##### Table of Contents



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




---



##### 



HERITAGE FINANCIAL GROUP
  
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2007 AND DECEMBER 31, 2006
    
    
    3CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND THE YEAR ENDED DECEMBER 31, 2006
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    10ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    20ITEM 4. CONTROLS AND PROCEDURES
    
    
    20PART II  OTHER INFORMATION
    
    
    22SIGNATURES
    
    
    27EXHIBITS31.1 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 Sections 906 Certification of the CEO and CFO




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
 Unaudited
    
    
    AuditedJune 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    10,948,099
    
    
    $
    9,781,232Interest-bearing deposits in banks
    
    
    384,834
    
    
    
    2,153,859Federal funds sold
    
    
    4,797,000
    
    
    
    12,677,000Securities available for sale, at fair value
    
    
    108,431,935
    
    
    
    84,571,767Federal home loan bank stock, at cost
    
    
    2,519,700
    
    
    
    2,499,400Loans
    
    
    294,919,650
    
    
    
    276,776,236Less allowance for loan losses
    
    
    4,513,921
    
    
    
    4,075,997Loans, net
    
    
    290,405,729
    
    
    
    272,700,239Premises and equipment, net
    
    
    13,113,156
    
    
    
    12,815,482Accrued interest receivable
    
    
    2,418,189
    
    
    
    2,288,827Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Foreclosed assets
    
    
    318,286
    
    
    
    322,449Cash surrender value of bank owned life insurance
    
    
    8,462,259
    
    
    
    8,293,202Other assets
    
    
    5,261,482
    
    
    
    4,226,365$
    448,060,669
    
    
    $
    413,329,822Liabilities and Stockholders EquityDeposits
Noninterest-bearing
    
    $
    23,618,671
    
    
    $
    14,784,180Interest-bearing
    
    
    304,147,617
    
    
    
    284,404,324Total deposits
    
    
    327,766,288
    
    
    
    299,188,504Federal funds purchased and securities sold under
repurchase agreements
    
    
    10,493,979
    
    
    
    5,531,394Other borrowings
    
    
    40,000,000
    
    
    
    40,000,000Other liabilities
    
    
    6,818,719
    
    
    
    5,801,146Total liabilities
    
    
    385,078,986
    
    
    
    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;
11,449,155 issued and outstanding
    
    
    114,492
    
    
    
    114,492Capital surplus
    
    
    38,372,663
    
    
    
    37,807,784Retained earnings
    
    
    41,151,737
    
    
    
    40,248,349Accumulated other comprehensive loss
    
    
    (4,514,029
    )
    
    
    (3,097,880
    )Unearned employee stock ownership plan (ESOP) shares,
352,560 and 374,595 shares
    
    
    (3,525,600
    )
    
    
    (3,745,950
    )71,599,263
    
    
    
    71,326,795Treasury stock, at cost, 561,359 and 555,138 shares
    
    
    (8,617,580
    )
    
    
    (8,518,017
    )Total stockholders equity
    
    
    62,981,683
    
    
    
    62,808,778$
    448,060,669
    
    
    $
    413,329,822
 See Notes to Consolidated Financial Statements.
 3




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2007 and 2006
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest incomeInterest and fees on loans
    
    $
    5,514,001
    
    
    $
    4,575,405
    
    
    $
    10,749,637
    
    
    $
    8,918,519Interest on taxable securities
    
    
    1,046,731
    
    
    
    650,827
    
    
    
    1,978,067
    
    
    
    1,309,545Interest on nontaxable securities
    
    
    281,425
    
    
    
    61,635
    
    
    
    466,451
    
    
    
    123,091Interest on federal funds sold
    
    
    155,978
    
    
    
    107,471
    
    
    
    377,058
    
    
    
    219,573Interest on deposits in other banks
    
    
    6,122
    
    
    
    11,185
    
    
    
    16,708
    
    
    
    26,8667,004,257
    
    
    
    5,406,523
    
    
    
    13,587,921
    
    
    
    10,597,594Interest expenseInterest on deposits
    
    
    2,767,336
    
    
    
    1,315,576
    
    
    
    5,379,721
    
    
    
    2,474,146Interest on other borrowings
    
    
    577,863
    
    
    
    522,703
    
    
    
    1,062,348
    
    
    
    1,066,6733,345,199
    
    
    
    1,838,279
    
    
    
    6,442,069
    
    
    
    3,540,819Net interest income
    
    
    3,659,058
    
    
    
