Heritage Financial 10Q 2009 Q2 Quarterly report

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

(A United States Corporation)

IRS Employer Identification Number 45-0479535

721 N. Westover Blvd., Albany, GA 31707
229-420-0000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

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


Large accelerated filero		Accelerated filero		Non-accelerated filero (Do not check if a smaller reporting company)		Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each issuer’s classes of common equity, as of the latest practicable date:

At August 12, 2009 there were 10,410,090 shares of issuer’s common stock outstanding.

HERITAGE FINANCIAL GROUP

INDEX


	Page
	Number
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2009 AND DECEMBER 31, 2008		3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008		4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008		5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND THE YEAR ENDED DECEMBER 31, 2008		6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008		7

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28

ITEM 4. CONTROLS AND PROCEDURES		29

PART II — OTHER INFORMATION		30

SIGNATURES		32

EX-31.1
EX-31.2
EX-32

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Balance Sheets
June 30, 2009 and December 31, 2008


	Unaudited			Audited
	June 30,			December 31,
	2009			2008
Assets

Cash and due from banks	$	17,759,744		$	10,159,602
Interest-bearing deposits in banks		628,866			745,758
Federal funds sold		1,370,000			30,254,000
Securities available for sale, at fair value		114,262,861			116,140,525
Federal home loan bank stock, at cost		3,253,400			3,185,800
Other equity securities, at cost		1,010,000			1,010,000

Loans		295,880,557			302,487,892
Less allowance for loan losses		5,746,501			4,950,722

Loans, net		290,134,056			297,537,170


Premises and equipment, net		16,711,616			16,801,183
Accrued interest receivable		1,940,205			2,155,327
Intangible assets		1,000,000			1,000,000
Foreclosed assets		907,384			2,119,818
Cash surrender value of bank owned life insurance		14,445,602			14,136,119
Other assets		7,561,533			6,812,425


	$	470,985,267		$	502,057,727

Liabilities and Stockholders’ Equity

Deposits
Noninterest-bearing	$	18,747,180		$	19,100,197
Interest-bearing		305,176,522			319,445,797

Total deposits		323,923,702			338,545,994

Federal funds purchased and securities sold under repurchase agreements		34,744,908			41,497,491
Other borrowings		42,500,000			52,500,000
Accrued interest payable		703,369			1,045,042
Other liabilities		6,981,758			6,256,227

Total liabilities		408,853,737			439,844,754


Commitments and contingencies

Stockholders’ equity
Preferred 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			114,523
Capital surplus		40,264,835			39,861,237
Retained earnings		41,498,603			41,357,209
Accumulated 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			75,782,786
Treasury 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.

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 Months
	2009		2008		2009			2008
Interest income
Interest and fees on loans	$	4,528,408		5,289,433	$	9,121,697		$	10,766,139
Interest on taxable securities		914,579		1,205,193		2,140,288			2,355,082
Interest on nontaxable securities		293,379		298,314		586,022			624,863
Interest on federal funds sold		15,424		51,614		31,976			123,368
Interest on deposits in other banks		172		2,723		434			10,871

		5,751,962		6,847,277		11,880,417			13,880,323


Interest expense
Interest on deposits		1,683,235		2,129,761		3,570,996			4,654,366
Interest on other borrowings		644,306		914,860		1,328,938			1,733,703

		2,327,541		3,044,621		4,899,934			6,388,069


Net interest income		3,424,421		3,802,656		6,980,483			7,492,254
Provision for loan losses		500,000		782,000		1,300,000			1,182,000

Net interest income after provision for loan losses		2,924,421		3,020,656		5,680,483			6,310,254


Noninterest income
Service charges on deposit accounts		836,648		976,140		1,644,483			1,903,418
Other service charges, commissions and fees		362,264		331,734		722,110			658,803
Brokerage fees		215,965		261,796		410,323			505,831
Mortgage origination fees		103,496		116,914		209,180			205,708
Bank owned life insurance		159,342		99,384		309,482			192,839
Gain on sale of securities		344,731		7,386		366,129			19,745
Other		16,090		205,982		22,295			278,119

		2,038,536		1,999,336		3,684,002			3,764,463


Noninterest expense
Salaries and employee benefits		2,226,667		2,224,418		4,424,356			4,525,375
Equipment		265,778		298,898		539,166			620,058
Occupancy		296,916		272,164		589,263			563,795
Advertising and marketing		110,705		111,345		198,229			256,676
Legal and accounting		154,778		141,972		272,658			268,803
Consulting & other professional fees		90,837		85,098		152,409			178,690
Directors fees and retirement		153,108		160,263		306,216			313,197
Telecommunications		54,372		63,258		116,328			135,177
Supplies		46,191		55,008		84,303			112,852
Data 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			79,445
Foreclosed asset expenses		48,238		32,945		93,228			82,655
FDIC insurance and other regulatory fees		283,930		69,126		364,886			128,360
Other operating		371,905		244,954		698,038			625,917

		4,741,650		4,176,946		8,856,329			8,532,460


Income before income taxes		221,307		843,046		508,156			1,542,257

Applicable income tax (benefits)		66,530		155,215		(41,244	)		274,887


Net income	$	154,777	$	687,831	$	549,400		$	1,267,370


Basic earnings per share	$	0.02	$	0.07	$	0.05		$	0.12

Diluted earnings per share	$	0.02	$	0.07	$	0.05		$	0.12

See Notes to Consolidated Financial Statements.

