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, 2012. Highlights of the Company's results for the year ended 2012 include:

• Net income of $6.8 million or $0.85 per diluted share, up 77% from net income of $3.8 million or $0.47 per diluted share for the year ended 2011;
• Excluding special items for each year, net income was $5.4 million or $0.67 per diluted share for 2012 versus net income of $1.6 million or $0.19 per diluted share for 2011 (see reconciliation of non-GAAP items);
• Loan growth for the year, excluding loans acquired through FDIC-assisted acquisitions, of $151.3 million or 35% from 2011;
• A decrease in loans acquired through FDIC-assisted acquisitions for the year of $41.9 million or 33% from 2011;
• A decrease in provision for loan losses, excluding FDIC-acquired loans, of $395,000 to $2.5 million for the year compared with $2.9 million for 2011;
• Provision for loan losses of $3.4 million for FDIC-acquired loans with approximately 80% of the losses reimbursable by the FDIC versus no provision expense on such loans for 2011; and
• A decrease in net charge-offs to 0.19% for the year compared with 0.82% for 2011.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "During 2012, our team worked hard to explore new opportunities for growth, effectively assimilate our recent acquisitions to capitalize on the benefits of that expansion, and optimize our operations at every level of our organization. Those efforts paid off handsomely in 2012 with significantly increased earnings, robust organic loan growth, and strong contributions from our mortgage banking and brokerage departments. Moreover, during 2012, we implemented several expense management initiatives that are anticipated to reduce costs by approximately $1.2 million in 2013.

"While we expect to face ongoing challenges in 2013 regarding both the competitive and interest rate environments, we remain confident in our outlook for the coming year," Dorminey continued. "Considering the fundamental strength of our operations, the success we have achieved in integrating recent acquisitions, our expanded footprint in the Southeast, and bolstered by anticipated cost reductions, we look forward to a successful and promising year in 2013."

Expense Management Initiatives

During the third quarter of 2012, the Company completed an early retirement program for certain employees announced during the second quarter of 2012 at a cost of $641,000. It is anticipated that the early retirement program will generate annual savings of approximately $700,000 per year beginning in 2013.

Additionally, during the fourth quarter of 2012, the Company closed two branches, one each in Collins and Guyton, Georgia, which were acquired in FDIC-assisted acquisitions. Combined, these branches had loans of approximately $5 million and deposits of $13 million. The Company does not expect to experience a significant reduction in customer relationships in these areas and will seek to service these customers from nearby branches. The Company anticipates expense savings of approximately $500,000 per year beginning in 2013 related to these closures.

Capital Management Initiatives

During the fourth quarter of 2012, the Company paid a special one-time dividend of $0.20 per share in addition to the normal quarterly dividend of $0.04 per share. The special one-time dividend was equivalent to and in lieu of regular quarterly dividends that would have been anticipated to be paid in 2013. The Company also repurchased approximately 73,000 shares of common stock at an average price of $13.50 under its stock repurchase program. The program, which expires in October 2013 unless extended or otherwise completed, has a remaining authorization to repurchase approximately 324,000 shares.

During the fourth quarter of 2012, the Company's previously announced shelf offering on Form S-3 with the Securities and Exchange Commission ("SEC") became effective. Under the shelf registration statement, the Company may offer and sell from time to time in the future, in one or more offerings, common stock, preferred stock, debt securities, warrants, depositary shares, or units consisting of any combination of the foregoing. The aggregate offering price of all securities that could be sold under the registration statement may not exceed $60 million.

The Company's estimated total risk-based capital ratio at December 31, 2012, was 18.4%, 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 10.6% as of December 31, 2012.

Looking ahead, the Company intends to maintain its capital strength at the current level to support growth and its acquisition activities. Accordingly, future stock buybacks and future dividends will be premised largely on the Company's future earnings power rather than a return of capital to stockholders. As previously announced, it is not currently anticipated that any quarterly dividends will be paid in 2013, but that regular quarterly dividends will be reinstated in 2014.