    3,568,244
    
    
    
    7,145,852
    
    
    
    7,056,775Provision for loan losses
    
    
    337,000
    
    
    
    (30,000
    )
    
    
    495,000
    
    
    
    60,000Net interest income after provision for
loan losses
    
    
    3,322,058
    
    
    
    3,598,244
    
    
    
    6,650,852
    
    
    
    6,996,775Noninterest incomeService charges on deposit accounts
    
    
    939,384
    
    
    
    712,700
    
    
    
    1,774,502
    
    
    
    1,312,290Other service charges, commissions and fees
    
    
    259,724
    
    
    
    234,390
    
    
    
    616,275
    
    
    
    453,537Brokerage fees
    
    
    264,181
    
    
    
    140,870
    
    
    
    441,407
    
    
    
    266,576Mortgage origination fees
    
    
    92,766
    
    
    
    121,258
    
    
    
    194,311
    
    
    
    222,138Bank owned life insurance
    
    
    87,260
    
    
    
    75,004
    
    
    
    169,056
    
    
    
    146,902Gain (loss) on sale of securities
    
    
    287
    
    
    
    
    
    
    
    (28,395
    )
    
    
    Other
    
    
    65,213
    
    
    
    58,211
    
    
    
    129,782
    
    
    
    153,1781,708,815
    
    
    
    1,342,433
    
    
    
    3,296,938
    
    
    
    2,554,621Noninterest expenseSalaries and employee benefits
    
    
    2,371,388
    
    
    
    2,047,199
    
    
    
    4,654,209
    
    
    
    4,213,160Equipment
    
    
    277,248
    
    
    
    287,517
    
    
    
    554,502
    
    
    
    627,641Occupancy
    
    
    254,067
    
    
    
    236,408
    
    
    
    504,256
    
    
    
    503,984Advertising and marketing
    
    
    105,747
    
    
    
    78,996
    
    
    
    195,811
    
    
    
    158,217Legal and accounting
    
    
    93,091
    
    
    
    138,021
    
    
    
    190,899
    
    
    
    340,322Directors fees and retirement
    
    
    131,202
    
    
    
    115,198
    
    
    
    259,404
    
    
    
    204,307Telephone
    
    
    58,513
    
    
    
    64,276
    
    
    
    114,036
    
    
    
    127,415Supplies
    
    
    56,461
    
    
    
    46,416
    
    
    
    110,711
    
    
    
    111,315Data processing fees
    
    
    372,690
    
    
    
    246,808
    
    
    
    551,496
    
    
    
    412,478Other operating
    
    
    626,092
    
    
    
    476,881
    
    
    
    1,117,187
    
    
    
    911,1614,346,499
    
    
    
    3,737,720
    
    
    
    8,252,511
    
    
    
    7,610,000Income before income taxes
    
    
    684,374
    
    
    
    1,202,957
    
    
    
    1,695,279
    
    
    
    1,941,396Applicable income taxes
    
    
    135,363
    
    
    
    368,322
    
    
    
    427,327
    
    
    
    610,316Net income
    
    $
    549,011
    
    
    $
    834,635
    
    
    $
    1,267,952
    
    
    $
    1,331,080Basic earnings per share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.12
 See Notes to Consolidated Financial Statements.
 4




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Six Months Ended June 30, 2007 and 2006
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    549,011
    
    
    $
    834,635
    
    
    $
    1,267,952
    
    
    $
    1,331,080Other comprehensive income (loss):Reclassification adjustment for (gains) losses
included in net income, net of (tax) benefit of
($114) and $11,261
    
    
    (173
    )
    
    
    
    
    
    
    17,134
    
    
    
    Unrealized holding losses arising during period,
Net of tax benefit of $1,006,221 and $269,717
for the quarter and $942,076 and $324,162
for the year to date
    
    
    (1,530,873
    )
    
    
    (410,351
    )
    
    
    (1,433,283
    )
    
    
    (493,183
    )Total other comprehensive loss
    
    
    (1,531,046
    )
    
    
    (410,351
    )
    
    
    (1,416,149
    )
    
    
    (493,183
    )Comprehensive income (loss)
    
    $
    (982,035
    )
    
    $
    424,284
    
    
    $
    (148,197
    )
    
    $
    837,897
 See Notes to Consolidated Financial Statements.
 5




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Stockholders Equity
For the Six Months Ended June 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,267,952
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,267,952Cash dividends declared,
$0.12 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (364,564
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (364,564
    )Repurchase of 6,451 shares of
stock for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,093
    )
    