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 Months
	2009			2008			2009			2008
Net income	$	154,777		$	687,831		$	549,400		$	1,267,370

Other 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		—			—			—			539,235
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 $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.

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


																			Accumulated
													Unearned						Other
	Common Stock						Capital			Retained			ESOP			Treasury			Comprehensive
	Shares			Par Value			Surplus			Earnings			Shares			Stock			Income (Loss)			Total
Balance, December 31, 2007		11,443,723		$	114,437		$	39,009,323		$	42,406,483		$	(3,305,250	)	$	(9,329,501	)	$	(3,303,342	)	$	65,592,150
Net loss		—			—			—			(262,360	)		—			—			—			(262,360	)
Cash dividend declared, $0.28 per share		—			—			—			(786,914	)		—			—			—			(786,914	)
Stock-based compensation expense								809,086			—			—			—			—			809,086
Repurchase 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			—			3,567
Issuance of restricted stock		9,505			95			(95	)		—			—			—			—			—
Forfeiture of restricted stock		(884	)		(9	)		9			—			—			—			—			—
Other comprehensive income		—			—			—			—			—			—			617,709			617,709
Excess tax expense from stock based compensation plans		—			—			(3,432	)		—			—			—			—			(3,432	)
ESOP shares earned, 44,070 shares		—			—			47,182			—			440,700			—			—			487,882

Balance, December 31, 2008		11,452,344			114,523			39,861,237			41,357,209			(2,864,550	)		(13,569,813	)		(2,685,633	)		62,212,973

Net income		—			—			—			549,400			—			—			—			549,400
Cash 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			—			1,896
Other comprehensive loss		—			—			—			—			—			—			(425,375	)		(425,375	)
Stock-based compensation expense		—			—			403,593			—			—			—			—			403,593
ESOP shares earned, 22,035 shares		—			—			1,735			—			220,350			—			—			222,085

Balance, 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.

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2009 and 2008


	For the Six Months
	2009			2008
OPERATING ACTIVITIES
Net income	$	549,400		$	1,267,370

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		454,227			502,548
Provision for loan losses		1,300,000			1,182,000
ESOP compensation expense		222,085			269,493
Stock-based compensation expense		403,593			405,872
Net gain on sale of securities available for sale		(366,129	)		(19,745	)
Proceeds on termination of cash flow hedge		—			898,725
Accretion 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			319,196
Decrease in interest payable		(341,673	)		(174,474	)
Increase (decrease) in taxes payable		(400,037	)		274,887
Loss on sale and write-downs of other real estate owned		304,068			79,445
Net other operating activities		660,043			(1,089,738	)

Total adjustments		1,965,883			2,406,370

Net cash provided by operating activities		2,515,283			3,673,740


INVESTING 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			8,616,448
Proceeds from sale of securities available for sale		26,670,015			20,451,970
Purchase 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			362,835

Net cash provided by (used in) investing activities		37,290,880			(24,719,585	)


FINANCING ACTIVITIES
Decrease in deposits		(14,622,292	)		(9,235,631	)
Increase (decrease) in federal funds purchased and securities sold under agreement to repurchase		(6,752,583	)		15,340,955
Proceeds from other borrowings		—			15,000,000
Repayment 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	)		18,410,269


Net 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			8,953,836

Cash and due from banks at end of period	$	17,759,744		$	6,318,260


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	5,241,607		$	6,562,543
Taxes		358,793			—

NONCASH TRANSACTIONS
Increase in unrealized losses on securities available for sale	$	533,025		$	2,624,239
Decrease in unrealized gain on termination of cash flow hedges		—			391,396
Increase in unrealized losses on cash flow hedges		—			314,866
Principal balances of loans transferred to other real estate owned		199,896			2,511,018

See Notes to Consolidated Financial Statements.

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 Months
	2009		2008		2009		2008
Basic earnings per share:
Net income	$	154,777	$	687,831	$	549,400	$	1,267,370

Weighted average common shares outstanding		10,039,847		10,210,936		10,033,052		10,246,912

Total basic earnings per common share	$	0.02	$	0.07	$	0.05	$	0.12


Diluted earnings per share:
Net income	$	154,777	$	687,831	$	549,400	$	1,267,370

Weighted average common shares outstanding		10,039,847		10,210,936		10,033,052		10,246,912

Effect of dilutive stock options and restricted stock		—		1,799		—		1,988

Weighted average dilutive common shares outstanding		10,039,847		10,212,735		10,033,052		10,248,900

Total diluted earnings per common share	$	0.02	$	0.07	$	0.05	$	0.12

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.

