##### 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 September 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. UNAUDITED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
    
    
    3CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND THE YEAR ENDED
DECEMBER 31, 2007
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    23ITEM 4. CONTROLS AND PROCEDURES
    
    
    24PART II  OTHER INFORMATION
    
    
    25SIGNATURES
    
    
    27EXHIBITS31.1 Rule 13a14(a) Certification of Chief Executive Officer31.2 Rule 13a14(a) Certification of Chief Financial Officer32 Section 1350 CertificationEX-31.1EX-31.2EX-32




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
 Unaudited
    
    
    AuditedSeptember 30,
    
    
    December 31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    16,133,167
    
    
    $
    8,953,836Interest-bearing deposits in banks
    
    
    583,340
    
    
    
    379,961Federal funds sold
    
    
    13,825,000
    
    
    
    14,505,000Securities available for sale, at fair value
    
    
    115,925,389
    
    
    
    107,867,192Federal home loan bank stock, at cost
    
    
    3,410,800
    
    
    
    2,969,700Other equity securities, at cost
    
    
    1,010,000
    
    
    
    Loans
    
    
    312,766,771
    
    
    
    304,673,138Less allowance for loan losses
    
    
    5,206,161
    
    
    
    4,415,669Loans, net
    
    
    307,560,610
    
    
    
    300,257,469Premises and equipment, net
    
    
    16,835,815
    
    
    
    14,815,520Accrued interest receivable
    
    
    2,816,955
    
    
    
    2,586,357Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Foreclosed assets
    
    
    2,221,867
    
    
    
    364,999Cash surrender value of bank owned life insurance
    
    
    13,984,826
    
    
    
    8,640,647Other assets
    
    
    7,595,181
    
    
    
    6,331,560$
    502,902,950
    
    
    $
    468,672,241Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    16,527,041
    
    
    $
    21,058,567Interest-bearing
    
    
    321,366,496
    
    
    
    309,570,843Total deposits
    
    
    337,893,537
    
    
    
    330,629,410Federal funds purchased and securities sold under repurchase agreements
    
    
    38,714,711
    
    
    
    15,288,452Other borrowings
    
    
    57,500,000
    
    
    
    50,000,000Accrued interest payable
    
    
    890,214
    
    
    
    947,352Other liabilities
    
    
    6,277,803
    
    
    
    6,214,877Total liabilities
    
    
    441,276,265
    
    
    
    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
    
    
    39,668,653
    
    
    
    39,009,323Retained earnings
    
    
    41,313,441
    
    
    
    42,406,483Accumulated other comprehensive loss
    
    
    (4,372,729
    )
    
    
    (3,303,342
    )Unearned employee stock ownership plan (ESOP) shares,
297,473 and 330,525 shares
    
    
    (2,974,725
    )
    
    
    (3,305,250
    )73,749,172
    
    
    
    74,921,651Treasury stock, at cost, 846,318 and 615,934 shares
    
    
    (12,122,487
    )
    
    
    (9,329,501
    )Total stockholders equity
    
    
    61,626,685
    
    
    
    65,592,150$
    502,902,950
    
    
    $
    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 Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007
 For the Three Months
    
    
    For the Nine Months2008
    
    
    2007
    
    
    2008
    
    
    2007Interest incomeInterest and fees on loans
    
    $
    5,179,786
    
    
    $
    5,701,464
    
    
    $
    15,945,925
    
    
    $
    16,451,101Interest on taxable securities
    
    
    1,268,420
    
    
    
    1,122,206
    
    
    
    3,623,502
    
    
    
    3,100,273Interest on nontaxable securities
    
    
    277,951
    
    
    
    286,710
    
    
    
    902,814
    
    
    
    753,161Interest on federal funds sold
    
    
    37,566
    
    
    
    115,207
    
    
    
    160,934
    
    
    
    492,265Interest on deposits in other banks
    
    
    3,636
    
    
    
    6,065
    
    
    
    14,507
    
    
    
    22,7736,767,359
    
    
    
    7,231,652
    
    
    
    20,647,682
    
    
    
    20,819,573Interest expenseInterest on deposits
    
    
    2,099,516
    
    
    
    2,810,852
    
    
    
