##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008  Commission File Number 000-51305
 
 (HERITAGE FINANCIAL GROUP LOGO)
 HERITAGE FINANCIAL GROUP
 721 N. Westover Blvd., Albany, GA 31707
229-420-0000
 þ o
  Large accelerated filer
o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company
þ(Do not check if a smaller reporting company)
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS




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##### 



HERITAGE FINANCIAL GROUP
  
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2008 AND DECEMBER 31, 2007
    
    
    3CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
    
    
    6 & 7CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
    
    
    8 & 9CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    10ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    13ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    22ITEM 4. CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATION
    
    
    24SIGNATURES
    
    
    26EXHIBITS31.1 Rule 13a-14(a) Certification of Chief Executive Officer31.2 Rule 13a-14(a) Certification of Chief Financial Officer32 Section 1350 CertificationEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEx-32 SECTION 906 CERTIFICATION OF THE CEO & CFO




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 MARCH 31, 2008 AND DECEMBER 31, 2007
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    9,113,231
    
    
    $
    8,953,836Interest-bearing deposits in banks
    
    
    566,920
    
    
    
    379,961Federal funds sold
    
    
    633,000
    
    
    
    14,505,000Securities available for sale, at fair value
    
    
    128,823,746
    
    
    
    107,867,192Federal home loan bank stock, at cost
    
    
    3,748,300
    
    
    
    2,969,700Loans
    
    
    312,279,000
    
    
    
    304,673,138Less allowance for loan losses
    
    
    4,720,175
    
    
    
    4,415,669Loans, net
    
    
    307,558,825
    
    
    
    300,257,469Premises and equipment, net
    
    
    16,188,598
    
    
    
    14,815,520Accrued interest receivable
    
    
    2,671,873
    
    
    
    2,586,357Foreclosed assets
    
    
    38,997
    
    
    
    364,999Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Cash surrender value of bank owned life insurance
    
    
    8,734,102
    
    
    
    8,640,647Other assets
    
    
    5,329,115
    
    
    
    6,331,560$
    484,406,707
    
    
    $
    468,672,241Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    21,710,206
    
    
    $
    21,058,567Interest-bearing
    
    
    294,779,181
    
    
    
    309,570,843Total deposits
    
    
    316,489,387
    
    
    
    330,629,410Federal funds purchased and securities sold under
agreements to repurchase
    
    
    31,106,912
    
    
    
    15,288,452Other borrowings
    
    
    65,000,000
    
    
    
    50,000,000Accrued interest payable
    
    
    744,182
    
    
    
    947,352Other liabilities
    
    
    5,758,848
    
    
    
    6,214,877Total liabilities
    
    
    419,099,329
    
    
    
    403,080,091Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,453,228 and 11,443,723 shares issued and outstanding
    
    
    114,532
    
    
    
    114,437Capital surplus
    
    
    39,237,974
    
    
    
    39,009,323Retained earnings
    
    
    42,778,757
    
    
    
    42,406,483Accumulated other comprehensive loss
    
    
    (2,376,824
    )
    
    
    (3,303,342
    )Unearned employee stock ownership (ESOP) shares,
319,508 and 330,525 shares
    
    
    (3,195,075
    )
    
    
    (3,305,250
    )76,559,364
    
    
    
    74,921,651Treasury stock, at cost 767,614 and 615,934 shares
    
    
    (11,251,986
    )
    
    
    (9,329,501
    )Total stockholders equity
    
    
    65,307,378
    
    
    $
    65,592,150$
    484,406,707
    
    
    $
    468,672,241
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE THREE MONTHS
 ENDED MARCH 31, 2008 AND 2007
 (Unaudited)
 Three Months Ended March 31,2008
    
    
    2007Interest incomeInterest and fees on loans
    
    $
    5,476,706
    
    
    $
    5,235,636Interest on taxable securities
    
    
    1,149,889
    
    
    
    931,336Interest on nontaxable securities
    
    
    326,549
    
    
    
    185,026Interest on federal funds sold
    
    
    71,754
    
    
    
    221,080Interest on deposits in other banks
    
    
    8,148
    
    
    
    10,5867,033,046
    
    
    
    6,583,664Interest expenseInterest on deposits
    
    
    2,524,605
    
    
    
