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, 2009
 Commission File Number 000-51305
 
 (HERITAGE FINANCIAL GROUP LOGO)
 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
 o 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)
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



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;
    
    inflation, interest rate, market and monetary fluctuations;
 2




---



##### 




    
    the timely development of and acceptance of 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;
    
    growth into new markets;
    
    changes in consumer spending and saving habits; and
    
    our success at managing the risks involved in the foregoing.
  Market Area
  MarketMarket
    
    Share
    
    Institutions inMarket Area
    
    Share
    
    Rank
    
    MarketsAlbany Georgia MSA
    
    
    13.1
    %
    
    
    3
    
    
    
    16Ocala Florida MSA
    
    
    0.7
    %
    
    
    19
    
    
    
    22Tattnall County Georgia
    
    
    15.6
    %
    
    
    4
    
    
    
    5Lake City Florida
    
    
    6.3
    %
    
    
    6
    
    
    
    7
 Southwest Georgia Market  Albany Metropolitan Statistic Area
  Southeast Georgia Market  Tattnall County
  3




---



##### 



North Central Florida Market  Ocala Metropolitan Statistic Area
  North Central Florida Market  Lake City Metropolitan Statistic Area
  Expansion
     Southeast Georgia Market  Statesboro MSA
  Southeast Georgia Market  Baxley  Appling County
  4




---



##### 



Southeast Georgia Market  Hazlehurst  Jeff Davis County
  Southwest Georgia Market  Adel  Cook County
   MarketMarket
    
    Share
    
    Institutions inMarket Area
    
    Share
    
    Rank
    
    MarketsStatesboro Georgia MSA
    
    
    4.9
    %
    
    
    6
    
    
    
    9Adel, GA
    
    
    28.7
    %
    
    
    2
    
    
    
    5Baxley, GA
    
    
    15.4
    %
    
    
    5
    
    
    
    5Hazlehurst, GA
    
    
    29.1
    %
    
    
    2
    
    
    
    5
    Competition
   On-line Presence
  5




---



##### 



Lending Activities
  December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real EstateOne- to four-family
    
    $
    81,255
    
    
    
    24.32
    %
    
    $
    79,727
    
    
    
    26.36
    %
    
    $
    74,752
    
    
    
    24.54
    %
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    74,121
    
    
    
    29.17
    %Multi-family
    
    
    11,650
    
    
    
    3.49
    
    
    
    10,719
    
    
    
    3.54
    
    
    
    12,297
    
    
    
    4.04
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    15,918
    
    
    
    6.26Commercial
    
    
    71,013
    
    
    
    21.25
    
    
    
    52,477
    
    
    
    17.35
    
    
    
    41,630
    
    
    
    13.66
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    37,985
    
    
    
    14.95Farmland
    
    
    9,013
    
    
    
    2.70
    
    
    
    5,744
    
    
    
    1.90
    
    
    
    4,818
    
    
    
    1.58
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    Construction and
Development
    
    
    28,002
    
    
    
    8.38
    
    
    
    43,297
    
    
    
    14.31
    
    
    
    51,308
    
    
    
    16.84
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    16,505
    
    
    
    6.50Total real estate loans
    
    
    200,933
    
    
    
    60.14
    
    
    
    191,964
    
    
    
    63.46
    
    
    
    184,805
    
    
    
    60.66
    
    
    
    170,554
    
    
    
    61.62
    
    
    
    144,529
    
    
    
    56.88Other loansConsumer loans:Student
    
    
    596
    
    
    
    0.18
    
    
    
    552
    
    
    
    0.18
    
    
    
    594
    
    
    
    0.20
    
    
    
    703
    
    
    
    0.25
    
    
    
    1,110
    
    
    
    0.44Automobile
    
    
    26,698
    
    
    
    7.99
    
    
    
    39,753
    
    
    
    13.14
    
    
    
    47,718
    
    
    
    15.66
    
    
    
    46,331
    
    
    
    16.74
    
    
    
    50,137
    
    
    
    19.73Home equity
    
    
    17,313
    
    
    
    5.18
    
    
    
    18,344
    
    
    
    6.06
    
    
    
    17,257
    
    
    
    5.66
    
    
    
    16,368
    
    
    
    5.91
    
    
    
    15,591
    
    
    
    6.14Other
    
    
    7,687
    
    
    
    2.30
    
    
    
    9,037
    
    
    
    2.99
    
    
    
    9,377
    
    
    
    3.08
    
    
    
    8,812
    
    
    
    3.19
    
    
    
    9,058
    
    
    
    3.56Total consumer loans
    
    
    52,294
    
    
    
    15.65
    
    
    
    67,686
    
    
    
    22.37
    
    
    
    74,946
    
    
    
    24.60
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    75,896
    
    
    
    29.87Commercial business loans
    
    
    45,785
    
    
    
    13.70
    
    
    
    42,838
    
    
    
    14.17
    
    
    
    44,922
    
    
    
    14.74
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    33,686
    
    
    
    13.26Total other loans
    
    
    98,079
    
    
    
    29.35
    
    
    
    110,524
    
    
    
    36.54
    
    
    
    119,868
    
    
    
    39.34
    
    
    
    106,222
    
    
    
    38.38
    
    
    
    109,582
    
    
    
    43.12299,012
    
    
    
    89.49
    
    
    
    302,488
    
    
    
    100.00
    
    
    
    304,673
    
    
    
    100.00
    
    
    
    276,776
    
    
    
    100.00
    
    
    
    254,111
    
    
    
    100.00Purchased loans, net of
fair
market value adjustments
    
    
    35,126
    
    
    
    10.51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total loans
    
    
    334,138
    
    
    
    100.00
    %
    
    
    302,488
    
    
    
    100.00
    %
    
    
    304,673
    
    
    
    100.00
    %
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %Less allowance for
loan losses
    
    
    6,060
    
    
    
    
    
    
    
    4,951
    
    
    
    
    
    
    
    4,416
    
    
    
    
    
    
    
    4,076
    
    
    
    
    
    
    
    3,618$
    328,078
    
    
    
    
    
    
    $
    297,537
    
    
    
    
    
    
    $
    300,257
    
    
    
    
    
    
    $
    272,700
    
    
    
    
    
    
    $
    250,493
 6




---



##### 



December 31,2009
    
    
    2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Fixed Rate Loans:Real EstateOne- to four-family
    
    $
    75,301
    
    
    
    22.53
    %
    
    $
    72,353
    
    
    
    23.92
    %
    
    $
    69,841
    
    
    
    22.92
    %Multi-family
    
    
    6,197
    
    
    
    1.86
    
    
    
    5,210
    
    
    
    1.72
    
    
    
    7,178
    
    
    
    2.36Commercial
    
    
    58,300
    
    
    
    17.45
    
    
    
    42,084
    
    
    
    13.91
    
    
    
    32,634
    
    
    
    10.71Farmland
    
    
    4,789
    
    
    
    1.44
    
    
    
    2,174
    
    
    
    0.72
    
    
    
    3,337
    
    
    
    1.10Construction and development
    
    
    8,634
    
    
    
    2.58
    
    
    
    8,426
    
    
    
    2.79
    
    
    
    13,903
    
    
    
    4.56Total real estate loans
    
    
    153,221
    
    
    
    45.86
    
    
    
    130,247
    
    
    
    43.06
    
    
    
    126,893
    
    
    
    41.65Consumer
    
    
    31,130
    
    
    
    9.32
    
    
    
    45,168
    
    
    
    14.93
    
    
    
    53,618
    
    
    
    17.60Commercial business
    
    
    18,975
    
    
    
    5.68
    
    
    
    14,218
    
    
    
    4.70
    
    
    
    16,482
    
    
    
    5.41Total fixed-rate loans
    
    
    203,326
    
    
    
    60.86
    
    
    
    189,633
    
    
    
    62.69
    
    
    
    196,993
    
    
    
    64.66Adjustable Rate Loans:Real EstateOne- to four-family
    
    
    5,954
    
    
    
    1.79
    
    
    
    7,374
    
    
    
    2.44
    
    
    
    4,911
    
    
    
    1.61Multi-family
    
    
    5,453
    
    
    
    1.63
    
    
    
    5,509
    
    
    
    1.82
    
    
    
    5,119
    
    
    
    1.68Commercial
    
    
    12,713
    
    
    
    3.80
    
    
    
    10,393
    
    
    
    3.44
    
    
    
    8,996
    
    
    
    2.95Farmland
    
    
    4,224
    
    
    
    1.26
    
    
    
    3,569
    
    
    
    1.18
    
    
    
    1,481
    
    
    
    0.49Construction and development
    
    
    19,368
    
    
    
    5.80
    
    
    
    34,871
    
    
    
    11.53
    
    
    
    37,405
    
    
    
    12.28Total real estate loans
    
    
    47,712
    
    
    
    14.28
    
    
    
    61,716
    
    
    
    20.41
    
    
    
    57,912
    
    
    
    19.01Consumer
    
    
    21,164
    
    
    
    6.33
    
    
    
    22,518
    
    
    
    7.44
    
    
    
    21,328
    
    
    
    7.00Commercial business
    
    
    26,810
    
    
    
    8.02
    
    
    
    28,621
    
    
    
    9.46
    
    
    
    28,440
    
    
    
    9.33Total adjustable rate loans
    
    
    95,686
    
    
    
    28.63
    
    
    
    112,855
    
    
    
    37.31
    
    
    
    107,680
    
    
    
    35.34299,012
    
    
    
    89.49
    
    
    
    302,488
    
    
    
    100.00
    
    
    
    304,673
    
    
    
    100.00Purchased loans, net of fair
market value adjustments
    
    
    35,126
    
    
    
    10.51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total loans
    
    
    334,138
    
    
    
    100.00
    %
    
    
    302,488
    
    
    
    100.00
    %
    
    
    304,673
    
    
    
    100.00
    %Less allowance for loan losses
    
    
    6,060
    
    
    
    
    
    
    
    4,951
    
    
    
    
    
    
    
    4,416Total loans, net
    
    $
    328,078
    
    
    
    
    
    
    $
    297,537
    
    
    
    
    
    
    $
    300,257
 7




---



##### 



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)$14,952
    
    
    6.64
    %
    
    $
    3,270
    
    
    
    6.43
    %
    
    $
    14,216
    
    
    
    6.49
    %
    
    $
    4,536
    
    
    
    5.62
    %
    
    $
    20,471
    
    
    
    4.77
    %
    
    $
    4,057
    
    
    
    8.23
    %
    
    $
    17,819
    
    
    
    5.82
    %
    
    $
    79,321
    
    
    
    5.88
    %One year through 5 years:$39,606
    
    
    6.62
    %
    
    $
    8,380
    
    
    
    5.28
    %
    
    $
    47,835
    
    
    
    6.07
    %
    
    $
    4,477
    
    
    
    5.39
    %
    
    $
    5,942
    
    
    
    5.99
    %
    
    $
    30,351
    
    
    
    7.80
    %
    
    $
    23,174
    
    
    
    5.88
    %
    
    $
    159,765
    
    
    
    6.45
    %Five years and over:$26,697
    
    
    5.58
    %
    
    $
    
    
    
    
    
    %
    
    $
    8,962
    
    
    
    5.80
    %
    
    $
    
    
    
    
    
    %
    
    $
    1,589
    
    
    
    6.17
    %
    
    $
    17,886
    
    
    
    3.88
    %
    
    $
    4,792
    
    
    
    3.59
    %
    
    $
    59,926
    
    
    
    4.96
    %Total:$81,255
    
    
    
    
    
    $
    11,650
    
    
    
    
    
    
    $
    71,013
    
    
    
    
    
    
    $
    9,013
    
    
    
    
    
    
    $
    28,002
    
    
    
    
    
    
    $
    52,294
    
    
    
    
    
    
    $
    45,785
    
    
    
    
    
    
    $
    299,012
 
 (1)
    
    Includes demand loans, loans having no stated maturity and overdraft loans. 8




---



##### 



Lending authority.
  Major loan customers
   One- to Four-Family Residential Real Estate Lending
    9




---



##### 



Commercial and Multi-Family Real Estate Lending
     Construction and Development Lending
  10




---



##### 



Commercial Business Lending
   Consumer Lending
     11




---



##### 



Loan Originations, Purchases, Sales, Repayments and Servicing
     Asset Quality
    12




---



##### 



Delinquent Loans.
 Thirty to
    
    
    Sixty to
    
    
    Total thirty daysfifty-nine days
    
    
    ninety days
    
    
    or more delinquentDelinquent Loans:One- to four-family
    
    $
    921
    
    
    $
    374
    
    
    $
    1,295Multi-family
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    118
    
    
    
    
    
    
    
    118Farmland
    
    
    6
    
    
    
    
    
    
    
    6Construction and development
    
    
    834
    
    
    
    
    
    
    
    834Consumer
    
    
    450
    
    
    
    92
    
    
    
    542Commercial business
    
    
    350
    
    
    
    102
    
    
    
    452Total
    
    $
    2,679
    
    
    $
    568
    
    
    $
    3,247Total as a percentage of total loans
    
    
    0.80
    %
    
    
    0.17
    %
    
    
    0.97
    %
 Nonperforming Assets.
 December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Nonaccruing Loans:One- to four-family
    
    $
    1,505
    
    
    $
    689
    
    
    $
    373
    
    
    $
    
    
    
    $
    102Multi-family
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    236
    
    
    
    988
    
    
    
    35
    
    
    
    
    
    
    
    241Construction and development
    
    
    2,863
    
    
    
    4,882
    
    
    
    2,357
    
    
    
    61
    
    
    
    Consumer
    
    
    489
    
    
    
    575
    
    
    
    447
    
    
    
    197
    
    
    
    524Commercial business
    
    
    3,248
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    8,463
    
    
    
    7,281
    
    
    
    3,212
    
    
    
    258
    
    
    
    867Foreclosed Assets:One- to four-family
    
    
    583
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    44Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    362
    
    
    
    284
    
    
    
    287
    
    
    
    306
    
    
    
    Construction and development
    
    
    794
    
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    56
    
    
    
    55
    
    
    
    78
    
    
    
    16
    
    
    
    15Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,795
    
    
    
    2,120
    
    
    
    365
    
    
    
    322
    
    
    
    59Total nonperforming assets
    
    $
    10,258
    
    
    $
    9,401
    
    
    $
    3,577
    
    
    $
    580
    
    
    $
    929Total as a percentage of total assets
    
    
    1.79
    %
    
    
    1.87
    %
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %
 13




---



##### 



Other Loans of Concern.
 Classified Assets.
   Provision for Loan Losses
 Allowance for Loan Losses
 14




---



##### 



December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Balance at beginning of period
    
    $
    4,951
    
    
    $
    4,416
    
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965Charge-offs:One- to four-family
    
    
    494
    
    
    
    81
    
    
    
    55
    
    
    
    
    
    
    
    27Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    25
    
    
    
    773
    
    
    
    29
    
    
    
    
    
    
    
    Construction and development
    
    
    3,100
    
    
    
    1,414
    
    
    
    435
    
    
    
    31
    
    
    
    Consumer
    
    
    664
    
    
    
    687
    
    
    
    398
    
    
    
    368
    
    
    
    567Commercial business
    
    
    2,338
    
    
    
    47
    
    
    
    116
    
    
    
    
    
    
    
    6,621
    
    
    
    3,002
    
    
    
    1,033
    
    
    
    399
    
    
    
    594Recoveries:One- to four-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    180
    
    
    
    161
    
    
    
    195
    
    
    
    162
    
    
    
    224Commercial business
    
    
    50
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    187
    
    
    
    195
    
    
    
    162
    
    
    
    232Net charge-offs
    
    
    6,391
    
    
    
    2,815
    
    
    
    838
    
    
    
