##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007  Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
   721 N. Westover Blvd., Albany, GA 31707
229-420-0000
 x o
 o o x
 o x
 APPLICABLE ONLY TO CORPORATE ISSUERS




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##### 



HERITAGE FINANCIAL GROUP
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
    
    
    3CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND THE YEAR ENDED
DECEMBER 31, 2006
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
    
    
    7 & 8CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    9ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4. CONTROLS AND PROCEDURES
    
    
    25PART II  OTHER INFORMATION
    
    
    26SIGNATURES
    
    
    31EX-10.11 Amendment to Existing Plan Agreement-DormineyEX-10.12 Amendment to Existing Plan Agreement-SlappeyEX-10.13 Amendment to Existing Plan Agreement-McGinleyEX-10.14 Amendment to Existing Plan Agreement-LandEX-10.15 Amendment to Existing Plan Agreement-StanleyEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32 Section 906 Certification of the CEO and CFO
  2




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
 Unaudited
    
    
    AuditedSeptember 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    9,431,806
    
    
    $
    9,781,232Interest-bearing deposits in banks
    
    
    413,406
    
    
    
    2,153,859Federal funds sold
    
    
    2,266,000
    
    
    
    12,677,000Securities available for sale, at fair value
    
    
    115,244,496
    
    
    
    84,571,767Federal home loan bank stock, at cost
    
    
    2,969,700
    
    
    
    2,499,400Loans
    
    
    296,921,397
    
    
    
    276,776,236Less allowance for loan losses
    
    
    4,495,883
    
    
    
    4,075,997Loans, net
    
    
    292,425,514
    
    
    
    272,700,239Premises and equipment, net
    
    
    14,312,751
    
    
    
    12,815,482Accrued interest receivable
    
    
    3,127,118
    
    
    
    2,288,827Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Foreclosed assets
    
    
    346,207
    
    
    
    322,449Cash surrender value of bank owned life insurance
    
    
    8,552,932
    
    
    
    8,293,202Other assets
    
    
    4,727,933
    
    
    
    4,226,365$
    454,817,863
    
    
    $
    413,329,822Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    19,815,644
    
    
    $
    14,784,180Interest-bearing
    
    
    297,493,705
    
    
    
    284,404,324Total deposits
    
    
    317,309,349
    
    
    
    299,188,504Federal funds purchased and securities sold under
repurchase agreements
    
    
    17,822,765
    
    
    
    5,531,394Other borrowings
    
    
    50,000,000
    
    
    
    40,000,000Other liabilities
    
    
    5,469,291
    
    
    
    5,801,146Total liabilities
    
    
    390,601,405
    
    
    
    350,521,044Commitments 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;
11,434,523 issued
    
    
    114,345
    
    
    
    114,492Capital surplus
    
    
    38,596,188
    
    
    
    37,807,784Retained earnings
    
    
    42,093,537
    
    
    
    40,248,349Accumulated other comprehensive loss
    
    
    (3,842,232
    )
    
    
    (3,097,880
    )Unearned employee stock ownership plan (ESOP) shares,
341,543 and 374,595 shares
    
    
    (3,415,425
    )
    
    
    (3,745,950
    )73,546,413
    
    
    
    71,326,795Treasury
stock, at cost, 615,964 and 555,138 shares
    
    
    (9,329,955
    )
    
    
    (8,518,017
    )Total stockholders equity
    
    
    64,216,458
    
    
    
    62,808,778$
    454,817,863
    
    
    $
    413,329,822
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest incomeInterest and fees on loans
    
    $
    5,701,464
    
    
    $
    4,998,436
    
    
    $
    16,451,101
    
    
    $
    13,916,955Interest on taxable securities
    
    
    1,122,206
    
    
    
    640,647
    
    
    
    3,100,273
    
    
    
    1,950,192Interest on nontaxable securities
    
    
    286,710
    
    
    
    51,959
    
    
    
    753,161
    
    
    
    175,050Interest on federal funds sold
    
    
    115,207
    
    
    
    96,571
    
    
    
    492,265
    
    
    
    316,144Interest on deposits in other banks
    
    
    6,065
    
    
    
