDIC-acquired loans with approximately 80% of the losses reimbursable by the FDIC compared with no provision expense on such loans for the third quarter of 2011 and $341,000 for the second quarter of 2012;
• A decrease in annualized net charge-offs to 0.24% for the third quarter of 2012 compared with 0.73% for the third quarter of 2011 and 0.23% for the second quarter of 2012; and
• Elected fair value accounting for mortgage loans held for sale for the third quarter resulting in an overall positive impact to earnings of $492,000.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "We are pleased to report another quarter of significant organic loan growth, continued improvement in core earnings, and ongoing acquisition and expansion activities. Regarding expansion activity, we were pleased to announce the addition of a new management team to our mortgage division. We expect this team to lead significant growth in our mortgage business, particularly in the Atlanta, Georgia market. We also opened a full-service banking office in Macon, Georgia, during the quarter, which will enhance the success of our mortgage and commercial banking operations in that market."

Dorminey added, "In addition to our efforts to increase revenues, we are concurrently working on expense management initiatives. During the quarter, we completed an early retirement program that will generate annual savings of approximately $700,000. We also continue to take steps to efficiently manage our capital. During the quarter, we completed our stock buyback plan adopted in December 2011. Concurrently, we are announcing a new 5% buyback plan along with a shelf stock offering of $60 million. These two plans will allow us to efficiently manage our capital levels at our current size, while also providing us with the tools we need to take advantage of acquisition and internal growth opportunities that may arise."

Expense Management Initiatives

During the third quarter of 2012, the Company completed the early retirement program announced during the second quarter of 2012 regarding certain employees at a cost of $641,000. It is anticipated that the early retirement program will generate annual savings of approximately $700,000 per year beginning in 2013.

Additionally, the Company is still on track to close its Collins, Georgia and Guyton, Georgia branches that it acquired in FDIC-assisted acquisitions. Combined, these branches have loans of approximately $5 million and deposits of $13 million. The Company expects that it will not experience a material reduction in customer relationships in these areas and will seek to service these customers from nearby branches. The Company expects these branches to close in the fourth quarter of 2012, subject to customary regulatory conditions, and anticipates expense savings of approximately $500,000 per year related to these closures.

Capital Management Initiatives

The Company announced that it will file a shelf offering on Form S-3 with the Securities and Exchange Commission (SEC). Under the shelf registration statement, once declared effective by the SEC, the Company may offer and sell from time to time in the future, in one or more offerings, common stock, preferred stock, debt securities, warrants, depository shares, or units consisting of any combination of the forgoing.

The aggregate offering price of all securities that may be sold under the registration statement will not exceed $60 million. This shelf offering will give the Company flexibility to take advantage of acquisition opportunities that may arise in the future by accessing the capital markets on a timely and cost-effective basis. The specifics of any future offering, along with the prices and terms of any such securities offered by the Company, will be determined at the time of any such offering and will be described in detail in a prospectus supplement filed in connection with such offering. At this present time, the Company has no specific plans for an offering.

"Although we do not have any current plans to raise capital, we believe that the shelf registration statement will provide a benefit to the Company and our stockholders by enabling us to take advantage of favorable market conditions in capital raising transactions and to facilitate and expedite opportunistic acquisition and growth activities," said T. Heath Fountain, Executive Vice President and Chief Financial Officer. "The dollar amounts set forth are the amounts that we currently anticipate will be adequate to meet our needs under this registration statement over the next two years. We may use less, and we may continue to issue other shares of common stock pursuant to available registration exemptions or other registration statements. Any draw-down under the registration statement will only be done with the advance approval of our Board of Directors."

The shelf registration statement relating to these securities will be filed with the SEC, but will not become effective until the SEC declares the statement so. These securities may not be sold nor may offers to buy be accepted prior to the time the shelf registration statement becomes effective. This press release does not constitute an offer to sell or the solicitation of an offer to buy the securities, nor shall there be any sale of the securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or jurisdiction. Any offering of the securities covered by the shelf registration statement will only be by means of a prospectus and an accompanying prospectus supplement.

During the third quarter of 2012, the Company repurchased approximately 260,000 shares of common stock at an average price of $13.54, completing its stock repurchase program expiring in December 2012. The Company's Board of Directors has approved another stock repurchase program expiring in October 2013, which authorizes the repurchase of 397,000 shares of common stock, or approximately 5% of the shares currently outstanding.

