Heritage Financial Group Inc

On December 10, 2014, Heritage and Renasant Corporation (“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 closing price on April 24, 2015 of $30.43 per share, the 0.9266 exchange ratio represented approximately $28.20 in value for each share of Heritage common stock. Subject to the receipt of all other required approvals and the satisfaction of all other conditions, including the approval by the stockholders of Heritage and Renasant, the merger is expected to be completed in the third quarter of 2015.  Heritage and Renasant expect to hold special stockholders meetings on June 16, 2015 to approve the merger.

General.  During the three months ended March 31, 2015, we recorded net income of $3.9 million compared to net income of $1.3 million for the same period in 2014.  Basic and diluted earnings per share for the three months ended March 31, 2015, were $0.44 and $0.43, respectively, compared to $0.18 and $0.18, respectively, for the same period in 2014.  The improvement in operating results for the three months ended March 31, 2015 compared to the same period in 2014 was primarily driven by increases in revenue from mortgage banking activities of $8.9 million and net interest income of $4.5 million offset by increases in salaries and employee benefits of $7.1 million,  equipment and occupancy of $709,000, information services expenses of $394,000, and increased negative accretion of the FDIC loss-share receivable of $852,000. 

Interest Income. Total interest income for the three months ended March 31, 2015, increased $4.5 million, or 28.0%, compared to the same period in 2014.  The increase was due to growth in average interest-earning assets for the three months ended March 31, 2015 of $342.9 million compared to the same period in 2014 primarily driven by the Alarion acquisition during the third quarter of 2014 coupled with the PrivateBank branch acquisition during the first quarter of 2015 on top of organic loan growth.  Also positively impacting interest income was the structural balance sheet shift from lower yielding investment securities to higher yielding loans.  The increase in the average balance of earning assets for the three months ended March 31, 2015 was offset in part with a decrease of one basis point in the yield on average-earning assets to 5.31% as compared to the same period in 2014. 

Interest income, on a fully taxable equivalent basis, on investment securities for the three months ended March  31, 2015, was $1.4 million compared to $1.7 million for the same period in 2014.  The weighted average yield on investments for the three months ended March 31, 2015,  declined 9 basis points which negatively impacted the interest income on investment securities compared to the same period in 2014.  The decline in the weighted average yield on investments for the three months ended March 31, 2015 was coupled with a reduction in the balance of investment securities of $33.8 million which negatively impacted the interest income on investments compared to the same period in 2014 as the balance was reduced as a percentage of interest earning assets.  We anticipate contracting the size of the investment securities as a percentage of interest earning assets throughout 2015.

On December 31, 2014, a putative stockholder class action lawsuit, Stein v. Heritage Financial Group, Inc. et al., was filed in the Circuit Court for Baltimore City, Maryland, Civil Division, against Heritage, the members of its board of directors, HeritageBank of the South, Renasant Corporation and Renasant Bank. The complaint, which was amended on February 18, 2015, alleges that the Heritage directors breached their fiduciary duties and/or violated Maryland law in connection with the negotiation and approval of the merger agreement by failing to maximize shareholder value and failing to disclose material information in the February 9, 2015 preliminary joint proxy statement/prospectus, and that Heritage, HeritageBank of the South, Renasant Corporation and Renasant Bank aided and abetted those alleged breaches of fiduciary duties. In addition to monetary damages in an unspecified amount and other remedies, the lawsuit seeks to enjoin Heritage stockholders from voting on the Heritage merger proposal at the Heritage special meeting and Renasant Corporation stockholders from voting on the Renasant merger proposal at the Renasant Corporation special meeting and to otherwise enjoin the directors from consummating the merger. The Company believes the claims asserted are without merit and intends to vigorously defend against the lawsuit.