##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
 
 721 N. Westover Blvd., Albany, GA 31707
229-420-0000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



HERITAGE FINANCIAL GROUP
 INDEX
  
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2010 AND DECEMBER 31, 2009
    
    
    3CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND THE YEAR ENDED
DECEMBER 31, 2009
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    
    18ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 4. CONTROLS AND PROCEDURES
    
    
    32ITEM 4T. CONTROLS AND PROCEDURES
    
    
    32PART II  OTHER INFORMATION
    
    
    34SIGNATURES
    
    
    36EXHIBITS31.1 RULE 13A14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER31.2 RULE 13A14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER32    SECTION 1350 CERTIFICATIONEX-31.1EX-31.2EX-32




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
March 31, 2010 and December 31, 2009
 Unaudited
    
    
    AuditedMarch 31,
    
    
    December 31,2010
    
    
    2009AssetsCash and due from banks
    
    $
    24,413,685
    
    
    $
    14,921,517Interest-bearing deposits in banks
    
    
    26,988,358
    
    
    
    43,236,287Federal funds sold
    
    
    15,655,000
    
    
    
    11,340,000Securities available for sale, at fair value
    
    
    115,551,744
    
    
    
    120,526,900Federal Home Loan Bank stock, at cost
    
    
    3,253,400
    
    
    
    3,253,400Other equity securities, at cost
    
    
    1,010,000
    
    
    
    1,010,000Loans
    
    
    342,495,227
    
    
    
    334,138,932Less allowance for loan losses
    
    
    5,816,171
    
    
    
    6,060,460Loans, net
    
    
    336,679,056
    
    
    
    328,078,472Premises and equipment, net
    
    
    16,791,176
    
    
    
    15,590,120Premises held for sale
    
    
    1,080,000
    
    
    
    1,080,000Accrued interest receivable
    
    
    2,736,813
    
    
    
    2,799,375Foreclosed assets
    
    
    3,567,520
    
    
    
    1,795,544Intangible assets
    
    
    1,539,675
    
    
    
    1,570,832Cash surrender value of bank owned life insurance
    
    
    14,908,315
    
    
    
    14,756,771Other assets
    
    
    10,188,137
    
    
    
    11,988,301$
    574,362,879
    
    
    $
    571,947,519Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    28,375,397
    
    
    $
    28,881,905Interest-bearing
    
    
    400,027,589
    
    
    
    397,724,617Total deposits
    
    
    428,402,986
    
    
    
    426,606,522Federal funds purchased and securities sold under repurchase agreements
    
    
    32,777,942
    
    
    
    32,843,465Other borrowings
    
    
    42,500,000
    
    
    
    42,500,000Accrued interest payable
    
    
    671,159
    
    
    
    706,321Other liabilities
    
    
    8,395,961
    
    
    
    8,474,370Total liabilities
    
    
    512,748,048
    
    
    
    511,130,678Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,454,344 issued and outstanding
    
    
    114,543
    
    
    
    114,543Capital surplus
    
    
    40,814,393
    
    
    
    40,609,551Retained earnings
    
    
    39,554,186
    
    
    
    38,984,165Accumulated other comprehensive loss
    
    
    (2,474,282
    )
    
    
    (2,387,234
    )Unearned employee stock ownership plan (ESOP) shares,
231,368 and 242,385 shares
    
    
    (2,313,675
    )
    
    
    (2,423,850
    )75,695,165
    
    
    
    74,897,175Treasury stock, at cost, 1,055,084 shares
    
    
    (14,080,334
    )
    
    
    (14,080,334
    )Total stockholders equity
    
    
    61,614,831
    
    
    
    60,816,841$
    574,362,879
    
    
    $
    571,947,519
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents





HERITAGE FINANCIAL GROUP AND SUBSIDIARY





Consolidated Statements of Operations (Unaudited)


For the Three Months Ended March 31, 2010 and 2009


For the Three Months2010
    
    
    2009Interest incomeInterest and fees on loans
    
    $
    5,319,840
    
    
    $
    4,593,289Interest on taxable securities
    
    
    776,046
    
    
    
    1,225,709Interest on nontaxable securities
    
    
    298,077
    
    
    
    292,643Interest on federal funds sold
    
    
    8,899
    
    
    
    16,552Interest on deposits in other banks
    
    
    44,149
    
    
    
    2626,447,011
    
    
    
    6,128,455Interest expenseInterest on deposits
    
    
    1,524,353
    
    
    
    1,887,761Interest on other borrowings
    
    
    513,290
    
    
    
    684,6322,037,643
    
    
    
    2,572,393Net interest income
    
    
    4,409,368
    
    
    
    3,556,062Provision for loan losses
    
    
    500,000
    
    
    
    800,000Net interest income after provision
for loan losses
    
    
    3,909,368
    
    
    
    2,756,062Noninterest incomeService charges on deposit accounts
    
    
    823,800
    
    
    
    807,835Other service charges, commissions
and fees
    
    
    402,570
    
    
    
    359,846Brokerage fees
    
    
    221,595
    
    
    
    194,358Mortgage origination fees
    
    
    38,896
    
    
    
    105,684Bank owned life insurance
    
    
    151,544
    
    
    
    150,140Gain on sales of securities
    
    
    151,847
    
    
    
    21,398Other
    
    
    21,310
    
    
    
    6,2051,811,562
    
    
    
    1,645,466Noninterest expenseSalaries and employee benefits
    
    
    2,564,882
    
    
    
    2,197,689Equipment
    
    
    254,726
    
    
    
    273,388Occupancy
    
    
    306,280
    
    
    
    292,347Advertising and marketing
    
    
    120,192
    
    
    
    87,524Legal and accounting
    
    
    148,542
    
    
    
    117,880Consulting & other professional fees
    
    
    71,205
    
    
    
    61,572Directors fees and retirement
    
    
    138,711
    
    
    
