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Heritage Financial Group, Inc. Reports Higher Third Quarter Net Income Of $2.0 Million Or $0.25 Per Diluted Share

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.

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