##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006  Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
      Title of Each Class
    
    Name of Each Exchange on which registeredCommon Stock, Par Value $0.01 per share
    
    NASDAQ Stock Market, LLC
  þ o
 þ o
  o þ
  DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6. Managements Discussion and AnalysisItem 7. Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESIndex to ExhibitsReport from Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2006 and 2005Consolidated Statements of Income for the Years Ended December 31, 2006 and 2005Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006 and 2005Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 2006 and 2005Consolidated Statements of Cash Flows For the Years Ended December 31, 2006 and 2005Notes to Consolidated Financial StatementsEx-10.10 Current Company Director Fee ArrangementsEx-10.11 2006 Equity Incentive PlanEx-21 Subsidiaries of the CompanyEx-23 Consent of AccountantsEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32   Section 906 Certification    Table of Contents  
 PART I
 
 Item 1. Description of Business
 General
      Forward Looking Statements
  2




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##### Table of Contents




    
    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;
    
    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
   Market Area Expansion
   3




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##### Table of Contents



Competition
   Internet Website
  Selected Consolidated Financial Information
 At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Selected Financial Condition Data:Total assets
    
    $
    413,330
    
    
    $
    363,797
    
    
    $
    343,468
    
    
    $
    335,668
    
    
    $
    310,902Loans, net
    
    
    272,700
    
    
    
    250,493
    
    
    
    235,275
    
    
    
    240,794
    
    
    
    227,490Securities available for sale, at fair value:U.S. government and agency securities
    
    
    29,439
    
    
    
    14,044
    
    
    
    11,528
    
    
    
    8,960
    
    
    
    4,983Corporate debt securities
    
    
    4,106
    
    
    
    3,786
    
    
    
    4,364
    
    
    
    2,965
    
    
    
    3,617Mortgage-backed securities
    
    
    28,044
    
    
    
    31,098
    
    
    
    26,478
    
    
    
    24,481
    
    
    
    16,922State, county and municipal
    
    
    16,316
    
    
    
    6,869
    
    
    
    8,874
    
    
    
    7,210
    
    
    
    7,118Equity and other investments
    
    
    6,667
    
    
    
    9,069
    
    
    
    8,044
    
    
    
    7,896
    
    
    
    2,994Federal Home Loan Bank stock, at cost
    
    
    2,499
    
    
    
    2,927
    
    
    
    2,957
    
    
    
    2,000
    
    
    
    1,750Deposits
    
    
    299,189
    
    
    
    238,640
    
    
    
    248,543
    
    
    
    255,321
    
    
    
    237,294Federal Home Loan Bank advances
and other borrowings
    
    
    40,000
    
    
    
    50,000
    
    
    
    51,000
    
    
    
    40,000
    
    
    
    35,000Total equity
    
    
    62,808
    
    
    
    68,983
    
    
    
    39,134
    
    
    
    36,987
    
    
    
    34,288
 4




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##### Table of Contents



For the Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Selected Operations Data:Total interest income
    
    $
    22,609
    
    
    $
    19,243
    
    
    $
    17,780
    
    
    $
    18,720
    
    
    $
    19,591Total interest expense
    
    
    8,377
    
    
    
    5,935
    
    
    
    4,898
    
    
    
    5,853
    
    
    
    6,756Net interest income
    
    
    14,232
    
    
    
    13,308
    
    
    
    12,882
    
    
    
    12,867
    
    
    
    12,835Provision for loan losses
    
    
    695
    
    
    
    1,014
    
    
    
    200
    
    
    
    650
    
    
    
    2,750Net interest income after provision for loan losses
    
    
    13,537
    
    
    
    12,294
    
    
    
    12,682
    
    
    
    12,217
    
    
    
    10,085Fees and service charges
    
    
    4,121
    
    
    
    3,836
    
    
    
    3,932
    
    
    
    2,969
    
    
    
    2,603Gain (loss) on sales of investment securities
    
    
    (59
    )
    
    
    (5
    )
    
    
    139
    
    
    
    403
    
    
    
    1,649Other noninterest income
    
    
    1,548
    
    
    
    1,504
    
    
    
    1,384
    
    
    
    1,589
    
    
    
    1,003Total noninterest income
    
    
    5,610
    
    
    
    5,335
    
    
    
    5,455
    
    
    
    4,961
    
    
    
    5,255Total noninterest expense
    
    
    16,060
    
    
    
    13,584
    
    
    
    13,054
    
    
    
    13,849
    
    
    
    12,932Income before taxes and extraordinary items
    
    
    3,086
    
    
    
    4,045
    
    
    
    5,083
    
    
    
    3,329
    
    
    
    2,407Income tax provision (benefit)
    
    
    732
    
    
    
    1,095
    
    
    
    1,550
    
    
    
    1,053
    
    
    
    839Net income
    
    $
    2,354
    
    
    $
    2,950
    
    
    $
    3,533
    
    
    $
    2,276
    
    
    $
    1,568
 5




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Selected Financial Ratios and Other Data:Performance Ratios:Return on assets
    
    
    0.63
    %
    
    
    0.83
    %
    
    
    1.04
    %
    
    
    0.70
    %
    
    
    0.52
    %Return on equity
    
    
    3.44
    %
    
    
    5.18
    %
    
    
    9.28
    %
    
    
    6.39
    %
    
    
    4.66
    %Dividend payout ratio
    
    
    28.64
    %
    
    
    16.13
    %
    
    
    
    
    
    
    
    
    
    
    Interest Rate Spread Information:Average during period
    
    
    3.50
    %
    
    
    3.86
    %
    
    
    4.08
    %
    
    
    4.14
    %
    
    
    4.57
    %End of period
    
    
    3.72
    %
    
    
    3.97
    %
    
    
    3.92
    %
    
    
    4.24
    %
    
    
    4.60
    %Net interest margin
    
    
    4.19
    %
    
    
    4.15
    %
    
    
    4.23
    %
    
    
    4.31
    %
    
    
    4.71
    %Operating expense to average total assets
    
    
    4.29
    %
    
    
    3.81
    %
    
    
    3.84
    %
    
    
    4.28
    %
    
    
    4.28
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    116.64
    %
    
    
    115.95
    %
    
    
    110.10
    %
    
    
    108.63
    %
    
    
    109.00
    %Efficiency ratio
    
    
    80.94
    %
    
    
    72.86
    %
    
    
    71.19
    %
    
    
    77.68
    %
    
    
    71.49
    %Asset Quality Ratios:Non-performing assets to total assets at end of period
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %
    
    
    0.44
    %Non-performing loans to total loans
    
    
    0.09
    %
    
    
    0.33
    %
    
    
    0.24
    %
    
    
    0.19
    %
    
    
    0.37
    %Allowance for loan losses to non-performing loans
    
    
    1,582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %
    
    
    402.00
    %Allowance for loans losses to net loans
    
    
    1.47
    %
    
    
    1.44
    %
    
    
    1.24
    %
    
    
    1.43
    %
    
    
    1.48
    %Net charge offs to average loans outstanding
    
    
    0.09
    %
    
    
    0.15
    %
    
    
    0.30
    %
    
    
    0.24
    %
    
    
    0.71
    %Capital Ratios:Equity to total assets at end of period
    
    
    15.22
    %
    
    
    18.96
    %
    
    
    11.39
    %
    
    
    11.02
    %
    
    
    11.03
    %Average equity to average assets
    
    
    18.29
    %
    
    
    15.98
    %
    
    
    11.21
    %
    
    
    11.02
    %
    
    
    11.15
    %Other Data:Number of full-service offices
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    8
 6