    237
    
    
    
    362Provision charged to operations
    
    
    7,500
    
    
    
    3,350
    
    
    
    1,178
    
    
    
    695
    
    
    
    1,015Balance at end of period
    
    $
    6,060
    
    
    $
    4,951
    
    
    $
    4,416
    
    
    $
    4,076
    
    
    $
    3,618Ratio of net charge-offs during the
period to average loans
outstanding during period
    
    
    2.13
    %
    
    
    1.58
    %
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.24
    %Ratio of net charge-offs during the
period to average nonperforming assets
    
    
    65.54
    %
    
    
    58.51
    %
    
    
    36.12
    %
    
    
    29.28
    %
    
    
    43.46
    %Allowance as a percentage of
nonperforming loans
    
    
    71.61
    %
    
    
    67.99
    %
    
    
    137.49
    %
    
    
    1,582.00
    %
    
    
    473.18
    %Allowance as a percentage of total
loans (end of period)
    
    
    1.81
    %
    
    
    1.64
    %
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.42
    %
 15




---



##### 



December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006(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
    
    $
    1,422
    
    
    
    81,255
    
    
    
    24.32
    %
    
    $
    637
    
    
    $
    79,727
    
    
    
    26.36
    %
    
    $
    553
    
    
    $
    74,752
    
    
    
    24.54
    %
    
    $
    875
    
    
    $
    73,681
    
    
    
    26.62
    %Secured by
multi-
family
residential
real estate
    
    
    75
    
    
    
    11,650
    
    
    
    3.49
    
    
    
    69
    
    
    
    10,719
    
    
    
    3.54
    
    
    
    123
    
    
    
    12,297
    
    
    
    4.04
    
    
    
    177
    
    
    
    16,913
    
    
    
    6.11Secured by
commercial
real estate
    
    
    979
    
    
    
    71,013
    
    
    
    21.25
    
    
    
    874
    
    
    
    52,477
    
    
    
    17.35
    
    
    
    847
    
    
    
    41,630
    
    
    
    13.66
    
    
    
    925
    
    
    
    44,496
    
    
    
    16.08Construction
and
development
    
    
    1,419
    
    
    
    28,002
    
    
    
    8.38
    
    
    
    1,275
    
    
    
    43,297
    
    
    
    14.31
    
    
    
    1,616
    
    
    
    51,308
    
    
    
    16.84
    
    
    
    471
    
    
    
    32,822
    
    
    
    11.86Farmland
    
    
    122
    
    
    
    9,013
    
    
    
    2.70
    
    
    
    72
    
    
    
    5,744
    
    
    
    1.90
    
    
    
    42
    
    
    
    4,818
    
    
    
    1.58
    
    
    
    32
    
    
    
    2,642
    
    
    
    0.95Consumer
    
    
    850
    
    
    
    52,294
    
    
    
    15.65
    
    
    
    890
    
    
    
    67,686
    
    
    
    22.37
    
    
    
    740
    
    
    
    74,946
    
    
    
    24.60
    
    
    
    791
    
    
    
    72,214
    
    
    
    26.09Commercial
business
    
    
    1,193
    
    
    
    45,785
    
    
    
    13.70
    
    
    
    1,134
    
    
    
    42,838
    
    
    
    14.17
    
    
    
    495
    
    
    
    44,922
    
    
    
    14.74
    
    
    
    805
    
    
    
    34,008
    
    
    
    12.29Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchased loans net
of fair market
value adjustments
    
    
    
    
    
    
    35,126
    
    
    
    10.51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    6,060
    
    
    
    334,138
    
    
    
    100.00
    %
    
    $
    4,951
    
    
    $
    302,488
    
    
    
    100.00
    %
    
    $
    4,416
    
    
    $
    304,673
    
    
    
    100.00
    %
    
    $
    4,076
    
    
    $
    276,776
    
    
    
    100.00
    %
 Investment Activities
   16




---



##### 



December 31,2009
    
    
    2008
    
    
    2007Carrying
    
    
    % of
    
    
    Carrying
    
    
    % of
    
    
    Carrying
    
    
    % ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in Thousands)Securities available for sale:U. S. Government sponsored agency securities (GSEs)
    
    $
    30,462
    
    
    
    25.27
    %
    
    $
    21,165
    
    
    
    18.22
    %
    
    $
    14,996
    
    
    
    13.90
    %Corporate debt securities
    
    
    1,910
    
    
    
    1.58
    
    
    
    1,789
    
    
    
    1.54
    
    
    
    3,854
    
    
    
    3.57GSE residential mortgage-backed securities
    
    
    54,537
    
    
    
    45.26
    
    
    
    60,927
    
    
    
    52.46
    
    
    
    55,354
    
    
    
    51.32Private label residential mortgage-backed securities
    
    
    3,874
    
    
    
    3.21
    
    
    
    4,481
    
    
    
    3.86
    
    
    
    245
    
    
    
    0.23State and municipal securities
    
    
    29,123
    
    
    
    24.16
    
    
    
    27,511
    
    
    
    23.69
    
    
    
    31,878
    
    
    
    29.55Equity and other
    
    
    621
    
    
    
    0.52
    
    
    
    268
    
    
    
    0.23
    
    
    
    1,540
    
    
    
    1.43$
    120,527
    
    
    
    100.00
    %
    
    $
    116,141
    
    
    
    100.00
    %
    
    $
    107,867
    
    
    
    100.00
    %Other earning assets:Interest-bearing deposits with banks
    
    $
    43,236
    
    
    
    74.76
    %
    
    
    746
    
    
    
    2.18
    %
    
    $
    380
    
    
    
    2.13
    %Federal funds sold
    
    
    11,340
    
    
    
    19.61
    
    
    
    30,254
    
    
    
    88.50
    
    
    
    14,505
    
    
    
    81.24FHLB stock
    
    
    3,253
    
    
    
    5.63
    
    
    
    3,186
    
    
    
    9.32
    
    
    
    2,970
    
    
    
    16.63$
    57,829
    
    
    
    100.00
    %
    
    $
    34,186
    
    
    
    100.00
    %
    
    $
    17,855
    
    
    
    100.00
    %
  17




---



##### 



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
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    27,960
    
    
    
    4.54
    %
    
    $
    2,611
    
    
    
    4.12
    %
    
    $
    30,571
    
    
    
    4.50
    %
    
    $
    30,462Corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    2,179
    
    
    
    6.55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,179
    
    
    
    6.55
    
    
    
    1,910GSE mortgage-
backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,988
    
    
    
    3.96
    
    
    
    38,103
    
    
    
    3.23
    
    
    
    54,091
    
    
    
    3.45
    
    
    
    54,537Private label
mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,859
    
    
    
    5.01
    
    
    
    3,859
    
    
    
    5.01
    
    
    
    3,874State and
municipal
    
    
    
    
    
    
    
    
    
    
    2,759
    
    
    
    5.20
    
    
    
    15,484
    
    
    
    5.50
    
    
    
    11,900
    
    
    
    5.94
    
    
    
    30,143
    
    
    
    5.67
    
    
    
    29,123Equity and other
    
    
    317
    
    
    
    3.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    435
    
    
    
    5.84
    
    
    
    752
    
    
    
    4.86
    
    
    
    621Total investment
securities
    
    $
    317
    
    
    
    3.50
    %
    
    $
    4,938
    
    
    
    5.80
    %
    
    $
    59,432
    
    
    
    4.65
    %
    
    $
    56,908
    
    
    
    3.98
    %
    
    $
    121,595
    
    
    
    4.38
    %
    
    $
    120,527
 Sources of Funds
 General.
 Deposits .
   18




---



##### 



December 31,2009
    
    
    2008
    
    
    2007Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest bearing deposits:Interest bearing demand
    
    $
    50,679
    
    
    
    1.05
    %
    
    $
    43,102
    
    
    
    1.12
    %
    
    $
    37,217
    
    
    
    0.99
    %Savings and money market accounts
    
    
    122,453
    
    
    
    1.27
    
    
    
    95,822
    
    
    
    1.45
    
    
    
    119,544
    
    
    
    2.85Retail time deposits
    
    
    122,332
    
    
    
    3.10
    
    
    
    126,120
    
    
    
    4.18
    
    
    
    128,162
    
    
    
    4.92Wholesale time deposits
    
    
    17,981
    
    
    
    3.32
    
    
    
    43,215
    
    
    
    4.35
    
    
    
    14,466
    
    
    
    5.37Total interest bearing deposits
    
    $
    303,445
    
    
    
    2.09
    %
    
    $
    308,259
    
    
    
    2.93
    %
    
    $
    299,389
    
    
    
    3.63
    %
 Time deposits:
 Maturity as of December 31, 20093-Months
    
    
    Over 3-6
    
    
    Over 6-12
    
    
    Over 12or Less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total(In Thousands)Time deposits of less than $100,000
    
    $
    32,626
    
    
    $
    18,114
    
    
    $
    24,148
    
    
    $
    21,268
    
    
    $
    96,156Time deposits of $100,000 or more
    
    
    27,227
    
    
    
    10,014
    
    
    
    23,327
    
    
    
    18,225
    
    
    
    78,793Total time deposits
    
    $
    59,854
    
    
    $
    28,128
    
    
    $
    47,475
    
    
    $
    39,493
    
    
    $
    174,949
 Borrowings .
     19




---



##### 



Year Ended December 31,2009
    
    
    2008
    
    
    2007(Dollars In Thousands)Maximum BalanceFederal Home Loan Bank advances
    
    $
    52,500
    
    
    $
    88,000
    
    
    $
    50,000Average BalanceFederal Home Loan Bank advances
    
    $
    47,268
    
    
    $
    60,800
    
    
    $
    44,521Average interest rate paid during the year
    
    
    3.87
    %
    
    
    4.09
    %
    
    
    4.56
    %End of Year BalanceFederal Home Loan Bank advances
    
    $
    42,500
    
    
    $
    52,500
    
    
    $
    50,000Weighted average interest rate of Federal HomeLoan Bank advances
    
    
    3.68
    %
    
    
    3.96
    %
    
    
    4.67
    %
  Year Ended December 31,2009
    
    
    2008
    
    
    2007(Dollars In Thousands)Maximum BalanceFederal funds purchased and securities
sold under repurchase agreements
    
    $
    53,279
    
    
    $
    41,497
    
    
    $
    17,823Average BalanceFederal funds purchased and securities
sold under repurchase agreements
    
    $
    40,112
    
    
    $
    32,504
    
    
    $
    11,525Average interest rate paid during the year
    
    
    1.23
    %
    
    
    2.95
    %
    
    
    4.96
    %End of Year BalanceFederal funds purchased and securities sold under
repurchase agreements
    
    $
    32,843
    
    
    $
    41,497
    
    
    $
    15,288Weighted average interest rate of Federal funds purchased and
securities sold under repurchase agreements
    
    
    1.08
    %
    
    
    1.91
    %
    
    
    4.67
    %
 Subsidiary and Other Activities
   20




---



##### 



How We Are Regulated
    HeritageBank of the South.
 Georgia Regulation.The Bank is subject to extensive regulation and supervision by the
Georgia Department of Banking and Finance. The Georgia Department of Banking and Finance
regularly examines the Bank, often jointly with the FDIC. As a Georgia savings bank, we are
required to have no more than 50% of our assets in commercial real estate and business loans.
We are in compliance with this requirement. Our lending and investment authority and other
activities are governed by Georgia law and regulations and policies of the Georgia Department
of Banking and Finance. We are subject to a statutory lending limit for aggregate loans to
one person or a group of persons combined because of certain common interests. That limit is
15% of our statutory capital base, except for loans fully secured by good collateral or ample
security, which includes real estate with an independent appraisal, in which case that limit
is increased to 25%. Our statutory capital base consists of our stock, paid-in-capital and
surplus, capital debt and appropriated retained earnings, which is that portion of our
retained earnings designated by the board of directors as not available for dividends,
reduced by intangible assets. We have not appropriated any retained earnings. Our lending
limit to a single borrower under Georgia law as of December 31, 2009 was $11.8 million
secured and $7.2 million unsecured. We have no loans in excess of our lending limit.
Georgia law also limits our ability to invest in real estate, including a limit on fixed
assets of 60% of our statutory capital base, except for temporary grants of authority to
exceed that limit granted by the Department of Banking and Finance. We are in compliance
with limitations on our fixed assets as of December 31, 2009.Insurance of Accounts and Regulation by the FDIC.The FDIC regularly examines the Bank and
prepares reports for the consideration of the Banks board of directors on any deficiencies
that it may find in the Banks operations. The Bank generally must notify or obtain the
approval of the FDIC if it or any of its subsidiaries intend to engage in activities not
authorized for national banks. The FDIC has adopted guidelines establishing safety and
soundness standards on such matters as loan underwriting and documentation, asset quality,
earnings standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan. The FDIC also has the authority to initiate
enforcement actions against the Bank.The Banks deposits are insured up to the applicable limits by the FDIC, and such insurance
is backed by the full faith and credit of the Unites States Government. Through December 31,
2013, the basic deposit insurance is $250,000 instead of the $100,000 limit that had been in
effect prior to October 31, 2008.As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance
premiums for the year ended December 31, 2009 were $820,000. Those premiums are expected to
increase in 2010 due to recent strains of the FDIC deposit insurance fund due to the cost of
large bank failures and the increase in the number of troubled banks.
 21




---



##### 



The FDIC also provides unlimited deposit insurance for noninterest-bearing transaction
accounts (typically business checking accounts), NOW accounts bearing interest at 0.5% or
less, and certain funds swept into noninterest-bearing savings accounts at institutions that
opt into this enhanced deposit insurance coverage. Due to the low level of balances we had
that qualified for this enhanced coverage, we opted out of this coverage, and therefore,
effective January 1, 2010, our customers no longer qualified for this coverage.The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution base
on annualized rates for one of four risk categories applied to its deposits subject to
certain adjustments. Each institution is assigned to one of four risk categories based on
its capital, supervisory ratings and other factors. Well capitalized institutions that are
financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk
Categories II, III and IV present progressively greater risks to the deposit insurance fund.
Under the FDICs risk-based assessment rules, effective April 1, 2009, the initial base
assessment rates prior to adjustments range from 12 to 16 basis points for Risk Category I,
and are 22 basis points for Risk Category II, 32 basis points for Risk Category III, and 45
basis points for Risk Category IV. Initial base assessments rates are subject to adjustments
based on an institutions unsecured debt, secured liabilities and brokered deposits, such
that the total base assessment rates after adjustments range from 7 to 24 basis points for
Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk
Category III, and 40 to 77.5 basis points for Risk Category IV. Rates increase uniformly by
3 basis points effective January 1, 2011.In addition to the regular quarterly assessments, due to losses and projected losses
attributed to failed institutions, the FDIC imposes a special assessment of 5 basis points on
the amount each depository institutions assets reduced by the amount of its Tier 1 capital
(no to exceed 10 basis points of its assessment base for regular quarterly premiums) as of
June 30, 2009, which was collected on September 30, 2009.As a result of the decline in the reserve ratio (the ratio of the net worth of the deposit
insurance fund to estimated insured deposits) and concerns about the expected failure costs
and available liquid assets in the deposit insurance fund, the FDIC required each insured
institution to prepay on December 30, 2009, the estimated amount of its quarterly assessment
for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the
regular quarterly assessment for the third quarter which is due on December 30, 2009). The
prepaid amount is recorded as an asset with a zero risk weight and the institution will
continue to record quarterly expenses for deposit insurance. For purposes of calculation the
prepaid amount, assessments are measured at the institutions assessment rate as of September
30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and are base
on the institutions assessment base for the third quarter of 2009, with growth assumed
quarterly at an annual rate of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments in cash, or
receive a rebate of prepaid amounts not exhausted after collection of assessments due on
January 13, 2013, as applicable. Collection of the prepayment does not preclude the FDIC
from changing assessment rates or revising the risk-based assessment in the future. The rule
includes a process for exemption from the prepayment for institutions whose safety and
soundness would be affected adversely.The FDIC estimates that the reserve ratio will reach the designated reserve ratio of 1.15% by
2017 as required by statute.The FDIC also may prohibit any FDIC-insured institution from engaging in any activity that it
determines by regulation or order to pose a serious risk to the deposit insurance fund. The
FDIC also has the authority to initiate enforcement actions against the Bank and may
terminate our deposit insurance it if determines we have engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
 Heritage Financial Group and Heritage, MHC .
 Regulation by the Office of Thrift Supervision.The Company and MHC are subject to
regulation, supervision and examination by the Office of Thrift Supervision. Under
regulations of the Office of Thrift Supervision, MHC must own a majority of outstanding shares of the Company.
Applicable federal law and regulations limit the activities of the
Company and MHC and require the approval of the Office of Thrift Supervision for any
acquisition or divestiture of a subsidiary, including another financial institution or
holding company thereof.
 22