    5,895
    
    
    
    22,773
    
    
    
    32,7617,231,652
    
    
    
    5,793,508
    
    
    
    20,819,573
    
    
    
    16,391,102Interest expenseInterest on deposits
    
    
    2,810,852
    
    
    
    1,586,597
    
    
    
    8,190,573
    
    
    
    4,060,743Interest on other borrowings
    
    
    717,661
    
    
    
    611,249
    
    
    
    1,780,009
    
    
    
    1,677,9223,528,513
    
    
    
    2,197,846
    
    
    
    9,970,582
    
    
    
    5,738,665Net interest income
    
    
    3,703,139
    
    
    
    3,595,662
    
    
    
    10,848,991
    
    
    
    10,652,437Provision for loan losses
    
    
    58,000
    
    
    
    635,000
    
    
    
    553,000
    
    
    
    695,000Net interest income after provision for
loan losses
    
    
    3,645,139
    
    
    
    2,960,662
    
    
    
    10,295,991
    
    
    
    9,957,437Noninterest incomeService charges on deposit accounts
    
    
    1,061,419
    
    
    
    910,236
    
    
    
    2,835,921
    
    
    
    2,222,526Other service charges, commissions and fees
    
    
    268,634
    
    
    
    239,711
    
    
    
    884,908
    
    
    
    725,661Brokerage fees
    
    
    293,257
    
    
    
    125,789
    
    
    
    734,664
    
    
    
    392,365Mortgage origination fees
    
    
    90,351
    
    
    
    116,558
    
    
    
    284,662
    
    
    
    338,696Bank owned life insurance
    
    
    90,673
    
    
    
    76,429
    
    
    
    259,729
    
    
    
    223,331Loss on sale of securities
    
    
    (20,768
    )
    
    
    (11,239
    )
    
    
    (49,163
    )
    
    
    (11,239
    )Other
    
    
    72,079
    
    
    
    63,500
    
    
    
    201,862
    
    
    
    184,2651,855,645
    
    
    
    1,520,984
    
    
    
    5,152,583
    
    
    
    4,075,605Noninterest expenseSalaries and employee benefits
    
    
    3,469,295
    
    
    
    2,325,747
    
    
    
    8,123,504
    
    
    
    6,538,907Equipment
    
    
    280,238
    
    
    
    285,499
    
    
    
    834,740
    
    
    
    913,140Occupancy
    
    
    253,377
    
    
    
    278,333
    
    
    
    757,633
    
    
    
    782,317Advertising and marketing
    
    
    103,657
    
    
    
    84,310
    
    
    
    299,468
    
    
    
    242,527Legal and accounting
    
    
    141,564
    
    
    
    205,766
    
    
    
    332,463
    
    
    
    546,088Directors fees and retirement
    
    
    338,351
    
    
    
    149,860
    
    
    
    597,755
    
    
    
    354,167Telephone
    
    
    55,874
    
    
    
    79,418
    
    
    
    169,910
    
    
    
    206,833Supplies
    
    
    50,104
    
    
    
    80,461
    
    
    
    160,815
    
    
    
    191,776Data processing fees
    
    
    303,237
    
    
    
    252,800
    
    
    
    854,733
    
    
    
    665,278Other operating
    
    
    560,096
    
    
    
    514,542
    
    
    
    1,677,283
    
    
    
    1,425,7035,555,793
    
    
    
    4,256,736
    
    
    
    13,808,304
    
    
    
    11,866,736Income (loss) before income taxes (benefits)
    
    
    (55,009
    )
    
    
    224,910
    
    
    
    1,640,270
    
    
    
    2,166,306Applicable income taxes (benefits)
    
    
    (1,217,683
    )
    
    
    63,141
    
    
    
    (790,356
    )
    
    
    673,457Net income
    
    $
    1,162,674
    
    
    $
    161,769
    
    
    $
    2,430,626
    
    
    $
    1,492,849Basic earnings per share
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    0.24
    
