Heritage Financial : Reports Fourth Quarter Net Income of $2.5 Million or $0.28 Per Diluted Share

Heritage Financial Group, Inc. (NASDAQ: HBOS), the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter and year ended December 31, 2014. Key highlights of the Company's report for the fourth quarter of 2014 include:

• Net income of $2.5 million or $0.28 per diluted share, up 27% from $2.0 million or $0.26 per diluted share for the linked quarter, but down 27% from $3.4 million or $0.45 per diluted share for the year-earlier quarter;
• Net income, excluding special items for each quarter, of $2.9 million or $0.32 per diluted share, down 9% from $3.2 million or $0.42 per diluted share for the linked quarter, and down 27% from $4.0 million or $0.53 per diluted share for the year-earlier quarter (see non-GAAP reconciliation);
• Core net interest margin expanded to 3.44%, up 15 basis points from 3.29% for the linked quarter and up 24 basis points from 3.20% for the year-earlier quarter;
• Loan growth, excluding acquired loans, of $24.9 million or 3% on a linked-quarter basis and $114.4 million or 17% compared with the year-earlier quarter;
• A decline in nonperforming loans, excluding acquired loans, of 12% on a linked-quarter basis and 36% compared with the year-earlier quarter;
• A decrease in the provision for loan losses, excluding acquired loans, to $285,000, down from $575,000 for the linked quarter but up from $220,000 for the year-earlier quarter; and
• An increase in mortgage originations to $344.7 million, up $52.1 million or 18% from the linked quarter and up $224.3 million or 186% from the year-earlier quarter.

Commenting on the announcement, Leonard Dorminey, President and Chief Executive Officer, said, "We are pleased to end 2014 with solid momentum in our operations, highlighted by attractive organic loan growth, continued improvements in credit quality measures, and strong growth in mortgage originations. These achievements reflect the underlying expansion of our footprint, with the acquisition of Alarion Financial Services ("Alarion") and Alarion Bank, which marked our entry into Gainesville, Florida, and strengthened our presence in the Ocala market. Also during 2014, we were able to expand our mortgage lending business, adding six additional offices during the year. These newer offices, along with the continued contributions from those opened previously, enabled our mortgage lending operations to more than double its revenue during 2014. Because of these strategic investments, as well as the completion of our recent branch acquisition in Atlanta, we believe the Company carries solid momentum into 2015 and remains well positioned for continued growth."

Commenting on the recent announcement of the Company's proposed merger with Renasant Corporation ("Renasant"), Dorminey reiterated that the transaction is expected to provide enhanced value to Heritage's stockholders and benefit clients, employees, and communities of the Company through access to greater resources and operational scale as part of a larger community bank. The transaction is expected to close during the third quarter of 2015 and is subject to Renasant and Heritage stockholder approval, regulatory approval and other conditions set forth in the merger agreement.

Dorminey also noted that the Company's Board of Directors has declared a regular quarterly cash dividend of $0.07 per share, which will be paid on February 18, 2015, to stockholders of record as of February 4, 2015.

Branch Acquisition and Merger Activity

On December 10, 2014, the Company and Renasant jointly announced the signing of a definitive merger agreement pursuant to which Renasant will acquire, in an all-stock merger, the Company and its wholly owned subsidiary HeritageBank of the South. According to the terms of the merger agreement, which has been approved by the boards of directors of both companies, Heritage stockholders will receive 0.9266 shares of Renasant common stock for each share of Heritage common stock, and the merger is expected to qualify as a tax-free reorganization for Heritage stockholders. Based on Renasant's 20-day average closing price of $29.14 per share as of December 9, 2014, the aggregate deal value is approximately $258 million or $27.00 per share. In connection with the proposed merger, the Company has incurred $231,000 in merger expenses through December 31, 2014.

On January 20, 2015, the Company completed its previously announced branch acquisition from The PrivateBank and Trust Company. The branch is located at 3169 Holcomb Bridge Road, Norcross, Georgia and the acquisition added $37 million in loans and $107 million in deposits before applying fair value adjustments.

On September 30, 2014, the Company successfully completed the merger of Alarion and its subsidiary Alarion Bank, which had six offices in the Gainesville and Ocala markets. In this acquisition, the Company acquired $160.5 million in non-credit impaired loans, $38.7 million in credit impaired loans, $2.0 million in other real estate owned ("OREO"), and $230.7 million in total deposits.