    
    
    
    
    
    (103,093
    )ESOP shares earned,
22,035 shares
    
    
    
    
    
    
    
    
    
    
    135,550
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    355,900Issuance of 230 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    3,530
    
    
    
    
    
    
    
    3,808Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,416,149
    )
    
    
    (1,416,149
    )Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    429,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429,051Balance, June 30, 2007
    
    
    11,449,155
    
    
    $
    114,492
    
    
    $
    38,372,663
    
    
    $
    41,151,737
    
    
    $
    (3,525,600
    )
    
    $
    (8,617,580
    )
    
    $
    (4,514,029
    )
    
    $
    62,981,683
 See Notes to Consolidated Financial Statements.
 6




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2007 and 2006
 Six Months Ended June 30,2007
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    1,267,952
    
    
    $
    1,331,080Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    490,412
    
    
    
    543,623Provision for loan losses
    
    
    495,000
    
    
    
    60,000ESOP compensation expense
    
    
    355,900
    
    
    
    267,370Stock-based compensation expense
    
    
    429,051
    
    
    
    108,850Net gain on sale of securities available for sale
    
    
    28,395
    
    
    
    Net (increase) decrease in foreclosed assets
    
    
    4,163
    
    
    
    (68,831
    )Increase in bank owned life insurance
    
    
    (169,057
    )
    
    
    (146,902
    )(Increase) decrease in interest receivable
    
    
    (129,362
    )
    
    
    9,943Increase in interest payable
    
    
    319,419
    
    
    
    36,160Decrease in taxes payable
    
    
    (218,030
    )
    
    
    (204,679
    )Net other operating activities
    
    
    823,194
    
    
    
    (1,155,513
    )Total adjustments
    
    
    2,429,085
    
    
    
    (549,979
    )Net cash provided by operating activities
    
    
    3,668,929
    
    
    
    781,101INVESTING ACTIVITIESDecrease in interest-bearing deposits in banks
    
    
    1,769,025
    
    
    
    897,440Purchases of securities available for sale
    
    
    (34,150,575
    )
    
    
    (1,995,157
    )Proceeds from maturities of securities available for sale
    
    
    3,932,915
    
    
    
    2,539,115Proceeds from sale of securities available for sale
    
    
    3,970,820
    
    
    
    2,000,000Net change in Federal home loan bank stock
    
    
    (20,300
    )
    
    
    (22,400
    )Decrease (increase) in federal funds sold
    
    
    7,880,000
    
    
    
    (11,897,000
    )Increase in loans, net
    
    
    (18,200,490
    )
    
    
    (8,569,487
    )Purchase of premises and equipment
    
    
    (788,086
    )
    
    
    (276,566
    )Net cash used in investing activities
    
    
    (35,606,691
    )
    
    
    (17,324,055
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    28,577,784
    
    
    
    17,933,515Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    4,962,585
    
    
    
    418,764Proceeds from other borrowings
    
    
    
    
    
    
    10,000,000Repayment of other borrowings
    
    
    
    
    
    
    (10,000,000
    )Purchase of treasury stock, net
    
    
    (99,284
    )
    
    
    (2,087,520
    )Dividends paid to stockholders
    
    
    (364,564
    )
    
    
    (337,238
    )Net cash provided by financing activities
    
    
    33,076,521
    
    
    
    15,927,521Net increase (decrease) in cash and due from banks
    
    
    1,166,867
    
    
    
    (615,433
    )Cash and due from banks at beginning of period
    
    
    9,781,232
    
    
    
    10,499,084Cash and due from banks at end of period
    
    $
    10,948,099
    
    
    $
    9,883,651
 See Notes to Consolidated Financial Statements.
 7




---



##### 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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic earnings per share:Net income
    
    $
    549,011
    
    
    $
    834,635
    
    
    $
    1,267,952
    
    
    $
    1,331,080Weighted average common shares outstanding
    
    
    10,324,625
    
    
    
    10,801,659
    
    
    
    10,321,290
    
    
    
    10,815,717Total basic earnings per common share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.12Diluted earnings per share:Net income
    
    $
    549,011
    
    
    $
    834,635
    
    
    $
    1,267,952
    
    
    $
    1,331,080Weighted average common shares outstanding
    
    
    10,324,625
    
    
    
    10,801,659
    
    
    