    6,753,882
    
    
    
    8,190,573Interest on other borrowings
    
    
    875,147
    
    
    
    717,661
    
    
    
    2,608,850
    
    
    
    1,780,0092,974,663
    
    
    
    3,528,513
    
    
    
    9,362,732
    
    
    
    9,970,582Net interest income
    
    
    3,792,696
    
    
    
    3,703,139
    
    
    
    11,284,950
    
    
    
    10,848,991Provision for loan losses
    
    
    1,218,000
    
    
    
    58,000
    
    
    
    2,400,000
    
    
    
    553,000Net interest income after provision
for loan losses
    
    
    2,574,696
    
    
    
    3,645,139
    
    
    
    8,884,950
    
    
    
    10,295,991Noninterest incomeService charges on deposit accounts
    
    
    1,046,544
    
    
    
    1,061,419
    
    
    
    2,949,962
    
    
    
    2,835,921Other service charges, commissions
and fees
    
    
    314,847
    
    
    
    268,633
    
    
    
    973,650
    
    
    
    884,908Brokerage fees
    
    
    264,662
    
    
    
    293,257
    
    
    
    770,493
    
    
    
    734,664Mortgage origination fees
    
    
    108,894
    
    
    
    90,351
    
    
    
    314,602
    
    
    
    284,662Bank owned life insurance
    
    
    151,360
    
    
    
    90,673
    
    
    
    344,199
    
    
    
    259,729Gain (loss) on sale of securities
    
    
    
    
    
    
    (20,768
    )
    
    
    19,745
    
    
    
    (49,163
    )Impairment loss on securities
    
    
    (3,019,181
    )
    
    
    
    
    
    
    (3,019,181
    )
    
    
    Other
    
    
    33,435
    
    
    
    72,080
    
    
    
    311,554
    
    
    
    201,862(1,099,439
    )
    
    
    1,855,645
    
    
    
    2,665,024
    
    
    
    5,152,583Noninterest expenseSalaries and employee benefits
    
    
    2,353,230
    
    
    
    3,469,295
    
    
    
    6,878,605
    
    
    
    8,123,504Equipment
    
    
    294,381
    
    
    
    280,238
    
    
    
    914,439
    
    
    
    834,740Occupancy
    
    
    303,118
    
    
    
    253,377
    
    
    
    866,913
    
    
    
    757,633Advertising and marketing
    
    
    86,800
    
    
    
    103,657
    
    
    
    343,476
    
    
    
    299,468Legal and accounting
    
    
    129,632
    
    
    
    141,564
    
    
    
    398,435
    
    
    
    332,463Consulting & other professional fees
    
    
    73,821
    
    
    
    236,322
    
    
    
    252,511
    
    
    
    523,403Directors fees and retirement
    
    
    147,310
    
    
    
    338,351
    
    
    
    460,507
    
    
    
    597,755Telecommunications
    
    
    63,003
    
    
    
    55,874
    
    
    
    198,180
    
    
    
    169,910Supplies
    
    
    34,383
    
    
    
    50,104
    
    
    
    147,235
    
    
    
    160,815Data processing fees
    
    
    333,276
    
    
    
    303,237
    
    
    
    974,736
    
    
    
    854,773Other operating
    
    
    870,581
    
    
    
    323,774
    
    
    
    1,786,958
    
    
    
    1,153,8804,689,535
    
    
    
    5,555,793
    
    
    
    13,221,995
    
    
    
    13,808,304Income (loss) before income taxes
    
    
    (3,214,278
    )
    
    
    (55,009
    )
    
    
    (1,672,021
    )
    
    
    1,640,270Applicable income tax benefits
    
    
    (1,452,505
    )
    
    
    (1,217,683
    )
    
    
    (1,177,618
    )
    
    
    (790,356
    )Net income (loss)
    
    $
    (1,761,773
    )
    
    $
    1,162,674
    
    
    $
    (494,403
    )
    
    $
    2,430,626Basic earnings (loss) per share
    
    $
    (0.17
    )
    
    $
    0.11
    
    
    $
    (0.05
    )
    
    $
    0.24Diluted earnings (loss) per share
    
    $
    (0.17
    )
    