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		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2009:
U. S. Government sponsored agency securities	$	19,521,863	$	115,896	$	(253,851	)	$	19,383,908
State and municipal securities		30,677,838		66,509		(2,130,640	)		28,613,707
Corporate debt securities		2,183,404		—		(358,423	)		1,824,981
Asset-backed securities		6,327,197		64,395		(26,599	)		6,364,993
Mortgage-backed securities		57,490,249		781,732		(486,959	)		57,785,022

Total debt securities		116,200,551		1,028,532		(3,256,472	)		113,972,611
Equity securities		434,801		28,199		(172,750	)		290,250

Total securities	$	116,635,352	$	1,056,731	$	(3,429,222	)	$	114,262,861


December 31, 2008:
U. S. Government sponsored agency securities	$	20,923,967	$	248,091	$	(7,077	)	$	21,164,981
State and municipal securities		30,052,558		60,677		(2,602,013	)		27,511,222
Corporate debt securities		2,187,686		—		(398,303	)		1,789,383
Mortgage-backed securities		64,380,979		1,469,043		(442,624	)		65,407,398

Total debt securities		117,545,190		1,777,811		(3,450,017	)		115,872,984
Equity securities		434,801		20,999		(188,259	)		267,541

Total 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		Fair
	Cost		Value
Due in one year or less	$	1,500,000	$	1,500,495
Due from one year to five years		2,631,838		2,632,817
Due from five to ten years		10,519,251		10,219,064
Due after ten years		44,494,014		42,125,463
Mortgage-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.

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			2008
Gross gains on sales of securities	$	403,958		$	361,701
Gross 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					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
June 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	)

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.

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 Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Available for sale investment securities	$	—	$	114,262,861	$	—	$	114,262,861

Total assets at fair value	$	—	$	114,262,861	$	—	$	114,262,861

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.

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.

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, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash, due from banks and interest-bearing deposits in banks	$	18,388,610	$	18,388,610	$	10,905,360	$	10,905,360

Federal funds sold	$	1,370,000	$	1,370,000	$	30,254,000	$	30,254,000

Securities available for sale	$	114,262,861	$	114,262,861	$	116,140,525	$	116,140,525

Federal home loan bank stock	$	3,253,400	$	3,253,400	$	3,185,800	$	3,185,800

Other equity securities	$	1,010,000	$	1,010,000	$	1,010,000	$	1,010,000-


Loans	$	295,880,557	$	296,735,800	$	302,487,892	$	309,635,072
Allowance for loan losses		5,746,501		—		4,950,722		—

Loans, net	$	290,134,056	$	296,735,800	$	297,537,170	$	309,635,072


Accrued interest receivable	$	1,940,205	$	1,940,205	$	2,155,327	$	2,155,327


Financial liabilities:
Deposits	$	323,923,702	$	310,136,628	$	338,545,994	$	336,904,274


Federal funds purchased and securities sold under repurchase agreements	$	34,744,908	$	34,744,908	$	41,497,491	$	41,497,491


Other borrowings	$	42,500,000	$	44,772,107	$	52,500,000	$	56,936,956


Accrued 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.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward-Looking Statements.

This report contains certain ‘forward-looking statements’ that may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” with respect to our financial condition. Results of operations and business are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

General

Heritage Financial Group (“the Company”) is the parent holding company of HeritageBank of the South (“the Bank”). The Company is in a mutual holding company structure and 76% of its outstanding common stock is owned by Heritage, MHC (“MHC”), a federal mutual holding company.

The principal business of the Company is operating our wholly owned subsidiary, the Bank. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans and investments, and the interest we pay on our interest-bearing liabilities, consisting of savings and checking accounts, money market accounts, time deposits, federal funds purchased and securities sold under agreements to repurchase and other borrowings. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of service charges on deposit accounts, mortgage origination fees, transaction fees, bank-owned life insurance, and commissions from investment services. Noninterest expense consists primarily of salaries and employee benefits, occupancy, equipment and data processing, advertising, professional fees and other costs. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Evolution of Business Strategy

We originally were chartered as a federal credit union in 1955. In 1998, we became a community chartered credit union. We accepted deposits and made loans to members who lived, worked or worshiped in the approved counties for the credit union charter. In 2001, we converted to a mutual thrift charter in order to better serve our customers and communities through a broader lending ability and an expanded customer base beyond the field of membership permitted for our credit union. The mutual holding company structure was established in 2002, and we converted from a thrift charter to a state savings bank charter in 2005. We feel this structure best suits our continued efforts to grow and expand our commercial business.

The Company completed an initial public stock offering on June 29, 2005. We sold 3,372,375 shares of common stock in that offering for $10.00 per share. The Company’s employee stock ownership plan (the “ESOP”) purchased 440,700 shares with the proceeds of a loan from the Company. The Company received net proceeds of $32.4 million in the public offering, 50% of which was contributed to the Bank and $4.4 million of which was loaned to the ESOP for its purchase of shares in the offering. The Company also issued an additional 7,867,875 shares of common stock to MHC, so that MHC would own 70% of the outstanding common stock at the close of the offering.

Our current business strategy is to operate a well-capitalized and profitable commercial and retail financial institution dedicated to serving the needs of our customers. We strive to be the primary financial institution in the market areas we serve. We offer a broad range of products and services, while stressing personalized and efficient customer service and convenient access to these products and services. We intend to continue to operate as a commercial and consumer lender. We have structured operations around a branch system that is staffed with knowledgeable and well-trained employees. Subject to capital requirements and our ability to grow in a reasonable and prudent manner, we may open additional branches as opportunities arise. In addition to our branch system, we continue to expand electronic services for our customers. We attempt to differentiate ourselves from our competitors by providing a higher level of customer service.