    
    $
    0.14Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    0.23
    
    
    $
    0.14
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    1,162,674
    
    
    $
    161,769
    
    
    $
    2,430,626
    
    
    $
    1,492,849Other comprehensive income (loss):Reclassification adjustment for losses
included in net income, net of tax benefit of
$8,237 and $4,457 for the quarter and
$19,498 and $4,457 for the year to date
    
    
    12,531
    
    
    
    6,781
    
    
    
    29,665
    
    
    
    6,781Unrealized holding gain (losses) arising during period,
Net of tax (benefit) of $433,326 and $499,982
for the quarter and ($508,750) and $175,820
for the year to date
    
    
    659,266
    
    
    
    760,677
    
    
    
    (774,017
    )
    
    
    267,494Total other comprehensive income (loss)
    
    
    671,797
    
    
    
    767,458
    
    
    
    (744,352
    )
    
    
    274,275Comprehensive income
    
    $
    1,834,471
    
    
    $
    929,227
    
    
    $
    1,686,274
    
    
    $
    1,767,124
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Stockholders Equity
For the Nine Months Ended September 30, 2007 (Unaudited) and the Year Ended December 31, 2006
 AccumulatedUnearned
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2005
    
    
    11,241,250
    
    
    $
    112,413
    
    
    $
    37,126,877
    
    
    $
    38,717,576
    
    
    $
    (4,186,650
    )
    
    $
    
    
    
    $
    (2,786,569
    )
    
    $
    68,983,647Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,353,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,353,637Cash dividend declared,
$0.20 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (673,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (673,936
    )Issuance of restricted shares
of common stock
    
    
    207,905
    
    
    
    2,079
    
    
    
    (2,079
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustments related to initial
adoption of SFAS 158,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (748,049
    )
    
    
    (748,049
    )Effects of changing pension
plan measurement date
pursuant to SFAS 158:Service cost, internal cost
and expected return on
plan assets October 1 -
December 31, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147,561
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147,561
    )Amortization of prior
service cost for October 1 -
December 31, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,367
    )
    
    
    
    
    
    
    
    
    
    
    1,367
    
    
    
    Stock based compensation
expense
    
    
    
    
    
    
    
    
    
    
    521,715
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    521,715Repurchase of 555,328 shares
of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,520,680
    )
    
    
    
    
    
    
    (8,520,680
    )Issuance of 190 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    432
    
    
    
    
    
    
    
    
    
    
    
    2,663
    
    
    
    
    
    
    
    3,095Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    435,371
    
    
    
    435,371ESOP shares earned,
44,070 shares
    
    
    
    
    
    
    
    
    
    
    160,839
    
    
    
    
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    601,539Balance, December 31, 2006
    
    
    11,449,155
    
    
    
    114,492
    
    
    
    37,807,784
    
    
    
    40,248,349
    
    
    
    (3,745,950
    )
    
    
    (8,518,017
    )
    
    
    (3,097,880
    )
    
    
    62,808,778Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,430,626
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,430,626Cash dividends declared,
$0.18 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (585,438
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (585,438
    )Repurchase of 61,106 shares of
stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (816,227
    )
    
    
    
    
    
    
    (816,227
    )ESOP shares earned,
33,053 shares
    
    
    
    
    
    
    
    
    
    
    172,008
    
    
    
    
    
    
    
    330,525
    
    
    
    
    
    
    
    
    
    
    
    502,533Forfeiture of restricted stock reward
    
    
    (14,632
    )
    
    
    (147
    )
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 280 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    4,289
    
    
    
    
    
    
    
    4,471Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (744,352
    )
    
    
    (744,352
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    616,067
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    616,067Balance, September 30, 2007
    
    
    11,434,523
    
    
    $
    114,345
    
    
    $
    38,596,188
    
    
    $
    42,093,537
    
    
    $
    (3,415,425
    )
    
    $
    (9,329,955
    )
    
    $
    (3,842,232
    )
    
    $
    64,216,458
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
 Nine Months Ended September 30,2007
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    2,430,626
    
    
    $
    1,492,849Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    733,800
    
    
    
    795,785Provision for loan losses
    
    
    553,000
    
    
    
    695,000ESOP compensation expense
    
    
    502,533
    
    
    