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Lending Activities
  December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real EstateOne- to four-family
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    74,324
    
    
    
    31.20
    %
    
    $
    77,342
    
    
    
    31.66
    %
    
    $
    61,389
    
    
    
    26.59
    %Multi-family
    
    
    16,913
    
    
    
    6.11
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    17,049
    
    
    
    7.16
    
    
    
    17,013
    
    
    
    6.96
    
    
    
    17,483
    
    
    
    7.57Commercial
    
    
    44,496
    
    
    
    16.08
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    38,581
    
    
    
    16.19
    
    
    
    42,112
    
    
    
    17.24
    
    
    
    44,908
    
    
    
    19.45Farmland
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and
development
    
    
    32,822
    
    
    
    11.86
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    8,248
    
    
    
    3.46
    
    
    
    11,382
    
    
    
    4.66
    
    
    
    11,489
    
    
    
    4.98Total real estate loans
    
    
    170,554
    
    
    
    61.62
    
    
    
    144,529
    
    
    
    56.88
    
    
    
    138,202
    
    
    
    58.01
    
    
    
    147,849
    
    
    
    60.52
    
    
    
    135,269
    
    
    
    58.58Other loansConsumer loans:Student
    
    
    703
    
    
    
    0.25
    
    
    
    1,110
    
    
    
    0.44
    
    
    
    1,190
    
    
    
    0.50
    
    
    
    1,307
    
    
    
    0.54
    
    
    
    1,721
    
    
    
    0.75Automobile
    
    
    46,331
    
    
    
    16.74
    
    
    
    50,137
    
    
    
    19.73
    
    
    
    47,455
    
    
    
    19.92
    
    
    
    44,280
    
    
    
    18.13
    
    
    
    51,057
    
    
    
    22.11Home equity
    
    
    16,368
    
    
    
    5.91
    
    
    
    15,591
    
    
    
    6.14
    
    
    
    13,837
    
    
    
    5.81
    
    
    
    12,807
    
    
    
    5.24
    
    
    
    12,420
    
    
    
    5.38Other
    
    
    8,812
    
    
    
    3.19
    
    
    
    9,058
    
    
    
    3.56
    
    
    
    9,212
    
    
    
    3.87
    
    
    
    9,534
    
    
    
    3.90
    
    
    
    10,932
    
    
    
    4.73Total consumer loans
    
    
    72,214
    
    
    
    26.09
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    71,694
    
    
    
    30.09
    
    
    
    67,928
    
    
    
    27.81
    
    
    
    76,130
    
    
    
    32.96Commercial business
loans
    
    
    34,008
    
    
    
    12.29
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    28,346
    
    
    
    11.90
    
    
    
    28,520
    
    
    
    11.67
    
    
    
    19,504
    
    
    
    8.45Total other loans
    
    
    106,222
    
    
    
    38.38
    
    
    
    109,582
    
    
    
    43.12
    
    
    
    100,040
    
    
    
    41.99
    
    
    
    96,448
    
    
    
    39.48
    
    
    
    95,634
    
    
    
    41.42Total loans
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %
    
    
    244,297
    
    
    
    100.00
    %
    
    
    230,903
    
    
    
    100.00
    %Less allowance for
loan losses
    
    
    4,076
    
    
    
    
    
    
    
    3,618
    
    
    
    
    
    
    
    2,965
    
    
    
    
    
    
    
    3,503
    
    
    
    
    
    
    
    3,413$
    272,700
    
    
    
    
    
    
    $
    250,493
    
    
    
    
    
    
    $
    235,275
    
    
    
    
    
    
    $
    240,794
    
    
    
    
    
    
    $
    227,490
 7




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##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Fixed Rate Loans:Real EstateOne- to four-family
    
    $
    68,774
    
    
    
    24.85
    %
    
    $
    69,928
    
    
    
    27.52
    %
    
    $
    71,373
    
    
    
    29.96
    %Multi-family
    
    
    14,542
    
    
    
    5.25
    
    
    
    15,113
    
    
    
    5.95
    
    
    
    16,385
    
    
    
    6.88Commercial
    
    
    28,109
    
    
    
    10.16
    
    
    
    26,293
    
    
    
    10.35
    
    
    
    33,562
    
    
    
    14.09Farmland
    
    
    670
    
    
    
    .24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    14,025
    
    
    
    5.07
    
    
    
    8,299
    
    
    
    3.27
    
    
    
    3,687
    
    
    
    1.55Total real estate loans
    
    
    126,120
    
    
    
    45.57
    
    
    
    119,633
    
    
    
    47.08
    
    
    
    125,007
    
    
    
    52.48Consumer
    
    
    50,629
    
    
    
    18.29
    
    
    
    55,970
    
    
    
    22.02
    
    
    
    53,908
    
    
    
    22.63Commercial business
    
    
    13,505
    
    
    
    4.88
    
    
    
    12,098
    
    
    
    4.76
    
    
    
    9,073
    
    
    
    3.81Total fixed-rate loans
    
    
    190,254
    
    
    
    68.74
    
    
    
    187,701
    
    
    
    73.86
    
    
    
    187,988
    
    
    
    78.90Adjustable Rate Loans:Real EstateOne- to four-family
    
    
    4,907
    
    
    
    1.77
    
    
    
    4,193
    
    
    
    1.65
    
    
    
    2,951
    
    
    
    1.24Multi-family
    
    
    2,371
    
    
    
    0.86
    
    
    
    805
    
    
    
    0.32
    
    
    
    664
    
    
    
    0.28Commercial
    
    
    16,387
    
    
    
    5.92
    
    
    
    11,692
    
    
    
    4.60
    
    
    
    5,018
    
    
    
    2.11Farmland
    
    
    1,972
    
    
    
    .71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    18,797
    
    
    
    6.79
    
    
    
    8,206
    
    
    
    3.23
    
    
    
    4,562
    
    
    
    1.91Total real estate loans
    
    
    44,434
    
    
    
    16.05
    
    
    
    24,896
    
    
    
    9.80
    
    
    
    13,195
    
    
    
    5.54Consumer
    
    
    21,585
    
    
    
    7.80
    
    
    
    19,926
    
    
    
    7.84
    
    
    
    17,785
    
    
    
    7.47Commercial business
    
    
    20,503
    
    
    
    7.41
    
    
    
    21,588
    
    
    
    8.50
    
    
    
    19,272
    
    
    
    8.09Total adjustable rate loans
    
    
    86,522
    
    
    
    31.26
    
    
    
    66,410
    
    
    
    26.14
    
    
    
    50,252
    
    
    
    21.10Total loans
    
    
    276,776
    
    
    
    100.00
    %
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %Less allowance for loan losses
    
    
    4,076
    
    
    
    
    
    
    
    3,618
    
    
    
    
    
    
    
    2,965Total loans, net
    
    $
    272,700
    
    
    
    
    
    
    $
    250,493
    
    
    
    
    
    
    $
    235,275
 8




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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)$
    11,859
    
    
    
    7.32
    %
    
    $
    6,250
    
    
    
    6.15
    %
    
    $
    18,776
    
    
    
    7.86
    %
    
    $
    331
    
    
    
    8.60
    %
    
    $
    20,970
    
    
    
    8.16
    %
    
    $
    5,736
    
    
    
    9.89
    %
    
    $
    14,333
    
    
    
    8.50
    %
    
    $
    78,255
    
    
    
    7.99%One year through 5 years:$
    22,439
    
    
    
    7.40
    %
    
    $
    10,663
    
    
    
    7.18
    %
    
    $
    22,813
    
    
    
