Heritage Financial 10-Q 2009 Q1 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 March 31, 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 filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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 May 8, 2009 there were 10,411,496 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 MARCH 31, 2009 AND DECEMBER 31, 2008		3
	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTSH ENDED MARCH 31, 2009 AND 2008		4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTSH ENDED MARCH 31, 2009 AND 2008		5
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTSH ENDED MARCH 31, 2009 AND THE YEAR ENDED DECEMBER 31, 2008		6
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTSH ENDED MARCH 31, 2009 AND 2008		7
	CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS		12
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		21
ITEM 4.	CONTROLS AND PROCEDURES		22
PART II — OTHER INFORMATION			23
SIGNATURES			24
EXHIBITS
31.1	Rule 13a–14(a) Certification of Chief Executive Officer
31.2	Rule 13a–14(a) Certification of Chief Financial Officer
32	Section 1350 Certification
EX-31
EX-32

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Balance Sheets
March 31, 2009 and December 31, 2008

	Unaudited			Audited
	March 31,			December 31,
	2009			2008
Assets
Cash and due from banks	$	12,562,907		$	10,159,602
Interest-bearing deposits in banks		651,464			745,758
Federal funds sold		9,713,000			30,254,000
Securities available for sale, at fair value		128,712,137			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		298,150,665			302,487,892
Less allowance for loan losses		5,435,360			4,950,722
Loans, net		292,715,305			297,537,170
Premises and equipment, net		16,770,949			16,801,183
Accrued interest receivable		2,244,515			2,155,327
Intangible assets		1,000,000			1,000,000
Foreclosed assets		1,402,751			2,119,818
Cash surrender value of bank owned life insurance		14,286,260			14,136,119
Other assets		6,669,739			6,812,425
	$	490,992,427		$	502,057,727
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	18,720,891		$	19,100,197
Interest-bearing		302,771,282			319,445,797
Total deposits		321,492,173			338,545,994
Federal funds purchased and securities sold under repurchase agreements		47,113,419			41,497,491
Other borrowings		52,500,000			52,500,000
Accrued interest payable		821,309			1,045,042
Other liabilities		6,644,655			6,256,227
Total liabilities		428,571,556			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		40,037,908			39,861,237
Retained earnings		41,547,235			41,357,209
Accumulated other comprehensive loss		(2,545,121	)		(2,685,633	)
Unearned employee stock ownership plan (ESOP) shares, 275,438 and 286,455 shares		(2,754,375	)		(2,864,550	)
		76,400,170			75,782,786
Treasury stock, at cost, 1,040,848 and 993,498 shares		(13,979,299	)		(13,569,813	)
Total stockholders’ equity		62,420,871			62,212,973
	$	490,992,427		$	502,057,727

See Notes to Consolidated Financial Statements.

3

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2009 and 2008

	For the Three Months
	2009			2008
Interest income
Interest and fees on loans	$	4,593,289		$	5,476,706
Interest on taxable securities		1,225,709			1,149,889
Interest on nontaxable securities		292,643			326,549
Interest on federal funds sold		16,552			71,754
Interest on deposits in other banks		262			8,148
		6,128,455			7,033,046
Interest expense
Interest on deposits		1,887,761			2,524,605
Interest on other borrowings		684,632			818,843
		2,572,393			3,343,448
Net interest income		3,556,062			3,689,598
Provision for loan losses		800,000			400,000
Net interest income after provision for loan losses		2,756,062			3,289,598
Noninterest income
Service charges on deposit accounts		807,835			927,278
Other service charges, commissions and fees		359,846			327,069
Brokerage fees		194,358			244,035
Mortgage origination fees		105,684			88,794
Bank owned life insurance		150,140			93,455
Gain on sale of securities		21,398			12,359
Other		6,205			72,137
		1,645,466			1,765,127
Noninterest expense
Salaries and employee benefits		2,197,689			2,300,957
Equipment		273,388			321,160
Occupancy		292,347			291,631
Advertising and marketing		87,524			145,331
Legal and accounting		117,880			126,831
Consulting & other professional fees		61,572			93,592
Directors fees and retirement		153,108			152,934
Telecommunications		61,956			71,919
Supplies		38,112			57,844
Data processing fees		329,960			304,213
(Gain) loss on sale and write-downs of other real estate owned		49,064			(805	)
Foreclosed asset expenses		44,990			49,710
FDIC insurance and other regulatory fees		80,956			59,234
Other operating		326,133			380,963
		4,114,679			4,355,514
Income before income taxes		286,849			699,211
Applicable income tax (benefits)		(107,774	)		119,672
Net income	$	394,623		$	579,539
Basic earnings per share	$	0.04		$	0.06
Diluted earnings per share	$	0.04		$	0.06

