Heritage Financial Group, Inc., the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter ended September 30, 2014. Key highlights of the Company's report for the third quarter of 2014 include:

“The branch, to be acquired from The PrivateBank and Trust Company ”

• Net income of $2.0 million or $0.26 per diluted share, up 11% from $1.8 million or $0.23 per diluted share for the linked quarter, and up 48% from $1.3 million or $0.18 per diluted share for the year-earlier quarter;
• Net income, excluding special items for each quarter, of $3.2 million or $0.42 per diluted share, up 35% from $2.4 million or $0.31 per diluted share for the linked quarter, and up 84% from $1.7 million or $0.23 per diluted share for the year-earlier quarter (see non-GAAP reconciliation);
• The successful completion of the Company's first open-bank acquisition, Alarion Financial Services, Inc. and its subsidiary Alarion Bank ("Alarion"), on September 30, 2014;
• Loan growth, excluding acquired loans, of $29.3 million or 4% on a linked-quarter basis and $108.5 million or 16% compared with the year-earlier quarter;
• A decline in nonperforming loans, excluding acquired loans, of 2% on a linked-quarter basis and 37% compared with the year-earlier quarter;
• An increase in the provision for loan losses, excluding acquired loans, to $575,000, up from $510,000 for the linked quarter and up 64% compared with $350,000 for the year-earlier quarter; and
• An increase in mortgage originations to $292.6 million, up $42.7 million or 17% from the linked quarter and up $177.3 million or 154% from the year-earlier quarter.

Commenting on the announcement, Leonard Dorminey, President and Chief Executive Officer, said, "Results for this past quarter reflected significant progress in the growth of our business and the execution of our expansion strategies – most notably with the completion of the Alarion acquisition, which facilitated our entry into the Gainesville, Florida market. Additionally, HeritageBank Mortgage has experienced continued growth, recording its second consecutive profitable quarter, and, with a record level of loan locks at quarter's end, is on track to finish the year strong. All aspects of our operations continue to perform well, as indicated by ongoing organic loan growth and continued momentum in loan production across most of our markets, which keeps us on pace for another year of double-digit growth. This progress, coupled with further improvements in credit quality measures, has greatly strengthened our banking operations.

"Subsequent to quarter's end, we were pleased to announce an agreement to purchase our first branch in the Metro Atlanta area," Dorminey continued. "The branch, to be acquired from The PrivateBank and Trust Company ("PrivateBank"), a wholly owned subsidiary of Chicago-based PrivateBancorp, Inc., is located on the northeast area of the city. It is expected to give us greater visibility and access to an attractive number of small- and medium-sized businesses, which will allow us to pursue a niche-focused commercial bank model and will provide the footing for further expansion in metro Atlanta. We are excited about this opportunity, especially considering Brian Schmitt has joined our company as Executive Vice President, Atlanta Market CEO and Director of Mergers & Acquisitions. Schmitt has over 30 years of experience in the Atlanta market and will be a tremendous asset in support of our growth plans."

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 November 26, 2014, to stockholders of record as of November 12, 2014.

Alarion Merger

On September 30, 2014, the Company successfully completed the merger of Alarion Financial Services, Inc. and its subsidiary Alarion Bank with and into Heritage Financial Group, Inc. and subsidiary HeritageBank of the South. In connection with the merger, the Company issued 1,158,147 shares for exchange of Alarion's shares and recorded $6.8 million in goodwill. 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. Immediately following the merger, the Company redeemed all of Alarion's preferred stock in exchange for $4.5 million in cash and 178,267 shares of the Company's common stock. The Company expects to complete Alarion's system conversion during the fourth quarter of 2014.

Third Quarter 2014 Results of Operations

The $187,000 increase in reported quarterly earnings for the third quarter of 2014 compared with the linked quarter resulted primarily from the following items:

• Solid growth in revenue from mortgage banking activities of $1.7 million;
• Decreased FDIC loss-share clawback expenses of $917,000;
• Reduced negative accretion of the FDIC loss-share receivable of $708,000;
• Increased gain on sales of securities of $490,000; offset by
• Increased acquisition-related expenses of $2.4 million, driven primarily by the Alarion merger; and
• Increased salaries and employee benefits of $1.1 million, driven primarily by mortgage banking expansion.

The $637,000 increase in reported quarterly earnings for the third quarter of 2014 compared with the year-earlier quarter primarily reflected the following items:

• Solid growth in revenue from mortgage banking activities of $4.8 million;
• Increased interest income of $2.6 million;
• Increased gain on sales of securities of $628,000; offset by
• Increased salaries and employee benefits of $3.3 million;
• Increased acquisition-related expenses of $2.3 million; and
• Increased negative accretion of the FDIC loss-share receivable of $1.2 million

Net interest income for the third quarter of 2014 increased 17% to $15.9 million from $13.6 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 4.80% for the third quarter of 2014, an increase of seven basis points from 4.73% for the year-earlier period. The increase in net interest margin for the third quarter of 2014 compared with the year-earlier quarter was driven by an improvement in the interest-earning asset mix, which increased the yield on interest earning assets by five basis points coupled with a one basis point decline in the cost of interest-bearing liabilities. Excluding acquired credit impaired loan discount adjustments from the net interest margin, the core net interest margin was 3.29% for the third quarter of 2014, an improvement of six basis points from 3.23% 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 third quarter of 2014, the Company continued to achieve loan growth, with its non-acquired loan portfolio increasing $29.3 million organically on a linked-quarter basis and advancing $108.5 million overall compared with the year-earlier quarter. For the third quarter of 2014, the Company's loan portfolio, including acquired loans, totaled $1.069 billion, increasing $224.0 million on a linked-quarter basis from $845.1 million and $280.0 million from $789.1 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 South Atlanta, Statesboro, Macon, Birmingham, Auburn/Columbus, and Ocala markets. Total deposits stood at $1.341 billion at the end of the third quarter of 2014, up 11% from $1.209 billion on a linked-quarter basis, and up 27% from $1.052 billion for the year-earlier quarter, driven primarily by the Alarion merger, which was offset in part by a large withdrawal by a municipal depositor.