    153,108Telecommunications
    
    
    69,361
    
    
    
    61,956Supplies
    
    
    57,567
    
    
    
    38,112Data processing fees
    
    
    480,689
    
    
    
    329,960(Gain) loss on sales and write-downs of
other real estate owned
    
    
    (231,128
    )
    
    
    49,064Foreclosed asset expenses
    
    
    170,842
    
    
    
    44,990FDIC insurance and other regulatory fees
    
    
    170,457
    
    
    
    80,956Other operating
    
    
    382,040
    
    
    
    326,1334,704,366
    
    
    
    4,114,679Income before income taxes
    
    
    1,016,564
    
    
    
    286,849Applicable income tax (benefits)
    
    
    218,809
    
    
    
    (107,774
    )Net income
    
    $
    797,755
    
    
    $
    394,623Basic earnings per share
    
    $
    0.08
    
    
    $
    0.04Diluted earnings per share
    
    $
    0.08
    
    
    $
    0.04


See Notes to Consolidated Financial Statements. 4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Unaudited)
 For the Three Months Ended March 31, 2010 and 2009
 For the Three       Months2010
    
    
    2009Net income
    
    $
    797,755
    
    
    $
    394,623Other comprehensive income (loss):Accretion of realized gain on terminated
cash flow hedge, net of tax of $35,187
    
    
    (52,780
    )
    
    
    (52,780
    )Unrealized holding gains on investments
arising during the period, net of tax of
$37,893 and $137,421
    
    
    56,840
    
    
    
    206,131Reclassification adjustment for investment
gains included in net income, net of tax of
$60,739 and $8,559
    
    
    (91,108
    )
    
    
    (12,839
    )Total other comprehensive income (loss)
    
    
    (87,048
    )
    
    
    140,512Comprehensive income
    
    $
    710,707
    
    
    $
    535,135
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Stockholders Equity (Unaudited)
For the Three Months Ended March 31, 2010 and
The Year Ended December 31, 2009
 AccumulatedUnearned
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalance, December 31,
2008
    
    
    11,452,344
    
    
    $
    114,523
    
    
    $
    39,861,237
    
    
    $
    41,357,209
    
    
    $
    (2,864,550
    )
    
    $
    (13,569,813
    )
    
    $
    (2,685,633
    )
    
    $
    62,212,973Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,652,319
    )Cash dividend
declared, $0.32
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720,725
    )Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    807,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807,402Repurchase of
62,026 shares
of stock for the
treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (516,426
    )
    
    
    
    
    
    
    (516,426
    )Issuance of 440
shares of
common stock
from the treasury
    
    
    
    
    
    
    
    
    
    
    (2,602
    )
    
    
    
    
    
    
    
    
    
    
    5,905
    
    
    
    
    
    
    
    3,303Issuance of
restricted shares
of common stock
    
    
    2,000
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    298,399
    
    
    
    298,399Tax benefit shortfall
from stock-based
compensation plans
    
    
    
    
    
    
    
    
    
    
    (58,494
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,494
    )ESOP shares earned,
44,070 shares
    
    
    
    
    
    
    
    
    
    
    (73,946
    )
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    366,754Tax benefit on ESOP
expense
    
    
    
    
    
    
    
    
    
    
    75,974
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,974Balance, December
31, 2009
    
    
    11,454,344
    
    
    $
    114,543
    
    
    $
    40,609,551
    
    
    $
    38,984,165
    
    
    $
    (2,423,850
    )
    
    $
    (14,080,334
    )
    
    $
    (2,387,234
    )
    
    $
    60,816,841Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797,755Cash dividend
declared, $0.09 per
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227,734
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227,734
    )Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    201,796
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,796Other comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,048
    )
    
    
    (87,048
    )Excess tax expense
from stock based
compensation plans
    
    
    
    
    
    
    
    
    
    
    5,574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,574ESOP shares earned,
11,018 shares
    
    
    
    
    
    
    
    
    
    
    (9,187
    )
    
    
    
    
    
    
    110,175
    
    
    
    
    
    
    
    
    
    
    
    100,988Tax benefit on ESOP
expense
    
    
    
    
    
    
    
    
    
    
    6,659
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,659Balance, March 31,
2010
    
    
    11,454,344
    
    
    $
    114,543
    
    
    $
    40,814,393
    
    
    $
    39,554,186
    
    
    $
    (2,313,675
    )
    
    $
    (14,080,334
    )
    
    $
    (2,474,282
    )
    
    $
    61,614,831
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)  For the Three Months Ended March 31, 2010 and 2009
 For the Three Months2010
    
    
    2009OPERATING ACTIVITIESNet income
    
    $
    797,755
    
    
    $
    394,623Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    215,449
    
    
    
    227,484Deposit premium amortization
    
    
    40,463
    
    
    
    Provision for loan losses
    
    
    500,000
    
    
    
    800,000ESOP compensation expense
    
    
    100,988
    
    
    
    86,302Stock-based compensation expense
    
    
    201,796
    
    
    
    201,797Net gain on sales of securities available for sale
    
    
    (151,847
    )
    
    
    (21,398
    )Accretion of gain on termination of cash flow hedge
    
    
    (87,967
    )
    
    
    (87,967
    )Increase in bank owned life insurance
    
    
    (151,544
    )
    
    
    (150,141
    )Excess tax shortfall related to stock-based compensation plans
    
    
    (5,574
    )
    
    
    Excess tax expense related to ESOP
    
    
    (6,659
    )
    
    
    (Increase) decrease in interest receivable
    
    
    62,563
    
    
    
    (89,188
    )Decrease in interest payable
    
    
    (35,162
    )
    
    
    (223,733
    )Increase (decrease) in taxes payable
    
    
    826,482
    
    
    
    (107,775
    )(Gain) loss on sales and write-downs of other real estate owned
    
    
    (231,128
    )
    
    
    49,064Net other operating activities
    
    
    965,537
    
    
    