See Notes to Consolidated Financial Statements.

4

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2009 and 2008

	For the Three Months
	2009			2008
Net income	$	394,623		$	579,539
Other comprehensive income (loss):
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		(52,780	)		—
Unrealized holding gains on investments arising during the period, net of tax of $137,421 and $413,813		206,131			629,578
Reclassification adjustment for investment gains included in net income, net of tax of $8,559 and $4,902		(12,839	)		(7,457	)
Total other comprehensive income		140,512			926,518
Comprehensive income	$	535,135		$	1,506,057

See Notes to Consolidated Financial Statements.

5

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2009 and
The Year Ended December 31, 2008

																			Accumulated
																			Other
	Common Stock						Capital			Retained			Unearned			Treasury			Comprehensive
	Shares			Par Value			Surplus			Earnings			ESOP 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		—			—			—			394,623			—			—			—			394,623
Cash dividend declared, $0.08 per share		—			—			—			(204,597	)		—			—			—			(204,597	)
Repurchase of 47,500 shares of stock for the treasury		—			—			—						—			(411,500	)		—			(411,500	)
Issuance of 150 shares of common stock from the treasury		—			—			(1,253	)		—			—			2,014			—			761
Other comprehensive income		—			—			—			—			—			—			140,512			140,512
Stock-based compensation expense		—			—			201,797			—			—			—			—			201,797
ESOP shares earned, 11,018 shares		—			—			(23,873	)		—			110,175			—			—			86,302
Balance, March 31, 2009		11,452,344		$	114,523		$	40,037,908		$	41,547,235		$	(2,754,375	)	$	(13,979,299	)	$	(2,545,121	)	$	62,420,871

See Notes to Consolidated Financial Statements.

