UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

Commission File Number 000-51305

 

HERITAGE FINANCIAL GROUP
(A United States Corporation)
IRS Employer Identification Number 45-0479535
721 N. Westover Blvd., Albany, GA 31707
229-420-0000
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on which registered
Common Stock, Par Value $0.01 per share		NASDAQ Stock Market, LLC

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer		o Accelerated filer		o Non-accelerated filer		þ Smaller reporting company
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

As of March 31, 2010, there were 10,399,260 shares of the registrant’s common stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on this date was approximately $21.1 million, computed by reference to the last sales price on NASDAQ Global Market on that date of $12.08 per share on 1,746,932 shares.

Part III of Form 10-K — Portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

PART I

Item 1. Business

General

Heritage Financial Group (the “Company”) was formed in February 2002, and operates through our wholly owned subsidiary, HeritageBank of the South (the “Bank”). We neither own nor lease any business property, but we use the premises, equipment and furniture of the Bank. We employ only persons who are executive officers of the Bank as our executive officers, and we also use the support staff of the Bank. We currently do not separately compensate any employees, although, in the future, we may hire additional employees if we expand our business at the holding company level.

The Company completed an initial public offering on June 29, 2005. It sold 3,372,375 shares of common stock in that offering for $10.00 per share. The Company’s employee stock ownership plan (the “ESOP”) purchased 440,700 shares with the proceeds of a loan from the Company. The Company received net proceeds of $32.4 million in the public offering, 50% of which was contributed to the Bank and $4.4 million of which was lent to the ESOP for its purchase of shares in the offering. The Company also issued 7,868,875 shares of common stock to Heritage, MHC (“MHC’). As of December 31, 2009, MHC owns approximately 76% of the Company.

The Bank was originally chartered in 1955 as a federal credit union, serving the Marine Corps Logistic Base in Albany, Georgia. Over the years, it evolved into a full-service, multi-branch community credit union in Dougherty, Lee, Mitchell and Worth counties. It was converted from a federal credit union charter to a federal mutual savings bank charter in July 2001. The objective of that charter conversion was to better serve customers and the local community though the broader lending ability of a savings bank and to expand our customer base beyond the limited field of membership permitted for credit unions. In February 2002, the Company was formed as part of a reorganization into a two-tier mutual holding company structure. On January 1, 2005, the Bank converted to a Georgia state-chartered stock savings bank.

The principal business of the Bank consists of attracting retail and commercial deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences, multi-family residences and commercial property and a variety of consumer and commercial business loans. Revenues from this business are derived principally from interest on loans and securities and fee income.

The Bank offers a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market deposit and term certificate accounts and checking accounts. It solicits deposits in our market areas and, to a lesser extent, from brokered deposits.

Forward Looking Statements

This document, including information incorporated by reference, contains forward-looking statements about the Company and its subsidiaries which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and the intentions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. The important factors we discuss below, as well as other factors discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in our filings with the Securities and Exchange Commission (“the SEC”) and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document:

	•		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;

	•		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.

The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

Market Area

We intend to continue to be a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We are headquartered in Albany, Georgia, and primarily serve Southwest Georgia through offices in Albany — Dougherty, Lee, and Worth Counties, Southeast Georgia through offices in Tattnall County (Reidsville and Collins), and North Central Florida through offices in Ocala — Marion County, and Lake City — Columbia County. We occasionally make loans beyond our market area to meet customer’s needs and to develop new business. The following table sets forth our market share as of June 30, 2009, the latest date for which information is available, in the major markets that we serve:

						Market
		Market				Share				Institutions in
Market Area		Share				Rank				Markets
Albany Georgia MSA			13.1	%			3				16
Ocala Florida MSA			0.7	%			19				22
Tattnall County Georgia			15.6	%			4				5
Lake City Florida			6.3	%			6				7

Southwest Georgia Market — Albany Metropolitan Statistic Area

The Southwest Georgia economy is historically based on manufacturing and agriculture, but it has become more service-oriented in the last two decades. Median household income and per capita income are below the state and national averages, reflecting the rural nature of the market and limited availability of high paying white collar and technical jobs. As of January 2010, the market area reported an unemployment rate of 11.8%, compared with the national average of 9.7%. Major employers in our market area include the Marine Corps Logistic Base, Phoebe Putney Memorial Hospital, Procter & Gamble, Teleperformance USA, Albany State University, Darton College, Palmyra Medical Centers, and Miller Brewing Company. During 2008, the area lost a major employer when Cooper Tire and Rubber Company announced they were closing their plant in Albany, eliminating 1,400 jobs. This market has a population of approximately 166,000. Population growth in this area has remained relatively flat, with a 5.2% growth from 2000 to 2009. Over the next five years, the population is expected to grow 2.6%.