---



##### 



Generally, transactions between the Bank and its affiliates are required to be on terms as
favorable to the institution as transactions with non-affiliates, and certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of the Banks
capital. In addition, the Bank may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most affiliates. The
Company and MHC are affiliates of the Bank.Under federal law, if the Bank fails the qualified thrift lender test, the Company and MHC
must obtain the approval of the Office of Thrift Supervision prior to continuing, directly or
through other subsidiaries, any business activity other than those approved for multiple
savings association holding companies or their subsidiaries. In addition, within one year of
such failure, MHC and the Company must register as, and will become subject to, the
restrictions applicable to bank holding companies. The qualified thrift lender test requires
a savings institution to have at least 65% of its portfolio assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12 months on a
rolling basis. As an alternative, the savings institution may maintain 60% of its assets in
those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either
test, such assets primarily consist of residential housing related loans and investments. At
December 31, 2009, the Bank met the test.Under regulations of the Office of Thrift Supervision, MHC, may convert to the stock form of
ownership, though it has no current intention to do so. In a stock conversion, the members
of MHC would have a right to subscribe for shares of stock in a new company that would own
MHCs shares in the Company. In addition, each share of stock in the Company not owned by
MHC, would be converted into shares in that new company in an amount that preserves the
holders percentage ownership.Georgia Regulation.The Georgia Department of Banking and Finance has supervisory and
examination authority over the Company and MHC. Under this authority, there are limits on
the amount of debt that can be incurred by the holding companies, and they must file periodic
reports and annual registration forms.
 Regulatory Capital Requirements for the Bank .
    23




---



##### 



Regulatory Capital Requirements for Heritage Financial Group.
 Limitations on Dividends and Other Capital Distributions.
   Federal Taxation
   Method of Accounting.For federal income tax purposes, the Bank currently reports its income
and expenses on the accrual method of accounting and uses a fiscal year ending on December
31, for filing its federal income tax return.
 24




---



##### 



Minimum Tax.The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on
a base of regular taxable income plus certain tax preferences, called alternative minimum
taxable income. The alternative minimum tax is payable to the extent such alternative
minimum taxable income is in excess of an exemption amount. Net operating losses can offset
no more than 90% of alternative minimum taxable income. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future years. The Bank
has not been subject to the alternative minimum tax, nor do we have any such amounts
available as credits for carryover.Net Operating Loss Carryovers. A financial institution may carryback net operating losses to
the preceding two taxable years and forward to the succeeding 20 taxable years. This
provision applies to losses incurred in taxable years beginning after August 6, 1997. At
December 31, 2009, the Bank had no net operating loss carryforwards for federal income tax
purposes.Corporate Dividends-Received Deduction.Because it files a consolidated return with its
wholly owned subsidiary, the Bank, dividends from the Bank are not included as income to the
Company. The corporate dividends-received deduction is 100% or 80%, in the case of dividends
received from corporations with which a corporate recipient does not file a consolidated tax
return, depending on the level of stock ownership of the payor of the dividend. Corporations
that own less than 20% of the stock of a corporation distributing a dividend may deduct 70%
of dividends received or accrued on their behalf.
 State Taxation
   Employees
  25




---



##### 



Item 1A. Risk Factors
  Item 1B. Unresolved Staff Comments
  Item 2. Description of Properties
  Item 3. Legal Proceedings
  Item 4. (Removed and Reserved)
 26




---



##### 



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 Share2009First quarter (01/01/2009  03/31/2009)
    
    $
    9.00
    
    
    $
    5.08
    
    
    $
    0.08Second quarter (04/01/2009  06/30/2009)
    
    
    10.03
    
    
    
    6.25
    
    
    
    0.08Third quarter (07/01/2009  09/30/2009)
    
    
    10.79
    
    
    
    7.77
    
    
    
    0.08Fourth quarter (10/1/2009  12/31/2009)
    
    
    8.84
    
    
    
    6.63
    
    
    
    0.082008First quarter (01/01/2008  03/31/2008)
    
    $
    12.99
    
    
    $
    10.86
    
    
    $
    0.07Second quarter (04/01/2008  06/30/2008)
    
    
    12.50
    
    
    
    11.00
    
    
    
    0.07Third quarter (07/01/2008  09/30/2008)
    
    
    12.00
    
    
    
    8.15
    
    
    
    0.07Fourth quarter (10/01/2008  12/31/2008)
    
    
    11.00
    
    
    
    8.25
    
    
    
    0.07
  27




---



##### 



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
    
    
    497,555
    
    
    $
    12.48
    
    
    
    43,506Equity compensation plans not approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    497,555
    
    
    $
    12.48
    
    
    
    43,506
  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
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    186,974November
    
    
    13,000
    
    
    
    7.03
    
    
    
    13,000
    
    
    
    173,974December
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,974Total
    
    
    13,000
    
    
    $
    7.03
    
    
    
    13,000
    
    
    
    173,974
  28




---



##### 



Item 6. Selected Financial Data
 Selected Consolidated Financial Information
 At December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(In thousands)Selected Financial Condition Data:Total assets
    
    $
    571,948
    
    
    $
    502,058
    
    
    $
    468,672
    
    
    $
    413,330
    
    
    $
    363,797Loans, net
    
    
    328,079
    
    
    
    297,537
    
    
    
    300,257
    
    
    
    272,700
    
    
    
    250,493Securities available for sale, at fair value:U.S. government and agency securities
    
    
    30,462
    
    
    
    21,165
    
    
    
    14,996
    
    
    
    29,439
    
    
    
    14,044Corporate debt securities
    
    
    1,910
    
    
    
    1,789
    
    
    
    3,854
    
    
    
    4,106
    
    
    
    3,786Mortgage-backed securities
    
    
    58,411
    
    
    
    65,408
    
    
    
    55,598
    
    
    
    28,044
    
    
    
    31,098State and municipal
    
    
    29,123
    
    
    
    27,511
    
    
    
    31,878
    
    
    
    16,316
    
    
    
    6,869Equity and other investments
    
    
    621
    
    
    
    268
    
    
    
    1,540
    
    
    
    6,667
    
    
    
    9,069Federal Home Loan Bank stock, at cost
    
    
    3,253
    
    
    
    3,186
    
    
    
    2,970
    
    
    
    2,499
    
    
    
    2,927Other equity securities, at cost
    
    
    1,010
    
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    Deposits
    
    
    426,607
    
    
    
    338,546
    
    
    
    330,629
    
    
    
    299,189
    
    
    
    238,640Federal Home Loan Bank advances
    
    
    42,500
    
    
    
    52,500
    
    
    
    50,000
    
    
    
    40,000
    
    
    
    50,000Federal funds purchased and securities sold under repurchase agreements
    
    
    32,843
    
    
    
    41,497
    
    
    
    15,288
    
    
    
    5,531
    
    
    
    237Total equity
    
    
    60,817
    
    
    
    62,213
    
    
    
    65,592
    
    
    
    62,808
    
    
    
    68,983Selected Operations Data:Total interest income
    
    $
    23,401
    
    
    $
    27,195
    
    
    $
    27,997
    
    
    $
    22,609
    
    
    $
    19,243Total interest expense
    
    
    8,794
    
    
    
    12,494
    
    
    
    13,462
    
    
    
    8,377
    
    
    
    5,935Net interest income
    
    
    14,607
    
    
    
    14,701
    
    
    
    14,535
    
    
    
    14,232
    
    
    
    13,308Provision for loan losses
    
    
    7,500
    
    
    
    3,350
    
    
    
    1,178
    
    
    
    695
    
    
    
    1,014Net interest income after provision for loan losses
    
    
    7,107
    
    
    
    11,351
    
    
    
    13,357
    
    
    
    13,537
    
    
    
    12,294Fees and service charges
    
    
    4,953
    
    
    
    5,245
    
    
    
    5,129
    
    
    
    4,121
    
    
    
    3,836Impairment loss on securities
    
    
    
    
    
    
    (3,119
    )
    
    
    
    
    
    
    
    
    
    
    Gain (loss) on sales of investment securities
    
    
    909
    
    
    
    235
    
    
    
    (355
    )
    
    
    (59
    )
    
    
    (5
    )Other noninterest income
    
    
    1,925
    
    
    
    2,227
    
    
    
    1,916
    
    
    
    1,548
    
    
    
    1,504Total noninterest income
    
    
    7,787
    
    
    
    4,588
    
    
    
    6,690
    
    
    
    5,610
    
    
    
    5,335Total noninterest expense
    
    
    18,271
    
    
    
    17,429
    
    
    
    17,976
    
    
    
    16,060
    
    
    
    13,584Income before tax (benefit) and extraordinary items
    
    
    (3,377
    )
    
    
    (1,490
    )
    
    
    2,071
    
    
    
    3,086
    
    
    
    4,045Income tax provision (benefit)
    
    
    (1,724
    )
    
    
    (1,228
    )
    
    
    (850
    )
    
    
    732
    
    
    
    1,095Net income (loss)
    
    $
    (1,653
    )
    
    $
    (262
    )
    
    $
    2,921
    
    
    $
    2,354
    
    
    $
    2,950
 29




---



##### 



Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Selected Financial Ratios and Other Data:Performance Ratios:Return on average assets
    
    
    (0.34
    %)
    
    
    (0.05
    %)
    
    
    0.66
    %
    
    
    0.63
    %
    
    
    0.83
    %Return on average equity
    
    
    (2.62
    %)
    
    
    (0.41
    %)
    
    
    4.55
    %
    
    
    3.44
    %
    
    
    5.18
    %Dividend payout ratio
    
    
    (43.62
    %)
    
    
    (299.94
    %)
    
    
    26.12
    %
    
    
    28.64
    %
    
    
    16.13
    %Net interest spread
    
    
    3.31
    %
    
    
    3.16
    %
    
    
    3.22
    %
    
    
    3.50
    %
    
    
    3.86
    %Net interest margin
    
    
    3.49
    %
    
    
    3.45
    %
    
    
    3.70
    %
    
    
    4.19
    %
    
    
    4.15
    %Operating expense to average total assets
    
    
    3.72
    %
    
    
    3.55
    %
    
    
    4.05
    %
    
    
    4.29
    %
    
    
    3.81
    %Average interest-earning assets to average interest-bearing liabilities
    
    
    108.97
    %
    
    
    110.34
    %
    
    
    114.66
    %
    
    
    116.64
    %
    
    
    115.95
    %Efficiency ratio
    
    
    81.59
    %
    
    
    90.36
    %
    
    
    84.69
    %
    
    
    80.94
    %
    
    
    72.86
    %Asset Quality Ratios:Nonperforming assets to total assets at end of period
    
    
    1.81
    %
    
    
    1.87
    %
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %Nonperforming loans to total loans
    
    
    2.53
    %
    
    
    2.41
    %
    
    
    1.05
    %
    
    
    0.09
    %
    
    
    0.33
    %Allowance for loan losses to nonperforming loans
    
    
    71.61
    %
    
    
    67.99
    %
    
    
    137.49
    %
    
    
    1,582.00
    %
    
    
    473.18
    %Allowance for loans losses to net loans
    
    
    1.81
    %
    
    
    1.64
    %
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.44
    %Net charge offs to average loans outstanding
    
    
    2.13
    %
    
    
    1.58
    %
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.15
    %Capital Ratios:Equity to total assets at end of period
    
    
    10.63
    %
    
    
    12.39
    %
    
    
    14.00
    %
    
    
    15.22
    %
    
    
    18.96
    %Average equity to average assets
    
    
    12.84
    %
    
    
    13.05
    %
    
    
    14.47
    %
    
    
    18.29
    %
    
    
    15.98
    %Common Share Data and Other Ratios:Gross shares outstanding at year end
    
    
    11,454,344
    
    
    
    11,452,344
    
    
    
    11,443,723
    
    
    
    11,449,155
    
    
    
    11,241,250Less treasury stock
    
    
    1,055,084
    
    
    
    993,498
    
    
    
    615,934
    
    
    
    555,138
    
    
    
    Net shares outstanding at year end
    
    
    10,399,260
    
    
    
    10,458,846
    
    
    
    10,827,789
    
    
    
    10,894,017
    
    
    
    11,241,250Shares owned by Heritage, MHC
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875
    
    
    
    7,868,875Public shares outstanding
    
    
    2,530,385
    
    
    
    2,589,971
    
    
    
    2,958,914
    
    
    
    3,025,142
    
    
    
    3,372,375Unearned ESOP shares
    
    
    242,385
    
    
    
    286,455
    
    
    
    330,525
    
    
    
    374,595
    
    
    
    418,665MHC Ownership
    
    
    76
    %
    
    
    75
    %
    
    
    73
    %
    
    
    72
    %
    
    
    70
    %Public Ownership
    
    
    24
    %
    
    
    25
    %
    
    
    27
    %
    
    
    28
    %
    
    
    30
    %Book value per share
    
    
    5.99
    
    
    
    6.12
    
    
    
    6.25
    
    
    
    5.97
    
    
    
    6.37Tangible book value per share
    
    
    5.83
    
    
    
    6.02
    
    
    
    6.15
    
    
    
    5.88
    
    
    
    6.37Other Data:Number of full-service offices
    
    
    10
    
    
    
    8
    
    
    
    7
    
    
    
    7
    
    
    
    6
 30




---



##### 



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
    31




---



##### 



1. Commercial Banking and Small Business Lending:
 2. Retail Banking:
 3. Brokerage/Investment Services:
 4. Mortgage Lending:
       32




---



##### 



Comparison of Financial Condition at December 31, 2009 and December 31, 2008
       33




---



##### 



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2009
    
    
    2008
    
    
    2007(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
    
    $
    299,399
    
    
    $
    18,555
    
    
    
    6.21
    %
    
    $
    310,985
    
    
    $
    20,882
    
    
    
    6.70
    %
    
    $
    291,438
    
    
    $
    22,160
    
    
    
    7.61
    %Taxable investment securities
    
    
    84,455
    
    
    
    3,604
    
    
    
    4.27
    
    
    
    88,896
    
    
    
    4,890
    
    
    
    5.50
    
    
    
    79,205
    
    
    
    4,220
    
    
    
    5.33Tax exempt investment
securities
    
    
    29,883
    
    
    
    1,174
    
    
    
    5.95
    
    
    
    28,255
    
    
    
    1,176
    
    
    
    6.30
    
    
    
    25,798
    
    
    
    1,044
    
    
    
    6.13Federal funds sold
    
    
    21,102
    
    
    
    54
    
    
    
    0.25
    
    
    
    14,316
    
    
    
    232
    
    
    
    1.62
    
    
    
