##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008  Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
   721 N. Westover Blvd., Albany, GA 31707
229-420-0000
 x o
 o o o x
 o x
 APPLICABLE ONLY TO CORPORATE ISSUERS




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##### 



HERITAGE FINANCIAL GROUP
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2008 AND DECEMBER 31, 2007
    
    
    3CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND THE YEAR ENDED
DECEMBER 31, 2007
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
    
    
    8CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    10ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    13ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4. CONTROLS AND PROCEDURES
    
    
    25PART II  OTHER INFORMATION
    
    
    26SIGNATURES
    
    
    28EXHIBITSEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEO & CFO




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets  June 30, 2008 and December 31, 2007
 Unaudited
    
    
    AuditedJune 30,
    
    
    December 31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    6,318,260
    
    
    $
    8,953,836Interest-bearing deposits in banks
    
    
    441,039
    
    
    
    379,961Federal funds sold
    
    
    6,149,000
    
    
    
    14,505,000Securities available for sale, at fair value
    
    
    116,756,266
    
    
    
    107,867,192Federal home loan bank stock, at cost
    
    
    3,748,300
    
    
    
    2,969,700Other equity securities, at cost
    
    
    980,000
    
    
    
    Loans
    
    
    314,545,560
    
    
    
    304,673,138Less allowance for loan losses
    
    
    4,107,864
    
    
    
    4,415,669Loans, net
    
    
    310,437,696
    
    
    
    300,257,469Premises and equipment, net
    
    
    16,569,834
    
    
    
    14,815,520Accrued interest receivable
    
    
    2,267,161
    
    
    
    2,586,357Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Foreclosed assets
    
    
    2,408,804
    
    
    
    364,999Cash surrender value of bank owned life insurance
    
    
    13,833,466
    
    
    
    8,640,647Other assets
    
    
    6,665,146
    
    
    
    6,331,560$
    487,574,972
    
    
    $
    468,672,241Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    18,774,559
    
    
    $
    21,058,567Interest-bearing
    
    
    302,619,220
    
    
    
    309,570,843Total deposits
    
    
    321,393,779
    
    
    
    330,629,410Federal
funds purchased and securities sold under repurchase agreements
    
    
    30,629,407
    
    
    
    15,288,452Other borrowings
    
    
    65,000,000
    
    
    
    50,000,000Accrued interest payable
    
    
    772,878
    
    
    
    947,352Other liabilities
    
    
    6,427,557
    
    
    
    6,214,877Total liabilities
    
    
    424,223,621
    
    
    
    403,080,091Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,453,228 and 11,443,723 issued
    
    
    114,532
    
    
    
    114,437Capital surplus
    
    
    39,463,944
    
    
    
    39,009,323Retained earnings
    
    
    43,269,417
    
    
    
    42,406,483Accumulated other comprehensive loss
    
    
    (4,791,821
    )
    
    
    (3,303,342
    )Unearned employee stock ownership plan (ESOP) shares,
308,490 and 330,525 shares
    
    
    (3,084,900
    )
    
    
    (3,305,250
    )74,971,172
    
    
    
    74,921,651Treasury stock, at cost, 797,534 and 615,934 shares
    
    
    (11,619,821
    )
    
    
    (9,329,501
    )Total stockholders equity
    
    
    63,351,351
    
    
    
    65,592,150$
    487,574,972
    
    
    $
    468,672,241
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Income (Unaudited)  For the Three and Six Months Ended June 30, 2008 and 2007
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest incomeInterest and fees on loans
    
    $
    5,289,433
    
    
    $
    5,514,001
    
    
    $
    10,766,139
    
    
    $
    10,749,637Interest on taxable securities
    
    
    1,205,193
    
    
    
    1,046,731
    
    
    
    2,355,082
    
    
    
    1,978,067Interest on nontaxable securities
    
    
    298,314
    
    
    
    281,425
    
    
    
    624,863
    
    
    