Southeast Georgia Market — Tattnall County

The Tattnall County, Georgia market is largely based on agriculture. Median and household income are below the state and national averages. As of January 2010, the unemployment rate for the county was 11.1%. Major employers in the market include Fries Farms and Tattnall State Prison. This market has a population of approximately 24,000. Population growth in this area has remained relatively flat, with a 5.7% growth from 2000 to 2009. Over the next five years, the population is expected to grow 3.3%.

North Central Florida Market — Ocala Metropolitan Statistic Area

The Ocala market economy is a service based economy. The area is known for its world-class equestrian training facilities and its booming retirement communities. Median household income and per capita income are below the state and national averages. However, due to the large retirement populations, much more of the income is disposable in nature compared to other markets. Top employers in the area include Monroe Regional Medical Centers, Wal-Mart Stores, AT&T, Publix Supermarkets, Emergency One, Lockheed Martin, ClosetMaid and Central Florida Community College. During 2009, Taylor, Bean & Whitaker, a national mortgage company, closed, eliminating over 1,200 jobs. The unemployment rate was 15.4% as of January 2010. This market has a population of approximately 342,000, and has experienced growth of 32.0% from 2000 to 2009. Over the next five years, the population is expected to grow 12.9%.

North Central Florida Market — Lake City Metropolitan Statistic Area

The Lake City Florida market economy is service based. Median household income and per capita income are below the state and national averages. Top employers in the area include the Veterans Administration Medical Center, TIMCO and Sitel. The unemployment rate was 11.6% as of January 2010. This market has a population of approximately 69,000, and has experience growth of 22.4% from 2000 to 2009. Over the next five years, the population is expected to grow 9.2%

Expansion

In 2008, we invested approximately $1.0 million for 4.9% of the outstanding shares in Chattahoochee Bank of Georgia (“Chattahoochee”), a de novo bank in Gainesville, Georgia. This investment provides us with the opportunity to further expand outside of Southwest Georgia. In addition to our investment in Chattahoochee, we have participated in loans generated by Chattahoochee that exceed their legal lending limits. This structure has allowed us to generate loan volume and exposure to Northeast Georgia without incurring building and personnel costs. Our Chief Executive Officer, O. Leonard Dorminey, serves on Chattahoochee’s Board of Directors, Executive Committee and Loan Committee. As of December 31, 2009, we had $4.8 million in loans purchased from Chattahoochee. As of that date, we also had $2.5 million in fed funds purchased from Chattahoochee.

On December 4, 2009, we acquired substantially all of the assets and assumed substantially all of the liabilities of The Tattnall Bank (“Tattnall”) in a federally-assisted acquisition from the Federal Deposit Insurance Corporation (the “FDIC”). Tattnall operated two branch offices in the Southeast Georgia markets of Reidsville and Collins, in Tattnall County. We did not enter into a loss-sharing agreement with the FDIC on this transaction; however, our bid to acquire Tattnall included a discount payment from the FDIC totaling $15.0 million.

On December 31, 2009, we acquired certain assets and assumed certain liabilities of the Lake City, Florida, branch of Atlantic Coast Bank. We purchased only performing loans that met underwriting standards of the Company, after a due diligence review of the loans at this branch. We assumed substantially all the deposits of this branch.

On February 25, 2010, we announced that the Bank signed a definitive agreement to purchase five bank branches from The Park Avenue Bank (“PAB”). These branches are located in the Southeast Georgia markets of Statesboro (2), Hazlehurst and Baxley, and the Southwest Georgia market of Adel. We expect this transaction to be completed in the second quarter of 2010, subject to regulatory approval. Following is information on the four markets in which we are acquiring branches from PAB.

Southeast Georgia Market — Statesboro MSA

The Statesboro market is a service based economy. Median and household income are below the state and national averages. As of January 2010, the unemployment rate was 10.3%. Major employers in the area include Georgia Southern University, Briggs & Stratton Corp., East Georgia Regional Medical Center and Viracon Georgia, Inc. Statesboro is a regional retail hub for many small communities in Southeast Georgia. This market has a population of approximately 67,000. Population growth has been steady, growing 20.1% from 2000 — 2009, and is expected to grow by 8.5% over the next five years. A major driver of growth for this area has been Georgia Southern University, which has approximately 18,000 full-time students.