    $
    0.11
    
    
    $
    (0.05
    )
    
    $
    0.23
 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 Nine Months Ended September 30, 2008 and 2007
 For the Three Months
    
    
    For the Nine Months2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (1,761,773
    )
    
    $
    1,162,674
    
    
    $
    (494,403
    )
    
    $
    2,430,626Other comprehensive income (loss):Net unrealized gain (loss) on cash flow
hedge arising during the period, net of
tax (benefit) of $114,665 for the
quarter and ($17,810) for the year to
date
    
    
    162,206
    
    
    
    
    
    
    
    (26,713
    )
    
    
    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 $19,609
for the quarter and $39,217 the year to
date
    
    
    (29,413
    )
    
    
    
    
    
    
    (58,826
    )
    
    
    Unrealized holding gains (losses)
arising during the period, net of tax
(benefit) of ($1,016,806) and $433,326
for the quarter and ($2,058,604) and
($508,750) for the year to date
    
    
    (1,525,210
    )
    
    
    659,266
    
    
    
    (3,087,907
    )
    
    
    (774,017
    )Reclassification adjustment for losses
included in net income, net of tax
benefit of $1,207,672 and $8,237 for the
quarter and $1,199,774 and $19,498 for
the year to date
    
    
    1,811,509
    
    
    
    12,531
    
    
    
    1,799,662
    
    
    
    29,665Total other comprehensive income (loss)
    
    
    419,092
    
    
    
    671,797
    
    
    
    (1,069,387
    )
    
    
    (744,352
    )Comprehensive income (loss)
    
    $
    (1,342,681
    )
    
    $
    1,834,471
    
    
    $
    (1,563,790
    )
    
    $
    1,686,274
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Stockholders Equity (Unaudited)
For the Nine Months Ended September 30, 2008 and
The Year Ended December 31, 2007
 AccumulatedOtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    Unearned
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    ESOP Shares
    
    
    Stock
    
    
    Loss
    
    
    TotalBalance, December 31, 2006
    
    
    11,449,155
    
    
    $
    114,492
    
    
    $
    37,807,784
    
    
    $
    40,248,349
    
    
    $
    (3,745,950
    )
    
    $
    (8,518,017
    )
    
    $
    (3,097,880
    )
    
    $
    62,808,778Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105Cash dividend declared, $0.24
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    811,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811,781Repurchase of 61,106 shares
of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (816,227
    )
    
    
    
    
    
    
    (816,227
    )Issuance of 310 shares of
common stock from the
treasury
    
    
    
    
    
    
    
    
    
    
    432
    
    
    
    
    
    
    
    
    
    
    
    4,743
    
    
    
    
    
    
    
    4,853Forfeiture of 14,632 shares
of restricted stock
    
    
    (14,632
    )
    
    
    (147
    )
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,462
    )
    
    
    (205,462
    )Excess tax benefit from
stock based compensation
plans
    
    
    
    
    
    
    
    
    
    
    64,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,119Exercise of stock options
    
    
    9,200
    
    
    
    92
    
    
    
    115,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,368ESOP shares earned, 44,070
shares
    
    
    
    
    
    
    
    
    
    
    210,106
    
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    650,806Balance, December 31, 2007
    
    
    11,443,723
    
    
    
    114,437
    
    
    
    39,009,323
    
    
    
    42,406,483
    
    
    
    (3,305,250
    )
    
    
    (9,329,501
    )
    
    
    (3,303,342
    )
    
    
    65,592,150Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (494,403
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (494,403
    )Cash dividend declared,
$0.21 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (598,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (598,639
    )Repurchase of 230,654 shares
of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,796,565
    )
    
    
    
    
    
    
    (2,796,565
    )Issuance of 270 shares of
treasury stock
    
    
    
    
    
    
    
    
    
    
    (533
    )
    
    
    
    
    
    
    
    
    
    
    3,579
    
    
    
    
    
    
    
    3,046Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,069,387
    )
    
    
    (1,069,387
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    608,808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608,808Issuance of restricted stock
    
    
    9,505
    
    
    
    95
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Excess tax from stock based
compensation plans
    
    
    
    
    
    
    
    
    