    422,208Stock-based compensation expense
    
    
    616,067
    
    
    
    338,921Net loss on sale of securities available for sale
    
    
    49,163
    
    
    
    11,239Net increase in foreclosed assets
    
    
    (23,758
    )
    
    
    (389,278
    )Increase in bank owned life insurance
    
    
    (259,730
    )
    
    
    (223,331
    )Increase in interest receivable
    
    
    (838,291
    )
    
    
    (232,487
    )Increase in interest payable
    
    
    169,438
    
    
    
    53,898Decrease in taxes payable
    
    
    (1,935,588
    )
    
    
    (252,638
    )Net other operating activities
    
    
    1,430,220
    
    
    
    (346,395
    )Total adjustments
    
    
    996,852
    
    
    
    872,922Net cash provided by operating activities
    
    
    3,427,478
    
    
    
    2,365,771INVESTING ACTIVITIESDecrease in interest-bearing deposits in banks
    
    
    1,740,453
    
    
    
    930,750Purchases of securities available for sale
    
    
    (51,143,567
    )
    
    
    (3,495,155
    )Proceeds from maturities of securities available for sale
    
    
    6,690,640
    
    
    
    3,730,080Proceeds from sale of securities available for sale
    
    
    12,490,449
    
    
    
    6,918,434Net change in Federal home loan bank stock
    
    
    (470,300
    )
    
    
    (22,400
    )Decrease in federal funds sold
    
    
    10,411,000
    
    
    
    2,781,000Purchase of intangible asset
    
    
    
    
    
    
    (1,000,000
    )Increase in loans, net
    
    
    (20,278,275
    )
    
    
    (25,509,981
    )Proceeds from sale of fixed assets
    
    
    249,622
    
    
    
    Purchase of premises and equipment
    
    
    (2,481,949
    )
    
    
    (1,851,295
    )Net cash used in investing activities
    
    
    (42,791,927
    )
    
    
    (17,518,567
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    18,120,845
    
    
    
    13,267,844Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    12,291,371
    
    
    
    3,803,612Proceeds from other borrowings
    
    
    10,000,000
    
    
    
    25,000,000Repayment of other borrowings
    
    
    
    
    
    
    (25,000,000
    )Purchase of treasury stock, net
    
    
    (811,755
    )
    
    
    (2,923,472
    )Dividends paid to stockholders
    
    
    (585,438
    )
    
    
    (506,085
    )Net cash provided by financing activities
    
    
    39,015,023
    
    
    
    13,641,899Net decrease in cash and due from banks
    
    
    (349,426
    )
    
    
    (1,510,897
    )Cash and due from banks at beginning of period
    
    
    9,781,232
    
    
    
    10,499,084Cash and due from banks at end of period
    
    $
    9,431,806
    
    
    $
    8,988,187
 See Notes to Consolidated Financial Statements.
 7




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
 Nine Months Ended September 30,2007
    
    
    2006SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    9,801,144
    
    
    $
    5,546,873Taxes
    
    
    1,147,254
    
    
    
    1,113,193
 See Notes to Consolidated Financial Statements.
 8




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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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic earnings per share:Net income
    
    $
    1,162,674
    
    
    $
    161,769
    
    
    $
    2,430,626
    
    
    $
    1,492,849Weighted average common shares outstanding
    
    
    10,349,924
    
    
    
    10,636,323
    
    
    
    10,337,310
    
    
    
    10,755,262Total basic earnings per common share
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    0.24
    
    
    $
    0.14Diluted earnings per share:Net income
    
    $
    1,162,674
    
    
    $
    161,769
    
    
    $
    2,430,626
    
    
    $
    1,492,849Weighted average common shares outstanding
    
    
    10,349,924
    
    
    
    10,636,323
    
    
    
    10,337,310
    
    
    
    10,755,262Effect of dilutive stock options and restricted stock
    
    
    52,389
    
    
    
    20,280
    
    
    
    67,020
    
    
    
    12,863Weighted average dilutive common shares outstanding
    
    
    10,402,313
    
    
    
    10,656,603
    
    
    
    10,404,330
    
    
    