Southeast Georgia Market — Baxley — Appling County

The Baxley — Appling County market is a service based economy, with strong roots in manufacturing and agriculture. Median and household income are below the state and national averages. As of January 2010, the unemployment rate was 11.0%. Major employers in the area include Southern Nuclear Operating Co., Altamaha Homecare and Rayonier Wood Products. The market has a population of approximately 18,000. Population growth has been relatively flat, with a 3.2% growth rate from 2000 to 2009. The population is expected to grow 1.6% over the next five years.

Southeast Georgia Market — Hazlehurst — Jeff Davis County

The Hazlehurst — Jeff Davis County market is a service based economy, with strong roots in manufacturing and agriculture. Median and household income are below that state and national averages. As of January 2010, the unemployment rate was 14.9%. Major employers in the area include Propex Inc., McPherson Manufacturing Corp. and Beasley Forest Products. The market has a population of approximately 13,000. Population growth has been relatively flat, with growth of 4.3% from 2000 to 2009. The population is expected to grow 2.3% over the next five years.

Southwest Georgia Market — Adel — Cook County

The Adel — Cook County market is based primarily on agriculture and manufacturing. Median and household income are below the state and national averages. As of January 2010, the unemployment rate was 14.5%. Major employers in the area include BASF Sparks LLC, Jimmy Bullard and Sons, and J-M Manufacturing Co. The market has a population of approximately 17,000. Population growth has been relatively flat, with growth of 5.7% from 2000 to 2009. The population is expected to grow 2.2% over the next five years.

The following table sets forth PAB’s market share for the four markets in which we are acquiring their branches:

						Market
		Market				Share				Institutions in
Market Area		Share				Rank				Markets
Statesboro Georgia MSA			4.9	%			6				9
Adel, GA			28.7	%			2				5
Baxley, GA			15.4	%			5				5
Hazlehurst, GA			29.1	%			2				5

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.

Competition

We face strong competition in originating commercial, real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other banks, credit unions and mortgage bankers. Other banks, credit unions and finance companies also provide vigorous competition in consumer and commercial lending.

We attract deposits through our branch office system. Competition for those deposits is principally from other banks and credit unions located in the same community, as well as mutual funds and other alternative investments. We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates.

On-line Presence

The Company maintains a website at www.eheritagebank.com. The information contained on that website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company currently makes available on or through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports, and all other Securities and Exchange Commission filings. These materials are also available free of charge on the Securities and Exchange Commission’s website at www.sec.gov.

Lending Activities

The following table presents information concerning the composition of the Bank’s loan portfolio in dollar amounts and in percentages (before deductions for allowances for losses) as of the dates indicated. Purchased loans have been excluded from the individual loan categories below because fair market value adjustment discounts of $7.2 million related to this pool of loans would distort the individual categories.

		December 31,
		2009								2008								2007								2006								2005
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
										(Dollars in Thousands)
Real Estate
One- 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				6.26
Commercial			71,013				21.25				52,477				17.35				41,630				13.66				44,496				16.08				37,985				14.95
Farmland			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				6.50
Total real estate loans			200,933				60.14				191,964				63.46				184,805				60.66				170,554				61.62				144,529				56.88
Other loans
Consumer loans:
Student			596				0.18				552				0.18				594				0.20				703				0.25				1,110				0.44
Automobile			26,698				7.99				39,753				13.14				47,718				15.66				46,331				16.74				50,137				19.73
Home equity			17,313				5.18				18,344				6.06				17,257				5.66				16,368				5.91				15,591				6.14
Other			7,687				2.30				9,037				2.99				9,377				3.08				8,812				3.19				9,058				3.56
Total consumer loans			52,294				15.65				67,686				22.37				74,946				24.60				72,214				26.09				75,896				29.87
Commercial business loans			45,785				13.70				42,838				14.17				44,922				14.74				34,008				12.29				33,686				13.26
Total other loans			98,079				29.35				110,524				36.54				119,868				39.34				106,222				38.38				109,582				43.12
			299,012				89.49				302,488				100.00				304,673				100.00				276,776				100.00				254,111				100.00
Purchased 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

The following table shows the composition of the Bank’s loan portfolio by fixed- and adjustable-rate at the dates indicated. Purchased loans have been excluded from the individual loan categories below because fair market value adjustment discounts of $7.2 million related to this pool of loans would distort the individual categories.

