##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
Commission File Number 000-51305
 
 (HERITAGE FINANCIAL GROUP LOGO)
 HERITAGE FINANCIAL GROUP
  
 Title of Each Class
Common Stock, Par Value $0.01 per share
    
    Name of Each Exchange on which registered
NASDAQ Stock Market, LLC
 o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 þ
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  Item 1. BusinessItem 1A. Risk FactorsItem 2. Description of PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial StatementsItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9B. Other InformationPART IIIItem 10.Directors and Executive Officers and Corporate GovernanceItem 11.Executive CompensationItem 12.Security Ownership of Certain Beneficial Owners and ManagementItem 13.Certain Relationships and Related TransactionsItem 14.Principal Accountant Fees and ServicesPART IVItem 15.ExhibitsSIGNATURESIndex to ExhibitsEX-21 SUBSIDIARIES OF THE COMPANYEX-23 CONSENT OF ACCOUNTANTSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 1350 CERTIFICATIONS    Table of Contents  PART I
 
 Item 1. Business
 General
      Forward Looking Statements
  
    
    further developments in the Companys ongoing review of and
efforts to resolve any problem credit relationships described in this report,
which could result in, among other things, further downgrades of
aforementioned loans, additional provisions to the loan loss reserve and the
incurrence of other material non-cash and cash charges;
    
    the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;
 2




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##### Table of Contents




    
    the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board;
    
    inflation, interest rate, market and monetary fluctuations;
    
    the timely development of and acceptance of our new products
and services and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors
products and services;
    
    the willingness of users to substitute our products and
services for products and services of our competitors;
    
    the impact of changes in financial services laws and
regulations (including laws concerning taxes, banking, securities and
insurance);
    
    the impact of technological changes;
    
    acquisitions;
    
    changes in consumer spending and saving habits; and
    
    our success at managing the risks involved in the foregoing.
  Market Area
  Southwest Georgia Market  Albany Metropolitan Statistic Area
  North Central Florida Market  Ocala Metropolitan Statistic Area
  3




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Expansion
  Competition
   On-line Presence
  4




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##### Table of Contents



Lending Activities
  December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real EstateOne- to four-family
    
    $
    74,752
    
    
    
    24.54
    %
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    74,324
    
    
    
    31.20
    %
    
    $
    77,342
    
    
    
    31.66
    %Multi-family
    
    
    12,297
    
    
    
    4.04
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    17,049
    
    
    
    7.16
    
    
    
    17,013
    
    
    
    6.96Commercial
    
    
    41,630
    
    
    
    13.66
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    38,581
    
    
    
    16.19
    
    
    
    42,112
    
    
    
    17.24Farmland
    
    
    4,818
    
    
    
    1.58
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and
Development
    
    
    51,308
    
    
    
    16.84
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    8,248
    
    
    
    3.46
    
    
    
    11,382
    
    
    
    4.66Total real estate loans
    
    
    184,805
    
    
    
    60.66
    
    
    
    170,554
    
    
    
    61.62
    
    
    
    144,529
    
    
    
    56.88
    
    
    
    138,202
    
    
    
    58.01
    
    
    
    147,849
    
    
    
    60.52Other loansConsumer loans:Student
    
    
    594
    
    
    
    0.20
    
    
    
    703
    
    
    
    0.25
    
    
    
    1,110
    
    
    
    0.44
    
    
    
    1,190
    
    
    
    0.50
    
    
    
    1,307
    
    
    
    0.54Automobile
    
    
    47,718
    
    
    
    15.66
    
    
    
    46,331
    
    
    
    16.74
    
    
    
    50,137
    
    
    
    19.73
    
    
    
    47,455
    
    
    
    19.92
    
    
    
    44,280
    
    
    
    18.13Home equity
    
    
    17,257
    
    
    
    5.66
    
    
    
    16,368
    
    
    
    5.91
    
    
    
    15,591
    
    
    
    6.14
    
    
    
    13,837
    
    
    
    5.81
    
    
    
    12,807
    
    
    
    5.24Other
    
    
    9,377
    
    
    
    3.08
    
    
    
    8,812
    
    
    
    3.19
    
    
    
    9,058
    
    
    
    3.56
    
    
    
    9,212
    
    
    
    3.87
    
    
    
    9,534
    
    
    
    3.90Total consumer loans
    
    
    74,946
    
    
    
    24.60
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    71,694
    
    
    
    30.09
    
    
    
    67,928
    
    
    
    27,81Commercial business loans
    
    
    44,922
    
    
    
    14.74
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    28,346
    
    
    
    11.90
    
    
    
    28,520
    
    
    
    11.67Total other loans
    
    
    119,868
    
    
    
    39.34
    
    
    
    106,222
    
    
    
    38.38
    
    
    
    109,582
    
    
    
    43.12
    
    
    
    100,040
    
    
    
    41.99
    
    
    
    96,448
    
    
    
    39.48Total loans
    
    
    304,673
    
    
    
    100.00
    %
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %
    
    
    244,297
    
    
    
    100.00
    %Less allowance for
loan losses
    
    
    4,416
    
    
    
    
    
    
    
    4,076
    
    
    
    
    
    
    
    3,618
    
    
    
    
    
    
    
    2,965
    
    
    
    
    
    
    
    3,503$
    300,257
    
    
    
    
    
    
    $
    272,700
    
    
    
    
    
    
    $
    250,493
    
    
    
    
    
    
    $
    235,275
    
    
    
    
    
    
    $
    240,794
 5




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December 31,2007
    
    
    2006
    
    
    2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Fixed Rate Loans:Real EstateOne- to four-family
    
    $
    69,841
    
    
    
    22.92
    %
    
    $
    68,774
    
    
    
    24.85
    %
    
    $
    69,928
    
    
    
    27.52
    %Multi-family
    
    
    7,178
    
    
    
    2.36
    
    
    
    14,542
    
    
    
    5.25
    
    
    
    15,113
    
    
    
    5.95Commercial
    
    
    32,634
    
    
    
    10.71
    
    
    
    28,109
    
    
    
    10.16
    
    
    
    26,293
    
    
    
    10.35Farmland
    
    
    3,337
    
    
    
    1.10
    
    
    
    670
    
    
    
    0.24
    
    
    
    
    
    
    
    Construction and development
    
    
    13,903
    
    
    
    4.56
    
    
    
    14,025
    
    
    
    5.07
    
    
    
    8,299
    
    
    
    3.27Total real estate loans
    
    
    126,893
    
    
    
    41.65
    
    
    
    126,120
    
    
    
    45.57
    
    
    
    119,633
    
    
    
    47.08Consumer
    
    
    53,618
    
    
    
    17.60
    
    
    
    50,629
    
    
    
    18.29
    
    
    
    55,970
    
    
    
    22.02Commercial business
    
    
    16,482
    
    
    
    5.41
    
    
    
    13,505
    
    
    
    4.88
    
    
    
    12,098
    
    
    
    4.76Total fixed-rate loans
    
    
    196,993
    
    
    
    64.66
    
    
    
    190,254
    
    
    
    68.74
    
    
    
    187,701
    
    
    
    73.86Adjustable Rate Loans:Real Estate
One- to four-family
    
    
    4,911
    
    
    
    1.61
    
    
    
    4,907
    
    
    
    1.77
    
    
    
    4,193
    
    
    
    1.65Multi-family
    
    
    5,119
    
    
    
    1.68
    
    
    
    2,371
    
    
    
    0.86
    
    
    
    805
    
    
    
    0.32Commercial
    
    
    8,996
    
    
    
    2.95
    
    
    
    16,387
    
    
    
    5.92
    
    
    
    11,692
    
    
    
    4.60Farmland
    
    
    1,481
    
    
    
    0.49
    
    
    
    1,972
    
    
    
    0.71
    
    
    
    
    
    
    
    Construction and development
    
    
    37,405
    
    
    
    12.28
    
    
    
    18,797
    
    
    
    6.79
    
    
    
    8,206
    
    
    
    3.23Total real estate loans
    
    
    57,912
    
    
    
    19.01
    
    
    
    44,434
    
    
    
    16.05
    
    
    
    24,896
    
    
    
    9.80Consumer
    
    
    21,328
    
    
    
    7.00
    
    
    
    21,585
    
    
    
    7.80
    
    
    
    19,926
    
    
    
    7.84Commercial business
    
    
    28,440
    
    
    
    9.33
    
    
    
    20,503
    
    
    
    7.41
    
    
    
    21,588
    
    
    
    8.50Total adjustable rate loans
    
    
    107,680
    
    
    
    35.34
    
    
    
    86,522
    
    
    
    31.26
    
    
    
    66,410
    
    
    
    26.14Total loans
    
    
    304,673
    
    
    
    100.00
    %
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %Less allowance for loan losses
    
    
    4,416
    
    
    
    
    
    
    
    4,076
    
    
    
    
    
    
    
    3,618Total loans, net
    
    $
    300,257
    
    
    
    
    
    
    $
    272,700
    
    
    
    
    
    
    $
    250,493
 6




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##### Table of Contents



Real EstateOne-to-Four Family
    
    
    Multi-family
    
    
    Commercial
    
    
    Farmland
    
    
    Construction
    
    
    Consumer
    
    
    Commercial Business
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAmount
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)One year or less:(1)$13,173
    
    
    6.89
    %
    
    $
    4,303
    
    
    
    7.17
    %
    
    $
    11,651
    
    
    
    7.55
    %
    
    $
    1,047
    
    
    
    7.29
    %
    
    $
    27,823
    
    
    
    7.59
    %
    
    $
    5,434
    
    
    
    9.20
    %
    
    $
    28,588
    
    
    
    7.46
    %
    
    $
    92,019
    
    
    
    7.52
    %One year through 5 years:$30,084
    
    
    7.57
    %
    
    $
    7,994
    
    
    
    7.10
    %
    
    $
    21,606
    
    
    
    7.71
    %
    
    $
    3,771
    
    
    
    7.50
    %
    
    $
    22,583
    
    
    
    7.46
    %
    
    $
    50,897
    
    
    
    8.17
    %
    
    $
    14,376
    
    
    
    7.63
    %
    
    $
    151,312
    
    
    
    7.75
    %Five years and over:$31,495
    
    
    5.93
    %
    
    $
    
    
    
    
    
    %
    
    $
    8,373
    
    
    
    7.76
    %
    
    $
    
    
    
    
    
    %
    
    $
    902
    
    
    
    7.59
    %
    
    $
    18,615
    
    
    
    8.12
    %
    
    $
    1,958
    
    
    
    7.01
    %
    
    $
    61,342
    
    
    
    6.90
    %Total:$74,752
    
    
    
    
    
    $
    12,297
    
    
    
    
    
    
    $
    41,630
    
    
    
    
    
    
    $
    4,818
    
    
    
    
    
    
    $
    51,308
    
    
    
    
    
    
    $
    74,946
    
    
    
    
    
    
    $
    44,922
    
    
    
    
    
    
    $
    304,673
 
 (1)
    
    Includes demand loans, loans having no stated maturity and overdraft loans. 7




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##### Table of Contents



Lending authority.
  Major loan customers
 One- to Four-Family Residential Real Estate Lending
    8




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##### Table of Contents



Commercial and Multi-Family Real Estate Lending
     Construction and Development Lending
  9




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##### Table of Contents



Commercial Business Lending
   Consumer Lending
     10




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##### Table of Contents



Loan Originations, Purchases, Sales, Repayments and Servicing
     Asset Quality
    11