The Company's estimated total risk-based capital ratio at September 30, 2012, was 19.2%, significantly exceeding the required minimum of 10% to be considered a well-capitalized institution. The ratio of tangible common equity to total tangible assets was 11.2% as of September 30, 2012.

Looking ahead, the Company intends to maintain its capital strength at the current level to support growth and its acquisition activities. Accordingly, stock buybacks and dividend growth in the future will reflect largely the Company's future earnings power, rather than a return of capital to stockholders.

Third Quarter 2012 Results of Operations

The Company reported net income of $2.0 million or $0.25 per diluted share for the third quarter in 2012 compared with net income of $1.7 million or $0.21 per diluted share for the third quarter in 2011. However, the Company's results for the third quarters of 2012 and 2011 included special items that affect comparability. Results for the third quarter of 2012 included net non-recurring income and expenses of $472,000, net of tax, while the results of the year-earlier quarter included net non-recurring income and expenses of $1.3 million, net of tax. Excluding these special items, the Company's adjusted net income for the third quarter of 2012 was $1.5 million or $0.19 per diluted share compared with net income of $422,000 or $0.05 per diluted share for the third quarter of 2011 (see reconciliation of non-GAAP items).

The $258,000 improvement in reported quarterly earnings primarily resulted from the following items:
• Improved net interest income of $5.3 million; and
• Reduced provision expense for loan losses, excluding FDIC-acquired loans, loan losses of $250,000; offset by
• Reduced non-interest income of $1.5 million;
• Increased non-interest expense of $2.2 million; and
• Increased provision expense for FDIC-acquired loan losses of $1.2 million.

Net interest income for the third quarter of 2012 increased 71% to $12.7 million from $7.4 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to both acquisitions and organic growth and a reduction in the cost of interest-bearing deposits. The Company's net interest margin was 5.77% for the third quarter of 2012, an increase of 102 basis points over 4.75% on a linked-quarter basis and 233 basis points over 3.44% in the year-earlier period. The improvement in the third quarter of 2012 net interest margin on a linked-quarter basis was driven by an increase in loan yields on the Company's FDIC-assisted loan portfolios, coupled with a decline in the cost of interest-bearing deposits as rates continue to reset to lower levels.

In the third quarter of 2012, the Company continued to achieve loan growth, with its loan portfolio increasing $39.5 million organically on a linked-quarter basis and advancing $121.9 million overall compared with the year-earlier quarter. For the third quarter of 2012, the Company's loan portfolio, including loans acquired through FDIC-assisted acquisitions, totaled $634.9 million, which increased $29.9 million on a linked-quarter basis. Total deposits stood at $845.1 million at the end of the third quarter of 2012, down 2% or $15.2 million on a linked-quarter basis from $860.3 million, primarily reflecting a planned runoff of time deposits.

Non-interest income for the third quarter of 2012 decreased 26% to $4.4 million from $5.9 million in the year-earlier quarter, primarily driven by a negative swing in the accretion for the FDIC loss-share receivable of $2.1 million and a negative change in gain on acquisitions of $2.1 million, which were partially offset by an increased gain on sale of securities of $1.3 million and improvements in mortgage banking fees of $1.0 million and bankcard services income of $98,000. Non-interest expense for the third quarter of 2012 increased 22% to $12.0 million from $9.8 million in the year-earlier quarter, primarily driven increased salaries and employment benefits of $1.0 million, driven in part by $641,000 in early retirement expense, and increased foreclosure expense on FDIC-acquired assets of $563,000 and loss on sale and write-downs of other real estate assets, excluding FDIC-acquired, of $229,000 offset in part by reduced acquisition-related expenses of $285,000.

