##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
      Title of Each Class
    
    Name of Each Exchange on which registeredCommon Stock, Par Value $0.01 per share
    
    NASDAQ Stock Market, LLC
 o þ
 o þ
 þ o
 þ
  o Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    þ Smaller reporting company(Do not check if a smaller reporting company)
 þ o
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 2. Description of PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial StatementsItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. ExhibitsSIGNATURESIndex to ExhibitsEX-21EX-23EX-31.1EX-31.2EX-32    Table of Contents  
 PART I
 
 Item 1. Business
 General
      Forward Looking Statements
  
    
    further developments in the Companys ongoing review of and efforts
to resolve any problem credit relationships described in this report, which could
result in, among other things, further downgrades of aforementioned loans,
additional provisions to the loan loss reserve and the incurrence of other
material non-cash and cash charges;
    
    the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;
    
    the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
 2




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##### Table of Contents




    
    inflation, interest rate, market and monetary fluctuations;
    
    the timely development of and acceptance of our new products and
services and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors products and
services;
    
    the willingness of users to substitute our products and services
for products and services of our competitors;
    
    the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
    
    the impact of technological changes;
    
    acquisitions;
    
    changes in consumer spending and saving habits; and
    
    our success at managing the risks involved in the foregoing.
  Market Area
  Southwest Georgia Market  Albany Metropolitan Statistic Area
  North Central Florida Market  Ocala Metropolitan Statistic Area
  3




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Expansion
  Northeast Georgia Market  Gainesville Metropolitan Statistic Area
  Competition
   On-line Presence
  4




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##### Table of Contents



Lending Activities
  December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real EstateOne- to four-family
    
    $
    79,727
    
    
    
    26.36
    %
    
    $
    74,752
    
    
    
    24.54
    %
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    74,324
    
    
    
    31.20
    %Multi-family
    
    
    10,719
    
    
    
    3.54
    
    
    
    12,297
    
    
    
    4.04
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    17,049
    
    
    
    7.16Commercial
    
    
    52,477
    
    
    
    17.35
    
    
    
    41,630
    
    
    
    13.66
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    38,581
    
    
    
    16.19Farmland
    
    
    5,744
    
    
    
    1.90
    
    
    
    4,818
    
    
    
    1.58
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and
Development
    
    
    43,297
    
    
    
    14.31
    
    
    
    51,308
    
    
    
    16.84
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    8,248
    
    
    
    3.46Total real estate loans
    
    
    191,964
    
    
    
    63.46
    
    
    
    184,805
    
    
    
    60.66
    
    
    
    170,554
    
    
    
    61.62
    
    
    
    144,529
    
    
    
    56.88
    
    
    
    138,202
    
    
    
    58.01Other loansConsumer loans:Student
    
    
    552
    
    
    
    0.18
    
    
    
    594
    
    
    
    0.20
    
    
    
    703
    
    
    
    0.25
    
    
    
    1,110
    
    
    
    0.44
    
    
    
    1,190
    
    
    
    0.50Automobile
    
    
    39,753
    
    
    
    13.14
    
    
    
    47,718
    
    
    
    15.66
    
    
    
    46,331
    
    
    
    16.74
    
    
    
    50,137
    
    
    
    19.73
    
    
    
    47,455
    
    
    
    19.92Home equity
    
    
    18,344
    
    
    
    6.06
    
    
    
    17,257
    
    
    
    5.66
    
    
    
    16,368
    
    
    
    5.91
    
    
    
    15,591
    
    
    
    6.14
    
    
    
    13,837
    
    
    
    5.81Other
    
    
    9,037
    
    
    
    2.99
    
    
    
    9,377
    
    
    
    3.08
    
    
    
    8,812
    
    
    
    3.19
    
    
    
    9,058
    
    
    
    3.56
    
    
    
    9,212
    
    
    
    3.87Total consumer loans
    
    
    67,686
    
    
    
    22.37
    
    
    
    74,946
    
    
    
    24.60
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    71,694
    
    
    
    30.09Commercial business
loans
    
    
    42,838
    
    
    
    14.17
    
    
    
    44,922
    
    
    
    14.74
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    28,346
    
    
    
    11.90Total other loans
    
    
    110,524
    
    
    
    36.54
    
    
    
    119,868
    
    
    
    39.34
    
    
    
    106,222
    
    
    
    38.38
    
    
    
    109,582
    
    
    
    43.12
    
    
    
    100,040
    
    
    
    41.99Total loans
    
    
    302,488
    
    
    
    100.00
    %
    
    
    304,673
    
    
    
    100.00
    %
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %Less allowance for
loan losses
    
    
    4,951
    
    
    
    
    
    
    
    4,416
    
    
    
    
    
    
    
    4,076
    
    
    
    
    
    
    
    3,618
    
    
    
    
    
    
    
    2,965$
    297,537
    
    
    
    
    
    
    $
    300,257
    
    
    
    
    
    
    $
    272,700
    
    
    
    
    
    
    $
    250,493
    
    
    
    
    
    
    $
    235,275
 5




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December 31,2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Fixed Rate Loans:Real EstateOne- to four-family
    
    $
    72,353
    
    
    
    23.92
    %
    
    $
    69,841
    
    
    
    22.92
    %
    
    $
    68,774
    
    
    
    24.85
    %Multi-family
    
    
    5,210
    
    
    
    1.72
    
    
    
    7,178
    
    
    
    2.36
    
    
    
    14,542
    
    
    
    5.25Commercial
    
    
    42,084
    
    
    
    13.91
    
    
    
    32,634
    
    
    
    10.71
    
    
    
    28,109
    
    
    
    10.16Farmland
    
    
    2,174
    
    
    
    0.72
    
    
    
    3,337
    
    
    
    1.10
    
    
    
    670
    
    
    
    0.24Construction and development
    
    
    8,426
    
    
    
    2.79
    
    
    
    13,903
    
    
    
    4.56
    
    
    
    14,025
    
    
    
    5.07Total real estate loans
    
    
    130,247
    
    
    
    43.06
    
    
    
    126,893
    
    
    
    41.65
    
    
    
    126,120
    
    
    
    45.57Consumer
    
    
    45,168
    
    
    
    14.93
    
    
    
    53,618
    
    
    
    17.60
    
    
    
    50,629
    
    
    
    18.29Commercial business
    
    
    14,218
    
    
    
    4.70
    
    
    
    16,482
    
    
    
    5.41
    
    
    
    13,505
    
    
    
    4.88Total fixed-rate loans
    
    
    189,633
    
    
    
    62.69
    
    
    
    196,993
    
    
    
    64.66
    
    
    
    190,254
    
    
    
    68.74Adjustable Rate Loans:Real EstateOne- to four-family
    
    
    7,374
    
    
    
    2.44
    
    
    
    4,911
    
    
    
    1.61
    
    
    
    4,907
    
    
    
    1.77Multi-family
    
    
    5,509
    
    
    
    1.82
    
    
    
    5,119
    
    
    
    1.68
    
    
    
    2,371
    
    
    
    0.86Commercial
    
    
    10,393
    
    
    
    3.44
    
    
    
    8,996
    
    
    
    2.95
    
    
    
    16,387
    
    
    
    5.92Farmland
    
    
    3,569
    
    
    
    1.18
    
    
    
    1,481
    
    
    
    0.49
    
    
    
    1,972
    
    
    
    0.71Construction and development
    
    
    34,871
    
    
    
    11.53
    
    
    
    37,405
    
    
    
    12.28
    
    
    
    18,797
    
    
    
    6.79Total real estate loans
    
    
    61,716
    
    
    
    20.41
    
    
    
    57,912
    
    
    
    19.01
    
    
    
    44,434
    
    
    
    16.05Consumer
    
    
    22,518
    
    
    
    7.44
    
    
    
    21,328
    
    
    
    7.00
    
    
    
    21,585
    
    
    
    7.80Commercial business
    
    
    28,621
    
    
    
    9.46
    
    
    
    28,440
    
    
    
    9.33
    
    
    
    20,503
    
    
    
    7.41Total adjustable rate loans
    
    
    112,855
    
    
    
    37.31
    
    
    
    107,680
    
    
    
    35.34
    
    
    
    86,522
    
    
    
    31.26Total loans
    
    
    302,488
    
    
    
    100.00
    %
    
    
    304,673
    
    
    
    100.00
    %
    
    
    276,776
    
    
    
    100.00
    %Less allowance for loan losses
    
    
    4,951
    
    
    
    
    
    
    
    4,416
    
    
    
    
    
    
    
    4,076Total loans, net
    
    $
    297,537
    
    
    
    
    
    
    $
    300,257
    
    
    
    
    
    
    $
    272,700
 6




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Real EstateOne- to Four Family
    
    
    Multi-family
    
    
    Commercial
    
    
    Farmland
    
    
    Construction
    
    
    Consumer
    
    
    Commercial Business
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)One year
or
less: (1)$
    16,551
    
    
    
    6.38
    %
    
    $
    4,860
    
    
    
    5.67
    %
    
    $
    11,732
    
    
    
    7.29
    %
    
    $
    4,559
    
    
    
    4.74
    %
    
    $
    31,723
    
    
    
    4.48
    %
    
    $
    4,855
    
    
    
    7.53
    %
    
    $
    17,677
    
    
    
    5.05
    %
    
    $
    91,957
    
    
    
    5.53
    %One year
through
5 years:$
    36,459
    
    
    
    6.67
    %
    
    $
    5,859
    
    
    
    5.07
    %
    
    $
    36,123
    
    
    
    6.41
    %
    
    $
    1,185
    
    
    
    5.77
    %
    
    $
    10,326
    
    
    
    5.78
    %
    
    $
    43,679
    
    
    
    7.93
    %
    
    $
    21,666
    
    
    
    6.04
    %
    
    $
    155,297
    
    
    
    6.75
    %Five
years
and
over:$
    26,717
    
    
    
    5.85
    %
    
    $
    
    
    
    
    
    %
    
    $
    4,622
    
    
    
    6.51
    %
    
    $
    
    
    
    
    
    %
    
    $
    1,248
    
    
    
    5.58
    %
    
    $
    19,152
    
    
    
    4.52
    %
    
    $
    3,495
    
    
    
    3.43
    %
    
    $
    55,234
    
    
    
    5.28
    %Total:$
    79,727
    
    
    
    
    
    
    $
    10,719
    
    
    
    
    
    
    $
    52,477
    
    
    
    
    
    
    $
    5,744
    
    
    
    
    
    
    $
    43,297
    
    
    
    
    
    
    $
    67,686
    
    
    
    
    
    
    $
    42,838
    
    
    
    
    
    
    $
    302,488
 
 (1)
    
    Includes demand loans, loans having no stated maturity and overdraft loans. 7




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##### Table of Contents



Lending authority.
  Major loan customers
 One- to Four-Family Residential Real Estate Lending
    8




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##### Table of Contents



Commercial and Multi-Family Real Estate Lending
     Construction and Development Lending
  9




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##### Table of Contents



Commercial Business Lending
   Consumer Lending
     10




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##### Table of Contents



Loan Originations, Purchases, Sales, Repayments and Servicing
     Asset Quality
    11




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##### Table of Contents



Delinquent Loans.
 Nonperforming Assets.
 December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in Thousands)Nonaccruing Loans:One- to four-family
    
    $
    689
    
    
    $
    373
    
    
    $
    
    
    
    $
    102
    
    
    $
    62Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    988
    
    
    
    35
    
    
    
    
    
    
    
    241
    
    
    
    201Construction and development
    
    
    4,882
    
    
    
    2,357
    
    
    
    61
    
    
    
    
    
    
    
    Consumer
    
    
    575
    
    
    
    447
    
    
    
    197
    
    
    
    524
    
    
    
    301Commercial business
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    7,281
    
    
    
    3,212
    
    
    
    258
    
    
    
    867
    
    
    
    546Foreclosed Assets:One- to four-family
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    127Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    284
    
    
    
    287
    
    
    
    306
    
    
    
    
    
    
    
    Construction and development
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    55
    
    
    
    78
    
    
    
    16
    
    
    
    15
    
    
    
    74Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,120
    
    
    
    365
    
    
    
    322
    
    
    
    59
    
    
    
    201Total nonperforming assets
    
    $
    9,401
    
    
    $
    3,577
    
    
    $
    580
    
    
    $
    929
    
    
    $
    765Total as a percentage of total assets
    
    
    1.87
    %
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %
 12




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Other Loans of Concern.
  Classified Assets.
   13




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##### Table of Contents



Provision for Loan Losses
 Allowance for Loan Losses
  14




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##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in Thousands)Balance at beginning of period
    
