News Column

Heritage Financial Group, Inc. Reports Higher Net Income for the Fourth Quarter and Year

January 29, 2014

Company Declares Quarterly Dividend of $0.07 Per Share 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 and year ended December 31, 2013 . Highlights of the Company's results for the year ended 2013 include: Net income of $11.3 million or $1.50 per diluted share, up 67% from net income of $6.8 million or $0.85 per diluted share for the year ended 2012; Excluding special items for each year, net income of $10.6 million or $1.42 per diluted share, up 86% from $5.7 million or $0.71 per diluted share for the year ended 2012 (see reconciliation of non-GAAP items); Loan growth, excluding loans acquired through FDIC -assisted acquisitions, of $98.8 million or 17% from 2012; A decline in the provision for loan losses, excluding FDIC -acquired loans, to $1.7 million , down 34% from $2.5 million for 2012; Commenting on the results, Leonard Dorminey , President and Chief Executive Officer, said, "We are pleased to announce solid financial results for the fourth quarter and for all of 2013. Our team has been focused on several strategic initiatives, and we are excited to report that those efforts came to fruition in our financial results this past quarter. Contributing to our results were organic loan growth from commercial banking, fee income and improved efficiency from our branch network, fee income and growth in assets under management from our brokerage division, continued growth in mortgage banking, and significant gains on resolutions from our FDIC -acquired special asset team. We enter 2014 well positioned on all strategic fronts." Dorminey also noted that the Company's Board of Directors has declared a quarterly cash dividend of $0.07 per share, resuming regular payments after a special dividend was paid in December 2012 in lieu of dividends for 2013. The new dividend will be paid on February 28, 2014 , to stockholders of record as of February 14, 2014 . Operating Efficiency Initiatives During 2013, the Company closed its branch in Vincent, Alabama , and its Broadway Avenue branch in Sylacauga, Alabama , both of which were added with the FDIC -assisted acquisition of Frontier Bank in March 2013 . Also, the Company completed staffing reductions related to the Frontier acquisition that will result in a decrease of approximately $1.6 million from Frontier's pre-acquisition level of personnel expenses. Separately, the Company reduced Bank staffing by nine full-time equivalent employees, resulting in a one-time charge of $67,000 for severance ( $60,000 in the third quarter of 2013 and $7,000 in the fourth quarter), and anticipates expense savings of approximately $460,000 per year related to this staffing reduction. Commenting on the operating efficiency initiatives, Heath Fountain , Executive Vice President and Chief Financial Officer, said, "We continue to focus on improving our operating efficiency while expanding our mortgage and banking presence. While we have completed many efficiency initiatives, we anticipate building on the momentum gained in 2013 to further improve our operating efficiency in 2014." Fourth Quarter 2013 Results of Operations Highlights of the Company's results for the fourth quarter of 2013 include: Net income of $3.4 million or $0.45 per diluted share, up 158% from $1.3 million or $0.18 per diluted share for the linked quarter and up 40% from $2.4 million or $0.31 per diluted share for the year-earlier quarter; Excluding special items for each quarter, net income of $4.0 million or $0.53 per diluted share, up 124% from $1.8 million or $0.24 per diluted share for the linked quarter and up 221% from $1.2 million or $0.16 per diluted share for the year-earlier quarter (see reconciliation of non-GAAP items); Loan growth, excluding loans acquired through FDIC -assisted acquisitions, of $19.0 million or 3% on a linked-quarter basis and $98.8 million or 17% compared with the year-earlier quarter; A decrease in FDIC -acquired loans of $9.3 million , or 8%, on a linked-quarter basis, but an increase of $29.9 million or 36% compared with the year-earlier quarter; A decrease in the provision for loan losses, excluding FDIC -acquired loans, to $220,000 , down 37% from $350,000 for the linked quarter and down 63% compared with $600,000 for the year-earlier quarter; The $2.1 million increase in reported quarterly earnings for the fourth quarter of 2013 compared with the linked quarter resulted primarily from the following items: Increased loan discount accretion from FDIC -acquired loans of $2.3 million , partially offset by increased negative accretion of the FDIC loss-share receivable of $522,000 ; Increased mortgage banking fees of $1.0 million ; Decreased FDIC -acquired other real estate owned write-downs and foreclosed asset expenses of $410,000 ; Decreased legacy other real estate owned write-downs and foreclosed asset expenses of $394,000 ; Increased interest income on core loans and loans held for sale of $385,000 ; Decreased acquisition-related expenses of $178,000 ; offset by Increased salaries and employee benefits of $614,000 ; and Increased impairment loss on assets held for sale of $328,000 . Commenting on the fourth quarter results, Fountain added, "During the fourth quarter, we were able to resolve several FDIC -acquired non-covered loans that significantly improved our loan discount accretion income. Loan discount accretion income can vary significantly based on the timing of asset resolutions and will continue to cause volatility