    7.08
    %
    
    $
    2,311
    
    
    
    8.44
    %
    
    $
    11,374
    
    
    
    8.00
    %
    
    $
    49,734
    
    
    
    7.74
    %
    
    $
    17,950
    
    
    
    7.78
    %
    
    $
    137,284
    
    
    
    7.57%Five years and over:$
    39,383
    
    
    
    5.93
    %
    
    $
    
    
    
    
    
    %
    
    $
    2,907
    
    
    
    7.56
    %
    
    $
    
    
    
    
    
    %
    
    $
    478
    
    
    
    7.64
    %
    
    $
    16,744
    
    
    
    8.91
    %
    
    $
    1,725
    
    
    
    8.25
    %
    
    $
    61,237
    
    
    
    6.90%Total:$
    73,681
    
    
    
    
    
    
    $
    16,913
    
    
    
    
    
    
    $
    44,496
    
    
    
    
    
    
    $
    2,642
    
    
    
    
    
    
    $
    32,822
    
    
    
    
    
    
    $
    72,214
    
    
    
    
    
    
    $
    34,008
    
    
    
    
    
    
    $
    276,776
 
  (1)
    
    Includes demand loans, loans having no stated maturity and overdraft loans. 
 9




---



##### Table of Contents



Lending authority.
  Major loan customers.
 One- to Four-Family Residential Real Estate Lending.
     10




---



##### Table of Contents



Commercial and Multi-Family Real Estate Lending.
     Construction and Development Lending.
  11




---



##### Table of Contents



Commercial Business Lending.
   Consumer Lending.
     12




---



##### Table of Contents



Loan Originations, Purchases, Sales, Repayments and Servicing
     Asset Quality
    13




---



##### Table of Contents



Delinquent Loans.
 Loans Delinquent For:60-90 Days
    
    
    90 Days and Over
    
    
    Total Delinquent LoansPercent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percentof Loan
    
    
    
    
    
    
    
    
    
    
    of Loan
    
    
    
    
    
    
    
    
    
    
    of LoanNumber
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category(Dollars in ThousandsReal Estate:One- to four-family
    
    
    
    
    
    $
    
    
    
    
    
    %
    
    
    
    
    
    $
    
    
    
    
    
    %
    
    
    
    
    
    $
    
    
    
    
    
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Farmland
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and
development
    
    
    1
    
    
    
    62
    
    
    
    .19
    %
    
    
    1
    
    
    
    61
    
    
    
    .19
    %
    
    
    2
    
    
    
    123
    
    
    
    .37Consumer
    
    
    4
    
    
    
    17
    
    
    
    .02
    
    
    
    15
    
    
    
    76
    
    
    
    .11
    
    
    
    19
    
    
    
    93
    
    
    
    .13Commercial business
    
    
    2
    
    
    
    40
    
    
    
    .12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    40
    
    
    
    .12Total
    
    
    7
    
    
    $
    119
    
    
    
    .04
    %
    
    
    16
    
    
    $
    137
    
    
    
    .05
    %
    
    
    23
    
    
    $
    256
    
    
    
    .09
    %
 Non-performing Assets.
 December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Nonaccruing Loans:One- to four-family
    
    $
    
    
    
    $
    102
    
    
    $
    62
    
    
    $
    130
    
    
    $
    182Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    241
    
    
    
    201
    
    
    
    
    
    
    
    Construction and development
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    197
    
    
    
    524
    
    
    
    301
    
    
    
    334
    
    
    
    483Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184Total
    
    
    258
    
    
    
    867
    
    
    
    546
    
    
    
    464
    
    
    
    849Foreclosed Assets:One- to four-family
    
    
    
    
    
    
    44
    
    
    
    127
    
    
    
    337
    
    
    
    370Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    16
    
    
    
    15
    
    
    
    74
    
    
    
    85
    
    
    
    151Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    322
    
    
    
    59
    
    
    
    201
    
    
    
    422
    
    
    
    521Total non-performing assets
    
    $
    580
    
    
    $
    926
    
    
    $
    765
    
    
    $
    886
    
    
    $
    1,370Total as a percentage of total assets
    
    
    0.14
    %
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %
    
    
    0.44
    %
 14




---



##### Table of Contents



Other Loans of Concern.
 Classified Assets.
   15




---



##### Table of Contents



Provision for Loan Losses.
 Allowance for Loan Losses.
  16




---



##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Balance at beginning of period
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503
    
    
    $
    3,413
    
    
    $
    2,346Charge-offs:One- to four-family
    
    
    
    
    
    
    27
    
    
    
    60
    
    
    
    62
    
    
    
    141Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129Commercial real estate
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    
    
    
    
    25Construction and development
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Consumer
    
    
    368
    
    
    
    567
    
    
    
    557
    
    
    
    710
    
    
    
    1,352Commercial business
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    182
    
    
    
    264399
    
    
    
    594
    
    
    
    990
    
    
    
    954
    
    
    
    2,026Recoveries:One- to four-family
    
    
    
    
    
    
    8
    
    
    
    1
    
    
    
    5
    
    
    
    Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Consumer
    
    
    162
    
    
    
    224
    
    
    
    247
    
    
    
    291
    
    
    
    293Commercial business
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    98
    
    
    
    162
    
    
    
    232
    
    
    
    252
    
    
    
    394
    
    
    
    343Net charge-offs
    
    
    237
    
    
    
    362
    
    
    
    738
    
    
    
    560
    
    
    
    1,683Provision charged to operations
    
    
    695
    
    
    
    1,015
    
    
    
    200
    
    
    
    650
    
    
    
    2,750Balance at end of period
    
    $
    4,076
    
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503
    
    
    $
    3,413Ratio of net charge-offs during the
period to average loans
outstanding during period
    
    
    0.09
    %
    
    
    0.24
    %
    
    
    0.30
    %
    
    
    0.24
    %
    
    
    0.71
    %Ratio of net charge-offs during
the
period
to average non-performing assets
    
    
    29.28
    %
    
    
    43.46
    %
    
    
    96.47
    %
    
    
    63.21
    %
    
    
    122.85
    %Allowance as a percentage of
non-performing loans
    
    
    1,582.00
    %
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %
    
    
    402.00
    %Allowance as a percentage of total
loans (end of period)
    
    
    1.47
    %
    
    
    1.42
    %
    
    
    1.24
    %
    
    
    1.43
    %
    
    
    1.48
    %
 17




---



##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003Percent
    
    
    
    
    
    
    
    
    
    
    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
    
    $
    875
    
    
    $
    73,681
    
    
    
    26.62
    %
    
    $
    983
    
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    378
    
    
    $
    74,324
    
    
    
    31.20
    %
    
    $
    355
    
    
    $
    77,342
    
    
    
    31.66
    %Secured by
multi-
family
residential
real estate
    
    
    177
    
    
    
    16,913
    
    
    
    6.11
    
    
    
    166
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    387
    
    
    
    17,049
    
    
    
    7.16
    
    
    
    313
    
    
    
    17,013
    
    
    
    6.96Secured by
commercial
real estate
    
    
    925
    
    
    
    44,496
    
    
    
    16.08
    
    
    
    711
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    713
    
    
    
    38,851
    
    
    
    16.19
    
    
    
    1,029
    
    
    
    42,112
    
    
    
    17.24Construction
and
development
    
    
    471
    
    
    
    32,822
    
    
    
    11.86
    
    
    
    218
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    112
    
    
    
    8,248
    
    
    
    3.46
    
    
    
    251
    
    
    
    11,382
    
    
    
    4.66Farmland
    
    
    32
    
    
    
    2,642
    
    
    