    $
    4,416
    
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503Charge-offs:One- to four-family
    
    
    81
    
    
    
    55
    
    
    
    
    
    
    
    27
    
    
    
    60Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    773
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    369Construction and development
    
    
    1,414
    
    
    
    435
    
    
    
    31
    
    
    
    
    
    
    
    Consumer
    
    
    687
    
    
    
    398
    
    
    
    368
    
    
    
    567
    
    
    
    557Commercial business
    
    
    47
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    43,002
    
    
    
    1,033
    
    
    
    399
    
    
    
    594
    
    
    
    990Recoveries:One- to four-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    1Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    161
    
    
    
    195
    
    
    
    162
    
    
    
    224
    
    
    
    247Commercial business
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4187
    
    
    
    195
    
    
    
    162
    
    
    
    232
    
    
    
    252Net charge-offs
    
    
    2,815
    
    
    
    838
    
    
    
    237
    
    
    
    362
    
    
    
    738Provision charged to operations
    
    
    3,350
    
    
    
    1,178
    
    
    
    695
    
    
    
    1,015
    
    
    
    200Balance at end of period
    
    $
    4,951
    
    
    $
    4,416
    
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965Ratio of net charge-offs during the
period to average loans
outstanding during period
    
    
    1.58
    %
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.24
    %
    
    
    0.30
    %Ratio of net charge-offs during the
period to average nonperforming assets
    
    
    58.51
    %
    
    
    36.12
    %
    
    
    29.28
    %
    
    
    43.46
    %
    
    
    96.47
    %Allowance as a percentage of
nonperforming loans
    
    
    67.99
    %
    
    
    137.49
    %
    
    
    1,582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %Allowance as a percentage of total
loans (end of period)
    
    
    1.64
    %
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.42
    %
    
    
    1.24
    %
 15




---



##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percentof Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of LoansLoan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in EachAmount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    CategoryLoan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to TotalAllowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    LoansSecured by
one-to four-
family
residential
real estate
    
    $
    637
    
    
    $
    79,727
    
    
    
    26.36
    %
    
    $
    553
    
    
    $
    74,752
    
    
    
    24.54
    %
    
    $
    875
    
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    983
    
    
    $
    74,121
    
    
    
    29.17
    %Secured by
multi-
family
residential
real estate
    
    
    69
    
    
    
    10,719
    
    
    
    3.54
    
    
    
    123
    
    
    
    12,297
    
    
    
    4.04
    
    
    
    177
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    166
    
    
    
    15,918
    
    
    
    6.26Secured by
commercial
real estate
    
    
    874
    
    
    
    52,477
    
    
    
    17.35
    
    
    
    847
    
    
    
    41,630
    
    
    
    13.66
    
    
    
    925
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    711
    
    
    
    37,985
    
    
    
    14.95Construction
and
development
    
    
    1,275
    
    
    
    43,297
    
    
    
    14.31
    
    
    
    1,616
    
    
    
    51,308
    
    
    
    16.84
    
    
    
    471
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    218
    
    
    
    16,505
    
    
    
    6.50Farmland
    
    
    72
    
    
    
    5,744
    
    
    
    1.90
    
    
    
    42
    
    
    
    4,818
    
    
    
    1.58
    
    
    
    32
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    890
    
    
    
    67,686
    
    
    
    22.37
    
    
    
    740
    
    
    
    74,946
    
    
    
    24.60
    
    
    
    791
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    858
    
    
    
    75,896
    
    
    
    29.87Commercial
business
    
    
    1,134
    
    
    
    42,838
    
    
    
    14.17
    
    
    
    495
    
    
    
    44,922
    
    
    
    14.74
    
    
    
    805
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    682
    
    
    
    33,686
    
    
    
    13.26Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,951
    
    
    $
    302,488
    
    
    
    100.00
    %
    
    $
    4,416
    
    
    $
    304,673
    
    
    
    100.00
    %
    
    $
    4,076
    
    
    $
    276,776
    
    
    
    100.00
    %
    
    $
    3,618
    
    
    $
    254,111
    
    
    
    100.00
    %
 Investment Activities
    16




---



##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006Carrying
    
    
    % of
    
    
    Carrying
    
    
    % of
    
    
    Carrying
    
    
    % ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in Thousands)Securities available for sale:U. S. Government sponsored agency securities
    
    $
    21,165
    
    
    
    18.22
    %
    
    $
    14,996
    
    
    
    13.90
    %
    
    $
    29,439
    
    
    
    34.81
    %Corporate debt securities
    
    
    1,789
    
    
    
    1.54
    
    
    
    3,854
    
    
    
    3.57
    
    
    
    4,106
    
    
    
    4.86Mortgage-backed securities
    
    
    65,408
    
    
    
    56.32
    
    
    
    55,599
    
    
    
    51.55
    
    
    
    28,044
    
    
    
    33.16State, county and municipal securities
    
    
    27,511
    
    
    
    23.69
    
    
    
    31,878
    
    
    
    29.55
    
    
    
    16,316
    
    
    
    19.29Equity and other
    
    
    268
    
    
    
    0.23
    
    
    
    1,540
    
    
    
    1.43
    
    
    
    6,667
    
    
    
    7.88$
    116,141
    
    
    
    100.00
    %
    
    $
    107,867
    
    
    
    100.00
    %
    
    $
    84,572
    
    
    
    100.00
    %Other earning assets:Interest-bearing deposits with banks
    
    $
    746
    
    
    
    2.18
    %
    
    $
    380
    
    
    
    2.13
    %
    
    $
    2,154
    
    
    
    12.43
    %Federal funds sold
    
    
    30,254
    
    
    
    88.50
    
    
    
    14,505
    
    
    
    81.24
    
    
    
    12,677
    
    
    
    73.15FHLB stock
    
    
    3,186
    
    
    
    9.32
    
    
    
    2,970
    
    
    
    16.63
    
    
    
    2,499
    
    
    
    14.42$
    34,186
    
    
    
    100.00
    %
    
    $
    17,855
    
    
    
    100.00
    %
    
    $
    17,330
    
    
    
    100.00
    %
  17




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##### Table of Contents



Less than One Year
    
    
    One to Five Years
    
    
    Over Five to Ten Years
    
    
    Over Ten Years
    
    
    Total SecuritiesWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    FairCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Value(Dollars in Thousands)Securities Available
for Sale:U.S. government and
agency securities
    
    $
    
    
    
    
    
    %
    
    $
    452
    
    
    
    4.41
    %
    
    $
    2,995
    
    
    
    5.65
    %
    
    $
    17,477
    
    
    
    5.89
    %
    
    $
    20,924
    
    
    
    5.82
    %
    
    $
    21,165Corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    1,188
    
    
    
    5.91
    
    
    
    1,000
    
    
    
    7.12
    
    
    
    
    
    
    
    
    
    
    
    2,188
    
    
    
    6.46
    
    
    
    1,789Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    2,549
    
    
    
    3.83
    
    
    
    17,790
    
    
    
    4.71
    
    
    
    44,042
    
    
    
    5.57
    
    
    
    64,381
    
    
    
    5.26
    
    
    
    65,408State, county and
municipal
    
    
    1,500
    
    
    
    4.17
    
    
    
    925
    
    
    
    5.04
    
    
    
    4,322
    
    
    
    5.65
    
    
    
    23,306
    
    
    
    6.82
    
    
    
    30,053
    
    
    
    6.43
    
    
    
    27,511Equity and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    435
    
    
    
    5.84
    
    
    
    435
    
    
    
    5.84
    
    
    
    268Total investment
securities
    
    $
    1,500
    
    
    
    4.17
    %
    
    $
    5,114
    
    
    
    4.58
    %
    
    $
    26,107
    
    
    
    5.04
    %
    
    $
    85,260
    
    
    
    5.98
    %
    
    $
    117,981
    
    
    
    5.68
    %
    
    $
    116,141
 Sources of Funds
 General.
 Deposits .
   18




---



##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest bearing deposits:Interest bearing demand
    
    $
    43,102
    
    
    
    1.12
    %
    
    $
    37,217
    
    
    
    0.99
    %
    
    $
    37,891
    
    
    
    0.83
    %Savings and money market accounts
    
    
    95,822
    
    
    
    1.45
    
    
    
    119,544
    
    
    
    2.85
    
    
    
    89,285
    
    
    
    1.50Retail time deposits
    
    
    126,120
    
    
    
    4.18
    
    
    
    128,162
    
    
    
    4.92
    
    
    
    111,299
    
    
    
    4.10Wholesale time deposits
    
    
    43,215
    
    
    
    4.35
    
    
    
    14,466
    
    
    
    5.37
    
    
    
    158
    
    
    
    6.27Total interest bearing deposits
    
    $
    308,259
    
    
    
    2.93
    %
    
    $
    299,389
    
    
    
    3.63
    %
    
    $
    238,633
    
    
    
    2.61
    %
 Time deposits:
 Maturity as of December 31, 20083-Months
    
    
    Over 3-6
    
    
    Over 6-12
    
    
    Over 12or Less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total(In Thousands)Time deposits of less than $100,000
    
    $
    40,530
    
    
    $
    19,122
    
    
    $
    36,806
    
    
    $
    15,861
    
    
    $
    108,272Time deposits of $100,000 or more
    
    
    15,026
    
    
    
    12,461
    
    
    
    19,984
    
    
    
    6,845
    
    
    
    58,363Total time deposits
    
    $
    55,556
    
    
    $
    31,583
    
    
    $
    56,790
    
    
    $
    22,706
    
    
    $
    166,635
 Borrowings .
    19




---



##### Table of Contents



Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars In Thousands)Maximum BalanceFederal Home Loan Bank advances
    
    $
    88,000
    
    
    $
    50,000
    
    
    $
    50,000Average BalanceFederal Home Loan Bank advances
    
    $
    60,800
    
    
    $
    44,521
    
    
    $
    46,134Average interest rate paid during the year
    
    
    4.09
    %
    
    
    4.56
    %
    
    
    4.21
    %End of Year BalanceFederal Home Loan Bank advances
    
    $
    52,500
    
    
    $
    50,000
    
    
    $
    40,000Weighted average interest rate of Federal Home
Loan Bank advances
    
    
    3.96
    %
    
    
    4.67
    %
    
    
    4.41
    %
 Subsidiary and Other Activities
   How We Are Regulated
   HeritageBank of the South.
 20




---



##### Table of Contents



Georgia Regulation.
 Insurance of Accounts and Regulation by the FDIC.
   21




---



##### Table of Contents



Heritage Financial Group and Heritage, MHC .
 Regulation by the Office of Thrift Supervision.
    Georgia Regulation.
 Regulatory Capital Requirements for the Bank .
  22




---



##### Table of Contents



Regulatory Capital Requirements for Heritage Financial Group.
 Limitations on Dividends and Other Capital Distributions.
  23




---



##### Table of Contents



Federal Taxation
   Method of Accounting.
 Minimum Tax.
 Net Operating Loss Carryovers
 Corporate Dividends-Received Deduction.
 State Taxation
   Employees
  24




---



##### Table of Contents



Item 1A. Risk Factors
  Difficult market conditions and economic trends have adversely affected our industry and our
business.
     Recent legislative and regulatory initiatives to address difficult market and economic conditions
may not stabilize the U.S. banking system.
  25




---



##### Table of Contents



Our loan portfolio possesses increased risk due to our substantial number of multi-family,
commercial real estate, commercial business and consumer loans.
  Our loan portfolio contains residential and commercial construction loans, which increase the risk
in our loan portfolio.
  If economic conditions deteriorate, our results of operations and financial condition could be
adversely impacted as borrowers ability to repay loans declines and the value of the collateral
securing our loans decreases.
  If our allowance for loan losses is not sufficient to cover actual loan losses, or if credit
delinquencies increase, our earnings could decrease.
  26




---



##### Table of Contents



Strong competition within our market area may limit our growth and profitability.
  We may face risks with respect to the future expansion of our business.
  
    
    entry into new markets where we lack experience;
    
    the introduction of new products or services into our business with which we lack experience;
    
    the time and cost associated with identifying and evaluating potential markets, products and
services, hiring experienced local management and opening new offices;
    
    potential time lags between preparatory activities and the generation of sufficient assets
and deposits to support the costs of expansion; and
    
    the estimates and judgments used to evaluate market risks with respect to new markets,
products and services may not be accurate.
 We operate in a highly regulated environment, and we may be adversely affected by changes in laws
and regulations.
  Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
  We may elect or be compelled to seek additional capital in the future, but that capital may not be
available when it is needed.
  27




---



##### Table of Contents



There is a limited market for our common stock.
  Our ability to pay dividends is limited and we may be unable to pay future dividends.
  MHC owns more than half of the common stock of the Company. As a result, MHC has enough votes to
control what happens on most matters submitted to a vote of stockholders.
  The amount of common stock we control, our charter and bylaws, and state and federal statutory
provisions could discourage hostile acquisitions of control
  
    
    staggered terms of the members of the board of directors;
    
    restrictions on the acquisition of our equity securities without regulatory approval;
and
    
    the authorization of 1,000,000 shares of serial preferred stock that could be issued
without stockholder approval on terms or in circumstances that could deter a future
takeover attempt.
 
