##### 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, 2009  Commission File Number 000-51305
 
 
 
 HERITAGE FINANCIAL GROUP
   721 N. Westover Blvd., Albany, GA 31707
229-420-0000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ
 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, 2009 AND DECEMBER 31, 2008
    
    
    3CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND THE YEAR ENDED
DECEMBER 31, 2008
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    17ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    28ITEM 4. CONTROLS AND PROCEDURES
    
    
    29PART II  OTHER INFORMATION
    
    
    30SIGNATURES
    
    
    32EX-31.1EX-31.2EX-32




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
June 30, 2009 and December 31, 2008
 Unaudited
    
    
    AuditedJune 30,
    
    
    December 31,2009
    
    
    2008AssetsCash and due from banks
    
    $
    17,759,744
    
    
    $
    10,159,602Interest-bearing deposits in banks
    
    
    628,866
    
    
    
    745,758Federal funds sold
    
    
    1,370,000
    
    
    
    30,254,000Securities available for sale, at fair value
    
    
    114,262,861
    
    
    
    116,140,525Federal home loan bank stock, at cost
    
    
    3,253,400
    
    
    
    3,185,800Other equity securities, at cost
    
    
    1,010,000
    
    
    
    1,010,000Loans
    
    
    295,880,557
    
    
    
    302,487,892Less allowance for loan losses
    
    
    5,746,501
    
    
    
    4,950,722Loans, net
    
    
    290,134,056
    
    
    
    297,537,170Premises and equipment, net
    
    
    16,711,616
    
    
    
    16,801,183Accrued interest receivable
    
    
    1,940,205
    
    
    
    2,155,327Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Foreclosed assets
    
    
    907,384
    
    
    
    2,119,818Cash surrender value of bank owned life insurance
    
    
    14,445,602
    
    
    
    14,136,119Other assets
    
    
    7,561,533
    
    
    
    6,812,425$
    470,985,267
    
    
    $
    502,057,727Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    18,747,180
    
    
    $
    19,100,197Interest-bearing
    
    
    305,176,522
    
    
    
    319,445,797Total deposits
    
    
    323,923,702
    
    
    
    338,545,994Federal funds purchased and securities sold under repurchase agreements
    
    
    34,744,908
    
    
    
    41,497,491Other borrowings
    
    
    42,500,000
    
    
    
    52,500,000Accrued interest payable
    
    
    703,369
    
    
    
    1,045,042Other liabilities
    
    
    6,981,758
    
    
    
    6,256,227Total liabilities
    
    
    408,853,737
    
    
    
    439,844,754Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,452,344 issued and outstanding
    
    
    114,523
    
    
    
    114,523Capital surplus
    
    
    40,264,835
    
    
    
    39,861,237Retained earnings
    
    
    41,498,603
    
    
    
    41,357,209Accumulated other comprehensive loss
    
    
    (3,111,008
    )
    
    
    (2,685,633
    )Unearned employee stock ownership plan (ESOP) shares,
264,420 and 286,455 shares
    
    
    (2,644,200
    )
    
    
    (2,864,550
    )76,122,753
    
    
    
    75,782,786Treasury stock, at cost, 1,042,254 and 993,498 shares
    
    
    (13,991,223
    )
    
    
    (13,569,813
    )Total stockholders equity
    
    
    62,131,530
    
    
    
    62,212,973$
    470,985,267
    
    
    $
    502,057,727
 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 Six Months Ended June 30, 2009 and 2008
 For the Three Months
    
    
    For the Six Months2009
    
    
    2008
    
    
    2009
    
    
    2008Interest incomeInterest and fees on loans
    
    $
    4,528,408
    
    
    
    5,289,433
    
    
    $
    9,121,697
    
    
    $
    10,766,139Interest on taxable securities
    
    
    914,579
    
    
    
    1,205,193
    
    
    
    2,140,288
    
    
    
    2,355,082Interest on nontaxable securities
    
    
    293,379
    
    
    
    298,314
    
    
    
    586,022
    
    
    
    624,863Interest on federal funds sold
    
    
    15,424
    
    
    
    51,614
    
    
    
    31,976
    
    
    
    123,368Interest on deposits in other banks
    
    
    172
    
    
    
    2,723
    
    
    
    434
    
    
    
    10,8715,751,962
    
    
    
    6,847,277
    
    
    
    11,880,417
    
    
    
    13,880,323Interest expenseInterest on deposits
    
    
    1,683,235
    
    
    
    2,129,761
    
    
    
    3,570,996
    
    
    
    4,654,366Interest on other borrowings
    
    
    644,306
    
    
    
    914,860
    
    
    
    1,328,938
    
    
    
    1,733,7032,327,541
    
    
    
    3,044,621
    
    
    
    4,899,934
    
    
    
    6,388,069Net interest income
    
    
    3,424,421
    
    
    
    3,802,656
    
    
    
    6,980,483
    
    
    
    7,492,254Provision for loan losses
    
    
    500,000
    
    
    
    782,000
    
    
    
    1,300,000
    
    
    
    1,182,000Net interest income after
provision for loan losses
    
    
    2,924,421
    
    
    
    3,020,656
    
    
    
    5,680,483
    
    
    
    6,310,254Noninterest incomeService charges on deposit accounts
    
    
    836,648
    
    
    
    976,140
    
    
    
    1,644,483
    
    
    
    1,903,418Other service charges, commissions and
fees
    
    
    362,264
    
    
    
    331,734
    
    
    
    722,110
    
    
    
    658,803Brokerage fees
    
    
    215,965
    
    
    
    261,796
    
    
    
    410,323
    
    
    