in earnings. We also posted a significant increase in our mortgage banking fees, building on the momentum that our mortgage division developed in the previous quarter." The $977,000 increase in reported quarterly earnings for the fourth quarter of 2013 compared with the year-earlier quarter primarily resulted from the following items: Improved net interest income of $1.7 million ; Decreased provision expense of $2.3 million ; Increased non-interest income of $1.4 million ; offset by Increased non-interest expense of $3.4 million . Net interest income for the fourth quarter of 2013 increased 12% to $16.3 million from $14.5 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 liabilities. The Company's net interest margin was 5.50% for the fourth quarter of 2013, a decline of 87 basis points from 6.37% for the year-earlier period. The reduction in net interest margin for the fourth quarter of 2013 compared with the year-earlier quarter was driven by a decline in the yield on loans, offset in part by an increase in the yield on investment securities coupled with a reduction in the cost of interest-bearing liabilities as rates continue to reset to lower levels and the Company takes advantage of historically low interest rates on non-deposit funding. Excluding FDIC -acquired loan discount adjustments from the net interest margin, the core net interest margin was 3.20% for the fourth quarter of 2013, a decrease of two basis points from 3.22% for the year-earlier quarter. In the fourth quarter of 2013, the Company continued to achieve loan growth, with its core loan portfolio increasing $19.0 million organically on a linked-quarter basis and advancing $98.8 million overall compared with the year-earlier quarter. For the fourth quarter of 2013, the Company's loan portfolio, including FDIC -acquired loans, totaled $798.8 million , increasing $9.7 million on a linked-quarter basis from $789.1 million and from $670.0 million compared with the year-earlier quarter. The organic loan growth for the linked quarter was primarily driven by growth in Albany , Macon , and South Atlanta, Georgia markets, Auburn and Birmingham, Alabama markets, and the Ocala, Florida market. Total deposits stood at $1.076 billion at the end of the fourth quarter of 2013, up 2% from $1.052 billion on a linked-quarter basis, and up 24% from $869.6 million for the year-earlier quarter. For the fourth quarter of 2013, the Company's loans held for sale totaled $110.7 million , increasing significantly by $72.6 million , or 191%, on a linked-quarter basis from $38.0 million , and increasing $95.1 million , or 609%, from $15.6 million compared with the year-earlier quarter. The significant increase in the loans held for sale for the current quarter was driven by a slowing in loan sales as the Company prepared to deliver directly to Fannie Mae. Loan sales to Fannie Mae for the fourth quarter totaled $20.8 million and, separately, the Company recorded a gain of $202,000 related to the mortgage servicing rights for those loans. Total mortgage production for the fourth quarter was $120.4 million , up 4% on a linked-quarter basis from $115.3 million and up 116% from $55.8 million compared with the year-earlier quarter. Non-interest income for the fourth quarter of 2013 increased 47% to $4.5 million from $3.1 million in the year-earlier quarter, primarily driven by increases in mortgage banking fees of $1.5 million and service charges on deposit accounts of $335,000 and a decline in negative accretion for the FDIC loss-share receivable of $552,000 , together which were partially offset by a decline in the gain on sales of securities of $1.2 million . Non-interest expense for the fourth quarter of 2013 increased 28% to $15.7 million from $12.3 million in the year-earlier quarter, primarily driven by increases in salaries and employee benefits of $2.6 million , impairment loss on assets held for sale of $328,000 and realized loss on assets held for sale of $228,000 . The increase in salaries and employee benefits was associated with the hiring of employees from the Frontier acquisition and for the mortgage division expansion, while the impairment loss on assets held for sale was driven by two former branch buildings and a corporate facility the Company holds, and the realized loss on assets held for sale was the result of the Company selling its former corporate headquarters building in Albany, Georgia . Accounting for FDIC-Assisted Acquisitions The Company performs ongoing assessments of the estimated cash flows of its FDIC -acquired loan portfolios. The fair value of the FDIC -acquired loan portfolios consisted of $50.9 million in covered and $63.3 million in non-covered loans at the end of the fourth quarter of 2013 compared with $72.4 million in covered and $11.9 million in non-covered loans for the year-earlier quarter. The outstanding principal balance of the FDIC -acquired loan portfolios totaled $177.8 million at the end of the fourth quarter of 2013 compared with $152.1 million for the year-earlier quarter. The details of the accounting for the FDIC -acquired loan portfolios for the fourth quarter of 2013 are as follows: Covered FDIC -acquired loans decreased $3.0 million from the linked quarter to $50 .9 million; Non-covered FDIC -acquired loans decreased $6.3 million to $63 .3 million; The FDIC loss-share receivable associated with covered assets acquired in FDIC -assisted acquisitions decreased $3.2 million to $41.3 million ; The negative accretion for the FDIC loss-share receivable was $2.0 million and the FDIC