 Item 2.
Description of Properties
  28




---



##### Table of Contents



Item 3.
Legal Proceedings
  
 Item 4.
Submission of Matters to a Vote of Security Holders
  29




---



##### Table of Contents



PART II
 
 Item 5.
Market for the Registrants Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities
 Market and Dividend Information
  DividendsPaidHigh
    
    Low
    
    Per Share2008First quarter
    
    $
    12.99
    
    
    $
    10.86
    
    
    $
    0.07Second quarter
    
    
    12.50
    
    
    
    11.00
    
    
    
    0.07Third quarter
    
    
    12.00
    
    
    
    8.15
    
    
    
    0.07Fourth quarter
    
    
    11.00
    
    
    
    8.25
    
    
    
    0.072007First quarter
    
    $
    16.75
    
    
    $
    15.39
    
    
    $
    0.06Second quarter
    
    
    16.81
    
    
    
    14.81
    
    
    
    0.06Third quarter
    
    
    15.25
    
    
    
    11.56
    
    
    
    0.06Fourth quarter
    
    
    14.46
    
    
    
    11.00
    
    
    
    0.06
  30




---



##### Table of Contents



Number of
    
    
    
    
    
    
    Number ofsecurities
    
    
    
    
    
    
    securitiesto be issued
    
    
    Weighted
    
    
    remainingupon
    
    
    average
    
    
    available forexercise of
    
    
    exercise price
    
    
    futureoutstanding
    
    
    of outstanding
    
    
    issuanceoptions,
    
    
    options,
    
    
    under equitywarrants
    
    
    warrants and
    
    
    compensationand rights
    
    
    rights
    
    
    plansEquity compensation plans approved by security holders
    
    
    491,555
    
    
    $
    12.55
    
    
    
    49,506Equity compensation plans not approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    491,555
    
    
    $
    12.55
    
    
    
    49,506
  Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares thatPart of
    
    
    may yet beTotal
    
    
    
    
    
    
    Publicly
    
    
    PurchasedNumber
    
    
    
    
    
    
    Announced
    
    
    Under theof Shares
    
    
    Average Price
    
    
    Plans or
    
    
    Plans orPurchased
    
    
    Paid Per Share
    
    
    Programs
    
    
    ProgramsOctober
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    133,240November
    
    
    127,500
    
    
    
    9.99
    
    
    
    127,500
    
    
    
    5,740December
    
    
    19,740
    
    
    
    8.83
    
    
    
    19,740
    
    
    
    236,000Total
    
    
    147,240
    
    
    $
    9.84
    
    
    
    147,240
    
    
    
    236,000
  31




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##### Table of Contents



Item 6.
Selected Financial Data
 Selected Consolidated Financial Information
 At December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands)Selected Financial Condition Data:Total assets
    
    $
    502,058
    
    
    $
    468,672
    
    
    $
    413,330
    
    
    $
    363,797
    
    
    $
    343,468Loans, net
    
    
    297,537
    
    
    
    300,257
    
    
    
    272,700
    
    
    
    250,493
    
    
    
    235,275Securities available for sale, at fair value:U.S. government and agency securities
    
    
    21,165
    
    
    
    14,996
    
    
    
    29,439
    
    
    
    14,044
    
    
    
    11,528Corporate debt securities
    
    
    1,789
    
    
    
    3,854
    
    
    
    4,106
    
    
    
    3,786
    
    
    
    4,364Mortgage-backed securities
    
    
    65,408
    
    
    
    55,598
    
    
    
    28,044
    
    
    
    31,098
    
    
    
    26,478State, county and municipal
    
    
    27,511
    
    
    
    31,878
    
    
    
    16,316
    
    
    
    6,869
    
    
    
    8,874Equity and other investments
    
    
    268
    
    
    
    1,540
    
    
    
    6,667
    
    
    
    9,069
    
    
    
    8,044Federal Home Loan Bank stock, at cost
    
    
    3,186
    
    
    
    2,970
    
    
    
    2,499
    
    
    
    2,927
    
    
    
    2,957Other equity securities, at cost
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposits
    
    
    338,546
    
    
    
    330,629
    
    
    
    299,189
    
    
    
    238,640
    
    
    
    248,543Federal Home Loan Bank advances
and other borrowings
    
    
    52,500
    
    
    
    50,000
    
    
    
    40,000
    
    
    
    50,000
    
    
    
    51,000Total equity
    
    
    62,213
    
    
    
    65,592
    
    
    
    62,808
    
    
    
    68,983
    
    
    
    39,134Selected Operations Data:Total interest income
    
    $
    27,195
    
    
    $
    27,997
    
    
    $
    22,609
    
    
    $
    19,243
    
    
    $
    17,780Total interest expense
    
    
    12,494
    
    
    
    13,462
    
    
    
    8,377
    
    
    
    5,935
    
    
    
    4,898Net interest income
    
    
    14,701
    
    
    
    14,535
    
    
    
    14,232
    
    
    
    13,308
    
    
    
    12,882Provision for loan losses
    
    
    3,350
    
    
    
    1,178
    
    
    
    695
    
    
    
    1,014
    
    
    
    200Net interest income after provision for loan losses
    
    
    11,351
    
    
    
    13,357
    
    
    
    13,537
    
    
    
    12,294
    
    
    
    12,682Fees and service charges
    
    
    5,245
    
    
    
    5,129
    
    
    
    4,121
    
    
    
    3,836
    
    
    
    3,932Impairment loss on securities
    
    
    (3,119
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) on sales of investment securities
    
    
    235
    
    
    
    (355
    )
    
    
    (59
    )
    
    
    (5
    )
    
    
    139Other noninterest income
    
    
    2,227
    
    
    
    1,916
    
    
    
    1,548
    
    
    
    1,504
    
    
    
    1,384Total noninterest income
    
    
    4,588
    
    
    
    6,690
    
    
    
    5,610
    
    
    
    5,335
    
    
    
    5,455Total noninterest expense
    
    
    17,429
    
    
    
    17,976
    
    
    
    16,060
    
    
    
    13,584
    
    
    
    13,054Income before tax (benefit) and extraordinary items
    
    
    (1,490
    )
    
    
    2,071
    
    
    
    3,086
    
    
    
    4,045
    
    
    
    5,083Income tax provision (benefit)
    
    
    (1,228
    )
    
    
    (850
    )
    
    
    732
    
    
    
    1,095
    
    
    
    1,550Net income
    
    $
    (262
    )
    
    $
    2,921
    
    
    $
    2,354
    
    
    $
    2,950
    
    
    $
    3,533
 32




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##### Table of Contents



Year Ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Selected Financial Ratios and Other Data:Performance Ratios:Return on average assets
    
    
    (0.05
    %)
    
    
    0.66
    %
    
    
    0.63
    %
    
    
    0.83
    %
    
    
    1.04
    %Return on average equity
    
    
    (0.41
    %)
    
    
    4.55
    %
    
    
    3.44
    %
    
    
    5.18
    %
    
    
    9.28
    %Dividend payout ratio
    
    
    (299.94
    %)
    
    
    26.12
    %
    
    
    28.64
    %
    
    
    16.13
    %
    
    
    Net interest spread
    
    
    3.16
    %
    
    
    3.22
    %
    
    
    3.50
    %
    
    
    3.86
    %
    
    
    4.08
    %Net interest margin
    
    
    3.45
    %
    
    
    3.70
    %
    
    
    4.19
    %
    
    
    4.15
    %
    
    
    4.23
    %Operating expense to average total assets
    
    
    3.55
    %
    
    
    4.05
    %
    
    
    4.29
    %
    
    
    3.81
    %
    
    
    3.84
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    110.34
    %
    
    
    114.66
    %
    
    
    116.64
    %
    
    
    115.95
    %
    
    
    110.10
    %Efficiency ratio
    
    
    90.36
    %
    
    
    84.69
    %
    
    
    80.94
    %
    
    
    72.86
    %
    
    
    71.19
    %Asset Quality Ratios:Nonperforming assets to total assets at end of period
    
    
    1.87
    %
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %Nonperforming loans to total loans
    
    
    2.41
    %
    
    
    1.05
    %
    
    
    0.09
    %
    
    
    0.33
    %
    
    
    0.24
    %Allowance for loan losses to nonperforming loans
    
    
    67.99
    %
    
    
    137.49
    %
    
    
    1,582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %Allowance for loans losses to net loans
    
    
    1.64
    %
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.44
    %
    
    
    1.24
    %Net charge offs to average loans outstanding
    
    
    0.91
    %
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.15
    %
    
    
    0.30
    %Capital Ratios:Equity to total assets at end of period
    
    
    12.39
    %
    
    
    14.00
    %
    
    
    15.22
    %
    
    
    18.96
    %
    
    
    11.39
    %Average equity to average assets
    
    
    13.05
    %
    
    
    14.47
    %
    
    
    18.29
    %
    
    
    15.98
    %
    
    
    11.21
    %Common Share Data and Other Ratios:Gross shares outstanding at year end*
    
    
    11,452,344
    
    
    
    11,443,723
    
    
    
    11,449,155
    
    
    
    11,241,250
    
    
    
    7,868,875Less treasury stock
    
    
    993,498
    
    
    
    615,934
    
    
    
    555,138
    
    
    
    
    
    
    
    Net shares outstanding at year end*
    
    
    10,458,846
    
    
    
    10,827,789
    
    
    
    10,894,017
    
    
    
    11,241,250
    
    
    
    7,868,875Shares owned by Heritage, MHC*
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875Public shares outstanding
    
    
    2,589,971
    
    
    
    2,958,914
    
    
    
    3,025,142
    
    
    
    3,372,375
    
    
    
    Unearned ESOP shares
    
    
    286,455
    
    
    
    330,525
    
    
    
    374,595
    
    
    
    418,665
    
    
    
    MHC Ownership
    
    
    75
    %
    
    
    73
    %
    
    
    72
    %
    
    
    70
    %
    
    
    100
    %Public Ownership
    
    
    25
    %
    
    
    27
    %
    
    
    28
    %
    
    
    30
    %
    
    
    Book value per share
    
    
    6.12
    
    
    
    6.25
    
    
    
    5.97
    
    
    
    6.37
    
    
    
    4.97Tangible book value per share
    
    
    6.02
    
    
    
    6.15
    
    
    
    5.88
    
    
    
    6.37
    
    
    
    4.97Other Data:Number of full-service offices
    
    
    8
    
    
    
    7
    
    
    
    7
    
    
    
    6
    
    
    
    6
 
 *
    
    In order to make the data comparative, shares outstanding at year end and shares owned by
Heritage, MHC for 2004 have been adjusted for the 7,867,875 shares that were issued to Heritage,
MHC, in conjunction with the Companys stock offering in 2005. At December 31, 2004 there were
1,000 shares outstanding, all of which were owned by Heritage, MHC. 33




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##### Table of Contents



Item 7.
 Managements Discussion and Analysis of Financial Condition and Results of
Operations
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Evolution of Business Strategy
    34




---



##### Table of Contents



1. Commercial Banking and Small Business Lending:
 2. Indirect Auto Lending:
 3. Retail Banking:
 4. Brokerage/Investment Services:
 5. Mortgage Lending:
   Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
 35




---



##### Table of Contents




    
    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.
  36




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##### Table of Contents



Comparison of Financial Condition at December 31, 2008 and December 31, 2007
         37




---



##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    310,985
    
    
    $
    20,882
    
    
    
    6.70
    %
    
    $
    291,438
    
    
    $
    22,160
    
    
    
    7.61
    %
    
    $
    264,366
    
    
    $
    19,123
    
    
    
    7.23
    %Taxable investment securities
    
    
    88,896
    
    
    
    4,890
    
    
    
    5.50
    
    
    
    79,205
    
    
    
    4,220
    
    
    
    5.33
    
    
    
    55,902
    
    
    
    2,660
    
    
    
    4.76Tax exempt investment
securities
    
    
    28,255
    
    
    
    1,176
    
    
    
    6.30
    
    
    
    25,798
    
    
    
    1,044
    
    
    
    6.13
    
    
    
    7,077
    
    
    
