##### 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 June 30, 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 JUNE 30, 2010 AND DECEMBER 31, 2009
    
    
    3CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND THE YEAR ENDED DECEMBER 31, 2009
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    38ITEM 4. CONTROLS AND PROCEDURES
    
    
    41ITEM 4T. CONTROLS AND PROCEDURES
    
    
    41PART II  OTHER INFORMATION
    
    
    43SIGNATURES
    
    
    45EXHIBITS31.1 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
June 30, 2010 and December 31, 2009
 Unaudited
    
    
    AuditedJune 30,
    
    
    December 31,2010
    
    
    2009AssetsCash and due from banks
    
    $
    28,141,662
    
    
    $
    14,921,517Interest-bearing deposits in banks
    
    
    21,008,252
    
    
    
    43,236,287Federal funds sold
    
    
    14,030,000
    
    
    
    11,340,000Securities available for sale, at fair value
    
    
    156,358,784
    
    
    
    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 held for sale
    
    
    448,356
    
    
    
    Loans
    
    
    388,737,290
    
    
    
    334,138,932Less allowance for loan losses
    
    
    6,026,913
    
    
    
    6,060,460Loans, net
    
    
    382,710,377
    
    
    
    328,078,472Premises and equipment, net
    
    
    20,360,971
    
    
    
    15,590,120Premises held for sale
    
    
    1,080,000
    
    
    
    1,080,000Accrued interest receivable
    
    
    2,717,782
    
    
    
    2,799,375Foreclosed assets
    
    
    3,018,774
    
    
    
    1,795,544Intangible assets
    
    
    2,604,478
    
    
    
    1,570,832Cash surrender value of bank owned life insurance
    
    
    15,062,762
    
    
    
    14,756,771Other assets
    
    
    10,070,193
    
    
    
    11,988,301$
    661,875,791
    
    
    $
    571,947,519Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    46,220,643
    
    
    $
    28,881,905Interest-bearing
    
    
    469,490,526
    
    
    
    397,724,617Total deposits
    
    
    515,711,169
    
    
    
    426,606,522Federal funds purchased and securities sold under repurchase agreements
    
    
    33,954,074
    
    
    
    32,843,465Other borrowings
    
    
    42,500,000
    
    
    
    42,500,000Accrued interest payable
    
    
    683,041
    
    
    
    706,321Other liabilities
    
    
    6,668,078
    
    
    
    8,474,370Total liabilities
    
    
    599,516,362
    
    
    
    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
    
    
    41,033,227
    
    
    
    40,609,551Retained earnings
    
    
    39,424,378
    
    
    
    38,984,165Accumulated other comprehensive loss, net tax of $1,275,768 and $1,591,489
    
    
    (1,913,652
    )
    
    
    (2,387,234
    )Unearned employee stock ownership plan (ESOP) shares,
220,350 and 242,385 shares
    
    
    (2,203,500
    )
    
    
    (2,423,850
    )76,454,996
    
    
    
    74,897,175Treasury stock, at cost, 1,056,387 and 1,055,084 shares
    
    
    (14,095,567
    )
    
    
    (14,080,334
    )Total stockholders equity
    
    
    62,359,429
    
    
    
    60,816,841$
    661,875,791
    
    
    $
    571,947,519
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Operations

(Unaudited)


For the Three and Six Months Ended June 30, 2010 and 2009
 For the Three Months
    
    
    For the Six Months2010
    
    
    2009
    
    
    2010
    
    
    2009Interest incomeInterest and fees on loans
    
    $
    5,763,492
    
    
    $
    4,528,408
    
    
    $
    11,083,332
    
    
    $
    9,121,697Interest on taxable securities
    
    
    789,515
    
    
    
    914,579
    
    
    
    1,565,561
    
    
    
    2,140,288Interest on nontaxable securities
    
    
    239,010
    
    
    
    293,379
    
    
    
    537,087
    
    
    
    586,022Interest on federal funds sold
    
    
    17,754
    
    
    
    15,424
    
    
    
    26,653
    
    
    
    31,976Interest on deposits in other banks
    
    
    45,757
    
    
    
    172
    
    
    
    89,906
    
    
    
    4346,855,528
    
    
    
    5,751,962
    
    
    
    13,302,539
    
    
    
    11,880,417Interest expenseInterest on deposits
    
    
    1,512,094
    
    
    
    1,683,235
    
    
    
    3,036,447
    
    
    
    3,570,996Interest on other borrowings
    
    
    647,523
    
    
    
    644,306
    
    
    
    1,160,813
    
    
    
    1,328,9382,159,617
    
    
    
    2,327,541
    
    
    
    4,197,260
    
    
    
    4,899,934Net interest income
    
    
    4,695,911
    
    
    
    3,424,421
    
    
    
    9,105,279
    
    
    
    6,980,483Provision for loan losses
    
    
    650,000
    
    
    
    500,000
    
    
    
    1,150,000
    
    
    
    1,300,000Net interest income after provision
for loan losses
    
    
    4,045,911
    
    
    
    2,924,421
    
    
    
    7,955,279
    
    
    
    5,680,483Noninterest incomeService charges on deposit accounts
    
    
    982,218
    
    
    
    836,648
    
    
    
    1,806,018
    
    
    
    1,644,483Other service charges, commissions
and fees
    
    
    465,895
    
    
    
    362,264
    
    
    
    868,465
    
    
    
    722,110Brokerage fees
    
    
    257,459
    
    
    
    215,965
    
    
    
    479,054
    
    
    
    410,323Mortgage origination fees
    
    
    70,723
    
    
    
    103,496
    
    
    
    109,619
    
    
    
    209,180Bank owned life insurance
    
    
    154,447
    
    
    
    159,342
    
    
    
    305,991
    
    
    
    309,482Gain on sales of securities
    
    
    7,859
    
    
    
    344,731
    
    
    
    159,706
    
    
    
    366,129Other
    
    
    16,712
    
    
    
    16,090
    
    
    
    38,022
    
    
    
    22,2951,955,313
    
    
    
    2,038,536
    
    
    
    3,766,875
    
    
    
    3,684,002Noninterest expenseSalaries and employee benefits
    
    
    2,973,966
    
    
    
    2,226,667
    
    
    
    5,538,848
    
    
    
    4,424,356Equipment
    
    
    251,787
    
    
    
    265,778
    
    
    
    506,513
    
    
    
    539,166Occupancy
    
    
    329,381
    
    
    
    296,916
    
    
    
    635,661
    
    
    