loss-share clawback accrual increased to $1.9 million ; Increase in provision expense for FDIC -acquired non-covered loans to $12,000 ; Loan discount accretion recognized in interest income improved $2.6 million ; The non-accretable discount decreased $11.8 million to $36.7 million ; and The accretable discount increased $3.4 million to $26.9 million . For the fourth quarter of 2013, loan discount accretion recognized in interest income improved 69% to $6.3 million from $3.7 million for the linked quarter, but declined 6% from $6.6 million for the year-earlier quarter. The FDIC loss-share receivable associated with covered FDIC -acquired assets decreased 7% to $41.3 million from $44.5 million for the linked quarter and declined 32% from $60.7 million for the year-earlier quarter. The reduction in the FDIC loss-share receivable for the linked quarter was primarily driven by negative accretion of $2.0 million affecting the loss-share receivable asset associated with the improvement in expected cash flows of the covered FDIC -acquired performing loan portfolios and FDIC reimbursements received of $1.2 million . An increase to the FDIC clawback liability accrual was recorded as an expense for the current quarter of $261,000 , which increased the total accrual to $1.9 million . This clawback was caused by an improvement in estimates of expected cash flows for both FDIC -assisted acquisitions covered under loss-sharing agreements. The covered FDIC -acquired loan discount affecting the loss-share receivable was $39.1 million , or 94.6% of the loss-share receivable, for the fourth quarter 2013 compared with $55.2 million , or 90.9% of the loss-share receivable, for the year-earlier quarter. The gross balance of covered FDIC -acquired assets decreased to $109.2 million for the fourth quarter of 2013 compared with $156.0 million for the year-earlier quarter. The FDIC loss-share receivable as a percent of the covered FDIC -acquired assets decreased to 37.8% compared with 38.9% for the year-earlier quarter. Asset Quality Total non-performing assets, excluding FDIC -acquired assets, decreased to $11.2 million , or 0.81% of total assets, compared with $13.6 million , or 1.03% of total assets, for the linked quarter and declined from $17.3 million , or 1.58% of total assets, for the year-earlier quarter. Annualized net charge-offs to average outstanding loans, excluding FDIC -acquired loans, were 0.10% for the fourth quarter of 2013 compared with 0.31% for the linked quarter and 0.05% for the year-earlier quarter. Non-performing loans, excluding FDIC -acquired loans, totaled $9.4 million , down from $11.0 million for the linked quarter and from $14.7 million for the year-earlier quarter. Other real estate owned and repossessed assets, excluding FDIC -acquired assets, totaled $1.8 million for the fourth quarter of 2013, down from $2.7 million for the linked quarter and from $2.6 million for the year-earlier quarter. The provision for loan losses on non- FDIC -acquired loans decreased to $220,000 for the fourth quarter of 2013 from $350,000 for the linked quarter and from $600,000 for the year-earlier quarter, primarily driven by improving trends in total criticized and classified loans. For the fourth quarter in 2013, the allowance for loan losses represented 1.31% of total loans outstanding, excluding FDIC -acquired loans, versus 1.34% for the linked quarter and 1.55% for the year-earlier quarter. The improving loan loss allowance was primarily the result of declining criticized and classified loans as a percentage of total loans. Capital Management Initiatives The Company reinstated its regular quarterly dividend during January 2014 at $0.07 per share. Looking ahead, the Company intends to maintain its capital strength at the current level to support growth and its acquisition activities. The Company currently has authorization to purchase approximately 344,000 shares under the current repurchase program, which is set to expire in April 2014 , unless extended or otherwise completed. Accordingly, future stock buybacks and future dividends will be premised largely on the Company's future earnings power rather than a return of capital to stockholders. The Company's estimated total risk-based capital ratio at December 31, 2013 , was 14.5%, 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 8.8% as of December 31, 2013 . 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 27 full-service branch locations, 14 mortgage offices, and 4 investment offices. As of December 31, 2013, the Company reported total assets of approximately $1.4 billion and total stockholders' equity of approximately $125 million . For more information about the Company, visit HeritageBank of the South on the Web at www.eheritagebank.com and see Investors. Cautionary Note Regarding Forward Looking Statements Except for historical information contained herein, the matters included in this news release and other information in the Company's filings with the Securities and Exchange Commission may contain certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words or phrases "opportunities," "prospects," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions. The forward-looking statements made herein represent the current expectations, plans or forecasts of the Company's future results and revenues. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and includes this statement for purposes of these safe harbor provisions. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements. Investors should not place undue reliance on any forward-looking statement and should consider the uncertainties and risks, discussed under Item 1A. "Risk Factors" of the Company's 2012 Annual Report on Form 10-K and in any of the Company's subsequent SEC filings. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in its other filings with the SEC . HERITAGE FINANCIAL GROUP, INC. Unaudited Reconciliation of Non-GAAP Measures Presented in Earnings Release (Dollars in thousands, except per share data) Three Months Ended Twelve Months Ended December 31 , December 31 , Sept. 30 , 2013 2012 2013 2013 2012 Total interest income $ 18,115 $ 16,351 $ 15,393 $ 65,651 $ 54,738 Loan held for sale – fair value election – – – – (156 ) Adjusted interest income $ 18,115 $ 16,351 $ 15,393 $ 65,651 $ 54,582 Total non-interest income $ 4,536 $ 3,092 $ 3,918 $ 18,414 $ 14,399 Mortgage banking activities – fair value election – – – – (336 ) Gain on sale of securities (85 ) (1,285 ) – (85 ) (2,838 ) (Gain) loss on acquisitions – – – (4,188 ) 56 Adjusted non-interest income $ 4,451 $ 1,738 $ 3,918 $ 14,141 $ 11,281 Total non-interest expense $ 15,706 $ 12,314 $ 15,334 $ 58,951 $ 46,250 Salaries and employee benefits – early retirement and severance expense (7 ) – (60 ) (67 ) (641 ) Acquisition-related expenses (102 ) (3 ) (280 ) (1,322 ) (418 ) Impairment loss on assets held for sale (328 ) – – (328 ) – Realized loss on the disposition of assets held for sale (226 ) – – (241 ) – Accrual of FDIC acquisitions estimated clawback liability (261 ) (219 ) (286 ) (1,237 ) (703 ) Adjusted non-interest expense $ 14,782 $ 12,092 $ 14,708 $ 55,756 $ 44,488 Net income as reported $ 3,405 $ 2,428 $ 1,322 $ 11,315 $ 6,757 Total adjustments, net of tax* 589 (921 ) 462 (763 ) (1,094 ) Adjustment for state tax credits – (264 ) – – – Adjusted net income $ 3,994 $ 1,243 $ 1,784 $ 10,552 $ 5,663 Diluted earnings per share $ 0.45 $ 0.31 $ 0.18 $ 1.52 $ 0.85 Total adjustments, net of tax* 0.08 (0.15 ) 0.06 (0.12 ) (0.14 ) Adjusted diluted earnings per share $ 0.53 $ 0.16 $ 0.24 $ 1.40 $ 0.71 * The effective tax rate for the period presented is used to determine net of tax amounts. Net Income and Diluted Earnings Per Share are presented in accordance with Generally Accepted Accounting Principles ("GAAP"). Adjusted Noninterest Income, Adjusted Noninterest Expense, Adjusted Net Income and Adjusted Diluted Earnings Per Share are non-GAAP financial measures. The Company believes that these non-GAAP measures aid in understanding and comparing current-year and prior-year results, both of which include unusual items of different natures. These non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results. Heritage Financial Group, Inc. and Subsidiary Consolidated Balance Sheets (Unaudited) (Dollars in thousands) (Unaudited) December 31 , December 31 , 2013 2012* Cash and due from banks $ 34,804 $ 23,993 Interest-bearing deposits in banks 3,249 15,393 Federal funds sold 130 4,306 Cash and cash equivalents 38,183 43,692 Securities available for sale, at fair value 294,299 221,406 Federal Home Loan Bank stock, at cost 7,342 4,330 Other equity securities, at cost 1,010 1,010 Loans held for sale 110,669 15,608 Loans 747,862 597,579 Covered loans 50,891 72,425 Less allowance for loan losses 8,955 9,061 Loans, net 789,798 660,943 Other real estate owned 3,482 3,242 Covered other real estate owned 7,053 9,467 Total other real estate owned 10,535 12,709 FDIC loss-share receivable 41,306 60,731 Premises and equipment, net 37,978 33,015 Goodwill and intangible assets 4,253 4,235 Cash surrender value of bank owned life insurance 24,183 23,382 Other assets 21,369 16,445 Total assets $ 1,380,925 $ 1,097,506 LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest-bearing deposits $ 148,253 $ 116,272 Interest-bearing deposits 928,168 753,282 Total deposits 1,076,421 869,554 Federal funds purchased and securities sold under repurchase agreements 37,648 33,219 Other borrowings 131,394 60,000 Other liabilities 10,399 14,084 Total liabilities 1,255,862 976,857 SHAREHOLDERS' EQUITY Preferred stock, par value; $0.01 ; 5,000,000 shares authorized; none issued - - Common stock, par value $0.01 ; 45,000,000 shares authorized; 7,834,537 and 8,172,486 shares issued and outstanding, respectively 78 82 Capital surplus 78,566 82,154 Retained earnings 57,614 46,299 Accumulated other comprehensive loss, net of tax of $5,175 and $2,566 , respectively (7,762 ) (3,849 ) Unearned employee stock ownership plan (ESOP), 332,535 and 385,836 shares, respectively (3,433 ) (4,037 ) Total shareholders' equity 125,063 120,649 Total liabilities & shareholders' equity $ 1,380,925 $ 1,097,506 * Derived from Audited Consolidated Financial Statements. Heritage Financial Group, Inc. and Subsidiary Consolidated Statements of Income (Unaudited) (Dollars in thousands except share and per share data) Three Months Ended Twelve Months Ended December 31 , December 31 , December 31 , December 31 , 2013 2012 2013 2012 Interest income: Interest and fees on loans $ 15,911 $ 15,084 $ 58,434 $ 48,831 Interest on loans held for sale 619 238 1,458 967 Interest on taxable securities 1,231 762 4,347 3,681 Interest on nontaxable securities 337 232 1,248 1,123 Interest on federal funds sold 2 9 9 30 Interest on deposits in other banks 15 26 155 106 Total interest income 18,115 16,351 65,651 54,738 Interest expense: Interest on deposits 1,000 1,108 4,077 4,874 Interest on other borrowings 862 713 3,308 2,739 Total interest expense 1,862 1,821 7,385 7,613 Net interest income 16,253 14,530 58,266 47,125 Provision for loan losses 