    466,451Interest on federal funds sold
    
    
    51,614
    
    
    
    155,978
    
    
    
    123,368
    
    
    
    377,058Interest on deposits in other banks
    
    
    2,723
    
    
    
    6,122
    
    
    
    10,871
    
    
    
    16,7086,847,277
    
    
    
    7,004,257
    
    
    
    13,880,323
    
    
    
    13,587,921Interest expenseInterest on deposits
    
    
    2,129,761
    
    
    
    2,767,336
    
    
    
    4,654,366
    
    
    
    5,379,721Interest on other borrowings
    
    
    914,860
    
    
    
    577,863
    
    
    
    1,733,703
    
    
    
    1,062,3483,044,621
    
    
    
    3,345,199
    
    
    
    6,388,069
    
    
    
    6,442,069Net interest income
    
    
    3,802,656
    
    
    
    3,659,058
    
    
    
    7,492,254
    
    
    
    7,145,852Provision for loan losses
    
    
    782,000
    
    
    
    337,000
    
    
    
    1,182,000
    
    
    
    495,000Net interest income after provision for
loan losses
    
    
    3,020,656
    
    
    
    3,322,058
    
    
    
    6,310,254
    
    
    
    6,650,852Noninterest incomeService charges on deposit accounts
    
    
    976,140
    
    
    
    939,384
    
    
    
    1,903,418
    
    
    
    1,774,502Other service charges, commissions and fees
    
    
    331,734
    
    
    
    259,724
    
    
    
    658,803
    
    
    
    616,275Brokerage fees
    
    
    261,796
    
    
    
    264,181
    
    
    
    505,831
    
    
    
    441,407Mortgage origination fees
    
    
    116,914
    
    
    
    92,766
    
    
    
    205,708
    
    
    
    194,311Bank owned life insurance
    
    
    99,384
    
    
    
    87,260
    
    
    
    192,839
    
    
    
    169,056Gain (loss) on sale of securities
    
    
    7,386
    
    
    
    287
    
    
    
    19,745
    
    
    
    (28,395
    )Other
    
    
    205,982
    
    
    
    65,213
    
    
    
    278,119
    
    
    
    129,7821,999,336
    
    
    
    1,708,815
    
    
    
    3,764,463
    
    
    
    3,296,938Noninterest expenseSalaries and employee benefits
    
    
    2,224,418
    
    
    
    2,371,388
    
    
    
    4,525,375
    
    
    
    4,654,209Equipment
    
    
    298,898
    
    
    
    277,248
    
    
    
    620,058
    
    
    
    554,502Occupancy
    
    
    272,164
    
    
    
    254,067
    
    
    
    563,795
    
    
    
    504,256Advertising and marketing
    
    
    111,345
    
    
    
    105,747
    
    
    
    256,676
    
    
    
    195,811Legal and accounting
    
    
    141,972
    
    
    
    93,091
    
    
    
    268,803
    
    
    
    190,899Consulting & other professional fees
    
    
    85,098
    
    
    
    174,169
    
    
    
    178,690
    
    
    
    287,081Directors fees and retirement
    
    
    160,263
    
    
    
    131,202
    
    
    
    313,197
    
    
    
    259,404Telecommunications
    
    
    63,258
    
    
    
    58,513
    
    
    
    135,177
    
    
    
    114,036Supplies
    
    
    55,008
    
    
    
    56,461
    
    
    
    112,852
    
    
    
    110,711Data processing fees
    
    
    337,247
    
    
    
    372,690
    
    
    
    641,460
    
    
    
    551,496Other operating
    
    
    427,275
    
    
    
    451,923
    
    
    
    916,377
    
    
    
    830,1064,176,946
    
    
    
    4,346,499
    
    
    
    8,532,460
    
    
    
    8,252,511Income before income taxes
    
    
    843,046
    
    
    
    684,374
    
    
    
    1,542,257
    
    
    