    273
    
    
    
    5.85Federal funds sold
    
    
    14,316
    
    
    
    232
    
    
    
    1.62
    
    
    
    10,456
    
    
    
    544
    
    
    
    5.20
    
    
    
    10,154
    
    
    
    496
    
    
    
    4.88Interest bearing deposits
with banks
    
    
    630
    
    
    
    15
    
    
    
    2.44
    
    
    
    652
    
    
    
    29
    
    
    
    4.39
    
    
    
    1,064
    
    
    
    57
    
    
    
    5.35Total interest-earning
Assets
    
    
    443,082
    
    
    
    27,195
    
    
    
    6.26
    
    
    
    407,549
    
    
    
    27,997
    
    
    
    7.01
    
    
    
    338,563
    
    
    
    22,609
    
    
    
    6.72Interest-Bearing Liabilities:Interest bearing demand
    
    
    43,102
    
    
    
    486
    
    
    
    1.12
    
    
    
    37,217
    
    
    
    368
    
    
    
    0.99
    
    
    
    37,891
    
    
    
    313
    
    
    
    0.83Savings and money market
    
    
    95,822
    
    
    
    1,390
    
    
    
    1.46
    
    
    
    119,544
    
    
    
    3,407
    
    
    
    2.85
    
    
    
    89,285
    
    
    
    1,337
    
    
    
    1.50Retail time deposits
    
    
    126,120
    
    
    
    5,283
    
    
    
    4.18
    
    
    
    128,162
    
    
    
    6,307
    
    
    
    4.92
    
    
    
    111,299
    
    
    
    4,562
    
    
    
    4.10Wholesale time deposits
    
    
    43,215
    
    
    
    1,884
    
    
    
    4.35
    
    
    
    14,466
    
    
    
    776
    
    
    
    5.37
    
    
    
    158
    
    
    
    10
    
    
    
    6.27Borrowings
    
    
    93,304
    
    
    
    3,451
    
    
    
    3.69
    
    
    
    56,014
    
    
    
    2,604
    
    
    
    4.65
    
    
    
    47,196
    
    
    
    2,155
    
    
    
    4.57Total interest-bearing
liabilities
    
    
    401,563
    
    
    
    12,494
    
    
    
    3.10
    
    
    
    355,403
    
    
    
    13,462
    
    
    
    3.79
    
    
    
    285,828
    
    
    
    8,377
    
    
    
    2.93Net interest income
    
    
    
    
    
    $
    14,701
    
    
    
    
    
    
    
    
    
    
    $
    14,535
    
    
    
    
    
    
    
    
    
    
    $
    14,232Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    3.79
    %Net earning assets
    
    $
    41,519
    
    
    
    
    
    
    
    
    
    
    $
    52,146
    
    
    
    
    
    
    
    
    
    
    $
    52,734Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.45
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %
    
    
    
    
    
    
    
    
    
    
    4.25
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.10
    x
    
    
    
    
    
    
    
    
    
    
    1.15
    x
    
    
    
    
    
    
    
    
    
    
    1.18
    x
 38




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##### Table of Contents



Rate/Volume Analysis
  Year Ended December 31,2008 vs. 2007
    
    
    2007 vs. 2006Increase (Decrease)
    
    
    Total
    
    
    Increase (Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    1,687
    
    
    $
    (2,965
    )
    
    $
    (1,278
    )
    
    $
    2,015
    
    
    $
    1,022
    
    
    $
    3,037Taxable investment securities
    
    
    245
    
    
    
    425
    
    
    
    670
    
    
    
    1,212
    
    
    
    348
    
    
    
    1,560Tax exempt investment securities
    
    
    102
    
    
    
    30
    
    
    
    132
    
    
    
    757
    
    
    
    14
    
    
    
    771Federal funds sold
    
    
    152
    
    
    
    (464
    )
    
    
    (312
    )
    
    
    15
    
    
    
    33
    
    
    
    48Interest bearing deposits with banks
    
    
    (931
    )
    
    
    917
    
    
    
    (14
    )
    
    
    (19
    )
    
    
    (9
    )
    
    
    (28
    )Total interest-earning assets
    
    $
    1,255
    
    
    $
    (2,057
    )
    
    
    (802
    )
    
    $
    3,980
    
    
    $
    1,408
    
    
    
    5,388Interest-bearing liabilities:Interest bearing demand
    
    $
    63
    
    
    $
    55
    
    
    
    118
    
    
    $
    (6
    )
    
    $
    61
    
    
    
    55Savings and money market
    
    
    (805
    )
    
    
    (1,212
    )
    
    
    (2,017
    )
    
    
    566
    
    
    
    1,504
    
    
    
    2,070Retail time deposits
    
    
    (97
    )
    
    
    (927
    )
    
    
    (1,024
    )
    
    
    752
    
    
    
    993
    
    
    
    1,745Wholesale time deposits
    
    
    (1,289
    )
    
    
    2,397
    
    
    
    1,108
    
    
    
    768
    
    
    
    (8
    )
    
    
    766Borrowings
    
    
    1,372
    
    
    
    (525
    )
    
    
    847
    
    
    
    445
    
    
    
    4
    
    
    
    449Total interest-bearing liabilities
    
    $
    (756
    )
    
    $
    (212
    )
    
    
    (968
    )
    
    $
    2,525
    
    
    $
    2,560
    
    
    
    5,085Net interest income
    
    
    
    
    
    
    
    
    
    $
    166
    
    
    
    
    
    
    
    
    
    
    $
    303
 39




---



##### Table of Contents



Comparison of Operating Results for the Years Ended December 31, 2008 and December 31, 2007
 General
  Net Interest Income
   Provision for Loan Losses
      40




---



##### Table of Contents



Impairment Losses on Securities
   Noninterest Income
  For the Years Ended,2008
    
    
    2007
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Service charges on deposit accounts
    
    $
    3,958
    
    
    $
    3,929
    
    
    $
    29
    
    
    
    0.7
    %Other service charges, commissions and fees
    
    
    1,288
    
    
    
    1,200
    
    
    
    88
    
    
    
    7.3
    %Brokerage fees
    
    
    1,030
    
    
    
    951
    
    
    
    79
    
    
    
    8.4
    %Mortgage origination fees
    
    
    400
    
    
    
    350
    
    
    
    50
    
    
    
    14.2
    %Bank owned life insurance
    
    
    495
    
    
    
    347
    
    
    
    148
    
    
    
    42.6
    %Other
    
    
    301
    
    
    
    268
    
    
    
    33
    
    
    
    12.0
    %Total noninterest income
    
    $
    7,472
    
    
    $
    7,045
    
    
    $
    427
    
    
    
    6.2
    %Noninterest income as a percentage of average assets
    
    
    1.5
    %
    
    
    1.6
    %
  41




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##### Table of Contents



42




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##### Table of Contents



Noninterest Expense
  For the years endedDecember 31,2008
    
    
    2007
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Salaries and employee benefits
    
    $
    8,987
    
    
    $
    10,321
    
    
    $
    (1,334
    )
    
    
    (12.9
    )%Equipment
    
    
    1,217
    
    
    
    1,109
    
    
    
    108
    
    
    
    9.7
    %Occupancy
    
    
    1,204
    
    
    
    1,045
    
    
    
    159
    
    
    
    15.2
    %Advertising and marketing
    
    
    496
    
    
    
    450
    
    
    
    46
    
    
    
    10.3
    %Legal and accounting
    
    
    528
    
    
    
    460
    
    
    
    68
    
    
    
    14.7
    %Directors fees and retirement
    
    
    552
    
    
    
    763
    
    
    
    (211
    )
    
    
    (27.6
    )%Consulting and other professional fees
    
    
    318
    
    
    
    603
    
    
    
    (285
    )
    
    
    (47.3
    )%Telecommunications
    
    
    258
    
    
    
    231
    
    
    
    27
    
    
    
    11.5
    %Supplies
    
    
    177
    
    
    
    220
    
    
    
    (43
    )
    
    
    (19.5
    )%Data processing fees
    
    
    1,300
    
    
    
    1,151
    
    
    
    149
    
    
    
    12.9
    %Loss on sale and write-downs of other real estate owned
    
    
    386
    
    
    
    
    
    
    
    386
    
    
    NMForeclosed asset expenses
    
    
    229
    
    
    
    42
    
    
    
    187
    
    
    
    447.5
    %FDIC insurance and other regulatory fees
    
    
    267
    
    
    
    121
    
    
    
    146
    
    
    
    120.8
    %Other operating
    
    
    1,510
    
    
    
    1,460
    
    
    
    49
    
    
    
    3.3
    %Total noninterest expenses
    
    $
    17,429
    
    
    $
    17,976
    
    
    $
    (548
    )
    
    
    (3.1
    )%Noninterest expenses as a percentage of average assets
    
    
    3.6
    %
    
    
    4.1
    %
           43




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##### Table of Contents



Income Tax Expense
   Liquidity and Capital Resources
    44




---



##### Table of Contents



Off-Balance-Sheet Liabilities
  (In Thousands)Commitments to extend credit
    
    $
    37,201Financial stand-by letters of credit
    
    
    4,989$
    42,190
 Capital
     Minimum Required toBe Well CapitalizedFor Capital
    
    Under PromptAdequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)Total Capital to Risk Weighted AssetsConsolidated
    
    $
    66,767
    
    
    
    18.4
    %
    
    
    29,035
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    59,670
    
    
    
    16.7
    %
    
    
    28,654
    
    
    
    8.0
    %
    
    
    35,818
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    61,816
    
    
    
    17.0
    %
    
    
    14,517
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    55,178
    
    
    
    15.4
    %
    
    
    14,327
    
    
    
    4.0
    %
    
    
    21,491
    
    
    
    6.0
    %Tier I Capital to Average Total AssetsConsolidated
    
    $
    61,816
    
    
    
    12.6
    %
    
    
    19,622
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    55,178
    
    
    
    11.0
    %
    
    
    19,983
    
    
    
    4.0
    %
    
    
    24,979
    
    
    
    5.0
    %
 45




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##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses
    Income Taxes
   46




---



##### Table of Contents



Estimates of Fair Value
    47




---



##### Table of Contents



Item 7a. Quantitative and Qualitative Disclosures about Market Risk
       EffectMarket
    
    
    
    on NetRate
    
    
    
    InterestChange
    
    
    
    Income+300
    
    
    
    
    
    11.3
    %+200
    
    
    
    
    
    10.8
    %+100
    
    
    
    
    
    6.4
    %-100
    
    
    
    
    
    -1.8
    %-200
    
    
    
    
    
    1.9
    %-300
    
    
    
    
    
    4.3
    %
 48




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##### Table of Contents



Item 8.
 Financial Statements
  (a)
    
    Report from Independent Registered Public Accounting Firm;(b)
    
    Consolidated Balance Sheets as of December 31, 2008 and 2007;(c)
    
    Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007;(d)
    
    Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2008 and 2007;(e)
    
    Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2008 and 2007;(f)
    
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007;(g)
    
    Notes to Consolidated Financial Statements.
 