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##### Table of Contents



Delinquent Loans.
 Nonperforming Assets.
 December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in Thousands)Nonaccruing Loans:One- to four-family
    
    $
    373
    
    
    $
    
    
    
    $
    102
    
    
    $
    62
    
    
    $
    130Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    35
    
    
    
    
    
    
    
    241
    
    
    
    201
    
    
    
    Construction and development
    
    
    2,357
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    447
    
    
    
    197
    
    
    
    524
    
    
    
    301
    
    
    
    334Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,212
    
    
    
    258
    
    
    
    867
    
    
    
    546
    
    
    
    464Foreclosed Assets:One- to four-family
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    127
    
    
    
    337Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    287
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    78
    
    
    
    16
    
    
    
    15
    
    
    
    74
    
    
    
    85Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    365
    
    
    
    322
    
    
    
    59
    
    
    
    201
    
    
    
    422Total nonperforming assets
    
    $
    3,577
    
    
    $
    580
    
    
    $
    929
    
    
    $
    765
    
    
    $
    886Total as a percentage of total assets
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %
 12




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Other Loans of Concern.
  Classified Assets.
   13




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##### Table of Contents



Provision for Loan Losses
 Allowance for Loan Losses
  14




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##### Table of Contents



December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in Thousands)Balance at beginning of period
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503
    
    
    $
    3,413Charge-offs:One- to four-family
    
    
    55
    
    
    
    
    
    
    
    27
    
    
    
    60
    
    
    
    62Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    Construction and development
    
    
    435
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    398
    
    
    
    368
    
    
    
    567
    
    
    
    557
    
    
    
    710Commercial business
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    1821,033
    
    
    
    399
    
    
    
    594
    
    
    
    990
    
    
    
    954Recoveries:One- to four-family
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    1
    
    
    
    2Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    195
    
    
    
    162
    
    
    
    224
    
    
    
    247
    
    
    
    291Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    98195
    
    
    
    162
    
    
    
    232
    
    
    
    252
    
    
    
    394Net charge-offs
    
    
    838
    
    
    
    237
    
    
    
    362
    
    
    
    738
    
    
    
    560Provision charged to operations
    
    
    1,178
    
    
    
    695
    
    
    
    1,015
    
    
    
    200
    
    
    
    650Balance at end of period
    
    $
    4,416
    
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503Ratio of net charge-offs during the
period to average loans
outstanding during period
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.24
    %
    
    
    0.30
    %
    
    
    0.24
    %Ratio of net charge-offs during the
period to average nonperforming assets
    
    
    36.12
    %
    
    
    29.28
    %
    
    
    43.46
    %
    
    
    96.47
    %
    
    
    63.21
    %Allowance as a percentage of
nonperforming loans
    
    
    137.49
    %
    
    
    1,582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %Allowance as a percentage of total
loans (end of period)
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.42
    %
    
    
    1.24
    %
    
    
    1.43
    %
 15




---



##### Table of Contents



December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percentof Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of LoansLoan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in EachAmount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    CategoryLoan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to TotalAllowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    LoansSecured by
one-to four-
family
residential
real estate
    
    $
    553
    
    
    $
    74,753
    
    
    
    24.54
    %
    
    $
    875
    
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    983
    
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    378
    
    
    $
    74,324
    
    
    
    31.20
    %Secured by
multi-
family
residential
real estate
    
    
    123
    
    
    
    12,297
    
    
    
    4.04
    
    
    
    177
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    166
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    387
    
    
    
    17,049
    
    
    
    7.16Secured by
commercial
real estate
    
    
    847
    
    
    
    41,630
    
    
    
    13.66
    
    
    
    925
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    711
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    713
    
    
    
    38,851
    
    
    
    16.19Construction
and
develop
ment
    
    
    1,616
    
    
    
    51,308
    
    
    
    16.84
    
    
    
    471
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    218
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    112
    
    
    
    8,248
    
    
    
    3.46Farmland
    
    
    42
    
    
    
    4,818
    
    
    
    1.58
    
    
    
    32
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    740
    
    
    
    74,945
    
    
    
    24.60
    
    
    
    791
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    858
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    756
    
    
    
    71,694
    
    
    
    30.09Commercial
business
    
    
    495
    
    
    
    44,922
    
    
    
    14.74
    
    
    
    805
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    682
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    434
    
    
    
    28,346
    
    
    
    11.90Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    Total
    
    $
    4,416
    
    
    $
    304,673
    
    
    
    100.00
    %
    
    $
    4,076
    
    
    $
    276,776
    
    
    
    100.00
    %
    
    $
    3,618
    
    
    $
    254,111
    
    
    
    100.00
    %
    
    $
    2,965
    
    
    $
    238,242
    
    
    
    100.00
    %
 Investment Activities
     16




---



##### Table of Contents



December 31,2007
    
    
    2006
    
    
    2005Carrying
    
    
    % of
    
    
    Carrying
    
    
    % of
    
    
    Carrying
    
    
    % ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in Thousands)Securities available for sale:U. S. Government sponsored agencies
    
    $
    14,996
    
    
    
    13.90
    %
    
    $
    29,439
    
    
    
    34.81
    %
    
    $
    14,044
    
    
    
    21.65
    %Corporate debt securities (1)
    
    
    3,854
    
    
    
    3.57
    
    
    
    4,106
    
    
    
    4.86
    
    
    
    3,786
    
    
    
    5.84Mortgage-backed securities
    
    
    55,599
    
    
    
    51.55
    
    
    
    28,044
    
    
    
    33.16
    
    
    
    31,098
    
    
    
    47.94State, county and municipal securities (2)
    
    
    31,878
    
    
    
    29.55
    
    
    
    16,316
    
    
    
    19.29
    
    
    
    6,869
    
    
    
    10.59Equity and other
    
    
    1,540
    
    
    
    1.43
    
    
    
    6,667
    
    
    
    7.88
    
    
    
    9,069
    
    
    
    13.98$
    107,867
    
    
    
    100.00
    %
    
    $
    84,572
    
    
    
    100.00
    %
    
    $
    64,866
    
    
    
    100.00
    %Other earning assets:Interest-bearing deposits with banks
    
    $
    380
    
    
    
    2.13
    %
    
    $
    2,154
    
    
    
    12.43
    %
    
    $
    1,387
    
    
    
    12.46
    %Federal funds sold
    
    
    14,505
    
    
    
    81.24
    
    
    
    12,677
    
    
    
    73.15
    
    
    
    6,820
    
    
    
    61.25FHLB stock
    
    
    2,970
    
    
    
    16.63
    
    
    
    2,499
    
    
    
    14.42
    
    
    
    2,927
    
    
    
    26.29$
    17,855
    
    
    
    100.00
    %
    
    $
    17,330
    
    
    
    100.00
    %
    
    $
    11,134
    
    
    
    100.00
    %
 
 (1)
    
    Includes $1.9 million in debt securities with below investment grade ratings(2)
    
    Includes $3.9 million in securities not rated 17




---



##### Table of Contents



Less than One Year
    
    
    One to Five Years
    
    
    Over Five to Ten Years
    
    
    Over Ten Years
    
    
    Total SecuritiesWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    FairCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    ValueSecurities Available
for Sale:U.S. government and
agency securities
    
    $
    
    
    
    
    
    %
    
    $
    1,497
    
    
    
    4.15
    %
    
    $
    2,995
    
    
    
    5.65
    %
    
    $
    10,477
    
    
    
    6.30
    %
    
    $
    14,969
    
    
    
    5.96
    %
    
    $
    14,996Corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    2,238
    
    
    
    6.00
    
    
    
    1,000
    
    
    
    6.98
    
    
    
    1,215
    
    
    
    7.12
    
    
    
    4,453
    
    
    
    6.53
    
    
    
    3,854Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    4.54
    
    
    
    8,193
    
    
    
    4.54
    
    
    
    47,438
    
    
    
    5.36
    
    
    
    55,766
    
    
    
    5.24
    
    
    
    55,599State, county and
municipal
    
    
    4,381
    
    
    
    5.47
    
    
    
    977
    
    
    
    5.02
    
    
    
    1,887
    
    
    
    6.10
    
    
    
    25,747
    
    
    
    5.78
    
    
    
    32,992
    
    
    
    5.70
    
    
    
    31,878Equity and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,924
    
    
    
    6.02
    
    
    
    1,924
    
    
    
    6.02
    
    
    
    1,540Total investment
securities
    
    $
    4,381
    
    
    
    5.47
    %
    
    $
    4,847
    
    
    
    5.16
    %
    
    $
    14,075
    
    
    
    5.16
    %
    
    $
    86,801
    
    
    
    5.64
    %
    
    $
    110,104
    
    
    
    5.54
    %
    
    $
    107,867
 Sources of Funds
 General.
 Deposits .
   18




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##### Table of Contents



December 31,2007
    
    
    2006
    
    
    2005Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest bearing deposits:Interest bearing demand
    
    $
    37,217
    
    
    
    0.99
    %
    
    $
    37,891
    
    
    
    0.83
    %
    
    $
    46,062
    
    
    
    0.75
    %Savings and money market accounts
    
    
    119,544
    
    
    
    2.85
    
    
    
    89,285
    
    
    
    1.50
    
    
    
    88,624
    
    
    
    0.91Retail time deposits
    
    
    128,162
    
    
    
    4.92
    
    
    
    111,299
    
    
    
    4.10
    
    
    
    
    
    
    
    Wholesale time deposits
    
    
    14,466
    
    
    
    5.37
    
    
    
    158
    
    
    
    6.27
    
    
    
    97,457
    
    
    
    2.96Total interest bearing deposits
    
    $
    299,389
    
    
    
    3.63
    %
    
    $
    238,633
    
    
    
    2.61
    %
    
    $
    232,143
    
    
    
    1.73
    %
  Maturity as of December 31, 20073 Months
    
    
    Over 3-6
    
    
    Over 6-12
    
    
    Over 12or Less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total(In Thousands)Time deposits of less than $100,000
    
    $
    34,102
    
    
    $
    21,346
    
    
    $
    21,409
    
    
    $
    16,501
    
    
    $
    93,358Time deposits of $100,000 or more
    
    
    31,146
    
    
    
    10,933
    
    
    
    31,928
    
    
    
    6,693
    
    
    
    80,700Total time deposits
    
    $
    65,268
    
    
    $
    32,279
    
    
    $
    53,337
    
    
    $
    23,194
    
    
    $
    174,058
 Borrowings .
    19




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##### Table of Contents



Year Ended December 31,2007
    
    
    2006
    
    
    2005(Dollars In Thousands)Maximum BalanceFederal Home Loan Bank advances
    
    $
    50,000
    
    
    $
    50,000
    
    
    $
    51,000Average BalanceFederal Home Loan Bank advances
    
    $
    44,521
    
    
    $
    46,134
    
    
    $
    45,821Average interest rate paid during the year
    
    
    4.56
    %
    
    
    4.21
    %
    
    
    4.15
    %End of Year BalanceFederal Home Loan Bank advances
    
    $
    50,000
    
    
    $
    40,000
    
    
    $
    50,000Weighted average interest rate of Federal Home
Loan Bank advances
    
    
    4.67
    %
    
    
    4.41
    %
    
    
    4.40
    %
 Subsidiary and Other Activities
   How We Are Regulated
   HeritageBank of the South.
 20