    10,321,290
    
    
    
    10,815,717Effect of dilutive stock options and restricted stock
    
    
    92,932
    
    
    
    3,787
    
    
    
    54,675
    
    
    
    1,894Weighted average dilutive common shares outstanding
    
    
    10,417,557
    
    
    
    10,805,446
    
    
    
    10,375,965
    
    
    
    10,817,611Total diluted earnings per common share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.12
 8




---



##### Table of Contents



CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3 
    
    SHARE BASED COMPENSATION
    9




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
 Forward-Looking Statements.
  General
   Evolution of Business Strategy
   10




---



##### Table of Contents



Evolution of Business Strategy (Continued)
      Critical Accounting Policies
  Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    46,579Financial stand-by letters of credit
    
    
    1,302$
    47,881
 11




---



##### Table of Contents



Comparison of Financial Condition at June 30, 2007 and December 31, 2006
    Comparison of Operating Results
 General
 For the three months ended June 30, 2007 and 2006
  For the six months ended June 30, 2007 and 2006
  12




---



##### Table of Contents



Interest Income
 For the three months ended June 30, 2007 and 2006
  For the six months ended June 30, 2007 and 2006
  Interest Expense
 For the three months ended June 30, 2007 and 2006
  For the six months ended June 30, 2007 and 2006
  Net Interest Income
 For the three months ended June 30, 2007 and 2006
  For the six months ended June 30, 2007 and 2006
  13




---



##### Table of Contents



For the three months and six months ended June 30, 2007 and 2006
  Provision for Loan Losses
 For the three months and six months ended June 30, 2007 and 2006
     
 14




---



##### Table of Contents



Noninterest Income
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    939,384
    
    
    $
    712,700
    
    
    $
    226,684
    
    
    
    31.8
    %
    
    $
    1,774,502
    
    
    $
    1,312,290
    
    
    $
    462,212
    
    
    
    35.2
    %Other service charges, commissions
and fees
    
    
    259,724
    
    
    
    234,390
    
    
    
    25,334
    
    
    
    10.8
    %
    
    
    616,275
    
    
    
    453,537
    
    
    
    162,738
    
    
    
    35.9
    %Brokerage fees
    
    
    264,181
    
    
    
    140,870
    
    
    
    123,311
    
    
    
    87.5
    %
    
    
    441,407
    
    
    
    266,576
    
    
    
    174,831
    
    
    
    65.6
    %Mortgage origination fees
    
    
    92,766
    
    
    
    121,258
    
    
    
    (28,492
    )
    
    
    -23.5
    %
    
    
    194,311
    
    
    
    222,138
    
    
    
    (27,827
    )
    
    
    -12.5
    %Bank owned life insurance
    
    
    87,260
    
    
    
    75,004
    
    
    
    12,256
    
    
    
    16.3
    %
    
    
    169,056
    
    
    
    146,902
    
    
    
    22,154
    
    
    
    15.1
    %Gain (loss) on sale of securities
    
    
    287
    
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    (28,395
    )
    
    
    
    
    
    
    (28,395
    )
    
    NMOther
    
    
    65,213
    
    
    
    58,211
    
    
    
    7,002
    
    
    
    12.0
    %
    
    
    129,782
    
    
    
    153,178
    
    
    
    (23,396
    )
    
    
    -15.3
    %Total noninterest income
    
    $
    1,708,815
    
    
    $
    1,342,433
    
    
    $
    366,382
    
    
    
    27.3
    %
    
    $
    3,296,938
    
    
    $
    2,554,621
    
    
    $
    742,317
    
    
    
    29.06
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.54
    %
    
    
    1.47
    %
    
    
    
    
    
    
    
    
    
    
    1.52
    %
    
    
    1.40
    %
   15




---



##### Table of Contents



Noninterest Expense
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,371,388
    
    
    $
    2,047,199
    
    
    $
    324,189
    
    
    
    15.8
    %
    
    $
    4,654,209
    
    
    $
    4,213,160
    
    
    $
    441,049
    
    
    
    10.5
    %Equipment
    
    
    277,248
    
    
    
    287,517
    
    
    
    (10,269
    )
    
    
    -3.6
    %
    
    
    554,502
    
    
    
    627,641
    
    
    
    (73,139
    )
    
    
    -11.7
    %Occupancy
    
    
    254,067
    
    
    
    236,408
    
    
    
    17,659
    
    
    
    7.5
    %
    
    
    504,256
    
    
    