    1,695,279Applicable income taxes
    
    
    155,215
    
    
    
    135,363
    
    
    
    274,887
    
    
    
    427,327Net income
    
    $
    687,831
    
    
    $
    549,011
    
    
    $
    1,267,370
    
    
    $
    1,267,952Basic earnings per share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.12
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Unaudited)  For the Three and Six Months Ended June 30, 2008 and 2007
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    687,831
    
    
    $
    549,011
    
    
    $
    1,267,370
    
    
    $
    1,267,952Other comprehensive income (loss):Net unrealized loss on cash flow hedge arising
during the period, net of tax benefit of
$125,946
for the quarter and for the year to date
    
    
    (188,920
    )
    
    
    
    
    
    
    (188,920
    )
    
    
    Net realized gain on termination of cash flow
hedge during the period, net of tax of $359,490
    
    
    
    
    
    
    
    
    
    
    539,235
    
    
    
    Elimination of unrealized gain on cash flow hedge
terminated during the period, net of tax of$156,558
    
    
    
    
    
    
    
    
    
    
    (234,838
    )
    
    
    Accretion of realized gain on terminated cash
flow hedge, net of tax of $19,608 for the
quarter and the year to date
    
    
    (29,412
    )
    
    
    
    
    
    
    (29,412
    )
    
    
    Unrealized holding losses arising during
the period, net of tax benefit of $1,461,489 and
$1,006,221 for the quarter and $1,041,798 and
$942,076 for the year to date
    
    
    (2,192,233
    )
    
    
    (1,530,873
    )
    
    
    (1,562,697
    )
    
    
    (1,433,283
    )Reclassification adjustment for (gains) losses
included in net income, net of (tax) benefit of
$2,954 and ($114) for the quarter and ($7,898)
and $11,261 for the year to date
    
    
    (4,432
    )
    
    
    (173
    )
    
    
    (11,847
    )
    
    
    17,134Total other comprehensive loss
    
    
    (2,414,997
    )
    
    
    (1,531,046
    )
    
    
    (1,488,479
    )
    
    
    (1,416,149
    )Comprehensive loss
    
    $
    (1,727,166
    )
    
    $
    (982,035
    )
    
    $
    (221,109
    )
    
    $
    (148,197
    )
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND
THE YEAR ENDED DECEMBER 31, 2007
 (Unaudited)
 Common StockCapitalShares
    
    
    Par Value
    
    
    SurplusBalance, December 31, 2006
    
    
    11,449,155
    
    
    $
    114,492
    
    
    $
    37,807,784Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $0.24 per share
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    811,781Repurchase of 61,106 shares of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    Issuance of 310 shares of common stock from the treasury
    
    
    
    
    
    
    
    
    
    
    432Forfeiture of 14,632 shares of restricted stock
    
    
    (14,632
    )
    
    
    (147
    )
    
    
    147Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Excess tax benefit from stock based compensation plans
    
    
    
    
    
    
    
    
    
    
    64,119Exercise of stock options
    
    
    9,200
    
    
    
    92
    
    
    
    115,276ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    210,106Balance, December 31, 2007
    
    
    11,443,723
    
    
    
    114,437
    
    
    
    39,009,323Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $0.14 per share
    
    
    
    
    
    
    
    
    
    
    Repurchase of 181,740 shares of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    Issuance of 140 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    (299
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    405,872Issuance of restricted stock
    
    
    9,505
    
    
    
    95
    
    
    
    (95
    )ESOP shares earned, 22,035 shares
    
    
    
    
    
    
    
    
    
    
    49,143Balance, June 30, 2008
    
    
    11,453,228
    
    
    $
    114,532
    
    
    $
    39,463,944
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND
THE YEAR ENDED DECEMBER 31, 2007
(Unaudited)
 AccumulatedUnearned
    
    
    
    
    
    
    OtherRetained
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveEarnings
    
    Shares
    
    
    Stock
    
    
    (Loss)
    