    10,456
    
    
    
    544
    
    
    
    5.20Interest bearing deposits
with banks
    
    
    1,931
    
    
    
    14
    
    
    
    0.72
    
    
    
    630
    
    
    
    15
    
    
    
    2.44
    
    
    
    652
    
    
    
    29
    
    
    
    4.39Total interest-earning
Assets
    
    
    436,770
    
    
    
    23,401
    
    
    
    5.50
    
    
    
    443,082
    
    
    
    27,195
    
    
    
    6.26
    
    
    
    407,549
    
    
    
    27,997
    
    
    
    7.01Interest-Bearing
Liabilities:Interest bearing demand
    
    
    50,679
    
    
    
    534
    
    
    
    1.05
    
    
    
    43,102
    
    
    
    486
    
    
    
    1.12
    
    
    
    37,217
    
    
    
    368
    
    
    
    0.99Savings and money market
    
    
    122,453
    
    
    
    1,553
    
    
    
    1.27
    
    
    
    95,822
    
    
    
    1,390
    
    
    
    1.46
    
    
    
    119,544
    
    
    
    3,407
    
    
    
    2.85Retail time deposits
    
    
    122,332
    
    
    
    3,788
    
    
    
    3.10
    
    
    
    126,120
    
    
    
    5,283
    
    
    
    4.18
    
    
    
    128,162
    
    
    
    6,307
    
    
    
    4.92Wholesale time deposits
    
    
    17,981
    
    
    
    597
    
    
    
    3.32
    
    
    
    43,215
    
    
    
    1,884
    
    
    
    4.35
    
    
    
    14,466
    
    
    
    776
    
    
    
    5.37Borrowings
    
    
    87,380
    
    
    
    2,322
    
    
    
    2.66
    
    
    
    93,304
    
    
    
    3,451
    
    
    
    3.69
    
    
    
    56,014
    
    
    
    2,604
    
    
    
    4.65Total interest-bearing
liabilities
    
    
    400,825
    
    
    
    8,794
    
    
    
    2.19
    
    
    
    401,563
    
    
    
    12,494
    
    
    
    3.10
    
    
    
    355,403
    
    
    
    13,462
    
    
    
    3.79Net
interest income
    
    
    
    
    
    $
    14,607
    
    
    
    
    
    
    
    
    
    
    $
    14,701
    
    
    
    
    
    
    
    
    
    
    $
    14,535Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.31
    %
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %Net earning assets
    
    $
    35,945
    
    
    
    
    
    
    
    
    
    
    $
    41,519
    
    
    
    
    
    
    
    
    
    
    $
    52,146Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.09x
    
    
    
    
    
    
    
    
    
    
    
    1.10x
    
    
    
    
    
    
    
    
    
    
    
    1.15x
 34




---



##### 



Rate/Volume Analysis
  Year Ended December 31,2009 vs. 2008
    
    
    2008 vs. 2007Increase (Decrease)
    
    
    Total
    
    
    Increase (Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    (592
    )
    
    $
    (1,735
    )
    
    $
    (2,327
    )
    
    $
    1,687
    
    
    $
    (2,965
    )
    
    $
    (1,278
    )Taxable investment securities
    
    
    (266
    )
    
    
    (1,020
    )
    
    
    (1,286
    )
    
    
    245
    
    
    
    425
    
    
    
    670Tax exempt investment securities
    
    
    6
    
    
    
    (8
    )
    
    
    (2
    )
    
    
    102
    
    
    
    30
    
    
    
    132Federal funds sold
    
    
    77
    
    
    
    (255
    )
    
    
    (178
    )
    
    
    152
    
    
    
    (464
    )
    
    
    (312
    )Interest bearing deposits with banks
    
    
    15
    
    
    
    (16
    )
    
    
    (1
    )
    
    
    (931
    )
    
    
    917
    
    
    
    (14
    )Total interest-earning assets
    
    $
    (760
    )
    
    $
    (3,034
    )
    
    
    (3,794
    )
    
    $
    1,255
    
    
    $
    (2,057
    )
    
    
    (802
    )Interest-bearing liabilities:Interest bearing demand
    
    $
    81
    
    
    $
    (33
    )
    
    
    48
    
    
    $
    63
    
    
    $
    55
    
    
    
    118Savings and money market
    
    
    509
    
    
    
    (346
    )
    
    
    163
    
    
    
    (805
    )
    
    
    (1,212
    )
    
    
    (2,017
    )Retail time deposits
    
    
    (148
    )
    
    
    (1,347
    )
    
    
    (1,495
    )
    
    
    (97
    )
    
    
    (927
    )
    
    
    (1,024
    )Wholesale time deposits
    
    
    (877
    )
    
    
    (410
    )
    
    
    (1,287
    )
    
    
    (1,289
    )
    
    
    2,397
    
    
    
    1,108Borrowings
    
    
    (432
    )
    
    
    (697
    )
    
    
    (1,129
    )
    
    
    1,372
    
    
    
    (525
    )
    
    
    847Total interest-bearing liabilities
    
    $
    (867
    )
    
    $
    (2,833
    )
    
    
    (3,700
    )
    
    $
    (756
    )
    
    $
    (212
    )
    
    
    (968
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    (94
    )
    
    
    
    
    
    
    
    
    
    $
    166
 35




---



##### 



Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008
 General
  Interest Income
  Interest Expense
  Net Interest Income
   Provision for Loan Losses
    36




---



##### 



Noninterest Income
  For the Years Ended2009
    
    
    2008
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Service charges on deposit accounts
    
    $
    3,547
    
    
    $
    3,958
    
    
    $
    (411
    )
    
    
    -10.4
    %Other service charges, commissions and fees
    
    
    1,406
    
    
    
    1,288
    
    
    
    118
    
    
    
    9.2
    %Brokerage fees
    
    
    914
    
    
    
    1,030
    
    
    
    (116
    )
    
    
    -11.3
    %Mortgage origination fees
    
    
    345
    
    
    
    400
    
    
    
    (55
    )
    
    
    -13.8
    %Bank owned life insurance
    
    
    621
    
    
    
    495
    
    
    
    126
    
    
    
    25.5
    %Other
    
    
    45
    
    
    
    301
    
    
    
    (256
    )
    
    
    -85.1
    %Total noninterest income
    
    $
    6,878
    
    
    $
    7,472
    
    
    $
    (594
    )
    
    
    -7.9
    %Noninterest income as a percentage of
average assets
    
    
    1.4
    %
    
    
    1.5
    %
  37




---



##### 



Noninterest Expense
  For the years endedDecember 31,2009
    
    
    2008
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Salaries and employee benefits
    
    $
    8,899
    
    
    $
    8,987
    
    
    $
    (88
    )
    
    
    -1.0
    %Equipment
    
    
    985
    
    
    
    1,217
    
    
    
    (232
    )
    
    
    -19.1
    %Occupancy
    
    
    1,198
    
    
    
    1,204
    
    
    
    (6
    )
    
    
    -0.5
    %Advertising and marketing
    
    
    439
    
    
    
    496
    
    
    
    (57
    )
    
    
    -11.5
    %Legal and accounting
    
    
    493
    
    
    
    528
    
    
    
    (35
    )
    
    
    -6.6
    %Directors fees and retirement
    
    
    553
    
    
    
    552
    
    
    
    1
    
    
    
    0.2
    %Consulting and other professional fees
    
    
    297
    
    
    
    318
    
    
    
    (21
    )
    
    
    -6.6
    %Telecommunications
    
    
    239
    
    
    
    258
    
    
    
    (19
    )
    
    
    -7.4
    %Supplies
    
    
    177
    
    
    
    177
    
    
    
    
    
    
    
    Data processing fees
    
    
    1,606
    
    
    
    1,300
    
    
    
    306
    
    
    
    23.5
    %Loss on sale and write-downs of other real estate owned
    
    
    422
    
    
    
    386
    
    
    
    36
    
    
    
    9.3
    %Foreclosed asset expenses
    
    
    257
    
    
    
    229
    
    
    
    28
    
    
    
    12.2
    %FDIC insurance and other regulatory fees
    
    
    872
    
    
    
    267
    
    
    
    605
    
    
    
    226.6
    %Impairment loss on premises held for sale
    
    
    502
    
    
    
    
    
    
    
    (502
    )
    
    NMOther operating
    
    
    1,332
    
    
    
    1,510
    
    
    
    (178
    )
    
    
    -11.8
    %Total noninterest expenses
    
    $
    18,271
    
    
    $
    17,429
    
    
    $
    842
    
    
    
    4.8
    %Noninterest expenses as a percentage of average assets
    
    
    3.7
    %
    
    
    3.6
    %
   38




---



##### 



Income Tax Expense
   Liquidity and Capital Resources
   39




---



##### 



Off-Balance-Sheet Liabilities
  (In Thousands)Commitments to extend credit
    
    $
    37,570Financial stand-by letters of credit
    
    
    834$
    38,404
 Capital
    40




---



##### 



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
    
    $
    66,476
    
    
    
    16.8
    %
    
    $
    31,735
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    60,004
    
    
    
    15.5
    %
    
    $
    31,067
    
    
    
    8.0
    %
    
    $
    38,834
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    61,586
    
    
    
    15.5
    %
    
    $
    15,867
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    55,114
    
    
    
    14.2
    %
    
    $
    15,534
    
    
    
    4.0
    %
    
    $
    23,301
    
    
    
    6.0
    %Tier I Capital to Average Total AssetsConsolidated
    
    $
    61,586
    
    
    
    12.4
    %
    
    $
    19,803
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AHeritageBank of the South
    
    $
    55,114
    
    
    
    11.2
    %
    
    $
    19,724
    
    
    
    4.0
    %
    
    $
    24,655
    
    
    
    5.0
    %
 Critical Accounting Policies
  Allowance for Loan Losses
    41




---



##### 



Income Taxes
   Estimates of Fair Value
     Item 7a. Quantitative and Qualitative Disclosures about Market Risk
 Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
  42




---



##### 




    
    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.
      43




---



##### 



At December 31, 2009Maturing or Repricing WithinZero to
    
    
    ThreeThree
    
    
    Months to
    
    
    One to Five
    
    
    Over FiveMonths
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    TotalEarning assets:Short-term assets
    
    $
    54,576
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    54,576Investment Securities
    
    
    16,555
    
    
    
    24,319
    
    
    
    53,172
    
    
    
    26,481
    
    
    
    120,527Loans
    
    
    103,447
    
    
    
    41,099
    
    
    
    147,637
    
    
    
    35,895
    
    
    
    328,078174,578
    
    
    
    65,418
    
    
    
    200,809
    
    
    
    62,376
    
    
    
    503,181Interest-bearing liabilities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing demand deposits
    
    
    67,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,446Savings and money market
    
    
    155,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,329Time Deposits
    
    
    59,854
    
    
    
    75,603
    
    
    
    36,622
    
    
    
    2,871
    
    
    
    174,950Other Borrowings
    
    
    32,843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,843FHLB Advances
    
    
    
    
    
    
    
    
    
    
    17,500
    
    
    
    25,000
    
    
    
    42,500315,472
    
    
    
    75,603
    
    
    
    54,122
    
    
    
    27,871
    
    
    
    473,068Interest rate sensitivity gap
    
    $
    (140,894
    )
    
    $
    (10,185
    )
    
    $
    146,687
    
    
    $
    34,505
    
    
    $
    30,113Cumulative interest rate
sensitivity gap
    
    $
    (140,894
    )
    
    $
    (151,079
    )
    
    $
    (4,392
    )
    
    $
    30,113Interest rate sensitivity gap ratio
    
    
    0.55
    
    
    
    0.87
    
    
    
    3.71
    
    
    
    2.24Cumulative interest rate
sensitivity gap ratio
    
    
    0.55
    
    
    
    0.61
    
    
    
    0.99
    
    
    
    1.06
  EffectMarket
    
    on NetRate
    
    InterestChange
    
    Income+400
    
    
    -10.0
    %+300
    
    
    -12.6
    %+200
    
    
    -12.9
    %+100
    
    
    -6.4
    %-50
    
    
    2.8
    %
 44




---



##### 



Item 8. Financial Statements
  (a)
    
    Report from Independent Registered Public Accounting Firm;(b)
    
    Consolidated Balance Sheets as of December 31, 2009 and 2008;(c)
    
    Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008;(d)
    
    Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2009
and 2008;(e)
    
    Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2009 and 2008;(f)
    
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008;(g)
    
    Notes to Consolidated Financial Statements.
 45




---



##### 



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
  Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
     Internal Control Over Financial Reporting
  Managements Annual Report on Internal Control Over Financial Reporting
  46




---



##### 



Internal
Control-Integrated Framework
  Item 9B. Other Information
  47




---



##### 



PART III
 Item 10. Directors and Executive Officers and Corporate Governance
 Directors
  Executive Officers
  Audit Committee Matters and Audit Committee Financial Expert
  Nomination Procedures
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  Item 11. Executive Compensation
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
   48




---



##### 



Item 13. Certain Relationships and Related Transactions and Director Independence
   Item 14. Principal Accountant Fees and Services
  49




---



##### 



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1) List of Financial Statements
  Report from Independent Registered Public Accounting Firm
 Consolidated Balances Sheets as of December 31, 2009 and 2008;
 Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008;
 Consolidated Statements of Other Comprehensive Income (Loss) for the Years Ended December 31, 2009
and 2008;
 Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2009 and 2008;
 Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008;
 Notes to Consolidated Financial Statements.
 (a)(2) List of Financial Statement Schedules:
   50




---



##### 



(a)(3) List of Exhibits:
 Reference to PriorFiling or ExhibitNumber AttachedExhibit Number
    
    Document
    
    Hereto2.0
    
    Plan of acquisition, reorganization, arrangement, liquidation, or succession
    
    None3.1
    
    Charter of the Registrant
    
    ***3.2
    
    Bylaws of the Registrant
    
    *4
    
    Instruments defining the rights of security holders, including indentures:Form of Heritage Financial Group Common Stock Certificate
    
    **9
    
    Voting Trust Agreement
    
    None10
    
    Material contracts:(1) Employment Agreements:(a) (i) O. Leonard Dorminey  Bank
    
    *(a) (ii) O. Leonard Dorminey  Holding Company
    
    *(c) Carol W. Slappey
    
    *(2) Deferred Compensation and Excess/Matching Contribution Plans
    
    *(3) Supplemental Executive Retirement Plan
    
    *(4) Directors Retirement Plan
    
    *(5) 401(k) Savings Plan
    
    **(6) Employee Stock Ownership Plan
    
    *(7) Purchase and Assumption Agreement dated September 1, 2009, between HeritageBankof the South and Atlantic Coast Federal Bank
    
    +(8) Definitive Whole-bank Purchase and Assumption Agreement dated December 4, 2009,between HeritageBank of the South and the Federal Deposit Insurance Corporation
    
    ++(9) Purchase and Assumption Agreement dated February 23, 2010, between HeritageBankof the South and The Park Avenue Bank
    
    +++11
    
    Statement re: computation of per share earnings
    
    None12
    
    Statement re: computation of ratios
    
    None13
    
    Annual report to security holders, Form 10-Q or quarterly reports to security holders
    
    None14
    
    Code of Business Conduct and Ethics
    
    ****16
    
    Letter re: change in certifying accountant
    
    None18
    
    Letter re: change in accounting principles
    
    None21
    
    Subsidiaries of the Company
    
    2122
    
    Published report regarding matters submitted to vote of security holders
    
    None23
    
    Consent of Accountants
    
    2324
    
    Power of Attorney
    
    ++++31
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    3132
    
    Section 1350 Certifications
    
    32
 
 *
    
    Filed as an exhibit to the Registrants Registration Statement on Form SB-2 (File No. 333-123581), declared effective by
the SEC on May 16, 2005.**
    
    Filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form SB-2. (File No.
333-123581) declared effective by the SEC on May 16, 2005.***
    
    Filed as an exhibit to the Filers Form 10-KSB for the year ended December 31, 2005, filed with the SEC on March 30, 2006.****
    
    Filed as an exhibit to the Filers Form 10-QSB for the quarter ended June 30, 2005, filed with the SEC on August 15, 2005.+
    
    Included as an exhibit to the Form 8-K filed with the SEC on September 2, 2009.++
    
    Included as an exhibit to the Form 8-K filed with the SEC on December 8, 2009.+++
    
    Included as an exhibit to the Form 8-K filed with the SEC on February 25, 2010.++++
    
    Included on signature page of this annual report. 51




---



##### 



IGNATURES
  HERITAGE FINANCIAL GROUPDate:  April 9, 2010
    By:
    /s/ O. Leonard DormineyO. Leonard Dorminey, President andChief Executive Officer

(Duly Authorized Representative) KNOW ALL MEN BY THESE PRESENTS
  Date:
    
    April 9, 2010
    
    /s/ O. Leonard DormineyO. Leonard DormineyPresident, Chief Executive Officer and Director (Principal Executive Officer)Date:
    
    April 9, 2010
    
    /s/ Antone D. LehrAntone D. Lehr, Chairman of the BoardDate:
    
    April 9, 2010
    
    /s/ Joseph C. BurgerJoseph C. Burger, Vice Chairman of the BoardDate:
    
    April 9, 2010
    
    /s/ Douglas J. McGinleyDouglas J. McGinley, DirectorDate:
    
    April 9, 2010
    
    /s/ Carol W. SlappeyCarol W. Slappey, DirectorDate:
    
    April 9, 2010
    
    /s/ J. Keith LandJ. Keith Land, DirectorDate:
    
    April 9, 2010
    
    /s/ J. Lee StanleyJ. Lee Stanley, DirectorDate:
    
    April 9, 2010
    
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 52




---



##### 



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




---



##### 



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




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS  DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008AssetsCash and due from banks
    
    $
    14,921,517
    
    
    $
    10,159,602Interest-bearing deposits in banks
    
    
    43,236,287
    
    
    
    745,758Federal funds sold
    
    
    11,340,000
    
    
    
    30,254,000Securities available for sale, at fair value
    
    
    120,526,900
    
    
    
    116,140,525Federal Home Loan Bank Stock, at cost
    
    
    3,253,400
    
    
    
    3,185,800Other equity securities, at cost
    
    
    1,010,000
    
    
    
    1,010,000Loans
    
    
    334,138,932
    
    
    
    302,487,892Less allowance for loan losses
    
    
    6,060,460
    
    
    
    4,950,722Loans, net
    
    
    328,078,472
    
    
    
    297,537,170Premises and equipment, net
    
    
    15,590,120
    
    
    
    16,801,183Premises held for sale
    
    
    1,080,000
    
    
    
    Accrued interest receivable
    
    
    2,799,375
    
    
    
    2,155,327Foreclosed assets
    
    
    1,795,544
    
    
    
    2,119,818Intangible assets
    
    
    1,570,832
    
    
    
    1,000,000Cash surrender value of bank owned life insurance
    
    
    14,756,771
    
    
    
    14,136,119Other assets
    
    
    11,988,301
    
    
    
    6,812,425$
    571,947,519
    
    
    $
    502,057,727Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    28,881,905
    
    
    $
    19,100,197Interest-bearing
    
    
    397,724,617
    
    
    
    319,445,797Total deposits
    
    
    426,606,522
    
    
    
    338,545,994Federal funds purchased and securities sold under repurchase agreements
    
    
    32,843,465
    
    
    
    41,497,491Other borrowings
    
    
    42,500,000
    
    
    
    52,500,000Accrued interest payable
    
    
    706,321
    
    
    
    1,045,042Other liabilities
    
    
    8,474,370
    
    
    
    6,256,227Total liabilities
    
    
    511,130,678
    
    
    
    439,844,754Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,454,344 and 11,452,344 issued and outstanding
    
    
    114,543
    
    
    
    114,523Capital surplus
    
    
    40,609,551
    
    
    
    39,861,237Retained earnings
    
    
    38,984,165
    
    
    
    41,357,209Accumulated other comprehensive loss
    
    
    (2,387,234
    )
    
    
    (2,685,633
    )Unearned employee stock ownership plan (ESOP) shares,
242,385 and 286,455 shares
    
    
    (2,423,850
    )
    
    
    (2,864,550
    )74,897,175
    
    
    
    75,782,786Treasury stock, at cost, 1,055,084 and 993,498 shares
    
    
    (14,080,334
    )
    
    
    (13,569,813
    )Total stockholders equity
    
    
    60,816,841
    
    
    
    62,212,973$
    571,947,519
    
    
    $
    502,057,727
 See Notes to Consolidated Financial Statements.
 F-2




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008Interest incomeInterest and fees on loans
    
    $
    18,555,397
    
    
    $
    20,881,600Interest on taxable securities
    
    
    3,603,871
    
    
    
    4,890,165Interest on nontaxable securities
    
    
    1,174,043
    
    
    
    1,175,720Interest on federal funds sold
    
    
    53,629
    
    
    
    232,456Interest on deposits in other banks
    
    
    13,870
    
    
    
    15,42423,400,810
    
    
    
    27,195,365Interest expenseInterest on deposits
    
    
    6,471,521
    
    
    
    9,042,782Interest on other borrowings
    
    
    2,321,842
    
    
    
    3,451,5608,793,363
    
    
    
    12,494,342Net interest income
    
    
    14,607,447
    
    
    
    14,701,023Provision for loan losses
    
    
    7,500,000
    
    
    
    3,350,000Net interest income after provision for loan losses
    
    
    7,107,447
    
    
    
    11,351,023Noninterest incomeService charges on deposit accounts
    
    
    3,546,681
    
    
    
    3,957,589Other service charges, commissions and fees
    
    
    1,405,938
    
    
    
    1,287,591Brokerage fees
    
    
    914,041
    
    
    
    1,029,980Mortgage origination fees
    
    
    344,576
    
    
    
    400,044Bank owned life insurance
    
    
    620,652
    
    
    
    495,492Impairment loss on securities available for sale
    
    
    
    
    
    
    (3,119,181
    )Gains on sale of securities
    
    
    908,877
    
    
    
    234,676Other
    
    
    45,885
    
    
    
    301,3087,786,650
    
    
    
    4,587,499Noninterest expenseSalaries and employee benefits
    
    
    8,898,984
    
    
    
    8,987,913Equipment
    
    
    984,985
    
    
    
    1,217,142Occupancy
    
    
    1,197,823
    
    
    
    1,204,156Data processing fees
    
    
    1,605,510
    
    
    
    1,299,963Directors fees and retirement
    
    
    553,428
    
    
    
    552,289Consulting and other professional fees
    
    
    296,975
    
    
    
    317,957Advertising and marketing
    
    
    439,032
    
    
    
    496,124Legal and accounting
    
    
    493,118
    
    
    
    528,085Telecommunications
    
    
    239,073
    
    
    
    257,617Supplies
    
    
    176,521
    
    
    
    176,973FDIC insurance and other regulatory fees
    
    
    871,622
    
    
    
    267,475Losses on sales and write-downs of other real estate owned
    
    
    422,100
    
    
    
    386,317Foreclosed asset expenses
    
    
    256,671
    
    
    
    229,039Impairment loss on premises held for sale
    
    
    502,469
    
    
    
    Other operating
    
    
    1,332,431
    
    
    
    1,507,80818,270,742
    
    
    
    17,428,858Loss before income tax benefit
    
    
    (3,376,645
    )
    
    
    (1,490,336
    )Applicable income tax benefit
    
    
    (1,724,326
    )
    
    
    (1,227,976
    )Net loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Basic loss per share
    
    $
    (0.16
    )
    
    $
    (0.03
    )Diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.03
    )
 See Notes to Consolidated Financial Statements.
 F-3




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008Net loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Other comprehensive income (loss):Net realized gain on termination of cash flow hedge during the period,
net of tax of $510,078
    
    
    
    
    
    
    765,117Elimination 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 $140,747 and $64,018
    
    
    (211,120
    )
    
    
    (96,027
    )Net unrealized holding gains (losses) arising during period,
net of tax (benefit) of $671,983 and ($994,469)
    
    
    1,007,973
    
    
    
    (1,491,704
    )Reclassification adjustment for (gains) losses and securities
impairment included in net income (loss),
net of tax (benefit) of $363,551 and ($1,153,802)
    
    
    (545,326
    )
    
    
    1,730,703Adjustment to recognize funded status of pension plan,
net of tax (benefit) of $31,248 and ($37,028)
    
    
    46,872
    
    
    
    (55,542
    )Total other comprehensive income
    
    
    298,399
    
    
    
    617,709Comprehensive income (loss)
    
    $
    (1,353,920
    )
    
    $
    335,349
 See Notes to Consolidated Financial Statements.
 F-4




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  YEARS ENDED DECEMBER 31, 2009 AND 2008
 AccumulatedOtherCompre-Unearned
    
    
    
    
    
    
    hensiveCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Treasury
    
    
    IncomeShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Stock
    
    
    (Loss)
    
    
    TotalBalance, December 31, 2007
    
    
    11,443,723
    
    
    $
    114,437
    
    
    $
    39,009,323
    
    
    $
    42,406,483
    
    
    $
    (3,305,250
    )
    
    $
    (9,329,501
    )
    
    $
    (3,303,342
    )
    
    $
    65,592,150Net 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
    )
    
    
    62,212,973Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,652,319
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,652,319
    )Cash dividend declared,
$0.32 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720,725
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    807,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807,402Repurchase of 62,026 shares of
stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (516,426
    )
    
    
    
    
    
    
    (516,426
    )Issuance of 440 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    (2,602
    )
    
    
    
    
    
    
    
    
    
    
    5,905
    
    
    
    
    
    
    
    3,303Issuance of restricted shares of
common stock
    
    
    2,000
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    298,399
    
    
    
    298,399Tax benefit shortfall from stock-
based compensation plans
    
    
    
    
    
    
    
    
    
    
    (58,494
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,494
    )ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    (73,946
    )
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    366,754Tax benefit on ESOP expense
    
    
    
    
    
    
    
    
    
    
    75,974
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,974Balance, December 31, 2009
    
    
    11,454,344
    
    
    $
    114,543
    
    
    $
    40,609,551
    
    
    $
    38,984,165
    
    
    $
    (2,423,850
    )
    
    $
    (14,080,334
    )
    
    $
    (2,387,234
    )
    
    $
    60,816,841
 See Notes to Consolidated Financial Statements.
 F-5




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008OPERATING ACTIVITIESNet loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    911,587
    
    
    
    964,205Impairment loss on premises held for sale
    
    
    502,469
    
    
    
    Provision for loan losses
    
    
    7,500,000
    
    
    
    3,350,000ESOP compensation expense
    
    
    366,754
    
    
    
    487,882Provision for deferred taxes
    
    
    (699,010
    )
    
    
    (1,926,940
    )Stock-based compensation expense
    
    
    807,402
    
    
    
    809,086Net gain on termination of cash flow hedge
    
    
    
    
    
    
    1,275,195Accretion of gain on termination of cash flow hedge
    
    
    (351,867
    )
    
    
    (160,045
    )Impairment losses on securities available for sale
    
    
    
    
    
    
    3,119,181Gains on sale of securities available for sale
    
    
    (908,877
    )
    
    
    (234,676
    )Loss on sale and write-downs of other real estate owned
    
    
    422,100
    
    
    
    386,317Net (gains) losses on sale or disposal of premises and equipment
    
    
    (12,064
    )
    
    
    865Increase in bank owned life insurance
    
    
    (620,652
    )
    
    
    (495,472
    )Excess tax shortfall related to stock-based compensation plans
    
    
    58,494
    
    
    
    3,432Excess tax expense related to ESOP
    
    
    (75,974
    )
    
    
    (Increase) decrease in interest receivable
    
    
    (44,055
    )
    
    
    431,030Increase (decrease) in interest payable
    
    
    (501,498
    )
    
    
    97,690(Increase) decrease in taxes receivable
    
    
    (878,411
    )
    
    
    695,099Increase in prepaid FDIC assessment
    
    
    (2,020,181
    )
    
    
    Net other operating activities
    
    
    (367,301
    )
    
    
    (83,939
    )Total adjustments
    
    
    4,088,916
    
    
    
    8,718,910Net cash provided by operating activities
    
    
    2,436,597
    
    
    
    8,456,550INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (42,490,529
    )
    
    
    (365,797
    )Purchases of securities available for sale
    
    
    (97,885,273
    )
    
    
    (64,161,362
    )Proceeds from maturities of securities available for sale
    
    
    31,400,213
    
    
    
    15,985,014Proceeds from sale of securities available for sale
    
    
    64,814,421
    
    
    
    37,416,842Purchase of bank owned life insurance
    
    
    
    
    
    
    (5,000,000
    )Increase in Federal Home Loan Bank stock
    
    
    (67,600
    )
    
    
    (216,100
    )Purchase of other equity securities
    
    
    
    
    
    
    (1,010,000
    )Increase (decrease) in federal funds sold
    
    
    18,914,000
    
    
    
    (15,749,000
    )Increase in loans, net
    
    
    (3,548,886
    )
    
    
    (3,906,118
    )Purchases of premises and equipment
    
    
    (691,749
    )
    
    
    (2,950,733
    )Net cash received from acquisition activity
    
    
    61,446,617
    
    
    
    Proceeds from sales of premises and equipment
    
    
    12,745
    
    
    
    Proceeds from sales of other real estate owned
    
    
    1,220,206
    
    
    
    1,112,341Net cash provided by (used in) investing activities
    
    
    33,124,165
    
    
    
    (38,844,913
    )
 F-6




---



##### 



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS  YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    $
    (9,634,666
    )
    
    $
    7,916,584Increase (decrease) in federal funds purchased and securities sold
under repurchase agreements
    
    
    (8,654,026
    )
    
    
    26,209,039Proceeds from other borrowings
    
    
    
    
    
    
    46,000,000Repayment of other borrowings
    
    
    (11,293,787
    )
    
    
    (43,500,000
    )Excess tax benefit related to stock-based compensation plans
    
    
    (58,494
    )
    
    
    (3,432
    )Excess tax related to ESOP
    
    
    75,974
    
    
    
    Purchase of treasury shares, net
    
    
    (513,123
    )
    
    
    (4,241,148
    )Dividends paid to stockholders
    
    
    (720,725
    )
    
    
    (786,914
    )Net cash provided by (used in) financing activities
    
    
    (30,798,847
    )
    
    
    31,594,129Net increase in cash and due from banks
    
    
    4,761,915
    
    
    
    1,205,766Cash and due from banks at beginning of year
    
    
    10,159,602
    
    
    
    8,953,836Cash and due from banks at end of year
    
    $
    14,921,517
    
    
    $
    10,159,602SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    9,132,084
    
    
    $
    12,396,652Income taxes
    
    $
    64,821
    
    
    $
    7,300NONCASH TRANSACTIONSDecrease in unrealized losses on securities available for sale
    
    $
    771,078
    
    
    $
    398,332Decrease in unrealized gain on terminated cash flow hedges
    
    $
    
    
    
    $
    391,396Principal balances of loans transferred to other real estate owned
    
    $
    716,084
    
    
    $
    3,276,417Pension liability increase (decrease)
    
    $
    (78,120
    )
    
    $
    92,570
 See Notes to Consolidated Financial Statements.
 F-7




---



##### 



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




---



##### 



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




---



##### 



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




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Allowance for Loan Losses (Continued)
  Mortgage Origination Fees
  Premises and Equipment
  YearsBuildings
    