 Item 9.
 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
  49




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##### Table of Contents



Item 9A. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
    Internal
Control-Integrated Framework
 
 Item 9B. Other Information
  50




---



##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers and Corporate Governance
 Directors
  Executive Officers
  Section 16(a) Compliance
  Code of Ethics
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13. Certain Relationships and Related Transactions
   51




---



##### Table of Contents



Item 14. Principal Accountant Fees and Services
  52




---



##### Table of Contents



PART IV
 
 Item 15. Exhibits
 Reference toPrior Filingor Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto3.1
    
    Charter of the Registrant
    
    ***3.2
    
    Bylaws of the Registrant
    
    *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
    
    *21
    
    Subsidiaries of the Company
    
    2123
    
    Consent of Accountants
    
    2331
    
    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
Securities and Exchange Commission 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 Securities and Exchange Commission 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 commission on March 30, 2006. 53




---



##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate:  March 31, 2009
    By:
    /s/ O. Leonard DormineyO. Leonard Dorminey, President andChief Executive Officer
(Duly Authorized Representative) KNOW ALL MEN BY THESE PRESENTS
  Date: March 31, 2009
    
    /s/ O. Leonard DormineyO. Leonard DormineyPresident, Chief Executive Officer and Director (Principal Executive Officer)Date: March 31, 2009
    
    /s/ Antone D. LehrAntone D. Lehr, Chairman of the BoardDate: March 31, 2009
    
    /s/ Joseph C. BurgerJoseph C. Burger, Vice Chairman of the BoardDate: March 31, 2009
    
    /s/ Douglas J. McGinleyDouglas J. McGinley, DirectorDate: March 31, 2009
    
    /s/ Carol W. SlappeyCarol W. Slappey, DirectorDate: March 31, 2009
    
    /s/ J. Keith LandJ. Keith Land, DirectorDate: March 31, 2009
    
    /s/ J. Lee StanleyJ. Lee Stanley, DirectorDate: March 31, 2009
    
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 54




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##### Table of Contents



Index to Exhibits
 21
    
    Subsidiaries of the Company23
    
    Consent of Accountants31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of President and Chief
Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer32
    
    Section 1350 Certifications
 55




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors
Heritage Financial Group  and Subsidiary
Albany, Georgia
 Heritage Financial Group and
Subsidiary
    
 F-1




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007AssetsCash and due from banks
    
    $
    10,159,602
    
    
    $
    8,953,836Interest-bearing deposits in banks
    
    
    745,758
    
    
    
    379,961Federal funds sold
    
    
    30,254,000
    
    
    
    14,505,000Securities available for sale, at fair value
    
    
    116,140,525
    
    
    
    107,867,192Federal Home Loan Bank Stock, at cost
    
    
    3,185,800
    
    
    
    2,969,700Other equity securities, at cost
    
    
    1,010,000
    
    
    
    Loans
    
    
    302,487,892
    
    
    
    304,673,138Less allowance for loan losses
    
    
    4,950,722
    
    
    
    4,415,669Loans, net
    
    
    297,537,170
    
    
    
    300,257,469Premises and equipment, net
    
    
    16,801,183
    
    
    
    14,815,520Accrued interest receivable
    
    
    2,155,327
    
    
    
    2,586,357Foreclosed assets
    
    
    2,119,818
    
    
    
    364,999Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Cash surrender value of bank owned life insurance
    
    
    14,136,119
    
    
    
    8,640,647Other assets
    
    
    6,812,425
    
    
    
    6,331,560$
    502,057,727
    
    
    $
    468,672,241Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    19,100,197
    
    
    $
    21,058,567Interest-bearing
    
    
    319,445,797
    
    
    
    309,570,843Total deposits
    
    
    338,545,994
    
    
    
    330,629,410Federal funds purchased and securities sold under repurchase agreements
    
    
    41,497,491
    
    
    
    15,288,452Other borrowings
    
    
    52,500,000
    
    
    
    50,000,000Accrued interest payable
    
    
    1,045,042
    
    
    
    947,352Other liabilities
    
    
    6,256,227
    
    
    
    6,214,877Total liabilities
    
    
    439,844,754
    
    
    
    403,080,091Commitments 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;
11,452,344 and 11,443,723 issued and outstanding
    
    
    114,523
    
    
    
    114,437Capital surplus
    
    
    39,861,237
    
    
    
    39,009,323Retained earnings
    
    
    41,357,209
    
    
    
    42,406,483Accumulated other comprehensive loss
    
    
    (2,685,633
    )
    
    
    (3,303,342
    )Unearned employee stock ownership plan (ESOP) shares,
286,455 and 330,525 shares
    
    
    (2,864,550
    )
    
    
    (3,305,250
    )75,782,786
    
    
    
    74,921,651Treasury stock, at cost, 993,498 and 615,934 shares
    
    
    (13,569,813
    )
    
    
    (9,329,501
    )Total stockholders equity
    
    
    62,212,973
    
    
    
    65,592,150$
    502,057,727
    
    
    $
    468,672,241
 See Notes to Consolidated Financial Statements.
 F-2




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##### Table of Contents



HERITAGE
FINANCIAL GROUP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007Interest incomeInterest and fees on loans
    
    $
    20,881,600
    
    
    $
    22,160,348Interest on taxable securities
    
    
    4,890,165
    
    
    
    4,220,327Interest on nontaxable securities
    
    
    1,175,720
    
    
    
    1,044,406Interest on federal funds sold
    
    
    232,456
    
    
    
    543,683Interest on deposits in other banks
    
    
    15,424
    
    
    
    28,59227,195,365
    
    
    
    27,997,356Interest expenseInterest on deposits
    
    
    9,042,782
    
    
    
    10,858,559Interest on other borrowings
    
    
    3,451,560
    
    
    
    2,603,81212,494,342
    
    
    
    13,462,371Net interest income
    
    
    14,701,023
    
    
    
    14,534,985Provision for loan losses
    
    
    3,350,000
    
    
    
    1,178,000Net interest income after provision for loan losses
    
    
    11,351,023
    
    
    
    13,356,985Noninterest incomeService charges on deposit accounts
    
    
    3,957,589
    
    
    
    3,928,553Other service charges, commissions and fees
    
    
    1,287,591
    
    
    
    1,199,643Brokerage fees
    
    
    1,029,980
    
    
    
    950,524Mortgage origination fees
    
    
    400,044
    
    
    
    350,276Bank owned life insurance
    
    
    495,492
    
    
    
    347,445Impairment loss on securities
    
    
    (3,119,181
    )
    
    
    Gain (loss) on sale of securities
    
    
    234,676
    
    
    
    (355,161
    )Other
    
    
    301,308
    
    
    
    269,0114,587,499
    
    
    
    6,690,291Noninterest expenseSalaries and employee benefits
    
    
    8,987,913
    
    
    
    10,321,235Equipment
    
    
    1,217,142
    
    
    
    1,109,431Occupancy
    
    
    1,204,156
    
    
    
    1,045,058Data processing fees
    
    
    1,299,963
    
    
    
    1,151,152Directors fees and retirement
    
    
    552,289
    
    
    
    762,840Consulting and other professional fees
    
    
    317,957
    
    
    
    603,275Advertising and marketing
    
    
    496,124
    
    
    
    449,815Legal and accounting
    
    
    528,085
    
    
    
    460,438Telecommunications
    
    
    257,617
    
    
    
    231,159Supplies
    
    
    176,973
    
    
    
    219,920FDIC insurance and other regulatory fees
    
    
    267,475
    
    
    
    121,146Loss on sale and writedowns of other real estate owned
    
    
    386,317
    
    
    
    Foreclosed asset expenses
    
    
    229,039
    
    
    
    41,834Other operating
    
    
    1,507,808
    
    
    
    1,459,26417,428,858
    
    
    
    17,976,567Income (loss) before income tax benefit
    
    
    (1,490,336
    )
    
    
    2,070,709Applicable income tax benefit
    
    
    (1,227,976
    )
    
    
    (850,396
    )Net income (loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Basic earnings (loss) per share
    
    $
    (0.03
    )
    
    $
    0.28Diluted earnings (loss) per share
    
    $
    (0.03
    )
    
    $
    0.28
 See Notes to Consolidated Financial Statements.
 F-3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007Net income (loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Other comprehensive income (loss):Net unrealized gain on cash flow hedge arising during the period,
net of tax of $156,558
    
    
    
    
    
    
    234,838Net realized gain on termination of cash flow hedge during the period,
net of tax of $510,078
    
    
    765,117
    
    
    
    Elimination of unrealized gain on cash flow hedge terminated during
the period, net of tax of $156,558
    
    
    (234,838
    )
    
    
    Accretion of realized gain on terminated cash flow hedge,
net of tax of $64,018
    
    
    (96,027
    )
    
    
    Net unrealized holding losses arising during period,
net of tax benefit of $994,469 and $323,476
    
    
    (1,491,704
    )
    
    
    (492,140
    )Reclassification adjustment for (gains) losses and securities
impairment included in net income (loss),
net of tax benefit of $1,153,802 and $140,858
    
    
    1,730,703
    
    
    
    214,303Adjustment to recognize funded status of pension plan,
net of tax benefit of $37,028 and $127,335
    
    
    (55,542
    )
    
    
    (162,463
    )Total other comprehensive income (loss)
    
    
    617,709
    
    
    
    (205,462
    )Comprehensive income
    
    $
    335,349
    
    
    $
    2,715,643
 See Notes to Consolidated Financial Statements.
 F-4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2008 AND 2007
 AccumulatedUnearned
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2006
    
    
    11,449,155
    
    
    $
    114,492
    
    
    $
    37,807,784
    
    
    $
    40,248,349
    
    
    $
    (3,745,950
    )
    
    $
    (8,518,017
    )
    
    $
    (3,097,880
    )
    
    $
    62,808,778Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105Cash dividend declared, $0.24
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    811,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811,781Repurchase of 61,106 shares of
stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (816,227
    )
    
    
    
    
    
    
    (816,227
    )Issuance of 310 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    4,743
    
    
    
    
    
    
    
    4,853Forfeiture of restricted shares
of common stock
    
    
    (14,632
    )
    
    
    (147
    )
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,462
    )
    
    
    (205,462
    )Excess tax benefit from
stock-based compensation plans
    
    
    
    
    
    
    
    
    
    
    64,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,119Exercise of stock options
    
    
    9,200
    
    
    
    92
    
    
    
    115,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,368ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    210,106
    
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    650,806Balance, December 31, 2007
    
    
    11,443,723
    
    
    
    114,437
    
    
    
    39,009,323
    
    
    
    42,406,483
    
    
    
    (3,305,250
    )
    
    
    (9,329,501
    )
    
    
    (3,303,342
    )
    
    
    65,592,160Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262,360
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262,360
    )Cash dividend declared, $0.28
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,914
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,914
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    809,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809,086Repurchase of 377,894 shares of
stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,244,715
    )
    
    
    
    
    
    
    (4,244,715
    )Issuance of 330 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    (836
    )
    
    
    
    
    
    
    
    
    
    
    4,403
    
    
    
    
    
    
    
    3,567Forfeiture of restricted shares
of common stock
    
    
    (884
    )
    
    
    (9
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of restricted shares of
common stock
    
    
    9,505
    
    
    
    95
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    617,709
    
    
    
    617,709Tax benefit shortfall from
stock-based compensation plans
    
    
    
    
    
    
    
    
    
    
    (3,432
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,432
    )ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    47,182
    
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    487,882Balance, December 31, 2008
    
    
    11,452,344
    
    
    $
    114,523
    
    
    $
    39,861,237
    
    
    $
    41,357,209
    
    
    $
    (2,864,550
    )
    
    
    (13,569,813
    )
    
    
    (2,685,633
    )
    
    $
    62,212,973
 See Notes to Consolidated Financial Statements.
 F-5




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    964,205
    
    
    
    974,435Provision for loan losses
    
    
    3,350,000
    
    
    
    1,178,000ESOP compensation expense
    
    
    487,882
    
    
    
    650,806Provision for deferred taxes
    
    
    (1,578,183
    )
    
    
    (246,373
    )Stock-based compensation expense
    
    
    809,086
    
    
    
    811,781Net gain on termination of cash flow hedge
    
    
    1,275,195
    
    
    
    Accretion of gain on termination of cash flow hedge
    
    
    (160,045
    )
    
    
    Impairment losses on securities available for sale
    
    
    3,119,181
    
    
    
    Net (gains) losses on sale of securities available for sale
    
    
    (234,676
    )
    
    
    355,161Net losses on sale or disposal of premises and equipment
    
    
    865
    
    
    
    1,258Increase in bank owned life insurance
    
    
    (495,472
    )
    
    
    (347,445
    )Excess tax (benefit) shortfall related to stock-based compensation plans
    
    
    3,432
    
    
    
    (64,119
    )(Increase) decrease in interest receivable
    
    
    431,030
    
    
    
    (297,530
    )Increase in interest payable
    
    
    97,690
    
    
    
    424,686(Increase) decrease in taxes receivable
    
    
    346,342
    
    
    
    (2,068,556
    )Net other operating activities
    
    
    (83,939
    )
    
    
    1,821,174Loss on sale and writedowns of other real estate owned
    
    
    386,317
    
    
    
    Total adjustments
    
    
    8,718,910
    
    
    
    3,193,278Net cash provided by operating activities
    
    
    8,456,550
    
    
    
    6,114,383INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    (365,797
    )
    
    
    1,773,898Purchases of securities available for sale
    
    
    (64,161,362
    )
    
    
    (81,182,050
    )Proceeds from maturities of securities available for sale
    
    
    15,985,014
    
    
    
    14,472,492Proceeds from sale of securities available for sale
    
    
    37,416,842
    
    
    
    42,595,907Purchase of bank owned life insurance
    
    
    (5,000,000
    )
    
    
    Increase in Federal Home Loan Bank stock
    
    
    (216,100
    )
    
    
    (470,300
    )Purchase of other equity securities
    
    
    (1,010,000
    )
    
    
    Increase in federal funds sold
    
    
    (15,749,000
    )
    
    
    (1,828,000
    )Increase in loans, net
    
    
    (3,906,118
    )
    