    505,831Mortgage origination fees
    
    
    103,496
    
    
    
    116,914
    
    
    
    209,180
    
    
    
    205,708Bank owned life insurance
    
    
    159,342
    
    
    
    99,384
    
    
    
    309,482
    
    
    
    192,839Gain on sale of securities
    
    
    344,731
    
    
    
    7,386
    
    
    
    366,129
    
    
    
    19,745Other
    
    
    16,090
    
    
    
    205,982
    
    
    
    22,295
    
    
    
    278,1192,038,536
    
    
    
    1,999,336
    
    
    
    3,684,002
    
    
    
    3,764,463Noninterest expenseSalaries and employee benefits
    
    
    2,226,667
    
    
    
    2,224,418
    
    
    
    4,424,356
    
    
    
    4,525,375Equipment
    
    
    265,778
    
    
    
    298,898
    
    
    
    539,166
    
    
    
    620,058Occupancy
    
    
    296,916
    
    
    
    272,164
    
    
    
    589,263
    
    
    
    563,795Advertising and marketing
    
    
    110,705
    
    
    
    111,345
    
    
    
    198,229
    
    
    
    256,676Legal and accounting
    
    
    154,778
    
    
    
    141,972
    
    
    
    272,658
    
    
    
    268,803Consulting & other professional fees
    
    
    90,837
    
    
    
    85,098
    
    
    
    152,409
    
    
    
    178,690Directors fees and retirement
    
    
    153,108
    
    
    
    160,263
    
    
    
    306,216
    
    
    
    313,197Telecommunications
    
    
    54,372
    
    
    
    63,258
    
    
    
    116,328
    
    
    
    135,177Supplies
    
    
    46,191
    
    
    
    55,008
    
    
    
    84,303
    
    
    
    112,852Data processing fees
    
    
    383,221
    
    
    
    337,247
    
    
    
    713,181
    
    
    
    641,460(Gain) loss on sale and write-downs of
other real estate owned
    
    
    255,004
    
    
    
    80,250
    
    
    
    304,068
    
    
    
    79,445Foreclosed asset expenses
    
    
    48,238
    
    
    
    32,945
    
    
    
    93,228
    
    
    
    82,655FDIC insurance and other regulatory fees
    
    
    283,930
    
    
    
    69,126
    
    
    
    364,886
    
    
    
    128,360Other operating
    
    
    371,905
    
    
    
    244,954
    
    
    
    698,038
    
    
    
    625,9174,741,650
    
    
    
    4,176,946
    
    
    
    8,856,329
    
    
    
    8,532,460Income before income taxes
    
    
    221,307
    
    
    
    843,046
    
    
    
    508,156
    
    
    
    1,542,257Applicable income tax (benefits)
    
    
    66,530
    
    
    
    155,215
    
    
    
    (41,244
    )
    
    
    274,887Net income
    
    $
    154,777
    
    
    $
    687,831
    
    
    $
    549,400
    
    
    $
    1,267,370Basic earnings per share
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    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, 2009 and 2008
 For the Three Months
    
    
    For the Six Months2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    154,777
    
    
    $
    687,831
    
    
    $
    549,400
    
    
    $
    1,267,370Other 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
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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    539,235Elimination 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 $35,187 and
$19,608 for the quarter and
$70,373 and $19,608 for the
year to date
    
    
    (52,780
    )
    
    
    (29,412
    )
    
    
    (105,560
    )
    
    
    (29,412
    )Unrealized holding losses on
investments arising during the
period, net of tax benefit of
$204,179 and $1,461,489 for
the quarter and $66,758 and
$1,041,798 for the year to
date
    
    
    (306,268
    )
    
    
    (2,192,233
    )
    
    
    (100,138
    )
    
    
    (1,562,697
    )Reclassification adjustment
for investment gains included
in net income, net of tax of
$137,892 and $2,954 for the
quarter and $146,452 and
$7,898 for the year to date
    
    
    (206,839
    )
    
    
    (4,432
    )
    
    
    (219,677
    )
    
    
    (11,847
    )Total other comprehensive loss
    
    
    (565,887
    )
    
    
    (2,414,997
    )
    
    
    (425,375
    )
    
    
    (1,488,479
    )Comprehensive income (loss)
    
    $
    (411,110
    )
    
    $
    (1,727,166
    )
    
    $
    124,025
    
    
    $
    (221,109
    )
 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 Six Months Ended June 30, 2009 and
The Year Ended December 31, 2008
 AccumulatedUnearned
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2007
    
    
    11,443,723
    
    
    $
    114,437
    
    
    $
    39,009,323
    
    
    $
    42,406,483
    
    
    $
    (3,305,250
    )
    
    $
    (9,329,501
    )
    
    $
    (3,303,342
    )
    
    $
    65,592,150Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262,360
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262,360
    )Cash dividend declared, $0.28
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,914
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,914
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    809,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809,086Repurchase of 377,894 shares
of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,244,715
    )
    
    
    
    
    
    
    (4,244,715
    )Issuance of 330 shares of
common stock from the
treasury
    
    
    
    
    
    
    
    
    
    
    (836
    )
    
    
    
    
    
    
    
    
    
    
    4,403
    
    
    
    
    
    
    
    3,567Issuance of restricted stock
    
    
    9,505
    
    
    
    95
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (884
    )
    
    
    (9
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    617,709
    
    
    
    617,709Excess tax expense from stock
based compensation plans
    
    
    
    
    
    
    
    
    
    
    (3,432
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,432
    )ESOP shares earned, 44,070
shares
    
    
    
    
    
    
    
    
    
    
    47,182
    
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    487,882Balance, December 31, 2008
    