Fourth Quarter 2012 Results of Operations

Highlights of the Company's results for the fourth quarter of 2012 include:

• Net income of $2.4 million or $0.31 per diluted share, up 80% from net income of $1.4 million or $0.17 per diluted share for the fourth quarter of 2011 and up 22% from $2.0 million or $0.25 per diluted share for the third quarter of 2012;
• Excluding special items for each quarter, net income was $1.2 million or $0.16 per diluted share for the fourth quarter of 2012 versus net income of $1.0 million or $0.13 per diluted share for the year-earlier quarter and $1.5 million or $0.19 per diluted share for the third quarter of 2012 (see reconciliation of non-GAAP items);
• Loan growth, excluding loans acquired through FDIC-assisted acquisitions, of $151.3 million or 35% for 2012 and $43.8 million or 8% on a linked-quarter basis;
• A decrease in loans acquired through FDIC-assisted acquisitions of $41.9 million or 33% for 2012 and a decrease of $8.8 million or 9% on a linked-quarter basis;
• A slight increase in provision for loan losses, excluding FDIC-acquired loans, of $5,000 to $600,000 for the fourth quarter of 2012 compared with $595,000 for the same quarter for 2011 and a decrease of $150,000 compared with $750,000 for the third quarter of 2012;
• Provision for loan losses for the fourth quarter of 2012 of $1.9 million for FDIC-acquired loans with approximately 80% of the losses reimbursable by the FDIC compared with no provision expense on such loans for the fourth quarter of 2011 and $1.2 million for the third quarter of 2012; and
• Annualized net charge-offs of 0.05% for the fourth quarter of 2012 were in line with the 0.04% experienced for the fourth quarter of 2011 and represented a significant decline from 0.24% for the third quarter of 2012.

The $1.1 million improvement in reported quarterly earnings for the fourth quarter of 2012 compared with the same period in 2011 primarily resulted from the following items:

• Improved net interest income of $5.3 million; offset by
• Reduced non-interest income of $300,000;
• Increased non-interest expense of $1.6 million; and
• Increased provision expense for FDIC-acquired loan losses of $1.9 million, with approximately 80% of the losses reimbursable by the FDIC.

Net interest income for the fourth quarter of 2012 increased 58% to $14.5 million from $9.2 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 6.37% for the fourth quarter of 2012, an increase of 60 basis points over 5.77% on a linked-quarter basis and 218 basis points over 4.19% in the year-earlier period. The improvement in the fourth 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. Excluding purchase accounting adjustments, which include FDIC-assisted loan discount accretion from the net interest margin, the core net interest margin was 3.19% for the fourth quarter of 2012, an increase of 77 basis points from 2.42% for the same quarter in 2011, but a decline of 13 basis points from 3.32% on a linked-quarter basis.

In the fourth quarter of 2012, the Company continued to achieve loan growth, with its loan portfolio increasing $43.8 million organically on a linked-quarter basis and advancing $151.3 million overall compared with the year-earlier quarter. For the fourth quarter of 2012, the Company's loan portfolio, including loans acquired through FDIC-assisted acquisitions, totaled $670.0 million, which increased $35.1 million on a linked-quarter basis. Total deposits stood at $869.6 million at the end of the fourth quarter of 2012, up 3% or $24.5 million on a linked-quarter basis from $845.1 million, but down from $884.2 million compared with the year-earlier quarter. The linked-quarter increase in deposits was primarily driven by core deposit growth of $15.2 million and wholesale deposit growth of $22.8 million offset in part by $13.5 million in planned runoff of retail time deposits.

Non-interest income for the fourth quarter of 2012 decreased 9% to $2.9 million from $3.2 million in the year-earlier quarter, primarily driven by a negative swing in the accretion for the FDIC loss-share receivable of $2.7 million, which was partially offset by an increased gain on sale of securities of $1.3 million and improvements in mortgage banking fees of $685,000, brokerage fees of $165,000, and bankcard services income of $103,000. Non-interest expense for the fourth quarter of 2012 increased 15% to $12.1 million from $10.5 million in the year-earlier quarter, primarily driven by increased foreclosure expense on FDIC-acquired assets of $457,000, increased salaries and employment benefits of $410,000, increased foreclosure expense, excluding FDIC-acquired assets, of $332,000, and loss on sale and write-downs of other real estate assets, excluding FDIC-acquired, of $307,000.