232 2,507 1,735 5,930 Net interest income after provision for loan losses 16,021 12,023 56,531 41,195 Non-interest income: Service charges on deposit accounts 1,642 1,307 5,670 4,748 Bankcard services income 890 794 3,335 3,231 Other service charges, commissions and fees 121 89 513 326 Brokerage fees 560 463 2,138 1,838 Mortgage banking activities 2,949 1,451 10,509 4,768 Bank-owned life insurance 198 210 801 771 Gain on sales of securities 85 1,285 85 2,838 Gain (loss) on acquisitions - - 4,188 (56 ) Accretion of FDIC loss-share receivable (2,021 ) (2,573 ) (9,293 ) (4,325 ) Other 112 66 468 260 Total non-interest income 4,536 3,092 18,414 14,399 Non-interest expense: Salaries and employee benefits 8,722 6,167 31,445 23,543 Equipment and occupancy 1,922 1,597 7,358 5,632 Advertising and marketing 299 147 1,170 656 Professional fees 559 387 1,416 1,319 Information services expenses 1,285 1,184 5,109 4,641 Loss (gain) on sales and write-downs of other real estate owned 38 277 406 219 Gain on sales and write-downs of FDIC -acquired other real estate owned (536 ) (204 ) (969 ) (313 ) Foreclosed asset expenses 240 353 1,019 970 Foreclosed FDIC -acquired asset expenses 286 575 1,386 1,767 FDIC insurance and other regulatory fees 254 252 1,081 1,037 Impairment loss on assets held for sale 328 - 328 - Acquisition related expenses 102 3 1,322 418 Deposit intangible expenses 200 191 809 781 FDIC loss-share clawback expenses 261 219 1,237 703 Other operating expenses 1,746 1,166 5,834 4,879 Total non-interest expense 15,706 12,314 58,951 46,252 Income before income taxes 4,851 2,801 15,994 9,342 Applicable income tax 1,446 373 4,679 2,585 Net income $ 3,405 $ 2,428 $ 11,315 $ 6,757 Earnings per common share: Basic earnings per share $0.46 $0.31 $1.52 $0.85 Diluted earnings per share $0.45 $0.31 $1.50 $0.85 Weighted average-common shares outstanding: Basic 7,407,722 7,720,839 7,421,348 7,969,104 Diluted 7,530,606 7,722,867 7,528,246 7,970,903 Heritage Financial Group, Inc. and Subsidiary Consolidated Statements of Income (Unaudited) (Dollars in thousands except share and per share data) Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Interest income: Interest and fees on loans $ 15,911 $ 13,452 $ 15,702 $ 13,369 $ 15,084 Interest on loans held for sale 619 434 290 115 238 Interest on taxable securities 1,231 1,155 1,095 866 762 Interest on nontaxable securities 337 318 308 285 232 Interest on federal funds sold 2 4 2 1 9 Interest on deposits in other banks 15 30 88 22 26 Total interest income 18,115 15,393 17,485 14,658 16,351 Interest expense: Interest on deposits 1,000 982 1,041 1,054 1,108 Interest on other borrowings 862 853 844 749 713 Total interest expense 1,862 1,835 1,885 1,803 1,821 Net interest income 16,253 13,558 15,600 12,855 14,530 Provision for loan losses 220 350 640 450 600 Provision for loan losses- FDIC -acquired covered - - 28 35 1,907 Provision for loan losses- FDIC -acquired non-covered 12 - - - - Net interest income after provision for loan losses 16,021 13,208 14,932 12,370 12,023 Non-interest income: Service charges on deposit accounts 1,642 1,577 1,297 1,154 1,307 Bankcard services income 890 852 831 762 794 Other service charges, commissions and fees 121 136 157 99 89 Brokerage fees 560 561 536 481 463 Mortgage banking activities 2,949 1,953 3,425 2,182 1,451 Bank-owned life insurance 198 200 201 202 210 Gain on sales of securities 85 - - - 1,285 Gain (loss) on acquisitions - - - 4,188 - Accretion of FDIC loss-share receivable (2,021 ) (1,499 ) (3,376 ) (2,397 ) (2,573 ) Other 112 138 124 94 66 Total non-interest income 4,536 3,918 3,195 6,765 3,092 Non-interest expense: Salaries and employee benefits 8,722 8,108 8,185 6,430 6,167 Equipment and occupancy 1,922 1,932 1,838 1,666 1,597 Advertising and marketing 299 335 349 187 147 Professional fees 559 340 302 215 387 Information services expenses 1,285 1,335 1,307 1,182 1,184 Loss (gain) on sales and write-downs of other real estate owned 38 335 58 (25 ) 277 (Gain) loss on sales and write-downs of FDIC -acquired other real estate owned (536 ) (206 ) (251 ) 24 (204 ) Foreclosed asset expenses 240 337 227 215 353 Foreclosed FDIC -acquired asset expenses 286 366 313 421 575 FDIC insurance and other regulatory fees 254 293 278 256 252 Impairment loss on assets held for sale 328 - - - - Acquisition related expenses 102 280 148 792 3 Deposit intangible expenses 200 204 211 194 191 FDIC loss-share clawback expenses 261 286 124 566 219 Other operating expenses 1,746 1,389 1,466 1,233 1,166 Total non-interest expense 15,706 15,334 14,555 13,356 12,314 Income before income taxes 4,851 1,792 3,572 5,779 2,801 Applicable income tax 1,446 470 912 1,851 373 Net income $ 3,405 $ 1,322 $ 2,660 $ 3,928 $ 2,428 Earnings per common share: Basic earnings per share $0.46 $0.18 $0.36 $0.52 $0.31 Diluted earnings per share $0.45 $0.18 $0.36 $0.52 $0.31 Dividends $0.00 $0.00 $0.00 $0.00 $0.24 Weighted average-common shares outstanding: Basic 7,407,722 7,371,804 7,381,370 7,526,344 7,720,839 Diluted 7,530,606 7,483,812 7,383,992 7,528,522 7,722,867 Heritage Financial Group, Inc. and Subsidiary Condensed Average Balances, Interest Rates and Yields (Unaudited) (Dollars in thousands) Three Months Ended Twelve Months Ended December 31 , December 31 , 2013 2012 2013 2012 Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate Interest-earning assets: Loans (1)(2) $ 868,420 $ 16,536 7.55 % $ 658,346 $ 15,325 9.26 % $ 795,094 $ 59,907 7.53 % $ 608,722 $ 49,807 8.18 % Investment securities (2) 299,638 1,683 2.23 % 211,524 1,073 2.02 % 283,782 6,020 2.12 % 240,198 5,186 2.16 % Other short-term investments 13,785 16 0.46 % 42,264 35 0.33 % 41,576 164 0.39 % 38,782 137 0.35 % Total interest-earning assets 1,181,843 18,235 6.12 % 912,134 16,433 7.17 % 1,120,452 66,091 5.90 % 887,702 55,130 6.21 % Non-interest earning assets 169,547 174,694 175,168 183,373 Total assets $ 1,351,390 $ 1,086,828 $ 1,295,620 $ 1,071,075 Interest-bearing liabilities: Deposits: Interest checking, money market and savings $ 543,633 $ 343 0.25 % $ 452,243 $ 276 0.24 % $ 534,972 $ 1,261 0.24 % $ 465,954 $ 1,347 0.29 % Time deposits 370,737 658 0.70 % 295,389 832 1.12 % 353,802 2,818 0.80 % 299,333 3,528 1.18 % Total interest bearing-deposits 914,370 1,001 0.43 % 747,632 1,108 0.59 % 888,774 4,079 0.46 % 765,287 4,875 0.64 % Federal Funds purchased and securities sold under repurchase agreements 36,548 337 3.66 % 34,324 336 3.89 % 34,527 1,331 3.85 % 33,528 1,333 3.98 % Other Borrowings 114,041 525 1.83 % 50,489 377 2.97 % 96,132 1,976 2.06 % 38,975 1,406 3.61 % Total interest-bearing liabilities 1,064,959 1,863 0.69 % 832,445 1,821 0.87 % 1,019,433 7,386 0.72 % 837,790 7,614 0.91 % Non-interest bearing liabilities: Demand Deposits 152,577 115,014 142,578 96,077 Other Liabilities 12,147 16,418 12,852 12,615 Total non-interest bearing liabilities 164,724 131,432 155,430 108,692 Total liabilities 1,229,683 963,877 1,174,863 946,482 Shareholders' equity 121,707 122,951 120,757 124,593 Total liabilities & shareholders' equity $ 1,351,390 $ 1,086,828 $ 1,295,620 $ 1,071,075 Net interest income $ 16,372 $ 14,612 $ 58,705 $ 47,516 Interest rate spread 5.43 % 6.30 % 5.17 % 5.30 % Net yield on interest-earning assets (net interest margin) 5.50 % 6.37 % 5.24 % 5.35 % Core net interest margin (non-GAAP): Loans (1)(2) $ 868,420 $ 16,536 7.55 % $ 658,346 $ 15,325 9.26 % $ 795,094 $ 59,907 7.53 % $ 608,722 $ 49,807 8.18 % FDIC -acquired loan discount adjustments (3) 69,283 6,272 35.92 % 73,309 6,646 36.07 % 73,647 20,722 28.14 % 86,382 15,709 18.19 % Adjusted loans 937,703 10,264 4.34 % 731,655 8,679 4.72 % 868,741 39,185 4.51 % 695,104 34,098 4.91 % Adjusted total interest-earning assets $ 1,251,126 11,963 3.79 % $ 985,443 9,787 3.95 % $ 1,194,099 45,369 3.80 % $ 974,084 39,421 4.05 % Total interest-bearing liabilities $ 1,064,959 1,863 0.69 % $ 832,445 1,821 0.87 % $ 1,019,433 7,386 0.72 % $ 837,790 7,614 0.91 % Core Net interest income $ 10,100 $ 7,966 $ 37,983 $ 31,807 Core Interest rate spread 3.10 % 3.08 % 3.07 % 3.14 % Core Net yield on interest-earning assets (net interest margin non-GAAP) 3.20 % 3.22 % 3.18 % 3.27 % (1) Average loan balances includes nonaccrual loans for the periods presented. (2) Fully Taxable Equivalent (“FTE”) at the rate of 34%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 34% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. (3) FDIC -acquired loan discount adjustments include the reduction of interest income for FDIC -acquired loan discount accretion excluding contractual interest payments and the increase of core loans for the total balance of FDIC -acquired loan discounts. Heritage Financial Group, Inc. and Subsidiary Consolidated Financial Highlights (Unaudited) (Dollars in thousands except share and per share data) Five Quarter Comparison Financial Condition Data: 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Total loans $ 798,753 $ 789,092 $ 769,921 $ 752,866 $ 670,004 Loans held for sale 110,669 38,042 43,545 18,905 15,608 Covered loans 50,891 53,843 57,176 65,815 72,425 Allowance for loan losses 8,955 8,894 9,047 9,105 9,061 Total other real estate owned 10,535 10,244 11,949 13,851 12,709 Covered other real estate owned 7,053 5,909 7,815 9,460 9,467 FDIC loss-share receivable 41,306 44,527 48,106 52,012 60,731 Goodwill and intangible assets 4,253 4,251 4,455 4,666 4,235 Total assets 1,380,925 1,322,309 1,334,016 1,370,550 1,097,506 Non-interest-bearing deposits 148,253 153,163 148,219 151,709 116,272 Interest-bearing deposits 928,168 899,318 917,712 943,850 753,282 Other borrowings 131,394 101,667 101,940 102,210 60,000 Federal funds purchased and securities sold under agreement to repurchase 37,648 35,393 33,094 34,251 33,219 Stockholders' equity 125,063 120,534 118,540 120,655 120,649 Total shares outstanding 7,834,537 7,834,765 7,803,910 7,881,260 8,172,486 Unearned ESOP shares 332,535 345,860 359,186 372,511 385,836 Total shares outstanding net of unearned ESOP 7,502,002 7,488,905 7,444,724 7,508,749 7,786,650 Book value per share $ 16.67 $ 16.10 $ 15.92 $ 16.07 $ 15.49 Book value per share including unearned ESOP (non-GAAP) 15.96 15.38 15.19 15.31 14.76 Tangible book value per share (non-GAAP) 16.10 15.53 15.32 15.45 14.95 Tangible book value per share including unearned ESOP (non-GAAP) 15.42 14.84 14.62 14.72 14.24 Market value per share 19.25 17.42 14.75 14.48 13.79 Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Key Financial Ratios and other information: Performance Ratios Annualized return on average assets 1.00% 0.40% 0.79% 1.37% 0.89% Annualized return on average equity 11.10% 4.41% 8.74% 13.01% 7.90% Net interest margin 5.50% 4.73% 5.61% 5.51% 6.37% Net interest spread 5.43% 4.66% 5.55% 5.44% 6.30% Core net interest margin 3.20% 3.23% 3.27% 3.35% 3.22% Core net interest spread 3.10% 3.13% 3.17% 3.23% 3.08% Efficiency ratio 71.66% 82.29% 74.17% 80.22% 69.50% Capital Ratios Average stockholders' equity to average assets 9.0% 9.0% 9.0% 10.5% 11.3% Tangible equity to tangible assets (non-GAAP) 8.8% 8.8% 8.6% 8.5% 10.6% Tier 1 leverage ratio 9.5% 9.4% 9.0% 10.4% 11.0% Tier 1 