    10,768,125Total diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    0.23
    
    
    $
    0.14
 9




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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3   SHARE BASED COMPENSATION
    10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
   11




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Evolution of Business Strategy (Continued)
         12




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Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    48,262Financial stand-by letters of credit
    
    
    1,052$
    49,314
 Comparison of Financial Condition at September 30, 2007 and December 31, 2006
    13




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Comparison of Operating Results
 General
 For the three months ended September 30, 2007 and 2006
   For the nine months ended September 30, 2007 and 2006
   14




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Reconciliation of net income to adjusted net income
  Unaudited Reconciliation of Net Income to Adjusted Net Income
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    1,163
    
    
    $
    162
    
    
    $
    2,431
    
    
    $
    1,493Charges to accelerate vesting on retirement plans,
after tax
    
    
    947
    
    
    
    
    
    
    
    947
    
    
    
    Reversal of contingent income tax liability
    
    
    (1,060
    )
    
    
    
    
    
    
    (1,060
    )
    
    
    Adjusted net income
    
    $
    1,050
    
    
    $
    161
    
    
    $
    2,318
    
    
    $
    1,493Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    0.23
    
    
    $
    0.14Charges to accelerate vesting on retirement plans,
after tax
    
    
    0.09
    
    
    
    
    
    
    
    0.09
    
    
    
    Reversal of contingent income tax liability
    
    
    (0.10
    )
    
    
    
    
    
    
    (0.10
    )
    
    
    Adjusted earnings per diluted share
    
    $
    0.10
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    0.14
  15




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##### Table of Contents



Interest Income
 For the three months ended September 30, 2007 and 2006
  For the nine months ended September 30, 2007 and 2006
  Interest Expense
 For the three months ended September 30, 2007 and 2006
  For the nine months ended September 30, 2007 and 2006
  Net Interest Income
 For the three months ended September 30, 2007 and 2006
  For the nine months ended September 30, 2007 and 2006
  16




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For the three months and nine months ended September 30, 2007 and 2006
  Provision for Loan Losses
 For the three months and nine months ended September 30, 2007 and 2006
       17




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Noninterest Income
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    
    
    
    

September 30,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    1,061,419
    
    
    $
    910,236
    
    
    $
    151,183
    
    
    
    16.61
    %
    
    $
    2,835,921
    
    
    $
    2,222,526
    
    
    $
    613,395
    
    
    
    27.60
    %Other service charges, commissions
and fees
    
    
    268,634
    
    
    
    239,711
    
    
    
    28,923
    
    
    
    12.07
    %
    
    
    884,908
    
    
    
    725,661
    
    
    
    159,247
    
    
    
    21.95
    %Brokerage fees
    
    
    293,257
    
    
    
    125,789
    
    
    
    167,468
    
    
    
    133.13
    %
    
    
    734,664
    
    
    
    392,365
    
    
    
    342,299
    
    
    
    87.24
    %Mortgage origination fees
    
    
    90,351
    
    
    
    116,558
    
    
    
    (26,207
    )
    
    
    -22.48
    %
    
    
    284,662
    
    
    
    338,696
    
    
    
    (54,034
    )
    
    
    -15.95
    %Bank owned life insurance
    
    
    90,673
    
    
    
    76,429
    
    
    
    14,244
    
    
    
    18.64
    %
    
    
    259,729
    
    
    
    223,331
    
    
    
    36,398
    
    
    
    16.30
    %Loss on sale of securities
    
    
    (20,768
    )
    
    
    (11,239
    )
    
    
    (9,529
    )
    
    
    84.79
    %
    
    
    (49,163
    )
    
    
    (11,239
    )
    
    
    (37,924
    )
    
    
    337.43
    %Other
    
    
    72,079
    
    
    
    63,500
    
    
    
    8,579
    
    
    
    13.51
    %
    
    
    201,862
    
    
    
    184,265
    
    
    
    17,597
    
    
    
    9.55
    %Total noninterest income
    
    $
    1,855,645
    
    
    $
    1,520,984
    
    
    $
    334,661
    
    
    
    22.00
    %
    
    $
    5,152,583
    
    
    $
    4,075,605
    
    
    $
    1,076,978
    
    
    