		December 31,
		2009								2008								2007
		Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Fixed Rate Loans:
Real Estate
One- 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				2.36
Commercial			58,300				17.45				42,084				13.91				32,634				10.71
Farmland			4,789				1.44				2,174				0.72				3,337				1.10
Construction and development			8,634				2.58				8,426				2.79				13,903				4.56
Total real estate loans			153,221				45.86				130,247				43.06				126,893				41.65
Consumer			31,130				9.32				45,168				14.93				53,618				17.60
Commercial business			18,975				5.68				14,218				4.70				16,482				5.41
Total fixed-rate loans			203,326				60.86				189,633				62.69				196,993				64.66
Adjustable Rate Loans:
Real Estate
One- to four-family			5,954				1.79				7,374				2.44				4,911				1.61
Multi-family			5,453				1.63				5,509				1.82				5,119				1.68
Commercial			12,713				3.80				10,393				3.44				8,996				2.95
Farmland			4,224				1.26				3,569				1.18				1,481				0.49
Construction and development			19,368				5.80				34,871				11.53				37,405				12.28
Total real estate loans			47,712				14.28				61,716				20.41				57,912				19.01
Consumer			21,164				6.33				22,518				7.44				21,328				7.00
Commercial business			26,810				8.02				28,621				9.46				28,440				9.33
Total adjustable rate loans			95,686				28.63				112,855				37.31				107,680				35.34
			299,012				89.49				302,488				100.00				304,673				100.00
Purchased 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								4,416
Total loans, net		$	328,078							$	297,537							$	300,257

The following schedule illustrates the contractual maturity of the Bank’s loan portfolio at December 31, 2009. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Tax exempt loans are shown at actual rates, not at tax-equivalent rates. This table excludes $35.1 million in purchased loans because fair market value adjustment discounts of $7.2 million related to this pool of loans would distort the individual categories.

Real Estate
One- to Four Family						Multi-family								Commercial								Farmland								Construction								Consumer								Commercial Business								Total
		Weighted								Weighted								Weighted								Weighted								Weighted								Weighted								Weighted								Weighted
		Average								Average								Average								Average								Average								Average								Average								Average
Amount		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

Lending authority. The Bank has established lending limits for its officers. Lenders may make loans up to $250,000, based on the experience of the lender. The commercial managers may make and approve loans up to $500,000. The Chief Executive Officer of the Bank may approve loans up to $2.0 million, and the Senior Credit Officer may approve loans up to $2.0 million in conjunction with the commercial managers. The Chief Executive Officer and the Senior Credit Officer may jointly approve loans up to $3.0 million and the Executive Loan Committee may approve loans up to $5.0 million. Loans over these amounts or outside our general underwriting guidelines must be approved by the board of directors.

We are subject to the lending limit established under Georgia law for loans to one borrower and the borrower’s related entities. See “How We Are Regulated – HeritageBank of the South – Georgia Regulation.” Based on our capital level at December 31, 2009, the maximum amount under Georgia law that we could loan to any one borrower and the borrower’s related entities was $11.8 million for fully secured loans (including loans secured by real estate for which we have an independent appraisal) and $7.1 million for all other loans. Internally, we have set limits of $5.0 million for fully secured loans and $4.5 million for all other loans to any one borrower and the borrower’s related entities. These internal limits may be exceeded by approval of the board of directors.

Major loan customers. Our ten largest lending relationships are with commercial borrowers and total $53.6 million in the aggregate, or 16.0% of our $334.1 million loan portfolio at December 31, 2009. These relationships consist of $7.6 million for a finance company secured by accounts receivable and real estate in Southwest Georgia; $6.9 million to a specialty chemical business in Southwest Georgia; $6.6 million secured by real estate in North Central Florida; $5.7 million for the permanent financing of a hotel in North Central Florida; $5.3 million to a retail pharmacy business secured by inventory and real estate located primarily in Southwest Georgia; $5.0 million to a franchise restaurant chain with multiple locations in North Central Florida; $4.4 million to a franchise restaurant chain with multiple locations in North Central Florida; $4.1 million secured by residential rental property in Southwest Georgia; $4.0 million, of which $2.6 million is secured by multifamily property in Southwest Georgia and $1.4 million is secured primarily by residential rental real estate in Southwest Georgia; $4.0 million, of which $2.5 million is secured by residential real estate in Southwest Georgia and $1.5 million is secured by a mini-warehouse facility in Southwest Georgia.

As of December 31, 2009, all of these loans were performing as agreed and none were listed as classified assets.

For further information on credit quality, see the discussion under the headings “- Classified Assets” and “- Loan Delinquencies and Defaults” below and see also Management’s Discussion and Analysis contained in Item 7 of this 10-K.