    
    Total$40,248,349
    
    $
    (3,745,950
    
    
    $
    (8,518,017
    )
    
    $
    (3,097,880
    )
    
    $
    62,808,7782,921,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105(762,971)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811,781(816,227
    )
    
    
    
    
    
    
    (816,227
    )4,743
    
    
    
    
    
    
    
    4,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,462
    )
    
    
    (205,462
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,368
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    650,80642,406,483
    
    
    (3,305,250
    )
    
    
    (9,329,501
    )
    
    
    (3,303,342
    )
    
    
    65,592,1501,267,370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,267,370(404,436)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (404,436
    )
    
    
    
    (2,292,365
    )
    
    
    
    
    
    
    (2,292,365
    )
    
    
    
    
    
    
    2,045
    
    
    
    
    
    
    
    1,746
    
    
    
    
    
    
    
    
    
    
    (1,488,479
    )
    
    
    (1,488,479
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    269,493$43,269,417
    
    $
    (3,084,900
    )
    
    $
    (11,619,821
    )
    
    $
    (4,791,821
    )
    
    $
    63,351,351
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)  For the Six Months Ended June 30, 2008 and 2007
 Six Months Ended June 30,2008
    
    
    2007OPERATING ACTIVITIESNet income
    
    $
    1,267,370
    
    
    $
    1,267,952Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    502,548
    
    
    
    490,412Provision for loan losses
    
    
    1,182,000
    
    
    
    495,000ESOP compensation expense
    
    
    269,493
    
    
    
    355,900Stock-based compensation expense
    
    
    405,872
    
    
    
    429,051Net (gain) loss on sale of securities available for sale
    
    
    (19,745
    )
    
    
    28,395Net gain on termination of cash flow hedge
    
    
    898,725
    
    
    
    Accretion of gain on termination of cash flow hedge
    
    
    (49,020
    )
    
    
    Net (increase) decrease in foreclosed assets
    
    
    (2,043,805
    )
    
    
    4,163Increase in bank owned life insurance
    
    
    (5,192,819
    )
    
    
    (169,057
    )(Increase) decrease in interest receivable
    
    
    319,196
    
    
    
    (129,362
    )Increase (decrease) in interest payable
    
    
    (174,474
    )
    
    
    319,419Increase (decrease) in taxes payable
    
    
    274,887
    
    
    
    (218,030
    )Net other operating activities
    
    
    (1,089,738
    )
    
    
    823,194Total adjustments
    
    
    (283,120
    )
    
    
    2,429,085Net cash provided by operating activities
    
    
    1,550,490
    
    
    
    3,668,929INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    (61,078
    )
    
    
    1,769,025Purchases of securities available for sale
    
    
    (40,561,986
    )
    
    
    (34,150,575
    )Proceeds from maturities of securities available for sale
    
    
    8,616,448
    
    
    
    3,932,915Proceeds from sale of securities available for sale
    
    
    20,451,970
    
    
    
    3,970,820Purchase of bank owned life insurance
    
    
    5,000,000
    
    
    
    Net change in Federal home loan bank stock
    
    
    (778,600
    )
    
    
    (20,300
    )Decrease in federal funds sold
    
    
    8,356,000
    
    
    
    7,880,000Increase in loans, net
    
    
    (11,362,227
    )
    
    
    (18,200,490
    )Purchase of premises and equipment
    
    
    (2,256,862
    )
    
    
    (788,086
    )Net cash used in investing activities
    
    
    (22,596,335
    )
    
    
    (35,606,691
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    (9,235,631
    )
    
    
    28,577,784Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    15,340,955
    
    
    
    4,962,585Proceeds from other borrowings
    
    
    15,000,000
    
    
    
    Purchase of treasury stock, net
    
    
    (2,290,619
    )
    
    
    (99,284
    )Dividends paid to stockholders
    
    
    (404,436
    )
    
