Heritage Financial Group, Inc., the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter ended March 31, 2013. Highlights of the Company's results for the first quarter of 2013 include:

• Net income of $3.9 million or $0.52 per diluted share, up threefold from net income of $971,000 or $0.12 per diluted share for the year-earlier quarter and up 62% from $2.4 million or $0.31 per diluted share for the linked quarter;
• Excluding special items for each quarter, net income was $2.0 million or $0.27 per diluted share, up 67% from net income of $1.2 million or $0.15 per diluted share for the year-earlier quarter and $1.2 million or $0.16 per diluted share for the linked quarter (see reconciliation of non-GAAP items);
• Successful completion of the Company's fourth FDIC-assisted acquisition, Frontier Bank ("Frontier") on March 8, 2013, resulting in a $2.5 million bargain purchase gain, net of tax;
• Loan growth, excluding loans acquired through FDIC-assisted acquisitions, of $18.0 million or 3% on a linked-quarter basis;
• An increase in loans acquired through FDIC-assisted acquisitions of $64.9 million or 77% on a linked-quarter basis;
• An increase in the provision for loan losses, excluding FDIC-acquired loans, to $450,000 compared with $400,000 for the year-earlier quarter, but a reduction from $600,000 for the linked quarter;
• Provision for loan losses of $35,000 for FDIC-acquired loans with approximately 80% of the losses reimbursable by the FDIC versus no provision expense on such loans for the year-earlier quarter and a reduction from $1.9 million for the linked quarter; and
• Non-performing assets to total assets declined to 1.15% for the first quarter of 2013 compared with 1.75% for the year-earlier quarter and 1.58% for the linked quarter.

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "We are pleased to report another quarter of improved financial results. The positive results of our focus on efficiency and expense management are coming to fruition. In addition, the investments we made in our mortgage division and commercial banking network are paying dividends, as evidenced by increased fee income and continued organic loan growth.

"We are also excited about the acquisition of Frontier in an FDIC-assisted transaction completed in the first quarter," Dorminey continued. "This marks our fourth FDIC-assisted transaction and further demonstrates our ability to successfully execute our expansion strategy and prudently deploy our strong capital base. We are optimistic about the opportunities for loan growth both in the Birmingham market area as well as the Western Georgia / Eastern Alabama corridor."

Expense Management Initiatives

In connection with the Frontier FDIC-assisted acquisition, the Company plans to close the Vincent, Alabama, branch later in 2013, subject to regulatory approval. The Company does not expect to experience a significant reduction in customer relationships and will serve these customers from other nearby locations. Separately, the Company implemented staff reductions related to the Frontier acquisition that will occur during the second and third quarters, resulting in a decrease of approximately $1.6 million from Frontier's pre-acquisition level of personnel expenses.

Commenting on the expense management initiatives in the Frontier acquisition, Heath Fountain, Chief Financial Officer and Chief Administrative Officer, said, "We are confident in our ability to operate the acquired branch network in an efficient and profitable manner. While we are early in the transition, we believe we will be able to achieve all of our cost-saving targets identified prior to the acquisition."

Capital Management Initiatives

During the first quarter of 2013, the Company repurchased approximately 291,000 shares of common stock at an average price of $14.02 under its stock repurchase program. With remaining authorization to repurchase approximately 33,000 shares under the current program, which was set to expire in October 2013, unless extended or otherwise completed, the Company's Board of Directors has increased the program by adding 394,000 shares, or 5% of the Company's currently outstanding common stock, and has extended the program for an additional year. As a result, the Company has a total authorization to repurchase up to approximately 427,000 shares that expires in April 2014, unless the program is extended or completed earlier.

The Company's estimated total risk-based capital ratio at March 31, 2013, was 16.4%, 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 8.5% as of March 31, 2013.

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.

First Quarter 2013 Results of Operations

The $3.0 million improvement in reported quarterly earnings for the first quarter of 2013 compared with the year-earlier quarter primarily resulted from the following items:

• Improved net interest income of $3.5 million;
• Increased non-interest income of $3.0 million; offset by
• Increased non-interest expense of $2.0 million.

Net interest income for the first quarter of 2013 increased 36% to $13.2 million from $9.7 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 liabilities. The Company's net interest margin was 5.51% for the first quarter of 2013, a decrease of 86 basis points from 6.37% on a linked-quarter basis, but an increase of 102 basis points over 4.49% in the year-earlier period. The reduction in the first quarter of 2013 net interest margin on a linked-quarter basis was driven by a decline in the loan yields on the Company's FDIC-assisted loan portfolio, offset in part by a decline in the cost of interest-bearing liabilities as rates continue to reset to lower levels and the Company takes advantage of historically low non-deposit funding. Excluding purchase accounting adjustments, which include FDIC-assisted loan discount accretion from the net interest margin, the core net interest margin was 3.35% for the first quarter of 2013, an increase of 16 basis points from 3.19% on a linked-quarter basis and 42 basis points from 2.93% for the year-earlier quarter.