    0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    791
    
    
    
    72,214
    
    
    
    26.09
    
    
    
    858
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    756
    
    
    
    71,694
    
    
    
    30.09
    
    
    
    850
    
    
    
    67,928
    
    
    
    27.81Commercial
business
    
    
    805
    
    
    
    34,008
    
    
    
    12.29
    
    
    
    682
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    434
    
    
    
    28,346
    
    
    
    11.90
    
    
    
    568
    
    
    
    28,520
    
    
    
    11.67Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    Total
    
    $
    4,076
    
    
    $
    276,776
    
    
    
    100.00
    %
    
    $
    3,618
    
    
    $
    254,111
    
    
    
    100.00
    %
    
    $
    2,965
    
    
    $
    238,242
    
    
    
    100.00
    %
    
    $
    3,503
    
    
    $
    244,297
    
    
    
    100.00
    %
 Investment Activities
     18




---



##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Carrying
    
    
    % of
    
    
    Carrying
    
    
    % of
    
    
    Carrying
    
    
    % ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in Thousands)Securities available for sale:U. S. Government sponsored agencies
    
    $
    29,439
    
    
    
    34.81
    %
    
    $
    14,044
    
    
    
    21.65
    %
    
    $
    11,528
    
    
    
    19.44
    %Corporate debt securities (1)
    
    
    4,106
    
    
    
    4.86
    
    
    
    3,786
    
    
    
    5.84
    
    
    
    4,364
    
    
    
    7.36Mortgage-backed securities
    
    
    28,044
    
    
    
    33.16
    
    
    
    31,098
    
    
    
    47.94
    
    
    
    26,478
    
    
    
    44.66State, county and municipal securities
    
    
    16,316
    
    
    
    19.29
    
    
    
    6,869
    
    
    
    10.59
    
    
    
    8,874
    
    
    
    14.97Equity and other (2)
    
    
    6,667
    
    
    
    7.88
    
    
    
    9,069
    
    
    
    13.98
    
    
    
    8,044
    
    
    
    13.57$
    84,572
    
    
    
    100.00
    %
    
    $
    64,866
    
    
    
    100.00
    %
    
    $
    59,228
    
    
    
    100.00
    %Other earning assets:Interest-bearing deposits with banks
    
    $
    2,154
    
    
    
    12.43
    %
    
    $
    1,387
    
    
    
    12.46
    %
    
    $
    421
    
    
    
    2.60
    %Federal funds sold
    
    
    12,677
    
    
    
    73.15
    
    
    
    6,820
    
    
    
    61.25
    
    
    
    12,783
    
    
    
    79.10FHLB stock
    
    
    2,499
    
    
    
    14.42
    
    
    
    2,927
    
    
    
    26.29
    
    
    
    2,957
    
    
    
    18.30$
    17,330
    
    
    
    100.00
    %
    
    $
    11,134
    
    
    
    100.00
    %
    
    $
    16,161
    
    
    
    100.00
    %
 
 (1)
    
    Includes $2.0 million in non-rated debt securities and $2.1 million in debt
securities with below investment grade ratings.(2)
    
    Consists primarily of an investment in a mutual fund that invests in adjustable rate
mortgages. 19




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##### 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
sponsored agencies
    
    $
    1,510
    
    
    
    3.29
    %
    
    $
    10,112
    
    
    
    4.92
    %
    
    $
    11,242
    
    
    
    6.05
    %
    
    $
    6,750
    
    
    
    6.00
    %
    
    $
    29,614
    
    
    
    5.54
    %
    
    $
    29,439Corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,252
    
    
    
    6.13
    
    
    
    1,219
    
    
    
    7.12
    
    
    
    4,471
    
    
    
    6.63
    
    
    
    4,106Mortgage-backed
securities
    
    
    4,217
    
    
    
    4.53
    
    
    
    14,567
    
    
    
    4.50
    
    
    
    8,434
    
    
    
    4.59
    
    
    
    1,620
    
    
    
    4.59
    
    
    
    28,838
    
    
    
    4.47
    
    
    
    28,044State, county and
municipal
    
    
    
    
    
    
    
    
    
    
    1,831
    
    
    
    3.26
    
    
    
    8,916
    
    
    
    3.84
    
    
    
    5,742
    
    
    
    4.03
    
    
    
    16,489
    
    
    
    3.80
    
    
    
    16,316Equity and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,935
    
    
    
    4.45
    
    
    
    6,667Total investment
securities
    
    $
    5,727
    
    
    
    3.91
    %
    
    $
    26,510
    
    
    
    4.22
    %
    
    $
    31,844
    
    
    
    5.15
    %
    
    $
    15,331
    
    
    
    5.44
    %
    
    $
    86,347
    
    
    
    4.90
    %
    
    $
    84,572
 Sources of Funds
 General.
 Deposits .
   20




---



##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest-bearing deposits:Interest-bearing demand deposits and
NOW accounts
    
    $
    38,196
    
    
    
    0.82
    %
    
    $
    46,062
    
    
    
    0.75
    %
    
    $
    50,922
    
    
    
    0.68
    %Savings and money market accounts
    
    
    89,004
    
    
    
    1.17
    
    
    
    88,624
    
    
    
    0.91
    
    
    
    87,607
    
    
    
    0.67Time deposits
    
    
    111,539
    
    
    
    4.36
    
    
    
    97,457
    
    
    
    2.96
    
    
    
    96,771
    
    
    
    2.41Total interest bearing deposits
    
    $
    238,739
    
    
    
    2.61
    %
    
    $
    232,143
    
    
    
    1.73
    %
    
    $
    235,300
    
    
    
    1.39
    %
  Maturity3 Months
    
    
    Over 3-6
    
    
    Over 6-12
    
    
    Over 12or Less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total(In Thousands)Time deposits of less than $100,000
    
    $
    14,836
    
    
    $
    15,922
    
    
    $
    29,837
    
    
    $
    17,096
    
    
    $
    77,691Time deposits of $100,000 or more
    
    
    19,343
    
    
    
    12,369
    
    
    
    17,070
    
    
    
    8,546
    
    
    
    57,328Total time deposits
    
    $
    34,179
    
    
    $
    28,291
    
    
    $
    46,907
    
    
    $
    25,642
    
    
    $
    135,019
 Borrowings .
    21




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Maximum BalanceFederal Home Loan Bank advances
    
    $
    50,000
    
    
    $
    51,000
    
    
    $
    51,000Average BalanceFederal Home Loan Bank advances
    
    $
    46,134
    
    
    $
    45,821
    
    
    $
    42,110Average interest rate paid during the year
    
    
    4.21
    %
    
    
    4.15
    %
    
    
    3.85
    %End of Year BalanceFederal Home Loan Bank advances
    
    $
    40,000
    
    
    $
    50,000
    
    
    $
    51,000Weighted average interest rate of Federal Home
Loan Bank advances
    
    
    4.41
    %
    
    
    4.40
    %
    
    $
    3.85
    %
 Subsidiary and Other Activities
   How We Are Regulated
   22




---



##### Table of Contents



HeritageBank of the South.
 Georgia Regulation.
 Insurance of Accounts and Regulation by the FDIC.
   23




---



##### Table of Contents



Heritage
Financial Group and Heritage, MHC.
 Regulation by the OTS.
    Georgia Regulation.
 Regulatory
Capital Requirements for the Bank.
  24




---



##### Table of Contents



Regulatory Capital Requirements for Heritage Financial Group.
 Limitations on Dividends and Other Capital Distributions.
  25