    589,263Advertising and marketing
    
    
    124,170
    
    
    
    110,705
    
    
    
    244,362
    
    
    
    198,229Legal and accounting
    
    
    179,101
    
    
    
    154,778
    
    
    
    327,643
    
    
    
    272,658Consulting & other professional fees
    
    
    65,510
    
    
    
    90,837
    
    
    
    136,715
    
    
    
    152,409Directors fees and retirement
    
    
    138,711
    
    
    
    153,108
    
    
    
    277,422
    
    
    
    306,216Telecommunications
    
    
    103,371
    
    
    
    54,372
    
    
    
    172,732
    
    
    
    116,328Supplies
    
    
    95,639
    
    
    
    46,191
    
    
    
    153,206
    
    
    
    84,303Data processing fees
    
    
    510,905
    
    
    
    383,221
    
    
    
    991,594
    
    
    
    713,181(Gain) loss on sales and write-downs of
other real estate owned
    
    
    (112,306
    )
    
    
    255,004
    
    
    
    (343,434
    )
    
    
    304,068Foreclosed asset expenses
    
    
    426,865
    
    
    
    48,238
    
    
    
    597,707
    
    
    
    93,228FDIC insurance and other regulatory fees
    
    
    228,213
    
    
    
    283,930
    
    
    
    398,670
    
    
    
    364,886Other operating
    
    
    710,084
    
    
    
    371,905
    
    
    
    1,092,124
    
    
    
    698,0386,025,397
    
    
    
    4,741,650
    
    
    
    10,729,763
    
    
    
    8,856,329Income (loss) before income taxes
    
    
    (24,173
    )
    
    
    221,307
    
    
    
    992,391
    
    
    
    508,156Applicable income tax (benefits)
    
    
    (152,726
    )
    
    
    66,530
    
    
    
    66,083
    
    
    
    (41,244
    )Net income
    
    $
    128,553
    
    
    $
    154,777
    
    
    $
    926,308
    
    
    $
    549,400Basic earnings per share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.05Diluted earnings per share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.05
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)
For the Three and Six Months Ended June 30, 2010 and 2009
 For the Three Months
    
    
    For the Six Months2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    128,553
    
    
    $
    154,777
    
    
    $
    926,308
    
    
    $
    549,400Other comprehensive income (loss):Accretion of realized gain on
terminated cash flow hedge, net of
tax of $35,187 and $35,187 for the
quarter and $70,373 and $70,373 for
the year to date
    
    
    (52,780
    )
    
    
    (52,780
    )
    
    
    (105,560
    )
    
    
    (105,560
    )Unrealized holding gains (losses)
on investments arising during the
period, net of tax (benefit) of
$412,083 and ($204,179) for the
quarter and $449,977 and ($66,758)
for the year to date
    
    
    618,125
    
    
    
    (306,268
    )
    
    
    674,966
    
    
    
    (100,138
    )Reclassification adjustment for
investment gains included in net
income, net of tax of $3,144 and
$137,892 for the quarter and
$63,882 and $146,452 for the year
to date
    
    
    (4,715
    )
    
    
    (206,839
    )
    
    
    (95,824
    )
    
    
    (219,677
    )Total other comprehensive income (loss)
    
    
    560,630
    
    
    
    (565,887
    )
    
    
    473,582
    
    
    
    (425,375
    )Comprehensive income (loss)
    
    $
    689,183
    
    
    $
    (411,110
    )
    
    $
    1,399,890
    
    
    $
    124,025
 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 Six Months Ended June 30, 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
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926,308Cash dividend
declared, $0.18 per
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486,095
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486,095
    )Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    403,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403,593Repurchase of
1,578 shares
of stock for the
treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,904
    )
    
    
    
    
    
    
    (18,904
    )Issuance of 275
shares of
common stock
from the treasury
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    
    
    
    
    
    
    
    
    3,671
    
    
    
    
    
    
    
    3,321Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    473,582
    
    
    
    473,582Excess tax expense
from stock based
compensation plans
    
    
    
    
    
    
    
    
    
    
    (11,352
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,352
    )ESOP shares earned,
22,035 shares
    
    
    
    
    
    
    
    
    
    
    14,699
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    235,049Tax benefit on ESOP
expense
    
    
    
    
    
    
    
    
    
    
    17,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,086Balance, June 30,
2010
    
    
    11,454,344
    
    
    $
    114,543
    
    
    $
    41,033,227
    
    
    $
    39,424,378
    
    
    $
    (2,203,500
    )
    
    $
    (14,095,567
    )
    
    $
    (1,913,652
    )
    
    $
    62,359,429
 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 Six Months Ended June 30, 2010 and 2009
 For the Six Months2010
    
    
    2009OPERATING ACTIVITIESNet income
    
    $
    926,308
    
    
    $
    549,400Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    431,436
    
    
    
    454,227Deposit premium amortization
    
    
    106,063
    
    
    
    Provision for loan losses
    
    
    1,150,000
    
    
    
    1,300,000ESOP compensation expense
    
    
    235,049
    
    
    
    222,085Stock-based compensation expense
    
    
    403,593
    
    
    
    403,593Net gain on sales of securities available for sale
    
    
    (159,706
    )
    
    
    (366,129
    )Accretion of gain on termination of cash flow hedge
    
    
    (175,933
    )
    
    
    (175,933
    )Increase in bank owned life insurance
    
    
    (305,991
    )
    
    
    (309,483
    )Excess tax shortfall related to stock-based compensation plans
    
    
    11,352
    
    
    
    Excess tax expense related to ESOP
    
    
    (17,086
    )
    
    
    Decrease in interest receivable
    
    
    304,678
    
    
    
    215,122Decrease in interest payable
    
    
    (62,588
    )
    
    
    (341,673
    )(Increase) decrease in taxes receivable
    
    
    479,003
    
    
    
    (400,037
    )(Gain) loss on sales and write-downs of other real estate owned
    
    
    (343,434
    )
    
    
    304,068Net other operating activities
    
    
    1,174,091
    
    
    
    660,043Total adjustments
    
    
    3,230,527
    
    
    
    1,965,883Net cash provided by operating activities
    
    
    4,156,835
    
    
    
    2,515,283INVESTING ACTIVITIESDecrease in interest-bearing deposits in banks
    
    
    22,228,035
    
    
    
    116,892Purchases of securities available for sale
    
    
    (76,131,495
    )
    
    
    (46,362,401
    )Proceeds from maturities of securities available for sale
    
    
    24,783,690
    
    
    