    
    11,452,344
    
    
    
    114,523
    
    
    
    39,861,237
    
    
    
    41,357,209
    
    
    
    (2,864,550
    )
    
    
    (13,569,813
    )
    
    
    (2,685,633
    )
    
    
    62,212,973Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549,400Cash dividend declared, $0.16
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408,006
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408,006
    )Repurchase of 49,026 shares
of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425,036
    )
    
    
    
    
    
    
    (425,036
    )Issuance of 270 shares of
common stock from the
treasury
    
    
    
    
    
    
    
    
    
    
    (1,730
    )
    
    
    
    
    
    
    
    
    
    
    3,626
    
    
    
    
    
    
    
    1,896Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425,375
    )
    
    
    (425,375
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    403,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403,593ESOP shares earned, 22,035
shares
    
    
    
    
    
    
    
    
    
    
    1,735
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    222,085Balance, June 30, 2009
    
    
    11,452,344
    
    
    $
    114,523
    
    
    $
    40,264,835
    
    
    $
    41,498,603
    
    
    $
    (2,644,200
    )
    
    $
    (13,991,223
    )
    
    $
    (3,111,008
    )
    
    $
    62,131,530
 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 Six Months Ended June 30, 2009 and 2008
 For the Six Months2009
    
    
    2008OPERATING ACTIVITIESNet income
    
    $
    549,400
    
    
    $
    1,267,370Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    454,227
    
    
    
    502,548Provision for loan losses
    
    
    1,300,000
    
    
    
    1,182,000ESOP compensation expense
    
    
    222,085
    
    
    
    269,493Stock-based compensation expense
    
    
    403,593
    
    
    
    405,872Net gain on sale of securities available for sale
    
    
    (366,129
    )
    
    
    (19,745
    )Proceeds on termination of cash flow hedge
    
    
    
    
    
    
    898,725Accretion of gain on termination of cash flow hedge
    
    
    (175,933
    )
    
    
    (49,020
    )Increase in bank owned life insurance
    
    
    (309,483
    )
    
    
    (192,819
    )Increase in interest receivable
    
    
    215,122
    
    
    
    319,196Decrease in interest payable
    
    
    (341,673
    )
    
    
    (174,474
    )Increase (decrease) in taxes payable
    
    
    (400,037
    )
    
    
    274,887Loss on sale and write-downs of other real estate owned
    
    
    304,068
    
    
    
    79,445Net other operating activities
    
    
    660,043
    
    
    
    (1,089,738
    )Total adjustments
    
    
    1,965,883
    
    
    
    2,406,370Net cash provided by operating activities
    
    
    2,515,283
    
    
    
    3,673,740INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    116,892
    
    
    
    (61,078
    )Purchases of securities available for sale
    
    
    (46,362,401
    )
    
    
    (40,561,986
    )Proceeds from maturities of securities available for sale
    
    
    21,403,154
    
    
    
    8,616,448Proceeds from sale of securities available for sale
    
    
    26,670,015
    
    
    
    20,451,970Purchase of bank owned life insurance
    
    
    
    
    
    
    (5,000,000
    )Net change in Federal home loan bank stock
    
    
    (67,600
    )
    
    
    (778,600
    )Decrease in federal funds sold
    
    
    28,884,000
    
    
    
    8,356,000(Increase) decrease in loans, net
    
    
    5,933,050
    
    
    
    (13,848,312
    )Purchase of premises and equipment
    
    
    (364,660
    )
    
    
    (2,256,862
    )Proceeds from sale of other real estate owned
    
    
    1,078,430
    
    
    
    362,835Net cash provided by (used in) investing activities
    
    
    37,290,880
    
    
    
    (24,719,585
    )FINANCING ACTIVITIESDecrease in deposits
    
    
    (14,622,292
    )
    
    
    (9,235,631
    )Increase (decrease) in federal funds purchased and securities sold
under agreement to repurchase
    
    
    (6,752,583
    )
    
    
    15,340,955Proceeds from other borrowings
    
    
    
    
    
    
    15,000,000Repayment of other borrowings
    
    
    (10,000,000
    )
    
    
    Purchase of treasury stock, net
    
    
    (423,140
    )
    
    
    (2,290,619
    )Dividends paid to stockholders
    
    
    (408,006
    )
    
    
    (404,436
    )Net cash provided by (used in) financing activities
    
    
    (32,206,021
    )
    
    
    18,410,269Net increase (decrease) in cash and due from banks
    
    
    7,600,142
    
    
    
    (2,635,576
    )Cash and due from banks at beginning of period
    
    
    10,159,602
    
    
    
    8,953,836Cash and due from banks at end of period
    
    $
    17,759,744
    
    
    $
    6,318,260SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    5,241,607
    
    
    $
    6,562,543Taxes
    
    
    358,793
    
    
    
    NONCASH TRANSACTIONSIncrease in unrealized losses on securities available for sale
    
    $
    533,025
    
    
    $
    2,624,239Decrease in unrealized gain on termination of cash flow hedges
    
    
    
    
    
    
    391,396Increase in unrealized losses on cash flow hedges
    
    
    
    
    
    
    314,866Principal balances of loans transferred to other real estate owned
    
    
    199,896
    
    
    