---



##### Table of Contents



Federal
Taxation.
   Method of Accounting.
 Minimum Tax.
 Net Operating Loss Carryovers
 Corporate Dividends-Received Deduction.
 State Taxation.
  Employees
  26




---



##### Table of Contents



Item 2. Description of Property
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  27




---



##### Table of Contents



PART II
 
 Item 5. Market Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
 Market and Dividend Information
  DividendsPaidHigh
    
    
    Low
    
    
    Per Share2006First 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
    
    
    
    0.052005First quarter
    
    $
    
    
    
    $
    
    
    
    $
    Second quarter
    
    
    10.75
    
    
    
    10.75
    
    
    
    Third quarter
    
    
    11.15
    
    
    
    10.70
    
    
    
    Fourth quarter
    
    
    11.52
    
    
    
    10.60
    
    
    
    0.05
   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
    
    
    520,605
    
    
    $
    12.60
    
    
    
    30,216Equity compensation
plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    520,605
    
    
    $
    12.60
    
    
    
    30,216
 28




---



##### Table of Contents



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
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    335,000November
    
    
    266,335
    
    
    
    16.64
    
    
    
    266,335
    
    
    
    68,665December
    
    
    68,665
    
    
    
    16.95
    
    
    
    68,665
    
    
    
    Total
    
    
    335,000
    
    
    $
    16.70
    
    
    
    335,000
    
    
    
    
  29




---



##### Table of Contents



Item 6. Managements Discussion and Analysis
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Evolution of Business Strategy
    30




---



##### Table of Contents



1. Commercial Banking and Small Business Lending:
 2. Indirect Auto Lending:
 3. Retail Banking:
 4. Brokerage/Investment Services:
 5. Mortgage Lending:
     31




---



##### Table of Contents



Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
   
    
    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 to align maturities and repricing terms of
funding sources with loans; and
    
    Continuing the origination of consumer loans.
  32




---



##### Table of Contents



Comparison of Financial Condition at December 31, 2006 and December 31, 2005
      33




---



##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(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
    
    $
    264,442
    
    
    $
    19,123
    
    
    
    7.23
    %
    
    $
    245,432
    
    
    $
    16,203
    
    
    
    6.60
    %
    
    $
    239,857
    
    
    $
    15,444
    
    
    
    6.44
    %Investment securities
    
    
    63,790
    
    
    
    2,933
    
    
    
    4.60
    
    
    
    65,169
    
    
    
    2,754
    
    
    
    4.23
    
    
    
    55,938
    
    
    
    2,237
    
    
    
    3.99Other short-term investments
    
    
    11,521
    
    
    
    552
    
    
    
    4.79
    
    
    
    10,410
    
    
    
    286
    
    
    
    2.75
    
    
    
    8,068
    
    
    
    99
    
    
    
    1.23Total interest-earning
assets
    
    
    339,753
    
    
    
    22,608
    
    
    
    6.65
    %
    
    
    321,011
    
    
    
    19,243
    
    
    
    5.99
    
    
    
    303,863
    
    
    
    17,780
    
    
    
    5.85Interest-Bearing Liabilities:Demand and NOW accounts
    
    
    38,196
    
    
    
    313
    
    
    
    0.82
    %
    
    
    46,062
    
    
    
    346
    
    
    
    0.75
    
    
    
    50,922
    
    
    
    598
    
    
    
    0.68Savings accounts
    
    
    89,004
    
    
    
    1,337
    
    
    
    1.50
    
    
    
    88,624
    
    
    
    803
    
    
    
    0.91
    
    
    
    87,607
    
    
    
    342
    
    
    
    0.67Time deposits
    
    
    111,539
    
    
    
    4,571
    
    
    
    4.10
    
    
    
    97,457
    
    
    
    2,883
    
    
    
    2.96
    
    
    
    96,711
    
    
    
    2,337
    
    
    
    2.41Borrowings
    
    
    47,175
    
    
    
    2,155
    
    
    
    4.57
    
    
    
    45,821
    
    
    
    1,903
    
    
    
    4.15
    
    
    
    42,110
    
    
    
    1,621
    
    
    
    3.85Total interest-bearing
liabilities
    
    
    285,914
    
    
    
    8,376
    
    
    
    2.93
    
    
    
    277,964
    
    
    
    5,935
    
    
    
    2.14
    
    
    
    277,410
    
    
    
    4,898
    
    
    
    1.77Net interest income
    
    
    
    
    
    $
    14,232
    
    
    
    
    
    
    
    
    
    
    $
    13,308
    
    
    
    
    
    
    
    
    
    
    $
    12,882Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.72
    %
    
    
    
    
    
    
    
    
    
    
    3.85
    %
    
    
    
    
    
    
    
    
    
    
    4.08
    %Net earning assets
    
    $
    53,839
    
    
    
    
    
    
    
    
    
    
    $
    43,047
    
    
    
    
    
    
    
    
    
    
    $
    26,453Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.19
    %
    
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.19
    x
    
    
    
    
    
    
    
    
    
    
    1.15
    x
    
    
    
    
    
    
    
    
    
    
    1.10
    x
 34




---



##### Table of Contents



Rate/Volume Analysis
  Year Ended December 31,2006 vs. 2005
    
    
    2005 vs. 2004Increase (Decrease)
    
    
    Total
    
    
    Increase (Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    1,255
    
    
    $
    1,665
    
    
    $
    2,920
    
    
    $
    359
    
    
    $
    400
    
    
    $
    759Investment securities
    
    
    (58
    )
    
    
    237
    
    
    
    179
    
    
    
    369
    
    
    
    148
    
    
    
    517Other
    
    
    31
    
    
    
    235
    
    
    
    266
    
    
    
    29
    
    
    
    158
    
    
    
    187Total interest-earning assets
    
    $
    1,228
    
    
    $
    2,137
    
    
    $
    3,365
    
    
    $
    757
    
    
    $
    706
    
    
    $
    1,463Interest-bearing liabilities:Savings and money market accounts
    
    $
    (59
    )
    
    
    26
    
    
    
    (33
    )
    
    $
    (57
    )
    
    $
    (195
    )
    
    
    (252
    )Demand and NOW deposits
    
    
    3
    
    
    
    531
    
    
    
    534
    
    
    
    4
    
    
    
    457
    
    
    
    461Certificates of deposit
    
    
    417
    
    
    
    1,271
    
    
    
    1,688
    
    
    
    17
    
    
    
    529
    
    
    
    546Borrowings
    
    
    52
    
    
    
    200
    
    
    
    252
    
    
    
    147
    
    
    
    135
    
    
    
    282Total interest-bearing liabilities
    
    $
    413
    
    
    $
    2,028
    
    
    $
    2,441
    
    
    $
    111
    
    
    $
    926
    
    
    $
    1,037Net interest income
    
    
    
    
    
    
    
    
    
    $
    924
    
    
    
    
    
    
    
    
    
    
    $
    426
 35




---



##### Table of Contents



Comparison of Operating Results for the Years Ended December 31, 2006 and December 31, 2005
 General
   Net Interest Income
   Provision for Loan Losses
  General comments on the provision for loan losses
  36




---



##### Table of Contents



Noninterest Income
  For the years endedDecember 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % Change(Dollars in Thousands)Service charges on deposit accounts
    
    $
    3,159
    
    
    $
    3,052
    
    
    $
    107
    
    
    
    3.5
    %Other service charges, commissions
and fees
    
    
    961
    
    
    
    784
    
    
    
    177
    
    
    
    22.6Brokerage fees
    
    
    555
    
    
    
    619
    
    
    
    (64
    )
    
    
    (10.3
    )Mortgage origination fees
    
    
    447
    
    
    