6

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2009 and 2008

	For the Three Months
	2009			2008
OPERATING ACTIVITIES
Net income	$	394,623		$	579,539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		227,484			256,435
Provision for loan losses		800,000			400,000
ESOP compensation expense		86,302			136,112
Stock-based compensation expense		201,797			202,936
Net gain on sale of securities available for sale		(21,398	)		(12,359	)
Proceeds on termination of cash flow hedge		—			898,725
Accretion of gain on termination of cash flow hedge		(87,967	)		—
Increase in bank owned life insurance		(150,141	)		(93,455	)
Increase in interest receivable		(89,188	)		(85,516	)
Decrease in interest payable		(223,733	)		(203,170	)
Increase (decrease) in taxes payable		(107,775	)		119,672
(Gain) loss on sale and write-down’s of other real estate owned		49,064			(805	)
Net other operating activities		545,214			(582,331	)
Total adjustments		1,229,659			1,036,244
Net cash provided by operating activities		1,624,282			1,615,783
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in banks		94,294			(186,959	)
Purchases of securities available for sale		(29,145,589	)		(27,196,720	)
Proceeds from maturities of securities available for sale		7,859,291			3,401,409
Proceeds from sale of securities available for sale		9,058,238			3,887,984
Net change in Federal home loan bank stock		(67,600	)		(778,600	)
Decrease in federal funds sold		20,541,000			13,872,000
(Increase) decrease in loans, net		3,803,201			(7,660,775	)
Purchase of premises and equipment		(197,250	)		(1,629,513	)
Proceeds from sale of other real estate owned		886,667			286,226
Net cash provided by (used in) investing activities		12,832,252			(16,004,948	)
FINANCING ACTIVITIES
Decrease in deposits		(17,053,821	)		(14,140,023	)
Increase in federal funds purchased and securities sold under agreement to repurchase		5,615,928			15,818,460
Proceeds from other borrowings		—			15,000,000
Purchase of treasury stock, net		(410,739	)		(1,922,612	)
Dividends paid to stockholders		(204,597	)		(207,265	)
Net cash provided by (used in) financing activities		(12,053,229	)		14,548,560
Net increase in cash and due from banks		2,403,305			159,395
Cash and due from banks at beginning of period		10,159,602			8,953,836
Cash and due from banks at end of period	$	12,562,907		$	9,113,231
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	2,769,127		$	3,546,618
Taxes		—			—
NONCASH TRANSACTIONS
Decrease in unrealized losses on securities available for sale	$	322,154		$	1,036,868
Decrease in unrealized gain on termination of cash flow hedges		—			391,396
Principal balances of loans transferred to other real estate owned		207,698			—

See Notes to Consolidated Financial Statements.

7

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 months ended March 31, 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 months ended March 31, 2009 and 2008:

	Three Months
	2009		2008
Basic earnings per share:
Net income	$	394,623	$	579,539
Weighted average common shares outstanding		10,026,182		10,282,887
Total basic earnings per common share	$	0.04	$	0.06
Diluted earnings per share:
Net income	$	394,623	$	579,539
Weighted average common shares outstanding		10,026,182		10,282,887
Effect of dilutive stock options and restricted stock		—		26,732
Weighted average dilutive common shares outstanding		10,026,182		10,309,619
Total diluted earnings per common share	$	0.04	$	0.06

At March 31, 2009 and 2008, potential common shares of 612,267 and 626,298 were not included in the calculation of diluted earnings per share because the assumed exercise of such shares would be anti-dilutive.

8

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 quarter ended March 31, 2009. All stock options, stock appreciation rights and restricted stock awards vest over a period of five years.

The Company granted restricted 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 March 31, 2009, there was approximately $1,100,000 of unrecognized compensation associated with these awards. For the three months ended March 31, 2009 and 2008, we recognized compensation expense associated with these awards of approximately $124,000.

We recognized compensation expense related to stock options of approximately $78,000 for the three months ended March 31, 2009 and 2008. At March 31, 2009, there was approximately $678,000 of unrecognized compensation related to stock options.

9

HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4 — 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 March 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Available for sale investment securities	$	—	$	128,712,137	$	—	$	128,712,137
Total assets at fair value	$	—	$	128,712,137	$	—	$	128,712,137

10

HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 March 31, 2009, there were no impaired loans reported at fair value utilizing Level 2 valuation inputs. Impaired loans with a carrying value of $7,862,700 were reduced by specific valuation allowance allocations totaling $710,500 for a total reported fair value of $7,152,200 on collateral valuations utilizing Level 3 valuation inputs at March 31, 2009.

11

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

12

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 three months of 2009, our commercial real estate, business and multifamily loans increased $225,000 or 0.2% to $155.3 million, representing 52.1% of our total loan portfolio at March 31, 2009. During this time period, our total loan portfolio decreased $4.3 million, or 1.4%. 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 March 31, 2009, we had total loans of $41.3 million and total deposits of $35.3 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 March 31, 2009, is as follows:

	(In thousands)
Commitments to extend credit	$	39,639
Financial stand-by letters of credit		5,239
	$	44,878