    2,511,018
 See Notes to Consolidated Financial Statements.
 7




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1   BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
 The accompanying consolidated financial information of the Company is unaudited; however,
such information reflects all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of the
financial position and results of operations. The results of operations for the three and
six months ended June 30, 2009, are not necessarily indicative of the results that may be
expected for the full year. These statements should be read in conjunction with the
consolidated financial statements and related notes included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008.
 The consolidated financial statements include the accounts of the Company and its
subsidiary. Significant intercompany transactions and balances have been eliminated in
consolidation.
 In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 Material estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the valuation of
foreclosed real estate, contingent assets and liabilities and deferred tax assets.
 NOTE 2   EARNINGS PER SHARE
 Basic earnings per share represent income available to common shareholders divided by the
weighted-average number of common shares outstanding during the period, excluding
unallocated shares of the Employee Stock Ownership Plan. The table below sets forth our
earnings per share for the three and six months ended June 30, 2009 and 2008:
 Three Months
    
    
    Six Months2009
    
    
    2008
    
    
    2009
    
    
    2008Basic earnings per share:Net income
    
    $
    154,777
    
    
    $
    687,831
    
    
    $
    549,400
    
    
    $
    1,267,370Weighted average common
shares outstanding
    
    
    10,039,847
    
    
    
    10,210,936
    
    
    
    10,033,052
    
    
    
    10,246,912Total basic earnings
per common share
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12Diluted earnings per share:Net income
    
    $
    154,777
    
    
    $
    687,831
    
    
    $
    549,400
    
    
    $
    1,267,370Weighted average common
shares outstanding
    
    
    10,039,847
    
    
    
    10,210,936
    
    
    
    10,033,052
    
    
    
    10,246,912Effect of dilutive
stock options and
restricted stock
    
    
    
    
    
    
    1,799
    
    
    
    
    
    
    
    1,988Weighted average
dilutive common shares
outstanding
    
    
    10,039,847
    
    
    
    10,212,735
    
    
    
    10,033,052
    
    
    
    10,248,900Total diluted
earnings per common
share
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
 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
 On May 17, 2006, our stockholders approved the 2006 Equity Incentive Plan (the Plan).
The purpose of the Plan is to promote the long-term growth and profitability of Heritage
Financial Group, to provide directors, advisory directors, officers and employees of
Heritage Financial Group and its affiliates with an incentive to achieve corporate
objectives, to attract and retain individuals of outstanding competence and to provide
such individuals with an equity interest in Heritage Financial Group. Under the Plan,
the Compensation Committee of the Board of Directors has discretion to award up to
771,149 shares, of which 550,281 were available as stock options or stock appreciation
rights and 220,328 shares were available as restricted stock awards. During 2006, the
Compensation Committee of the Board of Directors granted stock options and tandem stock
appreciation rights totaling 520,605 shares and granted restricted stock awards totaling
207,905 shares. During the first quarter of 2008, an additional 19,750 of tandem stock
option and stock appreciation rights, and 9,505 of restricted stock awards were granted
to employees. There were no grants of restricted stock, stock options, or stock
appreciation rights during the two quarters ended June 30, 2009. All stock options,
stock appreciation rights and restricted stock awards vest over a period of five years.
 The Company granted restricted stock awards that may not be sold or otherwise transferred
until certain restrictions have lapsed. The share based expense for these awards was
determined based on the market price of our stock at the date of grant applied to the
total number of shares that were anticipated to fully vest, amortized over the vesting
period. As of June 30, 2009, there was approximately $976,000 of unrecognized
compensation associated with these awards expected to be recognized over the next 2
years. For the three months ended June 30, 2009 and 2008, we recognized compensation
expense associated with these awards of approximately $124,000 and $131,000,
respectively. For the six months ended June 30, 2009 and 2008, we recognized
compensation expense associated with these awards of approximately $248,000 and $250,000,
respectively.
 We recognized compensation expense related to stock options of approximately $78,000 and
$84,000 for the three months ended June 30, 2009, and 2008, respectively. For the six
months ended June 30, 2009 and 2008, we recognized compensation expense related to these
options of $155,000 and $156,000, respectively. At June 30, 2009, there was
approximately $601,000 of unrecognized compensation related to stock options expected to
be recognized over the next two years.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4  SECURITIES
 The amortized cost and fair value of securities available for sale with gross unrealized
gains and losses are summarized as follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 30, 2009:U. S. Government sponsored
agency securities
    
    $
    19,521,863
    
    
    $
    115,896
    
    
    $
    (253,851
    )
    
    $
    19,383,908State and municipal securities
    
    
    30,677,838
    
    
    
    66,509
    
    
    
    (2,130,640
    )
    
    
    28,613,707Corporate debt securities
    
    
    2,183,404
    
    
    
    
    
    
    
    (358,423
    )
    
    
    1,824,981Asset-backed securities
    
    
    6,327,197
    
    
    
    64,395
    
    
    
    (26,599
    )
    
    
    6,364,993Mortgage-backed securities
    
    
    57,490,249
    
    
    
    781,732
    
    
    
    (486,959
    )
    
    
    57,785,022Total debt securities
    
    
    116,200,551
    
    
    
    1,028,532
    
    
    
    (3,256,472
    )
    
    
    113,972,611Equity securities
    
    
    434,801
    
    
    
    28,199
    
    
    
    (172,750
    )
    
    
    290,250Total securities
    
    $
    116,635,352
    
    
    $
    1,056,731
    
    
    $
    (3,429,222
    )
    
    $
    114,262,861December 31, 2008:U. S. Government sponsored agency securities
    
    $
    20,923,967
    
    
    $
    248,091
    
    
    $
    (7,077
    )
    
    $
    21,164,981State and municipal securities
    
    
    30,052,558
    
    
    
    60,677
    
    
    
    (2,602,013
    )
    
    
    27,511,222Corporate debt securities
    
    
    2,187,686
    
    
    
    
    
    
    
    (398,303
    )
    