    21,403,154Proceeds from sales of securities available for sale
    
    
    16,640,864
    
    
    
    26,670,015Net change in Federal Home Loan Bank stock
    
    
    
    
    
    
    (67,600
    )(Increase) decrease in federal funds sold
    
    
    (2,690,000
    )
    
    
    28,884,000(Increase) decrease in loans, net
    
    
    (9,392,577
    )
    
    
    5,933,050Purchase of premises and equipment
    
    
    (1,754,447
    )
    
    
    (364,660
    )Proceeds from acquisition activity
    
    
    40,530,558
    
    
    
    Proceeds from sale of other real estate owned
    
    
    1,982,531
    
    
    
    1,078,430Net cash provided by investing activities
    
    
    16,197,159
    
    
    
    37,290,880FINANCING ACTIVITIESDecrease in deposits
    
    
    (7,748,514
    )
    
    
    (14,622,292
    )Increase (decrease) in federal funds purchased and securities sold
under agreement to repurchase
    
    
    1,110,609
    
    
    
    (6,752,583
    )Excess tax benefit related to stock-based compensation plans
    
    
    (11,352
    )
    
    
    Excess tax related to ESOP
    
    
    17,086
    
    
    
    Repayment of other borrowings
    
    
    
    
    
    
    (10,000,000
    )Purchase of treasury stock, net
    
    
    (15,583
    )
    
    
    (423,140
    )Dividends paid to stockholders
    
    
    (486,095
    )
    
    
    (408,006
    )Net cash used in financing activities
    
    
    (7,133,849
    )
    
    
    (32,206,021
    )Net increase in cash and due from banks
    
    
    13,220,145
    
    
    
    7,600,142Cash and due from banks at beginning of period
    
    
    14,921,517
    
    
    
    10,159,602Cash and due from banks at end of period
    
    $
    28,141,662
    
    
    $
    17,759,744SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    4,220,540
    
    
    $
    5,241,607Taxes
    
    
    9,000
    
    
    
    358,793NONCASH TRANSACTIONSIncrease (decrease) in unrealized losses on securities available for sale
    
    $
    (965,237
    )
    
    $
    533,025Principal balances of loans transferred to other real estate owned
    
    
    2,909,934
    
    
    
    199,896
 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
      8




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 2
 EARNINGS PER SHARE
  Three Months
    
    
    Six Months2010
    
    
    2009
    
    
    2010
    
    
    2009Basic earnings per share:Net income
    
    $
    128,553
    
    
    $
    154,777
    
    
    $
    926,308
    
    
    $
    549,400Weighted average common shares
outstanding
    
    
    10,109,512
    
    
    
    10,039,847
    
    
    
    10,095,382
    
    
    
    10,033,052Total basic earnings per common share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.05Diluted earnings per share:Net income
    
    $
    128,553
    
    
    $
    154,777
    
    
    $
    926,308
    
    
    $
    549,400Weighted average common shares
outstanding
    
    
    10,109,512
    
    
    
    10,039,847
    
    
    
    10,095,382
    
    
    
    10,033,052Effect of dilutive stock options and
restricted stock
    
    
    2,284
    
    
    
    
    
    
    
    1,609
    
    
    
    Weighted average dilutive common shares
outstanding
    
    
    10,111,796
    
    
    
    10,039,847
    
    
    
    10,096,991
    
    
    
    10,033,052Total diluted earnings per common
share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.05
  9




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3
 SHARE BASED COMPENSATION
    10




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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
    
    
    ValueJune 30, 2010:U. S. Government sponsored
agency securities (GSEs)*
    
    $
    38,233,440
    
    
    $
    308,266
    
    
    $
    
    
    
    $
    38,541,706State and municipal securities
    
    
    21,120,264
    
    
    
    107,109
    
    
    
    (1,109,068
    )
    
    
    20,118,305Corporate debt securities
    
    
    2,174,465
    
    
    
    
    
    
    
    (427,032
    )
    
    
    1,747,433GSE residential mortgage-backed
securities
    
    
    90,965,393
    
    
    
    1,035,017
    
    
    
    (56
    )
    
    
    92,000,354Private label residential mortgage-backed
securities
    
    
    3,533,571
    
    
    
    106,199
    
    
    
    
    
    
    
    3,639,770Total debt securities
    
    
    156,027,133
    
    
    
    1,556,591
    
    
    
    (1,536,156
    )
    
    
    156,047,568Equity securities
    
    
    434,803
    
    
    
    25,199
    
    
    
    (148,786
    )
    
    
    311,216Total securities**
    
    $
    156,461,936
    
    
    $
    1,581,790
    
    
    $
    (1,684,942
    )
    
    $
    156,358,784December 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 June 30, 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. 11




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4 
    
    SECURITIES (Continued)
  Amortized
    
    
    FairCost
    
    
    ValueDue from one year to five years
    
    $
    7,624,465
    
    
    $
    7,214,058Due from five to ten years
    
    
    18,335,448
    
    
    
    18,423,380Due after ten years
    
    
    35,568,256
    
    
    
    34,770,006Mortgage-backed securities
    
    
    94,498,964
    
    
    
    95,640,124$
    156,027,133
    
    
    $
    156,047,568Securities with a carrying value of $52,556,197 and $46,814,000 at June 30, 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:June 30,
    
    
    June 30,2010
    
    
    2009Gross gains on sales of securities
    
    $
    169,448
    
    
    $
    403,958Gross losses on sales of securities
    
    
    (9,742
    )
    
    
    (37,829
    )Net realized gains on sales of securities
available for sale
    
    $
    159,706
    
    
    $
    366,129
 12




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4 
    
    SECURITIES (Continued)
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesJune 30, 2010:U.S. Government sponsored
agency securities (GSEs)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    State and municipal securities
    
    
    8,470,202
    
    
    
    (255,781
    )
    
    
    6,025,696
    
    
    
    (853,287
    )
    
    
    14,495,898
    
    
    
    (1,109,068
    )Corporate securities
    
    
    916,685
    
    
    
    (100,112
    )
    
    
    830,750
    
    
    
    (326,920
    )
    
    
    1,747,433
    
    
    
    (427,032
    )GSE residential mortgage-backed 
securities
    
    
    1,354,222
    
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    1,354,222
    
    
    
    (56
    )Private label residential
mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal, debt securities
    
    
    10,741,109
    
    
    
    (355,949
    )
    
    
    6,856,446
    
    
    
    (1,180,207
    )
    
    
    17,597,555
    
    
    
    (1,536,156
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    286,014
    
    
    