---



##### Table of Contents



Georgia Regulation.
 Insurance of Accounts and Regulation by the FDIC.
   21




---



##### Table of Contents



Heritage Financial Group and Heritage, MHC .
 Regulation by the Office of Thrift Supervision.
    Georgia Regulation.
 Regulatory Capital Requirements for the Bank .
  22




---



##### Table of Contents



Regulatory Capital Requirements for Heritage Financial Group.
 Limitations on Dividends and Other Capital Distributions.
 23




---



##### Table of Contents



Federal Taxation
   Method of Accounting.
 Minimum Tax.
 Net Operating Loss Carryovers
 Corporate Dividends-Received Deduction.
 State Taxation
   Employees
  24




---



##### Table of Contents



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 have increased, and intend to continue 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.
  If our allowance for loan losses is not sufficient to cover actual loan losses, or if credit
delinquencies increase, our earnings could decrease.
  25




---



##### Table of Contents



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.
 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.
  26




---



##### Table of Contents



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.
  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. Description of Properties
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  27




---



##### Table of Contents



PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
 Market and Dividend Information
  DividendsPaidHigh
    
    Low
    
    Per Share2007First quarter
    
    $
    16.75
    
    
    $
    15.39
    
    
    $
    0.06Second quarter
    
    
    16.81
    
    
    
    14.81
    
    
    
    0.06Third quarter
    
    
    15.25
    
    
    
    11.56
    
    
    
    0.06Fourth quarter
    
    
    14.46
    
    
    
    11.00
    
    
    
    0.062006First quarter
    
    $
    12.30
    
    
    $
    10.82
    
    
    $
    0.05Second quarter
    
    
    13.45
    
    
    
    12.01
    
    
    
    0.05Third quarter
    
    
    15.74
    
    
    
    13.05
    
    
    
    0.05Fourth quarter
    
    
    17.00
    
    
    
    15.00
    
    
    
    0.05
  28




---



##### Table of Contents



Number of
    
    
    
    
    
    
    Number ofsecurities
    
    
    
    
    
    
    securitiesto be issued
    
    
    Weighted
    
    
    remainingupon
    
    
    average
    
    
    available forexercise of
    
    
    exercise price
    
    
    futureoutstanding
    
    
    of outstanding
    
    
    issuanceoptions,
    
    
    options,
    
    
    under equitywarrants
    
    
    warrants and
    
    
    compensationand rights
    
    
    rights
    
    
    plansEquity compensation plans approved by security holders
    
    
    474,605
    
    
    $
    12.60
    
    
    
    67,016Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    474,605
    
    
    $
    12.60
    
    
    
    67,016
  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
    
    
    ProgramsOctober
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    238,894November
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,894December
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,894Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    238,894
  29




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##### Table of Contents



Item 6. Selected Financial Data
 Selected Consolidated Financial Information
 At December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Selected Financial Condition Data:Total assets
    
    $
    468,672
    
    
    $
    413,330
    
    
    $
    363,797
    
    
    $
    343,468
    
    
    $
    335,668Loans, net
    
    
    300,257
    
    
    
    272,700
    
    
    
    250,493
    
    
    
    235,275
    
    
    
    240,794Securities available for sale, at fair value:U.S. government and agency securities
    
    
    14,996
    
    
    
    29,439
    
    
    
    14,044
    
    
    
    11,528
    
    
    
    8,960Corporate debt securities
    
    
    3,854
    
    
    
    4,106
    
    
    
    3,786
    
    
    
    4,364
    
    
    
    2,965Mortgage-backed securities
    
    
    55,598
    
    
    
    28,044
    
    
    
    31,098
    
    
    
    26,478
    
    
    
    24,481State, county and municipal
    
    
    31,878
    
    
    
    16,316
    
    
    
    6,869
    
    
    
    8,874
    
    
    
    7,210Equity and other investments
    
    
    1,540
    
    
    
    6,667
    
    
    
    9,069
    
    
    
    8,044
    
    
    
    7,896Federal Home Loan Bank stock, at cost
    
    
    2,970
    
    
    
    2,499
    
    
    
    2,927
    
    
    
    2,957
    
    
    
    2,000Deposits
    
    
    330,629
    
    
    
    299,189
    
    
    
    238,640
    
    
    
    248,543
    
    
    
    255,321Federal Home Loan Bank advances
and other borrowings
    
    
    50,000
    
    
    
    40,000
    
    
    
    50,000
    
    
    
    51,000
    
    
    
    40,000Total equity
    
    
    65,592
    
    
    
    62,808
    
    
    
    68,983
    
    
    
    39,134
    
    
    
    36,987
 30




---



##### Table of Contents



For the Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)Selected Operations Data:Total interest income
    
    $
    27,997
    
    
    $
    22,609
    
    
    $
    19,243
    
    
    $
    17,780
    
    
    $
    18,720Total interest expense
    
    
    13,462
    
    
    
    8,377
    
    
    
    5,935
    
    
    
    4,898
    
    
    
    5,853Net interest income
    
    
    14,535
    
    
    
    14,232
    
    
    
    13,308
    
    
    
    12,882
    
    
    
    12,867Provision for loan losses
    
    
    1,178
    
    
    
    695
    
    
    
    1,014
    
    
    
    200
    
    
    
    650Net interest income after provision for loan losses
    
    
    13,357
    
    
    
    13,537
    
    
    
    12,294
    
    
    
    12,682
    
    
    
    12,217Fees and service charges
    
    
    5,129
    
    
    
    4,121
    
    
    
    3,836
    
    
    
    3,932
    
    
    
    2,969Gain (loss) on sales of investment securities
    
    
    (355
    )
    
    
    (59
    )
    
    
    (5
    )
    
    
    139
    
    
    
    403Other noninterest income
    
    
    1,916
    
    
    
    1,548
    
    
    
    1,504
    
    
    
    1,384
    
    
    
    1,589Total noninterest income
    
    
    6,690
    
    
    
    5,610
    
    
    
    5,335
    
    
    
    5,455
    
    
    
    4,961Total noninterest expense
    
    
    17,976
    
    
    
    16,060
    
    
    
    13,584
    
    
    
    13,054
    
    
    
    13,849Income before taxes and extraordinary items
    
    
    2,071
    
    
    
    3,086
    
    
    
    4,045
    
    
    
    5,083
    
    
    
    3,329Income tax provision (benefit)
    
    
    (850
    )
    
    
    732
    
    
    
    1,095
    
    
    
    1,550
    
    
    
    1,053Net income
    
    $
    2,921
    
    
    $
    2,354
    
    
    $
    2,950
    
    
    $
    3,533
    
    
    $
    2,276
 31




---



##### Table of Contents



Year Ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Selected Financial Ratios and Other Data:Performance Ratios:Return on assets
    
    
    0.66
    %
    
    
    0.63
    %
    
    
    0.83
    %
    
    
    1.04
    %
    
    
    0.70
    %Return on equity
    
    
    4.55
    %
    
    
    3.44
    %
    
    
    5.18
    %
    
    
    9.28
    %
    
    
    6.39
    %Dividend payout ratio
    
    
    26.12
    %
    
    
    28.64
    %
    
    
    16.13
    %
    
    
    
    
    
    
    Interest Rate Spread Information:Average during period
    
    
    3.22
    %
    
    
    3.50
    %
    
    
    3.86
    %
    
    
    4.08
    %
    
    
    4.14
    %End of period
    
    
    3.22
    %
    
    
    3.72
    %
    
    
    3.97
    %
    
    
    3.92
    %
    
    
    4.24
    %Net interest margin(1)
    
    
    3.70
    %
    
    
    4.19
    %
    
    
    4.15
    %
    
    
    4.23
    %
    
    
    4.31
    %Operating expense to average total assets
    
    
    4.05
    %
    
    
    4.29
    %
    
    
    3.81
    %
    
    
    3.84
    %
    
    
    4.28
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    114.66
    %
    
    
    116.64
    %
    
    
    115.95
    %
    
    
    110.10
    %
    
    
    108.63
    %Efficiency ratio(2)
    
    
    84.69
    %
    
    
    80.94
    %
    
    
    72.86
    %
    
    
    71.19
    %
    
    
    77.68
    %Asset Quality Ratios:Nonperforming assets to total assets at end of period
    
    
    0.76
    %
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %Nonperforming loans to total loans
    
    
    1.05
    %
    
    
    0.09
    %
    
    
    0.33
    %
    
    
    0.24
    %
    
    
    0.19
    %Allowance for loan losses to nonperforming loans
    
    
    137.49
    %
    
    
    1582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %Allowance for loans losses to net loans
    
    
    1.45
    %
    
    
    1.47
    %
    
    
    1.44
    %
    
    
    1.24
    %
    
    
    1.43
    %Net charge offs to average loans outstanding
    
    
    0.29
    %
    
    
    0.09
    %
    
    
    0.15
    %
    
    
    0.30
    %
    
    
    0.24
    %Capital Ratios:Equity to total assets at end of period
    
    
    14.00
    %
    
    
    15.22
    %
    
    
    18.96
    %
    
    
    11.39
    %
    
    
    11.02
    %Average equity to average assets
    
    
    14.47
    %
    
    
    18.29
    %
    
    
    15.98
    %
    
    
    11.21
    %
    
    
    11.02
    %Other Data:Number of full-service offices
    
    
    7
    
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    7
 
 (1)
    
    Net interest income divided by average interest-earning assets.(2)
    
    Total noninterest expense as a percentage of net interest income plus non-interest income. 32




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##### Table of Contents



Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Evolution of Business Strategy
    33




---



##### Table of Contents



1. Commercial Banking and Small Business Lending:
 2. Indirect Auto Lending:
 3. Retail Banking:
 4. Brokerage/Investment Services:
 5. Mortgage Lending:
    Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
 34




---



##### Table of Contents




    
    Limiting the percentage of long-term fixed-rate loans within our portfolio;
    
    Originating a mix of variable-rate and shorter term fixed-rate loans;
    
    Originating prime-based home equity lines of credit;
    
    Managing deposit relationships for stability and a lower cost of funds position;
    
    Using Federal Home Loan Bank advances and other funding sources to align maturities
and repricing terms of funding sources with loans; and
    
    Continuing the origination of consumer loans.
  35




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##### Table of Contents



Comparison of Financial Condition at December 31, 2007 and December 31, 2006
     36




---



##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    291,438
    
    
    $
    22,160
    
    
    
    7.61
    %
    
    $
    264,366
    
    
    $
    19,123
    
    
    
    7.23
    %
    
    $
    244,687
    
    
    $
    16,203
    
    
    
    6.62
    %Taxable investment securities
    
    
    79,205
    
    
    
    4,220
    
    
    
    5.33
    
    
    
    55,902
    
    
    
    2,660
    
    
    
    4.76
    
    
    
    58,200
    
    
    
    2,479
    
    
    
    4.26Tax exempt investment
securities
    
    
    25,798
    
    
    
    1,044
    
    
    
    6.13
    
    
    
    7,077
    
    
    
    273
    
    
    
    5.85
    
    
    
    6,969
    
    
    
    275
    
    
    
    5.97Federal funds sold
    
    
    10,456
    
    
    
    544
    
    
    
    5.20
    
    
    
    10,154
    
    
    
    496
    
    
    
    4.88
    
    
    
    9,218
    
    
    
    245
    
    
    
    2.77Interest bearing deposits
with banks
    
    
    652
    
    
    
    29
    
    
    
    4.39
    
    
    
    1,064
    
    
    
    57
    
    
    
    5.35
    
    
    
    1,192
    
    
    