    2,612,385Interest on other borrowings
    
    
    818,843
    
    
    
    484,4853,343,448
    
    
    
    3,096,870Net interest income
    
    
    3,689,598
    
    
    
    3,486,794Provision for loan losses
    
    
    400,000
    
    
    
    158,000Net interest income after provision for
loan losses
    
    
    3,289,598
    
    
    
    3,328,794Noninterest incomeService charges on deposit accounts
    
    
    927,278
    
    
    
    835,118Other service charges, commissions and fees
    
    
    327,069
    
    
    
    356,551Brokerage fees
    
    
    244,035
    
    
    
    177,226Mortgage origination fees
    
    
    88,794
    
    
    
    101,545Bank owned life insurance
    
    
    93,455
    
    
    
    81,796Gain (loss) on sale of securities
    
    
    12,359
    
    
    
    (28,682
    )Other
    
    
    72,137
    
    
    
    64,5691,765,127
    
    
    
    1,588,123Noninterest expenseSalaries and employee benefits
    
    
    2,300,957
    
    
    
    2,282,821Equipment
    
    
    321,160
    
    
    
    277,254Occupancy
    
    
    291,631
    
    
    
    250,189Advertising and marketing
    
    
    145,331
    
    
    
    90,064Legal and accounting
    
    
    126,831
    
    
    
    97,808Consulting and other professional fees
    
    
    93,592
    
    
    
    112,912Directors fees and retirement
    
    
    152,934
    
    
    
    128,202Telecommunications
    
    
    71,919
    
    
    
    55,523Supplies
    
    
    57,844
    
    
    
    54,250Data processing fees
    
    
    304,213
    
    
    
    178,806Other operating
    
    
    489,102
    
    
    
    378,1834,355,514
    
    
    
    3,906,012Income before income taxes
    
    
    699,211
    
    
    
    1,010,905Applicable income taxes
    
    
    119,672
    
    
    
    291,964Net income
    
    $
    579,539
    
    
    $
    718,941Basic earnings per share
    
    $
    0.06
    
    
    $
    0.07Diluted earnings per share
    
    $
    0.06
    
    
    $
    0.07
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 FOR THE THREE MONTHS
 ENDED MARCH 31, 2008 AND 2007
 (Unaudited)
 Three Months Ended March 31,2008
    
    
    2007Net income
    
    $
    579,539
    
    
    $
    718,941Other 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
    )
    
    
    Unrealized holding gains arising during period, net of tax
benefit of $413,813 and $64,145
    
    
    629,578
    
    
    
    97,591Reclassification adjustment for (gains) losses included in net income,
net of (tax) benefit of ($4,902) and $11,375
    
    
    (7,457
    )
    
    
    17,307Total other comprehensive income
    
    
    926,518
    
    
    
    114,898Comprehensive income
    
    $
    1,506,057
    
    
    $
    833,839
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND
 THE YEAR ENDED DECEMBER 31, 2007
 (Unaudited)
 Common Stock
    
    
    CapitalShares
    
    
    Par Value
    
    
    SurplusBalance, December 31, 2006
    
    
    11,449,155
    
    
    $
    114,492
    
    
    $
    37,807,784Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $.24 per share
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    811,781Repurchase of 61,106 shares of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    Issuance of 310 shares of common stock from the treasury
    
    
    
    
    
    
    
    
    
    
    432Forfeiture of 14,632 shares of restricted stock
    
    
    (14,632
    )
    
    
    (147
    )
    
    
    147Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Excess tax benefit from stock based compensation plans
    
    
    
    
    
    
    
    
    
    
    64,119Exercise of stock options
    
    
    9,200
    
    
    
    92
    
    
    
    115,276ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    210,106Balance, December 31, 2007
    
    
    11,443,723
    
    
    
    114,437
    
    
    
    39,009,323Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $.07 per share
    
    
    
    
    
    
    
    
    
    
    Repurchase of 151,740 shares of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    Issuance of 60 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    (127
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    202,936Issuance of restricted stock
    
    
    9,505
    
    
    
    95
    
    
    
    (95
    )ESOP shares earned, 11,018 shares
    
    
    
    
    
    
    
    
    