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Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Total assets decreased $11.1 million or 2.2% to $491.0 million at March 31, 2009, from $502.1 million at December 31, 2008. Total interest earning assets decreased $12.4 million or 2.8% to $437.2 million at March 31, 2009, from $449.6 million at December 31, 2008. Total loans decreased $4.3 million or 1.4% to $298.2 million at March 31, 2009. The weakened economic environment throughout the country, including the Southeastern United States, as well as our markets 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 increased $12.6 million at March 31, 2009 as compared to December 31, 2008. This increase was due primarily to investing liquid funds in higher earning assets than federal funds sold. Other earning assets, consisting of interest bearing deposits in banks and federal funds sold, decreased significantly to $10.3 million from $31.0 million at December 31, 2008. This decrease occurred as we deployed funds in investment securities and paid off brokered deposits during the first quarter of 2009.

Foreclosed assets decreased $717,000 to $1.4 million. The majority of this decrease was the sale of a significant portion of the foreclosure of a residential development in the Florida panhandle. This sale did not produce any additional loss from the level the Company had previously written the value of this other real estate to as of December 31, 2008. This loan was a participation purchased by the Bank’s commercial lending division in Albany.

Total liabilities decreased $11.3 million or 2.6% to $428.6 million at March 31, 2009 compared with $439.8 million at December 31, 2008. The decrease was due primarily to a decrease of $17.1 million in deposits. Brokered deposits decreased $13.1 million during the first quarter as we chose to pay off those higher costs borrowings. Certificates of deposits decreased $15.4 million in the quarter, while other deposit accounts increased $11.4 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 remained level at $52.5 million during the first three months of 2009. Federal funds purchased and securities sold under repurchase agreements increased to $47.1 million at March 31, 2009 from $41.5 million in December 31, 2008. This increase is due to primarily to an increase in the amount of federal funds purchased from Chattahoochee Bank of Georgia (“Chattahoochee”) to $17.0 million at March 31, 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 increased $208,000 to $62.4 million at March 31, 2009, compared with $62.2 million at December 31, 2008. Net income of $395,000 for the first three months of 2009, other comprehensive income of $141,000, stock based compensation of $202,000, and the allocation of $86,000 in ESOP shares increased equity, while the purchase of treasury stock for $412,000 and dividends of $205,000 decreased equity.

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Comparison of Operating Results

General

During the quarter ended March 31, 2009, we recorded net income of $395,000 compared to $580,000 in net income for the quarter ended March 31, 2008. The decrease in income was due to a decrease in net interest income, an increase in loan loss provision expense, and a decrease in noninterest income. Offsetting these reductions in income were decreases in noninterest expense for the quarter.

Interest Income

Total interest income for the three months ended March 31, 2009, decreased $905,000 or 12.9% to $6.1 million, compared to $7.0 million during the first quarter of 2008. The decrease was the result of a 108 basis points decrease in yield on average earning assets to 5.62% during the first quarter of 2009 as compared to the yield of 6.70% earned during the same period in 2008. This decrease was due to an overall fall in interest rates. 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 $21.1 million for the quarter ending March 31, 2009, compared with the same period in 2008.

Interest Expense

Total interest expense decreased $771,000 or 23.1% to $2.6 million for the quarter ended March 31, 2009, compared to $3.3 million during the same period in 2008. The a cost of interest bearing liabilities decreased 100 basis points to 2.51% during the first quarter of 2009 compared with 3.51% during the same period in 2008. The average balance of interest bearing liabilities during the first quarter of 2009 was $416.6 million, a decrease of $34.4 million compared to $382.2 million during the first quarter of 2008.

Net Interest Income

Net interest income of $3.6 million was a slight decrease from the $3.7 million shown during the same period in 2008. The net interest spread decreased 8 basis points for the first quarter of 2009 to 3.11% compared with 3.19% during the same period in 2008. The net interest margin fell 28 basis points to 3.31% for the three months ended March 31, 2009 compared to 3.59% 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.