One- to Four-Family Residential Real Estate Lending. We originate loans secured by first mortgages on one- to four-family residences in our lending area, and on occasion, outside our lending area for customers whose primary residences are within our lending area. The majority of these loans are originated by us and funded by other lenders. During 2002 and 2003, this type of lending increased because of increased demand for refinancing and our decision, in 2003, to originate more fixed-rate residential loans for our portfolio. In 2004, this loan demand decreased, primarily due to a decrease in refinancing activity, and we reduced the amount of mortgage loans originated for our portfolio, though we continued to originate loans for funding by another lender. In 2005, we ceased originating 15- and 30- year one- to four-family residential loans for our own portfolio. At December 31, 2009, we had $81.3 million, or 24.3% of our loan portfolio in one- to four-family residential loans. Of these, $75.3 million were fixed-rate loans and $6.0 million were adjustable rate loans.

We generally underwrite our one- to four-family owner-occupied loans based on the applicant’s employment and credit history and the appraised value of the subject property. Presently, we lend up to 90% of the lesser of the appraised value or purchase price for one- to four-family residential loans. For loans with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure below 80%. Properties securing our one- to four-family loans are appraised by independent fee appraisers approved by the board of directors. We require our borrowers to obtain title insurance and hazard insurance, and flood insurance, if necessary.

We currently originate one- to four-family mortgage loans on either a fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial institutions and consistent with our internal needs. Fixed-rate loans generally have a five-year term, with a balloon payment and a 15- to 30-year amortization calculation.

Adjustable-rate mortgage, or ARM, loans are generally offered with annual repricing with a maximum annual rate change of 1% and maximum overall rate change of 4%. We use a variety of indices to reprice our ARM loans. Our ARM loans generally provide for specified minimum and maximum interest rates, with a lifetime cap and floor, and a periodic adjustment of the interest rate over the rate in effect on the date of origination. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is our cost of funds. Our ARM loans are written using generally accepted underwriting guidelines. ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. We do not offer teaser rates on adjustable-rate mortgage loans.

We no longer originate one- to four-family loans that are assumable. However, our portfolio does contain one- to four-family loans that are assumable, subject to our approval, and may contain prepayment penalties. Due to current market conditions and rapidly changing underwriting criteria required by investors, including the Federal Home Loan Bank, Fannie Mae and Freddie Mac, these loans may not be readily sellable to Freddie Mac, Fannie Mae, or other private investors. Our real estate loans contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the collateral.

We generally underwrite our non- owner-occupied, one- to four-family loans primarily based on a 1.25 times debt service coverage, though we also consider the applicant’s creditworthiness and the appraised value of the property. Presently, we lend up to 85% of the lesser of the appraised value or purchase price for the residence. These loans are offered with a fixed rate or an adjustable rate using the prime rate as the index. These loans have terms of up to 15 years and are not assumable. We generally obtain title opinions from our counsel regarding these properties.

Commercial and Multi-Family Real Estate Lending. We offer a variety of multi-family and commercial real estate loans. These loans are secured primarily by multi-family dwellings, retail establishments, hotels, motels, warehouses and small office buildings located in our market areas. At December 31, 2009, commercial real estate and multi-family loans totaled $71.0 million and $11.7 million or 21.3% and 3.5%, respectively, of our gross loan portfolio.

Our loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate over a three-or five-year term with a balloon payment generally based on a 15 year amortization. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on our multi-family and commercial real estate loans typically do not exceed 80% of the appraised value of the property securing the loan.

Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We generally require personal guarantees of the borrowers and an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state certified or licensed fee appraisers approved by the board of directors, with a second independent appraisal review performed if the loan exceeds $500,000.

We generally do not maintain a tax or insurance escrow account for loans secured by multi-family and commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is generally required to provide periodic financial information.

Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one- to four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.

Construction and Development Lending. Our construction loan portfolio consists of loans for the construction of one- to four-family residences, multi-family residences and commercial properties. Construction lending generally affords us an opportunity to receive interest at rates higher than those obtainable from residential lending and to receive higher origination and other loan fees. In addition, construction loans are generally made with adjustable rates of interest for six- to nine-month terms, with interest-only payments due during the construction period. At December 31, 2009, we had $28.0 million in construction loans outstanding, representing 8.4% of our gross loan portfolio and consisting of $2.4 million in construction loans for one- to four-family residences, $3.5 million for commercial properties being constructed and $22.1 million in acquisition and development loans to builders, developers and individuals, for the development of lots for future residential and commercial construction.