Accounting for FDIC-Assisted Loans

The Company performs ongoing assessments of the estimated cash flows of its acquired FDIC-assisted loan portfolios. The fair value of the FDIC-assisted loan portfolios consisted of $78.8 million in covered and $14.3 million in non-covered loans at the end of the third quarter of 2012 compared with $87.4 million in covered and $15.2 million in non-covered loans at the end of the second quarter of 2012. The principal balance of the FDIC-assisted loan portfolios totaled $171.6 million at the end of the third quarter of 2012 compared with $188.0 million as of the end of the second quarter of 2012. The details of the accounting for the FDIC-assisted loan portfolios for the third quarter of 2012 are as follows:
• Covered loans acquired in FDIC-assisted acquisitions decreased $8.6 million to $78.8 million;
• Non-covered loans acquired in FDIC-assisted acquisitions decreased $911,000 to $14.3 million;
• The FDIC loss-share receivable associated with covered loans acquired in FDIC-assisted acquisitions decreased $8.6 million to $67.7 million;
• The negative accretion for the FDIC loss-share receivable was $1.6 million;
• Provision expense for loans acquired in FDIC-assisted acquisitions was $1.2 million;
• The non-accretable discount decreased $12.3 million to $54.2 million; and
• The accretable discount increased $5.6 million to $24.4 million.

For the third quarter of 2012, provision expense of $1.2 million was recorded for loan charge-offs on loans acquired in FDIC-assisted acquisitions not provided for by the discount, with approximately 80% of the charge-offs reimbursable by the FDIC. The provision expense for these loans did not affect the Company's loan loss reserve. The FDIC loss-share receivable associated with covered FDIC-assisted loans decreased $8.6 million from $76.3 million for the prior quarter to $67.7 million, primarily driven by reimbursements received from the FDIC of $7.0 million and negative accretion of $1.6 million affecting the loss-share receivable asset associated with the improvement in expected cash flows of the loss-share performing portfolios. A FDIC true-up (claw back) liability was recorded as an expense, which reduced non-interest income for the current quarter by $484,000. This true-up was driven by an improvement in estimates of expected cash flows for both FDIC-assisted acquisitions.

The non-accretable discount decreased to $54.2 million at the end of the third quarter of 2012 from $66.5 million on a linked-quarter basis, primarily driven by the clearing of $3.6 million of discount in conjunction with the resolution of FDIC-assisted loans and transfers to accretable discount of $8.7 million. The accretable discount increased to $24.4 million for the third quarter of 2012 from $18.8 million on a linked-quarter basis, primarily due to the transfer from the non-accretable discount as a result of the improvement in cash flows, partially offset by loan discount accretion of $4.8 million for the current quarter which compares with $2.1 million on a linked-quarter basis.

Asset Quality

Annualized net charge-offs to average outstanding loans, excluding loans acquired in FDIC-assisted acquisitions, were down to 0.24% for the third quarter of 2012 versus 0.73% for the third quarter of 2011. Total non-performing assets, excluding assets acquired in FDIC-assisted acquisitions, reversed an improving trend as a percentage of assets compared with the prior year and were $17.8 million or 1.68% of total assets for the third quarter of 2012 compared with $9.8 million or 0.89% of total assets for the same quarter in 2011. The primary reason for the increase in non-performing assets was the migration of two relationships totaling $6.0 million to non-performing status. One of the relationships totaling $3.5 million was classified a troubled-debt restructuring and additional collateral of $6.1 million has been secured. The other relationship was a Chapter 11 bankruptcy where the collateral deficiency is fully reserved as of the current quarter. Both of these relationships were previously identified as criticized assets. Other real estate owned and repossessed assets, excluding assets acquired in FDIC-assisted acquisitions, totaled $1.4 million for the third quarter of 2012, down from $1.8 million for the same quarter in 2011.

The provision for loan losses on non-FDIC-acquired loans decreased 25% to $750,000 for the third quarter of 2012 from $1.0 million for the same quarter in 2011, primarily driven by improving net charge-off trends. For the third quarter in 2012, the allowance for loan losses represented 1.57% of total loans outstanding, excluding loans acquired in FDIC-assisted acquisitions, versus 1.65% for the same quarter in 2011.

About Heritage Financial Group, Inc. and HeritageBank of the South

Heritage Financial Group, Inc. is the holding company for HeritageBank of the South, a community-oriented bank serving primarily South Georgia, North Central Florida and Eastern Alabama through 23 full-service branch locations, 11 mortgage offices, and 4 investment offices. As of September 30, 2012, the Company reported total assets of approximately $1.1 billion and total stockholders' equity of approximately $122 million. For more information about the Company, visit HeritageBank of the South on the Web at www.eheritagebank.com and see Investor Relations under About Us.

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