    
    (1,780
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,780
    )ESOP shares
earned, 33,052
shares
    
    
    
    
    
    
    
    
    
    
    52,930
    
    
    
    
    
    
    
    330,525
    
    
    
    
    
    
    
    
    
    
    
    383,455Balance, September 30, 2008
    
    
    11,453,228
    
    
    $
    114,532
    
    
    $
    39,668,653
    
    
    $
    41,313,441
    
    
    $
    (2,974,725
    )
    
    $
    (12,122,487
    )
    
    $
    (4,372,729
    )
    
    $
    61,626,685
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007
 For the Nine Months2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    (494,403
    )
    
    $
    2,430,626Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    733,986
    
    
    
    733,800Provision for loan losses
    
    
    2,400,000
    
    
    
    553,000ESOP compensation expense
    
    
    383,455
    
    
    
    502,533Stock-based compensation expense
    
    
    608,808
    
    
    
    616,067Provision for deferred taxes
    
    
    (2,249,432
    )
    
    
    (99,256
    )Net (gain) loss on sale of securities available for sale
    
    
    (19,745
    )
    
    
    49,163Impairment loss on securities available for sale
    
    
    3,019,181
    
    
    
    Net gain on termination of cash flow hedge
    
    
    898,725
    
    
    
    Accretion of gain on termination of cash flow hedge
    
    
    (98,043
    )
    
    
    Net increase in foreclosed assets
    
    
    (1,856,868
    )
    
    
    (23,758
    )Increase in bank owned life insurance
    
    
    (344,179
    )
    
    
    (259,730
    )Increase in interest receivable
    
    
    (230,598
    )
    
    
    (838,291
    )Increase (decrease) in interest payable
    
    
    (57,138
    )
    
    
    169,438Increase (decrease) in taxes payable
    
    
    1,067,296
    
    
    
    (1,935,588
    )Net other operating activities
    
    
    258,446
    
    
    
    1,529,474Total adjustments
    
    
    4,513,894
    
    
    
    996,852Net cash provided by operating activities
    
    
    4,019,491
    
    
    
    3,427,478INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    (203,379
    )
    
    
    1,740,453Purchases of securities available for sale
    
    
    (44,536,347
    )
    
    
    (51,143,567
    )Proceeds from maturities of securities available for sale
    
    
    10,879,670
    
    
    
    6,690,640Proceeds from sale of securities available for sale
    
    
    20,451,970
    
    
    
    12,490,449Purchase of bank owned life insurance
    
    
    (5,000,000
    )
    
    
    Net change in Federal home loan bank stock
    
    
    (441,100
    )
    
    
    (470,300
    )Purchase of other equity securities
    
    
    (1,010,000
    )
    
    
    Decrease in federal funds sold
    
    
    680,000
    
    
    
    10,411,000Increase in loans, net
    
    
    (9,703,141
    )
    
    
    (20,278,275
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    249,622Purchase of premises and equipment
    
    
    (2,754,281
    )
    
    
    (2,481,949
    )Net cash used in investing activities
    
    
    (31,636,608
    )
    
    
    (42,791,927
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    7,264,127
    
    
    
    18,120,845Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    23,426,259
    
    
    
    12,291,371Repayment of other borrowings
    
    
    (20,500,000
    )
    
    
    Proceeds from other borrowings
    
    
    28,000,000
    
    
    
    10,000,000Excess tax related to stock-based compensation plans
    
    
    (1,780
    )
    
    
    Purchase of treasury stock, net
    
    
    (2,793,519
    )
    
    
    (811,755
    )Dividends paid to stockholders
    
    
    (598,639
    )
    
    
    (585,438
    )Net cash provided by financing activities
    
    
    34,796,448
    
    
    
    39,015,023Net increase (decrease) in cash and due from banks
    
    
    7,179,331
    
    
    
    (349,426
    )Cash and due from banks at beginning of period
    
    
    8,953,836
    
    
    
    9,781,232Cash and due from banks at end of period
    
    $
    16,133,167
    
    
    $
    9,431,806SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    9,419,870
    
    
    $
    9,801,144Taxes
    
    
    6,300
    
    
    