    41
    
    
    
    3.40Total interest-earning
Assets
    
    
    407,549
    
    
    
    27,997
    
    
    
    7.01
    
    
    
    338,563
    
    
    
    22,609
    
    
    
    6.72
    
    
    
    320,266
    
    
    
    19,243
    
    
    
    6.07Interest-Bearing Liabilities:Interest bearing demand
    
    
    37,217
    
    
    
    368
    
    
    
    0.99
    
    
    
    37,891
    
    
    
    313
    
    
    
    0.83
    
    
    
    46,062
    
    
    
    345
    
    
    
    0.65Savings and money market
    
    
    119,544
    
    
    
    3,407
    
    
    
    2.85
    
    
    
    89,285
    
    
    
    1,337
    
    
    
    1.50
    
    
    
    88,624
    
    
    
    804
    
    
    
    0.88Retail time deposits
    
    
    128,162
    
    
    
    6,307
    
    
    
    4.92
    
    
    
    111,299
    
    
    
    4,562
    
    
    
    4.10
    
    
    
    97,457
    
    
    
    2,883
    
    
    
    2.96Wholesale time deposits
    
    
    14,466
    
    
    
    776
    
    
    
    5.37
    
    
    
    158
    
    
    
    10
    
    
    
    6.27
    
    
    
    
    
    
    
    
    
    
    
    Borrowings
    
    
    56,014
    
    
    
    2,604
    
    
    
    4.65
    
    
    
    47,196
    
    
    
    2,155
    
    
    
    4.57
    
    
    
    45,821
    
    
    
    1,903
    
    
    
    4.13Total interest-bearing
liabilities
    
    
    355,403
    
    
    
    13,462
    
    
    
    3.79
    
    
    
    285,828
    
    
    
    8,377
    
    
    
    2.93
    
    
    
    277,964
    
    
    
    5,935
    
    
    
    2.07Net interest income
    
    
    
    
    
    $
    14,535
    
    
    
    
    
    
    
    
    
    
    $
    14,232
    
    
    
    
    
    
    
    
    
    
    $
    13,308Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    3.79
    %
    
    
    
    
    
    
    
    
    
    
    4.00
    %Net earning assets
    
    $
    52,146
    
    
    
    
    
    
    
    
    
    
    $
    52,734
    
    
    
    
    
    
    
    
    
    
    $
    42,302Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.70
    %
    
    
    
    
    
    
    
    
    
    
    4.25
    %
    
    
    
    
    
    
    
    
    
    
    4.18
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.15
    x
    
    
    
    
    
    
    
    
    
    
    1.18
    x
    
    
    
    
    
    
    
    
    
    
    1.15
    x
 37




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##### Table of Contents



Rate/Volume Analysis
  Year Ended December 31,2007 vs. 2006
    
    
    2006 vs. 2005Increase (Decrease)
    
    
    Total
    
    
    Increase (Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    2,015
    
    
    $
    1,022
    
    
    $
    3,037
    
    
    $
    1,359
    
    
    $
    1,561
    
    
    $
    2,920Taxable investment securities
    
    
    1,212
    
    
    
    348
    
    
    
    1,560
    
    
    
    (57
    )
    
    
    238
    
    
    
    181Tax exempt investment securities
    
    
    757
    
    
    
    14
    
    
    
    771
    
    
    
    6
    
    
    
    (8
    )
    
    
    (2
    )Federal funds sold
    
    
    15
    
    
    
    33
    
    
    
    48
    
    
    
    41
    
    
    
    210
    
    
    
    251Interest bearing deposits with banks
    
    
    (19
    )
    
    
    (9
    )
    
    
    (28
    )
    
    
    (5
    )
    
    
    21
    
    
    
    16Total interest-earning assets
    
    $
    3,980
    
    
    $
    1,408
    
    
    
    5,388
    
    
    $
    1,344
    
    
    $
    2,022
    
    
    
    3,366Interest-bearing liabilities:Interest bearing demand
    
    $
    (6
    )
    
    $
    61
    
    
    
    55
    
    
    $
    (114
    )
    
    $
    81
    
    
    
    (33
    )Savings and money market
    
    
    566
    
    
    
    1,504
    
    
    
    2,070
    
    
    
    (21
    )
    
    
    555
    
    
    
    534Retail time deposits
    
    
    752
    
    
    
    993
    
    
    
    1,745
    
    
    
    450
    
    
    
    1,229
    
    
    
    1,679Wholesale time deposits
    
    
    768
    
    
    
    (8
    )
    
    
    766
    
    
    
    10
    
    
    
    
    
    
    
    10Borrowings
    
    
    445
    
    
    
    4
    
    
    
    449
    
    
    
    53
    
    
    
    199
    
    
    
    252Total interest-bearing liabilities
    
    $
    2,525
    
    
    $
    2,560
    
    
    
    5,085
    
    
    $
    378
    
    
    $
    2,064
    
    
    
    2,442Net interest income
    
    
    
    
    
    
    
    
    
    $
    303
    
    
    
    
    
    
    
    
    
    
    $
    924
 38




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##### Table of Contents



Comparison of Operating Results for the Years Ended December 31, 2007 and December 31, 2006
 General
   Net Interest Income
   Provision for Loan Losses
    General comments on the provision for loan losses
  39




---



##### Table of Contents



Noninterest Income
  For the Years Ended,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Service charges on deposit accounts
    
    $
    3,929
    
    
    $
    3,159
    
    
    $
    770
    
    
    
    24.4
    %Other service charges, commissions and fees
    
    
    1,200
    
    
    
    961
    
    
    
    229
    
    
    
    24.9
    %Brokerage fees
    
    
    951
    
    
    
    555
    
    
    
    396
    
    
    
    71.4
    %Mortgage origination fees
    
    
    350
    
    
    
    446
    
    
    
    (96
    )
    
    
    -21.5
    %Bank owned life insurance
    
    
    347
    
    
    
    306
    
    
    
    41
    
    
    
    13.4
    %Gain (loss) on sale of securities
    
    
    (355
    )
    
    
    (59
    )
    
    
    (296
    )
    
    
    501.7
    %Other
    
    
    268
    
    
    
    242
    
    
    
    26
    
    
    
    10.7
    %Total noninterest income
    
    $
    6,690
    
    
    $
    5,610
    
    
    $
    1,080
    
    
    
    19.3
    %Noninterest income as a percentage of average assets
    
    
    2.0
    %
    
    
    2.0
    %
       40




---



##### Table of Contents



Noninterest Expense
  For the years endedDecember 31,2007
    
    
    2006
    
    
    $ Chg
    
    
    % Chg(Dollars in Thousands)Salaries and employee benefits
    
    $
    10,321
    
    
    $
    8,901
    
    
    $
    1,420
    
    
    
    16.0
    %Equipment
    
    
    1,109
    
    
    
    1,171
    
    
    
    (62
    )
    
    
    -5.3
    %Occupancy
    
    
    1,045
    
    
    
    1,018
    
    
    
    27
    
    
    
    2.7
    %Advertising and marketing
    
    
    450
    
    
    
    326
    
    
    
    124
    
    
    
    38.0
    %Legal and accounting
    
    
    460
    
    
    
    647
    
    
    
    (187
    )
    
    
    -28.9
    %Directors fees and retirement
    
    
    763
    
    
    
    473
    
    
    
    290
    
    
    
    61.3
    %Consulting and other professional fees
    
    
    603
    
    
    
    460
    
    
    
    143
    
    
    
    31.1
    %Telephone
    
    
    231
    
    
    
    274
    
    
    
    (43
    )
    
    
    -15.7
    %Supplies
    
    
    220
    
    
    
    286
    
    
    
    (66
    )
    
    
    -23.1
    %Data processing fees
    
    
    1,151
    
    
    
    1,009
    
    
    
    142
    
    
    
    14.1
    %Other operating
    
    
    1,623
    
    
    
    1,495
    
    
    
    128
    
    
    
    8.6
    %Total noninterest expenses
    
    $
    17,976
    
    
    $
    16,060
    
    
    $
    1,916
    
    
    
    11.9
    %Noninterest expenses as a percentage of average assets
    
    
    4.1
    %
    
    
    4.3
    %
            41




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##### Table of Contents



Income Tax Expense
   Liquidity and Capital Resources
      42




---



##### Table of Contents



Off-Balance-Sheet Liabilities
  (In Thousands)Commitments to extend credit
    
    $
    44,175Financial stand-by letters of credit
    
    
    4,991$
    49,166
 Capital
    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
    
    $
    60,191
    
    
    
    17.1
    %
    
    $
    28,087
    
    
    
    8.0
    %
    
    $
    35,108
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    $
    55,802
    
    
    
    15.9
    %
    
    $
    14,043
    
    
    
    4.0
    %
    
    $
    21,065
    
    
    
    6.0
    %Tier I Capital to Average Total Assets
    
    $
    55,802
    
    
    
    12.6
    %
    
    $
    17,710
    
    
    
    4.0
    %
    
    $
    22,138
    
    
    
    5.0
    %
 Critical Accounting Policies
  43




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##### Table of Contents



Allowance for Loan Losses
    Income Taxes
   
 Item 7a. Quantitative and Qualitative Disclosures about Market Risk
   44




---



##### Table of Contents



EffectMarket
    
    on NetRate
    
    InterestChange
    
    Income+300
    
    
    10.02
    %+200
    
    
    8.93
    %+100
    
    
    5.61
    %-100
    
    
    -6.00
    %-200
    
    
    -10.73
    %-300
    
    
    -12.84
    %
 
 Item 8. Financial Statements
  (a)
    
    Report from Independent Registered Public Accounting Firm;(b)
    
    Consolidated Balance Sheets as of December 31, 2007 and 2006;(c)
    
    Consolidated Statements of Income for the Years Ended December 31, 2007 and 2006;(d)
    
    Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2007 and 2006;(e)
    
    Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2007 and 2006;(f)
    
    Consolidated Statements of Cash Flows For the Years Ended December 31, 2007 and 2006;(g)
    
    Notes to Consolidated Financial Statements.
 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
  45




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##### Table of Contents



Item 9A. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
    Internal
Control-Integrated Framework
 
 Item 9B. Other Information
  46




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers and Corporate Governance
 Directors
  Executive Officers
  Section 16(a) Compliance
  Code of Ethics
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13. Certain Relationships and Related Transactions
   
 Item 14. Principal Accountant Fees and Services
  47




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##### Table of Contents



PART IV
 
 Item 15. Exhibits
 Reference toPrior Filingor Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto3.1
    
    Charter of the Registrant
    
    ***3.2
    
    Bylaws of the Registrant
    
    *10
    
    Material contracts:(1) Employment Agreements:(a) (i) O. Leonard Dorminey  Bank
    
    *(a) (ii) O. Leonard Dorminey  Holding
    
    *(c) Carol W. Slappey
    
    *(2) Deferred Compensation and Excess/Matching Contribution Plans
    
    *(3) Supplemental Executive Retirement Plan
    
    *(4) Directors Retirement Plan
    
    *(5) 401(k) Savings Plan
    
    **(6) Employee Stock Ownership Plan
    
    *21
    
    Subsidiaries of the Company
    
    2123
    
    Consent of Accountants
    
    2331
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    3132
    
    Section 1350 Certifications
    
    32
 
 *
    
    Filed as an exhibit to the Registrants Registration Statement on Form SB-2 (File No. 333-123581), declared effective by the
Securities and Exchange Commission on May 16, 2005.**
    
    Filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form SB-2. (File No.
333-123581) declared effective by the Securities and Exchange Commission on May 16, 2005.***
    
    Filed as an exhibit to the Filers Form 10-KSB for the year ended December 31, 2005, filed with the commission on March 30, 2006. 48




---



##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate:    March 31, 2008
    By:
    /s/ O. Leonard DormineyO. Leonard Dorminey, President andChief Executive Officer
(Duly Authorized Representative) KNOW ALL MEN BY THESE PRESENTS
  Date:
    
    March 31, 2008
    
    /s/ O. Leonard DormineyO. Leonard DormineyPresident, Chief Executive Officer and Director
 (Principal Executive Officer)Date:
    
    March 31, 2008
    
    /s/ Antone D. LehrAntone D. Lehr, Chairman of the BoardDate:
    
    March 31, 2008
    
    /s/ Joseph C. BurgerJoseph C. Burger, Vice Chairman of the BoardDate:
    
    March 31, 2008
    
    /s/ Douglas J. McGinleyDouglas J. McGinley, DirectorDate:
    
    March 31, 2008
    
    /s/ Carol W. SlappeyCarol W. Slappey, DirectorDate:
    
    March 31, 2008
    
    /s/ J. Keith LandJ. Keith Land, DirectorDate:
    
    March 31, 2008
    
    /s/ J. Lee StanleyJ. Lee Stanley, DirectorDate:
    
    March 31, 2008
    
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 49




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##### Table of Contents



Index to Exhibits
 21
    
    Subsidiaries of the Company23
    
    Consent of Accountants31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of President and Chief
Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer32
    
    Section 1350 Certifications




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors  Heritage Financial Group  and Subsidiary  Albany, Georgia
 Heritage Financial Group and
Subsidiary
    
 F-1




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006AssetsCash and due from banks
    
    $
    8,953,836
    
    
    $
    9,781,232Interest-bearing deposits in banks
    
    
    379,961
    
    
    
    2,153,859Federal funds sold
    
    
    14,505,000
    
    
    
    12,677,000Securities available for sale, at fair value
    
    
    107,867,192
    
    
    
    84,571,767Federal home loan bank stock, at cost
    
    
    2,969,700
    
    
    
    2,499,400Loans
    
    
    304,673,138
    
    
    
    276,776,236Less allowance for loan losses
    
    
    4,415,669
    
    
    
    4,075,997Loans, net
    
    
    300,257,469
    
    
    
    272,700,239Premises and equipment, net
    
    
    14,815,520
    
    
    
    12,815,482Accrued interest receivable
    
    
    2,586,357
    
    
    
    2,288,827Foreclosed assets
    
    
    364,999
    
    
    
    322,449Intangible assets
    
    
    1,000,000
    
    
    
    1,000,000Cash surrender value of bank owned life insurance
    
    
    8,640,647
    
    
    
    8,293,202Other assets
    
    
    6,331,560
    
    
    
    4,226,365$
    468,672,241
    
    
    $
    413,329,822Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    21,058,567
    
    
    $
    14,784,180Interest-bearing
    
    
    309,570,843
    
    
    
    284,404,324Total deposits
    
    
    330,629,410
    
    
    
    299,188,504Federal funds purchased and securities sold under repurchase agreements
    
    
    15,288,452
    
    
    
    5,531,394Other borrowings
    
    
    50,000,000
    
    
    
    40,000,000Accrued interest payable
    
    
    947,352
    
    
    
    522,666Other liabilities
    
    
    6,214,877
    
    
    
    5,278,480Total liabilities
    
    
    403,080,091
    
    
    
    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;
11,443,723 and 11,449,155 issued and outstanding
    
    
    114,437
    
    
    
    114,492Capital surplus
    
    
    39,009,323
    
    
    
    37,807,784Retained earnings
    
    
    42,406,483
    
    
    
    40,248,349Accumulated other comprehensive loss
    
    
    (3,303,342
    )
    
    
    (3,097,880
    )Unearned employee stock ownership plan (ESOP) shares,
330,525 and 374,595 shares
    
    
    (3,305,250
    )
    
    
    (3,745,950
    )74,921,651
    
    
    
    71,326,795Treasury stock, at cost, 615,934 and 555,138 shares
    
    
    (9,329,501
    )
    
    
    (8,518,017
    )Total stockholders equity
    
    
    65,592,150
    
    
    
    62,808,778$
    468,672,241
    
    
    $
    413,329,822
 See Notes to Consolidated Financial Statements.
 F-2




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006Interest incomeInterest and fees on loans
    
    $
    22,160,348
    
    
    $
    19,122,694Interest on taxable securities
    
    
    4,220,327
    
    
    
    2,659,905Interest on nontaxable securities
    
    
    1,044,406
    
    
    
    273,303Interest on federal funds sold
    
    
    543,683
    
    
    
    495,471Interest on deposits in other banks
    
    
    28,592
    
    
    
    56,91727,997,356
    
    
    
    22,608,290Interest expenseInterest on deposits
    
    
    10,858,559
    
    
    
    6,221,300Interest on other borrowings
    
    
    2,603,812
    
    
    
    2,155,38813,462,371
    
    
    
    8,376,688Net interest income
    
    
    14,534,985
    
    
    
    14,231,602Provision for loan losses
    
    
    1,178,000
    
    
    
    695,000Net interest income after provision for loan losses
    
    
    13,356,985
    
    
    
    13,536,602Noninterest incomeService charges on deposit accounts
    
    
    3,928,553
    
    
    
    3,159,250Other service charges, commissions and fees
    
    
    1,199,643
    
    
    
    961,361Brokerage fees
    
    
    950,524
    
    
    
    555,148Mortgage origination fees
    
    
    350,276
    
    
    
    446,912Bank owned life insurance
    
    
    347,445
    
    
    
    305,760Loss on sale of securities
    
    
    (355,161
    )
    
    
    (58,663
    )Other
    
    
    269,011
    
    
    
    239,8876,690,291
    
    
    
    5,609,655Noninterest expenseSalaries and employee benefits
    
    
    10,321,235
    
    
    
    8,901,210Equipment
    
    
    1,109,431
    
    
    
    1,171,471Occupancy
    
    
    1,045,058
    
    
    
    1,017,898Data processing fees
    
    
    1,151,152
    
    
    
    1,008,865Directors fees and retirement
    
    
    762,840
    
    
    
    472,863Consulting and other professional fees
    
    
    603,275
    
    
    
    459,860Advertising and marketing
    
    
    449,815
    
    
    
    326,217Legal and accounting
    
    
    460,438
    
    
    
    646,573Telephone
    
    
    231,159
    
    
    
    274,531Supplies
    
    
    219,920
    
    
    
    285,901Other operating
    
    
    1,622,244
    
    
    
    1,494,75417,976,567
    
    
    
    16,060,143Income before income tax expense (benefit)
    
    
    2,070,709
    
    
    
    3,086,114Applicable income tax expense (benefit)
    
    
    (850,396
    )
    
    
    732,477Net income
    
    $
    2,921,105
    
    
    $
    2,353,637Basic earnings per share
    
    $
    0.28
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.28
    
    
    $
    0.22
 See Notes to Consolidated Financial Statements.
 F-3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006Net income
    
    $
    2,921,105
    
    
    $
    2,353,637Other comprehensive income (loss):Net unrealized gain on cash flow hedge arising during the period,
net of tax of $156,558
    
    
    234,838
    
    
    
    Net unrealized holding gains (losses) arising during period,
net of tax (benefit) of $(323,476) and $262,893
    
    
    (492,140
    )
    
    
    399,974Reclassification adjustment for losses included in
net income, net of tax benefit of $140,858 and $23,266
    
    
    214,303
    
    
    
    35,397Adjustment to recognize funded status of pension plan,
net of tax benefit of $127,335
    
    
    (162,463
    )Effects of changing pension plan measurement date pursuant to
SFAS No. 158, net of tax benefits of $912
    
    
    
    
    
    
    1,367Total other comprehensive income (loss)
    
    
    (205,462
    )
    
    
    436,738Comprehensive income
    
    $
    2,715,643
    
    
    $
    2,790,375
 See Notes to Consolidated Financial Statements.
 F-4




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2007 AND 2006
 Common StockPar
    
    
    CapitalShares
    
    
    Value
    
    
    SurplusBalance, December 31, 2005
    
    
    11,241,250
    
    
    $
    112,413
    
    
    $
    37,126,877Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $0.20 per share
    
    
    
    
    
    
    
    
    
    
    Adjustment related to initial adoption
of SFAS 158, net of tax
    
    
    
    
    
    
    
    
    
    
    Effects of changing pension plan measurement
date pursuant to SFAS No. 158:Service cost, internal cost and expected return on
plan assets for October 1  December 31, net of tax
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost for
October 1  December 31, net of tax
    
    
    
    
    
    
    
    
    
    
    Issuance of restricted shares of common stock
    
    
    207,905
    
    
    
    2,079
    
    
    
    (2,079)Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    521,715Repurchase of 555,328 shares of stock for the treasury
    
    
    
    
    
    
    
    
    
    
    Issuance of 190 shares of common
stock from the treasury
    
    
    
    
    
    
    
    
    
    
    432Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    ESOP shares earned, 44,070 shares
    
    
    
    
    
    
    
    
    
    
    160,839Balance, December 31, 2006
    
    
    11,449,155
    
    
    
    114,492
    
    
    
    37,807,784Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $0.24 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
    
    
    
    
    
    
    
    
    
    
    110Forfeiture 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
    
    
    $
    39,009,323
 See Notes to Consolidated Financial Statements.
 F-5




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##### Table of Contents



AccumulatedUnearned
    
    
    
    
    
    
    OtherRetained
    
    
    ESOP
    
    
    Treasury
    
    
    ComprehensiveEarnings
    
    
    Shares
    
    
    Stock
    
    
    Income (Loss)
    
    
    Total$
    38,717,576
    
    
    $
    (4,186,650
    )
    
    $
    
    
    
    $
    (2,786,569
    )
    
    $
    68,983,6472,353,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,353,637(673,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (673,936
    )
    
    
    
    
    
    
    
    
    
    
    
    (748,049
    )
    
    
    (748,049
    )(147,561
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147,561
    )(1,367
    )
    
    
    
    
    
    
    
    
    
    
    1,367
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    521,715
    
    
    
    
    
    
    
    (8,520,680
    )
    
    
    
    
    
    
    (8,520,680
    )
    
    
    
    
    
    
    
    2,663
    
    
    
    
    
    
    
    3,095
    
    
    
    
    
    
    
    
    
    
    
    435,371
    
    
    
    435,371
    
    
    
    440,700
    
    
    
    
    
    
    
    
    
    
    
    601,53940,248,349
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    
    650,806$
    42,406,483
    
    
    $
    (3,305,250
    )
    
    $
    (9,329,501
    )
    
    $
    (3,303,342
    )
    
    $
    65,592,150
 F-6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    2,921,105
    
    
    $
    2,353,637Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    974,435
    
    
    
    1,045,566Provision for loan losses
    
    
    1,178,000
    
    
    
    695,000ESOP compensation expense
    
    
    650,806
    
    
    
    601,539Provision for deferred taxes
    
    
    (246,373
    )
    
    
    (416,106
    )Stock-based compensation expense
    
    
    811,781
    
    
    
    521,715Net losses on sale of securities available for sale
    
    
    355,161
    
    
    