Construction loans also involve additional risks because funds are advanced upon the security of the project under construction, which is of uncertain value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, and the related loan-to-value ratios. We fund our construction loans based on percentage of completion as determined by physical property inspections. Acquisition and development loans are required to be paid down as lots are sold, though on an accelerated basis so that we are repaid before all the lots are sold. See also the discussion under the headings “- Classified Assets” and “- Loan Delinquencies and Defaults”.

Commercial Business Lending. At December 31, 2009, commercial business loans totaled $45.8 million or 13.7% of our gross loan portfolio. Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory and equipment. Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than traditional single family loans.

Unlike residential mortgage loans, commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and, therefore, are of higher risk. Commercial business loans are generally secured by business assets, such as accounts receivable, equipment and inventory. This collateral may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions).

Our management recognizes the generally increased risks associated with our commercial business lending. Our commercial lending policy emphasizes complete credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of the industry conditions affecting the borrower. Review of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. In addition, we generally obtain personal guarantees from the borrowers on these types of loans. The majority of the Bank’s commercial loans have been to borrowers in Southwest Georgia and North Central Florida. We intend to continue our commercial lending in this geographic area.

Consumer Lending. We offer a variety of secured consumer loans, including home equity lines of credit, new and used auto loans, boat and recreational vehicle loans, and loans secured by deposit accounts. We also offer a limited amount of unsecured loans. We originate our consumer loans primarily in our market areas. At December 31, 2009, our consumer loan portfolio totaled $52.3 million, or 15.7% of our gross loan portfolio.

Our home equity lines of credit totaled $17.3 million, and accounted for 5.2% of our gross loan portfolio at December 31, 2009. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. Home equity lines of credit generally have a 15-year draw period and require the payment of 1.5% of the outstanding loan balance per month during the draw period, which may be reborrowed at any time during the draw period. We also offer a 15-year home equity line of credit that requires interest-only payments for the first five years, then fully amortizing payments over the remaining 10 years of the loan. At December 31, 2009, unfunded commitments on home equity lines of credit totaled $12.3 million. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.

We originate auto loans on a direct basis and very limited on an indirect basis. Prior to 2008, we were very active in indirect auto lending. However, as we tightened our lending standards on indirect auto loans, we saw dramatic decreases in indirect auto loan production. Going forward, we do not expect indirect lending to be a significant part of our business, and we expect this portfolio to continue to decline as loans pay off. Auto loans totaled $26.7 million at December 31, 2009, or 8.0% of our gross loan portfolio, of which $10.2 million was direct loans and $16.5 million was indirect loans. Auto loans may be written for up to six years and usually have fixed rates of interest. Loan-to-value ratios are up to 100% of the sales price for new autos and 100% of retail value on autos, based on valuation from official used car guides.

Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates, and carry higher rates of interest than do one- to four-family residential mortgage loans. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans may entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Loan Originations, Purchases, Sales, Repayments and Servicing

We originate one- to four-family residential mortgage loans primarily through referrals from real estate agents, builders and from existing customers. Walk-in customers and referrals from existing customers are also important sources of loan originations. Since our conversion to a federal thrift in 2001, we have been able to expand our target market to include individuals who were not members of the credit union and have increased the number and amount of commercial real estate and commercial business loan originations. Loan origination fees earned totaled $557,000, $746,000 and $695,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

While we originate both adjustable-rate and fixed-rate loans, our ability to originate loans is dependent upon customer demand for loans in our market areas. Demand is affected by competition and the interest rate environment. Loans and participations purchased must conform to our underwriting guidelines. Furthermore, during the past few years, we, like many other financial institutions, experienced significant prepayments on loans due to the low interest rate environment prevailing in the United States. In periods of economic uncertainty, the ability of financial institutions, including ours, to originate or purchase large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income.

We have agreements with mortgage lenders, pursuant to which we originate residential mortgage loans for these lenders in accordance with their policies, terms and conditions and forward the loan package to those lenders for funding. We charge the borrower an origination fee for processing the borrower’s application in accordance with the lender’s specifications. We also may earn a premium on these loans based on the difference between the rate on the loan and the lock-in rate accepted by the lender. During 2009, we originated $28.5 million of mortgage loans for these lenders and generated approximately $345,000 of loan origination fees on these loans.

In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market. Fees for late payments totaled $283,000, $288,000 and $264,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Asset Quality

When a borrower fails to make a required payment on a loan, we attempt to cure the delinquency by contacting the borrower. In the case of loans secured by residential real estate, a late notice is sent 15 and 30 days after the due date, and the borrower is contacted by phone beginning 16 days after the due date. When the loan is 31 days past due, a delinquency letter is mailed to the borrower. All delinquent accounts are reviewed by a collector, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If the account becomes 60 days delinquent and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel, with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. If foreclosed, we take title to the property and sell it directly through a real estate broker.

