Heritage Financial Group Reports 1Q Net Income of $1 Million
Tuesday, May 1st, 2012
Heritage Financial Group, Inc., the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter ended March 31, 2012. Highlights of the Company's results for the first quarter 2012 include:
- Net income of $1.0 million or $0.12 per diluted share compared with net income of $1.2 million or $0.15 per diluted share for the first quarter of 2011;
- Excluding special items for each quarter, net income was $1.2 million or $0.15 per diluted share for 2012 versus a net loss of $3,000 or $0.00 per diluted share for 2011 (see reconciliation of non-GAAP items);
- Organic loan growth, excluding loans acquired in FDIC-assisted acquisitions, of $44.2 million or 11% from 2011;
- Loans acquired through FDIC-assisted acquisitions increased $22.3 million or 25% from the first quarter of 2011;
- A decrease in provision for loan losses of $200,000 for the first quarter of 2012 compared with the same quarter for 2011;
- A significant decrease in annualized net charge-offs to 0.24% for the first quarter of 2012 from 2.80% for the first quarter of 2011; and
- A slight decline in nonperforming assets (NPAs) to total assets, excluding assets acquired in FDIC-assisted acquisitions, to 1.27% for 2012 from 1.29% for 2011.
Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "During the first quarter of 2012, Heritage Financial Group continued to post improving results. Excluding the effects of special items associated with acquisitions, net income per diluted share increased to $0.15 for the first quarter of 2012 versus essentially flat earnings in the year-earlier quarter. Importantly, this improvement reflected both organic growth across most of our markets as well as the contribution of two FDIC-assisted acquisitions completed during 2011. With respect to acquisitions, we are pleased with our integration activities over the past year, which have been very successful, providing us with a sense of optimism about the prospects for seizing additional opportunities to expand in the months and years ahead."
Regarding expansion activity, Dorminey noted that the Company recently signed a definitive agreement to purchase a branch office in Auburn, Alabama, marking the Company's initial entry into that state. When completed, the purchase is expected to add approximately $13 million in loans and approximately $20 million in deposits. While this acquisition is small, we view the Auburn-Opelika area as one of the most attractive markets in the state of Alabama, characterized by low unemployment and a dynamic economic environment, and it is home to Auburn University and is in close proximity to two automobile manufacturing plants, along with their related suppliers in the area. The Company also recently announced that it will open a new commercial banking office in Macon, Georgia, after entering that market in August 2011 with a mortgage loan office. The Company considers Macon to be a strategically important and vibrant market and an attractive expansion opportunity.
During the first quarter, the Company also closed the single branch it acquired in Statesboro in connection with the August 2011 FDIC-assisted acquisition of First Southern National Bank. Management was pleased to see continued strong and loyal support from its new First Southern customers during and following this consolidation effort to improve efficiency and reduce costs.
In closing, Dorminey added, "We were pleased with our company's overall progress in the first quarter and consider it a solid start to the new year. Importantly, we saw meaningful improvements in credit quality and, thus, were able to reduce our provision for loan losses. While the first quarter did include some acquisition-related expenses associated with the closing of the First Southern office, it marked the beginning of a return to a more normalized level of noninterest expenses following two years of heightened expansion activity. Throughout the remainder of the year, we will continue to focus aggressively on efforts to reduce our operating expenses. We also are taking steps to enhance revenue through loan growth, as evidenced by our core portfolio growth and our entrance into the Auburn and Macon markets."
Capital Initiatives
The Company's estimated total risk-based capital ratio at March 31, 2012, was 22.2%, 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 March 31, 2012.
During the first quarter of 2012, the Company repurchased approximately 43,000 shares under its stock repurchase program. The program, which expires in July 2012 unless completed sooner or otherwise extended, has a remaining authorization to repurchase approximately 438,000 shares. Additionally, in February 2012, Heritage Financial Group's Board of Directors increased the Company's quarterly cash dividend 33% to $0.04 per share.
First Quarter 2012 Results of Operations
The Company reported net income of $1.0 million or $0.12 per diluted share for the first quarter in 2012 compared with net income of $1.2 million or $0.15 per diluted share for the first quarter in 2011. However, the Company's results for the first quarters of 2012 and 2011 included special items that affect comparability. Results for the first quarter of 2012 included acquisition-related expenses of $246,000 net of tax, while the results of the year-earlier quarter included a bargain purchase gain and acquisition-related expenses that together totaled $1.2 million net of tax. Excluding these special items, the Company's adjusted net income for the first quarter of 2012 was $1.2 million or $0.15 per diluted share compared with a net loss of $3,000 or $0.00 per diluted share for the first quarter of 2011 (see reconciliation of non-GAAP items).