    26.42
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.64
    %
    
    
    1.63
    %
    
    
    
    
    
    
    
    
    
    
    1.56
    %
    
    
    1.48
    %
   19




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##### Table of Contents



Noninterest Expense
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    
    
    
    
    September 30,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    3,469,295
    
    
    $
    2,325,747
    
    
    $
    1,143,548
    
    
    
    49.17
    %
    
    $
    8,123,504
    
    
    $
    6,538,907
    
    
    $
    1,584,597
    
    
    
    24.23
    %Equipment
    
    
    280,238
    
    
    
    285,499
    
    
    
    (5,261
    )
    
    
    -1.84
    %
    
    
    834,740
    
    
    
    913,140
    
    
    
    (78,400
    )
    
    
    -8.59
    %Occupancy
    
    
    253,377
    
    
    
    278,333
    
    
    
    (24,956
    )
    
    
    -8.97
    %
    
    
    757,633
    
    
    
    782,317
    
    
    
    (24,684
    )
    
    
    -3.16
    %Advertising and marketing
    
    
    103,657
    
    
    
    84,310
    
    
    
    19,347
    
    
    
    22.95
    %
    
    
    299,468
    
    
    
    242,527
    
    
    
    56,941
    
    
    
    23.48
    %Legal and accounting
    
    
    141,564
    
    
    
    205,766
    
    
    
    (64,202
    )
    
    
    -31.20
    %
    
    
    332,463
    
    
    
    546,088
    
    
    
    (213,625
    )
    
    
    -39.12
    %Directors fees and retirement
    
    
    338,351
    
    
    
    149,860
    
    
    
    188,491
    
    
    
    125.78
    %
    
    
    597,755
    
    
    
    354,167
    
    
    
    243,588
    
    
    
    68.78
    %Telephone
    
    
    55,874
    
    
    
    79,418
    
    
    
    (23,544
    )
    
    
    -29.65
    %
    
    
    169,910
    
    
    
    206,833
    
    
    
    (36,923
    )
    
    
    -17.85
    %Supplies
    
    
    50,104
    
    
    
    80,461
    
    
    
    (30,357
    )
    
    
    -37.73
    %
    
    
    160,815
    
    
    
    191,776
    
    
    
    (30,961
    )
    
    
    -16.14
    %Data processing fees
    
    
    303,237
    
    
    
    252,800
    
    
    
    50,437
    
    
    
    19.95
    %
    
    
    854,733
    
    
    
    665,278
    
    
    
    189,455
    
    
    
    28.48
    %Other operating
    
    
    560,096
    
    
    
    514,542
    
    
    
    45,554
    
    
    
    8.85
    %
    
    
    1,677,283
    
    
    
    1,425,703
    
    
    
    251,580
    
    
    
    17.65
    %Total noninterest expenses
    
    $
    5,555,793
    
    
    $
    4,256,736
    
    
    $
    1,299,057
    
    
    
    30.52
    %
    
    $
    13,808,304
    
    
    $
    11,866,736
    
    
    $
    1,941,568
    
    
    
    16.36
    %Noninterest expenses as a
percentage of
average assets (annualized)
    
    
    4.91
    %
    
    
    4.56
    %
    
    
    
    
    
    
    
    
    
    
    4.18
    %
    
    
    4.31
    %
 20




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21




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##### Table of Contents



Income Tax Expense
   Liquidity and Capital Resources
     22




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##### Table of Contents



Contractual Obligations
  Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More than 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(Dollars in Thousands)Federal Home Loan Bank Advances
    
    $
    50,000
    
    
    $
    
    
    
    $
    25,000
    
    
    $
    
    
    
    $
    25,000Operating Lease Obligations
    
    
    175
    
    
    
    57
    
    
    
    86
    
    
    
    32
    
    
    
    Construction Contracts
    
    
    1,450
    
    
    
    1,450
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    51,625
    
    
    $
    1,507
    
    
    $
    25,086
    
    
    $
    32
    
    
    $
    25,000
 Regulatory Capital Ratios for HeritageBank of the South at September 30, 2007
  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
    