    1,147,254NONCASH TRANSACTIONSIncrease in unrealized losses on securities available for sale
    
    $
    5,146,511
    
    
    $
    1,282,776Decrease in unrealized gain on termination of cash flow hedges
    
    
    391,396
    
    
    
    Increase in unrealized losses on cash flow hedges
    
    
    44,523
    
    
    
    
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1   BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
     NOTE 2   EARNINGS PER SHARE
  Three Months
    
    
    Nine Months2008
    
    
    2007
    
    
    2008
    
    
    2007Basic earnings per share:Net income (loss)
    
    $
    (1,761,773
    )
    
    $
    1,162,674
    
    
    $
    (494,403
    )
    
    $
    2,430,626Weighted average common
shares outstanding
    
    
    10,215,179
    
    
    
    10,349,924
    
    
    
    10,236,257
    
    
    
    10,337,310Total basic earnings
per common share
    
    $
    (0.17
    )
    
    $
    0.11
    
    
    $
    (0.05
    )
    
    $
    0.24Diluted earnings per share:Net income (loss)
    
    $
    (1,761,773
    )
    
    $
    1,162,674
    
    
    $
    (494,403
    )
    
    $
    2,430,626Weighted average common
shares outstanding
    
    
    10,215,179
    
    
    
    10,349,924
    
    
    
    10,236,257
    
    
    
    10,337,310Effect of dilutive
stock options and
restricted stock
    
    
    
    
    
    
    52,389
    
    
    
    
    
    
    
    67,020Weighted average
dilutive common shares
outstanding
    
    
    10,215,179
    
    
    
    10,402,313
    
    
    
    10,236,257
    
    
    
    10,404,330Total diluted
earnings per common
share
    
    $
    (0.17
    )
    
    $
    0.11
    
    
    $
    (0.05
    )
    
    $
    0.23
 8




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3   SHARE BASED COMPENSATION
    NOTE 4   DERIVATIVE FINANCIAL INSTRUMENTS
    9




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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
    
    $
    
    
    
    $
    115,925,389
    
    
    $
    
    
    
    $
    115,925,389Total assets at fair value
    
    $
    
    
    
    $
    115,925,389
    
    
    $
    
    
    
    $
    115,925,389LiabilitiesDerivative financial instruments
    
    $
    
    
    
    $
    44,523
    
    
    $
    
    
    
    $
    44,523Total liabilities at fair value
    
    $
    
    
    
    $
    44,523
    
    
    $
    
    
    
    $
    44,523
 10




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
    11




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##### Table of Contents



Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    39,437Financial stand-by letters of credit
    
    
    4,986$
    44,423
 12




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##### Table of Contents



Comparison of Financial Condition at September 30, 2008 and December 31, 2007
         13




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##### Table of Contents



Comparison of Operating Results
 General
 For the three months ended September 30, 2008 and 2007
  For the nine months ended September 30, 2008 and 2007
  Reconciliation of net income to adjusted net income
  Unaudited Reconciliation of Net Income to Adjusted Net Income
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008Net income (loss)
    
    $
    (1,762
    )
    
    $
    1,163
    
    
    $
    (494
    )
    
    $
    2,431Impairment loss on securities, net of tax
    
    
    1,812
    
    
    
    
    
    
    
    1,812
    
    
    
    Charges to accelerate vesting on
retirement plans, after tax
    
    
    
    
    
    
    947
    
    
    
    
    
    
    
    947Reversal of contingent income tax liability
    
    
    
    
    
    
    (1,060
    )
    
    
    
    
    
    
    (1,060
    )Adjusted net income
    
    $
    50
    
    
    $
    1,050
    
    
    $
    1,318
    
    
    $
    2,318Diluted earnings (loss) per share
    
    $
    (0.17
    )
    
    $
    0.11
    
    
    $
    (0.05
    )
    
    $
    0.23Impairment loss on securities, net of tax
    
    
    0.18
    
    
    
    
    
    
    
    0.17Charges to accelerate vesting on
retirement plans, after tax
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    0.09Reversal of contingent income tax liability
    
    
    
    
    
    
    (0.10
    )
    
    $
    
    
    
    $
    (0.10
    )Adjusted earnings per diluted share
    
    $
    0.01
    
    
    $
    (0.10
    )
    
