Heritage Financial Group, Inc., the holding company for HeritageBank of the South, today announced higher earnings for the first quarter ended March 31, 2011, compared with the year-earlier quarter.

The Company's net income for the first quarter of 2011 totaled $1.2 million or $0.15 per diluted share versus $798,000 or $0.09 per diluted share in the first quarter of 2010, as adjusted to reflect the exchange ratio. The Company's results for the first quarter ended March 31, 2011, included a pre-tax bargain purchase gain of $2.3 million related to the acquisition of Citizens Bank of Effingham (Citizens) in an FDIC-assisted transaction on February 18, 2011. Excluding the bargain purchase gain net of tax, the Company incurred a net loss of $186,000 or $0.02 per diluted share for the first quarter of 2011 (see reconciliation of net income and net income per diluted share to these non-GAAP amounts later in this release).

Several additional items affected the Company's first quarter performance, including a shift from gains to losses on sales and write-downs of other real estate owned (OREO). In the current-year period, those losses and write-downs totaled $402,000 versus gains of $231,000 in the year-earlier period. The Company also incurred conversion costs of approximately $283,000 in the first quarter of 2011 related to the Citizens transaction, as well as approximately $107,000 in outside professional fees related to expansion and integration efforts, with no comparable amounts for such expenses in the same quarter last year.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer of Heritage Financial Group, Inc., said, "During the first quarter of 2011, we continued to expand our brand and branch footprint, seizing another attractive opportunity to deploy our capital and position the Company for future growth. In February, we completed our second FDIC-assisted transaction, acquiring Citizens Bank of Effingham, a full-service bank based in Springfield, Georgia. In this whole-bank purchase, we assumed approximately $206 million in deposits, acquired $139 million in loans, and purchased virtually all of its remaining assets. We also entered into a loss-share agreement with the FDIC that will reimburse us for 80% of the losses on Citizens' covered loans and other real estate owned.

"In addition to acquisition growth, we also continued to experience organic growth in most of our markets, as we continued to build on our recent entry into several attractive markets, like Valdosta and Statesboro," Dorminey continued. "We were excited to find concurrent opportunities to expand our mortgage lending operations in the first quarter as we leveraged our mortgage production to create a true secondary market mortgage program with in-house underwriting. Extending these capabilities to Statesboro, Valdosta and McDonough, Georgia, in the first quarter, we recently have added six new originators and opened mortgage loan production offices in Warner Robins, LaGrange and Gainesville, Georgia.

"Clearly, our expansion activities have necessitated additional staffing to support our growing infrastructure, and we continue to incur some transitional costs with duplicate back office systems and operations," Dorminey added. "Still, we believe the steps we have taken to expand our footprint and enhance our services will prove to be strategically important to our long-term growth, and we are excited about the opportunities we see for building greater returns on the investments we have made in this regard and the prospects that should continue to arise considering the current banking climate."

In the first quarter of 2011, the Company continued to post loan and deposit growth, with both increasing on a linked-quarter basis and rising significantly compared with the year-earlier quarter. The Company has continued to experience organic growth in all of its markets except Ocala, which has been disproportionately affected by the real estate downturn and higher unemployment. Still, bank acquisitions, including the Company's second whole-bank acquisition in February 2011, accounted for much of the growth in loans and deposits over the past 12 months. At March 31, 2011, the Company's loan portfolio totaled $496.1 million, including $62.4 million of loans covered by an FDIC loss-share agreement, up 45% from $342.5 million at March 31, 2010. Total deposits stood at $731.1 million at the end of the first quarter of 2011, up 71% from $428.4 million at the end of the year-earlier quarter.

The Company's total risk-based capital ratio at March 31, 2011, was 24.5%, significantly exceeding the required minimum of 10% to be considered a well-capitalized institution. This reflected, in part, the Company's second-step conversion and offering that was completed in November 2010, raising net proceeds of $61.4 million. The ratio of tangible common equity to total tangible assets was 12.3% as of March 31, 2011.

Net interest income for the first quarter increased 37% to $6.0 million from $4.4 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to both acquisitions and organic in-market growth. The Company's net interest margin for the first quarter of 2011 declined 46 basis points to 3.42% on a linked-quarter basis from 3.88% in the fourth quarter of 2010 and 26 basis points from 3.68% in the year-earlier period, reflecting excess liquidity related to the Company's capital raise in the fourth quarter of 2010, as that capital is currently deployed in lower-yielding investments.

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