We continue to implement our business strategy, as set forth in our Form 10-K, which was filed with the Securities and Exchange Commission on March 31, 2009. A critical component of this strategy includes increasing our commercial loan portfolio. During the first six months of 2009, our commercial real estate, business and multifamily loans increased $939,000 or 0.6% to $156.0 million, representing 52.7% of our total loan portfolio at June 30, 2009. During this time period, our total loan portfolio decreased $6.6 million, or 2.2%. Our ability to continue to grow our commercial loan portfolio is an important element of our long-term business strategy.

Another key component of our business strategy is the expansion of our operations outside of the Southwest Georgia market. As of June 30, 2009, we had total loans of $42.7 million and total deposits of $37.1 million at our Ocala, Florida branches. We are currently operating two permanent branches in Ocala.

Operating these branches outside of the Southwest Georgia market subjects us to additional risk factors. These risk factors include, but are not limited to the following: management of employees from a distance, lack of knowledge of the local market, additional credit risks, logistical operational issues, and time constraints of management. These risk factors, as well as others we have not identified, may affect our ability to successfully operate outside of our current market area.

For more information on risk factors please see Item IA under Part II of this 10-Q.

Critical Accounting Policies

We have not changed any of our critical accounting policies since those disclosed in our Form 10-K, which was filed with the Securities and Exchange Commission on March 31, 2009. Those accounting policies relate to the judgments and estimates used in the preparation of our financial statements in the calculation of the allowance for loan losses, the accounting for impaired loans and the provision for income taxes.

Off Balance Sheet Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. We use the same credit policies in making these commitments as we do for on-balance sheet instruments. A summary of the Company’s commitments as of June 30, 2009, is as follows:


	(In thousands)

Commitments to extend credit	$	37,215
Financial stand-by letters of credit		5,053

	$	42,268

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

Total assets decreased $31.1 million or 6.2% to $471.0 million at June 30, 2009, from $502.1 million at December 31, 2008. Total interest earning assets decreased $37.5 million or 8.3% to $412.1 million at June 30, 2009, from $449.6 million at December 31, 2008. Total loans decreased $6.6 million or 2.2% to $295.1 million at June 30, 2009. The weakened economic environment throughout the country, including the Southeastern United States, as well as our markets in particular, is resulting in very limited loan demand. Therefore, we expect loan volume to be very limited for the remainder of 2009 unless economic trends improve significantly.

Securities decreased $1.9 million at June 30, 2009 as compared to December 31, 2008. This decrease was due primarily to principal payments on mortgage backed securities. Other earning assets, consisting of interest bearing deposits in banks and federal funds sold, decreased significantly to $2.0 million from $31.0 million at December 31, 2008. This decrease occurred as we paid off brokered deposits during the first quarter of 2009 and paid off $10.0 million in FHLB borrowings during the second quarter. We expect deposits in banks and federal funds sold to increase during the remainder of the year as we expect to continue to see weak demand for new loans, increases in deposits, and pay-downs on our loan portfolio.

Foreclosed assets decreased $1.2 million to $900, 000. For the six months ended June 30, 2009, we have added $200,000 in principal balances to other real estate owned. Offsetting those additions were sales of $1.1 million and write-downs of $304,000 which reduced other real estate owned. During this time period, we had a net decrease of $30,000 in repossessed personal property.

Total liabilities decreased $31.1 million or 7.1% to $408.9 million at June 30, 2009 compared with $439.8 million at December 31, 2008. The decrease was due primarily to a decrease of $14.6 million in deposits, of which $14.5 million was brokered deposits. In addition, a $10.0 million FHLB advance matured in the second quarter. We were able to pay off this advance, further reducing our cost of funds. Certificates of deposit decreased $25.3 million in the first half of 2009, while other deposit accounts increased $25.1 million. This shift occurred as we lowered our rates on certificates of deposits and focused on generating and maintaining core deposit relationships.

The total amount of other borrowings declined $10.0 million to $42.5 million during the first half of 2009. Federal funds purchased and securities sold under repurchase agreements decreased to $34.7 million at June 30, 2009 from $41.5 million in December 31, 2008. This decrease is due primarily to a decrease in the amount of federal funds purchased from Chattahoochee Bank of Georgia (“Chattahoochee”) to $4.6 million at June 30, 2009 compared to $11.0 million at December 31, 2008. These purchases are done as an accommodation to Chattahoochee so that they can earn a competitive rate on federal funds without having to place concentrated amounts of federal funds with traditional correspondent banks. In return, these funds provide us with a stable, low cost source of funds.

Total equity decreased $81,000 to $62.1 million at June 30, 2009, compared with $62.2 million at December 31, 2008. Net income of $549,000 for the first six months of 2009, stock based compensation of $404,000, and ESOP related transactions of $222,000 increased equity, while purchases of treasury stock for $425,000, dividends of $408,000, and other comprehensive loss of $425,000 decreased equity.