    $
    59,323
    
    
    
    17.3
    %
    
    $
    27,451
    
    
    
    8.0
    %
    
    $
    34,314
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    55,031
    
    
    
    16.0
    
    
    
    13,725
    
    
    
    4.0
    
    
    
    20,588
    
    
    
    6.0Tier I Capital to Average Total Assets
    
    
    55,031
    
    
    
    12.8
    
    
    
    17,218
    
    
    
    4.0
    
    
    
    21,523
    
    
    
    5.0
  23




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##### Table of Contents



ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       EffectMarket
    
    
    
    on NetRate
    
    
    
    InterestChange
    
    
    
    Income+300
    
    
    
    
    12.80
    %+200
    
    
    
    
    8.66
    %+100
    
    
    
    
    4.41
    %-100
    
    
    
    
    -4.60
    %-200
    
    
    
    
    -9.60
    %-300
    
    
    
    
    -15.34
    %
  24




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
     25




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  Our loan portfolio possesses increased risk due to our substantial number of multi-family,
commercial real estate, commercial business and consumer loans.
  We plan to increase residential and commercial construction lending activities, which will increase
the risk in our loan portfolio.
  If economic conditions deteriorate, our results of operations and financial condition could be
adversely impacted as borrowers ability to repay loans declines and the value of the collateral
securing our loans decreases.
  26




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##### Table of Contents



If our allowance for loan losses is not sufficient to cover actual loan losses, or if credit
delinquencies increase, our earnings could decrease.
  Strong competition within our market area may limit our growth and profitability.
  We may face risks with respect to the future expansion of our business.
  
    
    entry into new markets where we lack experience;
    
    the introduction of new products or services into our business with which we lack experience;
    
    the time and cost associated with identifying and evaluating potential markets, products and
services, hiring experienced local management and opening new offices;
    
    potential time lags between preparatory activities and the generation of sufficient assets
and deposits to support the costs of expansion; and
    
    the estimates and judgments used to evaluate market risks with respect to new markets,
products and services may not be accurate.
 27




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##### Table of Contents



We operate in a highly regulated environment, and we may be adversely affected by changes in laws
and regulations.
  There is a limited market for our common stock.
  Our ability to pay dividends is limited and we may be unable to pay future dividends.
  MHC owns more than half of the common stock of the Company. As a result, MHC has enough votes to
control what happens on most matters submitted to a vote of stockholders.
  28




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##### Table of Contents



The amount of common stock we control, our charter and bylaws, and state and federal statutory
provisions could discourage hostile acquisitions of control
  
    
    staggered terms of the members of the board of directors;
    
    restrictions on the acquisition of our equity securities without regulatory
approval; and
    
    the authorization of 1,000,000 shares of serial preferred stock that could be
issued without stockholder approval on terms or in circumstances that could deter a future
takeover attempt.
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   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
    
    
    ProgramsJuly
    
    
    7,500
    
    
    $
    13.50
    
    
    
    7,500
    
    
    
    286,049August
    
    
    35,000
    
    
    
    12.86
    
    
    
    35,000
    
    
    
    251,049September
    
    
    12,155
    
    
    
    13.67
    
    
    
    12,155
    
    
    
    238,894Total
    
    
    54,655
    
    
    $
    13.34
    
    
    
    54,655
    
    
    
    238,894
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  29




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ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5 . OTHER INFORMATION
  ITEM 6 . EXHIBITS
 Reference toPrior FilingRegulation S-K
    
    
    
    or Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto10.11
    
    Amendment to Existing Plan Agreement  Dorminey
    
    
    10.1110.12
    
    Amendment to Existing Plan Agreement  Slappey
    
    
    10.1210.13
    
    Amendment to Existing Plan Agreement  McGinley
    
    
    10.1310.14
    
    Amendment to Existing Plan Agreement  Land
    
    
    10.1410.15
    
    Amendment to Existing Plan Agreement  Stanley
    
    
    10.1531.1
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3131.2
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    Section 1350 Certifications
    
    
    32
 30




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: November 14, 2007
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive Officer Date: November 14, 2007
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 31