    545,214Total adjustments
    
    
    2,243,396
    
    
    
    1,229,659Net cash provided by operating activities
    
    
    3,041,151
    
    
    
    1,624,282INVESTING ACTIVITIESDecrease in interest-bearing deposits in banks
    
    
    16,247,929
    
    
    
    94,294Purchases of securities available for sale
    
    
    (15,364,450
    )
    
    
    (29,145,589
    )Proceeds from maturities of securities available for sale
    
    
    11,542,144
    
    
    
    7,859,291Proceeds from sale of securities available for sale
    
    
    8,892,197
    
    
    
    9,058,238Net change in Federal Home Loan Bank stock
    
    
    
    
    
    
    (67,600
    )(Increase) decrease in federal funds sold
    
    
    (4,315,000
    )
    
    
    20,541,000(Increase) decrease in loans, net
    
    
    (11,408,407
    )
    
    
    3,803,201Purchase of premises and equipment
    
    
    (1,416,504
    )
    
    
    (197,250
    )Proceeds from acquisition activity
    
    
    921,195
    
    
    
    Proceeds from sale of other real estate owned
    
    
    766,974
    
    
    
    886,667Net cash provided by investing activities
    
    
    5,866,078
    
    
    
    12,832,252FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    865,964
    
    
    
    (17,053,821
    )Increase (decrease) in federal funds purchased and securities sold
under agreement to repurchase
    
    
    (65,524
    )
    
    
    5,615,928Excess tax benefit related to stock-based compensation plans
    
    
    5,574
    
    
    
    Excess tax related to ESOP
    
    
    6,659
    
    
    
    Purchase of treasury stock, net
    
    
    
    
    
    
    (410,739
    )Dividends paid to stockholders
    
    
    (227,734
    )
    
    
    (204,597
    )Net cash provided by (used in) financing activities
    
    
    584,939
    
    
    
    (12,053,229
    )Net increase in cash and due from banks
    
    
    9,492,168
    
    
    
    2,403,305Cash and due from banks at beginning of period
    
    
    14,921,517
    
    
    
    10,159,602Cash and due from banks at end of period
    
    $
    24,413,685
    
    
    $
    12,562,907SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    2,072,805
    
    
    $
    2,769,127Taxes
    
    
    9,000
    
    
    
    NONCASH TRANSACTIONSDecrease in unrealized losses on securities available for sale
    
    $
    57,113
    
    
    $
    322,154Principal balances of loans transferred to other real estate owned
    
    
    2,346,229
    
    
    
    207,698
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1   BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
     NOTE 2   EARNINGS PER SHARE
  Three Months2010
    
    
    2009Basic earnings per share:Net income
    
    $
    797,755
    
    
    $
    394,623Weighted average common shares outstanding
    
    
    10,081,094
    
    
    
    10,026,182Total basic earnings per common share
    
    $
    0.08
    
    
    $
    0.04Diluted earnings per share:Net income
    
    $
    797,755
    
    
    $
    394,623Weighted average common shares outstanding
    
    
    10,081,094
    
    
    
    10,026,182Effect of dilutive stock options and
restricted stock
    
    
    698
    
    
    
    Weighted average dilutive common shares
outstanding
    
    
    10,081,792
    
    
    
    10,026,182Total diluted earnings per common share
    
    $
    0.08
    
    
    $
    0.04
  8




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3   SHARE BASED COMPENSATION
    9




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4   SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2010:U.S. Government sponsored
agency securities (GSEs)*
    
    $
    22,962,984
    
    
    $
    106,443
    
    
    $
    (66,866
    )
    
    $
    23,002,561State and municipal securities
    
    
    28,551,170
    
    
    
    160,135
    
    
    
    (1,326,091
    )
    
    
    27,385,214Corporate debt securities
    
    
    2,176,655
    
    
    
    
    
    
    
    (437,754
    )
    
    
    1,738,901GSE residential mortgage-backed
securities
    
    
    58,585,352
    
    
    
    508,887
    
    
    
    (18,827
    )
    
    
    59,075,412Private label residential mortgage-backed
securities
    
    
    3,649,563
    
    
    
    22,093
    
    
    
    
    
    
    
    3,671,656Total debt securities
    
    
    115,925,724
    
    
    
    797,558
    
    
    
    (1,849,538
    )
    
    
    114,873,744Equity securities
    
    
    751,522
    
    
    
    55,799
    
    
    
    (129,321
    )
    
    
    678,000Total securities**
    
    $
    116,677,246
    
    
    $
    853,357
    
    
    $
    (1,978,859
    )
    
    $
    115,551,744December 31, 2009:U.S. Government sponsored
agency securities (GSEs)*
    
    $
    30,571,605
    
    
    $
    190,036
    
    
    $
    (299,664
    )
    
    $
    30,461,977State and municipal securities
    
    
    30,142,545
    
    
    
    196,013
    
    
    
    (1,215,694
    )
    
    
    29,122,864Corporate debt securities
    
    
    2,178,999
    
    
    
    44,976
    
    
    
    (313,757
    )
    
    
    1,910,218GSE residential mortgage-backed
securities
    
    
    54,091,124
    
    
    
    449,796
    
    
    
    (4,682
    )
    
    
    54,536,238Private label residential mortgage-backed
securities
    
    
    3,859,494
    
    
    
    15,015
    
    
    
    (30
    )
    
    
    3,874,479Total debt securities
    
    
    120,843,767
    
    
    
    895,836
    
    
    
    (1,833,827
    )
    
    
    119,905,776Equity securities
    
    
    751,521
    
    
    
    47,999
    
    
    
    (178,396
    )
    
    
    621,124Total securities**
    
    $
    121,595,288
    
    
    $
    943,835
    
    
    $
    (2,012,223
    )
    
    $
    120,526,900
 
 *
    
    Such as Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, and Federal Home Loan Banks.**
    