Comparison of Operating Results

General

For the three months ended June 30, 2009 and 2008

During the quarter ended June 30, 2009, we recorded net income of $155,000 compared to $688,000 in net income for the quarter ended June 30, 2008. The decrease in income was due to a decrease in net interest income and an increase in noninterest expense. Offsetting the reduction in income was a decrease in loan loss provision expense.

For the six months ended June 30, 2009 and 2008

For the six months ended June 30, 2009, we recorded net income of $549,000 compared to $1,267,000 for the same period in 2008. The decrease in income was due to a decrease in net interest income, an increase in provision expense, a decrease in noninterest income, and an increase in noninterest expenses.

Interest Income

For the three months ended June 30, 2009 and 2008

Total interest income for the three months ended June 30, 2009, decreased $1.0 million or 16.0% to $5.8 million, compared to $6.8 million during the second quarter of 2008. The decrease was the result of a 91 basis points decrease in yield on average earning assets to 5.40% during the second quarter of 2009 as compared to the yield of 6.31% earned during the same period in 2008. This decrease was due to an overall reduction in interest rates. The investment portfolio yield decreased significantly due to efforts we made during the quarter to shorten the average life of our investment portfolio. We believe this will better position our balance sheet for a rising interest rate environment at some point in the future. We expect the yield on our earning assets to continue to decrease slightly during the remainder of 2009 as we continue to see the effects of the Federal Reserve rate cuts from 2007 and 2008. Average interest earning assets decreased $6.1 million for the quarter ending June 30, 2009, compared with the same period in 2008.

For the six months ended June 30, 2009 and 2008

Total interest income for the six months ended June 30, 2009, decreased $2.0 million or 14.4% to $11.9 million, compared to $13.9 million during the same period in 2008. A 77 basis point decrease in loan yield to 6.19% in 2009 from 6.96% in 2008 was the primary cause of the decrease. A decrease in investment yield also contributed to the decrease, as previously mentioned. The total yield on earning assets decreased 99 basis points to 5.50% for the 2009 period compared to 6.49% for the 2008 period. We expect this yield to continue to decrease, although more moderately, for the remainder of 2009. Average interest earning assets increased $7.1 million to $445.9 million at June 30, 2009, from $438.8 million at June 30, 2008. We expect average interest earning assets to decrease or remain level for the remainder of 2009 due to a lack of loan demand.

Interest Expense

For the three months ended June 30, 2009 and 2008

Total interest expense decreased $717,000 or 23.6% to $2.3 million for the quarter ended June 30, 2009, compared to $3.0 million during the same period in 2008. The cost of interest bearing liabilities decreased 78 basis points to 2.31% during the second quarter of 2009 compared with 3.09% during the same period in 2008. The average balance of interest bearing liabilities during the second quarter of 2009 was $404.0 million, an increase of $8.2 million compared to $395.8 million during the second quarter of 2008.

For the six months ended June 30, 2009 and 2008

Total interest expense for the year to date period decreased $1.5 million to $4.9 million compared to $6.4 million during the 2008 period. The cost of interest bearing liabilities decreased 89 basis points during the 2009 period to 2.41% compared to 3.30% during the 2008 period. $1.1 million of the decrease came from lower rates on deposit accounts, while $405,000 of the decrease came from lower rates on borrowings. We expect the cost of funds to continue to decease during the remainder of 2009, primarily from the decrease in costs of certificates of deposits.

Net Interest Income

For the three months ended June 30, 2009 and 2008

Net interest income of $3.4 million was a $378,000 decrease from the $3.8 million shown during the same period in 2008. The net interest spread decreased 13 basis points for the second quarter of 2009 to 3.09% compared with 3.22% during the same period in 2008. The net interest margin fell 29 basis points to 3.27% for the three months ended June 30, 2009 compared to 3.56% during the same period in 2008.

For the six months ended June 30, 2009 and 2008

Net interest income of $7.0 million was a $512,000 decrease from the $7.5 million shown during the same period in 2008. The net interest spread decreased 11 basis points for the first six months of 2009 to 3.09% compared with 3.20% during the same period in 2008. The net interest margin fell 28 basis points to 3.29% for the six months ended June 30, 2009 compared to 3.57% during the same period in 2008.

General Comments on Interest Rates

During 2007 and 2008, we saw dramatic drops in interest rates as the Federal Reserve lowered the federal funds target rate a total of 325 basis points. These reductions in rates have put extreme downward pressure on our margins, as our loans tend to reprice more quickly than our deposit products. In addition, many of our competitors face extreme pressure on liquidity, and have therefore priced their deposit products aggressively. Most of this pressure has come from large regional and national banks that have been forced to seek deposit funding for their balance sheets when other sources of funding became more difficult to obtain. We are beginning to benefit from higher long term rates and from the repricing of our certificates of deposits. These improvements to the margin are partially offsetting the declining yield. We expect our net interest margin to remain relatively stable for the remainder of 2009.

Our asset-liability management policy seeks to mitigate interest rate risk by making our balance sheet as neutral as possible to changes in interest rates. Although our goal is to be neutral to changes in rates, we will never achieve this without taking undue risk. Therefore, we remain exposed to further reductions in interest rates. For more information on the effect of changes in interest rates, see Item 3 of this Form 10-Q.