    404
    
    
    
    43
    
    
    
    10.6Bank owned life insurance
    
    
    306
    
    
    
    297
    
    
    
    9
    
    
    
    3.0Loss on sale of securities
    
    
    (59
    )
    
    
    (5
    )
    
    
    (54
    )
    
    
    1,080.0Other
    
    
    241
    
    
    
    184
    
    
    
    57
    
    
    
    31.1Total noninterest income
    
    $
    5,610
    
    
    $
    5,335
    
    
    $
    275
    
    
    
    5.2
    %Noninterest income as a percentage of
average assets
    
    
    2.05
    %
    
    
    1.50
    %
     37




---



##### Table of Contents



Noninterest Expense
  For the years ended December 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % Change(Dollars
in Thousands)Salaries and employee benefits
    
    $
    8,901
    
    
    $
    7,500
    
    
    $
    1,401
    
    
    
    18.68
    %Equipment
    
    
    1,171
    
    
    
    1,577
    
    
    
    (406
    )
    
    
    (25.75
    )Occupancy
    
    
    1,018
    
    
    
    1,000
    
    
    
    18
    
    
    
    1.80Advertising and marketing
    
    
    326
    
    
    
    271
    
    
    
    55
    
    
    
    20.30Legal and accounting
    
    
    647
    
    
    
    492
    
    
    
    155
    
    
    
    31.50Directors fees and retirement
    
    
    473
    
    
    
    292
    
    
    
    181
    
    
    
    62.00Telephone
    
    
    274
    
    
    
    252
    
    
    
    22
    
    
    
    8.73Supplies
    
    
    286
    
    
    
    238
    
    
    
    48
    
    
    
    20.17Data processing fees
    
    
    1,009
    
    
    
    469
    
    
    
    540
    
    
    
    115.14Other operating
    
    
    1,955
    
    
    
    1,493
    
    
    
    462
    
    
    
    30.94Total noninterest expenses
    
    $
    16,060
    
    
    $
    13,584
    
    
    $
    2,476
    
    
    
    18.23
    %Noninterest expenses as a
percentage of average assets
    
    
    5.86
    %
    
    
    3.81
    %
  Type of Expense
    
    IncreaseSalaries
    
    $
    322ESOP expense
    
    
    360Stock based compensation
    
    
    382Defined benefit pension plan
    
    
    120Insurance and other benefits
    
    
    217Total increase
    
    $
    1,401
  38




---



##### Table of Contents



Income Tax Expense
  Liquidity and Commitments
     39




---



##### Table of Contents



Off-Balance-Sheet Liabilities
  (In Thousands)Commitments to extend credit
    
    $
    32,903Financial stand-by letters of credit
    
    
    1,053$
    33,956
 Capital
    Actual
    
    
    Required
    
    
    ExcessPercent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Assets
    
    
    Amount
    
    
    of Assets
    
    
    Amount
    
    
    of Assets(Dollars in Millions)Tier 1 leverage
    
    $
    53.3
    
    
    
    13.9
    %
    
    $
    19.1
    
    
    
    5.0
    %
    
    $
    84.2
    
    
    
    8.9
    %Tier 1 risk-based
    
    
    53.3
    
    
    
    17.3
    
    
    
    18.5
    
    
    
    6.0
    
    
    
    34.8
    
    
    
    11.3Total risk-based
    
    
    57.1
    
    
    
    18.5
    
    
    
    30.8
    
    
    
    10.0
    
    
    
    26.3
    
    
    
    8.5
 Critical Accounting Policies
  40




---



##### Table of Contents



Allowance for Loan Losses
    Income Taxes
   41




---



##### Table of Contents



Item 7. Financial Statements
  (a)
Report from Independent Registered Public Accounting Firm;
 (b) Consolidated Balance Sheets as of December 31, 2006 and 2005;
 (c) Consolidated Statements of Income for the Years Ended December 31, 2006 and 2005;
 (d) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006 and 2005;
 (e) Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2006 and 2005;
 (f) Consolidated Statements of Cash Flows For the Years Ended December 31, 2006 and 2005;
 (g) Notes to Consolidated Financial Statements.
 
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures
    42




---



##### Table of Contents



Other Information
  43




---



##### Table of Contents



PART III
 
 Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
 Directors
  Executive Officers
  Section 16(a) Compliance
  Code of Ethics
  
 Executive Compensation
  
 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
   44




---



##### Table of Contents



Certain Relationships and Related Transactions
   
 Exhibits
 Reference toPrior FilingRegulation S-B

    
    
    
    or Exhibit NumberExhibit Number

    
    Document
    
    Attached Hereto3
    (i)
    
    Charter of the Registrant
    
    
    3.13 (ii)
    
    Bylaws of the Registrant
    
    
    *4
    
    
    Stock Certificate
    
    
    *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
    
    
    *(10) Current Company Director Fee Arrangements
    
    
    10.10(11) Heritage Financial Group 2006 Equity Incentive Plan
    
    
    10.1121
    
    
    Subsidiaries of the Company
    
    
    2123
    
    
    Consent of Accountants
    
    
    2324
    
    
    Power of Attorney
    
    
    ***31
    
    
    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.***
    
    Included on signature page. 
 Item 14. Principal Accountant Fees and Services
  45




---



##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate:    March 27, 2007
    By:
    /s/ O. Leonard DormineyO. Leonard Dorminey, President and
Chief      Executive Officer(Duly Authorized Representative) KNOW ALL MEN BY THESE PRESENTS
  Date:
    
    March 27, 2007
    
    /s/ O. Leonard DormineyO. Leonard DormineyPresident, Chief Executive Officer and Director (Principal Executive Officer)Date:
    
    March 27, 2007
    
    /s/ Antone D. LehrAntone D. Lehr, Chairman of the BoardDate:
    
    March 27, 2007
    
    /s/ Joseph C. BurgerJoseph C. Burger, Vice Chairman of the BoardDate:
    
    March 27, 2007
    
    /s/ Douglas J. McGinleyDouglas J. McGinley, DirectorDate:
    
    March 27, 2007
    
    /s/ Carol W. SlappeyCarol W. Slappey, DirectorDate:
    
    March 27, 2007
    
    /s/ J. Keith LandJ. Keith Land, DirectorDate:
    
    March 27, 2007
    
    /s/ J. Lee StanleyJ. Lee Stanley, DirectorDate:
    
    March 27, 2007
    
    /s/ T. Heath FountainT. Heath FountainSenior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 46




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##### Table of Contents



Index to Exhibits
 10.10
    
    Current Company Director Fee Arrangements10.11
    
    Heritage Financial Group 2006 Equity Incentive Plan21
    
    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
   (MAULDIN & JENKINS, LLC)
 
 F-1




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005AssetsCash and due from banks
    
    $
    9,781,232
    
    
    $
    10,499,084Interest-bearing deposits in banks
    
    
    2,153,859
    
    
    
    1,387,046Federal funds sold
    
    
    12,677,000
    
    
    
    6,820,000Securities available for sale, at fair value
    
    
    84,571,767
    
    
    
    64,866,021Federal home loan bank stock, at cost
    
    
    2,499,400
    
    
    
    2,927,000Loans
    
    
    276,776,236
    
    
    
    254,110,534Less allowance for loan losses
    
    
    4,075,997
    
    
    
    3,617,678Loans, net
    
    
    272,700,239
    
    
    
    250,492,856Premises and equipment, net
    
    
    12,815,482
    
    
    
    12,004,468Accrued interest receivable
    
    
    2,288,827
    
    
    