    At March 31, 2010 and December 31, 2009, the Company held no
securities of any single issuer (excluding the U.S. Government and federal
agencies) with a book value that exceeded 10% of stockholders equity. 10




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4 
    
    SECURITIES (Continued)
 The amortized cost and fair value of debt securities available for sale as of March 31,
2010 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without penalty. Therefore, these securities are not
included in the maturity categories in the following maturity summary.
 Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    
    
    
    $
    Due from one year to five years
    
    
    1,526,655
    
    
    
    1,384,886Due from five to ten years
    
    
    7,589,779
    
    
    
    7,401,484Due after ten years
    
    
    44,574,375
    
    
    
    43,340,306Mortgage-backed securities
    
    
    62,234,915
    
    
    
    62,747,068$
    115,925,724
    
    
    $
    114,873,744
 Securities with a carrying value of $47,988,416 and $46,814,000 at March 31, 2010
and December 31, 2009, respectively, were pledged to secure public deposits, repurchase
agreements and for other purposes required or permitted by law.Gains and losses on sales of securities available for sale consist of the following:
 March 31,
    
    
    March 31,2010
    
    
    2009Gross gains on sales of securities
    
    $
    152,707
    
    
    $
    21,690Gross losses on sales of securities
    
    
    (860
    )
    
    
    (292
    )Net realized gains on sales of securities available for sale
    
    $
    151,847
    
    
    $
    21,398
 11




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4 
    
    SECURITIES (Continued)
 The following table shows the gross unrealized losses and fair value of securities
aggregated by category and length of time that securities have been in a continuous
unrealized loss position at March 31, 2010 and December 31, 2009.
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2010:U.S. Government sponsored
agency securities (GSEs)
    
    $
    9,030,743
    
    
    $
    (66,866
    )
    
    $
    
    
    
    $
    
    
    
    $
    9,030,743
    
    
    $
    (66,866
    )State and municipal securities
    
    
    10,110,278
    
    
    
    (288,899
    )
    
    
    11,049,266
    
    
    
    (1,037,192
    )
    
    
    21,159,544
    
    
    
    (1,326,091
    )Corporate securities
    
    
    869,745
    
    
    
    (148,551
    )
    
    
    869,156
    
    
    
    (289,203
    )
    
    
    1,738,901
    
    
    
    (437,754
    )GSE residential mortgage-backed securities
    
    
    6,839,379
    
    
    
    (18,827
    )
    
    
    
    
    
    
    
    
    
    
    6,839,379
    
    
    
    (18,827
    )Private label residential mortgage-
backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal, debt securities
    
    
    26,850,145
    
    
    
    (523,143
    )
    
    
    11,918,422
    
    
    
    (1,326,395
    )
    
    
    38,768,567
    
    
    
    (1,849,538
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    305,479
    
    
    
    (129,321
    )
    
    
    305,479
    
    
    
    (129,321
    )Total temporarily impaired securities
    
    $
    26,850,145
    
    
    $
    (523,143
    )
    
    $
    12,223,901
    
    
    $
    (1,455,716
    )
    
    $
    39,074,046
    
    
    $
    (1,978,859
    )December 31, 2009:U.S. Government sponsored
agency securities (GSEs)
    
    $
    14,295,966
    
    
    $
    (299,664
    )
    
    $
    
    
    
    $
    
    
    
    $
    14,295,966
    
    
    $
    (299,664
    )State and municipal securities
    
    
    8,125,696
    
    
    
    (311,298
    )
    
    
    10,722,375
    
    
    
    (904,396
    )
    
    
    18,878,071
    
    
    
    (1,215,694
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    845,308
    
    
    
    (313,757
    )
    
    
    845,308
    
    
    
    (313,757
    )GSE residential mortgage-backed securities
    
    
    2,883,976
    
    
    
    (4,682
    )
    
    
    
    
    
    
    
    
    
    
    2,883,976
    
    
    
    (4,682
    )Private label residential mortgage- backed securities
    
    
    24,344
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )Subtotal, debt securities
    
    
    25,329,982
    
    
    
    (615,674
    )
    
    
    11,567,683
    
    
    
    (1,218,153
    )
    
    
    36,897,665
    
    
    
    (1,833,827
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    256,504
    
    
    
    (178,396
    )
    
    
    256,404
    
    
    
    (178,396
    )Total temporarily impaired securities
    
    $
    25,329,982
    
    
    $
    (615,674
    )
    
    $
    11,824,087
    
    
    $
    (1,396,549
    )
    
    $
    37,154,069
    
    
    $
    (2,012,223
    )
 Management evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant such
evaluation.
 In analyzing an issuers financial condition, management considers whether the securities
are issued by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred and industry analysts reports. As management has the intent and
ability to hold the securities until maturity, or for the foreseeable future and due to
the fact that the unrealized losses relate primarily to changes in interest rates and do
not affect the expected cash flows of the underlying collateral or issuer, no declines
are deemed to be other than temporary.
 12




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4 
    
    SECURITIES (Continued)The investment in the common stock of the Federal Home Loan Bank of Atlanta is accounted
for by the cost method, which also represents par value, and is made for long-term
business affiliation reasons. In addition, this investment is subject to restrictions
relating to sale, transfer or other disposition. Dividends are recognized in income when
declared. The carrying value of this investment at March 31, 2010 is $3,253,400. The
estimated fair value of this investment is $3,253,400 as of March 31, 2010, and therefore
is not considered impaired.Other equity securities represent an investment in the common stock of the Chattahoochee
Bank of Georgia (Chattahoochee), a de novo bank in Gainesville, Georgia. The Company
accounts for this investment by the cost method. This investment represents
approximately 4.9% of the outstanding shares of Chattahoochee. Since its initial capital
raise, Chattahoochee has not had any stock transactions, and therefore, no fair market
value is readily available. The carrying value of this investment at March 31, 2010, is
$1,010,000. The Company plans to hold this investment for the foreseeable future, and
does not consider it impaired as of March 31, 2010.
 NOTE 5 
    
