Heritage Financial Group (NASDAQ: HBOS), the holding company for HeritageBank of the South, today announced financial results for the first quarter ended March 31, 2010. The Company's first quarter net income totaled $798,000 or $0.08 per diluted share, more than doubling net income of $395,000 or $0.04 per diluted share reported for the year-earlier quarter. Other highlights of the quarter included a strong increase in net interest income versus the year-earlier quarter, a 38% decrease in the loan loss provision – reflecting stabilizing quality in the Company's loan portfolio, and solid year-over-year advances in total assets, loans receivable, and deposits.

Separately, the Company also announced that it has received regulatory approval on its previously announced purchase of five bank branches from PAB Bankshares, Inc. (NASDAQ: PABK), the Valdosta, Georgia-based holding company for The Park Avenue Bank. These branches, all in Georgia, are located in Statesboro (2), Baxley, Hazlehurst, and Adel. The transaction, which is expected to add approximately $52 million to the Bank's loan portfolio and approximately $98 million to its deposit base, now is expected to close on or about May 24, 2010.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer of Heritage Financial Group, said, "We are pleased to post a solid start to the new year, with significantly higher earnings for the first quarter and strengthening credit quality. These results also reflect the positive impact of the recent addition of three branches – one in Florida by acquisition and two in Georgia by means of a FDIC-assisted whole-bank purchase and assumption – that has contributed to the substantial loan and deposit growth we have experienced since the first quarter of 2009.

"We are excited about the growth opportunities we see for our company and bank," Dorminey added. "Our increased expansion activity over the past year has taken us to new markets, helped fill in our branch footprint between Albany and Ocala, and has allowed us to deploy our capital position. We look forward to continuing these efforts with the conclusion of our purchase of five branches from PAB Bankshares later this month, which will mark nearly a doubling of our branch network in just the past year. We also remain cautiously optimistic about the prospects for an improving economy over the course of the year and the new, organic growth opportunities that may accompany such a recovery."

As previously announced, in March 2010Heritage Financial Group adopted a plan to reorganize from a two-tier mutual holding company to a full stock holding company and will undertake a "second-step" offering of shares of the new holding company's common stock. The conversion and offering is expected to be completed in the third quarter of 2010, subject to regulatory, stockholder and depositor approvals. Keefe Bruyette & Woods will serve as the sole book running manager for the offering and Sterne Agee & Leach will serve as co-manager for the offering.

At the end of the first quarter of 2010, Heritage Financial Group's capital levels remained significantly above the levels required to be considered "well-capitalized" under regulatory standards – the highest capital rating category a financial institution can achieve. The Company's total risk-based capital ratio at March 31, 2010, was 15.3%, significantly exceeding the required minimum of 10% to be considered a well-capitalized institution. The ratio of tangible common equity to total tangible assets (both non-GAAP measures – see reconciliation to closest GAAP measures later in this release) was 10.5% as of March 31, 2010. The Company provides this ratio, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.

Net interest income for the first quarter increased 24% to $4,410,000 from $3,556,000 in the same quarter last year, primarily reflecting a higher level of interest-earning assets combined with lower funding costs. The Company's net interest margin increased 37 basis points to 3.68% in the first quarter of 2010 compared with 3.31% in the year-earlier period due to a higher level of interest-earning assets combined with lower funding costs. On a linked-quarter basis, net interest margin declined four basis points in the first quarter from 3.72% in the fourth quarter of 2009.

Total nonperforming loans and nonperforming assets were $6,518,000 and $10,088,000, respectively, at March 31, 2010, and included nonperforming assets and nonperforming loans of $327,000 and $13,000, respectively, associated with the portfolio acquired from the FDIC in December 2009. The acquired portfolio was not covered by a loss-share agreement, but was subject to a purchase discount totaling $15 million. Total nonperforming loans and nonperforming assets were $7,731,000 and $9,526,000, respectively, at December 31, 2009, and $7,916,000 and $9,319,000, respectively, at March 31, 2009.

In order to provide a more comparable analysis of credit quality issues, the Company provides credit quality information for its core loan portfolio, which excludes the FDIC acquired loan portfolio and is equivalent to prior reported periods. Nonperforming assets in the core portfolio increased to $9,758,000 at March 31, 2010, from $8,427,000 at December 31, 2009, due to an increase in Other Real Estate Owned (OREO) and repossessed assets, which rose to $3,253,000 from $1,190,000 in the fourth quarter of 2009. Nonperforming loans in the core portfolio at the end of the first quarter declined to $6,505,000 from $7,237,000 in the fourth quarter of 2009, primarily reflecting a slowing in the pace of loans being placed on nonperforming status. Nonperforming loans were 2.05% of total loans as of March 31, 2010, versus 2.34% of total loans at December 31, 2009.

Net charge-offs to average outstanding loans in the total portfolio, on an annualized basis, were 0.88% for the first quarter of 2010 versus 7.42% for the fourth quarter of 2009 and 0.42% in the year-earlier period. The higher level of net charge-offs in the fourth quarter of 2009 primarily reflected the Company's action to write down and charge off a significant amount of a single loan on raw land in preparation for a pending sale of the property. While this sale did not occur as planned, the net carrying value of the subject property is now well below appraised value.

Management believes that nonperforming assets and net charge-offs will likely remain at elevated levels, at least in the near term, because of the continued weakness in the economy. However, the Company has continued to reduce its exposure to acquisition, construction and development loans, with those representing only 7% of its core portfolio at March 31, 2010, versus 12% at the end of the first quarter of 2009. Additionally, criticized and classified loans have remained relatively stable over the past several months. Accordingly, the Company's provision for loan losses declined to $500,000 for the first quarter of 2010 from $800,000 in the year-earlier period and $3,700,000 in the fourth quarter of 2009, with the latter reflecting the previously mentioned partial write down and charge off of a single loan. At March 31, 2010, the allowance for loan losses represented 1.70% of total loans outstanding versus 1.81% of total loans outstanding at December 31, 2009, and 1.82% of total loans outstanding at March 31, 2009.

Noninterest income increased 10% to $1,812,000 for the first quarter of 2010 from $1,645,000 in the year-earlier quarter. Noninterest expense for the first quarter of 2010 increased 14% to $4,705,000 from $4,114,000 in the first quarter of 2009, primarily reflecting higher salaries and employee benefits related to the addition of three branches since the first quarter of 2009, as well as higher FDIC insurance premiums. These increases were partially offset by gains on the sale of OREO.

The Company's total assets increased 17% to $574,363,000 at March 31, 2010, from $490,992,000 at March 31, 2009, again primarily reflecting the acquisition of three branches since the year-earlier quarter. Gross loans increased 15% to $342,495,000 at March 31, 2010, from $298,151,000 at March 31, 2009. Deposits rose 33% to $428,403,000 at March 31, 2010, from $321,492,000 at the March 31, 2009. Total stockholders' equity of $61,615,000 at March 31, 2010, was down slightly from $62,421,000 at March 31, 2009.

Heritage Financial Group is the mid-tier holding company for HeritageBank of the South, a community-oriented bank serving primarily South Georgia and North Central Florida through 10 full-service banking offices. As of March 31, 2010, the Company reported total assets of approximately $574 million and total stockholders' equity of approximately $62 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.

Heritage, MHC, a mutual holding company formed in 2002, holds approximately 76% of the shares of Heritage Financial Group. The remaining 24% of Heritage Financial Group's shares are held by public stockholders.

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. We intend 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 include this statement for purposes of these safe harbor provisions. Further information concerning the Company and its business, including additional factors that could materially affect our financial results, is included in our other filings with the SEC.