    58,663Net losses on sale or disposal of premises and equipment
    
    
    1,258
    
    
    
    3,691Increase in Bank owned life insurance
    
    
    (347,445
    )
    
    
    (305,760
    )Excess tax benefit related to stock-based compensation plans
    
    
    (64,119
    )
    
    
    Increase in interest receivable
    
    
    (297,530
    )
    
    
    (622,198
    )Increase in interest payable
    
    
    424,686
    
    
    
    299,459Decrease in taxes payable
    
    
    (2,068,556
    )
    
    
    (149,512
    )Net other operating activities
    
    
    2,030,925
    
    
    
    253,793Total adjustments
    
    
    3,403,029
    
    
    
    1,985,850Net cash provided by operating activities
    
    
    6,324,134
    
    
    
    4,339,487INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    1,773,898
    
    
    
    (766,813
    )Purchases of securities available for sale
    
    
    (81,182,050
    )
    
    
    (35,262,508
    )Proceeds from maturities of securities available for sale
    
    
    14,472,492
    
    
    
    8,605,911Proceeds from sale of securities available for sale
    
    
    42,595,907
    
    
    
    7,615,419Net change in Federal Home Loan Bank stock
    
    
    (470,300
    )
    
    
    427,600Increase in federal funds sold
    
    
    (1,828,000
    )
    
    
    (5,857,000
    )Purchase of intangible asset
    
    
    
    
    
    
    (1,000,000
    )Increase in loans, net
    
    
    (29,340,852
    )
    
    
    (23,610,563
    )Purchases of premises and equipment
    
    
    (3,225,354
    )
    
    
    (1,860,271
    )Proceeds from sale of premises and equipment
    
    
    249,623
    
    
    
    Net cash used in investing activities
    
    
    (56,954,636
    )
    
    
    (51,708,225
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    31,440,906
    
    
    
    60,548,235Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    9,757,058
    
    
    
    5,294,172Proceeds from other borrowings
    
    
    15,000,000
    
    
    
    25,000,000Repayment of other borrowings
    
    
    (5,000,000
    )
    
    
    (35,000,000
    )Excess tax benefit related to stock-based compensation plans
    
    
    64,119
    
    
    
    Proceeds from exercise of stock options
    
    
    115,368
    
    
    
    Purchase of treasury shares, net
    
    
    (811,374
    )
    
    
    (8,517,585
    )Dividends paid to stockholders
    
    
    (762,971
    )
    
    
    (673,936
    )Net cash provided by financing activities
    
    
    49,803,106
    
    
    
    46,650,886Net decrease in cash and due from banks
    
    
    (827,396
    )
    
    
    (717,852
    )Cash and due from banks at beginning of period
    
    
    9,781,232
    
    
    
    10,499,084Cash and due from banks at end of period
    
    $
    8,953,836
    
    
    $
    9,781,232
 F-7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    2006SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    13,037,685
    
    
    $
    8,077,229Taxes
    
    
    1,464,533
    
    
    
    1,298,095NONCASH TRANSACTIONSIncrease (decrease) in unrealized losses on securities available for sale
    
    $
    463,068
    
    
    $
    (723,230
    )Increase in unrealized gains on cash flow hedges
    
    
    391,396
    
    
    
    Principal balances of loans transferred to foreclosed assets
    
    
    605,622
    
    
    
    708,180Pension liability adjustment
    
    
    289,798
    
    
    
    1,279,785
 See Notes to Consolidated Financial Statements.
 F-8




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
  Minority Stock Offering
  Basis of Presentation and Accounting Estimates
   
 Cash, Due from Banks and Cash Flows
   F-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Securities
    Loans
    F-10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Allowance for Loan Losses
     Mortgage Origination Fees
  Premises and Equipment
  YearsBuildings
    
    
    39Furniture and equipment
    
    
    3-7
 F-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Intangible Assets
  Foreclosed Assets
  Pension Plan
  Employee Stock Ownership Plan (ESOP)
   F-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Treasury Stock
  Income Taxes
  Earnings Per Share
  Comprehensive Income
  Reclassification of Certain Items
  F-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements
 Fair Value Measurements.
 The Fair Value Option for
Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115. Accounting for Certain Investments in Debt and Equity
 Business
Combinations.
 Noncontrolling Interests in
Consolidated Financial Statements  An Amendment of ARB No. 51.
 F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2007:U. S. Government sponsored agencies
    
    $
    14,969,355
    
    
    $
    62,808
    
    
    $
    (35,858
    )
    
    $
    14,996,305State and municipal securities
    
    
    32,991,873
    
    
    
    42,779
    
    
    
    (1,156,205
    )
    
    
    31,878,447Corporate debt securities
    
    
    4,453,786
    
    
    
    
    
    
    
    (600,183
    )
    
    
    3,853,603Mortgage-backed securities
    
    
    55,765,963
    
    
    
    265,446
    
    
    
    (432,910
    )
    
    
    55,598,499Total debt securities
    
    
    108,180,977
    
    
    
    371,033
    
    
    
    (2,225,156
    )
    
    
    106,326,854Equity securities
    
    
    1,924,014
    
    
    
    
    
    
    
    (383,676
    )
    
    
    1,540,338Total securities
    
    $
    110,104,991
    
    
    $
    371,033
    
    
    $
    (2,608,832
    )
    
    $
    107,867,192December 31, 2006:U. S. Government sponsored agencies
    
    $
    29,613,640
    
    
    $
    15,996
    
    
    $
    (190,645
    )
    
    $
    29,438,991State and municipal securities
    
    
    16,488,605
    
    
    
    15,162
    
    
    
    (188,281
    )
    
    
    16,315,486Corporate debt securities
    
    
    4,471,524
    
    
    
    
    
    
    
    (365,636
    )
    
    
    4,105,888Mortgage-backed securities
    
    
    28,837,929
    
    
    
    10,761
    
    
    
    (804,257
    )
    
    
    28,044,433Total debt securities
    
    
    79,411,698
    
    
    
    41,919
    
    
    
    (1,548,819
    )
    
    
    77,904,798Equity securities
    
    
    6,934,800
    
    
    
    
    
    
    
    (267,831
    )
    
    
    6,666,969Total securities
    
    $
    86,346,498
    
    
    $
    41,919
    
    
    $
    (1,816,650
    )
    
    $
    84,571,767
  Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    4,380,224
    
    
    $
    4,377,490Due from one year to five years
    
    
    4,713,132
    
    
    
    4,475,949Due from five to ten years
    
    
    5,882,412
    
    
    
    5,893,054Due after ten years
    
    
    37,439,246
    
    
    
    35,981,862Mortgage-backed securities
    
    
    55,765,963
    
    
    
    55,598,499$
    108,180,977
    
    
    $
    106,326,854
  F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (Continued)
  December 31,2007
    
    
    2006Gross gains on sales of securities
    
    $
    108,594
    
    
    $
    15,462Gross losses on sales of securities
    
    
    (463,755
    )
    
    
    (74,125
    )Net realized losses on sales of securities available for sale
    
    $
    (355,161
    )
    
    $
    (58,663
    )
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2007:U. S. Government sponsored
agencies
    
    $
    1,491,434
    
    
    $
    (8,566
    )
    
    $
    1,470,007
    
    
    $
    (27,292
    )
    
    $
    2,961,441
    
    
    $
    (35,858
    )State and municipal securities
    
    
    18,870,294
    
    
    
    (1,014,825
    )
    
    
    5,601,015
    
    
    
    (141,380
    )
    
    
    24,471,309
    
    
    
    (1,156,205
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    2,822,003
    
    
    
    (600,183
    )
    
    
    2,822,003
    
    
    
    (600,183
    )Mortgage-backed securities
    
    
    5,096,750
    
    
    
    (11,716
    )
    
    
    15,847,197
    
    
    
    (421,194
    )
    
    
    20,943,947
    
    
    
    (432,910
    )Subtotal, debt securities
    
    
    25,458,478
    
    
    
    (1,035,107
    )
    
    
    25,740,222
    
    
    
    (1,190,049
    )
    
    
    51,198,700
    
    
    
    (2,225,156
    )Equity securities
    
    
    1,214,192
    
    
    
    (275,023
    )
    
    
    326,147
    
    
    
    (108,653
    )
    
    
    1,540,339
    
    
    
    (383,676
    )Total temporarily impaired
securities
    
    $
    26,672,670
    
    
    $
    (1,310,130
    )
    
    $
    26,066,369
    
    
    $
    (1,298,702
    )
    
    $
    52,739,039
    
    
    $
    (2,608,832
    )December 31, 2006:U. S. Government sponsored agencies
    
    $
    1,997,324
    
    
    $
    (2,676
    )
    
    $
    10,411,755
    
    
    $
    (187,969
    )
    
    $
    12,409,079
    
    
    $
    (190,645
    )State and municipal securities
    
    
    11,364,227
    
    
    
    (143,396
    )
    
    
    3,220,803
    
    
    
    (44,885
    )
    
    
    14,585,030
    
    
    
    (188,281
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    3,374,233
    
    
    
    (365,636
    )
    
    
    3,374,233
    
    
    
    (365,636
    )Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    25,208,842
    
    
    
    (804,257
    )
    
    
    25,208,842
    
    
    
    (804,257
    )Subtotal, debt securities
    
    
    13,361,551
    
    
    
    (146,072
    )
    
    
    42,215,633
    
    
    
    (1,402,747
    )
    
    
    55,577,184
    
    
    
    (1,548,819
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    6,666,969
    
    
    
    (267,831
    )
    
    
    6,666,969
    
    
    
    (267,831
    )Total temporarily impaired securities
    
    $
    13,361,551
    
    
    $
    (146,072
    )
    
    $
    48,882,602
    
    
    $
    (1,670,578
    )
    
    $
    62,244,153
    
    
    $
    (1,816,650
    )
   F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
  December 31,2007
    
    
    2006Commercial real estate
    
    $
    41,630,161
    
    
    $
    44,496,260Commercial and industrial loans
    
    
    44,921,900
    
    
    
    34,007,661Multifamily
    
    
    12,296,741
    
    
    
    16,913,240Construction and land
    
    
    51,308,309
    
    
    
    32,822,450Farmland
    
    
    4,817,842
    
    
    
    2,641,587Mortgage loans, 1-4 families
    
    
    74,752,559
    
    
    
    73,680,613Home equity
    
    
    17,256,522
    
    
    
    16,368,242Indirect auto loans
    
    
    31,898,142
    
    
    
    29,159,407Direct auto loans
    
    
    15,819,782
    
    
    
    17,172,420Student loans
    
    
    593,765
    
    
    
    702,684Other
    
    
    9,377,415
    
    
    
    8,811,672304,673,138
    
    
    
    276,776,236Total allowance for loan losses
    
    
    (4,415,669
    )
    
    
    (4,075,997
    )Loans, net
    
    $
    300,257,469
    
    
    $
    272,700,239
  As of and For the YearsEnded December 31,2007
    
    
    2006Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    3,211,635
    
    
    
    257,649Total impaired loans
    
    $
    3,211,635
    
    
    $
    257,649Valuation allowance related to impaired loans
    
    $
    434,986
    
    
    $
    38,485Average investment in impaired loans
    
    $
    1,928,011
    
    
    $
    576,662Forgone interest income on impaired loans
    
    $
    66,180
    
    
    $
    43,717
   December 31,2007
    
    
    2006Balance, beginning of year
    
    $
    4,075,997
    
    
    $
    3,617,678Provision for loan losses
    
    
    1,178,000
    
    
    