    
    25,937Balance, March 31, 2008
    
    
    11,453,228
    
    
    $
    114,532
    
    
    $
    39,237,974
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND
THE YEAR ENDED DECEMBER 31, 2007
(Unaudited)
 AccumulatedUnearned
    
    
    
    
    
    
    OtherRetained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveEarnings
    
    
    Shares
    
    
    Stock
    
    
    (Loss)
    
    
    Total$
    40,248,349
    
    
    $
    (3,745,950
    
    
    $
    (8,518,017
    )
    
    $
    (3,097,880
    )
    
    $
    62,808,7782,921,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,921,105(762,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811,781(816,227
    )
    
    
    
    
    
    
    (816,227
    )
    
    
    
    
    
    
    
    4,743
    
    
    
    
    
    
    
    4,853
    
    
    
    
    
    
    
    
    
    
    
    (205,462
    )
    
    
    (205,462
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,368
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    650,80642,406,483
    
    
    
    (3,305,250
    )
    
    
    (9,329,501
    )
    
    
    (3,303,342
    )
    
    
    65,592,150579,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579,539(207,265
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,265
    )
    
    
    
    (1,923,365
    )
    
    
    
    
    
    
    (1,923,365
    )
    
    
    
    
    
    
    
    880
    
    
    
    
    
    
    
    753
    
    
    
    
    
    
    
    
    
    
    
    926,518
    
    
    
    926,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,936
    
    
    
    110,175
    
    
    
    
    
    
    
    
    
    
    
    136,112$
    42,778,758
    
    
    $
    (3,195,075
    )
    
    $
    (11,251,986
    )
    
    $
    (2,376,824
    )
    
    $
    65,307,378
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS
 ENDED MARCH 31, 2008 AND 2007
 (Unaudited)
 Three Months Ended March 31,2008
    
    
    2007OPERATING ACTIVITIESNet income
    
    $
    579,539
    
    
    $
    718,941Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    256,435
    
    
    
    241,508Provision for loan losses
    
    
    400,000
    
    
    
    158,000ESOP compensation expense
    
    
    136,112
    
    
    
    179,649Stock-based compensation expense
    
    
    202,936
    
    
    
    214,526Net (gain) loss on sale of securities available for sale
    
    
    (12,359
    )
    
    
    28,682Net gain on termination of cash flow hedge
    
    
    898,725
    
    
    
    Net (increase) decrease in foreclosed assets
    
    
    326,002
    
    
    
    (26,511
    )Increase in bank owned life insurance
    
    
    (93,455
    )
    
    
    (81,797
    )Increase in interest receivable
    
    
    (85,516
    )
    
    
    (393,289
    )Increase (decrease) in interest payable
    
    
    (203,170
    )
    
    
    172,128Increase in taxes payable
    
    
    119,672
    
    
    
    249,964Net other operating activities
    
    
    (582,331
    )
    
    
    91,290Total adjustments
    
    
    1,363,051
    
    
    
    834,150Net cash provided by operating activities
    
    
    1,942,590
    
    
    
    1,553,091INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    (186,959
    )
    
    
    1,870,754Purchases of securities available for sale
    
    
    (27,196,720
    )
    
    
    (25,835,338
    )Proceeds from maturities of securities available for sale
    
    
    3,401,409
    
    
    
    1,498,299Proceeds from sale of securities available for sale
    
    
    3,887,984
    
    
    
    3,970,820Net change in Federal home loan bank stock
    
    
    (778,600
    )
    
    
    (20,300
    )(Increase) decrease in federal funds sold
    
    
    13,872,000
    
    
    
    (6,000
    )Increase in loans, net
    
    
    (7,701,356
    )
    
    
    (9,895,464
    )Purchase of premises and equipment
    
    
    (1,629,513
    )
    
    
    (243,652
    )Net cash used in investing activities
    
    
    (16,331,755
    )
    
    
    (28,660,881
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    (14,140,023
    )
    
    
    21,470,440Increase in federal funds purchased and securities sold
under agreements to repurchase
    
    
    15,818,460
    
    
    
    5,002,673Purchase of treasury stock, net
    
    
    (1,922,612
    )
    
    
    (78,516
    )Proceeds from other borrowings
    
    
    15,000,000
    
    
    