    
    (364,564
    )Net cash provided by financing activities
    
    
    18,410,269
    
    
    
    33,076,521Net increase (decrease) in cash and due from banks
    
    
    (2,635,576
    )
    
    
    1,166,867Cash and due from banks at beginning of period
    
    
    8,953,836
    
    
    
    9,781,232Cash and due from banks at end of period
    
    $
    6,318,260
    
    
    $
    10,948,099
 See Notes to Consolidated Financial Statements.
 8




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE SIX MONTHS
ENDED JUNE 30, 2008 AND 2007
(Unaudited)
 Six Months Ended March 31,2008
    
    
    2007SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    6,562,543
    
    
    $
    6,122,650Taxes
    
    
    
    
    
    
    907,873NONCASH TRANSACTIONSIncrease in unrealized losses on securities available for sale
    
    $
    2,624,239
    
    
    $
    2,358,277Decrease in unrealized gain on termination of cash flow hedges
    
    
    391,396
    
    
    
    Increase in unrealized losses on cash flow hedges
    
    
    314,866
    
    
    
    
 See Notes to Consolidated Financial Statements.
 9




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1  BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
     NOTE 2  EARNINGS PER SHARE
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic earnings per share:Net income
    
    $
    687,831
    
    
    $
    549,011
    
    
    $
    1,267,370
    
    
    $
    1,267,952Weighted average common shares outstanding
    
    
    10,210,936
    
    
    
    10,324,625
    
    
    
    10,246,912
    
    
    
    10,321,290Total basic earnings per common share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.12Diluted earnings per share:Net income
    
    $
    687,831
    
    
    $
    549,011
    
    
    $
    1,267,370
    
    
    $
    1,267,952Weighted average common shares outstanding
    
    
    10,210,936
    
    
    
    10,324,625
    
    
    
    10,246,912
    
    
    
    10,321,290Effect of dilutive stock options and restricted stock
    
    
    1,799
    
    
    
    92,932
    
    
    
    1,988
    
    
    
    54,675Weighted average dilutive common shares outstanding
    
    
    10,212,735
    
    
    
    10,417,557
    
    
    
    10,248,900
    
    
    
    10,375,965Total diluted earnings per common share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.12
 10




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##### Table of Contents



NOTE 3  SHARE BASED COMPENSATION
    NOTE 4  DERIVATIVE FINANCIAL INSTRUMENTS
    11




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##### Table of Contents



NOTE 5  FAIR VALUE MEASUREMENTS
     Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsAvailable for sale investment
securities
    
    $
    
    
    
    $
    116,756,266
    
    
    $
    
    
    
    $
    116,756,266Total assets at fair value
    
    $
    
    
    
    $
    116,756,266
    
    
    $
    
    
    
    $
    116,756,266LiabilitiesDerivative financial
instruments
    
    $
    
    
    
    $
    314,866
    
    
    $
    
    
    
    $
    314,866Total liabilities at fair value
    
    $
    
    
    
    $
    314,866
    
    
    $
    
    
    
    $
    314,866
 12




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
   13




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##### Table of Contents



Evolution of Business Strategy (Continued)
      Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    43,473Financial stand-by letters of credit
    
    
    4,986$
    48,459
 14




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##### Table of Contents



Comparison of Financial Condition at June 30, 2008 and December 31, 2007
        15




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##### Table of Contents



Comparison of Operating Results
 General
 For the three months ended June 30, 2008 and 2007
  For the six months ended June 30, 2008 and 2007
  Interest Income
 For the three months ended June 30, 2008 and 2007
  For the six months ended June 30, 2008 and 2007
  16




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##### Table of Contents



Interest Expense
 For the three months ended June 30, 2008 and 2007
  For the six months ended June 30, 2008 and 2007
  Net Interest Income
 For the three months ended June 30, 2008 and 2007
  For the six months ended June 30, 2008 and 2007
  General Comments on Interest Rates
  17