Fourth Quarter 2014 Results of Operations

The $535,000 increase in reported quarterly earnings for the fourth quarter of 2014 compared with the linked quarter resulted primarily from the following items:

• Increased interest income of $1.7 million;
• Solid growth in revenue from mortgage banking activities of $1.2 million;
• Decreased acquisition-related expenses of $2.1 million; offset by
• Increased salaries and employee benefits of $3.2 million, driven primarily by mortgage banking expansion and the Alarion merger;
• Decreased gain on sales of securities of $438,000; and
• Increased equipment and occupancy expense of $355,000.

The $911,000 decrease in reported quarterly earnings for the fourth quarter of 2014 compared with the year-earlier quarter primarily reflected the following items:

• Increased salaries and employee benefits of $5.8 million due primarily to personnel additions related to mortgage banking expansion and the Alarion merger;
• Increased equipment and occupancy expense of $667,000; offset by
• Growth in revenue from mortgage banking activities of $5.0 million; and
• Increased interest income of $1.6 million.

Net interest income for the fourth quarter of 2014 increased 8% to $17.5 million from $16.3 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to acquisitions and organic growth. The Company's net interest margin was 4.48% for the fourth quarter of 2014, a reduction of 102 basis points from 5.50% for the year-earlier period. The decrease in the net interest margin for the fourth quarter of 2014 compared with the year-earlier quarter was driven by a decline in the yield on interest-earning assets of 1.09% associated with a reduction in the contribution of interest income related to acquired credit impaired loans, which was offset in part by a decline in the cost of interest-bearing liabilities of five basis points driven by lower cost of other borrowings. Excluding acquired credit impaired loan discount adjustments from the net interest margin, the core net interest margin was 3.44% for the fourth quarter of 2014, an improvement of 24 basis points from 3.20% for the year-earlier quarter. The improvement in the core net interest margin was driven primarily by an improvement in the interest-earning asset mix compared with the year-earlier quarter.

In the fourth quarter of 2014, the Company continued to achieve loan growth, with its non-acquired loan portfolio increasing $24.9 million organically on a linked-quarter basis and advancing $114.4 million overall compared with the year-earlier quarter. For the fourth quarter of 2014, the Company's loan portfolio, including acquired loans, totaled $1.085 billion, increasing $16.4 million on a linked-quarter basis from $1.069 billion and $286.7 million from $798.8 million compared with the year-earlier quarter, driven primarily by the Alarion merger and to a lesser extent organic loan growth. The organic loan growth from the linked quarter reflected primarily growth in the Albany, Macon, Birmingham, Auburn/Columbus, and South Atlanta markets. Total deposits stood at $1.322 billion at the end of the fourth quarter of 2014, down 1% from $1.341 billion on a linked-quarter basis, but up 23% from $1.076 billion for the year-earlier quarter, driven primarily by the Alarion merger.

For the fourth quarter of 2014, the Company's loans held for sale totaled $161.1 million, increasing $13.2 million or 9% on a linked-quarter basis from $147.9 million, and increasing $50.4 million or 46% from $110.7 million compared with the year-earlier quarter. The increase in the loans held for sale for the current quarter occurred as production outpaced loan sales. Loan sales to agencies in the fourth quarter totaled $197.6 million and, separately, the Company recorded a gain of $1.9 million related to the mortgage servicing rights for those loans. Total mortgage production for the fourth quarter was $344.7 million, up 18% on a linked-quarter basis from $292.6 million and up 186% from $120.4 million compared with the year-earlier quarter.

Noninterest income for the fourth quarter of 2014 improved 111% to $9.6 million from $4.5 million in the year-earlier quarter, reflecting primarily increases in revenue from mortgage banking activities of $5.0 million. Noninterest expense for the fourth quarter of 2014 increased 47% to $23.2 million from $15.7 million in the year-earlier quarter, driven primarily by increases in salaries and employee benefits of $5.8 million and growth in equipment and occupancy expense of $667,000, both related to the expansion of the mortgage division and the Alarion merger.

Accounting for Acquired Assets

The Company performs ongoing assessments of the estimated cash flows of its acquired credit impaired loan portfolios. The fair value of the acquired loan portfolios consisted of $86.8 million in non-covered and $42.4 million in covered loans at the end of the fourth quarter of 2014 compared with $63.3 million in non-covered and $50.9 million in covered loans for the year-earlier quarter. The outstanding principal balance of the acquired credit impaired loan portfolios totaled $179.1 million at the end of the fourth quarter of 2014 compared with $177.8 million for the year-earlier quarter. The details of the accounting for the acquired credit impaired loan portfolios for the fourth quarter of 2014 are as follows:

• Covered loans decreased $43,000 and non-covered loans decreased $5.3 million from the linked quarter;
• The negative accretion for the FDIC loss-share receivable was $2.3 million and the FDIC loss-share clawback accrual increased to $191,000; and
• Loan discount accretion recognized in interest income increased to $3.6 million.