    695,000Loans charged off
    
    
    (1,033,471
    )
    
    
    (398,353
    )Recoveries of loans previously charged off
    
    
    195,143
    
    
    
    161,672Balance, end of year
    
    $
    4,415,669
    
    
    $
    4,075,997
 F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
  Balance, beginning of year
    
    $
    3,570,195Advances
    
    
    904,238Repayments
    
    
    (1,040,499
    )Changes in officer/director
    
    
    7,188,009Balance, end of year
    
    $
    10,621,943
 NOTE 4. PREMISES AND EQUIPMENT
  December 31,2007
    
    
    2006Land
    
    $
    4,770,720
    
    
    $
    4,790,361Buildings
    
    
    8,959,020
    
    
    
    9,167,686Furniture and equipment
    
    
    7,797,802
    
    
    
    8,158,419Construction in progress
    
    
    2,641,120
    
    
    
    59,21724,168,662
    
    
    
    22,175,683Accumulated depreciation
    
    
    (9,353,142
    )
    
    
    (9,360,201
    )$
    14,815,520
    
    
    $
    12,815,482
    F-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4. PREMISES AND EQUIPMENT (Continued)
 Leases
     2008
    
    $
    55,1852009
    
    
    56,4442010
    
    
    57,7422011
    
    
    24,4722012
    
    
    13,200Thereafter
    
    
    782,100$
    989,143
 NOTE 5. DEPOSITS
  2008
    
    $
    150,864,1872009
    
    
    10,506,6312010
    
    
    7,467,2062011
    
    
    3,705,3492012 and beyond
    
    
    1,515,350$
    174,058,723
   F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS
 Pension Plan
  December 31,2007
    
    
    2006Changes in benefit obligations:Obligations at beginning of year
    
    $
    7,361,124
    
    
    $
    6,190,265Service cost
    
    
    707,337
    
    
    
    618,266Interest cost
    
    
    413,137
    
    
    
    350,297Benefits paid
    
    
    (1,271,190
    )
    
    
    (396,766
    )Actuarial losses
    
    
    364,241
    
    
    
    599,062Obligations at end of year
    
    $
    7,574,649
    
    
    $
    7,361,124Changes in plan assets:Fair value of assets at beginning of year
    
    $
    6,050,241
    
    
    $
    3,991,420Actual return on assets
    
    
    248,637
    
    
    
    605,587Company contributions
    
    
    1,200,000
    
    
    
    1,850,000Benefits paid
    
    
    (1,271,190
    )
    
    
    (396,766
    )Fair value of assets at end of year
    
    $
    6,227,688
    
    
    $
    6,050,241Funded status at end of year, included in other liabilities
    
    $
    (1,346,961
    )
    
    $
    (1,310,883
    )Pretax amounts recognized in accumulated other
comprehensive income consist of:Net loss
    
    $
    3,462,374
    
    
    $
    3,163,462Prior service cost
    
    
    185,047
    
    
    
    194,161$
    3,647,421
    
    
    $
    3,357,623Accumulated benefit obligation
    
    $
    6,065,240
    
    
    $
    5,874,388Net periodic benefit cost:Service cost
    
    $
    707,337
    
    
    $
    618,266Interest cost
    
    
    413,137
    
    
    
    350,297Expected return on plan assets
    
    
    (465,558
    )
    
    
    (291,996
    )Amortization of prior losses
    
    
    282,250
    
    
    
    333,986Amortization of service costs
    
    
    9,114
    
    
    
    9,114Net periodic benefit cost
    
    $
    946,280
    
    
    $
    1,019,667
 F-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
  Current year actuarial loss
    
    $
    581,162Amortization of prior losses
    
    
    (282,250
    )Amortization of prior service cost
    
    
    (9,114
    )Total recognized in other comprehensive income
    
    $
    289,798
  Prior to
    
    
    
    
    
    AfterSFAS 158
    
    SFAS 158
    
    SFAS 158Adjustments
    
    Adjustments
    
    AdjustmentsAssets:Intangible pension asset
    
    $
    194,161
    
    
    $
    (194,161
    )
    
    $
    Deferred tax asset
    
    
    840,857
    
    
    
    490,776
    
    
    
    1,331,633Liabilities:Liability for pension benefits
    
    
    266,219
    
    
    
    1,044,664
    
    
    
    1,310,883Stockholders equity:Accumulated other comprehensive loss
    
    
    1,279,308
    
    
    
    748,049
    
    
    
    2,027,357
  December 31,2007
    
    2006Assumptions used in computations:In computing ending obligations:Discount rate
    
    
    5.75
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %In computing expected return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
 F-21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
  2007
    
    2006Fixed income
    
    
    59.4
    %
    
    
    34.5
    %Equities
    
    
    39.1
    %
    
    
    56.1
    %Cash and cash equivalents
    
    
    1.5
    %
    
    
    9.4
    %
    Prior service cost
    
    $
    9,114Net loss
    
    
    310,909$
    320,023
  Fiscal Year
    
    Amount2008
    
    $
    19,1902009
    
    
    19,0942010
    
    
    28,5852011
    
    
    63,1122012
    
    
    124,3192013-2017
    
    
    922,336
 401(K) Plan
  F-22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 Employee Stock Ownership Plan (ESOP)
 st st
   2007
    
    
    2006Shares released for allocation
    
    
    110,175
    
    
    
    66,105Unearned
    
    
    330,525
    
    
    
    374,595Total ESOP shares
    
    
    440,700
    
    
    
    440,700Fair value of unearned shares
    
    $
    3,718,406
    
    
    $
    6,237,007
 NOTE 7. DEFERRED COMPENSATION PLANS
     F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
  December 31,2007
    
    
    2006Sold in overnight agreements maturing in one to four days
    
    $
    288,452
    
    
    $
    5,531,394Sold in a structured agreement at a variable rate due March 8, 2017
with a quarterly put beginning March 8, 2010. The rate resets
quarterly and was 4.75% at December 31, 2007.
    
    
    10,000,000
    
    
    
    Sold in a structured agreement at a fixed rate of 4.75% due August 21,
2017 with a quarterly put beginning August 21, 2011.
    
    
    5,000,000
    
    
    
    $
    15,288,452
    
    
    $
    5,531,394
 NOTE 9. OTHER BORROWINGS
  December 31,2007
    
    
    2006Advance from Federal Home Loan Bank with interest at a fixed rate of
5.16% until March 24, 2008, due June 22, 2009
    
    $
    10,000,000
    
    
    $
    10,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
3.71% until September 17, 2009, due September 17, 2014
    
    
    5,000,000
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
4.23% until August 17, 2010, due August 17, 2015
    
    
    5,000,000
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
3.40% until December 10, 2007, due December 10, 2009
    
    
    
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
4.54% until October 30, 2009, due October 31, 2016
    
    
    15,000,000
    
    
    
    15,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
5.24%, due July 21, 2008
    
    
    10,000,000
    
    
    
    Advance from Federal Home Loan Bank with interest at a fixed rate of
4.36%, due December 10, 2008
    
    
    5,000,000
    
    
    
    $
    50,000,000
    
    
    $
    40,000,000
  F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9. OTHER BORROWINGS (Continued)
  2008
    
    $
    15,000,0002009
    
    
    10,000,0002010
    
    
    2011
    
    
    2012
    
    
    Later years
    
    
    25,000,000$
    50,000,000
  NOTE 10. INCOME TAXES
  Years Ended December 31,2007
    
    
    2006Current
    
    $
    457,865
    
    
    $
    1,148,583Reversal of contingent tax liability
    
    
    (1,061,888
    )
    
    
    Deferred
    
    
    (246,373
    )
    
    
    (416,106
    )$
    (850,396
    )
    
    $
    732,477
  Years Ended December 31,2007
    
    
    2006Tax at federal income tax rate
    
    $
    704,041
    
    
    $
    1,049,279Increase (decrease) resulting from:Reversal of contingent tax liability
    
    
    (1,061,888
    )
    
    
    Tax-exempt interest
    
    
    (361,592
    )
    
    
    (83,430
    )Bank owned life insurance
    
    
    (118,131
    )
    
    
    (103,958
    )State income taxes
    
    
    
    
    
    
    38,075Employee Stock Ownership Plan
    
    
    31,999
    
    
    
    15,248Other
    
    
    (44,825
    )
    
    
    (182,737
    )Provision for income taxes
    
    $
    (850,396
    )
    
    $
    732,477
 F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10. INCOME TAXES (Continued)
 Years Ended December 31,2007
    
    
    2006Deferred tax assets:Loan loss reserves
    
    $
    1,099,315
    
    
    $
    1,038,110Deferred compensation
    
    
    1,182,086
    
    
    
    899,421Organizational cost
    
    
    9,664
    
    
    
    14,374Pension liability
    
    
    1,458,633
    
    
    
    1,448,657Unrealized loss on securities available for sale
    
    
    888,070
    
    
    
    702,840Stock-based compensation
    
    
    224,333
    
    
    
    41,671Nonaccrual loans
    
    
    10,922
    
    
    
    6,293Other
    
    
    5,676
    
    
    
    5,6284,878,699
    
    
    
    4,156,994Deferred tax liabilities:Depreciation and amortization
    
    
    350,926
    
    
    
    178,368Unrealized gain on cash flow hedges
    
    
    156,558
    
    
    
    Deferred pension costs
    
    
    324,267
    
    
    
    238,446Deferred loans costs
    
    
    21,747
    
    
    
    853,498
    
    
    
    416,814Net deferred tax assets
    
    $
    4,025,201
    
    
    $
    3,740,180
 NOTE 11. EARNINGS PER SHARE
  Years Ended December 31,2007
    
    
    2006Basic Earnings and Shares:Net Income
    
    $
    2,921,105
    
    
    $
    2,353,637Weighted-average basic shares outstanding
    
    
    10,337,804
    
    
    
    10,700,190Basic Earnings Per Share:Net Income
    
    $
    0.28
    
    
    $
    0.22Diluted Earnings and Shares:Net Income
    
    $
    2,921,105
    
    
    $
    2,353,637Weighted-average basic shares outstanding
    
    
    10,337,804
    
    
    
    10,700,190Add: Stock options and nonvested shares
    
    
    39,521
    
    
    
    17,801Weighted-average diluted shares outstanding
    
    
    10,377,325
    
    
    
    10,717,991Diluted Earnings Per Share:Net Income
    
    $
    0.28
    
    
    $
    0.22
 F-26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. STOCK PLANS AND STOCK-BASED COMPENSATION
   Share-Based Payment
    2007
    
    
    2006Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Price
    
    
    Number
    
    
    PriceUnder option, beginning of year
    
    
    520,605
    
    
    $
    12.60
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    520,605
    
    
    
    12.60Exercised
    
    
    (9,200
    )
    
    
    12.54
    
    
    
    
    
    
    
    Forfeited
    
    
    (36,800
    )
    
    
    12.54
    
    
    
    
    
    
    
    Under option, end of year
    
    
    474,605
    
    
    $
    12.60
    
    
    
    520,605
    
    
    $
    12.60Exercisable at end of year
    
    
    94,921
    
    
    $
    12.60
    
    
    
    
    
    
    $
    Weighted average fair value per option of options
granted during year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    3.19Total grant date fair value of options vested during the year
    
    
    
    
    
    $
    333,900
    
    
    
    
    
    
    $
    Total intrinsic value of options exercised during the year
    
    
    