    FAIR VALUE MEASUREMENTSOn January 1, 2008, the Company adopted Fair Value Measurements and Disclosures (FASB ASC
820), Fair Value Measurements. Fair Value Measurements and Disclosuresdefines fair
value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. Fair Value Measurements and Disclosuresapplies to reported
balances that are required or permitted to be measured at fair value under existing
accounting pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.Fair Value Measurements and Disclosuresemphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, Fair Value Measurements and Disclosures
establishes a fair value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent of the reporting
entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and
the reporting entitys own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
 13




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5 
    
    FAIR VALUE MEASUREMENTS (Continued)Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are inputs
other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs may include quoted prices for
similar assets and liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest rates, foreign
exchange rates and yield curves that are observable at commonly quoted intervals. Level
3 inputs are unobservable inputs for the assets or liabilities, which are typically based
on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Companys assessment of the significance
of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.The table below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of March 31, 2010, aggregated by the level in the fair value hierarchy
within which those measurements fall.
 Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsAvailable for sale investment
securities
    
    $
    55,800
    
    
    $
    115,495,944
    
    
    $
    
    
    
    $
    115,551,744Total assets at fair value
    
    $
    55,800
    
    
    $
    115,495,944
    
    
    $
    
    
    
    $
    115,551,744
 14




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5 
    
    FAIR VALUE MEASUREMENTS (Continued)Assets Measured at Fair Value on a Nonrecurring BasisThe following is a description of the valuation methodologies used for instruments
measured at fair value on a non-recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.Loan impairment is reported when full payment under the loan terms is not expected. In
accordance with the provisions of the loan impairment guidance (FASB ASC 310-10-35),
individual loans were written down to their fair value. Loans applicable to write downs
of impaired loans are estimated using the present value of expected cash flows or the
appraised value of the underlying collateral discounted as necessary due to managements
estimates of changes in economic conditions. A portion of the allowance for loan losses
is allocated to impaired loans if the value of such loans is deemed to be less than the
unpaid balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported as a component of the provision for loan losses.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. When the fair value of the collateral is based
on an observable market price or a current appraised value, the Company records the loan
impairment as non-recurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the loan
impairment as non-recurring Level 3.Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying value or
fair value. Fair value is based upon independent market prices, appraised values of the
collateral or managements estimation of the value of the collateral. When the fair
value of the collateral is based on an observable market price or a current appraised
value, the Company records the foreclosed assets as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no observable
market price, the Company records the foreclosed asset as nonrecurring Level 3.At March 31, 2010, there were no impaired loans reported at fair value utilizing Level 2
valuation inputs. Impaired loans with a carrying value of $6,420,153 were reduced by
specific valuation allowance allocations totaling $1,237,966 for a total reported fair
value of $5,182,187 on collateral valuations utilizing Level 3 valuation inputs at March
31, 2010.Fair Value OptionFair Value Measurements and Disclosures (FASB ASC 820)allows companies to report
selected financial assets and liabilities at fair value. The changes in fair value are
recognized in earnings and the assets and liabilities measured under this methodology
are required to be displayed separately on the balance sheet. While this became
effective for the Company beginning January 1, 2008, the Company has not elected the
fair value option that is offered.
 15




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5 
    
    FAIR VALUE MEASUREMENTS (Continued)Disclosures about Fair Value of Financial InstrumentsThe fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there are no
quoted market prices for the Companys various financial instruments. In cases where
quoted market prices are not available, fair value is based on discounted cash flows or
other valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an immediate settlement of
the instrument. In accordance with the Fair Value Measurement and Disclosures Topic of
the FASB Accounting Standards Codification, the Company excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily represent
the underlying fair value of the Company.The following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments:
 Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:The
carrying amount of cash, due from banks, interest-bearing deposits at other financial
institutions and federal funds sold approximates fair value.Securities:Fair value of securities is based on available quoted market prices.
The carrying amount of equity securities with no readily determinable fair value
approximates fair value.Loans:The carrying amount of variable-rate loans that reprice frequently and have
no significant change in credit risk approximates fair value. The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers with
similar credit quality. The fair value of impaired loans is estimated based on
discounted contractual cash flows or underlying collateral values, where applicable.Deposits:The carrying amount of demand deposits, savings deposits and variable-rate
certificates of deposit approximates fair value. The fair value of fixed-rate
certificates of deposit is estimated based on discounted contractual cash flows using
interest rates currently being offered for certificates of similar maturities.Federal Funds Purchased and Securities Sold Under Repurchase Agreements:The fair
value of fixed rate federal funds purchased and securities sold under repurchase
agreements is estimated based on discounted contractual cash flows using the current
incremental borrowing rates for similar type borrowing arrangements.Other Borrowings:The carrying amount of variable rate advances approximates fair
value. The fair value of fixed rate advances is estimated based on discounted
contractual cash flows using the current incremental borrowing rates for similar type
borrowing arrangements.Accrued Interest:The carrying amount of accrued interest approximates fair value.Off-Balance-Sheet Instruments:The carrying amount of commitments to extend credit
and standby letters of credit approximates fair value.
 16




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5 
    
    FAIR VALUE MEASUREMENTS (Continued)The carrying amount and estimated fair value of the Companys financial instruments
were as follows:
 March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    51,402,043
    
    
    $
    51,402,043
    
    
    $
    58,157,804
    
    
    $
    58,157,804Federal funds sold
    
    $
    15,655,000
    
    
    $
    15,655,000
    
    
    $
    11,340,000
    
    
    $
    11,340,000Securities available for sale
    
    $
    115,551,744
    
    
    $
    115,551,744
    
    
    $
    120,526,900
    
    
    $
    120,526,900Federal home loan bank stock
    
    $
    3,253,400
    
    
    $
    3,253,400
    
    
    $
    3,253,400
    
    
    $
    3,253,400Other equity securities
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000Loans
    