    (148,786
    )
    
    
    286,014
    
    
    
    (148,786
    )Total temporarily impaired
securities
    
    $
    10,741,109
    
    
    $
    (355,949
    )
    
    $
    7,142,460
    
    
    $
    (1,328,993
    )
    
    $
    17,883,569
    
    
    $
    (1,684,942
    )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
    )
    
    
    18,848,071
    
    
    
    (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
    )
    
    
    
    
    
    
    
    
    
    
    24,344
    
    
    
    (30
    )Subtotal, debt securities
    
    
    25,329,982
    
    
    
    (615,674
    )
    
    
    11,567,683
    
    
    
    (1,218,153
    )
    
    
    36,897,665
    
    
    
    (1,833,827
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    256,404
    
    
    
    (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
    )
   13




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4    SECURITIES (Continued)
   NOTE 5    FAIR VALUE MEASUREMENTS
 Fair Value Measurements and Disclosures (FASB
ASC 820) Fair Value Measurements and Disclosures Fair Value Measurements and Disclosures
 Fair Value Measurements and Disclosures Fair Value Measurements and Disclosures
 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)
   Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsAvailable for sale investment
securities
    
    $
    25,200
    
    
    $
    156,333,584
    
    
    $
    
    
    
    $
    156,358,784Total assets at fair value
    
    $
    25,200
    
    
    $
    156,333,584
    
    
    $
    
    
    
    $
    156,358,784
 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)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 June 30, 2010, there were no impaired loans reported at fair value utilizing Level 2
valuation inputs. Impaired loans with a carrying value of $7,476,514 were reduced by
specific valuation allowance allocations totaling $1,609,000 for a total reported fair
value of $5,867,514 on collateral valuations utilizing Level 3 valuation inputs at June
30, 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.
 16




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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 held for sale:The carrying amount of loans held for sale 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.
 17




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5 
    
    FAIR VALUE MEASUREMENTS (Continued)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.The carrying amount and estimated fair value of the Companys financial instruments were
as follows:
 June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits
in banks
    
    $
    49,149,914
    
    
    $
    49,149,914
    
    
    $
    58,157,804
    
    
    $
    58,157,804Federal funds sold
    
    $
    14,030,000
    
    
    $
    14,030,000
    
    
    $
    11,340,000
    
    
    $
    11,340,000Securities available for sale
    
    $
    156,358,784
    
    
    $
    156,358,784
    
    
    $
    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 held for sale
    
    $
    448,356
    
    
    $
    448,356
    
    
    $
    
    
    
    $
    Loans
    
    $
    388,737,290
    
    
    $
    392,322,166
    
    
    $
    334,138,932
    
    
    $
    341,971,372Allowance for loan losses
    
    
    6,026,913
    
    
    
    
    
    
    
    6,060,460
    
    
    
    Loans, net
    
    $
    382,710,377
    
    
    $
    392,322,166
    
    
    $
    328,078,472
    
    
    $
    341,971,372Accrued interest receivable
    
    $
    2,717,782
    
    
    $
    2,717,782
    
    
    $
    2,799,379
    
    
    $
    2,799,379Financial liabilities:Deposits
    
    $
    515,711,169
    
    
    $
    510,188,044
    
    
    $
    426,606,522
    
    
    $
    424,097,453Federal funds purchased
and securities sold under
repurchase agreements
    
    $
    33,954,074
    
    
    $
    37,358,074
    
    
    $
    32,843,465
    
    
    $
    35,285,910Other borrowings
    
    $
    42,500,000
    
    
    $
    46,011,062
    
    
    $
    42,500,000
    
    
    $
    44,563,744Accrued interest payable
    
    $
    683,041
    
    
    $
    683,041
    
    
    $
    706,321
    
    
    $
    706,321
 18




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6  ACQUISITION ACTIVITY
 Five Branches of The Park Avenue Bank
  As RecordedFair Value
    
    
    by HeritageAcquired
    
    
    and Other
    
    
    Financial(dollars in thousands)
    
    from PAB
    
    
    Adjustments
    
    
    GroupAssetsCash and cash equivalents
    
    $
    1,183
    
    
    $
    39,379
    (a)
    
    $
    40,562Premises and equipment
    
    
    3,448
    
    
    
    
    
    
    
    3,448Loans
    
    
    51,941
    
    
    
    (149
    ) (b)
    
    
    51,792Core deposit intangibles
    
    
    
    
    
    
    1,130
    (c)
    
    
    1,130Other assets
    
    
    245
    
    
    
    
    
    
    
    245Total Assets
    
    $
    56,817
    
    
    $
    40,360
    
    
    $
    97,177LiabilitiesNoninterest-bearing deposits
    
    $
    15,564
    
    
    $
    
    
    
    $
    15,564Interest-bearing deposits
    
    
    81,289
    
    
    
    268
    (d)
    
    
    81,557Other liabilities
    
    
    39
    
    
    
    17
    (e)
    
    
    56Total Liabilities
    
    $
    96,892
    
    
    $
    285
    
    
    $
    97,177
 
 Explanations(a)
    
    The adjustment represents the cash received from PAB
to reflect the acquisition of excess liabilities
assumed over assets purchased.(b)
    
    The adjustment represents the adjustment to fair market value
of the loans assumed in the transaction.(c)
    
    The adjustment represents the consideration paid for the value
of the core deposit base assumed in the acquisition. The core deposit asset
was recorded as an identifiable intangible asset and will be amortized on an
accelerated basis over the average life of the deposit base, estimated to be
seven years.(d)
    
    The adjustment is necessary because the weighted average
interest rate of the CDs acquired exceeded the cost of similar funding at the
time of acquisition. The fair value adjustment will be amortized to reduce
interest expense on a declining basis over the average life of the portfolio.(e)
    
    The adjustment represents additional liabilities assumed in the
transaction.  19




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6    ACQUISITION ACTIVITY (Continued)
 The Tattnall Bank
    20




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6    ACQUISITION ACTIVITY (Continued)
  Acquiredloans
    
    
    Acquiredwithout
    
    
    loans withdeterioration
    
    
    deterioration
    
    
    Totalin credit
    
    
    in credit
    
    
    loans(dollars in thousands)
    
    quality
    
    
    quality
    
    
    acquiredContractually required principal and interest
    
    $
    10,156
    
    
    $
    27,530
    
    
    $
    37,686Non-accretable difference
    
    
    (1,358
    )
    
    
    (9,994
    )
    
    
    (11,352
    )Cash flows expected to be collected
    
    
    8,798
    
    
    