    
    (29,340,852
    )Purchases of premises and equipment
    
    
    (2,950,733
    )
    
    
    (3,225,354
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    249,623Proceeds from sale of other real estated owned
    
    
    1,112,341
    
    
    
    209,751Net cash used in investing activities
    
    
    (38,844,913
    )
    
    
    (56,744,885
    )
 F-6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007FINANCING ACTIVITIESIncrease in deposits
    
    $
    7,916,584
    
    
    $
    31,440,906Increase in federal funds purchased and securities sold
under repurchase agreements
    
    
    26,209,039
    
    
    
    9,757,058Proceeds from other borrowings
    
    
    46,000,000
    
    
    
    15,000,000Repayment of other borrowings
    
    
    (43,500,000
    )
    
    
    (5,000,000
    )Excess tax (benefit) shortfall related to stock-based compensation plans
    
    
    (3,432
    )
    
    
    64,119Proceeds from exercise of stock options
    
    
    
    
    
    
    115,368Purchase of treasury shares, net
    
    
    (4,241,148
    )
    
    
    (811,374
    )Dividends paid to stockholders
    
    
    (786,914
    )
    
    
    (762,971
    )Net cash provided by financing activities
    
    
    31,594,129
    
    
    
    49,803,106Net increase (decrease) in cash and due from banks
    
    
    1,205,766
    
    
    
    (827,396
    )Cash and due from banks at beginning of period
    
    
    8,953,836
    
    
    
    9,781,232Cash and due from banks at end of period
    
    $
    10,159,602
    
    
    $
    8,953,836SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    12,396,652
    
    
    $
    13,037,685Income taxes
    
    
    7,300
    
    
    
    1,464,533NONCASH TRANSACTIONSIncrease (decrease) in unrealized losses on securities available for sale
    
    $
    (398,332
    )
    
    $
    463,068Increase in unrealized gains on cash flow hedges
    
    
    
    
    
    
    391,396Decrease in unrealized gain on terminated cash flow hedges
    
    
    391,396
    
    
    
    Principal balances of loans transferred to other real estate owned
    
    
    3,276,417
    
    
    
    190,851Pension liability adjustment
    
    
    92,570
    
    
    
    289,798
 See Notes to Consolidated Financial Statements.
 F-7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
  Minority Stock Offering
  Basis of Presentation and Accounting Estimates
   
 Cash, Due from Banks and Cash Flows
   F-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Securities
    Loans
   F-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Loans (Continued)
  Allowance for Loan Losses
     F-10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Mortgage Origination Fees
  Premises and Equipment
  YearsBuildings
    
    
    39Furniture and equipment
    
    
    3-7
 Intangible Assets
  Foreclosed Assets
  Transfers of Financial Assets
  Pension Plan
  F-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Employee Stock Ownership Plan (ESOP)
   Treasury Stock
  Income Taxes
   Earnings (Loss) Per Share
  Comprehensive Income
  F-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Standards
 SFAS No. 141, Business Combinations (Revised 2007).
 SFAS No. 157, Fair Value Measurements.
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
- Including an amendment of FASB Statement No. 115.
 SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB Statement No. 51.
 F-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Standards (Continued)
 SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.
 FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109.
 FSP No. 48-1 Definition of Settlement in FASB Interpretation No. 48.
 F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2008:U. S. Government sponsored
agency securities
    
    $
    20,923,967
    
    
    $
    248,091
    
    
    $
    (7,077
    )
    
    $
    21,164,981State and municipal securities
    
    
    30,052,558
    
    
    
    60,677
    
    
    
    (2,602,013
    )
    
    
    27,511,222Corporate debt securities
    
    
    2,187,686
    
    
    
    
    
    
    
    (398,303
    )
    
    
    1,789,383Mortgage-backed securities
    
    
    64,380,979
    
    
    
    1,469,043
    
    
    
    (442,624
    )
    
    
    65,407,398Total debt securities
    
    
    117,545,190
    
    
    
    1,777,811
    
    
    
    (3,450,017
    )
    
    
    115,872,984Equity securities
    
    
    434,801
    
    
    
    20,999
    
    
    
    (188,259
    )
    
    
    267,541Total securities
    
    $
    117,979,991
    
    
    $
    1,798,810
    
    
    $
    (3,638,276
    )
    
    $
    116,140,525
 December 31, 2007:U. S. Government sponsored agency securities
    
    $
    14,969,355
    
    
    $
    62,808
    
    
    $
    (35,858
    )
    
    $
    14,996,305State and municipal securities
    
    
    32,991,873
    
    
    
    42,779
    
    
    
    (1,156,205
    )
    
    
    31,878,447Corporate debt securities
    
    
    4,453,786
    
    
    
    
    
    
    
    (600,183
    )
    
    
    3,853,603Mortgage-backed securities
    
    
    55,765,963
    
    
    
    265,446
    
    
    
    (432,910
    )
    
    
    55,598,499Total debt securities
    
    
    108,180,977
    
    
    
    371,033
    
    
    
    (2,225,156
    )
    
    
    106,326,854Equity securities
    
    
    1,924,014
    
    
    
    
    
    
    
    (383,676
    )
    
    
    1,540,338Total securities
    
    $
    110,104,991
    
    
    $
    371,033
    
    
    $
    (2,608,832
    )
    
    $
    107,867,192
  Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    1,500,000
    
    
    $
    1,511,670Due from one year to five years
    
    
    2,564,821
    
    
    
    2,487,407Due from five to ten years
    
    
    8,316,844
    
    
    
    7,995,632Due after ten years
    
    
    40,782,546
    
    
    
    38,470,877Mortgage-backed securities
    
    
    64,380,979
    
    
    
    65,407,398$
    117,545,190
    
    
    $
    115,872,984
  F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (Continued)
  December 31,2008
    
    
    2007Gross gains on sales of securities
    
    $
    361,701
    
    
    $
    108,594Gross losses on sales of securities
    
    
    (127,025
    )
    
    
    (463,755
    )Net realized gains (losses) on
sales of securities available for
sale
    
    $
    234,676
    
    
    $
    (355,161
    )
   Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2008:U.S. Government sponsored 

agency securities
    
    $
    1,992,923
    
    
    $
    (7,077
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,992,923
    
    
    $
    (7,077
    )State and municipal securities
    
    
    12,567,698
    
    
    
    (889,679
    )
    
    
    10,383,740
    
    
    
    (1,712,334
    )
    
    
    22,951,438
    
    
    
    (2,602,013
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    763,444
    
    
    
    (398,303
    )
    
    
    763,444
    
    
    
    (398,303
    )Mortgage-backed securities
    
    
    4,366,655
    
    
    
    (378,461
    )
    
    
    4,772,176
    
    
    
    (64,163
    )
    
    
    9,138,831
    
    
    
    (442,624
    )Subtotal, debt securities
    
    
    18,927,276
    
    
    
    (1,275,217
    )
    
    
    15,919,360
    
    
    
    (2,174,800
    )
    
    
    34,846,636
    
    
    
    (3,450,017
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    246,541
    
    
    
    (188,259
    )
    
    
    246,541
    
    
    
    (188,259
    )Total temporarily impaired
securities
    
    $
    18,927,276
    
    
    $
    (1,275,217
    )
    
    $
    16,165,901
    
    
    $
    (2,363,059
    )
    
    $
    35,093,177
    
    
    $
    (3,638,276
    )December 31, 2007:U.S. Government sponsored
agency securities
    
    $
    1,491,434
    
    
    $
    (8,566
    )
    
    $
    1,470,007
    
    
    $
    (27,292
    )
    
    $
    2,961,441
    
    
    $
    (35,858
    )State and municipal securities
    
    
    18,870,294
    
    
    
    (1,014,825
    )
    
    
    5,601,015
    
    
    
    (141,380
    )
    
    
    24,471,309
    
    
    
    (1,156,205
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    2,822,003
    
    
    
    (600,183
    )
    
    
    2,822,003
    
    
    
    (600,183
    )Mortgage-backed securities
    
    
    5,096,750
    
    
    
    (11,716
    )
    
    
    15,847,197
    
    
    
    (421,194
    )
    
    
    20,943,947
    
    
    
    (432,910
    )Subtotal, debt securities
    
    
    25,458,478
    
    
    
    (1,035,107
    )
    
    
    25,740,222
    
    
    
    (1,190,049
    )
    
    
    51,198,700
    
    
    
    (2,225,156
    )Equity securities
    
    
    1,214,192
    
    
    
    (275,023
    )
    
    
    326,147
    
    
    
    (108,653
    )
    
    
    1,540,339
    
    
    
    (383,676
    )Total temporarily impaired securities
    
    $
    26,672,670
    
    
    $
    (1,310,130
    )
    
    $
    26,066,369
    
    
    $
    (1,298,702
    )
    
    $
    52,739,039
    
    
    $
    (2,608,832
    )
 F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (Continued)
     F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
  December 31,2008
    
    
    2007Commercial real estate
    
    $
    52,477,396
    
    
    $
    41,630,161Commercial and industrial loans
    
    
    42,838,238
    
    
    
    44,921,900Multifamily
    
    
    10,719,282
    
    
    
    12,296,741Construction and land
    
    
    43,296,696
    
    
    
    51,308,309Farmland
    
    
    5,743,563
    
    
    
    4,817,842Mortgage loans, 1-4 families
    
    
    79,727,032
    
    
    
    74,752,559Home equity
    
    
    18,343,923
    
    
    
    17,256,522Indirect auto loans
    
    
    26,577,958
    
    
    
    31,898,142Direct auto loans
    
    
    13,175,286
    
    
    
    15,819,782Student loans
    
    
    552,174
    
    
    
    593,765Other
    
    
    9,036,344
    
    
    
    9,377,415302,487,892
    
    
    
    304,673,138Total allowance for loan losses
    
    
    (4,950,722
    )
    
    
    (4,415,669
    )Loans, net
    
    $
    297,537,170
    
    
    $
    300,257,469
  As of and For the Years EndedDecember 31,2008
    
    
    2007Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    7,281,226
    
    
    
    3,211,635Total impaired loans
    
    $
    7,281,226
    
    
    $
    3,211,635Valuation allowance related to impaired loans
    
    $
    666,193
    
    
    $
    434,986Average investment in impaired loans
    
    $
    4,811,203
    
    
    $
    1,928,011Forgone interest income on impaired loans
    
    $
    202,843
    
    
    $
    66,180
   Years Ended December 31,2008
    
    
    2007Balance, beginning of year
    
    $
    4,415,669
    
    
    $
    4,075,997Provision for loan losses
    
    
    3,350,000
    
    
    
    1,178,000Loans charged off
    
    
    (3,001,570
    )
    
    
    (1,033,471
    )Recoveries of loans previously charged off
    
    
    186,623
    
    
    
    195,143Balance, end of year
    
    $
    4,950,722
    
    
    $
    4,415,669
 F-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
  Balance, beginning of year
    
    $
    10,621,943Advances
    
    
    15,397,037Repayments
    
    
    (15,943,120
    )Balance, end of year
    
    $
    10,075,860
 NOTE 4. OTHER REAL ESTATE OWNED
  Years Ended December 31,2008
    
    
    2007Balance, beginning of year
    
    $
    287,030
    
    
    $
    305,930Additions
    
    
    3,276,417
    
    
    
    190,851Disposals
    
    
    (1,112,341
    )
    
    
    (209,751
    )Loss on sale and write downs of other real estate owned
    
    
    (386,317
    )
    
    
    Balance, end of year
    
    $
    2,064,789
    
    
    $
    287,030
 NOTE 5. PREMISES AND EQUIPMENT
  December 31,2008
    
    
    2007Land and improvements
    
    $
    5,864,170
    
    
    $
    4,770,720Buildings
    
    
    12,511,976
    
    
    
    8,959,020Furniture and equipment
    
    
    8,578,984
    
    
    
    7,797,802Construction in progress
    
    
    40,674
    
    
    
    2,641,12026,995,804
    
    
    
    24,168,662Accumulated depreciation
    
    
    (10,194,621
    )
    
    
    (9,353,142
    )$
    16,801,183
    
    
    $
    14,815,520
    F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5. PREMISES AND EQUIPMENT (Continued)
 Leases
     2009
    
    $
    106,9002010
    
    
    81,8002011
    
    
    24,5002012
    
    
    13,2002013
    
    
    13,200Thereafter
    
    
    770,000$
    1,009,600
 NOTE 6. DEPOSITS
  2009
    
    $
    143,929,2212010
    
    
    13,773,3942011
    
    
    5,384,5072012
    
    
    1,403,4542013 and beyond
    
    
    2,144,349$
    166,634,925
   F-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. EMPLOYEE BENEFIT PLANS
 Pension Plan
  December 31,2008
    