    $
    0.12
    
    
    $
    0.22
  14




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##### Table of Contents



Interest Income
 For the three months ended September 30, 2008 and 2007
  For the nine months ended September 30, 2008 and 2007
  Interest Expense
 For the three months ended September 30, 2008 and 2007
  For the nine months ended September 30, 2008 and 2007
  15




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##### Table of Contents



Net Interest Income
 For the three months ended September 30, 2008 and 2007
  For the nine months ended September 30, 2008 and 2007
  General Comments on Interest Rates
   Provision for Loan Losses
 For the three months and nine months ended September 30, 2008 and 2007
    16




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##### Table of Contents



Impairment Losses on Securities
   17




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##### Table of Contents



Noninterest Income
  Three Months Ended September 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    1,046,544
    
    
    $
    1,061,419
    
    
    $
    (14,875
    )
    
    
    -1.40
    %Other service charges, commissions and fees
    
    
    314,847
    
    
    
    268,633
    
    
    
    46,214
    
    
    
    17.20
    %Brokerage fees
    
    
    264,662
    
    
    
    293,257
    
    
    
    (28,595
    )
    
    
    -9.75
    %Mortgage origination fees
    
    
    108,894
    
    
    
    90,351
    
    
    
    18,543
    
    
    
    20.52
    %Bank owned life insurance
    
    
    151,360
    
    
    
    90,673
    
    
    
    60,687
    
    
    
    66.93
    %Other
    
    
    33,435
    
    
    
    72,080
    
    
    
    (38,645
    )
    
    
    -53.61
    %Total noninterest income
    
    $
    1,919,742
    
    
    $
    1,876,413
    
    
    $
    43,329
    
    
    
    2.31
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.55
    %
    
    
    1.66
    %
 Nine Months Ended September 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    2,949,962
    
    
    $
    2,835,921
    
    
    $
    114,041
    
    
    
    4.02
    %Other service charges, commissions and fees
    
    
    973,650
    
    
    
    884,908
    
    
    
    88,742
    
    
    
    10.03
    %Brokerage fees
    
    
    770,493
    
    
    
    734,664
    
    
    
    35,829
    
    
    
    4.88
    %Mortgage origination fees
    
    
    314,602
    
    
    
    284,662
    
    
    
    29,940
    
    
    
    10.52
    %Bank owned life insurance
    
    
    344,199
    
    
    
    259,729
    
    
    
    84,470
    
    
    
    32.52
    %Other
    
    
    311,554
    
    
    
    201,862
    
    
    
    109,692
    
    
    
    54.34
    %Total noninterest income
    
    $
    5,664,460
    
    
    $
    5,201,746
    
    
    $
    462,714
    
    
    
    8.90
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.56
    %
    
    
    1.57
    %
     18




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##### Table of Contents



1 2
 Noninterest Expense
  Three Months Ended September 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,353,230
    
    
    $
    3,469,295
    
    
    $
    (1,116,065
    )
    
    
    -32.17
    %Equipment
    
    
    294,381
    
    
    
    280,238
    
    
    
    14,143
    
    
    
    5.05
    %Occupancy
    
    
    303,118
    
    
    
    253,377
    
    
    
    49,741
    
    
    
    19.63
    %Advertising and marketing
    
    
    86,800
    
    
    
    103,657
    
    
    
    (16,857
    )
    
    
    -16.26
    %Legal and accounting
    
    
    129,632
    
    
    
    141,564
    
    
    
    (11,932
    )
    
    
    -8.43
    %Consulting & other professional fees
    
    
    73,821
    
    
    
    236,322
    
    
    
    (162,501
    )
    
    
    -68.76
    %Directors fees and retirement
    
    
    147,310
    
    
    
    338,351
    
    
    
    (191,041
    )
    
    
    -56.46
    %Telecommunications
    
    
    63,003
    
    
    
    55,874
    
    
    
    7,129
    
    
    
    12.76
    %Supplies
    
    
    34,383
    
    
    
    50,104
    
    
    
    (15,721
    )
    
    
    -31.38
    %Data processing fees
    
    
    333,276
    
    
    