    
    1,789,383Mortgage-backed securities
    
    
    64,380,979
    
    
    
    1,469,043
    
    
    
    (442,624
    )
    
    
    65,407,398Total debt securities
    
    
    117,545,190
    
    
    
    1,777,811
    
    
    
    (3,450,017
    )
    
    
    115,872,984Equity securities
    
    
    434,801
    
    
    
    20,999
    
    
    
    (188,259
    )
    
    
    267,541Total securities
    
    $
    117,979,991
    
    
    $
    1,798,810
    
    
    $
    (3,638,276
    )
    
    $
    116,140,525
 The amortized cost and fair value of debt securities available for sale as of June
30, 2009 by contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the securities
may be called or repaid without penalty. Therefore, these securities are not included in
the maturity categories in the following maturity summary.
 Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    1,500,000
    
    
    $
    1,500,495Due from one year to five years
    
    
    2,631,838
    
    
    
    2,632,817Due from five to ten years
    
    
    10,519,251
    
    
    
    10,219,064Due after ten years
    
    
    44,494,014
    
    
    
    42,125,463Mortgage-backed securities
    
    
    57,490,249
    
    
    
    57,785,022$
    116,635,352
    
    
    $
    114,262,861
 Securities with a carrying value of $54,117,086 and $64,931,946 at June 30, 2009 and
December 31, 2008, respectively, were pledged to secure public deposits, repurchase
agreements and for other purposes required or permitted by law.
 10




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4   SECURITIES (CONTINUED)
 Gains and losses on sales of securities available for sale consist of the following:
 June 30,
    
    
    December 31,2009
    
    
    2008Gross gains on sales of securities
    
    $
    403,958
    
    
    $
    361,701Gross losses on sales of securities
    
    
    (37,829
    )
    
    
    (127,025
    )Net realized gains (losses) on sales of securities available for sale
    
    $
    366,129
    
    
    $
    234,676
 The following table shows the gross unrealized losses and fair value of securities
aggregated by category and length of time that securities have been in a continuous
unrealized loss position at June 30, 2009 and December 31, 2008.
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesJune 30, 2009:U.S. Government sponsored
agency securities
    
    $
    13,349,269
    
    
    $
    (253,851
    )
    
    $
    
    
    
    $
    
    
    
    $
    13,349,269
    
    
    $
    (253,851
    )State and municipal securities
    
    
    4,541,452
    
    
    
    (131,981
    )
    
    
    17,848,196
    
    
    
    (1,998,659
    )
    
    
    22,389,648
    
    
    
    (2,130,640
    )Corporate securities
    
    
    
    
    
    
    
    
    
    
    802,000
    
    
    
    (358,423
    )
    
    
    802,000
    
    
    
    (358,423
    )Asset-backed securities
    
    
    1,569,384
    
    
    
    (26,599
    )
    
    
    
    
    
    
    
    
    
    
    1,569,384
    
    
    
    (26,599
    )Mortgage-backed securities
    
    
    19,880,566
    
    
    
    (148,516
    )
    
    
    3,920,762
    
    
    
    (338,443
    )
    
    
    23,801,328
    
    
    
    (486,959
    )Subtotal, debt securities
    
    
    39,340,671
    
    
    
    (560,947
    )
    
    
    22,570,958
    
    
    
    (2,695,525
    )
    
    
    61,911,629
    
    
    
    (3,256,472
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    262,050
    
    
    
    (172,750
    )
    
    
    262,050
    
    
    
    (172,750
    )Total temporarily impaired
securities
    
    $
    39,340,671
    
    
    $
    (560,947
    )
    
    $
    22,833,008
    
    
    $
    (2,868,275
    )
    
    $
    62,173,679
    
    
    $
    (3,429,222
    )December 31, 2008:U.S. Government sponsored
agency securities
    
    $
    1,992,923
    
    
    $
    (7,077
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,992,923
    
    
    $
    (7,077
    )State and municipal securities
    
    
    12,567,698
    
    
    
    (889,679
    )
    
    
    10,383,740
    
    
    
    (1,712,334
    )
    
    
    22,951,438
    
    
    
    (2,602,013
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    763,444
    
    
    
    (398,303
    )
    
    
    763,444
    
    
    
    (398,303
    )Mortgage-backed securities
    
    
    4,366,655
    
    
    
    (378,461
    )
    
    
    4,772,176
    
    
    
    (64,163
    )
    
    
    9,138,831
    
    
    
    (442,624
    )Subtotal, debt securities
    
    
    18,927,276
    
    
    
    (1,275,217
    )
    
    
    15,919,360
    
    
    
    (2,174,800
    )
    
    
    34,846,636
    
    
    
    (3,450,017
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    246,541
    
    
    
    (188,259
    )
    
    
    246,541
    
    
    
    (188,259
    )Total temporarily impaired securities
    
    $
    18,927,276
    
    
    $
    (1,275,217
    )
    
    $
    16,165,901
    
    
    $
    (2,363,059
    )
    