    503,984
    
    
    
    272
    
    
    
    0.1
    %Advertising and marketing
    
    
    105,747
    
    
    
    78,996
    
    
    
    26,751
    
    
    
    33.9
    %
    
    
    195,811
    
    
    
    158,217
    
    
    
    37,594
    
    
    
    23.8
    %Legal and accounting
    
    
    93,091
    
    
    
    138,021
    
    
    
    (44,930
    )
    
    
    -32.6
    %
    
    
    190,899
    
    
    
    340,322
    
    
    
    (149,423
    )
    
    
    -43.9
    %Directors fees and retirement
    
    
    131,202
    
    
    
    115,198
    
    
    
    16,004
    
    
    
    13.9
    %
    
    
    259,404
    
    
    
    204,307
    
    
    
    55,097
    
    
    
    27.0
    %Telephone
    
    
    58,513
    
    
    
    64,276
    
    
    
    (5,763
    )
    
    
    -9.0
    %
    
    
    114,036
    
    
    
    127,415
    
    
    
    (13,379
    )
    
    
    -10.5
    %Supplies
    
    
    56,461
    
    
    
    46,416
    
    
    
    10,045
    
    
    
    21.2
    %
    
    
    110,711
    
    
    
    111,315
    
    
    
    (604
    )
    
    
    -0.5
    %Data processing fees
    
    
    372,690
    
    
    
    246,808
    
    
    
    125,882
    
    
    
    51.0
    %
    
    
    551,496
    
    
    
    412,478
    
    
    
    139,018
    
    
    
    33.7
    %Other operating
    
    
    626,092
    
    
    
    476,881
    
    
    
    149,211
    
    
    
    31.3
    %
    
    
    1,117,187
    
    
    
    911,161
    
    
    
    206,026
    
    
    
    22.6
    %Total noninterest expenses
    
    $
    4,346,499
    
    
    $
    3,737,720
    
    
    $
    608,779
    
    
    
    16.3
    %
    
    $
    8,252,511
    
    
    $
    7,610,000
    
    
    $
    642,511
    
    
    
    8.4
    %Noninterest expenses as a
percentage of
average assets (annualized)
    
    
    3.91
    %
    
    
    4.10
    %
    
    
    
    
    
    
    
    
    
    
    3.80
    %
    
    
    4.18
    %
 16




---



##### Table of Contents



17




---



##### Table of Contents



Income Tax Expense
    Liquidity and Capital Resources
     18




---



##### 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
    
    $
    40,000
    
    
    $
    
    
    
    $
    15,000
    
    
    $
    
    
    
    $
    25,000Operating Lease Obligations
    
    
    188
    
    
    
    70
    
    
    
    86
    
    
    
    32
    
    
    
    Construction Contracts
    
    
    1,450
    
    
    
    1,450
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    41,638
    
    
    $
    1,520
    
    
    $
    15,086
    
    
    $
    32
    
    
    $
    25,000
 Regulatory Capital Ratios for HeritageBank of the South at June 30, 2007
  Minimum Required to BeFor Capital
    
    
    Well Capitalized UnderAdequacy
    
    
    Prompt Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Total Capital to Risk Weighted Assets
    
    $
    57,964
    
    
    
    17.1
    %
    
    $
    26,980
    
    
    
    8.0
    %
    
    $
    33,725
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    53,475
    
    
    
    15.9
    
    
    
    13,490
    
    
    
    4.0
    
    
    
    20,235
    
    
    
    6.0Tier I Capital to Average Total Assets
    
    
    53,475
    
    
    
    12.4
    
    
    
    17,302
    
    
    
    4.0
    
    
    
    21,627
    
    
    
    5.0
  19




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       
 ITEM 4. CONTROLS AND PROCEDURES
   20




---



##### Table of Contents



21




---



##### 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.
  22




---



##### 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.
 23




---



##### 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.
  24




---



##### 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
    
    
    ProgramsApril
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    295,000May
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June
    
    
    1,451
    
    
    
    16.26
    
    
    
    1,451
    
    
    
    293,549Total
    
    
    1,451
    
    
    $
    16.26
    
    
    
    1,451
    
    
    
    293,549
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  25




---



##### Table of Contents



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 Hereto31
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    Section 1350 Certifications
    
    
    32
 26




---



##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: August 13, 2007
    By:

/s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive Officer Date: August 13, 2007
    By:
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and
Chief Financial Officer 27