    303,237
    
    
    
    30,039
    
    
    
    9.91
    %Other operating
    
    
    870,581
    
    
    
    323,774
    
    
    
    546,807
    
    
    
    168.89
    %Total noninterest expenses
    
    $
    4,689,535
    
    
    $
    5,555,793
    
    
    $
    (866,258
    )
    
    
    -15.59
    %Noninterest expenses as a
percentage of average assets
(annualized)
    
    
    3.78
    %
    
    
    4.90
    %
 Nine Months Ended September 30,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    6,878,605
    
    
    $
    8,123,504
    
    
    $
    (1,244,899
    )
    
    
    -15.32
    %Equipment
    
    
    914,439
    
    
    
    834,740
    
    
    
    79,699
    
    
    
    9.55
    %Occupancy
    
    
    866,913
    
    
    
    757,633
    
    
    
    109,280
    
    
    
    14.42
    %Advertising and marketing
    
    
    343,476
    
    
    
    299,468
    
    
    
    44,008
    
    
    
    14.70
    %Legal and accounting
    
    
    398,435
    
    
    
    332,463
    
    
    
    65,972
    
    
    
    19.84
    %Consulting & other professional fees
    
    
    252,511
    
    
    
    523,403
    
    
    
    (270,892
    )
    
    
    -51.76
    %Directors fees and retirement
    
    
    460,507
    
    
    
    597,755
    
    
    
    (137,248
    )
    
    
    -22.96
    %Telecommunications
    
    
    198,180
    
    
    
    169,910
    
    
    
    28,270
    
    
    
    16.64
    %Supplies
    
    
    147,235
    
    
    
    160,815
    
    
    
    (13,580
    )
    
    
    -8.44
    %Data processing fees
    
    
    974,736
    
    
    
    854,733
    
    
    
    120,003
    
    
    
    14.04
    %Other operating
    
    
    1,786,958
    
    
    
    1,153,880
    
    
    
    633,078
    
    
    
    54.87
    %Total noninterest expenses
    
    $
    13,221,995
    
    
    $
    13,808,304
    
    
    $
    (586,309
    )
    
    
    -4.25
    %Noninterest expenses as a
percentage of average assets
(annualized)
    
    
    3.63
    %
    
    
    4.18
    %
    19




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##### Table of Contents



Income Tax Expense
   Liquidity and Capital Resources
   20




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##### Table of Contents



Regulatory Capital Ratios for HeritageBank of the South at September 30, 2008
  Minimum Requiredto Be Well CapitalizedFor Capital
    
    
    Under PromptAdequacy
    
    
    Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Total Capital to Risk Weighted Assets
    
    $
    59,937
    
    
    
    16.1
    %
    
    $
    29,772
    
    
    
    8.0
    %
    
    $
    37,215
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    55,278
    
    
    
    14.9
    
    
    
    14,886
    
    
    
    4.0
    
    
    
    22,329
    
    
    
    6.0Tier I Capital to Average Total Assets
    
    
    55,278
    
    
    
    11.3
    
    
    
    19,496
    
    
    
    4.0
    
    
    
    24,370
    
    
    
    5.0
  Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises
    21




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##### Table of Contents



22




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       Market Rate
    
    Effect on NetChange
    
    Interest Income+300
    
    
    7.66
    %+200
    
    
    8.24
    %+100
    
    
    7.27
    %-100
    
    
    -9.47
    %-200
    
    
    -14.51
    %-300
    
    
    -16.50
    %
  23




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    24




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  Difficult market conditions and economic trends have adversely affected our industry and our
business.
     Recent legislative and regulatory initiatives to address these difficult market and economic
conditions may not stabilize the U.S. banking system.
  25




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##### Table of Contents



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 ProgramsJuly
    
    
    11,621
    
    
    $
    10.38
    
    
    
    11,621
    
    
    
    45,533August
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,533September
    
    
    37,293
    
    
    
    10.29
    
    
    
    37,293
    
    
    
    8,240Total
    
    
    48,914
    
    
    $
    10.31
    
    
    
    48,914
    
    
    
    8,240
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  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
 26




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: November 14, 2008
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive OfficerDate: November 14, 2008
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 27