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Heritage parent reports net loss

POSTED: August 1, 2011 6:33 p.m.

ALBANY—Heritage Financial Group, Inc. (NASDAQ: HBOS), the holding company for HeritageBank of the South, announced unaudited financial results for the quarter ended June 30. Key aspects of the Company’s results for the second quarter of 2011 include:

A net loss of $481,000 or $0.06 per diluted share, which compared with net income of $128,000 or $0.02 per diluted share in the year-earlier quarter;

Organic loan growth, excluding loans acquired in FDIC-assisted acquisitions, of $10.6 million or 3 percent on a linked-quarter basis;

Core deposit growth, excluding certificates of deposit and brokered deposits, of $18.9 million or 4 percent on a linked-quarter basis;

An increase in the allowance for loan losses to 1.58 percent of period-end loans, excluding loans acquired in FDIC-assisted acquisitions, from 1.51 percent of loans at March 31, 2011;

A decline in annualized net charge-offs to 0.26 percent for the second quarter of 2011 from 2.80 percent on a linked-quarter basis; and

A decline in nonperforming assets (NPAs), excluding loans acquired in FDIC-assisted acquisitions, to 1.17 percent from 1.66 percent on a linked-quarter basis.

“During the second quarter of 2011, we experienced significant costs and dedicated substantial Company resources to convert our second FDIC-assisted transaction, Citizens Bank of Effingham onto our core operating system,” said Leonard Dorminey, president and chief executive officer. “After the successful integration of Citizens, we have refocused our attention on strategic expansion to build our brand and branch footprint by seizing on other attractive opportunities to deploy our capital and position the company for future growth.

“At the same time, the credit quality of our non-FDIC-assisted loan portfolio also improved in the second quarter,” Dorminey continued. “We continue to manage our FDIC-acquired loan portfolios prudently, and have hired an experienced team to handle the workout of our FDIC-acquired assets and the complex requirements of loss-share agreements.”

Additionally, the company announced that its board of directors has authorized a new stock repurchase program in connection with the restricted shares issued under the 2011 equity incentive plan. Under the new program, the company may purchase during the coming year up to 163,852 shares, or approximately 2 percent of its currently outstanding publicly held shares of common stock. The repurchases will be made from time to time in open-market or negotiated transactions as deemed appropriate by the company and will depend on market conditions. The new program will expire in July 2012 unless completed sooner or otherwise extended.

Results of Operations

The company reported a net loss of $481,000 or $0.06 per diluted share for the three months ended June 30, 2011, compared with net income of $128,000 or $0.02 per diluted share for the three months ended June 30, 2010. This $609,000 change in earnings was primarily the result of the following items:

Increased non-interest expense of $4.0 million, reflecting $2.0 million in additional employee salaries and benefits directly linked to the hiring of 101 full-time equivalent employees in connection with the Company’s recent expansion by acquisition;

Higher write-downs for other real estate owned (OREO) of $647,000, excluding OREO acquired in FDIC-assisted acquisitions;

Increased provision expense of $50,000, driven by growth in the non-FDIC-assisted loan portfolio, offset by:

• Improved net interest income of $1.7 million due to growth in interest-earning assets; and

• Improved non-interest income of $1.6 million, reflecting increases in service charges and mortgage-related fees of $240,000 and $553,000, respectively, coupled with an increase in gains on the sale of investment securities of $445,000.

The company’s results for the second quarter ended June 30, 2011, included acquisition-related expenses of $474,000 and a reduction in the pre-tax bargain purchase gain of $117,000. This reduction reflected the availability of updated information at June 30, 2011, concerning the intangible value of Citizens’ core deposits acquired on Feb. 18, 2011. Excluding the acquisition-related expenses and adjustment to the bargain purchase gain net of tax, the Company would have incurred a net loss of $96,000 or $0.01 per diluted share for the first quarter of 2011 (see reconciliation of non-GAAP items).

Net interest income for the first quarter increased 37% to $6.4 million from $4.7 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 second quarter of 2011 decreased six basis points to 3.36 percent on a linked-quarter basis from 3.42 percent in the first quarter of 2011, and declined 19 basis points from 3.55 percent in the year-earlier period, reflecting excess liquidity related to the company’s capital raise in the fourth quarter of 2010 and acquisition activity, as those funds are currently deployed in lower-yielding investments.

The company’s total risk-based capital ratio at June 30, 2011, was 23.4 percent, significantly exceeding the required minimum of 10 percent 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 percent as of June 30, 2011.

In the second 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 in all of its markets except Ocala. Ocala 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 June 30, 2011, the company’s loan portfolio totaled $500.7 million, including loans acquired through FDIC-assisted acquisitions, up 1 percent from $496.1 million at March 31, 2011, including loans acquired through FDIC-assisted acquisitions. Total deposits stood at $763.7 million at the end of the second quarter of 2011, up 4 percent from $731.1 million at March 31, 2011.

Accounting for FDIC-Assisted Loans

The Company performs ongoing assessments of the estimated cash flows of its acquired FDIC-assisted loan portfolios. The FDIC-assisted loan portfolios consist of $60.4 million in covered and $24.2 million in non-covered loans as of June 30, 2011.

The details of the accounting for the FDIC-assisted loan portfolios for the second quarter of 2011 are as follows:

Covered loans acquired in FDIC-assisted acquisitions decreased $1.9 million from the first quarter of 2011;

Non-covered loans acquired in FDIC-assisted acquisitions declined $4.0 million during the quarter;

The FDIC indemnification asset associated with covered loans acquired in FDIC-assisted acquisitions remained unchanged at $58.2 million;

The non-accretable discount decreased $3.7 million to $67.3 million; and

The accretable discount increased $1.4 million to $4.1 million, and $224,000 was transferred to income.

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