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Provision for Loan Losses

During the quarter ended March 31, 2009, we recorded an $800,000 provision for loan losses, which was a significant increase compared to the $400,000 provision during the same period in 2008. As general economic treads 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 increased to 0.42% for the three months ending March 31, 2009 compared to 0.12% during the same period of 2008.

Nonperforming loans increased $600,000 to $7.9 million at March 31, 2009 compared to $7.3 million at December 31, 2008. Nonperforming loans to total loans increased to 2.66% at March 31, 2009 from 2.41% at December 31, 2008. Nonperforming assets decreased $100,000 to $9.3 million at March 31, 2009 compared to $9.4 million at December 31, 2008. Nonperforming assets to total assets increased to 1.90% at March 31, 2009 as compared to 1.87% at December 31, 2008. The allowance for loan losses as a percentage of total loans increased to 1.82% at March 31, 2009 compared with 1.64% at December 31, 2008.

Loans past due 30 days and still accruing totaled $4.1 million, or 1.36% of total loans at March 31, 2009. This compares to $4.5 million at December 31, 2008, or 1.47% of loans.

Our internally criticized and classified assets totaled $26.6 million at March 31, 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.

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Noninterest Income

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

	Three Months Ended March 31,
	2009			2008			$ Chg			% Chg
Service charges on deposit accounts	$	807,835		$	927,278		$	(119,443	)		-12.88	%
Other service charges, commissions and fees		359,846			327,069			32,777			10.02	%
Brokerage fees		194,358			244,035			(49,677	)		-20.36	%
Mortgage origination fees		105,684			88,794			16,890			19.02	%
Bank owned life insurance		150,140			93,455			56,685			60.65	%
Other		6,205			72,137			(65,932	)		-91.40	%
Total noninterest income	$	1,624,068		$	1,752,768		$	(128,700	)		-7.34	%
Noninterest income as a percentage of average assets (annualized)		1.29	%		1.49	%

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 during the quarter was due to a decrease in assets under management during the quarter, due entirely 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 due primarily 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.

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 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.

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Noninterest Expense

A summary of noninterest expense follows:

	Three Months Ended March 31,
	2009			2008			$ Chg			% Chg
Salaries and employee benefits	$	2,197,689		$	2,300,957		$	(103,268	)		-4.49	%
Equipment		273,388			321,160			(47,772	)		-14.87	%
Occupancy		292,347			291,631			716			0.25	%
Advertising and marketing		87,524			145,331			(57,807	)		-39.78	%
Legal and accounting		117,880			126,831			(8,951	)		-7.06	%
Consulting & other professional fees		61,572			93,592			(32,020	)		-34.21	%
Directors fees and retirement		153,108			152,934			174			0.11	%
Telecommunications		61,956			71,919			(9,963	)		-13.85	%
Supplies		38,112			57,844			(19,732	)		-34.11	%
Data processing fees		329,960			304,213			25,747			8.46	%
(Gain) loss on sale and write-downs of other real estate owned		49,064			(805	)		49,869		NM
Foreclosed asset expenses		44,990			49,710			(4,720	)		-9.50	%
FDIC insurance and other regulatory fees		80,956			59,234			21,722			36.67	%
Other operating		326,133			380,963			(54,830	)		-14.39	%
Total noninterest expenses	$	4,114,679		$	4,355,514		$	(240,835	)		-5.53	%
Noninterest expenses as a percentage of average assets (annualized)		3.26	%		3.69	%

The decrease in salaries and employee benefits is due to a decrease in the number of full-time equivalent employees (“FTE’s”) to 117 at March 31, 2009, compared to 125 at March 31, 2008. We have reached an optimal level of employment and expect that our FTE count will remain level for the remainder of 2009.

Equipment and occupancy expenses decreased primarily due to a decrease in depreciation expense. We expect depreciation expense to increase later in 2009 as we replace computer equipment.