The $244,000 quarter-over-quarter reduction in reported earnings was primarily the result of the following items:
- Reduced noninterest income of $2.1 million, reflecting a $2.3 million bargain purchase gain associated with the Citizens FDIC-assisted acquisition during the first quarter of 2011 and $498,000 of negative accretion of the FDIC loss-share receivable during the first quarter of 2012, partially offset by improvement in mortgage banking fees of $421,000 and bankcard services income of $238,000;
- Increased noninterest expense of $2.4 million due to higher salaries and employment benefits of $1.2 million and increased equipment and occupancy expense of $528,000, driven by the acquisition-related hiring of an additional 51 full-time equivalent employees, as well as growth in most other noninterest expense categories; offset by
- Improved net interest income of $3.7 million due to growth in interest-earning assets and a reduction in the cost of interest-bearing deposits; and
- Lower provision expense of $200,000 reflecting lower net charge-offs compared with the 2011 quarter.
Net interest income for the first quarter of 2012 increased 62% to $9.7 million from $6.0 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 for the first quarter of 2012 increased 30 basis points to 4.49% on a linked-quarter basis from 4.19% for the fourth quarter of 2011 and 107 basis points from 3.42% in the year-earlier period. The improvement in the first 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 first quarter of 2012, the Company continued to achieve loan growth, with its loan portfolio increasing $15.2 million organically on a linked-quarter basis and advancing $44.2 million overall compared with the year-earlier quarter. For the first quarter ended 2012, the Company's loan portfolio, including loans acquired through FDIC-assisted acquisitions, totaled $562.5 million, which increased $1.9 million on a linked-quarter basis as a result of organic loan growth of $15.2 million. This increase was partially offset by loan pay-downs in the FDIC-assisted portfolios. Total deposits stood at $868.7 million at the end of the first quarter of 2012, down 2% or $15.5 million from $884.2 million for the fourth quarter of 2011, driven primarily by planned runoff of time deposits.
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 $95.5 million in covered and $17.4 million in non-covered loans for the first quarter ended 2012 compared with $107.5 million in covered and $18.7 million in non-covered loans for the fourth quarter ended 2011. The principal balance of the FDIC-assisted loan portfolios totaled $209.8 million for the first quarter ended 2012 compared with $228.4 million as of the fourth quarter ended 2011. The details of the accounting for the FDIC-assisted loan portfolios for the first quarter of 2012 are as follows:
- Covered loans acquired in FDIC-assisted acquisitions decreased $12.0 million to $95.5 million;
- Non-covered loans acquired in FDIC-assisted acquisitions decreased $1.3 million to $17.4 million;
- The FDIC loss-share receivable associated with covered loans acquired in FDIC-assisted acquisitions decreased $1.0 million to $82.9 million;
- The accretion for the FDIC loss-share receivable turned negative $498,000;
- The non-accretable discount decreased $5.4 million to $84.1 million; and
- The accretable discount decreased $100,000 to $12.7 million.
For the first quarter ended 2012, net charge-offs for both the covered and non-covered loans were fully provided by the associated loan discounts and expected reimbursement from the FDIC and did not affect the Company's loan loss reserve. The FDIC loss-share receivable associated with covered FDIC-assisted loans decreased $1.0 million from $83.9 million for the prior quarter to $82.9 million primarily, driven by negative accretion of $843,000 affecting the loss-share receivable asset that was associated with the improvement in expected cash flows of the loss-share performing portfolios.
The non-accretable discount decreased to $84.1 million at the end of the first quarter of 2012 from $89.5 million on a linked-quarter basis, primarily driven by the clearing of $3.9 million of discount in conjunction with the resolution of the FDIC-assisted loans and transfers to accretable discount of $1.5 million. The accretable discount decreased to $12.7 million for the current quarter from $12.8 million on a linked-quarter basis, primarily due to loan discount accretion of $1.6 million that was partially offset by the transfer from the non-accretable discount as a result of the improvement in cash flows.
Asset Quality
Net charge-offs to average outstanding loans on an annualized basis, excluding loans acquired in FDIC-assisted acquisitions, were down sharply to 0.24% for the first quarter of 2012 versus 2.80% for the first quarter of 2011. Total nonperforming loans, excluding loans acquired in FDIC-assisted acquisitions, were $10.7 million or 2.38% of total loans for the first quarter of 2012 compared with $9.1 million or 2.24% of total loans for the same quarter in 2011. Other real estate owned and repossessed assets, excluding assets acquired in FDIC-assisted acquisitions, were $3.0 million for the first quarter of 2012, down from $3.2 million for the same quarter in 2011.
The provision for loan losses decreased to $400,000 for the first quarter of 2012 from $600,000 for the same quarter in 2011, reflecting primarily a decline in annualized net charge-offs. For the first quarter in 2012, the allowance for loan losses represented 1.70% of total loans outstanding, excluding loans acquired in FDIC-assisted acquisitions, versus 1.51% for the first quarter in 2011.