For the fourth quarter of 2014, credit impaired loan discount accretion recognized in interest income declined 22% to $3.6 million from the linked quarter, and declined 43% from $6.3 million for the year-earlier quarter. The FDIC loss-share receivable associated with acquired assets covered decreased 15% to $23.8 million from $27.9 million for the linked quarter and declined 42% from $41.3 million for the year-earlier quarter. The reduction in the FDIC loss-share receivable for the linked quarter was driven primarily by negative accretion of $2.3 million, affecting the loss-share receivable asset associated with the improvement in expected cash flows of the acquired credit impaired performing loan portfolios covered and by FDIC reimbursements received of $1.5 million. An increase to the FDIC clawback liability accrual was recorded as an expense for the current quarter of $191,000, which increased the total accrual to $3.5 million. This FDIC clawback liability was caused by improvement in the estimates of expected cash flows for acquired credit impaired loans covered under loss-sharing agreements.

The acquired credit impaired loan covered discount affecting the loss-share receivable was $22.4 million, or 93.8% of the loss-share receivable, for the fourth quarter of 2014 compared with $39.1 million, or 94.6% of the loss-share receivable, for the year-earlier quarter. The gross balance of acquired assets covered decreased to $79.0 million for the fourth quarter of 2014 compared with $109.2 million for the year-earlier quarter. The FDIC loss-share receivable as a percent of the acquired assets covered decreased to 30.2% compared with 37.8% for the year-earlier quarter.

Asset Quality

Total nonperforming assets, excluding acquired assets, decreased to $6.7 million, or 0.39% of total assets, compared with $7.5 million, or 0.43% of total assets, for the linked quarter and declined from $11.2 million, or 0.81% of total assets, for the year-earlier quarter. Annualized net charge-offs to average outstanding loans, excluding acquired loans, were 0.07% for the fourth quarter of 2014 compared with annualized net charge-offs of 0.06% for the linked quarter and annualized net charge-offs of 0.10% for the year-earlier quarter. Nonperforming loans, excluding acquired loans, totaled $6.1 million for the fourth quarter of 2014, down from $6.9 million for the linked quarter and down from $9.4 million for the year-earlier quarter. OREO and repossessed assets, excluding acquired assets, totaled $577,000 for the fourth quarter of 2014, down from $648,000 for the linked quarter and from $1.8 million for the year-earlier quarter.

The provision for loan losses on non-acquired loans decreased to $285,000 for the fourth quarter of 2014 from $575,000 for the linked quarter, primarily driven by improving credit trends, but increased from $220,000 for the year-earlier quarter. For the fourth quarter of 2014, the allowance for loan losses represented 1.26% of total loans outstanding, excluding acquired loans, versus 1.28% for the linked quarter and 1.31% for the year-earlier quarter.

About Heritage Financial Group, Inc. and HeritageBank of the South

Heritage Financial Group, Inc. is the holding company for HeritageBank of the South, a community-oriented bank serving primarily Georgia, Florida and Alabama through 36 banking locations, 21 mortgage offices, and 5 investment offices. As of December 31, 2014, the Company reported total assets of approximately $1.7 billion and total stockholders' equity of approximately $160 million. For more information about the Company, visit HeritageBank of the South on the Web at www.eheritagebank.com under the "Investors" tab.

Cautionary Note Regarding Forward Looking Statements

Except for historical information contained herein, the matters included in this news release and other information in the Company's filings with the Securities and Exchange Commission may contain certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words or phrases such as "opportunities," "prospects," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions. The forward-looking statements made herein represent the current expectations, plans or forecasts of the Company's future results and revenues. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and includes this statement for purposes of these safe harbor provisions. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements. Investors should not place undue reliance on any forward-looking statement and should consider the uncertainties and risks, discussed under Item 1A. "Risk Factors" of the Company's 2013 Annual Report on Form 10-K and in any of the Company's subsequent SEC filings. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in its other filings with the SEC.

Net Income and Diluted Earnings Per Share are presented in accordance with Generally Accepted Accounting Principles ("GAAP"). Adjusted Noninterest Income, Adjusted Noninterest Expense, Adjusted Net Income and Adjusted Diluted Earnings Per Share are non-GAAP financial measures. The Company believes that these non-GAAP measures aid in understanding and comparing current-year and prior-year results, both of which include unusual items of different natures. These non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results.