    Dividends paid to shareholders
    
    
    (207,265
    )
    
    
    (181,509
    )Net cash provided by financing activities
    
    
    14,548,560
    
    
    
    26,213,088Net increase (decrease) in cash and due from banks
    
    
    159,395
    
    
    
    (894,702
    )Cash and due from banks at beginning of year
    
    
    8,953,836
    
    
    
    9,781,232Cash and due from banks at end of year
    
    $
    9,113,231
    
    
    $
    8,886,530
 See Notes to Consolidated Financial Statements.
 8




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2008 AND 2007
(Unaudited)
 Three Months Ended March 31,2008
    
    2007SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    3,546,618
    
    
    $
    2,924,742Taxes
    
    
    
    
    
    
    279,412NONCASH TRANSACTIONSDecrease in unrealized losses on securities available for sale
    
    $
    1,036,868
    
    
    $
    191,497Decrease in unrealized gains on cash flow hedges
    
    
    391,396
    
    
    
    
 See Notes to Consolidated Financial Statements.
 9




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1   BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
     NOTE 2   EARNINGS PER SHARE
  Three Months Ended March 31,2008
    
    
    2007Basic earnings per share:Net income
    
    $
    579,539
    
    
    $
    718,941Weighted average common shares outstanding
    
    
    10,282,887
    
    
    
    10,317,919Total basic earnings per common share
    
    $
    0.06
    
    
    
    0.07Diluted earnings per share:Net income
    
    $
    579,539
    
    
    $
    718,941Weighted average common shares outstanding
    
    
    10,282,887
    
    
    
    10,317,919Effect of dilutive stock options and restricted stock
    
    
    26,732
    
    
    
    65,990Weighted average dilutive common shares outstanding
    
    
    10,309,619
    
    
    
    10,383,909Total diluted earnings per common share
    
    $
    0.06
    
    
    
    0.07
 10




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##### Table of Contents



NOTE 3   SHARE-BASED COMPENSATION
    NOTE 4   DERIVATIVE FINANCIAL INSTRUMENTS
  NOTE 5   FAIR VALUE MEASUREMENTS
    11




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Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsAvailable for sale investment
securities
    
    $
    
    
    
    $
    128,823,746
    
    
    $
    
    
    
    $
    128,823,746Total assets at fair value
    
    $
    
    
    
    $
    128,823,746
    
    
    $
    
    
    
    $
    128,823,746
 12




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##### Table of Contents



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




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##### Table of Contents



Critical Accounting Policies.
  Off Balance Sheet Liabilities.
  (In thousands)Commitments to extend credit
    
    $
    44,612,648Financial stand-by letters of credit
    
    
    4,985,985$
    49,598,633
 14




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##### Table of Contents



Comparison of Financial Condition at March 31, 2008 and December 31, 2007
    Comparison of Operating Results for the Three Months Ended March 31, 2008 and 2007
 General
  Interest Income
  15




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##### Table of Contents



Interest Expense
  Net Interest Income
  General Comments on Interest Rates
  Provision for Loan Losses
    16




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17




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##### Table of Contents



Noninterest Income
  Three Months EndedMarch 31,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    927,278
    
    
    $
    835,118
    
    
    $
    92,160
    
    
    
    11.04
    %Other service charges, commissions
and fees
    
    
    327,069
    
    
    
    356,551
    
    
    
    (29,482
    )
    
    
    -8.27
    %Brokerage fees
    
    
    244,035
    
    
    
    177,226
    
    
    
    66,809
    
    
    
    37.70
    %Mortgage origination fees
    
    
    88,794
    
    
    
    101,545
    
    
    
    (12,751
    )
    
    
    -12.56
    %Bank owned life insurance
    
    
    93,455
    
    
    
    81,796
    
    
    
    11,659
    
    
    
    14.25
    %Gain (Loss) on sale of securities
    
    
    12,359
    
    
    
    (28,682
    )
    
    
    41,041
    
    
    
    -143.09
    %Other
    
    
    72,137
    
    
    
    64,569
    
    
    
    7,568
    
    
    
    11.72
    %Total noninterest income
    
    $
    1,765,127
    
    
    $
    1,588,123
    
    
    $
    177,004
    
    
    