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##### Table of Contents



Provision for Loan Losses
 For the three months and six months ended June 30, 2008 and 2007
         18




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##### Table of Contents



Noninterest Income
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % Chg
    
    
    2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    976,140
    
    
    $
    939,384
    
    
    $
    36,756
    
    
    
    3.91
    %
    
    $
    1,903,418
    
    
    $
    1,774,502
    
    
    $
    128,916
    
    
    
    7.26
    %Other service charges, commissions
and fees
    
    
    331,734
    
    
    
    259,724
    
    
    
    72,010
    
    
    
    27.73
    %
    
    
    658,803
    
    
    
    616,275
    
    
    
    42,528
    
    
    
    6.90
    %Brokerage fees
    
    
    261,796
    
    
    
    264,181
    
    
    
    (2,385
    )
    
    
    -0.90
    %
    
    
    505,831
    
    
    
    441,407
    
    
    
    64,424
    
    
    
    14.60
    %Mortgage origination fees
    
    
    116,914
    
    
    
    92,766
    
    
    
    24,148
    
    
    
    26.03
    %
    
    
    205,708
    
    
    
    194,311
    
    
    
    11,397
    
    
    
    5.87
    %Bank owned life insurance
    
    
    99,384
    
    
    
    87,260
    
    
    
    12,124
    
    
    
    13.89
    %
    
    
    192,839
    
    
    
    169,056
    
    
    
    23,783
    
    
    
    14.07
    %Gain (loss) on sale of securities
    
    
    7,386
    
    
    
    287
    
    
    
    7,099
    
    
    
    2473.52
    %
    
    
    19,745
    
    
    
    (28,395
    )
    
    
    48,140
    
    
    
    -169.54
    %Other
    
    
    205,982
    
    
    
    65,213
    
    
    
    140,769
    
    
    
    215.86
    %
    
    
    278,119
    
    
    
    129,782
    
    
    
    148,337
    
    
    
    114.30
    %Total noninterest income
    
    $
    1,999,336
    
    
    $
    1,708,815
    
    
    $
    290,521
    
    
    
    17.00
    %
    
    $
    3,764,463
    
    
    $
    3,296,938
    
    
    $
    467,525
    
    
    
    14.18
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.64
    %
    
    
    1.54
    %
    
    
    
    
    
    
    
    
    
    
    1.57
    %
    
    
    1.52
    %
    19




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##### Table of Contents



1 2
 Noninterest Expense
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % Chg
    
    
    2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,224,418
    
    
    $
    2,371,388
    
    
    $
    (146,970
    )
    
    
    -6.20
    %
    
    $
    4,525,375
    
    
    $
    4,654,209
    
    
    $
    (128,834
    )
    
    
    -2.77
    %Equipment
    
    
    298,898
    
    
    
    277,248
    
    
    
    21,650
    
    
    
    7.81
    %
    
    
    620,058
    
    
    
    554,502
    
    
    
    65,556
    
    
    
    11.82
    %Occupancy
    
    
    272,164
    
    
    
    254,067
    
    
    
    18,097
    
    
    
    7.12
    %
    
    
    563,795
    
    
    
    504,256
    
    
    
    59,539
    
    
    
    11.81
    %Advertising and marketing
    
    
    111,345
    
    
    
    105,747
    
    
    
    5,598
    
    
    
    5.29
    %
    
    
    256,676
    
    
    
    195,811
    
    
    
    60,865
    
    
    
    31.08
    %Legal and accounting
    
    
    141,972
    
    
    
    93,091
    
    
    
    48,881
    
    
    
    52.51
    %
    
    
    268,803
    
    
    
    190,899
    
    
    
    77,904
    
    
    
    40.81
    %Consulting & other professional fees
    
    
    85,098
    
    
    
    174,169
    
    
    
    (89,071
    )
    
    
    -51.14
    %
    
    
    178,690
    
    
    
    287,081
    
    
    