    17,536
    
    
    
    26,334Accretable yield
    
    
    (1,090
    )
    
    
    (2,480
    )
    
    
    (3,570
    )Basis in acquired loans
    
    $
    7,708
    
    
    $
    15,056
    
    
    $
    22,764
  Acquiredloans
    
    
    Acquiredwithout
    
    
    loans withdeterioration
    
    
    deterioration
    
    
    Totalin credit
    
    
    in credit
    
    
    loans(dollars in thousands)
    
    quality
    
    
    quality
    
    
    acquiredBalance, December 31, 2009
    
    $
    1,025
    
    
    $
    2,352
    
    
    $
    3,377Transfers from non-accretable difference to accretable yield
    
    
    272
    
    
    
    372
    
    
    
    644Accretion
    
    
    (533
    )
    
    
    (1,041
    )
    
    
    (1,574
    )Balance, June 30, 2010
    
    $
    764
    
    
    $
    1,683
    
    
    $
    2,447
  21




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 7    SUBSEQUENT EVENTS
     22




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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
   23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
       24




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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
    
    $
    42,604Financial stand-by letters of credit
    
    
    808$
    43,412
 Comparison of Financial Condition at June 30, 2010 and December 31, 2009
   25




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
        26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Comparison of Operating Results for the Three and Six Month Periods Ended June 30, 2010 and 2009
 General.
   Interest Income.
   Interest Expense
   27




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Net Interest Income
    Three Months Ended June 30,2010
    
    
    2009(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    364,075
    
    
    $
    5,763
    
    
    
    6.36
    %
    
    $
    296,363
    
    
    $
    4,528
    
    
    
    6.14
    %Mortgage Loans held for sale
    
    
    30
    
    
    
    
    
    
    
    5.07
    
    
    
    
    
    
    
    
    
    
    
    Taxable investment securities
    
    
    88,276
    
    
    
    790
    
    
    
    3.58
    
    
    
    87,657
    
    
    
    915
    
    
    
    4.17Tax exempt investment securities
    
    
    24,170
    
    
    
    239
    
    
    
    5.99
    
    
    
    30,155
    
    
    
    293
    
    
    
    5.90Federal funds sold
    
    
    27,384
    
    
    
    18
    
    
    
    0.26
    
    
    
    24,362
    
    
    
    15
    
    
    
    0.25Interest bearing deposits with banks
    
    
    40,968
    
    
    
    45
    
    
    
    0.45
    
    
    
    468
    
    
    
    
    
    
    
    0.15Total interest-earning
Assets
    
    
    544,903
    
    
    
    6,855
    
    
    
    5.14
    
    
    
    439,005
    
    
    
    5,751
    
    
    
    5.40Interest-Bearing Liabilities:Interest bearing demand
    
    
    87,087
    
    
    
    222
    
    
    
    1.02
    
    
    
    49,794
    
    
    
    128
    
    
    
    1.03
    %Savings and money market
    
    
    179,263
    
    
    
    303
    
    
    
    0.68
    
    
    
    112,608
    
    
    
    365
    
    
    
    1.30Retail time deposits
    
    
    153,317
    
    
    
    920
    
    
    
    2.41
    
    
    
    126,769
    
    
    
    1,040
    
    
    
    3.29Wholesale time deposits
    
    
    11,316
    
    
    
    67
    
    
    
    2.37
    
    
    
    17,370
    
    
    
    150
    
    
    
    3.47Borrowings
    
    
    75,998
    
    
    
    647
    
    
    
    3.42
    
    
    
    97,426
    
    
    
    644
    
    
    
    2.65Total interest-bearing
liabilities
    
    
    506,981
    
    
    
    2,159
    
    
    
    1.71
    
    
    
    403,967
    
    
    
    2,327
    
    
    
    2.31Net interest income
    
    
    
    
    
    $
    4,696
    
    
    
    
    
    
    
    
    
    
    $
    3,424Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.43
    %
    
    
    
    
    
    
    
    
    
    
    3.09
    %Net earning assets
    
    $
    37,922
    
    
    
    
    
    
    
    
    
    
    $
    35,038Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.55
    
    
    
    
    
    
    
    
    
    
    
    3.27
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.07
    x
    
    
    
    
    
    
    
    
    
    
    1.09
    x
 28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
 Six Months Ended June 302010
    
    
    2009(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    350,438
    
    
    $
    11,083
    
    
    
    6.39
    %
    
    $
    297,534
    
    
    $
    9,122
    
    
    
    6.19
    %Mortgage Loans held for sale
    
    
    15
    
    
    
    
    
    
    
    5.07
    
    
    
    
    
    
    
    
    
    
    
    Taxable investment securities
    
    
    88,221
    
    
    
    1,566
    
    
    
    3.55
    
    
    
    92,190
    
    
    
    2,140
    
    
    
    4.64Tax exempt investment securities
    
    
    27,149
    
    
    
    537
    
    
    
    5.99
    
    
    
    30,110
    
    
    
    586
    
    
    
    5.90Federal funds sold
    
    
    20,693
    
    
    
    27
    
    
    
    0.26
    
    
    
    25,528
    
    
    
    32
    
    
    
    0.25Interest bearing deposits with banks
    
    
    37,193
    
    
    
    90
    
    
    
    0.49
    
    
    
    502
    
    
    
    
    
    
    
    0.17Total interest-earning
Assets
    
    
    523,709
    
    
    
    13,303
    
    
    
    5.23
    
    
    
    445,864
    
    
    
    11,880
    
    
    
    5.50Interest-Bearing Liabilities:Interest bearing demand
    
    
    77,400
    
    
    
    405
    
    
    
    1.06
    
    
    
    49,401
    
    
    
    260
    
    
    
    1.06Savings and money market
    
    
    168,276
    
    
    
    604
    
    
    
    0.72
    
    
    
    112,385
    
    
    
    734
    
    
    
    1.32Retail time deposits
    
    
    154,883
    
    
    
    1,881
    
    
    
    2.45
    
    
    
    130,196
    
    
    
    2,202
    
    
    
    3.41Wholesale time deposits
    
    
    12,449
    
    
    
    146
    
    
    
    2.37
    
    
    
    20,930
    
    
    
    375
    
    
    
    3.61Borrowings
    
    
    75,773
    
    
    
    1,161
    
    
    
    3.09
    
    
    
    97,360
    
    
    
    1,329
    
    
    
    2.75Total interest-bearing
liabilities
    
    
    488,781
    
    
    
    4,197
    
    
    