Delinquent consumer loans are handled in a similar manner, except that appropriate action may be taken to collect any loan payment that is delinquent for more than 15 days. Follow-up contacts are generally on an accelerated basis compared to the mortgage loan procedure. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.

Delinquent commercial business loans and loans secured by multi-family, farmland and commercial real estate are initially handled by the loan officer in charge of the loan, who is responsible for contacting the borrower. The collection department also works with the commercial loan officers to see that necessary steps are taken to collect delinquent loans. In addition, we have an officer loan committee that meets at least twice a month and reviews past due and criticized loans, as well as other loans that management feels may present possible collection problems. If an acceptable workout of a delinquent commercial loan cannot be agreed upon, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.

Delinquent Loans. The table below sets forth the amounts and categories of delinquent loans that were still accruing interest at December 31, 2009:

		Thirty to				Sixty to				Total thirty days
		fifty-nine days				ninety days				or more delinquent
Delinquent Loans:
One- to four-family		$	921			$	374			$	1,295
Multi-family			—				—				—
Commercial real estate			118				—				118
Farmland			6				—				6
Construction and development			834				—				834
Consumer			450				92				542
Commercial business			350				102				452
Total		$	2,679			$	568			$	3,247
Total as a percentage of total loans			0.80	%			0.17	%			0.97	%

Nonperforming Assets. The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio. Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful. At all dates presented, we had no accruing loans more than 90 days delinquent. At December 31, 2009, we had troubled debt restructurings totaling $5.4 million, which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Included below in nonaccruing loans at December 31, 2009, are troubled debt restructurings of $2.1 million. In addition, at that date we had troubled debt restructurings totaling $3.2 million which were performing in accordance with their modified terms, and are not included in nonaccruing loans. For all other dates presented, we had no troubled debt restructurings. Foreclosed assets owned include assets acquired in settlement of loans.

		December 31,
		2009				2008				2007				2006				2005
		(Dollars in Thousands)
Nonaccruing Loans:
One- to four-family		$	1,505			$	689			$	373			$	—			$	102
Multi-family			122				—				—				—				—
Commercial real estate			236				988				35				—				241
Construction and development			2,863				4,882				2,357				61				—
Consumer			489				575				447				197				524
Commercial business			3,248				147				—				—				—
Total			8,463				7,281				3,212				258				867
Foreclosed Assets:
One- to four-family			583				115				—				—				44
Multi-family			—				—				—				—				—
Commercial real estate			362				284				287				306				—
Construction and development			794				1,666				—				—				—
Consumer			56				55				78				16				15
Commercial business			—				—				—				—				—
Total			1,795				2,120				365				322				59
Total nonperforming assets		$	10,258			$	9,401			$	3,577			$	580			$	929
Total as a percentage of total assets			1.79	%			1.87	%			0.76	%			0.14	%			0.25	%

As of December 31, 2009, the increased level of nonperforming assets is attributable primarily to our commercial lending activities. Commercial and consumer loans generally involve significantly greater credit risks than single-family residential lending. For a discussion of significant nonperforming assets, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this 10-K.

For the year ended December 31, 2009, there was approximately $610,000 of gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms. No significant amount was included in interest income on these loans for this period.

Other Loans of Concern. In addition to the nonperforming assets set forth in the table above, as of December 31, 2009, there was also an aggregate of $22.5 million of loans with respect to which known information about the possible credit problems of the borrowers have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. These loans have been considered in management’s determination of the adequacy of our allowance for loan losses.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When an institution classifies problem assets as either substandard or doubtful, it may establish specific allowances for these loans in an amount deemed prudent by management and approved by the board of directors. In addition, an institution is also required to develop general allowances. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance, which may order the establishment of additional general or specific loss allowances.

We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets, at December 31, 2009, we had $25.8 million of our assets internally classified, of which $24.0 million is classified as substandard, none is classified as doubtful or loss, and $1.8 million is in other real estate and repossessions. The total amount classified represented 46.6% of our equity capital and 5.1% of our assets at December 31, 2009.

Provision for Loan Losses. We recorded a provision for loan losses for the year ended December 31, 2009 of $7.5 million, compared to $3.4 million for the year ended December 31, 2008. The provision for loan losses is charged to income to provide adequate allowance for loan losses to reflect probable incurred losses based on the factors discussed below under “— Allowance for Loan Losses.” The provision for loan losses for the year ended December 31, 2009 was based on management’s review of such factors which indicated that the allowance for loan losses reflected probable incurred losses in the loan portfolio as of the year ended December 31, 2009. For a more detailed analysis of the increased provision for loan losses in 2009, see “Provision for Loan Losses” included in Item 7 of this 10-K.