risk-based capital ratio 13.5% 14.3% 14.3% 15.2% 17.2% Total risk-based capital ratio 14.5% 15.4% 15.3% 16.3% 18.4% Other Information Full-time equivalent employees 426 412 401 355 321 Banking 306 308 316 285 264 Mortgage 113 97 79 64 50 Investments 7 7 6 6 7 Number of full-service offices 27 27 29 29 20 Mortgage loan offices 14 12 12 12 13 Investment offices 4 4 4 4 4 Heritage Financial Group, Inc. and Subsidiary Consolidated Financial Highlights (Unaudited) (Dollars in thousands) Five Quarter Comparison Loans 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Construction and land $ 50,167 $ 48,808 $ 42,753 $ 37,659 $ 33,340 Farmland 23,420 22,561 23,447 20,749 20,141 Permanent 1 - 4 174,565 169,105 166,199 163,302 161,883 Permanent 1 - 4 - junior liens and revolving 32,038 30,180 29,432 28,852 27,345 Multifamily 22,650 27,468 26,301 24,280 21,293 Nonresidential 256,567 250,859 234,259 225,946 212,570 Commercial business 101,161 95,108 88,828 83,015 83,659 Consumer and other 23,976 21,499 26,889 19,931 25,498 Total core loans $ 684,544 $ 665,588 $ 638,108 $ 603,734 $ 585,729 FDIC -acquired non-covered 63,318 69,661 74,637 83,317 11,850 Total loans 747,862 735,249 712,745 687,051 597,579 FDIC -acquired covered 50,891 53,843 57,176 65,815 72,425 Allowance for loan losses 8,955 8,894 9,047 9,105 9,061 $ 789,798 $ 780,198 $ 760,874 $ 743,761 $ 660,943 Loan Balances by Geographical Region (excluding FDIC - acquired loans): Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Albany, Georgia $ 294,033 $ 288,089 $ 282,509 $ 273,116 $ 282,151 Valdosta, Georgia 100,936 101,729 96,485 90,385 84,198 Ocala, Florida 58,343 58,115 58,240 58,533 55,197 Statesboro, Georgia 122,928 124,667 118,056 107,650 103,176 Auburn, Alabama 36,130 31,485 26,061 24,386 20,149 Macon, Georgia 68,638 60,197 55,935 49,165 40,858 Birmingham, Alabama 1,590 344 822 499 - South Atlanta 1,946 962 - - - $ 684,544 $ 665,588 $ 638,108 $ 603,734 $ 585,729 Asset Quality Data (excluding FDIC -acquired loans): Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Nonaccrual loans $ 9,435 $ 10,986 $ 12,223 $ 12,723 $ 14,677 Loans - 90 days past due & still accruing - - - - - Total non-performing loans 9,435 10,986 12,223 12,723 14,677 OREO 1,789 2,654 3,046 3,028 2,620 Total non-performing assets $ 11,224 $ 13,640 $ 15,269 $ 15,751 $ 17,297 Trouble debt restructuring - nonaccrual $ 5,763 $ 5,840 $ 6,496 $ 4,593 $ 6,856 Trouble debt restructuring - accruing 1,983 1,996 2,009 2,023 7 Total trouble debt restructuring $ 7,746 $ 7,836 $ 8,505 $ 6,616 $ 6,863 Accruing past due loans $ 1,001 $ 669 $ 934 $ 1,316 $ 2,131 Total criticized assets 22,741 26,116 25,785 25,474 28,194 Total classified assets 19,582 23,048 22,985 22,118 25,129 Allowance for loan losses 8,955 8,894 9,047 9,105 9,061 Net charge-offs $ 160 $ 503 $ 698 $ 406 $ 68 Asset Quality Ratios: Allowance for loan losses to total core loans 1.31% 1.34% 1.42% 1.51% 1.55% Allowance for loan losses to average core loans 1.33% 1.37% 1.45% 1.53% 1.62% Allowance for loan losses to non-performing loans 94.91% 80.96% 74.02% 71.56% 61.73% Non-performing loans to total core loans 1.38% 1.65% 1.92% 2.11% 2.51% Non-performing assets to total assets 0.81% 1.03% 1.14% 1.15% 1.58% Net charge-offs to average core loans (annualized) 0.10% 0.31% 0.45% 0.27% 0.05% Heritage Financial Group, Inc. and Subsidiary Consolidated Financial Highlights (Unaudited) (Dollars in thousands) Five Quarter Comparison FDIC -acquired assets 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 FDIC -acquired non-covered loans: Commercial real estate $ 22,268 $ 25,027 $ 27,258 $ 30,851 $ 6,359 Residential real estate 30,134 32,318 33,452 34,938 2,110 Construction and land 5,156 5,195 5,941 7,756 494 Commercial and industrial 2,604 3,638 4,106 5,125 1,574 Consumer and other 3,156 3,483 3,880 4,647 1,313 Total 63,318 69,661 74,637 83,317 11,850 FDIC -acquired covered loans: Commercial real estate 14,161 14,956 15,384 18,849 21,820 Residential real estate 23,886 25,082 27,283 30,735 32,846 Construction and land 11,642 12,469 12,645 13,370 14,248 Commercial and industrial 864 924 1,340 2,216 2,670 Consumer and other 338 412 524 645 841 Total 50,891 53,843 57,176 65,815 72,425 Total carrying value of FDIC -acquired loans $ 114,209 $ 123,504 $ 131,813 $ 149,132 $ 84,275 Non-accrete discount for FDIC -acquired loans 36,746 48,545 55,170 59,558 46,000 Accretable discount for FDIC -acquired loans 26,860 23,445 23,007 26,136 21,834 Total discount for FDIC -acquired loans 63,606 71,990 78,177 85,694 67,834 Outstanding principal balance for FDIC -acquired loans $ 177,815 $ 195,494 $ 209,989 $ 234,826 $ 152,109 FDIC -acquired OREO: Non-covered $ 1,694 $ 1,680 $ 1,087 $ 1,363 $ 602 Covered 7,053 5,909 7,815 9,460 9,467 Total carrying value of FDIC -acquired OREO $ 8,747 $ 7,589 $ 8,902 $ 10,823 $ 10,069 Total discount for FDIC -acquired OREO 11,186 12,038 11,013 12,176 11,690 Gross carrying value of FDIC -acquired OREO $ 19,933 $ 19,627 $ 19,915 $ 22,999 $ 21,759 Total loan discount accretion recognized in income: Individual assessed discount accretion $ 3,132 $ 791 $ 2,336 $ 637 $ 2,515 Pooled assessed discount accretion 3,140 2,927 3,808 3,951 4,131 Total loan discount accretion recognized in income $ 6,272 $ 3,718 $ 6,144 $ 4,588 $ 6,646 FDIC -acquired ratios: Total discount to principal balance for FDIC -acquired loans 35.8% 36.8% 37.2% 36.5% 44.6% Five Quarter Comparison Non-covered FDIC -acquired assets 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Outstanding principal balance: FDIC -acquired non-covered loan