    1.73
    
    
    
    410,272
    
    
    
    4,900
    
    
    
    2.41Net interest income
    
    
    
    
    
    $
    9,106
    
    
    
    
    
    
    
    
    
    
    $
    6,980Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.50
    %
    
    
    
    
    
    
    
    
    
    
    3.09
    %Net earning assets
    
    $
    34,928
    
    
    
    
    
    
    
    
    
    
    $
    35,592Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    
    
    
    
    3.29
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.07
    x
    
    
    
    
    
    
    
    
    
    
    1.09
    x
  29




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 (Continued)
 Three Months Ended June 30,2010 vs. 2009Increase (Decrease)
    
    
    TotalDue to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    1,034
    
    
    $
    201
    
    
    $
    1,235Loans held for sale
    
    
    
    
    
    
    
    
    
    
    Taxable investment securities
    
    
    (36
    )
    
    
    (89
    )
    
    
    (125
    )Tax exempt investment securities
    
    
    (63
    )
    
    
    9
    
    
    
    (54
    )Federal funds sold
    
    
    2
    
    
    
    1
    
    
    
    3Interest bearing deposits with banks
    
    
    44
    
    
    
    1
    
    
    
    45Total interest-earning assets
    
    $
    981
    
    
    $
    123
    
    
    
    1,104Interest-bearing liabilities:Interest bearing demand
    
    $
    95
    
    
    $
    (1
    )
    
    
    94Savings and money market
    
    
    270
    
    
    
    (332
    )
    
    
    (62
    )Retail time deposits
    
    
    191
    
    
    
    (311
    )
    
    
    (120
    )Wholesale time deposits
    
    
    (48
    )
    
    
    (35
    )
    
    
    (83
    )Borrowings
    
    
    (87
    )
    
    
    90
    
    
    
    3Total interest-bearing liabilities
    
    $
    421
    
    
    $
    (589
    )
    
    
    (168
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    1,272
 Six Months Ended June 30,2010 vs. 2009Increase (Decrease)
    
    
    TotalDue to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    1,607
    
    
    $
    354
    
    
    $
    1,961Loans held for sale
    
    
    
    
    
    
    
    
    
    
    Taxable investment securities
    
    
    (133
    )
    
    
    (441
    )
    
    
    (574
    )Tax exempt investment securities
    
    
    (66
    )
    
    
    17
    
    
    
    (49
    )Federal funds sold
    
    
    (6
    )
    
    
    1
    
    
    
    (5
    )Interest bearing deposits with banks
    
    
    88
    
    
    
    2
    
    
    
    90Total interest-earning assets
    
    $
    1,490
    
    
    $
    (67
    )
    
    
    1,423Interest-bearing liabilities:Interest bearing demand
    
    $
    145
    
    
    $
    
    
    
    
    145Savings and money market
    
    
    498
    
    
    
    (628
    )
    
    
    (130
    )Retail time deposits
    
    
    370
    
    
    
    (691
    )
    
    
    (321
    )Wholesale time deposits
    
    
    (125
    )
    
    
    (104
    )
    
    
    (229
    )Borrowings
    
    
    (184
    )
    
    
    16
    
    
    
    (168
    )Total interest-bearing liabilities
    
    $
    704
    
    
    $
    (1,407
    )
    
    
    (703
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    2,126
 30




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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
     As of and for the quarter ended6/30/10
    
    3/31/10
    
    12/31/09
    
    6/30/09(Dollars in thousands)Total PortfolioAllowance for loan losses to total loans
    
    
    1.55
    %
    
    
    1.70
    %
    
    
    1.81
    %
    
    
    1.94
    %Allowance for loan losses to average loans
    
    
    1.66
    %
    
    
    1.73
    %
    
    
    1.98
    %
    
    
    1.93
    %Allowance for loan losses to non-performing
loans
    
    
    80.21
    %
    
    
    89.23
    %
    
    
    71.61
    %
    
    
    47.47
    %Loan  30  89 days past due & still accruing
    
    $
    2,498
    
    
    $
    1,810
    
    
    $
    3,247
    
    
    $
    1,275Nonaccrual loans
    
    
    7,514
    
    
    
    6,518
    
    
    
    8,463
    
    
    
    12,104Loans  90 days past due & still accruing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    7,514
    
    
    
    6,518
    
    
    
    8,463
    
    
    
    12,104OREO and repossessed assets
    
    
    3,019
    
    
    
    3,567
    
    
    
    1,795
    
    
    
    907Total non-performing assets
    
    
    10,533
    
    
    
    10,085
    
    
    
    9,526
    
    
    
    13,011Non-performing loans to total loans
    
    
    1.93
    %
    
    
    1.90
    %
    
    
    2.53
    %
    
    
    4.09
    %Non-performing assets to total assets
    
    
    1.59
    %
    
    
    1.76
    %
    
    
    1.79
    %
    
    
    2.76
    %Net charge-offs to average loans (annualized)
    
    
    0.48
    %
    
    
    0.88
    %
    
    
    7.42
    %
    
    
    0.26
    %Net charge-offs
    
    $
    439
    
    
    $
    744
    
    
    $
    5,667
    
    
    $
    189Portfolio excluding purchased loansAllowance for loan losses to total loans
    
    
    1.98
    %
    
    
    1.90
    %
    
    
    2.03
    %
    
    
    1.94
    %Allowance for loan losses to average loans
    
    
    2.00
    %
    
    
    1.96
    %
    
    
    2.06
    %
    
    
    1.93
    %Allowance for loan losses to non-performing
loans
    
    
    80.90
    %
    
    
    90.29
    %
    
    
    83.74
    %
    
    
    47.47
    %Loan  30  89 days past due & still accruing
    
    $
    369
    
    
    $
    1,603
    
    
    $
    1,826
    
    
    $
    1,275Nonaccrual loans
    
    
    7,450
    
    
    
    6,442
    
    
    
    7,237
    
    
    
    12,104Loans  90 days past due & still accruing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    7,450
    
    
    
    6,442
    
    
    
    7,237
    
    
    
    12,104OREO and repossessed assets
    
    
    2,782
    
    
    
    3,253
    
    
    
    1,190
    
    
    
    907Total non-performing assets
    
    
    10,232
    
    
    
    9,695
    
    
    
    8,427
    
    
    
    13,011Non-performing loans to total loans
    
    
    2.45
    %
    
    
    2.10
    %
    
    
    2.42
    %
    
    
    4.09
    %Non-performing assets to total assets
    
    
    1.54
    %
    
    
    1.69
    %
    
    
    1.47
    %
    
    
    2.76
    %Net charge-offs to average loans (annualized)
    