    1,666,629Foreclosed assets
    
    
    322,449
    
    
    
    59,272Intangible assets
    
    
    1,000,000
    
    
    
    Cash surrender value of bank owned life insurance
    
    
    8,293,202
    
    
    
    7,987,442Other assets
    
    
    4,226,365
    
    
    
    5,086,968$
    413,329,822
    
    
    $
    363,796,786Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    14,784,180
    
    
    $
    14,059,406Interest-bearing
    
    
    284,404,324
    
    
    
    224,580,863Total deposits
    
    
    299,188,504
    
    
    
    238,640,269Federal funds purchased and securities sold under repurchase agreements
    
    
    5,531,394
    
    
    
    237,222Other borrowings
    
    
    40,000,000
    
    
    
    50,000,000Other liabilities
    
    
    5,801,146
    
    
    
    5,935,648Total liabilities
    
    
    350,521,044
    
    
    
    294,813,139Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, par value $0.01; 25,000,000 shares authorized;
11,449,155 and 11,241,250 issued and outstanding
    
    
    114,492
    
    
    
    112,413Capital surplus
    
    
    37,807,784
    
    
    
    37,126,877Retained earnings
    
    
    40,248,349
    
    
    
    38,717,576Accumulated other comprehensive loss
    
    
    (3,097,880
    )
    
    
    (2,786,569
    )Unearned employee stock ownership plan (ESOP) shares,
374,595 and 418,665 shares
    
    
    (3,745,950
    )
    
    
    (4,186,650
    )71,326,795
    
    
    
    68,983,647Treasury stock, at cost (555,138 shares at December 31, 2006)
    
    
    (8,518,017
    )
    
    
    Total stockholders equity
    
    
    62,808,778
    
    
    
    68,983,647$
    413,329,822
    
    
    $
    363,796,786
 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, 2006 AND 2005
 2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    19,122,694
    
    
    $
    16,203,254Interest on taxable securities
    
    
    2,659,905
    
    
    
    2,479,443Interest on nontaxable securities
    
    
    273,303
    
    
    
    274,552Interest on federal funds sold
    
    
    495,471
    
    
    
    245,227Interest on deposits in other banks
    
    
    56,917
    
    
    
    40,59722,608,290
    
    
    
    19,243,073Interest expenseInterest on deposits
    
    
    6,221,300
    
    
    
    4,031,710Interest on other borrowings
    
    
    2,155,388
    
    
    
    1,902,8698,376,688
    
    
    
    5,934,579Net interest income
    
    
    14,231,602
    
    
    
    13,308,494Provision for loan losses
    
    
    695,000
    
    
    
    1,014,555Net interest income after provision for loan losses
    
    
    13,536,602
    
    
    
    12,293,939Noninterest incomeService charges on deposit accounts
    
    
    3,159,250
    
    
    
    3,051,757Other service charges, commissions and fees
    
    
    961,361
    
    
    
    784,216Brokerage fees
    
    
    555,148
    
    
    
    618,636Mortgage origination fees
    
    
    446,912
    
    
    
    403,535Bank owned life insurance
    
    
    305,760
    
    
    
    297,377Loss on sale of securities
    
    
    (58,663
    )
    
    
    (4,653
    )Other
    
    
    239,887
    
    
    
    183,8105,609,655
    
    
    
    5,334,678Noninterest expenseSalaries and employee benefits
    
    
    8,901,210
    
    
    
    7,499,674Equipment
    
    
    1,171,471
    
    
    
    1,577,343Occupancy
    
    
    1,017,898
    
    
    
    999,725Advertising and marketing
    
    
    326,217
    
    
    
    270,831Legal and accounting
    
    
    646,573
    
    
    
    492,239Directors fees and retirement
    
    
    472,863
    
    
    
    291,976Telephone
    
    
    274,531
    
    
    
    251,653Supplies
    
    
    285,901
    
    
    
    237,657Data processing fees
    
    
    1,008,865
    
    
    
    468,899Other operating
    
    
    1,954,614
    
    
    
    1,493,60616,060,143
    
    
    
    13,583,603Income before income taxes
    
    
    3,086,114
    
    
    
    4,045,014Applicable income taxes
    
    
    732,477
    
    
    
    1,094,519Net income
    
    $
    2,353,637
    
    
    $
    2,950,495Basic earnings per share
    
    $
    0.22
    
    
    $
    0.31Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.31
 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, 2006 AND 2005
 2006
    
    
    2005Net income
    
    $
    2,353,637
    
    
    $
    2,950,495Other
comprehensive income (loss):Net unrealized holding gains (losses) arising during period,
net of tax (benefit) of $262,893 and $(650,940)
    
    
    399,974
    
    
    
    (990,361
    )Reclassification adjustment for losses included in
net income, net of tax benefit of $23,266 and $1,845
    
    
    35,397
    
    
    
    2,808Effects of changing pension plan measurement date pursuant to
SFAS No. 158, net of tax benefits of $912 and $129,528
    
    
    1,367
    
    
    
    (197,070
    )Total
other comprehensive income (loss)
    
    
    436,738
    
    
    
    (1,184,623
    )Comprehensive income
    
    $
    2,790,375
    
    
    $
    1,765,872
 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, 2006 AND 2005
 Common Stock
    
    
    CapitalParShares
    
    
    Value
    
    
    SurplusBalance, December 31, 2004
    
    
    1,000
    
    
    $
    10
    
    
    $
    4,799,990Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $.05 per share
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Issuance of 7,867,875 shares of common stock to
Heritage, MHC
    
    
    7,867,875
    
    
    
    78,679
    
    
    
    (78,679
    )Sale of 3,372,375 shares of common stock in an
initial public offering, net of issuance costs
    
    
    3,372,375
    
    
    
    33,724
    
    
    
    32,384,337ESOP shares earned, 22,035 shares
    
    
    
    
    
    
    
    
    
    
    21,229Balance, December 31, 2005
    
    
    11,241,250
    
    
    
    112,413
    
    
    
    37,126,877Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared, $.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
    
    
    $
    37,807,784
 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$
    35,935,700
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,601,946
    )
    
    $
    39,133,7542,950,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,950,495(168,619
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168,619
    )
    
    
    
    
    
    
    
    
    
    
    
    (1,184,623
    )
    
    
    (1,184,623
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,407,000
    )
    
    
    
    
    
    
    
    
    
    
    28,011,061
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    241,57938,717,576
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    
    601,539$
    40,248,349
    
    
    $
    (3,745,950
    )
    
    $
    (8,518,017
    )
    
    $
    (3,097,880
    )
    
    $
    62,808,778
 F-6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    2,353,637
    
    
    $
    2,950,495Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,045,566
    
    
    
    1,244,079Provision for loan losses
    
    
    695,000
    
    
    
    1,014,555ESOP compensation expense
    
    
    601,539
    
    
    
    241,579Provision for deferred taxes
    
    
    (416,106
    )
    
    
    (720,088
    )Stock-based compensation expense
    
    
    521,715
    
    
    
    Net losses on sale of securities available for sale
    
    
    58,663
    
    
    
    4,653Net (gains) losses on sale or disposal of premises and equipment
    
    
    3,691
    
    
    
    (2,555
    )Net (increase) decrease in foreclosed assets
    
    
    (263,177
    )
    
    
    141,282Increase in bank owned life insurance
    
    
    (305,760
    )
    
    
    (297,377
    )Increase in interest receivable
    
    
    (622,198
    )
    
    
    (240,758
    )Increase in interest payable
    
    
    299,459
    
    
    
    15,000Increase (decrease) in taxes payable
    
    
    (149,512
    )
    