Provision for Loan Losses

For the three months and six months ended June 30, 2009 and 2008

During the quarter ended June 30, 2009, we recorded a $500,000 provision for loan losses, which was a decrease compared to the $782,000 provision during the same period in 2008. For the year to date period, we recorded a $1.3 million provision compared to the $1.2 million provision in the prior year period. As general economic trends have continued to decline, we have experienced increases in internally criticized and classified loans, as well as increases in nonperforming and past due loans.

Annualized net charge-offs to average outstanding loans decreased to 0.25% for the three months ending June 30, 2009, compared to 1.77% during the same period of 2008. For the year to date period, annualized net charge-offs to average outstanding loans were 0.34% compared to 0.96% during the prior year period. Although net charge-offs decreased for the quarter to date and year to date periods, we do not believe this is indicative of a trend, and we expect charge-offs to remain at elevated levels throughout 2009.

Nonperforming loans increased $4.8 million to $12.1 million at June 30, 2009 compared to $7.3 million at December 31, 2008. This increase was due primarily to the classification of one commercial relationship totaling approximately $4.0 million as nonperforming during the second quarter of 2009. We expect to repossess the collateral securing this loan, which consists primarily of non-real estate assets. We believe we have properly assessed the value of this collateral, and have adequately reserved for it as of June 30, 2009. However, we may incur additional losses and carrying costs as we repossess and dispose of the collateral.

Nonperforming loans to total loans increased to 4.09% at June 30, 2009 from 2.41% at December 31, 2008. Nonperforming assets increased $3.6 million to $13.0 million at June 30, 2009 compared to $9.4 million at December 31, 2008. Nonperforming assets to total assets increased to 2.76% at June 30, 2009 as compared to 1.87% at December 31, 2008. The allowance for loan losses as a percentage of total loans increased to 1.94% at June 30, 2009 compared with 1.64% at December 31, 2008.

Loans past due 30 days and still accruing totaled $1.3 million, or 0.43% of total loans at June 30, 2009. This compares to $3.5 million at December 31, 2008, or 1.16% of loans. The decrease in past due loans occurred primarily as past due loans migrated to nonaccrual status.

Our internally criticized and classified assets totaled $28.6 million at June 30, 2009, compared to $27.0 million at December 31, 2008. These balances include the aforementioned nonperforming loans, other real estate, and repossessed assets. Our internal loan review processes strive to identify weaknesses in loans prior to performance issues. However, our processes do not always provide sufficient time to work out plans with borrowers that would avoid foreclosure and/or losses.

We continue to see weakness in our loan portfolio and as economic conditions remain difficult, we expect this trend to continue until we see improvement in the overall economy. We have taken actions to prevent losses in our current portfolio, including a weekly meeting of members of management and lenders to discuss the status and action plan on each problem loan. We have also taken steps to better evaluate the capital and liquidity positions of our commercial loan guarantors, particularly those involved in commercial real estate construction and development.

We establish provisions for loan losses, which are charged to operations, at a level we believe will reflect probable credit losses based on historical loss trends and an evaluation of specific credits in the loan portfolio. In evaluating the level of the allowance for loan losses, we consider the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and past due status and trends.

We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as necessary in order to maintain the proper level of allowance. While we use available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses is maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

Noninterest Income

A summary of noninterest income, excluding securities transactions, follows:


	Three Months Ended June 30,
	2009			2008			$ Chg			% Chg
Service 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			% Chg
Service 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	%

The decrease in service charges on deposit accounts is due primarily to a decrease in overdraft fees. Due to the economic slowdown, we have seen our customers’ spending decrease, and therefore, overdrafts incurred have decreased. We expect these fees to continue trending downward until the economy improves and our customer spending increases.

The increase in other service charges, commissions and fees is due to an increase in ATM and debit card income. This increase comes as our customers continue to shift to more electronic transactions rather than using paper checks. We expect to see this trend continue.

The decrease in brokerage fees was due to a decrease in assets under management, due to the decreases seen in the equity markets. We expect to see brokerage fees remain lower than the prior year levels due to the decrease in the equity markets.

Mortgage origination fees have increased slightly for the year due to an increase in refinancing activity. In addition, we have seen some increased activity in new home purchases. We are also benefiting from a decrease in the number of competing mortgage brokers in the markets we serve. We expect mortgage origination fees to remain strong as long as long term interest rates remain low and refinancing activity remains strong. For the quarter, mortgage fees declined slightly. This decrease was temporary, and due primarily to an increase in underwriting time due to new mortgage regulations. We expect mortgage origination fees to increase for the remainder of 2009.

The increase in earnings on bank owned life insurance is due to the purchase of $5.0 million in bank owned life insurance during the second quarter of 2008.

The decrease in other noninterest income for the year to date is due primarily to a decrease in FHLB stock dividends. We do not expect to receive dividends on our FHLB stock in the near future. For the quarter to date, the decrease is due to the suspension of FHLB dividends, and due to the gain on sale of our interest in a real estate partnership during the second quarter of 2008.