    
    0.58
    %
    
    
    1.00
    %
    
    
    7.70
    %
    
    
    0.26
    %Net charge-offs
    
    $
    439
    
    
    $
    744
    
    
    $
    5,667
    
    
    $
    189
 31




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
  As of and for the sixmonths ended6/30/10
    
    6/31/09(Dollars in thousands)Total PortfolioAllowance for loan losses to total loans
    
    
    1.55
    %
    
    
    1.94
    %Allowance for loan losses to average loans
    
    
    1.72
    %
    
    
    1.93
    %Allowance for loan losses to non-performing loans
    
    
    80.21
    %
    
    
    47.47Loan  30  89 days past due & still accruing
    
    $
    2,498
    
    
    $
    1,275Nonaccrual loans
    
    
    7,514
    
    
    
    12,104Loans  90 days past due & still accruing
    
    
    
    
    
    
    Total non-performing loans
    
    
    7,514
    
    
    
    12,104OREO and repossessed assets
    
    
    3,019
    
    
    
    907Total non-performing assets
    
    
    10,533
    
    
    
    13,011Non-performing loans to total loans
    
    
    1.93
    %
    
    
    4.09
    %Non-performing assets to total assets
    
    
    1.59
    %
    
    
    2.76
    %Net charge-offs to average loans (annualized)
    
    
    0.68
    %
    
    
    0.34
    %Net charge-offs
    
    $
    1,184
    
    
    $
    504Portfolio excluding purchased loansAllowance for loan losses to total loans
    
    
    1.98
    %
    
    
    1.94Allowance for loan losses to average loans
    
    
    2.02
    %
    
    
    1.93Allowance for loan losses to non-performing loans
    
    
    80.90
    %
    
    
    47.47Loan  30  89 days past due & still accruing
    
    $
    369
    
    
    $
    1,275Nonaccrual loans
    
    
    7,450
    
    
    
    12,104Loans  90 days past due & still accruing
    
    
    
    
    
    
    Total non-performing loans
    
    
    7,450
    
    
    
    12,104OREO and repossessed assets
    
    
    2,782
    
    
    
    907Total non-performing assets
    
    
    10,232
    
    
    
    13,011Non-performing loans to total loans
    
    
    2.45
    %
    
    
    4.09
    %Non-performing assets to total assets
    
    
    1.54
    %
    
    
    2.76
    %Net charge-offs to average loans (annualized)
    
    
    0.79
    %
    
    
    0.34
    %Net charge-offs
    
    $
    1,184
    
    
    $
    504
  32




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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 June 30,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    982,218
    
    
    $
    836,648
    
    
    $
    145,570
    
    
    
    17.40
    %Other service charges, commissions
and fees
    
    
    465,895
    
    
    
    362,264
    
    
    
    103,631
    
    
    
    28.61
    %Brokerage fees
    
    
    257,459
    
    
    
    215,965
    
    
    
    41,494
    
    
    
    19.21
    %Mortgage origination fees
    
    
    70,723
    
    
    
    103,496
    
    
    
    (32,773
    )
    
    
    -31.67
    %Bank owned life insurance
    
    
    154,447
    
    
    
    159,342
    
    
    
    (4,895
    )
    
    
    -3.07
    %Other
    
    
    16,712
    
    
    
    16,090
    
    
    
    622
    
    
    
    3.87
    %Total noninterest income
    
    $
    1,947,454
    
    
    $
    1,693,805
    
    
    $
    253,649
    
    
    
    14.98
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.26
    %
    
    
    1.36
    %
 33




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Six Months Ended June 30,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    1,806,018
    
    
    $
    1,644,483
    
    
    $
    161,535
    
    
    
    9.82
    %Other service charges, commissions
and fees
    
    
    868,465
    
    
    
    722,110
    
    
    
    146,355
    
    
    
    20.27
    %Brokerage fees
    
    
    479,054
    
    
    
    410,323
    
    
    
    68,731
    
    
    
    16.75
    %Mortgage origination fees
    
    
    109,619
    
    
    
    209,180
    
    
    
    (99,561
    )
    
    
    -47.60
    %Bank owned life insurance
    
    
    305,991
    
    
    
    309,482
    
    
    
    (3,491
    )
    
    
    -1.13
    %Other
    
    
    38,022
    
    
    
    22,295
    
    
    
    15,727
    
    
    
    70.54
    %Total noninterest income
    
    $
    3,607,169
    
    
    $
    3,317,873
    
    
    $
    289,296
    
    
    
    8.72
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.22
    %
    
    
    1.33
    %
   Noninterest Expense
  34




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Three Months Ended June 30,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,973,966
    
    
    $
    2,226,667
    
    
    $
    747,299
    
    
    
    33.56
    %Equipment
    
    
    251,787
    
    
    
    265,778
    
    
    
    (13,991
    )
    
    
    -5.26
    %Occupancy
    
    
    329,381
    
    
    
    296,916
    
    
    
    32,465
    
    
    
    10.93
    %Advertising and marketing
    
    
    124,170
    
    
    
    110,705
    
    
    
    13,465
    
    
    
    12.16
    %Legal and accounting
    
    
    179,101
    
    
    
    154,778
    
    
    
    24,323
    
    
    
    15.71
    %Consulting & other professional fees
    
    
    65,510
    
    
    
    90,837
    
    
    
    (25,327
    )
    
    
    -27.88
    %Directors fees and retirement
    
    
    138,711
    
    
    
    153,108
    
    
    
    (14,397
    )
    
    
    9.40
    %Telecommunications
    
    
    103,371
    
    
    
    54,372
    
    
    
    48,999
    
    
    
    90.12
    %Supplies
    
    
    95,639
    
    
    
    46,191
    
    
    
    49,448
    
    
    
    107.05
    %Data processing fees
    
    
    510,904
    
    
    
    383,221
    
    
    
    127,684
    
    
    
    33.32
    %Loss on sale and write-downs of other
real estate owned
    
    
    (112,306
    )
    
    
    255,004
    
    
    
    (367,310
    )
    
    
    -144.04
    %Foreclosed asset and collection expenses
    
    
    426,865
    
    
    
    48,238
    
    
    
    378,627
    
    
    
    784.91
    %FDIC insurance and other regulatory fees
    
    
    228,213
    
    
    
    283,930
    
    
    
    (55,717
    )
    
    
    -19.62
    %Other operating
    
    
    710,084
    
    
    