pools $ 61,893 $ 66,294 $ 70,144 $ 76,675 $ 14,196 FDIC -acquired non-covered loans individually assessed 22,214 27,627 31,603 35,837 2,903 Total non-covered outstanding principal loan balance 84,107 93,921 101,747 112,512 17,099 Gross carrying value for FDIC -acquired non-covered OREO 4,470 4,993 2,529 2,371 793 Total gross balance of non-covered assets $ 88,577 $ 98,914 $ 104,276 $ 114,883 $ 17,892 Non-covered non-accretable discount for estimated credit losses: FDIC -acquired non-covered loan pools $ 8,932 9,297 9,341 9,479 1,775 FDIC -acquired non-covered loans individually assessed 5,397 12,294 14,894 16,482 2,130 Total non-covered non-accretable discount 14,329 21,591 24,235 25,961 3,905 FDIC -acquired non-covered OREO discount 2,776 3,313 1,442 1,008 191 Total non-covered discount for estimated credit losses 17,105 24,904 25,677 26,969 4,096 Non-covered accretable discount: Non-covered accretable discount for improvement in cash flows 5,458 380 318 475 381 Other non-covered accretable discount 1,002 2,288 2,558 2,759 963 Total non-covered accretable discount 6,460 2,668 2,876 3,234 1,344 Total non-covered discount $ 23,565 $ 27,572 $ 28,553 $ 30,203 $ 5,440 Non-covered loan discount accretion recognized in income: Individual assessed discount accretion $ 2,375 $ 619 $ 974 $ 42 $ 29 Pooled assessed discount accretion 249 184 174 24 39 Total non-covered discount accretion recognized in income $ 2,624 $ 803 $ 1,148 $ 66 $ 68 Non-covered FDIC -acquired ratios: Total discount to principal balance for non-covered FDIC -acquired assets 26.6% 27.9% 27.4% 26.3% 30.4% Gross balance of non-covered loans to total FDIC -acquired loans 47.3% 48.0% 48.5% 47.9% 11.2% Five Quarter Comparison Covered FDIC -acquired assets 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Outstanding principal balance: FDIC -acquired covered loan pools $ 69,192 $ 74,020 $ 79,552 $ 90,020 $ 98,570 FDIC -acquired covered loans individually assessed 24,517 27,554 28,690 32,294 36,440 Total covered outstanding principal loan balance 93,709 101,574 108,242 122,314 135,010 Gross carrying value for FDIC -acquired OREO covered 15,463 14,634 17,385 20,628 20,966 Total gross balance of covered assets $ 109,172 $ 116,208 $ 125,627 $ 142,942 $ 155,976 Covered non-accretable discount for estimated credit losses: FDIC -acquired covered loan pools $ 15,284 $ 16,281 $ 19,917 $ 20,705 $ 27,194 FDIC -acquired covered loans individually assessed 7,133 10,673 11,018 12,892 14,900 Total covered non-accretable discount 22,417 26,954 30,935 33,597 42,094 FDIC -acquired covered OREO discount 8,410 8,725 9,570 11,168 11,499 Total covered discount for estimated credit losses 30,827 35,679 40,505 44,765 53,593 Covered accretable discount: Covered accretable discount for improvement in cash flows 18,012 17,676 16,297 18,820 15,396 Other covered accretable discount 2,389 3,101 3,834 4,082 5,095 Total covered accretable discount 20,401 20,777 20,131 22,902 20,491 Total covered discount $ 51,228 $ 56,456 $ 60,636 $ 67,667 $ 74,084 Covered loan discount accretion recognized in income: Individual assessed accretion $ 757 $ 172 $ 1,362 $ 595 $ 2,486 Pooled assessed accretion 2,891 2,743 3,634 3,927 4,092 Total covered discount accretion recognized in income $ 3,648 $ 2,915 $ 4,996 $ 4,522 $ 6,578 Covered FDIC -acquired ratios: Total discount to principal balance for covered FDIC -acquired assets 46.9% 48.6% 48.3% 47.3% 47.5% Five Quarter Comparison FDIC loss-share receivable 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 FDIC loss-share receivable: Single family estimated credit losses $ 8,995 $ 9,134 $ 9,764 $ 10,720 $ 11,292 Non-single family estimated credit losses 30,077 33,550 35,678 40,148 43,899 Pending reimbursements and other 2,234 1,843 2,664 1,144 5,540 Total $ 41,306 $ 44,527 $ 48,106 $ 52,012 $ 60,731 FDIC loss-share clawback liability $ 1,941 $ 1,681 $ 1,393 $ 1,269 $ 703 Total covered discount $ 51,228 $ 56,456 $ 60,636 $ 67,667 $ 74,084 Total covered discount impacting FDIC loss-share receivable $ 48,839 $ 53,355 $ 56,802 $ 63,585 $ 68,989 Total covered discount impacting FDIC loss-share receivable at 80% $ 39,071 $ 42,684 $ 45,442 $ 50,868 $ 55,191 FDIC loss-share receivable ratios: FDIC receivable as % of gross balance of covered assets 37.8% 38.3% 38.3% 36.4% 38.9% Covered discount at 80% as of % of FDIC receivable 94.6% 95.9% 94.5% 97.8% 90.9% Heritage Financial Group, Inc. and Subsidiary Consolidated Financial Highlights (Unaudited) Mortgage Segment Information Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Net interest income $ 114 $ 218 $ 112 $ 19 $ 156 Provision for loan losses - - - - - Noninterest income 2,951 1,952 3,424 2,182 1,452 Noninterest expense 3,149 2,968 3,239 2,206 1,732 Income tax expense (benefit) (26 ) (247 ) 92 (2 ) (38 ) Mortgage profit (loss) $ (58 ) $ (551 ) $ 205 $ (3 ) $ (86 ) Mortgage segment assets $ 120,716 $ 44,588 $ 46,854 $ 20,849 $ 16,382 Mortgage Segment Selected Other Information: Five Quarter Comparison 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 Retail production $ 84,381 $ 83,657 $ 97,608 $ 49,450 $ 55,815 Wholesale production $ 36,030 $ 31,646 $ 19,072 $ 5,588 $ - Purchase as a % of total production 78 % 76 % 66 % 54 % 42 % Refi as a % of total production 22 % 24 % 34 % 46 % 58 % End of period Locks $ 43,054 $ 47,871 $ 53,910 $ 49,964 $ 20,271 Heritage Financial Group, Inc. T. Heath Fountain , 229-878-2055 Executive Vice President and Chief Financial Officer Source: Heritage Financial Group, Inc.


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