    $
    35,093,177
    
    
    $
    (3,638,276
    )
 11




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 4   SECURITIES (CONTINUED)
 Management evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant such
evaluation.
 In analyzing an issuers financial condition, management considers whether the securities
are issued by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred and industry analysts reports. As management has the intent and
ability to hold the securities until maturity, or for the foreseeable future and due to
the fact that the unrealized losses relate primarily to changes in interest rates and do
not affect the expected cash flows of the underlying collateral or issuer, no declines
are deemed to be other than temporary.
 The investment in the common stock of the Federal Home Loan Bank of Atlanta is accounted
for by the cost method, which also represents par value, and is made for long-term
business affiliation reasons. In addition, this investment is subject to restrictions
relating to sale, transfer or other disposition. Dividends are recognized in income when
declared. The carrying value of this investment at June 30, 2009 is $3,253,400. The
estimated fair value of this investment is $3,253,400 as of June 30, 2009, and therefore
is not considered impaired.
 Other equity securities represent an investment in the common stock of the Chattahoochee
Bank of Georgia (Chattahoochee), a de novo bank in Gainesville, Georgia. The Company
accounts for this investment by the cost method. This investment represents
approximately 4.9% of the outstanding shares of Chattahoochee. Since its initial capital
raise, Chattahoochee has not had any stock transactions, and therefore, no fair market
value is readily available. The carrying value of this investment at June 30, 2009, is
$1,010,000. The Company plans to hold this investment for the foreseeable future, and
does not consider it impaired as of June 30, 2009.
 12




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5   FAIR VALUE MEASUREMENTS
 On January 1, 2008, the Company adopted FASB No. 157, Fair Value Measurements. FASB No.
157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. FASB No. 157 applies to reported balances
that are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
 FASB No. 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair value
measurements, FASB No. 157 establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained from sources independent of
the reporting entity (observable inputs that are classified within Level 1 and 2 of the
hierarchy) and the reporting entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are inputs
other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs may include quoted prices for
similar assets and liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest rates, foreign
exchange rates and yield curves that are observable at commonly quoted intervals. Level
3 inputs are unobservable inputs for the assets or liabilities, which are typically based
on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Companys assessment of the significance
of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.
 The table below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of June 30, 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall.
 Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsAvailable for sale investment
securities
    
    $
    
    
    
    $
    114,262,861
    
    
    $
    
    
    
    $
    114,262,861Total assets at fair value
    
    $
    
    
    
    $
    114,262,861
    
    
    $
    
    
    
    $
    114,262,861
 13




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5   FAIR VALUE MEASUREMENTS (CONTINUED)
 Following is a description of the valuation methodologies used for instruments measured
at fair value on a non-recurring basis and recognized in the accompanying balance sheet,
as well as the general classification of such instruments pursuant to the valuation
hierarchy.
 Impaired Loans
 Loan impairment is reported when full payment under the loan terms is not
expected. Impaired loans are carried at the present value of estimated future cash
flows using the loans existing rate, or the fair value of collateral if the loan
is collateral dependent. A portion of the allowance for loan losses is allocated
to impaired loans if the value of such loans is deemed to be less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported as a component of the provision for loan
losses. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Company
records the loan impairment as non-recurring Level 2. When an appraised value is
not available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the loan impairment as non-recurring Level 3. At June 30, 2009,
there were no impaired loans reported at fair value utilizing Level 2 valuation
inputs. Impaired loans with a carrying value of $12,104,128 were reduced by
specific valuation allowance allocations totaling $1,979,600 for a total reported
fair value of $10,124,528 on collateral valuations utilizing Level 3 valuation
inputs at June 30, 2009.
 Fair Value Option
 In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115. SFAS No. 159 allows companies to report selected financial
assets and liabilities at fair value. The changes in fair value are recognized in
earnings and the assets and liabilities measured under this methodology are
required to be displayed separately on the balance sheet. While SFAS No. 159 became
effective for the Company beginning January 1, 2008, the Company has not elected
the fair value option that is offered by this statement.
 Disclosures about Fair Value of Financial Instruments
 The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair value
is best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Companys various financial instruments.
In cases where quoted market prices are not available, fair value is based on
discounted cash flows or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS No. 107, Disclosures
about Fair Value of Financial Instruments,excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5   FAIR VALUE MEASUREMENTS (CONTINUED)
 The following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments:
 Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:The
carrying amount of cash, due from banks, interest-bearing deposits at other financial
institutions and federal funds sold approximates fair value.Securities:Fair value of securities is based on available quoted market prices.
The carrying amount of equity securities with no readily determinable fair value
approximates fair value.Loans:The carrying amount of variable-rate loans that reprice frequently and have
no significant change in credit risk approximates fair value. The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers with
similar credit quality. The fair value of impaired loans is estimated based on
discounted contractual cash flows or underlying collateral values, where applicable.Cash Flow Hedge Derivative Instruments:The carrying amount and fair value of cash
flow hedge derivative instruments in based on available quoted market prices.Deposits:The carrying amount of demand deposits, savings deposits and variable-rate
certificates of deposit approximates fair value. The fair value of fixed-rate
certificates of deposit is estimated based on discounted contractual cash flows using
interest rates currently being offered for certificates of similar maturities.Federal Funds Purchased and Securities Sold Under Repurchase Agreements:The fair
value of fixed rate federal funds purchased and securities sold under repurchase
agreements is estimated based on discounted contractual cash flows using the current
incremental borrowing rates for similar type borrowing arrangements.Other Borrowings:The carrying amount of variable rate advances approximates fair
value. The fair value of fixed rate advances is estimated based on discounted
contractual cash flows using the current incremental borrowing rates for similar type
borrowing arrangements.Accrued Interest:The carrying amount of accrued interest approximates fair value.Off-Balance-Sheet Instruments:The carrying amount of commitments to extend credit
and standby letters of credit approximates fair value.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 5   FAIR VALUE MEASUREMENTS (CONTINUED)
 The carrying amount and estimated fair value of the Companys financial instruments were
as follows:
 June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    18,388,610
    