    371,905
    
    
    
    338,182
    
    
    
    90.93
    %Total noninterest expenses
    
    $
    6,025,397
    
    
    $
    4,741,650
    
    
    $
    1,283,747
    
    
    
    27.07
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    3.90
    %
    
    
    3.84
    %Six Months Ended June 30,2010
    
    
    2009
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    5,538,848
    
    
    $
    4,424,356
    
    
    $
    1,114,492
    
    
    
    25.19
    %Equipment
    
    
    506,513
    
    
    
    539,166
    
    
    
    (32,653
    )
    
    
    -6.06
    %Occupancy
    
    
    635,661
    
    
    
    589,263
    
    
    
    46,398
    
    
    
    7.87
    %Advertising and marketing
    
    
    244,362
    
    
    
    198,229
    
    
    
    46,133
    
    
    
    23.27
    %Legal and accounting
    
    
    327,643
    
    
    
    272,658
    
    
    
    54,985
    
    
    
    20.17
    %Consulting & other professional fees
    
    
    136,715
    
    
    
    152,409
    
    
    
    (15,694
    )
    
    
    -10.30
    %Directors fees and retirement
    
    
    277,422
    
    
    
    306,216
    
    
    
    (28,794
    )
    
    
    -9.40
    %Telecommunications
    
    
    172,732
    
    
    
    116,328
    
    
    
    56,404
    
    
    
    48.49
    %Supplies
    
    
    153,206
    
    
    
    84,303
    
    
    
    68,903
    
    
    
    81.73
    %Data processing fees
    
    
    991,594
    
    
    
    713,181
    
    
    
    278,413
    
    
    
    39.04
    %Loss on sale and write-downs of other
real estate owned
    
    
    (343,434
    )
    
    
    304,068
    
    
    
    (647,502
    )
    
    
    -212.95
    %Foreclosed asset and collection expenses
    
    
    597,707
    
    
    
    93,228
    
    
    
    504,479
    
    
    
    541.12
    %FDIC insurance and other regulatory fees
    
    
    398,670
    
    
    
    364,886
    
    
    
    33,784
    
    
    
    9.26
    %Other operating
    
    
    1,092,124
    
    
    
    698,038
    
    
    
    394,086
    
    
    
    56.46
    %Total noninterest expenses
    
    $
    10,729,763
    
    
    $
    8,856,329
    
    
    $
    1,873,434
    
    
    
    21.15
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    3.61
    %
    
    
    3.59
    %
   35




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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
     36




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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 June 30, 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
    
    $
    63,140
    
    
    
    14.9
    %
    
    $
    33,987
    
    
    
    8.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    57,049
    
    
    
    13.6
    %
    
    $
    33,460
    
    
    
    8.0
    %
    
    $
    41,825
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    57,902
    
    
    
    13.6
    %
    
    $
    16,994
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    51,800
    
    
    
    12.4
    %
    
    $
    16,730
    
    
    
    4.0
    %
    
    $
    25,095
    
    
    
    6.0
    %Tier I Capital to Average Total AssetsConsolidated
    
    $
    57,902
    
    
    
    9.4
    %
    
    $
    24,549
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    51,800
    
    
    
    8.5
    %
    
    $
    24,288
    
    
    
    4.0
    %
    
    $
    30,360
    
    
    
    5.0
    %
  37




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##### Table of Contents



ITEM 3. QUANTITAVE 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.
  38




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
 Asset and Liability Management and Market Risk
      39




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  At June 30, 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
    
    $
    35,038
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    35,038Investment Securities
    
    
    13,818
    
    
    
    42,659
    
    
    
    71,789
    
    
    
    28,093
    
    
    
    156,359Loans held for sale
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    448Loans
    
    
    131,048
    
    
    
    52,755
    
    
    
    152,688
    
    
    
    52,246
    
    
    
    388,737180,352
    
    
    
    95,414
    
    
    
    224,477
    
    
    
    80,339
    
    
    
    580,582Interest-bearing liabilities:Interest-bearing demand
deposits
    
    
    103,279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,279Savings and money market
    
    
    197,894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,894Time Deposits
    
    
    30,359
    
    
    
    78,039
    
    
    
    56,404
    
    
    
    3,516
    
    
    
    168,318Other Borrowings
    
    
    33,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,954FHLB Advances
    
    
    
    
    
    
    7,500
    
    
    
    10,000
    
    
    
    25,000
    
    
    
    42,500365,486
    
    
    
    85,539
    
    
    
    66,404
    
    
    
    28,516
    
    
    
    545,945Interest rate sensitivity gap
    
    $
    (185,134
    )
    
    $
    9,875
    
    
    $
    158,073
    
    
    $
    51,823
    
    
    $
    34,637Cumulative interest rate
sensitivity gap
    
    $
    (185,134
    )
    
    $
    (175,259
    )
    
    $
    (17,186
    )
    
    $
    34,637Interest rate sensitivity gap
ratio
    
    
    0.49
    
    
    
    1.12
    
    
    
    3.38
    
    
    
    2.82Cumulative interest rate
sensitivity gap ratio
    
    
    0.49
    
    
    
    0.61
    
    
    
    0.97
    
    
    
    1.06
 40




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  EffectMarket
    
    on NetRate
    
    InterestChange
    
    Income+400
    
    
    -13.4
    %+300
    
    
    -13.6
    %+200
    
    
    -13.8
    %+100
    
    
    -6.9
    %-50
    
    
    2.4
    %
 
 ITEM 4. CONTROLS AND PROCEDURES
  
 ITEM 4T. CONTROLS AND PROCEDURES
    41




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##### Table of Contents



ITEM 4T. CONTROLS AND PROCEDURES (Continued)
   42




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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 ProgramsApril
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    173,974May
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,974June
    
    
    1,578
    
    
    
    11.98
    
    
    
    1,578
    
    
    
    172,396Total
    
    
    1,578
    
    
    $
    11.98
    
    
    
    1,578
    
    
    
    172,396
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . (REMOVED AND RESERVED)
  ITEM 5 . OTHER INFORMATION
  43




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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
    
    ++++3.1
    
    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.++++
    
    Included as an exhibit to the Form 8-K filed with the SEC on March 19, 2010. 44




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: August 23, 2010
    
    By:
    
    /s/ O. Leonard Dorminey

O. Leonard DormineyPresident and Chief Executive OfficerDate: August 23, 2010
    
    By:
    
    /s/ T. Heath Fountain

T. Heath FountainSenior Vice President andChief Financial Officer
 45