    
    40Furniture and equipment
    
    
    3-7
 Intangible Assets
   F-11




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Foreclosed Assets
  Transfers of Financial Assets
  Pension Plan
  Employee Stock Ownership Plan (ESOP)
   Treasury Stock
  F-12




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Income Taxes
 Income Taxes)
   Loss Per Share
  Comprehensive Income (Loss)
  Advertising Costs
  Reclassification
  F-13




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Standards
 Generally Accepted Accounting Principles
  Fair Value Measurements and Disclosures
  F-14




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Standards (Continued)
     NOTE 2. ACQUISITION ACTIVITY
 The Tattnall Bank
  F-15




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. ACQUISITION ACTIVITY (Continued)
 The Tattnall Bank (Continued)
  As RecordedAcquired
    
    
    Fair Value
    
    
    by Heritagefrom the
    
    
    and Other
    
    
    Financial(dollars in thousands)
    
    FDIC
    
    
    Adjustments
    
    
    GroupAssetsCash and cash equivalents
    
    $
    19,204
    
    
    $
    12,700
    (a)
    
    $
    31,904Investment securities
    
    
    1,036
    
    
    
    
    
    
    
    1,036Loans
    
    
    32,472
    
    
    
    (7,598)
    (b)
    
    
    24,874Foreclosed assets
    
    
    5,470
    
    
    
    (4,869)
    (c)
    
    
    601Core deposit intangibles
    
    
    
    
    
    
    159
    (d)
    
    
    159Due from the FDIC
    
    
    
    
    
    
    1,108
    (e)
    
    
    1,108Other assets
    
    
    600
    
    
    
    
    
    
    
    600Total Assets
    
    $
    58,782
    
    
    
    1,500
    
    
    $
    60,282LiabilitiesNoninterest-bearing deposits
    
    $
    4,661
    
    
    $
    
    
    
    $
    4,661Interest-bearing deposits
    
    
    51,507
    
    
    
    369
    (f)
    
    
    51,876Borrowings
    
    
    1,294
    
    
    
    
    
    
    
    1,294Accrual for expenses associated with the disposition of problem assets
    
    
    
    
    
    
    2,315
    (g)
    
    
    2,315Other liabilities
    
    
    136
    
    
    
    
    
    
    
    136Total Liabilities
    
    $
    57,598
    
    
    $
    2,684
    
    
    $
    60,282
 Explanations
 
 (a)
    
    The adjustment represents the cash received from the FDIC
immediately subsequent to the closing.(b)
    
    The adjustment represents the write down of the book value of
Tattnalls loans to their estimated fair value based on expected cash flows which
includes an estimate of expected future loan losses.(c)
    
    The adjustment represents the write down of the book value of
Tattnalls OREO and repossessed assets to their estimated fair value at the
acquisition date based on their estimated disposition costs.(d)
    
    The adjustment represents the value of the core deposit base
assumed in the acquisition. The core deposit asset was recorded as an
identifiable intangible asset and will be amortized on an accelerated basis over
the average life of the deposit base, estimated to be seven years.(e)
    
    The adjustment represents the amount receivable from the FDIC, as
adjustments were made from the date of the initial payment from the FDIC. This
receivable, when added to the $12.7 million payment received from the FDIC, and
the $1.2 million in net assets acquired, total the $15.0 million discount price
from the FDIC for the acquisition.(f)
    
    The adjustment is necessary because the weighted average interest
rate of Tattnalls CDs exceeded the cost of similar funding at the time of
acquisition. The fair value adjustment will be amortized to reduce interest
expense on a declining basis over the average life of the portfolio, which is
estimated to be ten months.(g)
    
    The adjustment represents managements estimates of the costs to
work through and dispose of problem assets in Tattnalls portfolio, including
OREO and loans. This estimate is managements best estimate at the time of
acquisition. Any additional expenses above the amount accrued will be expensed
as incurred. F-16




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. ACQUISITION ACTIVITY (Continued)
 The Tattnall Bank (Continued)
    Lake City Branch of Atlantic Coast Bank
   Acquiredfrom Lake
    
    
    
    
    
    
    As RecordedCity Branch
    
    
    Fair Value
    
    
    by Heritageof Atlantic
    
    
    and Other
    
    
    Financial(dollars in thousands)
    
    Coast Bank
    
    
    Adjustments
    
    
    GroupAssetsCash and cash equivalents
    
    $
    392
    
    
    $
    29,150
    (a)
    
    $
    29,542Premises and equipment
    
    
    592
    
    
    
    
    
    
    
    592Loans
    
    
    10,336
    
    
    
    370
    (b)
    
    
    10,706Core deposit intangibles
    
    
    
    
    
    
    411
    (c)
    
    
    411Other assets
    
    
    292
    
    
    
    
    
    
    
    292Total Assets
    
    $
    11,612
    
    
    $
    29,931
    
    
    $
    41,543LiabilitiesNoninterest-bearing deposits
    
    $
    1,074
    
    
    $
    
    
    
    $
    1,074Interest-bearing deposits
    
    
    40,084
    
    
    
    343
    (d)
    
    
    40,427Other liabilities
    
    
    16
    
    
    
    26
    (e)
    
    
    42Total Liabilities
    
    $
    41,174
    
    
    $
    369
    
    
    $
    41,543
 F-17




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. ACQUISITION ACTIVITY (Continued)
 Lake City Branch of Atlantic Coast Bank (Continued)
 Explanations
 
 (a)
    
    The adjustment represents the cash received from Atlantic Coast
Bank to reflect the acquisition of excess liabilities assumed over assets
purchased.(b)
    
    The adjustment represents the adjustment to fair market value of
the loans assumed in the transaction.(c)
    
    The adjustment represents the consideration paid for the value of
the core deposit base assumed in the acquisition. The core deposit asset was
recorded as an identifiable intangible asset and will be amortized on an
accelerated basis over the average life of the deposit base, estimated to be
seven years.(d)
    
    The adjustment is necessary because the weighted average interest
rate of the Lake City Branch CDs exceeded the cost of similar funding at the
time of acquisition. The fair value adjustment will be amortized to reduce
interest expense on a declining basis over the average life of the portfolio,
which is estimated to be twelve months.(e)
    
    The adjustment represents the accrual of certain expenses expected
to be incurred as part of the acquisition. NOTE 3. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2009:U. S. Government sponsored agency
securities (GSEs)*
    
    $
    30,571,605
    
    
    $
    190,036
    
    
    $
    (299,664
    )
    
    $
    30,461,977State and municipal securities
    
    
    30,142,545
    
    
    
    196,013
    
    
    
    (1,215,694
    )
    
    
    29,122,864Corporate debt securities
    
    
    2,178,999
    
    
    
    44,976
    
    
    
    (313,757
    )
    
    
    1,910,218GSE residential mortgage-backed securities
    
    
    54,091,124
    
    
    
    449,796
    
    
    
    (4,682
    )
    
    
    54,536,238Private label residential mortgage-backed
securities
    
    
    3,859,494
    
    
    
    15,015
    
    
    
    (30
    )
    
    
    3,874,479Total debt securities
    
    
    120,843,767
    
    
    
    895,836
    
    
    
    (1,833,827
    )
    
    
    119,905,776Equity securities
    
    
    751,521
    
    
    
    47,999
    
    
    
    (178,396
    )
    
    
    621,124Total securities**
    
    $
    121,595,288
    
    
    $
    943,835
    
    
    $
    (2,012,223
    )
    
    $
    120,526,900
 
 *
    
    Such as Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal Home Loan Banks.**
    
    At December 31, 2009, we held no securities of any single
issuer (excluding the U.S. Government and federal agencies) with a book value
that exceeded 10% of stockholders equity. F-18




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. SECURITIES (Continued)
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2008:U. S. Government sponsored agency securities (GSEs)
    
    $
    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
    )
    
    
    1,789,383GSE residential mortgage-backed securities
    
    
    59,519,328
    
    
    
    1,469,043
    
    
    
    (61,699
    )
    
    
    60,926,672Private label residential mortgage-backed securities
    
    
    4,861,651
    
    
    
    
    
    
    
    (380,925
    )
    
    
    4,480,726Total 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
  Amortized
    
    
    FairCost
    
    
    ValueDue from one year to five years
    
    $
    3,700,300
    
    
    $
    3,487,707Due from five to ten years
    
    
    11,384,865
    
    
    
    11,493,407Due after ten years
    
    
    47,807,984
    
    
    
    46,513,945Mortgage-backed securities
    
    
    57,950,618
    
    
    
    58,410,717$
    120,843,767
    
    
    $
    119,905,776
   December 31,2009
    
    2008Gross gains on sales of securities
    
    $
    964,793
    
    
    $
    361,701Gross losses on sales of securities
    
    
    (55,916
    )
    
    
    (127,025
    )Net realized gains on sales of securities available for sale
    
    $
    908,877
    
    
    $
    234,676
 F-19




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. SECURITIES (Continued)
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2009:U.S. Government sponsored
agency securities (GSEs)
    
    $
    14,295,966
    
    
    $
    (299,664
    )
    
    $
    
    
    
    $
    
    
    
    $
    14,295,966
    
    
    $
    (299,664
    )State and municipal securities
    
    
    8,125,696
    
    
    
    (311,298
    )
    
    
    10,722,375
    
    
    
    (904,396
    )
    
    
    18,848,071
    
    
    
    (1,215,694
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    845,308
    
    
    
    (313,757
    )
    
    
    845,308
    
    
    
    (313,757
    )GSE residential mortgage-backed
securities
    
    
    2,883,976
    
    
    
    (4,682
    )
    
    
    
    
    
    
    
    
    
    
    2,883,976
    
    
    
    (4,682
    )Private label residential
mortgage-backed securities
    
    
    24,344
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    24,344
    
    
    
    (30
    )Subtotal, debt securities
    
    
    25,329,982
    
    
    
    (615,674
    )
    
    
    11,567,683
    
    
    
    (1,218,153
    )
    
    
    36,897,665
    
    
    
    (1,833,827
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    256,404
    
    
    
    (178,396
    )
    
    
    256,404
    
    
    
    (178,396
    )Total temporarily impaired
securities
    
    $
    25,329,982
    
    
    $
    (615,674
    )
    
    $
    11,824,087
    
    
    $
    (1,396,549
    )
    
    $
    37,154,069
    
    
    $
    (2,012,223
    )
 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 (GSEs)
    
    $
    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
    )GSE residential mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Private label residential
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
    )
 GSE debt securities
 F-20




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. SECURITIES (Continued)
 Corporate bonds
 GSE residential mortgage-backed securities
 Private-label residential mortgage-backed securities
 Marketable equity securities
 Other-Than-Temporary Impairment
   F-21




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. SECURITIES (Continued)
 Other-Than-Temporary Impairment (Continued)
  
    
    Default rate
    
    Severity
   Restricted Equity Securities
   F-22




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
  December 31,2009
    
    
    2008Commercial real estate
    
    $
    71,013,650
    
    
    $
    52,477,396Commercial and industrial loans
    
    
    45,784,735
    
    
    
    42,838,238Multifamily
    
    
    11,650,057
    
    
    
    10,719,282Construction and land
    
    
    28,002,622
    
    
    
    43,296,696Farmland
    
    
    9,012,642
    
    
    
    5,743,563Mortgage loans, 1-4 families
    
    
    81,255,214
    
    
    
    79,727,032Home equity
    
    
    17,312,606
    
    
    
    18,343,923Indirect auto loans
    
    
    16,546,425
    
    
    
    26,577,958Direct auto loans
    
    
    10,151,213
    
    
    
    13,175,286Student loans
    
    
    596,494
    
    
    
    552,174Other
    
    
    7,687,048
    
    
    
    9,036,344Total originated loans
    
    
    299,012,706
    
    
    
    302,487,892Purchased loans, net of fair market value adjustments
    
    
    35,126,226
    
    
    
    Total loans
    
    
    334,138,932
    
    
    
    302,487,892Total allowance for loan losses
    
    
    (6,060,460
    )
    
    
    (4,950,722
    )Loans, net
    
    $
    328,078,472
    
    
    $
    297,537,170
    As of and For the YearsEnded December 31,2009
    
    
    2008Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    7,236,764
    
    
    
    7,281,226Total impaired loans
    
    $
    7,236,764
    
    
    $
    7,281,226Valuation allowance related to impaired loans
    
    $
    1,175,081
    
    
    $
    666,193Average investment in impaired loans
    
    $
    9,505,953
    
    
    $
    4,811,203Forgone interest income on impaired loans
    
    $
    610,371
    
    
    $
    202,843
 F-23




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
    Years Ended December 31,2009
    
    
    2008Balance, beginning of year
    
    $
    4,950,722
    
    
    $
    4,415,669Provision for loan losses
    
    
    7,500,000
    
    
    
    3,350,000Loans charged off
    
    
    (6,620,779
    )
    
    
    (3,001,570
    )Recoveries of loans previously charged off
    
    
    230,517
    
    
    
    186,623Balance, end of year
    
    $
    6,060,460
    
    
    $
    4,950,722
 In the ordinary course of business, the Company has granted loans to certain
directors, executive officers and their affiliates. Changes in related party loans at
December 31, 2009 are summarized as follows:
 Balance, beginning of year
    
    $
    10,075,860Advances
    
    
    9,699,433Repayments
    
    
    (11,053,483
    )Balance, end of year
    
    $
    8,721,810
 NOTE 5. OTHER REAL ESTATE OWNED
  Years Ended December 31,2009
    
    
    2008Balance, beginning of year
    
    $
    2,064,789
    
    
    $
    287,030Additions
    
    
    716,084
    
    
    
    3,276,417Purchased other real estate, net of fair market value adjustments
    
    
    600,870
    
    
    
    Disposals
    
    
    (1,220,206
    )
    
    
    (1,112,341
    )Losses on sales and write downs of other real estate owned
    
    
    (422,100
    )
    
    
    (386,317
    )Balance, end of year
    
    $
    1,739,437
    
    
    $
    2,064,789
 F-24




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. PREMISES AND EQUIPMENT
  December 31,2009
    
    
    2008Land and improvements
    
    $
    5,416,591
    
    
    $
    5,864,170Buildings
    
    
    10,658,122
    
    
    
    12,511,976Furniture and equipment
    
    
    8,818,068
    
    
    
    8,578,984Construction in progress
    
    
    885,627
    
    
    
    40,67425,778,408
    
    
    
    26,995,804Accumulated depreciation
    
    
    (10,188,288
    )
    
    
    (10,194,621
    )$
    15,590,120
    
    
    $
    16,801,183Premises held for sale
    
    $
    1,080,000
    
    
    $
    
     Leases
     2010
    
    $
    81,8002011
    
    
    24,5002012
    
    
    13,2002013
    
    
    13,2002014
    
    
    13,200Thereafter
    
    
    770,000$
    915,900
 F-25




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. INTANGIBLE ASSETS
  As of December 31, 2009GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationLake City, Florida, branch
    
    $
    159,463
    
    
    $
    The Tattnall Bank
    
    
    411,369
    
    
    
    Core deposit premiums
    
    $
    570,832
    
    
    $
    
   2010
    
    $
    153,1152011
    
    
    129,7092012
    
    
    106,3032013
    
    
    82,8972014 and beyond
    
    
    98,808$
    570,832
 NOTE 8. DEPOSITS
  2010
    
    $
    131,418,9852011
    
    
    27,398,7942012
    
    
    8,293,0962013
    
    
    3,235,0852014 and beyond
    
    
    4,604,134$
    174,950,094
   F-26




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9.
    