For the third quarter of 2014, the Company's loans held for sale totaled $147.9 million, increasing $20.7 million or 16% on a linked-quarter basis from $127.2 million, and increasing $109.8 million or 289% from $38.0 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 third quarter totaled $195.4 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 third quarter was $292.6 million, up 17% on a linked-quarter basis from $249.9 million and up 154% from $115.3 million compared with the year-earlier quarter.

Noninterest income for the third quarter of 2014 improved 111% to $8.3 million from $3.9 million in the year-earlier quarter, driven primarily by increases in revenue from mortgage banking activities of $4.8 million and gain on sales of securities of $628,000 offset in part by an increase in negative accretion of the FDIC loss-share receivable of $1.2 million. Noninterest expense for the third quarter of 2014 increased 34% to $20.6 million from $15.3 million in the year-earlier quarter, driven primarily by increases in salaries and employee benefits of $3.3 million related to the expansion of the mortgage division and an increase in acquisition-related expenses of $2.3 million primarily related to 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 $92.1 million in non-covered and $42.4 million in covered loans at the end of the third quarter of 2014 compared with $69.7 million in non-covered and $53.8 million in covered loans for the year-earlier quarter. The outstanding principal balance of the FDIC-acquired loan portfolios totaled $188.8 million at the end of the third quarter of 2014 compared with $195.5 million for the year-earlier quarter. The details of the accounting for the acquired credit impaired loan portfolios for the third quarter of 2014 are as follows:

• Covered loans decreased $1.0 million and non-covered loans increased $35.2 million from the linked quarter;
• The negative accretion for the FDIC loss-share receivable was $2.7 million and the FDIC loss-share clawback accrual decreased to $35,000;
• Provision expense for covered loans increased to $65,000; and
• Loan discount accretion recognized in interest income increased to $4.6 million.

For the third quarter of 2014, credit impaired loan discount accretion recognized in interest income declined to $4.62 million from $4.64 million for the linked quarter, but improved 24% from $3.7 million for the year-earlier quarter. Provision expense of $65,000 was recorded for loan charge-offs on acquired credit impaired covered loans individually assessed and not provided for by the discount, with approximately 80% of the charge-offs reimbursable by the FDIC. The provision expense for these covered loans did not affect the Company's loan loss reserve. The FDIC loss-share receivable associated with acquired assets covered decreased 16% to $27.9 million from $33.2 million for the linked quarter and declined 37% from $44.5 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 $2.7 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 $2.6 million. A decrease to the FDIC clawback liability accrual was recorded as a reduction to the expense for the current quarter of $35,000, which decreased the total accrual to $3.3 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 $25.7 million, or 91.9% of the loss-share receivable, for the third quarter of 2014 compared with $42.7 million, or 95.9% of the loss-share receivable, for the year-earlier quarter. The gross balance of acquired assets covered decreased to $82.8 million for the third quarter of 2014 compared with $116.2 million for the year-earlier quarter. The FDIC loss-share receivable as a percent of the acquired assets covered decreased to 33.8% compared with 38.3% for the year-earlier quarter.

Asset Quality

Total nonperforming assets, excluding acquired assets, decreased to $7.5 million, or 0.43% of total assets, compared with $7.5 million, or 0.50% of total assets, for the linked quarter and declined from $13.6 million, or 1.03% of total assets, for the year-earlier quarter. Annualized net charge-offs to average outstanding loans, excluding acquired loans, were 0.06% for the third quarter of 2014 compared with annualized net charge-offs of 0.05% for the linked quarter and annualized net charge-offs of 0.31% for the year-earlier quarter. Nonperforming loans, excluding acquired loans, totaled $6.9 million for the third quarter of 2014, down from $7.0 million for the linked quarter and down from $11.0 million for the year-earlier quarter. OREO and repossessed assets, excluding acquired assets, totaled $648,000 for the third quarter of 2014, up from $507,000 for the linked quarter, but down from $2.7 million for the year-earlier quarter.

The provision for loan losses on non-acquired loans increased to $575,000 for the third quarter of 2014 from $510,000 for the linked quarter and from $350,000 for the year-earlier quarter, primarily driven by core loan growth. For the third quarter of 2014, the allowance for loan losses represented 1.28% of total loans outstanding, excluding acquired loans, versus 1.27% for the linked quarter and 1.34% for the year-earlier quarter.

Capital Management Initiatives

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.

The Company's estimated total risk-based capital ratio at September 30, 2014, was 12.8%, 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 8.2% as of September 30, 2014.

Investor Presentation

The Company will make available to investors a presentation, updated for third quarter results, on the Company's website at www.eheritagebank.com under the "Investors" tab and will remain available for 90 days.