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 $72.4 million in covered and $11.9 million in non-covered loans at the end of the fourth quarter of 2012 compared with $78.8 million in covered and $14.3 million in non-covered loans at the end of the third quarter of 2012. The principal balance of the FDIC-assisted loan portfolios totaled $152.1 million at the end of the fourth quarter of 2012 compared with $171.6 million as of the end of the third quarter of 2012. The details of the accounting for the FDIC-assisted loan portfolios for the fourth quarter of 2012 are as follows:

• Covered loans acquired in FDIC-assisted acquisitions decreased $6.3 million to $72.4 million;
• Non-covered loans acquired in FDIC-assisted acquisitions decreased $2.4 million to $11.9 million;
• The FDIC loss-share receivable associated with covered loans acquired in FDIC-assisted acquisitions decreased $7.0 million to $60.7 million;
• The negative accretion for the FDIC loss-share receivable was $2.8 million;
• Provision expense for individually assessed loans acquired in FDIC-assisted acquisitions was $1.9 million;
• The non-accretable discount decreased $8.2 million to $46.0 million; and
• The accretable discount decreased $2.6 million to $21.8 million.

For the fourth quarter of 2012, provision expense of $1.9 million was recorded for loan charge-offs on individually assessed 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 $7.0 million from $67.7 million for the prior quarter to $60.7 million, primarily driven by reimbursements received from the FDIC of $4.0 million and negative accretion of $2.8 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 $219,000. This true-up was driven by an improvement in estimates of expected cash flows for both FDIC-assisted acquisitions covered under loss-sharing agreements.

The non-accretable discount decreased to $46.0 million at the end of the fourth quarter of 2012 from $54.2 million on a linked-quarter basis, primarily driven by the clearing of $4.2 million of discount in conjunction with the resolution of FDIC-assisted loans and transfers to accretable discount of $4.0 million. The accretable discount decreased to $21.8 million for the fourth quarter of 2012 from $24.4 million on a linked-quarter basis, primarily due to loan discount accretion of $6.6 million for the current quarter, which compares with $4.8 million on a linked-quarter basis partially offset by the transfer from the non-accretable discount as a result of the improvement in cash flows.

Asset Quality

Annualized net charge-offs to average outstanding loans, excluding loans acquired in FDIC-assisted acquisitions, were 0.05% for the fourth quarter of 2012 compared with 0.24% for the linked-quarter and in line with the 0.04% experienced for the fourth quarter of 2011. Total non-performing assets, excluding assets acquired in FDIC-assisted acquisitions, decreased to $17.3 million or 1.58% of total assets compared with $17.8 million or 1.68% of total assets for the linked-quarter, but increased from $10.4 million or 0.95% of total assets from 2011. Non-performing loans totaled $14.7 million, down from $16.4 million for the linked-quarter, but up from $7.0 million for 2011.

The primary reason for the increase in non-performing assets from 2011 was the migration of two relationships totaling $6.0 million to non-performing status during the third quarter of 2012. One of the relationships totaling $3.5 million was classified a troubled-debt restructuring and additional collateral of $6.1 million has been secured. The other relationship was a Chapter 11 bankruptcy where the collateral deficiency is fully reserved as of the current quarter. Both of these relationships were previously identified as criticized assets. Other real estate owned and repossessed assets, excluding assets acquired in FDIC-assisted acquisitions, totaled $2.7 million for the fourth quarter of 2012, up from $1.4 million for the linked-quarter, but down from $2.9 million for 2011.

The provision for loan losses on non-FDIC-acquired loans slightly increased to $600,000 for the fourth quarter of 2012 from $595,000 for the same quarter in 2011, primarily driven by organic loan growth offset in part by improving net charge-off trends. For the fourth quarter in 2012, the allowance for loan losses represented 1.55% of total loans outstanding, excluding loans acquired in FDIC-assisted acquisitions, versus 1.57% for the linked-quarter and 1.72% for the same quarter in 2011.