    EMPLOYEE BENEFIT PLANS
 Pension PlanThe Company provides pension benefits for eligible employees through a defined
benefit pension plan. Effective January 1, 2009, the Board of Directors voted to
freeze the plan to new entrants. Participants of the plan prior to January 1, 2009
that meet certain age and service requirements participate in the retirement plan on a
noncontributing basis. Information pertaining to the activity in the plan is as
follows:
 December 31,2009
    
    
    2008Changes in benefit obligations:Obligations at beginning of year
    
    $
    6,753,603
    
    
    $
    7,574,649Service cost
    
    
    609,511
    
    
    
    753,177Interest cost
    
    
    418,965
    
    
    
    398,996Benefits paid
    
    
    (544,384
    )
    
    
    (615,968
    )Actuarial (gain) loss
    
    
    1,089,620
    
    
    
    (1,357,251
    )Obligations at end of year
    
    $
    8,327,315
    
    
    $
    6,753,603Changes in plan assets:Fair value of assets at beginning of year
    
    $
    4,592,074
    
    
    $
    6,227,688Actual return on assets
    
    
    1,185,399
    
    
    
    (1,320,750
    )Company contributions
    
    
    1,000,000
    
    
    
    301,104Benefits paid
    
    
    (544,384
    )
    
    
    (615,968
    )Fair value of assets at end of year
    
    $
    6,233,089
    
    
    $
    4,592,074Funded status at end of year, included in other liabilities
    
    $
    (2,094,226
    )
    
    $
    (2,161,529
    )Pretax amounts recognized in accumulated other comprehensive income consist of:Net loss
    
    $
    3,495,052
    
    
    $
    3,564,058Prior service cost
    
    
    166,819
    
    
    
    175,933$
    3,661,871
    
    
    $
    3,739,991Accumulated benefit obligation
    
    $
    6,587,683
    
    
    $
    5,424,718Net periodic benefit cost:Service cost
    
    $
    609,511
    
    
    $
    753,177Interest cost
    
    
    418,965
    
    
    
    398,996Expected return on plan assets
    
    
    (358,807
    )
    
    
    (449,094
    )Amortization of prior losses
    
    
    332,034
    
    
    
    310,909Amortization of service costs
    
    
    9,114
    
    
    
    9,114Net periodic benefit cost
    
    $
    1,010,817
    
    
    $
    1,023,102
 F-27




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9.
    
    EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)Other changes in plan assets and benefit obligations recognized in other
comprehensive income for the years ended December 31, 2009 and 2008:
 December 31,2009
    
    
    2008Current year actuarial loss
    
    $
    263,028
    
    
    $
    412,593Amortization of prior losses
    
    
    (332,034
    )
    
    
    (310,909
    )Amortization of prior service cost
    
    
    (9,114
    )
    
    
    (9,114
    )Total recognized in other comprehensive income (loss)
    
    $
    (78,120
    )
    
    $
    92,570
 December 31,2009
    
    2008Assumptions used in computations:In computing ending obligations:Discount rate
    
    
    6.00
    %
    
    
    6.50
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %In computing expected return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
 To determine the expected rate of return on plan assets, the Company considers the
current and expected asset allocations, as well as historical and expected returns
on various categories of plan assets. The approximate allocation of plan assets as
of December 31, 2009 and 2008 is as follows:
 2009
    
    2008Fixed income
    
    
    39.8
    %
    
    
    78.3
    %Equities
    
    
    51.9
    %
    
    
    20.3
    %Cash and cash equivalents
    
    
    8.3
    %
    
    
    1.4
    %
 Plan fiduciaries set investment policies and strategies for the plan assets.
Long-term strategic investment objectives include capital appreciation through
balancing risk and return.The Company expects to contribute $1,000,000 to the plan during 2010.The amounts in accumulated other comprehensive income (loss) that are expected to
be recognized as components of net periodic benefit cost during 2010 are as
follows:
 Prior service cost
    
    $
    9,114Net loss
    
    
    306,014$
    315,128
 F-28




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9.
    
    EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
 Estimated future benefit payments, which reflect expected future service, as
appropriate, are as follows:
 Fiscal Year
    
    Amount2010
    
    $320,1972011
    
    
    552,4192012
    
    
    1,364,6332013
    
    
    582,0002014
    
    
    300,7102015-2019
    
    
    6,283,365
 401(K) Plan
 The Company has also established a salary deferral plan under Section 401(k)
of the Internal Revenue Code. The plan allows eligible employees to defer a
portion of their compensation up to 25%, subject to certain limits based on federal
tax laws. Such deferrals accumulate on a tax deferred basis until the employee
withdraws the funds. The Company matches 50% of employees contributions up to 4%
of their salary. Total expense recorded for the Companys match was approximately
$90,000 and $100,000 for December 31, 2009 and 2008, respectively.
 Employee Stock Ownership Plan (ESOP)
 In connection with the minority stock offering, the Company established an
Employee Stock Ownership Plan (ESOP) for the benefit of its employees with an
effective date of June 29, 2005. The ESOP purchased 440,700 shares of common stock
from the minority stock offering with proceeds from a ten-year note in the amount
of $4,407,000 from the Company. The Companys Board of Directors determines the
amount of contribution to the ESOP annually, but it is required to make
contributions sufficient to service the ESOPs debt. Shares are released for
allocation to employees as the ESOP debt is repaid. Eligible employees receive an
allocation of released shares at the end of the calendar year on a relative
compensation basis. An employee becomes eligible on January 1st or July
1st immediately following the date they complete one year of service.
Company dividends on allocated shares will be paid to employee accounts. Dividends
on unallocated shares held by the ESOP will be applied to the ESOP note payable.Contributions to the ESOP during 2009 and 2008 amounted to $462,804 and $556,691,
respectively.Compensation expense for shares committed to be released under the Companys ESOP
in 2009 and 2008 were $366,755 and $487,882, respectively. Shares held by the ESOP
were as follows:
 2009
    
    
    2008Shares released for allocation
    
    
    198,315
    
    
    
    154,245Unearned
    
    
    242,385
    
    
    
    286,455Total ESOP shares
    
    
    440,700
    
    
    
    440,700Fair value of unearned shares
    
    $
    1,757,291
    
    
    $
    2,578,095
 F-29




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10.
    
    DEFERRED COMPENSATION PLANS
 The Company has entered into separate deferred compensation arrangements with
certain executive officers and directors. The plans call for certain amounts payable
at retirement, death or disability. The estimated present value of the deferred
compensation is being accrued over the remaining expected service period. The Company
has purchased life insurance policies which they intend to use to finance this
liability. Cash surrender value of life insurance of $14,756,771 and $14,136,119 at
December 31, 2009 and 2008, respectively, is separately stated on the consolidated
balance sheets. In September of 2007, the Company accelerated vesting under its
deferred compensation agreements with each of its currently serving covered directors
and executives. Under this acceleration, each covered director and executive is fully
vested in their plan balance.Accrued deferred compensation of $3,089,229 and $3,123,970 at December 31, 2009 and
2008, respectively, is included in other liabilities.The Company has also entered into deferred salary agreements with certain officers
electing to defer a portion of their salary. These amounts are expensed and the plan
accumulates the deferred salary plus earnings. At December 31, 2009 and 2008, the
liability for these agreements was $514,169 and $439,893, respectively, and is
included in other liabilities.Aggregate compensation expense under the plans was $41,218 and $61,507 for the years
ended December 31, 2009 and 2008, respectively.
 NOTE 11.
    
    FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
 Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Securities sold under repurchase agreements are secured
borrowings and are reflected at the amount of cash received in connection with the
transactions. The Company may be required to provide additional collateral based on
the fair value of the underlying securities. The Company monitors the fair value of
the underlying securities on a daily basis. Federal funds purchased and securities
sold under repurchase agreements at December 31, 2009 and 2008 were as follows:
 December 31,2009
    
    
    2008Federal funds purchased from Chattahoochee Bank of Georgia
with interest at 0.15% maturing daily
    
    $
    2,533,892
    
    
    $
    10,969,017Sold in overnight agreements maturing in one to four days
    
    
    309,573
    
    
    
    528,474Sold 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, 2009 was 0.00%
    
    
    5,000,000
    
    
    
    5,000,000Sold 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, 2009 was 0.07%
    
    
    5,000,000
    
    
    
    5,000,000Sold 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
    
    
    
    5,000,000Sold 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 0.00% at December 31, 2009
    
    
    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$
    32,843,465
    
    
    $
    41,497,491
 F-30




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12.
    
    OTHER BORROWINGS
 Other borrowings consist of the following:
 December 31,2009
    
    
    2008Advance from Federal Home Loan Bank with interest at a fixed rate of
5.16% until March 24, 2009, due June 22, 2009
    
    $
    
    
    
    $
    10,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
3.71%, 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
    
    
    
    7,500,000Advance from Federal Home Loan Bank with interest at a fixed rate of
2.74% until January 25, 2010, due July 23, 2018
    
    
    10,000,000
    
    
    
    10,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
4.54%, due October 31, 2016
    
    
    15,000,000
    
    
    
    15,000,000$
    42,500,000
    
    
    $
    52,500,000
 The advances from Federal Home Loan Bank are collateralized by the pledging of a
blanket lien on all first mortgage loans and other specific loans.Other borrowings at December 31, 2009 have maturities in future years as follows:
 2010
    
    $
    2011
    
    
    2012
    
    
    7,500,0002013
    
    
    2014
    
    
    5,000,000Later years
    
    
    30,000,000$
    42,500,000
 The Company and subsidiary Bank have available unused lines of credit with various
financial institutions including the FHLB totaling approximately $47,536,000 at
December 31, 2009.
 F-31




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. INCOME TAXES
 The income tax benefit in the consolidated statements of operations consists of
the following:
 Years Ended December 31,2009
    
    
    2008Current
    
    $
    (1,024,716
    )
    
    $
    698,964Deferred
    
    
    (699,610
    )
    
    
    (1,926,940
    )$
    (1,724,326
    )
    
    $
    (1,227,976
    )
 The Companys income tax benefit differs from the amounts computed by applying the
federal income tax statutory rates to income before income taxes. A reconciliation of
the differences is as follows:
 Years Ended December 31,2009
    
    
    2008Tax at federal income tax rate
    
    $
    (1,148,059
    )
    
    $
    (506,714
    )Increase (decrease) resulting from:Tax-exempt interest
    
    
    (385,077
    )
    
    
    (407,702
    )Bank owned life insurance
    
    
    (211,022
    )
    
    
    (168,467
    )Employee Stock Ownership Plan
    
    
    (64,578
    )
    
    
    (23,395
    )Other
    
    
    84,410
    
    
    
    (121,698
    )Provision for income tax benefits
    
    $
    (1,724,326
    )
    
    $
    (1,227,976
    )
 The components of deferred taxes are summarized as follows:
 Deferred tax assets:Loan loss reserves
    
    $
    1,520,552
    
    
    $
    1,486,793Deferred compensation
    
    
    1,441,359
    
    
    
    1,425,545Organizational cost
    
    
    
    
    
    
    4,832Pension liability
    
    
    1,464,415
    
    
    
    1,495,663Unrealized loss on securities available for sale
    
    
    420,307
    
    
    
    728,738Impairment loss on securities available for sale
    
    
    555,686
    
    
    
    600,000Stock-based compensation
    
    
    367,796
    
    
    
    300,567Nonaccrual loans
    
    
    244,148
    
    
    
    81,136Premises held for sale
    
    
    200,988
    
    
    
    Other real estate owned
    
    
    314,192
    
    
    
    Other
    
    
    21,465
    
    
    
    5,6766,550,908
    
    
    
    6,128,950Deferred tax liabilities:Depreciation and amortization
    
    
    104,381
    
    
    
    31,701Realized gains on terminated cash flow hedges
    
    
    305,313
    
    
    
    446,060Deferred pension costs
    
    
    31,024
    
    
    
    35,468Deferred loans costs
    
    
    69,175
    
    
    
    75,384509,893
    
    
    
    588,613Net deferred tax assets
    
    $
    6,041,015
    
    
    $
    5,540,337
 F-32




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 14. LOSS PER SHARE
 The components used to calculate basic and diluted loss per share follows:
 Years Ended December 31,2009
    
    
    2008Basic Loss and Shares:Net Loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Weighted-average basic shares outstanding
    
    
    10,053,122
    
    
    
    10,208,981Basic Loss Per Share:Net Loss
    
    $
    (0.16
    )
    
    $
    (0.03
    )Diluted Loss and Shares:Net Loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Weighted-average basic shares outstanding
    
    
    10,053,122
    
    
    
    10,208,981Add: Stock options and nonvested shares
    
    
    
    
    
    
    Weighted-average diluted shares outstanding
    
    
    10,053,122
    
    
    
    10,208,981Diluted Loss Per Share:Net Loss
    
    $
    (0.16
    )
    
    $
    (0.03
    )
 At December 31, 2009 and 2008, potential common shares of 689,570 and 614,168 were not
included in the calculation of diluted loss per share because the assumed exercise of
such shares would be anti-dilutive.
 NOTE 15. STOCK PLANS AND STOCK-BASED COMPENSATION
 On May 17, 2006, our stockholders approved the 2006 Equity Incentive Plan (the
Plan). The purpose of the Plan is to promote the long-term growth and profitability
of Heritage Financial Group, to provide directors, advisory directors, officers and
employees of Heritage Financial Group and its affiliates with an incentive to achieve
corporate objectives, to attract and retain individuals of outstanding competence, and
to provide such individuals with an equity interest in Heritage Financial Group.
Under the Plan, the Compensation Committee of the Board of Directors has discretion to
award up to 771,149 shares, of which 550,821 were available as stock options or stock
appreciation rights and 220,328 shares were available as restricted stock awards.
 The Company granted restricted awards that may not be sold or otherwise transferred
until certain restrictions have lapsed. The unearned compensation related to these
awards is being amortized to compensation expense over the period the restrictions
lapse (generally one to five years). The share-based expense for these awards was
determined based on the market price of our stock at the date of grant applied to the
total number of shares that were anticipated to fully vest, amortized over the vesting
period.
 At December 31, 2009, there was approximately $435,000 of unrecognized compensation
cost related to stock options, which is expected to be recognized over a
weighted-average period of 2.5 years.
 F-33




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
 A summary of the status of the two plans at December 31, 2009 and 2008, along
with changes during the years then ended follows:
 2009
    
    
    2008Weighted-Average
    
    
    
    
    
    
    Weighted-AverageExercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Price
    
    
    Number
    
    
    PriceUnder option, beginning of year
    
    
    491,555
    
    
    $
    12.55
    
    
    
    474,605
    
    
    $
    12.60Granted
    
    
    6,000
    
    
    
    6.97
    
    
    
    19,750
    
    
    
    11.25Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (2,240
    )
    
    
    12.54Expired
    
    
    
    
    
    
    
    
    
    
    (560
    )
    
    
    12.54Under option, end of year
    
    
    497,555
    
    
    $
    12.48
    
    
    
    491,555
    
    
    $
    12.55Exercisable at end of year
    
    
    287,030
    
    
    $
    12.59
    
    
    
    188,720
    
    
    $
    12.61Weighted average fair value per option of options
granted during year
    
    
    
    
    
    $
    1.49
    
    
    
    
    
    
    $
    1.91Total grant date fair value of options vested during the year
    
    
    
    
    
    $
    310,591
    
    
    
    
    
    
    $
    303,124Total intrinsic value of options exercised during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Shares available for grant
    
    
    
    
    
    
    43,506
    
    
    
    
    
    
    
    49,506
 The following table presents information on stock options outstanding for the
period shown, less estimated forfeitures:
 Year Ended
    
    Year EndedDecember 31, 2009
    
    December 31, 2008Stock options vested and expected to vest:Number
    
    
    497,555
    
    
    