    $
    342,495,227
    
    
    $
    346,140,810
    
    
    $
    334,138,932
    
    
    $
    341,971,372Allowance for loan losses
    
    
    5,816,171
    
    
    
    
    
    
    
    6,060,460
    
    
    
    Loans, net
    
    $
    336,679,056
    
    
    $
    346,140,810
    
    
    $
    328,078,472
    
    
    $
    341,971,372Accrued interest receivable
    
    $
    2,736,813
    
    
    $
    2,736,813
    
    
    $
    2,799,379
    
    
    $
    2,799,379Financial liabilities:Deposits
    
    $
    428,402,986
    
    
    $
    426,709,068
    
    
    $
    426,606,522
    
    
    $
    424,097,453Federal funds purchased and securities
sold under repurchase agreements
    
    $
    32,777,942
    
    
    $
    35,474,747
    
    
    $
    32,843,465
    
    
    $
    35,285,910Other borrowings
    
    $
    42,500,000
    
    
    $
    44,910,940
    
    
    $
    42,500,000
    
    
    $
    44,563,744Accrued interest payable
    
    $
    671,159
    
    
    $
    671,159
    
    
    $
    706,321
    
    
    $
    706,321
 NOTE 6    SUBSEQUENT EVENTSSubsequent events and transactions that occurred after March 31, 2010 but prior to May
17, 2010, the date these financial statements were available to be issued, have been
evaluated for potential recognition or disclosure in these financial statements.In April 2010, the Company declared a regular quarterly cash dividend of $0.09 per share.
The dividend will be paid on May 21, 2010, to stockholders of record as of May 7, 2010.
 17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
   18




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
      19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    39,175Financial stand-by letters of credit
    
    
    704$
    39,879
 Comparison of Financial Condition at March 31, 2010 and December 31, 2009
     20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
      Comparison of Operating Results
  Interest Income
  21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Interest Expense
  Net Interest Income
   Quarter Ended March 312010
    
    
    2009(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    336,800
    
    
    
    5,320
    
    
    
    6.42
    %
    
    $
    298,704
    
    
    $
    4,593
    
    
    
    6.24
    %Taxable investment securities
    
    
    88,166
    
    
    
    776
    
    
    
    3.52
    
    
    
    96,723
    
    
    
    1,225
    
    
    
    5.07Tax exempt investment securities
    
    
    30,127
    
    
    
    298
    
    
    
    6.00
    
    
    
    30,065
    
    
    
    292
    
    
    
    5.90Federal funds sold
    
    
    14,001
    
    
    
    9
    
    
    
    0.26
    
    
    
    26,693
    
    
    
    17
    
    
    
    0.25Interest bearing deposits with banks
    
    
    33,419
    
    
    
    44
    
    
    
    0.54
    
    
    
    536
    
    
    
    1
    
    
    
    0.20Total interest-earning
Assets
    
    
    502,513
    
    
    
    6,447
    
    
    
    5.32
    
    
    
    452,721
    
    
    
    6,128
    
    
    
    5.61Interest-Bearing Liabilities:Interest bearing demand
    
    
    67,713
    
    
    
    184
    
    
    
    1.10
    
    
    
    49,008
    
    
    
    133
    
    
    
    1.09Savings and money market
    
    
    157,288
    
    
    
    300
    
    
    
    0.77
    
    
    
    112,162
    
    
    
    369
    
    
    
    1.34Retail time deposits
    
    
    156,448
    
    
    
    961
    
    
    
    2.49
    
    
    
    133,623
    
    
    
    1,161
    
    
    
    3.53Wholesale time deposits
    
    
    13,580
    
    
    
    79
    
    
    
    2.37
    
    
    
    24,488
    
    
    
    224
    
    
    
    3.72Borrowings
    
    
    75,548
    
    
    
    513
    
    
    
    2.76
    
    
    
    97,293
    
    
    
    684
    
    
    
    2.85Total interest-bearing
liabilities
    
    
    470,577
    
    
    
    2,037
    
    
    
    1.75
    
    
    
    416,574
    
    
    
    2,571
    
    
    
    2.51Net interest income
    
    
    
    
    
    $
    4,410
    
    
    
    
    
    
    
    
    
    
    $
    3,557Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    
    
    
    
    
    
    
    
    3.10
    %Net earning assets
    
    $
    31,936
    
    
    
    
    
    
    
    
    
    
    $
    36,147Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    3.31
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.07
    x
    
    
    
    
    
    
    
    
    
    
    1.09
    x
 22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
  Quarter Ended March 31,2010 vs. 2009Increase (Decrease)
    
    
    TotalDue to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    573
    
    
    $
    154
    
    
    $
    727Taxable investment securities
    
    
    (89
    )
    
    
    (360
    )
    
    
    (449
    )Tax exempt investment securities
    
    
    1
    
    
    
    5
    
    
    
    6Federal funds sold
    
    
    (9
    )
    
    
    1
    
    
    
    (8
    )Interest bearing deposits with banks
    
    
    42
    
    
    
    1
    
    
    
    43Total interest-earning assets
    
    $
    518
    
    
    $
    (199
    )
    
    
    319Interest-bearing liabilities:Interest bearing demand
    
    $
    50
    
    
    $
    1
    
    
    
    51Savings and money market
    
    
    225
    
    
    
    (294
    )
    
    
    (69
    )Retail time deposits
    
    
    179
    
    
    
    (379
    )
    
    
    (200
    )Wholesale time deposits
    
    
    (79
    )
    
    
    (66
    )
    
    
    (145
    )Borrowings
    
    
    (97
    )
    
    
    (74
    )
    
    
    (171
    )Total interest-bearing liabilities
    
    $
    278
    
    
    $
    (812
    )
    
    
    (534
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    853
  23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Provision for Loan Losses
  For the quarter ended3/31/10
    