    
    2007Changes in benefit obligations:Obligations at beginning of year
    
    $
    7,574,649
    
    
    $
    7,361,124Service cost
    
    
    753,177
    
    
    
    707,337Interest cost
    
    
    398,996
    
    
    
    413,137Benefits paid
    
    
    (615,968
    )
    
    
    (1,271,190
    )Actuarial (gain) loss
    
    
    (1,357,251
    )
    
    
    364,241Obligations at end of year
    
    $
    6,753,603
    
    
    $
    7,574,649Changes in plan assets:Fair value of assets at beginning of year
    
    $
    6,227,688
    
    
    $
    6,050,241Actual return on assets
    
    
    (1,320,750
    )
    
    
    248,637Company contributions
    
    
    301,104
    
    
    
    1,200,000Benefits paid
    
    
    (615,968
    )
    
    
    (1,271,190
    )Fair value of assets at end of year
    
    $
    4,592,074
    
    
    $
    6,227,688Funded status at end of year, included in other liabilities
    
    $
    (2,161,529
    )
    
    $
    (1,346,961
    )Pretax amounts recognized in accumulated other
comprehensive income consist of:Net loss
    
    $
    3,564,058
    
    
    $
    3,462,374Prior service cost
    
    
    175,933
    
    
    
    185,047$
    3,739,991
    
    
    $
    3,647,421Accumulated benefit obligation
    
    $
    5,424,718
    
    
    $
    6,065,240Net periodic benefit cost:Service cost
    
    $
    753,177
    
    
    $
    707,337Interest cost
    
    
    398,996
    
    
    
    413,137Expected return on plan assets
    
    
    (449,094
    )
    
    
    (465,558
    )Amortization of prior losses
    
    
    310,909
    
    
    
    282,250Amortization of service costs
    
    
    9,114
    
    
    
    9,114Net periodic benefit cost
    
    $
    1,023,102
    
    
    $
    946,280
 F-21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
  December 31,2008
    
    
    2007Current year actuarial loss
    
    $
    412,593
    
    
    $
    581,162Amortization of prior losses
    
    
    (310,909
    )
    
    
    (282,250
    )Amortization of prior service cost
    
    
    (9,114
    )
    
    
    (9,114
    )Total recognized in other comprehensive income
    
    $
    92,570
    
    
    $
    289,798
 December 31,2008
    
    2007Assumptions used in computations:In computing ending obligations:Discount rate
    
    
    6.50
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %In computing expected return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
 F-22




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
  2008
    
    2007Fixed income
    
    
    78.3
    %
    
    
    59.4
    %Equities
    
    
    20.3
    %
    
    
    39.1
    %Cash and cash equivalents
    
    
    1.4
    %
    
    
    1.5
    %
    Prior service cost
    
    $
    9,114Net loss
    
    
    332,034$
    341,148
  Fiscal Year
    
    Amount2009
    
    $
    320,1532010
    
    
    318,7402011
    
    
    536,3242012
    
    
    1,147,4582013
    
    
    558,8802014-2018
    
    
    4,387,365
 401(K) Plan
  F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. EMPLOYEE BENEFIT PLANS (Continued)
 Employee Stock Ownership Plan (ESOP)
 st st
   2008
    
    
    2007Shares released for allocation
    
    
    154,245
    
    
    
    110,175Unearned
    
    
    286,455
    
    
    
    330,525Total ESOP shares
    
    
    440,700
    
    
    
    440,700Fair value of unearned shares
    
    $
    2,578,095
    
    
    $
    3,718,406
 NOTE 8. DEFERRED COMPENSATION PLANS
     F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
  December 31,2008
    
    
    2007Federal funds purchased from Chattahoochee Bank of Georgia
with interest at 0.15% maturing daily
    
    $
    10,969,017
    
    
    $
    Sold in overnight agreements maturing in one to four days
    
    
    528,474
    
    
    
    288,452Sold in a structured agreement due January 25, 2015. The rate resets
quarterly until January 25, 2011. At that date, it can be terminated
or renewed at a rate of 3.78% until maturity. The rate at
December 31, 2008 was 3.01%
    
    
    5,000,000
    
    
    
    Sold in a structured agreement due March 3, 2013. The rate resets
quarterly until September 3, 2010. At that date, it can be terminated
or renewed at a rate of 3.45% fixed until maturity. The rate at
December 31, 2008 was 1.95%
    
    
    5,000,000
    
    
    
    Sold in a structured agreement due March 3, 2018. The rate is fixed
at a rate of 2.19% until March 3, 2010. At that date, it can be
renewed at a variable rate or terminated
    
    
    5,000,000
    
    
    
    Sold in a structured agreement at a variable rate due March 8, 2017
with a quarterly put beginning March 8, 2010. The rate resets
quarterly and was 1.79% at December 31, 2008
    
    
    10,000,000
    
    
    
    10,000,000Sold in a structured agreement at a fixed rate of 4.75% due August 21,
2017 with a quarterly put beginning August 21, 2011
    
    
    5,000,000
    
    
    
    5,000,000$
    41,497,491
    
    
    $
    15,288,452
 F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10. OTHER BORROWINGS
  December 31,2008
    
    
    2007Advance from Federal Home Loan Bank with interest at a fixed rate of
5.16% until March 24, 2009, due June 22, 2009
    
    $
    10,000,000
    
    
    $
    10,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
3.71% until September 17, 2009, due September 17, 2014
    
    
    5,000,000
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
4.23% until August 17, 2010, due August 17, 2015
    
    
    5,000,000
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at a variable rate of
2.85%, due February 28, 2011
    
    
    7,500,000
    
    
    
    Advance from Federal Home Loan Bank with interest at a fixed rate of
2.74% until July 23, 2009, due July 23, 2018
    
    
    10,000,000
    
    
    
    Advance from Federal Home Loan Bank with interest at a fixed rate of
4.54% until October 30, 2009, due October 31, 2016
    
    
    15,000,000
    
    
    
    15,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
5.24%, due July 21, 2008
    
    
    
    
    
    
    10,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
4.36%, due December 10, 2008
    
    
    
    
    
    
    5,000,000$
    52,500,000
    
    
    $
    50,000,000
   2009
    
    $
    10,000,0002010
    
    
    2011
    
    
    7,500,0002012
    
    
    2013
    
    
    Later years
    
    
    35,000,000$
    52,500,000
  F-26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11. INCOME TAXES
  Years Ended December 31,2008
    
    
    2007Current
    
    $
    350,207
    
    
    $
    457,865Reversal of contingent tax liability
    
    
    
    
    
    
    (1,061,888
    )Deferred
    
    
    (1,578,183
    )
    
    
    (246,373
    )$
    (1,227,976
    )
    
    $
    (850,396
    )
  Years Ended December 31,2008
    
    
    2007Tax at federal income tax rate
    
    $
    (506,714
    )
    
    $
    704,041Increase (decrease) resulting from:Reversal of contingent tax liability
    
    
    
    
    
    
    (1,061,888
    )Tax-exempt interest
    
    
    (407,702
    )
    
    
    (361,592
    )Bank owned life insurance
    
    
    (168,467
    )
    
    
    (118,131
    )Employee Stock Ownership Plan
    
    
    (23,395
    )
    
    
    31,999Other
    
    
    (121,698
    )
    
    
    (44,825
    )Provision for income tax benefits
    
    $
    (1,227,976
    )
    
    $
    (850,396
    )Deferred tax assets:Loan loss reserves
    
    $
    1,486,793
    
    
    $
    1,099,315Deferred compensation
    
    
    1,076,788
    
    
    
    1,182,086Organizational cost
    
    
    4,832
    
    
    
    9,664Pension liability
    
    
    1,495,663
    
    
    
    1,458,633Unrealized loss on securities available for sale
    
    
    728,738
    
    
    
    888,070Impairment loss on securities available for sale
    
    
    600,000
    
    
    
    Stock-based compensation
    
    
    300,567
    
    
    
    224,333Nonaccrual loans
    
    
    81,136
    
    
    
    10,922Other
    
    
    5,676
    
    
    
    5,6765,780,193
    
    
    
    4,878,699Deferred tax liabilities:Depreciation and amortization
    
    
    31,701
    
    
    
    350,926Realized gains on terminated cash flow hedges
    
    
    446,060
    
    
    
    Unrealized gain on cash flow hedges
    
    
    
    
    
    
    156,558Deferred pension costs
    
    
    35,468
    
    
    
    324,267Deferred loans costs
    
    
    75,384
    
    
    
    21,747588,613
    
    
    
    853,498Net deferred tax assets
    
    $
    5,191,580
    
    
    $
    4,025,201
 F-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. EARNINGS (LOSS) PER SHARE
  Years Ended December 31,2008
    
    
    2007Basic Earnings and Shares:Net Income (Loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Weighted-average basic shares outstanding
    
    
    10,208,981
    
    
    
    10,337,804Basic Earnings (Loss) Per Share:Net Income (Loss)
    
    $
    (0.03
    )
    
    $
    0.28Diluted Earnings and Shares:Net Income (Loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Weighted-average basic shares outstanding
    
    
    10,208,981
    
    
    
    10,337,804Add: Stock options and nonvested shares
    
    
    
    
    
    
    39,521Weighted-average diluted shares outstanding
    
    
    10,208,981
    
    
    
    10,377,325Diluted Earnings Per Share:Net Income
    
    $
    (0.03
    )
    
    $
    0.28
  NOTE 13. STOCK PLANS AND STOCK-BASED COMPENSATION
   Share-Based Payment
  F-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
   2008
    
    
    2007Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Price
    
    
    Number
    
    
    PriceUnder option, beginning of year
    
    
    474,605
    
    
    $
    12.60
    
    
    
    520,605
    
    
    $
    12.60Granted
    
    
    19,750
    
    
    
    11.25
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (9,200
    )
    
    
    12.54Forfeited
    
    
    (2,240
    )
    
    
    12.54
    
    
    
    (36,800
    )
    
    
    12.54Expired
    
    
    (560
    )
    
    
    12.54
    
    
    
    
    
    
    
    Under option, end of year
    
    
    491,555
    
    
    $
    12.55
    
    
    
    474,605
    
    
    $
    12.60Exercisable at end of year
    
    
    188,720
    
    
    $
    12.61
    
    
    
    94,921
    
    
    $
    12.60Weighted average fair value per option of options
granted during year
    
    
    
    
    
    $
    1.91
    
    
    
    
    
    
    $
    Total grant date fair value of options vested during the year
    
    
    
    
    
    $
    303,124
    
    
    
    
    
    
    $
    333,900Total intrinsic value of options exercised during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    14,812Shares available for grant
    
    
    
    
    
    
    49,506
    
    
    
    
    
    
    
    67,016
  Year ended
    
    Year EndedDecember 31,
    
    December 31,2008
    
    2007Stock options vested and expected to vest:Number
    
    
    491,555
    
    
    
    474,605Weighted Average Exercise Price
    
    $
    12.55
    
    
    $
    12.60Aggregate Intrinsic Value
    
    
    
    
    
    
    Weighted Average Contractual Term of Options
    

    7.5 years
    
    

    8.4 yearsStock options vested and currently exercisable:Number
    
    
    188,720
    
    
    
    94,921Weighted Average Exercise Price
    
    $
    12.60
    
    
    $
    12.60Aggregate Intrinsic Value
    
    
    
    
    
    
    Weighted Average Contractual Term of Options
    
    7.4 years
    
    
    8.4 years
 F-29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  Options Outstanding
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Contractual Life
    
    Exercise
    
    
    
    
    
    ExercisePrices
    
    Number
    
    in Years
    
    Price
    
    Number
    
    Price$12.54
    
    
    464,305
    
    
    
    7.4
    
    
    $
    12.54
    
    
    
    185,720
    
    
    $
    12.54$16.63
    
    
    7,500
    
    
    
    7.9
    
    
    $
    16.63
    
    
    
    3,000
    
    
    $
    16.63$11.25
    
    
    19,750
    
    
    
    9.0
    
    
    $
    11.25
    
    
    
    
    
    
    $
    491,555
    
    
    
    7.5
    
    
    $
    12.55
    
    
    
    188,720
    
    
    $
    12.61
  Year Ended
    
    Year EndedDecember 31,
    
    December 31,2008
    
    2007Weighted-average risk-free interest rate
    
    
    4.01
    %
    
    
    5.04
    %Weighted average expected life of the options
    
    7.5 years
    
    
    7.5 yearsWeighted average expected dividends (as a percent of the fair
value of the stock)
    
