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Heritage Financial Group, Inc. Reports Second Quarter Net Income Of $1.4 Million Or $0.17 Per Diluted Share

Capital Initiatives

The Company's estimated total risk-based capital ratio at June 30, 2012, was 19.6%, 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 June 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.

During the second quarter of 2012, the Company repurchased approximately 179,000 shares under its stock repurchase programs. The program expiring in July 2012 has been completed, and the program, expiring in December 2012 unless extended or otherwise completed, has a remaining authorization to repurchase approximately 260,000 shares.

Second Quarter 2012 Results of Operations

The Company reported net income of $1.4 million or $0.17 per diluted share for the second quarter in 2012 compared with a net loss of $481,000 or $0.06 per diluted share for the second quarter in 2011. However, the Company's results for the second quarters of 2012 and 2011 included special items that affect comparability. Results for the second quarter of 2012 included net non-recurring expenses of $23,000, net of tax, while the results of the year-earlier quarter included net non-recurring expenses of $385,000, net of tax. Excluding these special items, the Company's adjusted net income for the second quarter of 2012 was $1.4 million or $0.17 per diluted share compared with a net loss of $96,000 or $0.01 per diluted share for the second quarter of 2011 (see reconciliation of non-GAAP items).

The $1.8 million improvement in reported earnings was primarily the result of the following items:
  • 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;
  • Increased noninterest income of $119,000, driven by improvements in mortgage banking fees of $314,000, bankcard services income of $157,000 and bargain purchase gains of $151,000, partially offset by reductions in the gain on sale of securities of $426,000 and in the accretion for the FDIC loss-share receivable of $138,000; offset by
  • Increased noninterest expense of $634,000, primarily due to higher salaries and employment benefits of $537,000 and increased equipment and occupancy expense of $279,000 and $152,000, respectively, driven by the acquisition-related hiring of an additional 24 full-time equivalent employees, as well as growth in most other noninterest expense categories, and offset in part by reduced acquisition-related expenses of $405,000;
  • Increased provision expense for non-FDIC-acquired loan losses of $50,000, driven by organic loan growth;
  • Increased provision expense for FDIC-acquired loan losses of $341,000, driven by the resolution of those assets, which did not increase the allowance for loan losses.

Net interest income for the second quarter of 2012 increased 58% to $10.1 million from $6.4 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 4.75% for the second quarter of 2012, an increase of 26 basis points over 4.49% on a linked-quarter basis and 139 basis points over 3.36% in the year-earlier period. The improvement in the second 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.

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