Heritage Financial Group, Inc., the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter and year ended December 31, 2011. Key aspects of the Company's results for the year ended 2011 include:

• Net income of $3.8 million, or $0.47 per diluted share, compared with net income of $1.4 million or $0.17 per diluted share for the year ended 2010;
• Excluding special items for each year, net income was $1.6 million or $0.19 per diluted share versus a net loss of $434,000 or $0.05 per diluted share for 2010 (see reconciliation of non-GAAP items);
• Organic loan growth, excluding loans acquired in FDIC-assisted acquisitions, of $36.8 million or 9% from 2010;
• Loans acquired through FDIC-assisted acquisitions increased $104.8 million or 490% from 2010, driven primarily by two FDIC-assisted acquisitions completed during 2011;
• A decrease in the allowance for loan losses to 1.72% of period-end loans, excluding loans acquired in FDIC-assisted acquisitions, from 2.04% of period-end loans, excluding loans acquired in FDIC-assisted acquisitions, for 2010;
• A slight increase in annualized net charge-offs to 0.91% for 2011 from 0.87% for 2010; and
• A decline in nonperforming assets (NPAs) to total assets, excluding loans acquired in FDIC-assisted acquisitions, to 0.95% at year-end 2011 from 1.80% at year-end 2010.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "This past year marked a period of historic growth for our company as we completed two strategic FDIC-assisted acquisitions that vastly expanded our branch network and increased our market share in Southeast Georgia. We have fully integrated these acquisitions and continue to explore other opportunities for strategic expansion.

"During 2011, we saw a dramatic decrease in our provision expense as we continue to experience improvement in the credit quality in our loan portfolio, excluding loans acquired through FDIC-assisted acquisitions," Dorminey continued. "We are optimistic about the prospects for continued improvement in our financial performance in 2012."

Fourth Quarter 2011 Results of Operations

The Company reported net income of $1.4 million, or $0.16 per diluted share, for the three months ended December 31, 2011, compared with net income of $922,000 or $0.11 per diluted share for the three months ended December 31, 2010. This $430,000 improvement in earnings was primarily the result of the following items:

• Improved net interest income of $3.3 million due to growth in interest-earning assets;
• Lower provision expense of $2.8 million reflecting lower net charge-offs compared with the 2010 quarter; offset by
• Reduced noninterest income of $3.1 million, reflecting a $2.7 million bargain purchase gain associated with the Tattnall FDIC-assisted acquisition and $916,000 of life insurance proceeds on a former key employee recorded during the 2010 quarter, partially offset by improvement in mortgage banking fees of $404,000; and
• Increased non-interest expense of $3.0 million due to increased salaries and employment benefits of $2.1 million driven by the acquisition-related hiring of an additional 121 full-time equivalent employees, on top of growth in most other noninterest expense categories.

The Company's results for the three months ended December 31, 2011, included acquisition-related expenses, net of tax, of $177,000 and a $477,000 income tax benefit for state tax credits recorded as the Company returned to core profitability. Excluding special items, the Company would have reported net income of $1.1 million or $0.13 per diluted share for the fourth quarter of 2011 compared with a net loss of $1.6 million or $0.19 per diluted share in the fourth quarter of 2010 (see reconciliation of non-GAAP items).

Net interest income for the fourth quarter increased 55% to $9.2 million from $5.9 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to both acquisitions and organic growth. The Company's net interest margin for the fourth quarter of 2011 increased 75 basis points to 4.19% on a linked-quarter basis from 3.44% in the third quarter of 2011 and increased 31 basis points from 3.88% in the year-earlier period. The improvement in the fourth quarter of 2011 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.

The Company's estimated total risk-based capital ratio at December 31, 2011, was 19.2%, 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 11.0% as of December 31, 2011.