    11.15
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.50
    %
    
    
    1.49
    %
     18




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##### Table of Contents



Noninterest Expense
 Three Months EndedMarch 31,2008
    
    
    2007
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,300,957
    
    
    $
    2,282,821
    
    
    $
    18,136
    
    
    
    0.79
    %Equipment
    
    
    321,160
    
    
    
    277,254
    
    
    
    43,906
    
    
    
    15.84
    %Occupancy
    
    
    291,631
    
    
    
    250,189
    
    
    
    41,442
    
    
    
    16.56
    %Advertising and marketing
    
    
    145,331
    
    
    
    90,064
    
    
    
    55,267
    
    
    
    61.36
    %Legal and accounting
    
    
    126,831
    
    
    
    97,808
    
    
    
    29,023
    
    
    
    29.67
    %Consulting and other professional fees
    
    
    93,592
    
    
    
    112,912
    
    
    
    (19,320
    )
    
    
    -17.11
    %Directors fees and retirement
    
    
    152,934
    
    
    
    128,202
    
    
    
    24,732
    
    
    
    19.29
    %Telecommunications
    
    
    71,919
    
    
    
    55,523
    
    
    
    16,396
    
    
    
    29.53
    %Supplies
    
    
    57,844
    
    
    
    54,250
    
    
    
    3,594
    
    
    
    6.62
    %Data processing fees
    
    
    304,213
    
    
    
    178,806
    
    
    
    125,407
    
    
    
    70.14
    %Other operating
    
    
    489,102
    
    
    
    378,183
    
    
    
    110,919
    
    
    
    29.33
    %Total noninterest expenses
    
    $
    4,355,514
    
    
    $
    3,906,012
    
    
    $
    449,502
    
    
    
    11.51
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    3.69
    %
    
    
    3.67
    %
        19




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##### Table of Contents



Income Tax Expense
  Liquidity and Capital Resources
    20




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##### Table of Contents



Regulatory Capital Ratios for HeritageBank of the South at March 31, 2008
  Minimum Required toBe Well CapitalizedFor Capital
    
    Under PromptAdequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total Capital to Risk Weighted Assets
    
    
    63,201
    
    
    
    17.6
    %
    
    
    28,764
    
    
    
    8.0
    %
    
    
    35,955
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    58,704
    
    
    
    16.3
    %
    
    
    14,382
    
    
    
    4.0
    %
    
    
    21,573
    
    
    
    6.0
    %Tier I Capital to Average Assets
    
    
    58,704
    
    
    
    12.7
    %
    
    
    18,452
    
    
    
    4.0
    %
    
    
    23,065
    
    
    
    5.0
    %
  21




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       EffectMarket
    
    
    
    on NetRate
    
    
    
    InterestChange
    
    
    
    Income+300
    
    
    
    
    
    9.17
    %+200
    
    
    
    
    
    8.38
    %+100
    
    
    
    
    
    5.23
    %-100
    
    
    
    
    
    -6.27
    %-200
    
    
    
    
    
    -11.94
    %-300
    
    
    
    
    
    -13.48
    %
  22




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
     23




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares thatPart of
    
    
    may yet beTotal
    
    
    
    
    
    
    Publicly
    
    
    PurchasedNumber
    
    
    
    
    
    
    Announced
    
    
    Under theof Shares
    
    
    Average Price
    
    
    Plans or
    
    
    Plans orPurchased
    
    
    Paid Per Share
    
    
    Programs
    
    
    ProgramsJanuary
    
    
    7,500
    
    
    $
    12.00
    
    
    
    7,500
    
    
    
    231,394February
    
    
    88,000
    
    
    
    12.67
    
    
    
    88,000
    
    
    
    143,394March
    
    
    56,240
    
    
    
    12.64
    
    
    
    56,240
    
    
    
    87,154Total
    
    
    151,740
    
    
    $
    12.44
    
    
    
    151,740
    
    
    
    87,154
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5 . OTHER INFORMATION
  24




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##### Table of Contents



ITEM 6 . EXHIBITS
 Reference toPrior FilingRegulation S-K
    
    
    
    or Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto31
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    Section 1350 Certifications
    
    
    32
 25




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: May 13, 2008
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive OfficerDate: May 13, 2008
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 26