    491,555Weighted Average Exercise Price
    
    $
    12.48
    
    
    $
    12.55Aggregate Intrinsic Value
    
    
    
    
    
    
    Weighted Average Contractual Term of Options
    
    6.5 years
    
    7.5 yearsStock options vested and currently exercisable:Number
    
    
    287,030
    
    
    
    188,720Weighted Average Exercise Price
    
    $
    12.59
    
    
    $
    12.60Aggregate Intrinsic Value
    
    
    
    
    
    
    Weighted Average Contractual Term of Options
    
    6.4 years
    
    7.4 years
 F-34




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
 A further summary of the options outstanding at December 31, 2009 follows:
 Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    Average
    
    
    
    
    
    AverageContractual Life in
    
    Exercise
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    Years
    
    Price
    
    Number
    
    Price$6.97
    
    
    6,000
    
    
    
    9.9
    
    
    $
    6.97
    
    
    
    -
    
    
    $
    $11.25
    
    
    19,750
    
    
    
    8.0
    
    
    $
    11.25
    
    
    
    4,500
    
    
    $
    16.63$12.54
    
    
    464,305
    
    
    
    6.4
    
    
    $
    12.54
    
    
    
    278,580
    
    
    $
    12.54$16.63
    
    
    7,500
    
    
    
    6.9
    
    
    $
    16.63
    
    
    
    3,950
    
    
    $
    11.25497,555
    
    
    
    6.5
    
    
    $
    12.48
    
    
    
    287,030
    
    
    $
    12.59
 The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are based on historical
volatility of the Companys stock. Expected dividends are based on expected dividend
trends and the expected market price of the Companys stock price at grant.
Historical data is used to estimate option exercises and employee terminations within
the valuation model. The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The assumptions listed in the table below were used for the period indicated.
 Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008Weighted-average risk-free interest rate
    
    
    3.36
    %
    
    
    4.01
    %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)
    
    
    3.12
    %
    
    
    2.55
    %Weighted-average expected volatility
    
    
    24.50
    %
    
    
    14.37
    %
 For the years ended December 31, 2009 and 2008, the Company recognized pre-tax
compensation expense related to stock options of approximately $311,000.
 F-35




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  WeightedAverageMarketRestricted
    
    
    PriceShares
    
    
    at GrantBalance, beginning of year
    
    
    122,613
    
    
    $
    12.50Granted
    
    
    2,000
    
    
    
    6.97Vested
    
    
    (39,602
    )
    
    
    12.54Forfeited
    
    
    
    
    
    
    Balance, end of year
    
    
    85,011
    
    
    $
    12.35
  F-36




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
    2010
    
    $
    351,8662011
    
    
    248,0132012
    
    
    163,405$
    763,284
 F-37




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. COMMITMENTS AND CONTINGENCIES
  Loan Commitments
   December 31,2009
    
    
    2008Commitments to extend credit
    
    $
    37,570,312
    
    
    $
    37,200,583Standby letters of credit
    
    
    834,060
    
    
    
    4,989,085$
    38,404,372
    
    
    $
    42,189,668
    Contingencies
  F-38




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. CONCENTRATIONS OF CREDIT
    NOTE 19. REGULATORY MATTERS
     F-39




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. 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, 2009Total Capital to Risk Weighted AssetsConsolidated
    
    $
    66,476
    
    
    
    16.8
    %
    
    $
    31,735
    
    
    
    8.0
    %
    
    $
    N/A
    
    
    
    HeritageBank of the South
    
    
    60,004
    
    
    
    15.5
    %
    
    
    31,067
    
    
    
    8.0
    %
    
    
    38,834
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    61,586
    
    
    
    15.5
    %
    
    $
    15,867
    
    
    
    4.0
    %
    
    $
    N/A
    
    
    
    HeritageBank of the South
    
    
    55,114
    
    
    
    14.2
    %
    
    
    15,534
    
    
    
    4.0
    %
    
    
    23,301
    
    
    
    6.0
    %Tier I Capital to Average Assets:Consolidated
    
    $
    61,586
    
    
    
    12.4
    %
    
    $
    19,803
    
    
    
    4.0
    %
    
    $
    N/A
    
    
    
    HeritageBank of the South
    
    
    55,114
    
    
    
    11.2
    %
    
    
    19,724
    
    
    
    4.0
    %
    
    
    24,655
    
    
    
    5.0
    %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
    %
    F-40




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 20. FAIR VALUE OF ASSETS AND LIABILITIES
 Determination of Fair Value
 Fair Value Measurements and Disclosures
  Fair Value Hierarchy
      F-41




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 20. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
  Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:
 Securities:
 Loans:
 Deposits:
 Federal Funds Purchased and Securities Sold Under Repurchase Agreements:
 Other Borrowings:
 Accrued Interest:
 Off-Balance-Sheet Instruments:
 F-42




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 20. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 Fair Value Measurements UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    Unobservable
    
    
    
    
    
    
    TotalIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    
    
    
    
    Carrying(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Netting
    
    
    ValueDecember 31, 2009Securities
available for saleDebt securities
    
    $
    
    
    
    $
    119,905,776
    
    
    $
    
    
    
    $
    
    
    
    $
    119,905,776Marketable equity
securities
    
    
    48,000
    
    
    
    573,124
    
    
    
    
    
    
    
    
    
    
    
    621,124Total securities available
for sale
    
    $
    48,000
    
    
    $
    120,478,900
    
    
    $
    
    
    
    $
    
    
    
    $
    120,526,900December 31, 2008Securities
available for saleDebt securities
    
    $
    
    
    
    $
    115,872,984
    
    
    $
    
    
    
    $
    
    
    
    $
    115,872,984Marketable equity
securities
    
    
    21,000
    
    
    
    246,541
    
    
    
    
    
    
    
    
    
    
    
    267,541Total securities available
for sale
    
    $
    21,000
    
    
    $
    116,119,525
    
    
    $
    
    
    
    $
    
    
    
    $
    116,140,525
 Assets Measured at Fair Value on a Nonrecurring Basis
 Fair Value Measurements UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Total Gains(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)December 31, 2009Impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    7,236,764
    
    
    $
    (4,274,496
    )Foreclosed assets
    
    
    
    
    
    
    
    
    
    
    530,028
    
    
    
    (362,200
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    7,766,792
    
    
    $
    (4,636,696
    )December 31, 2008Impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    7,207,780
    
    
    $
    (665,106
    )Foreclosed assets
    
    
    
    
    
    
    
    
    
    
    1,386,726
    
    
    
    (448,050
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    8,594,506
    
    
    $
    (1,113,156
    )
 F-43




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 20. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
    December 31, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    58,157,804
    
    
    $
    58,157,804
    
    
    $
    10,905,360
    
    
    $
    10,905,360Federal funds sold
    
    $
    11,340,000
    
    
    $
    11,340,000
    
    
    $
    30,254,000
    
    
    $
    30,254,000Securities available for sale
    
    $
    120,526,900
    
    
    $
    120,526,900
    
    
    $
    116,140,525
    
    
    $
    116,140,525Federal home loan bank stock
    
    $
    3,253,400
    
    
    $
    3,253,400
    
    
    $
    3,185,800
    
    
    $
    3,185,800Other equity securities
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000Loans
    
    $
    334,138,932
    
    
    $
    341,971,372
    
    
    $
    302,487,892
    
    
    $
    309,635,072Allowance for loan losses
    
    
    6,060,460
    
    
    
    
    
    
    
    4,950,722
    
    
    
    Loans, net
    
    $
    328,078,472
    
    
    $
    341,971,372
    
    
    $
    297,537,170
    
    
    $
    309,635,072Accrued interest receivable
    
    $
    2,799,375
    
    
    $
    2,799,375
    
    
    $
    2,155,327
    
    
    $
    2,155,327Financial liabilities:Deposits
    
    $
    426,606,522
    
    
    $
    424,097,453
    
    
    $
    338,545,994
    
    
    $
    336,904,274Federal funds purchased and securities
sold under repurchase agreements
    
    $
    32,843,465
    
    
    $
    35,285,910
    
    
    $
    41,497,491
    
    
    $
    44,497,491Other borrowings
    
    $
    42,500,000
    
    
    $
    44,563,744
    
    
    $
    52,500,000
    
    
    $
    56,936,956Accrued interest payable
    
    $
    706,321
    
    
    $
    706,321
    
    
    $
    1,045,042
    
    
    $
    1,045,042
 F-44




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 21. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL GROUP (PARENT COMPANY ONLY)
 CONDENSED BALANCE SHEETS  DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008AssetsCash and due from banks
    
    $
    4,264,674
    
    
    $
    112,682Federal funds sold
    
    
    
    
    
    
    62,000Other equity securities, at cost
    
    
    1,010,000
    
    
    
    1,010,000Securities available for sale, at fair value
    
    
    401,712
    
    
    
    4,616,161Investment in subsidiary
    
    
    54,461,917
    
    
    
    55,884,743Premises and equipment, net
    
    
    476,028
    
    
    
    469,986Other assets
    
    
    1,088,572
    
    
    
    941,580Total assets
    
    $
    61,702,903
    
    
    $
    63,097,152LiabilitiesOther liabilities
    
    $
    886,062
    
    
    $
    884,179Stockholders equity
    
    
    60,816,841
    
    
    
    62,212,973Total liabilities and stockholders equity
    
    $
    61,702,903
    
    
    $
    63,097,152
 F-45




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 21. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008IncomeDividends from subsidiary
    
    $
    1,000,000
    
    
    $
    1,571,500Interest
    
    
    101,744
    
    
    
    359,260Impairment loss on securities
    
    
    
    
    
    
    (860,049
    )Gains on sales of securities
    
    
    37,215
    
    
    
    89,250Other income
    
    
    
    
    
    
    1,571Total income
    
    
    1,138,959
    
    
    
    1,161,532ExpenseDepreciation
    
    
    13,197
    
    
    
    14,705Other expense
    
    
    702,195
    
    
    
    768,009Total expense
    
    
    715,392
    
    
    
    782,714Income before income tax benefits and equity in
distributions in excess of earnings of subsidiary
    
    
    423,567
    
    
    
    378,818Income tax benefits
    
    
    231,563
    
    
    
    441,145Income before distribution in
excess of earnings of subsidiary
    
    
    655,130
    
    
    
    819,963Distributions in excess of earnings of subsidiary
    
    
    (2,307,449
    )
    
    
    (1,082,323
    )Net loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )
 F-46




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 21.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
 2009
    
    
    2008OPERATING ACTIVITIESNet loss
    
    $
    (1,652,319
    )
    
    $
    (262,360
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    13,197
    
    
    
    14,705Excess tax (benefit) shortfall related to stock-based
compensation plans
    
    
    58,494
    
    
    
    3,432Stock-based compensation expense
    
    
    226,084
    
    
    
    225,420Impairment losses on securities available for sale
    
    
    
    
    
    
    860,049Gains on sales of securities
    
    
    (37,215
    )
    
    
    (89,250
    )Distributions in excess of earnings of subsidiary
    
    
    2,307,449
    
    
    
    1,082,323Other operating activities
    
    
    (224,967
    )
    
    
    (393,772
    )Total adjustments
    
    
    2,343,042
    
    
    
    1,702,907Net cash provided by operating activities
    
    
    690,723
    
    
    
    1,440,547INVESTING ACTIVITIESDecrease in federal funds sold
    
    
    62,000
    
    
    
    2,401,000Purchase of premises and equipment
    
    
    (19,239
    )
    
    
    Purchases of securities available for sale
    
    
    (964,033
    )
    
    
    Proceeds from maturities of securities available for sale
    
    
    1,707,321
    
    
    
    1,101,362Proceeds from sale of securities available for sale
    
    
    3,561,788
    
    
    
    409,250Purchase of other equity securities
    
    
    
    
    
    
    (1,010,000
    )Net cash provided by investing activities
    
    
    4,347,837
    
    
    
    2,901,612FINANCING ACTIVITIESShares released to employee stock ownership plan
    
    
    409,077
    
    
    
    487,882Excess tax (benefit) shortfall related to stock-based compensation plans
    
    
    (58,494
    )
    
    
    (3,432
    )Purchase of treasury shares, net
    
    
    (516,426
    )
    
    
    (4,241,148
    )Dividends paid to stockholders
    
    
    (720,725
    )
    
    
    (786,914
    )Net cash used in financing activities
    
    
    (886,568
    )
    
    
    (4,543,612
    )Net increase (decrease) in cash and due from banks
    
    
    4,151,992
    
    
    
    (201,453
    )Cash and due from banks at beginning of year
    
    
    112,682
    
    
    
    314,135Cash and due from banks at end of year
    
    $
    4,264,674
    
    
    $
    112,682
 F-47




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 22.
    
    STOCK REPURCHASE PLAN
 In May and October 2006, the Board of Directors approved a plan to repurchase
555,328 shares of the Companys common stock. During 2006, the Company acquired
555,328 shares of common stock, for a total cost of $8,520,680.
 In February 2007, the Board of Directors approved a plan to repurchase 300,000 shares
of the Companys common stock. As of December 31, 2007, the Company had acquired
61,106 shares at a total cost of $816,227. On February 19, 2008, the Board of
Directors extended this plan until February 2009. During 2008, the Company completed
this plan by repurchasing the remaining 238,894 shares for a total cost of $2,879,378.
 In October 2008, the Board of Directors approved a plan to repurchase 125,000 shares.
The Company completed this plan, purchasing 125,000 shares for a total cost of
$1,242,838. In December 2008, the Board of Directors approved a plan to repurchase
250,000 shares. This plan was renewed by the Board for one more year in December
2009. As of December 31, 2009, the Company had acquired 76,026 shares under this plan
for a total cost of $633,021.
 NOTE 23.
    
    SUBSEQUENT EVENTS
 Branch Acquisition
 On February 23, 2010, the Company entered into a Purchase and Assumption
Agreement with The Park Avenue Bank, providing for the acquisition of five branches in
Georgia. These branches are located in: Statesboro (2), Baxley, Hazlehurst and Adel.
In the transaction, the Company will purchase approximately $52 million in loans, the
real and personal property of the branches, and will assume approximately $72 million
in non-certificate deposits, upon which the Company will pay a deposit premium of
1.5%, with a guaranteed minimum payment of $900,000. Additionally, the Company will
assume an estimated $30 million in certificates of deposit that mature within 45 days
of the transactions closing; no deposit premium will be paid on these certificates of
deposit. The transaction is expected to close in the second quarter of 2010 and is
subject to regulatory approval.
 Second Step Stock Offering
 On March 17, 2010, the Company adopted a plan to reorganize from a two-tier
mutual holding company to a full stock holding company and will undertake a
second-step offering of shares of the holding companys common stock. The
conversion and offering is expected to be completed in the third quarter of 2010,
subject to regulatory, stockholder and depositor approvals.
 As part of the reorganization, HeritageBank of the South will become a wholly owned
subsidiary of a to-be-formed stock corporation, Heritage Financial Group, Inc. Shares
of the common stock of the Company, other than those held by Heritage, MHC, will be
converted into shares of common stock in Heritage Financial Group, Inc., using an
exchange ratio designed to preserve current percentage ownership interests. Shares
owned by Heritage, MHC will be retired, and new shares representing that ownership
will be offered and sold to the Banks eligible depositors, the Banks tax-qualified
employee benefit plans and to members of the general public as set forth in the Plan
of Conversion and Reorganization of Heritage, MHC.
 The Plan of Conversion and Reorganization of Heritage, MHC will be submitted to the
Office of Thrift Supervision and the Georgia Department of Banking and Finance for
regulatory approval. Upon receipt of regulatory approvals, the Company will seek
approval from its stockholders and HeritageBank of the South depositors.
 F-48