Noninterest Expense

A summary of noninterest expense follows:


	Three Months Ended June 30,
	2009			2008			$ Chg			% Chg
Salaries 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			% Chg
Salaries 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	%

At the end of the second quarter, the number of full-time equivalent employees (“FTE’s”) increased slightly to 118 from 117 at the end of the first quarter of 2009. At June 30, 2008, we had 126 FTE’s. We have reached an optimal level of employment and expect that our FTE count will remain level for the remainder of 2009.

Equipment expenses decreased for the quarter and year to date primarily due to a decrease in depreciation expense. We expect depreciation expense to increase later in 2009 as we replace computer equipment.

The increase in occupancy expenses for the quarter and year to date are due to the opening of our second branch in Ocala during the second half of 2009.

The decrease in advertising expense for the year to date is due to efforts to hold these expenses down as a result of the slow economic environment. For the quarter, advertising expense remained level as we embarked on an advertising campaign. We expect advertising expenses to remain level for the remainder of 2009.

The increase in legal and accounting fees was due primarily to an increase legal fees related to foreclosed assets and problem loans. We expect these legal fees to increase during the remainder of 2009 due to the increased level of foreclosed assets and problem loans.

Consulting and other professional fees for the year to date decreased due to efforts to decrease outside services and nonessential expenses. For the quarter, these expenses increased slightly, however, we expect these expenses to continue to decline.

Directors fees and retirement remained level for the quarter and year to date and should remain level for the remainder of 2009.

The decrease in telecommunications expenses is related to the removal of certain redundant communication sources. We expect these expenses to remain level for the remainder of 2009.

Expenses for supplies decreased as we have implemented better cost controls related to the purchase of supplies.

Data processing fees increased due to the increase in debit card and ATM card usage. These increased fees are more than offset by the income we receive on these transactions. We expect this trend to continue.

The loss on sale and write-downs of other real estate owned is due to the elevated levels of other real estate owned. As we continue to experience elevated levels of problem loans, we expect to see losses on the disposition of other real estate, especially as real estate values remain depressed due to a lack of demand.

Foreclosed asset expenses increased for the quarter and the year to date. We expect these expenses to remain high due to the high levels of problem loans and higher than normal levels of foreclosed assets.

FDIC insurance and other regulatory fees increased dramatically for the quarter and the year to date. This increase is due primarily to the FDIC special assessment imposed during the quarter. We are also facing increased deposit assessment rates charged by the FDIC. This trend will continue for the foreseeable future as the FDIC continues to experience large losses on bank closures. In addition, the FDIC has notified insured banks that another special assessment may be imposed in December.

Other operating expenses increased for the quarter and the year to date due to the imposition of interest and penalties by the IRS during an audit. We do not expect any further impact from this audit. In addition, we had increased loan expenses during the quarter related to perfecting our security interest in several commercial loans as we reviewed large loan relationships. This expense could continue to increase as we review our collateral position on loans that we believe could end up in foreclosure.

Income Tax Expense

During the quarter ended June 30, 2009, the Company recorded tax expense of $67,000. This compares to a tax expense of $155,000 during the second quarter of 2008. The effective tax rate for the 2009 quarter was 30.1% compared to 18.4% for the 2008 quarter. The increase in rate is due primarily to the payment of approximately $20,000 in taxes related to adjustments from a second quarter IRS audit.

For the six months ended 2009, we recorded a tax benefit of $41,000 compared to tax expense of $275,000 during the first six months of 2008. Due to an increased level of provision expense and a lower net interest income, the Company’s nontaxable income exceeded the level of total net income for the first six months of 2009. As the Company continues to experience lower than historical levels of net income, we expect to see this trend continue. The Company continually monitors its level of nontaxable income to total income, and may adjust its level of nontaxable income producing assets in order to produce the highest level of after tax yield. At the current time, the Company believes it will return to levels of net income sufficient to utilize its current level on nontaxable income in the near future.

Liquidity and Capital Resources

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest earning assets and interest bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term notice if needed.

The liquidity and capital resources of the Company are monitored continuously by the Company’s Board-authorized Asset Liability Management Committee and on a periodic basis by state and federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company’s and the Bank’s liquidity ratios at June 30, 2009, were considered satisfactory. At that date, the Bank’s short-term investments were adequate to cover any reasonably immediate need for funds. The Company is aware of no events or trends likely to result in a material change in liquidity.

The consolidated statement of cash flows for the six months ended June 30, 2009 and 2008, detail cash flows from operating, investing and financing activities. For the six months ended June 30, 2009, net cash provided by operating activities was $2.5 million while investing activities provided $37.3 million, primarily from a decrease in loans and federal funds sold, and financing activities used $32.2 million primarily from a decrease in brokered deposits and other borrowings, resulting in a net increase in cash during the six month period of $7.6 million.

Regulatory Capital Ratios for the Company and HeritageBank of the South at June 30, 2009

The Company’s and the Bank’s regulatory capital levels exceed the minimums required by state and federal authorities. The following table reflects the Company and the Bank’s compliance at June 30, 2009, with regulatory capital requirements. These calculations are based on total risk weighted assets of $345.7 million on a consolidated basis and $338.1 million for HeritageBank of the South as of June 30, 2009, and average total assets of $498.0 million on a consolidated basis and $488.7 million for HeritageBank of the South for the six months ended June 30, 2009.