Allowance for Loan Losses. We maintain an allowance for loan losses to absorb probable incurred losses in the loan portfolio. The allowance is based on ongoing, monthly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions. Geographic peer group data is obtained by general loan type and adjusted to reflect known differences between peers and the Bank, such as loan seasoning, underwriting experience, local economic conditions and customer characteristics. More complex loans, such as multi-family and commercial real estate loans and commercial business loans, are evaluated individually for impairment, primarily through the evaluation of collateral values.

At December 31, 2009, our allowance for loan losses was $6.1 million or 1.81% of the total loan portfolio. Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolios. The allowance is discussed further in Notes 1 and 4 of the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 7 of this 10-K.

The following table sets forth an analysis of our allowance for loan losses.

		December 31,
		2009				2008				2007				2006				2005
		(Dollars in Thousands)
Balance at beginning of period		$	4,951			$	4,416			$	4,076			$	3,618			$	2,965
Charge-offs:
One- to four-family			494				81				55				—				27
Multi-family			—				—				—				—				—
Commercial real estate			25				773				29				—				—
Construction and development			3,100				1,414				435				31				—
Consumer			664				687				398				368				567
Commercial business			2,338				47				116				—				—
			6,621				3,002				1,033				399				594
Recoveries:
One- to four-family			—				—				—				—				8
Multi-family			—				—				—				—				—
Commercial real estate			—				4				—				—				—
Construction and development			—				2				—				—				—
Consumer			180				161				195				162				224
Commercial business			50				20				—				—				—
			230				187				195				162				232
Net charge-offs			6,391				2,815				838				237				362
Provision charged to operations			7,500				3,350				1,178				695				1,015
Balance at end of period		$	6,060			$	4,951			$	4,416			$	4,076			$	3,618
Ratio 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	%

The distribution of our allowance for losses on loans at the dates indicated is summarized as follows:

		December 31,
		2009												2008												2007												2006
		(Dollars in Thousands)
										Percent												Percent												Percent												Percent
										of Loans												of Loans												of Loans												of Loans
						Loan				in Each								Loan				in Each								Loan				in Each								Loan				in Each
		Amount of				Amounts				Category				Amount of				Amounts				Category				Amount of				Amounts				Category				Amount of				Amounts				Category
		Loan Loss				By				to Total				Loan Loss				By				to Total				Loan Loss				By				to Total				Loan Loss				By				to Total
		Allowance				Category				Loans				Allowance				Category				Loans				Allowance				Category				Loans				Allowance				Category				Loans
Secured 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				6.11
Secured by commercial real estate			979				71,013				21.25				874				52,477				17.35				847				41,630				13.66				925				44,496				16.08
Construction and development			1,419				28,002				8.38				1,275				43,297				14.31				1,616				51,308				16.84				471				32,822				11.86
Farmland			122				9,013				2.70				72				5,744				1.90				42				4,818				1.58				32				2,642				0.95
Consumer			850				52,294				15.65				890				67,686				22.37				740				74,946				24.60				791				72,214				26.09
Commercial business			1,193				45,785				13.70				1,134				42,838				14.17				495				44,922				14.74				805				34,008				12.29
Unallocated			—				—								—				—				—				—				—				—				—				—				—
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

Georgia savings banks have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal, state and local agencies and jurisdictions, including callable agency securities, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, Georgia savings banks also may invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a Georgia savings banks is otherwise authorized to make directly. See “How We Are Regulated — HeritageBank of the South — Georgia Regulation” for a discussion of additional restrictions on our investment activities.

The Chief Financial Officer and Treasurer have the basic responsibility for the management of our investment portfolio. They consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset and Liability Management and Market Risk” in Item 7 of this 10-K.

Our investment securities currently consist of mortgage-backed securities, federal agency securities, preferred stocks, state and local government securities and corporate debt securities. See Note 3 of the Notes to Consolidated Financial Statements.

As a member of the Federal Home Loan Bank of Atlanta, we had $3.2 million in stock of the Federal Home Loan Bank of Atlanta at December 31, 2009. We maintain the minimum amount of stock the Federal Home Loan Bank of Atlanta allows based on our level of borrowings. For the year ended December 31, 2009, we received $10,000 in dividends from the Federal Home Loan Bank of Atlanta.

The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. Our securities portfolio at December 31, 2009, did not contain securities of any single issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.