    
    2.55
    %
    
    
    1.48
    %Weighted-average expected volatility
    
    
    14.37
    %
    
    
    14.41
    %
  F-30




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  WeightedAverageMarketRestricted
    
    
    PriceShares
    
    
    at GrantBalance, beginning of year
    
    
    151,692
    
    
    $
    12.60Granted
    
    
    9,505
    
    
    
    11.25Vested
    
    
    (37,700
    )
    
    
    12.60Forfeited
    
    
    (884
    )
    
    
    12.54Balance, end of year
    
    
    122,613
    
    
    $
    12.50
  F-31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
  Estimated FairValue atCommence
    
    Termination
    
    Derivative
    
    Notional
    
    Rate
    
    Rate
    
    December 31,Date
    
    Date
    
    Type
    
    Amount
    
    Received
    
    Hedged
    
    200710/29/2007
    
    10/29/2012
    
    Interest rate swap
    
    $
    10,000,000
    
    
    7.33% Fixed
    
    Prime Floating
    
    $
    159,04311/2/2007
    
    11/2/2012
    
    Interest rate swap
    
    
    5,000,000
    
    
    7.50% Fixed
    
    Prime Floating
    
    
    117,31611/2/2007
    
    11/2/2012
    
    Interest rate swap
    
    
    5,000,000
    
    
    8.00% Fixed
    
    Prime Floating
+ 0.50%
    
    
    115,037$
    20,000,000
    
    
    
    
    
    
    $
    391,396
   2009
    
    $
    351,8662010
    
    
    351,8662011
    
    
    248,0132012
    
    
    163,405$
    1,115,150
 F-32




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. COMMITMENTS AND CONTINGENCIES
 Accounting for Derivative
Instruments and Hedging Activities
 Loan Commitments
   December 31,2008
    
    
    2007Commitments to extend credit
    
    $
    37,200,583
    
    
    $
    44,174,786Financial standby letters of credit
    
    
    4,989,085
    
    
    
    4,990,926$
    42,189,668
    
    
    $
    49,165,712
    Contingencies
  F-33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16. CONCENTRATIONS OF CREDIT
    NOTE 17. REGULATORY MATTERS
     F-34




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. REGULATORY MATTERS (Continued)
  For Capital
    
    To Be Well CapitalizedAdequacy
    
    Under Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)As of December 31, 2008Total Capital to Risk Weighted AssetsConsolidated
    
    $
    66,767
    
    
    
    18.4
    %
    
    $
    29,035
    
    
    
    8.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    59,670
    
    
    
    16.7
    %
    
    
    28,654
    
    
    
    8.0
    %
    
    
    35,818
    
    
    
    10.0
    %Tier I Capital to Risk Weighted
AssetsConsolidated
    
    $
    61,816
    
    
    
    17.0
    %
    
    $
    14,517
    
    
    
    4.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    55,178
    
    
    
    15.4
    %
    
    
    14,327
    
    
    
    4.0
    %
    
    
    21,491
    
    
    
    6.0
    %Tier I Capital to Average Assets:Consolidated
    
    $
    61,816
    
    
    
    12.6
    %
    
    $
    19,622
    
    
    
    4.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    55,178
    
    
    
    11.0
    %
    
    
    19,983
    
    
    
    4.0
    %
    
    
    24,979
    
    
    
    5.0
    %As of December 31, 2007Total Capital to Risk Weighted AssetsConsolidated
    
    $
    70.451
    
    
    
    19.5
    %
    
    $
    28,897
    
    
    
    8.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    60,191
    
    
    
    17.1
    %
    
    
    28,087
    
    
    
    8.0
    %
    
    
    35,108
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    66,062
    
    
    
    18.3
    %
    
    $
    14,448
    
    
    
    4.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    55,802
    
    
    
    15.9
    %
    
    
    14,043
    
    
    
    4.0
    %
    
    
    21,065
    
    
    
    6.0
    %Tier I Capital to Average Assets:Consolidated
    
    $
    66,062
    
    
    
    14.9
    %
    
    $
    17,756
    
    
    
    4.0
    %
    
    $
    n/a
    
    
    
    HeritageBank of the South
    
    
    55,802
    
    
    
    12.6
    %
    
    
    17,710
    
    
    
    4.0
    %
    
    
    22,138
    
    
    
    5.0
    %
    F-35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair Value Measurements
 Fair Value Measurements
 Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active.
  Level 1
    
    Quoted prices in active markets for identical assets or liabilities. Level 1
assets and liabilities include debt and equity securities that are traded in an
active exchange market, as well as certain U.S. Treasury and U.S.
Government-sponsored enterprise debt securities that are highly liquid and are
actively traded in over-the-counter markets.Level 2
    
    Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2
assets and liabilities include debt securities with quoted prices that are
traded less frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with inputs that are
observable in the market or can be derived principally from or corroborated by
observable market data.
 F-36




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair Value Measurements (Continued)
 Level 3
    
    Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation.
 Assets Measured at Fair Value on a Recurring Basis
  Available for Sale Securities
   Fair Value Measurements at December 31, 2008Quoted Prices
    
    SignificantAssets/Liabilities
    
    In Active
    
    Other
    
    SignificantMeasured at
    
    Markets for
    
    Observable
    
    UnobservableFair Value
    
    Identical Assets
    
    Inputs
    
    InputsDecember 31,
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available for sale
securities
    
    $
    116,140,525
    
    
    $
    21,000
    
    
    $
    116,119,525

    
    

    
    
    $
    
 F-37




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 Assets Measured at Fair Value on a Non-recurring Basis
  Impaired Loans
  Fair Value Option
 The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115
 Disclosures about Fair Value of Financial Instruments
 Disclosures
about Fair Value of Financial Instruments,
 F-38




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 Disclosures about Fair Value of Financial Instruments (Continued)
  Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:
 Securities:
 Loans:
 Cash Flow Hedge Derivative Instruments:
 Deposits:
 Federal Funds Purchased and Securities Sold Under Repurchase Agreements:
 Other Borrowings:
 Accrued Interest:
 Off-Balance-Sheet Instruments:
 F-39




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 Disclosures about Fair Value of Financial Instruments (Continued)
  December 31, 2008
    
    
    December 31, 2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    10,905,360
    
    
    $
    10,905,360
    
    
    $
    9,333,797
    
    
    $
    9,333,797Federal funds sold
    
    $
    30,254,000
    
    
    $
    30,254,000
    
    
    $
    14,505,000
    
    
    $
    14,505,000Securities available for sale
    
    $
    116,140,525
    
    
    $
    116,140,525
    
    
    $
    107,867,192
    
    
    $
    107,867,192Federal home loan bank stock
    
    $
    3,185,800
    
    
    $
    3,185,800
    
    
    $
    2,969,700
    
    
    $
    2,969,700Other equity securities
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    
    
    
    $
    Loans
    
    $
    302,487,892
    
    
    $
    309,635,072
    
    
    $
    304,673,138
    
    
    $
    310,270,355Allowance for loan losses
    
    
    4,950,722
    
    
    
    
    
    
    
    4,415,669
    
    
    
    Loans, net
    
    $
    297,537,170
    
    
    $
    309,635,072
    
    
    $
    300,257,469
    
    
    $
    310,270,355Cash flow hedge derivative instruments
    
    $
    
    
    
    $
    
    
    
    $
    391,396
    
    
    $
    391,396Accrued interest receivable
    
    $
    2,155,327
    
    
    $
    2,155,327
    
    
    $
    2,586,357
    
    
    $
    2,586,357Financial liabilities:Deposits
    
    $
    338,545,994
    
    
    $
    336,904,274
    
    
    $
    330,629,410
    
    
    $
    333,449,645Federal funds purchased and securities
sold under repurchase agreements
    
    $
    41,497,491
    
    
    $
    44,497,491
    
    
    $
    15,288,452
    
    
    $
    15,870,319Other borrowings
    
    $
    52,500,000
    
    
    $
    56,936,956
    
    
    $
    50,000,000
    
    
    $
    51,099,312Accrued interest payable
    
    $
    1,045,042
    
    
    $
    1,045,042
    
    
    $
    947,352
    
    
    $
    947,352
 F-40




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL GROUP (PARENT COMPANY ONLY)
 CONDENSED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007AssetsCash and due from banks
    
    $
    112,682
    
    
    $
    314,135Federal funds sold
    
    
    62,000
    
    
    
    2,463,000Other equity securities, at cost
    
    
    1,010,000
    
    
    
    Securities available for sale, at fair value
    
    
    4,616,161
    
    
    
    6,727,072Investment in subsidiary
    
    
    55,884,743
    
    
    
    55,867,990Premises and equipment, net
    
    
    469,986
    
    
    
    484,691Other assets
    
    
    941,580
    
    
    
    449,703Total assets
    
    $
    63,097,152
    
    
    $
    66,306,591LiabilitiesOther liabilities
    
    $
    884,179
    
    
    $
    714,441Stockholders equity
    
    
    62,212,973
    
    
    
    65,592,150Total liabilities and stockholders equity
    
    $
    63,097,152
    
    
    $
    66,306,591
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 (Continued)
 CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007IncomeDividends from subsidiaries
    
    $
    1,571,500
    
    
    $
    1,200,000Interest
    
    
    359,260
    
    
    
    523,604Impairment loss on securities
    
    
    (860,049
    )
    
    
    Gain on sale of securities
    
    
    89,250
    
    
    
    Other income
    
    
    1,571
    
    
    
    Total income
    
    
    1,161,532
    
    
    
    1,723,604ExpenseDepreciation
    
    
    14,705
    
    
    
    14,618Other expense
    
    
    768,009
    
    
    
    956,704Total expense
    
    
    782,714
    
    
    
    971,322Income before income tax benefits and
equity in undistributed earnings
(distributions in excess of earnings) of subsidiary
    
    
    378,818
    
    
    
    752,282Income tax benefits
    
    
    441,145
    
    
    
    225,784Income before equity in undistributed earnings
(distributions in excess of earnings) of subsidiary
    
    
    819,963
    
    
    
    978,066Equity in undistributed earnings (distributions in
excess of earnings) of subsidiary
    
    
    (1,082,323
    )
    
    
    1,943,039Net income (loss)
    
    $
    (262,360
    )
    
    $
    2,921,105
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 (Continued)
 CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    (262,360
    )
    
    $
    2,921,105Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    14,705
    
    
    
    14,618Excess tax (benefit) shortfall related to stock-based
compensation plans
    
    
    3,432
    
    
    
    (64,119
    )Stock-based compensation expense
    
    
    225,420
    
    
    
    811,781Impairment losses on securities available for sale
    
    
    860,049
    
    
    
    Gain on sale of securities
    
    
    (89,250
    )
    
    
    (Equity in undistributed earnings) distributions in excess
of earnings of subsidiary
    
    
    1,082,323
    
    
    
    (1,943,039
    )Other operating activities
    
    
    (393,772
    )
    
    
    (535,274
    )Total adjustments
    
    
    1,702,907
    
    
    
    (1,716,033
    )Net cash provided by operating activities
    
    
    1,440,547
    
    
    
    1,205,072INVESTING ACTIVITIESDecrease in federal funds sold
    
    
    2,401,000
    
    
    
    3,348,000Purchase of premises and equipment
    
    
    
    
    
    
    (891
    )Purchases of securities
    
    
    
    
    
    
    (1,500,000
    )Proceeds from maturities of securities
    
    
    1,101,362
    
    
    
    738,460Proceeds from sale of securities
    
    
    409,250
    
    
    
    1,500,000Purchase of other equity securities
    
    
    (1,010,000
    )
    
    
    Net cash provided by investing activities
    
    
    2,901,612
    
    
    
    4,085,569FINANCING ACTIVITIESDecrease in federal funds purchased
    
    
    
    
    
    
    (5,000,000
    )Shares released to employee stock ownership plan
    
    
    487,882
    
    
    
    650,806Excess tax (benefit) shortfall related to stock-based compensation
plans
    
    
    (3,432
    )
    
    
    64,119Proceeds from exercise of stock options
    
    
    
    
    
    
    115,368Purchase of treasury shares, net
    
    
    (4,241,148
    )
    
    
    (811,374
    )Dividends paid to stockholders
    
    
    (786,914
    )
    
    
    (762,971
    )Net cash used in financing activities
    
    
    (4,543,612
    )
    
    
    (5,744,052
    )Net decrease in cash and due from banks
    
    
    (201,453
    )
    
    
    (453,411
    )Cash and due from banks at beginning of year
    
    
    314,135
    
    
    
    767,546Cash and due from banks at end of year
    
    $
    112,682
    
    
    $
    314,135
 F-43




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 20. STOCK REPURCHASE PLAN
    F-44