    
    
    $
    14,812
    
    
    
    
    
    
    $
    Shares available for grant
    
    
    
    
    
    
    67,016
    
    
    
    
    
    
    
    30,216
 F-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  Year ended
    
    Year EndedDecember
    
    December31, 2007
    
    31, 2006Stock options vested and expected to vest:Number
    
    
    474,605
    
    
    
    520,605Weighted Average Exercise Price
    
    $
    12.60
    
    
    $
    12.60Aggregate Intrinsic Value
    
    
    
    
    
    
    2,109,012Weighted Average Contractual Term of Options
    
    8.4 years
    
    9.3 years
 Year ended
    
    Year EndedDecember
    
    December31, 2007
    
    31, 2006Stock options vested and currently exercisable:Number
    
    
    94,921
    
    
    
    Weighted Average Exercise Price
    
    $
    12.60
    
    
    
    Aggregate Intrinsic Value
    
    
    
    
    
    
    Weighted Average Contractual Term of Options
    
    8.4 years
    
    
    
  Options Outstanding
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    Average
    
    
    
    
    
    AverageRange of Exercise
    
    
    
    
    
    Contractual Life
    
    Exercise
    
    
    
    
    
    ExercisePrices
    
    Number
    
    in Years
    
    Price
    
    Number
    
    Price$12.54
    
    
    467,105
    
    
    
    8.4
    
    
    $
    12.54
    
    
    
    93,421
    
    
    $
    12.54$16.63
    
    
    7,500
    
    
    
    8.9
    
    
    $
    16.63
    
    
    
    1,500
    
    
    $
    16.63474,605
    
    
    
    8.4
    
    
    $
    12.60
    
    
    
    94,921
    
    
    $
    12.60
 F-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  Year EndedDecember 31,2006Weighted-average risk-free interest rate
    
    
    5.04
    %Weighted average expected life of the options
    
    7.5 yearsWeighted average expected dividends (as a percent of the fair value of the stock)
    
    
    1.48
    %Weighted-average expected volatility
    
    
    14.41
    %
   WeightedAverageMarketRestricted
    
    
    PriceShares
    
    
    at GrantBalance, beginning of year
    
    
    207,905
    
    
    $
    12.60Granted
    
    
    
    
    
    
    Vested
    
    
    41,581
    
    
    
    12.60Forfeited
    
    
    14,632
    
    
    
    12.54Balance, end of year
    
    
    151,692
    
    
    $
    12.60
  F-29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS
  Estimated FairValue atCommence
    
    Termination
    
    Derivative
    
    Notional
    
    
    Rate
    
    Rate
    
    December 31,Date
    
    Date
    
    Type
    
    Amount
    
    
    Received
    
    Hedged
    
    200710/29/2007
    
    10/29/2012
    
    Interest rate swap
    
    $
    10,000,000
    
    
    7.33% Fixed
    
    Prime Floating
    
    $
    159,04311/2/2007
    
    11/2/2012
    
    Interest rate swap
    
    
    5,000,000
    
    
    7.50% Fixed
    
    Prime Floating
    
    
    117,31611/2/2007
    
    11/2/2012
    
    Interest rate swap
    
    
    5,000,000
    
    
    8.00% Fixed
    
    Prime Floating + 0.50%
    
    
    115,037
    
    
    
    
    
    $
    20,000,000
    
    
    
    
    
    
    $
    391,396
 F-30




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
 Accounting for Derivative Instruments and
Hedging Activities
 Loan Commitments
   December 31,2007
    
    
    2006Commitments to extend credit
    
    $
    44,174,786
    
    
    $
    32,902,890Financial standby letters of credit
    
    
    4,990,926
    
    
    
    1,053,531$
    49,165,712
    
    
    $
    33,956,421
    Contingencies
  F-31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. CONCENTRATIONS OF CREDIT
    NOTE 16. REGULATORY MATTERS
     F-32




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16. REGULATORY MATTERS (Continued)
  For Capital
    
    To Be Well CapitalizedAdequacy
    
    Under Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2007Total Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    60,191,000
    
    
    
    17.1
    %
    
    $
    28,087,000
    
    
    
    8.0
    %
    
    $
    35,108,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    55,802,000
    
    
    
    15.9
    %
    
    $
    14,043,000
    
    
    
    4.0
    %
    
    $
    21,065,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    55,802,000
    
    
    
    12.6
    %
    
    $
    17,710,000
    
    
    
    4.0
    %
    
    $
    22,138,000
    
    
    
    5.0
    %As of December 31, 2006Total Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    57,136,000
    
    
    
    18.5
    %
    
    $
    24,668,000
    
    
    
    8.0
    %
    
    $
    30,835,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    53,279,000
    
    
    
    17.3
    %
    
    $
    12,334,000
    
    
    
    4.0
    %
    
    $
    18,501,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    53,279,000
    
    
    
    13.9
    %
    
    $
    15,284,000
    
    
    
    4.0
    %
    
    $
    19,105,000
    
    
    
    5.0
    %
    F-33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures about Fair Value of Financial Instruments
  Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:
 Securities:
 Loans:
 Cash Flow Hedge Derivative Instruments:
 Deposits:
 Federal Funds Purchased, Repurchase Agreements and Other Borrowings:
 Accrued Interest:
 Off-Balance-Sheet Instruments:
 F-34




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
  December 31, 2007
    
    
    December 31, 2006Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    9,333,797
    
    
    $
    9,333,797
    
    
    $
    11,935,091
    
    
    $
    11,935,091Federal funds sold
    
    $
    14,505,000
    
    
    $
    14,505,000
    
    
    $
    12,677,000
    
    
    $
    12,677,000Securities available for sale
    
    $
    107,867,192
    
    
    $
    107,867,192
    
    
    $
    84,571,767
    
    
    $
    84,571,767Federal home loan bank stock
    
    $
    2,969,700
    
    
    $
    2,969,700
    
    
    $
    2,499,400
    
    
    $
    2,499,400Loans
    
    $
    304,673,138
    
    
    $
    310,270,355
    
    
    $
    276,776,236
    
    
    $
    264,862,866Allowance for loan losses
    
    
    4,415,669
    
    
    
    
    
    
    
    4,075,997
    
    
    
    Loans, net
    
    $
    300,257,469
    
    
    $
    310,270,355
    
    
    $
    272,700,239
    
    
    $
    264,862,866Cash flow hedge derivative instruments
    
    $
    391,396
    
    
    $
    391,396
    
    
    $
    
    
    
    $
    Accrued interest receivable
    
    $
    2,586,357
    
    
    $
    2,586,357
    
    
    $
    2,288,827
    
    
    $
    2,288,827Financial liabilities:Deposits
    
    $
    330,629,410
    
    
    $
    333,449,645
    
    
    $
    299,188,504
    
    
    $
    298,931,076Federal funds purchased and securities
sold under agreements to repurchase
    
    $
    15,288,452
    
    
    $
    15,870,319
    
    
    $
    5,531,394
    
    
    $
    5,531,394Other borrowings
    
    $
    50,000,000
    
    
    $
    51,099,312
    
    
    $
    40,000,000
    
    
    $
    39,683,607Accrued interest payable
    
    $
    947,352
    
    
    $
    947,352
    
    
    $
    522,666
    
    
    $
    522,666
 F-35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 CONDENSED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006AssetsCash and due from banks
    
    $
    314,135
    
    
    $
    767,546Federal funds sold
    
    
    2,463,000
    
    
    
    5,811,000Investment securities
    
    
    6,727,072
    
    
    
    7,593,852Investment in subsidiary
    
    
    55,867,990
    
    
    
    53,415,145Premises and equipment, net
    
    
    484,691
    
    
    
    498,418Other assets
    
    
    449,703
    
    
    
    217,005Total assets
    
    $
    66,306,591
    
    
    $
    68,302,966LiabilitiesFederal funds purchased and securities sold under
agreements to repurchase
    
    $
    
    
    
    $
    5,000,000Other liabilities
    
    
    714,441
    
    
    
    494,188714,441
    
    
    
    5,494,188Stockholders equity
    
    
    65,592,150
    
    
    
    62,808,778Total liabilities and stockholders equity
    
    $
    66,306,591
    
    
    $
    68,302,966
 F-36




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006IncomeDividends from subsidiaries
    
    $
    1,200,000
    
    
    $
    1,600,000Interest
    
    
    523,604
    
    
    
    658,829Loss on sale of securities
    
    
    
    
    
    
    (3,761
    )Total income
    
    
    1,723,604
    
    
    
    2,255,068ExpenseDepreciation
    
    
    14,618
    
    
    
    14,527Other expense
    
    
    956,704
    
    
    
    786,027Total expense
    
    
    971,322
    
    
    
    800,554Income before income taxes benefits and
equity in undistributed earnings of subsidiary
    
    
    752,282
    
    
    
    1,454,514Income tax benefits
    
    
    225,784
    
    
    
    60,588Income before equity in undistributed earnings
of subsidiary
    
    
    978,066
    
    
    
    1,515,102Equity in undistributed earnings of subsidiary
    
    
    1,943,039
    
    
    
    838,535Net income
    
    $
    2,921,105
    
    
    $
    2,353,637
 F-37




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18. CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    2,921,105
    
    
    $
    2,353,637Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    14,618
    
    
    
    14,527Excess tax benefit related to stock-based compensation plans
    
    
    (64,119
    )
    
    
    Stock-based compensation expense
    
    
    811,781
    
    
    
    521,715Loss on sale of securities
    
    
    
    
    
    
    3,761Undistributed earnings of subsidiary
    
    
    (1,943,039
    )
    
    
    (838,535
    )Other operating activities
    
    
    (535,274
    )
    
    
    56,160Total adjustments
    
    
    (1,716,033
    )
    
    
    (242,372
    )Net cash provided by operating activities
    
    
    1,205,072
    
    
    
    2,111,265INVESTING ACTIVITIES(Increase) decrease in federal funds sold
    
    
    3,348,000
    
    
    
    (1,906,000
    )Purchase of premises and equipment
    
    
    (891
    )
    
    
    Purchases of securities
    
    
    (1,500,000
    )
    
    
    (2,500,000
    )Proceeds from maturities of securities
    
    
    738,460
    
    
    
    2,330,656Proceeds from sale of securities
    
    
    1,500,000
    
    
    
    2,497,250Net cash provided by investing activities
    
    
    4,085,569
    
    
    
    421,906FINANCING ACTIVITIESIncrease (decrease) in federal funds purchased
    
    
    (5,000,000
    )
    
    
    5,000,000Shares released to employee stock ownership plan
    
    
    650,806
    
    
    
    601,539Excess tax benefit related to stock-based compensation plans
    
    
    64,119
    
    
    
    Proceeds from exercise of stock options
    
    
    115,368
    
    
    
    Purchase of treasury shares, net
    
    
    (811,374
    )
    
    
    (8,517,585
    )Dividends paid to stockholders
    
    
    (762,971
    )
    
    
    (673,936
    )Net cash used in financing activities
    
    
    (5,744,052
    )
    
    
    (3,589,982
    )Net decrease in cash and due from banks
    
    
    (453,411
    )
    
    
    (1,056,811
    )Cash and due from banks at beginning of year
    
    
    767,546
    
    
    
    1,824,357Cash and due from banks at end of year
    
    $
    314,135
    
    
    $
    767,546
 F-38




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. STOCK REPURCHASE PLAN
   NOTE 20. SUBSEQUENT EVENT
  F-39