    12/31/09
    
    3/31/09(Dollars in thousands)Allowance for loan losses to total loans
    
    
    1.70
    %
    
    
    1.81
    %
    
    
    1.82
    %Allowance for loan losses to average loans
    
    
    1.73
    %
    
    
    1.98
    %
    
    
    1.82
    %Allowance for loan losses to non-performing loans
    
    
    89.23
    %
    
    
    78.39
    %
    
    
    68.66
    %Loan  30  89 days past due & still accruing
    
    $
    1,810
    
    
    $
    3,247
    
    
    $
    4,054Nonaccrual loans
    
    
    6,518
    
    
    
    8,463
    
    
    
    7,916Loans  90 days past due & still accruing
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    6,518
    
    
    
    8,463
    
    
    
    7,916OREO and repossessed assets
    
    
    3,567
    
    
    
    1,795
    
    
    
    1,403Total non-performing assets
    
    
    10,085
    
    
    
    9,526
    
    
    
    9,319Non-performing loans to total loans
    
    
    1.90
    %
    
    
    2.53
    %
    
    
    2.66
    %Non-performing assets to total assets
    
    
    1.76
    %
    
    
    1.79
    %
    
    
    1.90
    %Net charge-offs to average loans (annualized)
    
    
    0.88
    %
    
    
    7.42
    %
    
    
    0.42
    %Net charge-offs
    
    $
    744
    
    
    $
    5,667
    
    
    $
    315
   24




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
    Noninterest Income
  Three Months Ended March 31,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    823,800
    
    
    $
    807,835
    
    
    $
    15,965
    
    
    
    1.98
    %Other service charges, commissions and fees
    
    
    402,570
    
    
    
    359,846
    
    
    
    42,724
    
    
    
    11.87
    %Brokerage fees
    
    
    221,595
    
    
    
    194,358
    
    
    
    27,237
    
    
    
    14.01
    %Mortgage origination fees
    
    
    38,896
    
    
    
    105,684
    
    
    
    (66,788
    )
    
    
    -63.20
    %Bank owned life insurance
    
    
    151,544
    
    
    
    150,140
    
    
    
    1,404
    
    
    
    0.94
    %Other
    
    
    21,310
    
    
    
    6,205
    
    
    
    15,105
    
    
    
    243.43
    %Total noninterest income
    
    $
    1,659,715
    
    
    $
    1,624,068
    
    
    $
    35,647
    
    
    
    2.19
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.16
    %
    
    
    1.29
    %
    25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
    Noninterest Expense
  Three Months Ended March 31,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,564,882
    
    
    
    2,197,689
    
    
    $
    367,193
    
    
    
    16.71
    %Equipment
    
    
    254,726
    
    
    
    273,388
    
    
    
    (18,662
    )
    
    
    -6.83
    %Occupancy
    
    
    306,280
    
    
    
    292,347
    
    
    
    13,933
    
    
    
    4.77
    %Advertising and marketing
    
    
    120,192
    
    
    
    87,524
    
    
    
    32,668
    
    
    
    37.32
    %Legal and accounting
    
    
    148,542
    
    
    
    117,880
    
    
    
    30,662
    
    
    
    26.01
    %Consulting & other professional fees
    
    
    71,205
    
    
    
    61,572
    
    
    
    9,633
    
    
    
    15.65
    %Directors fees and retirement
    
    
    138,711
    
    
    
    153,108
    
    
    
    (14,397
    )
    
    
    -9.40
    %Telecommunications
    
    
    69,361
    
    
    
    61,956
    
    
    
    7,405
    
    
    
    11.95
    %Supplies
    
    
    57,567
    
    
    
    38,112
    
    
    
    19,455
    
    
    
    51.05
    %Data processing fees
    
    
    480,689
    
    
    
    329,960
    
    
    
    150,729
    
    
    
    45.68
    %(Gain) loss on sale and write-downs of other real estate owned
    
    
    (231,128
    )
    
    
    49,064
    
    
    
    (280,192
    )
    
    
    -571.07
    %Foreclosed asset expenses
    
    
    170,842
    
    
    
    44,990
    
    
    
    125,852
    
    
    
    279.73
    %FDIC insurance and other regulatory fees
    
    
    170,457
    
    
    
    80,956
    
    
    
    89,501
    
    
    
    110.56
    %Other operating
    
    
    382,040
    
    
    
    326,133
    
    
    
    55,907
    
    
    
    17.14
    %Total noninterest expenses
    
    $
    4,704,366
    
    
    $
    4,114,679
    
    
    $
    589,687
    
    
    
    14.33
    %Noninterest expenses as a percentage of average assets (annualized)
    
    
    3.30
    %
    
    
    3.26
    %
     26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
         Income Tax Expense
  Liquidity and Capital Resources
  27




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   Regulatory Capital Ratios for the Company and HeritageBank of the South at March 31, 2010
  Minimum Requiredto Be Well CapitalizedFor Capital
    
    
    Under PromptAdequacy
    
    
    Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Total Capital to Risk Weighted AssetsConsolidated
    
    $
    62,982
    
    
    
    16.6
    %
    
    $
    30,311
    
    
    
    8.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    56,719
    
    
    
    15.3
    %
    
    $
    29,743
    
    
    
    8.0
    %
    
    $
    37,179
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    58,320
    
    
    
    15.4
    %
    
    $
    15,156
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    52,033
    
    
    
    14.0
    %
    
    $
    14,872
    
    
    
    4.0
    %
    
    $
    22,307
    
    
    
    6.0
    %Tier I Capital to Average Total AssetsConsolidated
    
    $
    58,320
    
    
    
    10.2
    %
    
    $
    22,796
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    52,033
    
    
    
    9.3
    %
    
    $
    22,431
    
    
    
    4.0
    %
    
    $
    28,038
    
    
    
    5.0
    %
  28




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
   
    
    Limiting the percentage of long-term fixed-rate loans within our portfolio;
    