    
    $
    18,388,610
    
    
    $
    10,905,360
    
    
    $
    10,905,360Federal funds sold
    
    $
    1,370,000
    
    
    $
    1,370,000
    
    
    $
    30,254,000
    
    
    $
    30,254,000Securities available for sale
    
    $
    114,262,861
    
    
    $
    114,262,861
    
    
    $
    116,140,525
    
    
    $
    116,140,525Federal home loan bank stock
    
    $
    3,253,400
    
    
    $
    3,253,400
    
    
    $
    3,185,800
    
    
    $
    3,185,800Other equity securities
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000
    
    
    $
    1,010,000-Loans
    
    $
    295,880,557
    
    
    $
    296,735,800
    
    
    $
    302,487,892
    
    
    $
    309,635,072Allowance for loan losses
    
    
    5,746,501
    
    
    
    
    
    
    
    4,950,722
    
    
    
    Loans, net
    
    $
    290,134,056
    
    
    $
    296,735,800
    
    
    $
    297,537,170
    
    
    $
    309,635,072Accrued interest receivable
    
    $
    1,940,205
    
    
    $
    1,940,205
    
    
    $
    2,155,327
    
    
    $
    2,155,327Financial liabilities:Deposits
    
    $
    323,923,702
    
    
    $
    310,136,628
    
    
    $
    338,545,994
    
    
    $
    336,904,274Federal funds purchased and securities
sold under repurchase agreements
    
    $
    34,744,908
    
    
    $
    34,744,908
    
    
    $
    41,497,491
    
    
    $
    41,497,491Other borrowings
    
    $
    42,500,000
    
    
    $
    44,772,107
    
    
    $
    52,500,000
    
    
    $
    56,936,956Accrued interest payable
    
    $
    703,369
    
    
    $
    703,369
    
    
    $
    1,045,042
    
    
    $
    1,045,042
 NOTE 6    SUBSEQUENT EVENTS
 Subsequent events have been evaluated through August 13, 2009, which is the date
financial statements were available to be issued.
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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
   17




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Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    37,215Financial stand-by letters of credit
    
    
    5,053$
    42,268
 18




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Comparison of Financial Condition at June 30, 2009 and December 31, 2008
       19




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Comparison of Operating Results
 General
 For the three months ended June 30, 2009 and 2008
  For the six months ended June 30, 2009 and 2008
  Interest Income
 For the three months ended June 30, 2009 and 2008
  For the six months ended June 30, 2009 and 2008
  Interest Expense
 For the three months ended June 30, 2009 and 2008
  20




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For the six months ended June 30, 2009 and 2008
  Net Interest Income
 For the three months ended June 30, 2009 and 2008
  For the six months ended June 30, 2009 and 2008
  General Comments on Interest Rates
   Provision for Loan Losses
 For the three months and six months ended June 30, 2009 and 2008
  21




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22




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##### Table of Contents



Noninterest Income
  Three Months Ended June 30,2009
    
    
    2008
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    836,648
    
    
    $
    976,140
    
    
    $
    (139,492
    )
    
    
    -14.29
    %Other service charges, commissions and fees
    
    
    362,264
    
    
    
    331,734
    
    
    
    30,530
    
    
    
    9.20
    %Brokerage fees
    
    
    215,965
    
    
    
    261,796
    
    
    
    (45,831
    )
    
    
    -17.51
    %Mortgage origination fees
    
    
    103,496
    
    
    
    116,914
    
    
    
    (13,418
    )
    
    
    -11.48
    %Bank owned life insurance
    
    
    159,342
    
    
    
    99,384
    
    
    
    59,958
    
    
    
    60.33
    %Other
    
    
    16,090
    
    
    
    205,982
    
    
    
    (189,892
    )
    
    
    -92.19
    %Total noninterest income
    
    $
    1,693,805
    
    
    $
    1,991,950
    
    
    $
    (298,145
    )
    
    
    -14.97
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.37
    %
    
    
    1.64
    %
 Six Months Ended June 30,2009
    
    
    2008
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    1,644,483
    
    
    $
    1,903,418
    
    
    $
    (258,935
    )
    
    
    -13.60
    %Other service charges, commissions and fees
    
    
    722,110
    
    
    
    658,803
    
    
    
    63,307
    
    
    
    9.61
    %Brokerage fees
    
    
    410,323
    
    
    
    505,831
    
    
    
    (95,508
    )
    
    
    -18.88
    %Mortgage origination fees
    
    
    209,180
    
    
    
    205,708
    
    
    
    3,472
    
    
    
    1.69
    %Bank owned life insurance
    
    
    309,482
    
    
    
    192,839
    
    
    
    116,643
    
    
    
    60.49
    %Other
    
    
    22,295
    
    
    
    278,119
    
    
    
    (255,824
    )
    
    
    -91.98
    %Total noninterest income
    
    $
    3,317,873
    
    
    $
    3,744,718
    
    
    $
    (426,845
    )
    
    
    -11.40
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.34
    %
    
    
    1.57
    %
       23




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##### Table of Contents



Noninterest Expense
  Three Months Ended June 30,2009
    
    
    2008
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,226,667
    
    
    $
    2,224,418
    
    
    $
    2,249
    
    
    
    0.10
    %Equipment
    
    
    265,778
    
    
    
    298,898
    
    
    
    (33,120
    )
    
    
    -11.08
    %Occupancy
    
    
    296,916
    
    
    
    272,164
    
    
    
    24,752
    
    
    
    9.09
    %Advertising and marketing
    
    
    110,705
    
    
    
    111,345
    
    
    
    (640
    )
    
    
    -0.57
    %Legal and accounting
    
    
    154,778
    
    
    
    141,972
    
    
    
    12,806
    
    
    