The decrease in advertising expense is due to efforts to hold these expenses down due to the slow economic environment. Also, we incurred additional expenses in the first quarter of 2008 associated with the opening of a branch in Ocala.

The decrease in legal and accounting fees was due primarily to lower legal fees. 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 decreased due to efforts to decrease outside services and nonessential expenses.

Directors fees and retirement remained level 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.

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Foreclosed asset expenses decreased slightly for the 2009 quarter. However, 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 during the 2009 quarter. This increase is due primarily to 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, we expect to record a charge for the FDIC’s proposed one-time assessment in the second quarter of 2009. We expect the charge to be between $300,000 and $700,000 depending upon the final decision of the assessment rate by the FDIC.

Other operating expenses are down due to overall efforts to reduce levels of noninterest expenses. These efforts include a reduction in travel, as well as reductions in expenses at all levels of the Company.

Income Tax Expense

During the quarter ended March 31, 2009, the Company recorded a tax benefit of $108,000. This compares to a tax expense of $120,000 during the first quarter 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 quarter 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 March 31, 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 three months ended March 31, 2009 and 2008, detail cash flows from operating, investing and financing activities. For the three months ended March 31, 2009, net cash provided by operating activities was $1.6 million while investing activities provided $12.8 million, primarily from the maturity and sale of securities and a decrease in loans, and financing activities used $12.0 million primarily from a decrease in brokered deposits, resulting in a net increase in cash during the three month period of $2.4 million.

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Regulatory Capital Ratios for the Company and HeritageBank of the South at March 31, 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 Bank’s compliance at March 31, 2009, with regulatory capital requirements. These calculations are based on total risk weighted assets of $359.8 million consolidated and $352.1 million for HeritageBank of the South as of March 31, 2009, and average total assets of $503.8 million consolidated and $497.5 million for HeritageBank of the South for the three months ended March 31, 2009.

											Minimum Required to Be
						For Capital					Well Capitalized Under
						Adequacy					Prompt Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets Consolidated	$	68,380		19.0	%	$	28,781		8.0	%		—		—
HeritageBank of the South	$	61,453		17.5	%	$	28,167		8.0	%	$	35,209		10.0	%
Tier I Capital to Risk Weighted Assets Consolidated	$	63,966		17.8	%	$	14,390		4.0	%		—		—
HeritageBank of the South	$	57,039		16.2	%	$	14,084		4.0	%	$	21,126		6.0	%
Tier I Capital to Average Total Assets Consolidated	$	63,966		12.7	%	$	20,153		4.0	%		—		—
HeritageBank of the South	$	57,039		11.5	%	$	19,899		4.0	%	$	24,874		5.0	%

Heritage Financial Group is subject to Georgia capital requirements for bank holding companies. At March 31, 2009, Heritage Financial Group had total equity of $62.4 million or 12.7% of total assets as of that date. Under Georgia capital requirements for holding companies, Heritage Financial Group had Tier I leverage capital of $64.0 million or 12.7%, which was $43.8 million above the 4.0% requirement.

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ITEM 3. QUANTITAVE 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 March 31, 2009:

Market Rate	Effect on Net
Change	Interest Income
+300		-5.4	%
+200		-5.6	%
+100		-2.4	%
-100		1.4	%
-200		4.4	%
-300		5.9	%

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

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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 March 31, 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 March 31, 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 March 31, 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.

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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 March 31, 2009.

Below is a summary of issuer purchases of equity securities during the quarter ended March 31, 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
January		25,000	$	9.05		25,000		211,000
February		7,500		8.80		7,500		203,500
March		15,000		7.95		15,000		188,500
Total		47,500	$	8.66		47,500		188,500

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

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

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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: May 14, 2009	By:	/s/ O. Leonard Dorminey
		O. Leonard Dorminey
		President and Chief Executive Officer
Date: May 14, 2009	By:	/s/ T. Heath Fountain
		T. Heath Fountain
		Senior Vice President and Chief Financial Officer

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