    Originating a mix of variable-rate and shorter term fixed-rate loans;
    
    Originating prime-based home equity lines of credit;
    
    Managing deposit relationships for stability and a lower cost of funds position;
    
    Using Federal Home Loan Bank advances and other funding sources to align maturities
and repricing terms of funding sources with loans; and
    
    Continuing the origination of consumer loans.
  29




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ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
 Asset and Liability Management and Market Risk
      30




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  At March 31, 2010Maturing or Repricing Within(Dollars in thousands)Zero to Three
    
    
    Three Months
    
    
    One to Five
    
    
    Over FiveMonths
    
    
    to One Year
    
    
    Years
    
    
    Years
    
    
    TotalEarning assets:Short-term assets
    
    $
    42,643
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    42,643Investment Securities
    
    
    21,042
    
    
    
    16,561
    
    
    
    54,336
    
    
    
    23,613
    
    
    
    115,552Loans
    
    
    114,555
    
    
    
    41,332
    
    
    
    136,901
    
    
    
    43,891
    
    
    
    336,679178,240
    
    
    
    57,893
    
    
    
    191,237
    
    
    
    67,504
    
    
    
    494,874Interest-bearing liabilities:Interest-bearing demand
deposits
    
    
    74,139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,139Savings and money market
    
    
    163,124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,124Time Deposits
    
    
    38,262
    
    
    
    63,577
    
    
    
    57,879
    
    
    
    3,047
    
    
    
    162,765Other Borrowings
    
    
    32,778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,778FHLB Advances
    
    
    
    
    
    
    7,500
    
    
    
    10,000
    
    
    
    25,000
    
    
    
    42,500308,303
    
    
    
    71,077
    
    
    
    67,879
    
    
    
    28,047
    
    
    
    475,306Interest rate sensitivity gap
    
    $
    (130,063
    )
    
    $
    (13,184
    )
    
    $
    123,358
    
    
    $
    39,457
    
    
    $
    19,568Cumulative interest rate
sensitivity gap
    
    $
    (130,063
    )
    
    $
    (143,247
    )
    
    $
    (19,889
    )
    
    $
    19,568Interest rate sensitivity gap
ratio
    
    
    0.58
    
    
    
    0.81
    
    
    
    2.82
    
    
    
    2.41Cumulative interest rate
sensitivity gap ratio
    
    
    0.58
    
    
    
    0.62
    
    
    
    0.96
    
    
    
    1.04
 31




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  EffectMarket
    
    on NetRate
    
    InterestChange
    
    Income+400
    
    
    -13.9
    %+300
    
    
    -14.3
    %+200
    
    
    -14.7
    %+100
    
    
    -7.4
    %-50
    
    
    2.6
    %
 
 ITEM 4. CONTROLS AND PROCEDURES
  
 ITEM 4T. CONTROLS AND PROCEDURES
    32




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ITEM 4T. CONTROLS AND PROCEDURES (Continued)
   33




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Number of
    
    
    MaximumTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Number of SharesNumber
    
    
    
    
    
    
    as Part of
    
    
    that may yet beof Shares
    
    
    Average Price
    
    
    Publicly Announced
    
    
    Purchased Under thePurchased
    
    
    Paid Per Share
    
    
    Plans or Programs
    
    
    Plans or ProgramsJanuary
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    173,974February
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,974March
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,974Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    173,974
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . (REMOVED AND RESERVED)
  ITEM 5 . OTHER INFORMATION
  34




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ITEM 6 . EXHIBITS
 Reference toPrior Filingor Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto2.0
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession
    
    None3.1
    
    Charter of the Registrant
    
    ***3.2
    
    Bylaws of the Registrant
    
    *4
    
    Instruments defining the rights of security holders, including indentures:Form of Heritage Financial Group Common Stock Certificate
    
    **10
    
    Material contracts:(1) Employment Agreements:(a) (i) O. Leonard Dorminey  Bank
    
    *(a)
(ii) O. Leonard Dorminey  Holding Company
    
    *(c)       Carol W. Slappey
    
    *(2) Deferred Compensation and Excess/Matching Contribution Plans
    
    *(3) Supplemental Executive Retirement Plan
    
    *(4) Directors Retirement Plan
    
    *(5) 401(k) Savings Plan
    
    **(6) Employee Stock Ownership Plan
    
    *(7) Purchase and Assumption Agreement dated September 1, 2009, between HeritageBank of the South and Atlantic Coast Federal Bank
    
    +(8) Definitive Whole-bank Purchase and Assumption Agreement dated December 4, 2009, between HeritageBank of the South and the Federal
Deposit Insurance Corporation
    
    ++(9) Purchase and Assumption Agreement dated February 23, 2010, between HeritageBank of the South and The Park Avenue Bank
    
    +++11
    
    Statement re: computation of per share earnings
    
    None15
    
    Letter re: unaudited interim financial information
    
    None18
    
    Letter re: change in accounting principles
    
    None22
    
    Published report regarding matters submitted to vote of security holders
    
    None23
    
    Consent of Accountants
    
    None24
    
    Power of Attorney
    
    None31
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    3132
    
    Section 1350 Certifications
    
    32
 
 *
    
    Filed as an exhibit to the Registrants Registration Statement on Form SB-2 (File No. 333-123581), declared effective by
the SEC on May 16, 2005.**
    
    Filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form SB-2. (File No.
333-123581) declared effective by the SEC on May 16, 2005.***
    
    Filed as an exhibit to the Filers Form 10-KSB for the year ended December 31, 2005, filed with the SEC on March 30, 2006.+
    
    Included as an exhibit to the Form 8-K filed with the SEC on September 2, 2009.++
    
    Included as an exhibit to the Form 8-K filed with the SEC on December 8, 2009.+++
    
    Included as an exhibit to the Form 8-K filed with the SEC on February 25, 2010. 35




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: May 17, 2010
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive OfficerDate: May 17, 2010
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 36