											Minimum Required
											to Be Well Capitalized
						For Capital					Under Prompt
						Adequacy					Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets
Consolidated	$	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 Assets
Consolidated	$	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 Assets
Consolidated	$	64,243		12.9	%	$	19,917		4.0	%		—		—
HeritageBank of the South	$	57,465		11.8	%	$	19,548		4.0	%	$	24,436		5.0	%

Heritage Financial Group is subject to Georgia capital requirements for bank holding companies. At June 30, 2009, Heritage Financial Group had total equity of $62.1 million or 13.2% of total assets as of that date. Under Georgia capital requirements for holding companies, Heritage Financial Group had Tier I leverage capital of $64.2 million or 12.9% of average assets, which was $44.3 million above the 4.0% requirement.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed only to U.S. dollar interest rate changes, and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company monitors its sensitivity to changes in interest rates and may use derivative instruments to hedge this risk. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Finally, the Company has no exposure to foreign currency exchange rate risk and commodity price risk.

Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as “interest rate risk”. The repricing of interest earning assets and interest bearing liabilities can influence the changes in net interest income.

The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to 100, 200 and 300 basis point increases and decreases in market rates on net interest income and is monitored on a quarterly basis.

The Company’s strategy is to mitigate interest risk to the greatest extent possible. Based on our analysis of the Company’s overall risk to changes in interest rates, we structure investment and funding transactions to reduce this risk. In addition, we may enter into off-balance sheet transactions to mitigate this risk. These strategies aim to achieve neutrality to interest rate risk. Although we strive to have our net interest income neutral to changes in rates, due to the inherent nature of our business, we will never be completely neutral to changes in rates.

The Company maintains a Risk Management Committee which monitors and analyzes interest rate risk. This Committee is comprised of members of senior management and outside directors. This Committee meets on a monthly basis and reviews the simulations listed above, as well as other interest rate risk reports.

The following table shows the results of our projections for net interest income expressed as a percentage change over net interest income in a flat rate scenario for an immediate change or “shock” in market interest rates over a twelve month period as of June 30, 2009:


Market Rate		Effect on Net
Change		Interest Income
	+300		-7.5	%
	+200		-9.0	%
	+100		-5.1	%
	-100		4.1	%
	-200		9.0	%
	-300		11.9	%

Additional information required by Item 305 of Regulation S-K is set forth under Item 2 of this report.


ITEM 4.		CONTROLS AND PROCEDURES

An evaluation of the Company’s disclosure controls and procedures as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the “Act”) as of June 30, 2009, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no changes in our internal control over financial reporting (as defined in Rule 13a — 15(f) under the Act) that occurred during the quarter ended June 30, 2009, that has materially affected, or is likely to materially affect our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In our opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.


ITEM 1A.		RISK FACTORS

There has not been any material change in the risk factors disclosure from that contained in the Company’s 2008 Annual Report on Form 10-K for the fiscal year ended December 31, 2008.


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

There were no unregistered sales of equity securities during the quarter ended June 30, 2009.

Below is a summary of issuer purchases of equity securities during the quarter ended June 30, 2009.


					Number of		Maximum
	Total				Shares Purchased		Number of Shares
	Number				as Part of		that may yet be
	of Shares		Average Price		Publicly Announced		Purchased Under the
	Purchased		Paid Per Share		Plans or Programs		Plans or Programs
April		—	$	—		—		188,500
May		—		—		—		188,500
June		1,526		8.87		1,526		186,974

Total		1,526	$	8.87		1,526		186,974


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of the Shareholders of the Company was held on May 20, 2009. At this meeting, proxies were solicited pursuant to Regulation 14A under the Exchange Act. Total shares outstanding amounted to 10,411,496. A total of 10,094,993 shares (97.0% of total shares outstanding) were represented by shareholders in attendance at the meeting or by proxy.

The following director nominees were elected to serve as directors for terms to expire in 2012:

O. Leonard Dorminey, 9,901,972 votes for, 193,021 votes withheld, representing 98.1% in favor. There were no broker non-votes.

Antone D. Lehr, 9,902,032 votes for, 192,961 votes withheld, representing 98.1% in favor. There were no broker non-votes.

Ratification of the appointment of Mauldin & Jenkins, Certified Public Accountants, LLC, as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2009: 10,061,750 votes for, 31,768 votes against, and 1,475 abstentions, representing 99.7% in favor. There were no broker non-votes.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS


			Reference to
			Prior Filing
Regulation S-K			or Exhibit Number
Exhibit Number		Document	Attached Hereto

	31	Rule 13a-14(a)/15d-14(a) Certifications		31

	32	Section 1350 Certifications		32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		HERITAGE FINANCIAL GROUP
Date: August 14, 2009	By:	/s/ O. Leonard Dorminey
		O. Leonard Dorminey
		President and Chief Executive Officer


Date: August 14, 2009	By:	/s/ T. Heath Fountain
		T. Heath Fountain
		Senior Vice President and
		Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Heritage Financial Inactive 10-Q2009 Q2 Quarterly report

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