In the fourth quarter of 2011, the Company continued to post organic and acquisition-related loan growth, increasing on a linked-quarter basis and advancing significantly compared with the year-earlier quarter. Still, bank acquisitions, including the Company's second and third whole-bank acquisitions in February 2011 and August 2011, respectively, accounted for much of the growth in loans and deposits over the past 12 months. At December 31, 2011, the Company's loan portfolio, including loans acquired through FDIC-assisted acquisitions, totaled $560.6 million, which was flat on a linked-quarter basis as a result of organic loan growth of $14.4 million, which offset loan pay-downs in the FDIC-assisted portfolios. Total deposits stood at $884.2 million at the end of the fourth quarter of 2011, down $15.9 million or 2% from $900.1 million at September 30, 2011, driven primarily by planned time deposit runoff.

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 consist of $107.5 million in covered and $18.7 million in non-covered loans as of December 31, 2011, compared with $116.2 million in covered and $24.7 million in non-covered loans as of September 30, 2011. The principal balance of the FDIC-assisted loan portfolios totaled $228.4 million as of December 31, 2011, compared with $248.6 million as of September 30, 2011. The details of the accounting for the FDIC-assisted loan portfolios for the fourth quarter of 2011 are as follows:

• Covered loans acquired in FDIC-assisted acquisitions decreased $8.7 million to $107.5 million;
• Non-covered loans acquired in FDIC-assisted acquisitions decreased $6.0 million to $18.7 million;
• The FDIC loss-share receivable associated with covered loans acquired in FDIC-assisted acquisitions decreased $3.9 million to $83.9 million;
• The accretion for the FDIC loss-share receivable turned negative $72,000;
• The non-accretable discount decreased $9.3 million to $89.5 million; and
• The accretable discount increased $4.0 million to $12.8 million.

At December 31, 2011, covered and non-covered loans acquired in FDIC-assisted acquisitions decreased to $107.5 million and $18.7 million, respectively, on a linked-quarter basis from $116.2 million and $24.7 million, respectively, primarily driven by loan pay-downs. The net charge-offs for both the covered and non-covered loans were fully provided for 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 $3.9 million from $87.8 million in the prior quarter to $83.9 million, driven by $3.2 million of reimbursements received from the FDIC.

The non-accretable discount decreased to $89.5 million at the end of the fourth quarter of 2011 from $98.8 million on a linked-quarter basis, primarily driven by net charge-offs in the FDIC-assisted loan portfolios and transfers to accretable discount. The accretable discount increased to $12.8 million for the current quarter from $8.8 million on a linked-quarter basis, primarily driven by transfers from accretable discount as a result of the improvement in cash flows received from the Company's FDIC-assisted loan portfolios. Moreover, the improvement in cash flows received also negatively affected the accretion for the loss-share receivable and turned it negative $72,000.

Asset Quality

Total nonperforming loans, excluding loans acquired in FDIC-assisted acquisitions, were $7.0 million at December 31, 2011, down from $8.0 million at September 30, 2011. Other real estate owned and repossessed assets, excluding assets acquired in FDIC-assisted acquisitions, were $3.4 million at December 31, 2011, up from $1.8 million at September 30, 2011, and primarily driven by the resolution process of moving nonperforming loans to foreclosure. Nonperforming loans to total loans, excluding loans acquired in FDIC-assisted acquisitions, decreased to 1.62% as of December 31, 2011, from 1.90% as of September 30, 2011. Net charge-offs to average outstanding loans, excluding loans acquired in FDIC-assisted acquisitions, on an annualized basis, were 0.04% for the fourth quarter of 2011 versus 0.73% for the third quarter of 2011, while the year-to-date net charge-offs were 0.91% as of December 31, 2011, versus 0.87% as of December 31, 2010.

The provision for loan losses decreased to $595,000 for the fourth quarter of 2011 from $1.0 million for the third quarter of 2011, driven primarily by a decrease in annualized net charge-offs. At December 31, 2011, the allowance for loan losses represented 1.72% of total loans outstanding, excluding loans acquired in FDIC-assisted acquisitions, versus 1.65% at September 30, 2011.