    9.02
    %Consulting & other professional fees
    
    
    90,837
    
    
    
    85,098
    
    
    
    5,739
    
    
    
    6.74
    %Directors fees and retirement
    
    
    153,108
    
    
    
    160,263
    
    
    
    (7,155
    )
    
    
    -4.46
    %Telecommunications
    
    
    54,372
    
    
    
    63,258
    
    
    
    (8,886
    )
    
    
    -14.05
    %Supplies
    
    
    46,191
    
    
    
    55,008
    
    
    
    (8,817
    )
    
    
    -16.03
    %Data processing fees
    
    
    383,221
    
    
    
    337,247
    
    
    
    45,974
    
    
    
    13.63
    %Loss on sale and write-downs of other
real estate owned
    
    
    255,004
    
    
    
    80,250
    
    
    
    174,754
    
    
    
    217.76
    %Foreclosed asset expenses
    
    
    48,238
    
    
    
    32,945
    
    
    
    15,293
    
    
    
    46.42
    %FDIC insurance and other regulatory fees
    
    
    283,930
    
    
    
    69,126
    
    
    
    214,804
    
    
    
    310.74
    %Other operating
    
    
    371,905
    
    
    
    244,954
    
    
    
    126,951
    
    
    
    51.83
    %Total noninterest expenses
    
    $
    4,741,650
    
    
    $
    4,176,946
    
    
    $
    564,704
    
    
    
    13.52
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    3.84
    %
    
    
    3.43
    %
 Six Months Ended June 30,2009
    
    
    2008
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    4,424,356
    
    
    $
    4,525,375
    
    
    $
    (101,019
    )
    
    
    -2.23
    %Equipment
    
    
    539,166
    
    
    
    620,058
    
    
    
    (80,892
    )
    
    
    -13.05
    %Occupancy
    
    
    589,263
    
    
    
    563,795
    
    
    
    25,468
    
    
    
    4.52
    %Advertising and marketing
    
    
    198,229
    
    
    
    256,676
    
    
    
    (58,447
    )
    
    
    -22.77
    %Legal and accounting
    
    
    272,658
    
    
    
    268,803
    
    
    
    3,855
    
    
    
    1.43
    %Consulting & other professional fees
    
    
    152,409
    
    
    
    178,690
    
    
    
    (26,281
    )
    
    
    -14.71
    %Directors fees and retirement
    
    
    306,216
    
    
    
    313,197
    
    
    
    (6,981
    )
    
    
    -2.23
    %Telecommunications
    
    
    116,328
    
    
    
    135,177
    
    
    
    (18,849
    )
    
    
    -13.94
    %Supplies
    
    
    84,303
    
    
    
    112,852
    
    
    
    (28,549
    )
    
    
    -25.30
    %Data processing fees
    
    
    713,181
    
    
    
    641,460
    
    
    
    71,721
    
    
    
    11.18
    %Loss on sale and write-downs of other
real estate owned
    
    
    304,068
    
    
    
    79,445
    
    
    
    224,623
    
    
    
    282.74
    %Foreclosed asset expenses
    
    
    93,228
    
    
    
    82,655
    
    
    
    10,573
    
    
    
    12.79
    %FDIC insurance and other regulatory fees
    
    
    364,886
    
    
    
    128,360
    
    
    
    236,526
    
    
    
    184.27
    %Other operating
    
    
    698,038
    
    
    
    625,917
    
    
    
    72,121
    
    
    
    11.52
    %Total noninterest expenses
    
    $
    8,856,329
    
    
    $
    8,532,460
    
    
    $
    323,869
    
    
    
    3.80
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    3.59
    %
    
    
    3.56
    %
     24




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Income Tax Expense
   25




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Liquidity and Capital Resources
    26




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##### Table of Contents



Regulatory Capital Ratios for the Company and HeritageBank of the South at June 30, 2009
  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 AssetsConsolidated
    
    $
    68,476
    
    
    
    19.8
    %
    
    $
    27,652
    
    
    
    8.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    61,711
    
    
    
    18.3
    %
    
    $
    27,050
    
    
    
    8.0
    %
    
    $
    33,813
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    64,243
    
    
    
    18.6
    %
    
    $
    13,826
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    57,465
    
    
    
    17.0
    %
    
    $
    13,525
    
    
    
    4.0
    %
    
    $
    20,288
    
    
    
    6.0
    %Tier I Capital to Average Total AssetsConsolidated
    
    $
    64,243
    
    
    
    12.9
    %
    
    $
    19,917
    
    
    
    4.0
    %
    
    
    
    
    
    
    HeritageBank of the South
    
    $
    57,465
    
    
    
    11.8
    %
    
    $
    19,548
    
    
    
    4.0
    %
    
    $
    24,436
    
    
    
    5.0
    %
  27




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       Market Rate
    
    
    
    Effect on NetChange
    
    
    
    Interest Income+300
    
    
    
    
    
    -7.5
    %+200
    
    
    
    
    
    -9.0
    %+100
    
    
    
    
    
    -5.1
    %-100
    
    
    
    
    
    4.1
    %-200
    
    
    
    
    
    9.0
    %-300
    
    
    
    
    
    11.9
    %
  28




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ITEM 4.
    
    CONTROLS AND PROCEDURES
    29




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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
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    188,500May
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188,500June
    
    
    1,526
    
    
    
    8.87
    
    
    
    1,526
    
    
    
    186,974Total
    
    
    1,526
    
    
    $
    8.87
    
    
    
    1,526
    
    
    
    186,974
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      30




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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
 31




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: August 14, 2009
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive OfficerDate: August 14, 2009
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President andChief Financial Officer 32