    (108,391
    )
    
    
    -37.76
    %Directors fees and retirement
    
    
    160,263
    
    
    
    131,202
    
    
    
    29,061
    
    
    
    22.15
    %
    
    
    313,197
    
    
    
    259,404
    
    
    
    53,793
    
    
    
    20.74
    %Telecommunications
    
    
    63,258
    
    
    
    58,513
    
    
    
    4,745
    
    
    
    8.11
    %
    
    
    135,177
    
    
    
    114,036
    
    
    
    21,141
    
    
    
    18.54
    %Supplies
    
    
    55,008
    
    
    
    56,461
    
    
    
    (1,453
    )
    
    
    -2.57
    %
    
    
    112,852
    
    
    
    110,711
    
    
    
    2,141
    
    
    
    1.93
    %Data processing fees
    
    
    337,247
    
    
    
    372,690
    
    
    
    (35,443
    )
    
    
    -9.51
    %
    
    
    641,460
    
    
    
    551,496
    
    
    
    89,964
    
    
    
    16.31
    %Other operating
    
    
    427,275
    
    
    
    451,923
    
    
    
    (24,648
    )
    
    
    -5.45
    %
    
    
    916,377
    
    
    
    830,106
    
    
    
    86,271
    
    
    
    10.39
    %Total noninterest expenses
    
    $
    4,176,946
    
    
    $
    4,346,499
    
    
    $
    (169,553
    )
    
    
    -3.90
    %
    
    $
    8,532,460
    
    
    $
    8,252,511
    
    
    $
    279,949
    
    
    
    3.39
    %Noninterest expenses as a
percentage of
average assets (annualized)
    
    
    3.43
    %
    
    
    3.91
    %
    
    
    
    
    
    
    
    
    
    
    3.56
    %
    
    
    3.80
    %
 20




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##### Table of Contents



21




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##### Table of Contents



Income Tax Expense
   Liquidity and Capital Resources
    22




---



##### Table of Contents



Regulatory Capital Ratios for HeritageBank of the South at June 30, 2008
  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 Assets
    
    $
    61,848
    
    
    
    16.1
    %
    
    $
    30,789
    
    
    
    8.0
    %
    
    $
    38,486
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    57,740
    
    
    
    15.0
    
    
    
    15,394
    
    
    
    4.0
    
    
    
    23,092
    
    
    
    6.0Tier I Capital to Average Total Assets
    
    
    57,740
    
    
    
    12.0
    
    
    
    19,174
    
    
    
    4.0
    
    
    
    23,967
    
    
    
    5.0
  23




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##### Table of Contents



ITEM 3.
    
    QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       EffectMarket
    
    on NetRate
    
    InterestChange
    
    Income+300
    
    
    12.28
    %+200
    
    
    10.87
    %+100
    
    
    6.60
    %-100
    
    
    -7.25
    %-200
    
    
    -13.05
    %-300
    
    
    -15.85
    %
  24




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##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
    25




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1.
    
    LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   Number of
    
    
    MaximumTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Number of SharesNumber
    
    
    
    
    
    
    as Part of
    
    
    that may yet beof Shares
    
    
    Average Price
    
    
    Publicly Announced
    
    
    Purchased Under thePurchased
    
    
    Paid Per Share
    
    
    Plans or Programs
    
    
    Plans or ProgramsApril
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    87,154May
    
    
    30,000
    
    
    
    12.30
    
    
    
    30,000
    
    
    
    57,154June
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    30,000
    
    
    $
    12.30
    
    
    
    30,000
    
    
    
    57,154
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      26




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##### Table of Contents



ITEM 5 . OTHER INFORMATION
  ITEM 6 . EXHIBITS
 Reference toPrior FilingRegulation S-K
    
    
    
    or Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto31
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    Section 1350 Certifications
    
    
    32
 27




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: August 14, 2008
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive Officer Date: August 14, 2008
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 28