In the first quarter of 2013, the Company continued to achieve loan growth, with its loan portfolio increasing $18.0 million organically on a linked-quarter basis and advancing $154.1 million overall compared with the year-earlier quarter. For the first quarter of 2013, the Company's loan portfolio, including loans acquired through FDIC-assisted acquisitions, totaled $752.9 million, increasing $82.9 million on a linked-quarter basis from $670.0 million and from $562.5 million compared with the year-earlier quarter. Total deposits stood at $1.1 billion at the end of the first quarter of 2013, up 26% or $226.0 million on a linked-quarter basis from $869.6 million and from $868.7 million compared with the year-earlier quarter. The linked-quarter increase in deposits was primarily driven by the Frontier acquisition, which accounted for $212.1 million, and the remaining growth resulted in core deposit growth of $34.0 million and wholesale deposit growth of $23.8 million, which was offset in part by $24.5 million in planned time deposit runoff associated with Frontier internet and single service customers and $19.4 million in planned runoff of retail time deposits.

Non-interest income for the first quarter of 2013 increased 109% to $5.8 million from $2.8 million in the year-earlier quarter, primarily driven by a bargain purchase gain recorded on the Frontier FDIC-assisted acquisition of $4.2 million, coupled with solid growth in mortgage banking fees of $1.1 million, which was partially offset by an increase in negative accretion for the FDIC loss-share receivable of $2.5 million. Non-interest expense for the first quarter of 2013 increased 18% to $12.8 million from $10.8 million in the year-earlier quarter, primarily driven by increased salaries and employment benefits of $894,000 associated with the hiring of 30 employees for the mortgage division, increased acquisition-related expenses of $461,000 related to Frontier, increased equipment and occupancy expense of $342,000 related to the Company's continued efforts to expand the mortgage division, and increased foreclosure expense on FDIC-acquired assets of $259,000.

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 $65.8 million in covered and $83.3 million in non-covered loans at the end of the first quarter of 2013 compared with $72.4 million in covered and $11.9 million in non-covered loans for the linked quarter. The principal balance of the FDIC-assisted loan portfolios totaled $234.8 million at the end of the first quarter of 2013 compared with $152.1 million for the linked quarter. The details of the accounting for the FDIC-assisted loan portfolios for the first quarter of 2013 are as follows:

• Covered loans acquired in FDIC-assisted acquisitions decreased $6.6 million to $65.8 million;
• Non-covered loans acquired in FDIC-assisted acquisitions increased $71.5 million to $83.3 million, driven by the Frontier acquisition;
• The FDIC loss-share receivable associated with covered assets acquired in FDIC-assisted acquisitions decreased $8.7 million to $52.0 million;
• The negative accretion for the FDIC loss-share receivable was $3.0 million;
• Provision expense for individually assessed loans acquired in FDIC-assisted acquisitions was $35,000;
• The non-accretable discount increased $13.6 million to $59.6 million; and
• The accretable discount increased $4.3 million to $26.1 million.

During the first quarter of 2013, the Company completed the FDIC-assisted acquisition of Frontier without a loss-sharing agreement. The acquisition added non-covered loans at a principal balance of $98.0 million with a $23.0 million non-accretable discount and a $1.7 million accretable discount for a fair value balance of $73.3 million as of the acquisition date.

For the first quarter of 2013, provision expense of $35,000 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 assets decreased $8.7 million from $60.7 million for the prior quarter to $52.0 million, primarily driven by reimbursements received from the FDIC of $5.6 million and negative accretion of $3.5 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 (clawback) liability was recorded as an expense, which reduced non-interest income for the current quarter by $566,000. 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 increased to $59.6 million at the end of the first quarter of 2013 from $46.0 million on a linked-quarter basis, primarily driven by the addition of $23.0 million for the Frontier acquired loans, offset by the clearing of $2.2 million of discount in conjunction with the resolution of FDIC-assisted loans and transfers to accretable discount of $7.2 million for the improvement in expected cash flows. The accretable discount increased to $26.1 million for the first quarter of 2013 from $21.8 million on a linked-quarter basis, primarily driven by the transfer of $7.2 million from the non-accretable discount and the addition of $1.7 million for the Frontier acquired loans, offset in part by loan discount accretion of $4.6 million for the current quarter, which compares with $6.6 million on a linked-quarter basis.

Asset Quality

Total non-performing assets, excluding assets acquired in FDIC-assisted acquisitions, decreased to $15.7 million, or 1.15% of total assets, compared with $17.3 million, or 1.58% of total assets, for the linked quarter and improved from $13.7 million, or 1.75% of total assets, from the year-earlier quarter. Annualized net charge-offs to average outstanding loans, excluding loans acquired in FDIC-assisted acquisitions, were 0.27% for the first quarter of 2013 compared with 0.05% for the linked quarter and 0.24% for the year-earlier quarter. Non-performing loans totaled $12.7 million, down from $14.7 million for the linked quarter, but up from $10.7 million for the year-earlier quarter. Other real estate owned and repossessed assets, excluding assets acquired in FDIC-assisted acquisitions, totaled $3.0 million for the first quarter of 2013, slightly up from $2.7 million for the linked quarter and in line with $3.0 million for the year-earlier quarter.

The provision for loan losses on non-FDIC-acquired loans slightly increased to $450,000 for the first quarter of 2013 from $400,000 for the year-earlier quarter, primarily driven by organic loan growth. For the first quarter in 2013, the allowance for loan losses represented 1.51% of total loans outstanding, excluding loans acquired in FDIC-assisted acquisitions, versus 1.55% for the linked quarter and 1.70% for the year-earlier quarter. The improving loan loss allowance is primarily the result of declining criticized and classified assets as a percentage of total loans.