    
    751,221Net other operating activities
    
    
    (191,210
    )
    
    
    29,834Total adjustments
    
    
    1,277,670
    
    
    
    2,181,425Net cash provided by operating activities
    
    
    3,631,307
    
    
    
    5,131,920INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (766,813
    )
    
    
    (966,369
    )Purchases of securities available for sale
    
    
    (35,262,508
    )
    
    
    (35,082,914
    )Proceeds from maturities of securities available for sale
    
    
    8,605,911
    
    
    
    14,740,327Proceeds from sale of securities available for sale
    
    
    7,615,419
    
    
    
    13,122,850Net change in Federal Home Loan Bank stock
    
    
    427,600
    
    
    
    30,300Redemption of corporate credit union membership shares
    
    
    
    
    
    
    553,834(Increase) decrease in federal funds sold
    
    
    (5,857,000
    )
    
    
    5,963,000Purchase of intangible asset
    
    
    (1,000,000
    )
    
    
    Increase in loans, net
    
    
    (22,902,383
    )
    
    
    (16,230,469
    )Purchases of premises and equipment
    
    
    (1,860,271
    )
    
    
    (576,053
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    14,213Net cash used in investing activities
    
    
    (51,000,045
    )
    
    
    (18,431,281
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    60,548,235
    
    
    
    (9,902,451
    )Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    5,294,172
    
    
    
    237,222Proceeds from other borrowings
    
    
    25,000,000
    
    
    
    20,000,000Repayment of other borrowings
    
    
    (35,000,000
    )
    
    
    (21,000,000
    )Proceeds from sale of common stock, net of issuance costs
    
    
    
    
    
    
    28,011,061Purchase of treasury shares, net
    
    
    (8,517,585
    )
    
    
    Dividends paid to stockholders
    
    
    (673,936
    )
    
    
    (168,619
    )Net cash provided by financing activities
    
    
    46,650,886
    
    
    
    17,177,213Net increase (decrease) in cash and due from banks
    
    
    (717,852
    )
    
    
    3,877,852Cash and due from banks at beginning of period
    
    
    10,499,084
    
    
    
    6,621,232Cash and due from banks at end of period
    
    $
    9,781,232
    
    
    $
    10,499,084
 F-7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    8,077,229
    
    
    $
    5,919,579Taxes
    
    
    1,298,095
    
    
    
    1,063,386NONCASH TRANSACTIONSPrincipal
balances of loans transferred to other real estate owned
    
    $
    263,038
    
    
    $
    125,737Pension liability adjustment
    
    
    1,279,785
    
    
    
    316,812
 See Notes to Consolidated Financial Statements.
 F-8




---



##### 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




---



##### Table of Contents



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




---



##### 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




---



##### 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




---



##### 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




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements
 Statements of Financial Accounting Standards
 , The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115.
    F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements (Continued)
 Emerging Issues Task Force Consensuses
   Financial Accounting Standards Board Staff Positions and Interpretations
 FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109.
 SEC Staff Accounting Bulletins
 Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of a Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements.
 F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 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
    )
    
    $
    84,571,767December 31, 2005:U. S. Government sponsored agencies
    
    $
    14,388,447
    
    
    $
    
    
    
    $
    (344,029
    )
    
    $
    14,044,418State and municipal securities
    
    
    6,949,742
    
    
    
    22,343
    
    
    
    (102,996
    )
    
    
    6,869,089Corporate debt securities
    
    
    4,488,970
    
    
    
    
    
    
    
    (703,393
    )
    
    
    3,785,577Mortgage-backed securities
    
    
    32,102,023
    
    
    
    188
    
    
    
    (1,004,710
    )
    
    
    31,097,501Total debt securities
    
    
    57,929,182
    
    
    
    22,531
    
    
    
    (2,155,128
    )
    
    
    55,796,585Equity securities
    
    
    9,434,800
    
    
    
    
    
    
    
    (365,364
    )
    
    
    9,069,436Total securities
    
    $
    67,363,982
    
    
    $
    22,531
    
    
    $
    (2,520,492
    )
    
    $
    64,866,021
  Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    1,510,093
    
    
    $
    1,495,714Due from one year to five years
    
    
    11,942,353
    
    
    
    11,817,100Due from five to ten years
    
    
    23,410,375
    
    
    
    23,126,734Due after ten years
    
    
    13,710,948
    
    
    
    13,420,817Mortgage-backed securities
    
    
    28,837,929
    
    
    
    28,044,433$
    79,411,698
    
    
    $
    77,904,798
  F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (Continued)
  December 31,2006
    
    
    2005Gross gains on sales of securities
    
    $
    15,462
    
    
    $
    16,155Gross losses on sales of securities
    
    
    (74,125
    )
    
    
    (20,808
    )Net realized losses on sales of securities available for sale
    
    $
    (58,663
    )
    
    $
    (4,653
    )
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 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
    )December 31, 2005:U. S. Government sponsored agencies
    
    $
    5,120,786
    
    
    $
    (99,979
    )
    
    $
    7,904,580
    
    
    $
    (244,050
    )
    
    $
    13,025,366
    
    
    $
    (344,029
    )State and municipal securities
    
    
    3,120,853
    
    
    
    (38,871
    )
    
    
    1,967,098
    
    
    
    (64,125
    )
    
    
    5,087,951
    
    
    
    (102,996
    )Corporate debt securities
    
    
    793,820
    
    
    
    (251,694
    )
    
    
    2,329,613
    
    
    
    (451,699
    )
    
    
    3,123,433
    
    
    
    (703,393
    )Mortgage-backed securities
    
    
    17,647,550
    
    
    
    (425,669
    )
    
    
    13,047,108
    
    
    
    (579,041
    )
    
    
    30,694,658
    
    
    
    (1,004,710
    )Subtotal, debt securities
    
    
    26,683,009
    
    
    
    (816,213
    )
    
    
    25,248,399
    
    
    
    (1,338,915
    )
    
    
    51,931,408
    
    
    
    (2,155,128
    )Equity securities
    
    
    404,635
    
    
    
    (30,165
    )
    
    
    7,664,801
    
    
    
    (335,199
    )
    
    
    8,069,436
    
    
    
    (365,364
    )Total temporarily impaired securities
    
    $
    27,087,644
    
    
    $
    (846,378
    )
    
    $
    32,913,200
    
    
    $
    (1,674,114
    )
    
    $
    60,000,844
    
    
    $
    (2,520,492
    )
   F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
  December 31,2006
    
    
    2005Commercial real estate
    
    $
    44,496,260
    
    
    $
    37,985,258Commercial and industrial loans
    
    
    34,007,661
    
    
    
    33,686,379Multifamily
    
    
    16,913,240
    
    
    
    15,918,181Construction and land
    
    
    32,822,450
    
    
    
    16,504,471Farmland
    
    
    2,641,587
    
    
    
    Mortgage loans, 1-4 families
    
    
    73,680,613
    
    
    
    74,120,826Home equity
    
    
    16,368,242
    
    
    
    15,591,165Indirect auto loans
    
    
    29,159,407
    
    
    
    31,464,505Direct auto loans
    
    
    17,172,420
    
    
    
    18,300,779Student loans
    
    
    702,684
    
    
    
    989,375Other
    
    
    8,811,672
    
    
    
    9,549,595276,776,236
    
    
    
    254,110,534Total allowance for loan losses
    
    
    (4,075,997
    )
    
    
    (3,617,678
    )Loans, net
    
    $
    272,700,239
    
    
    $
    250,492,856
  As of and For the Years EndedDecember 31,2006
    
    
    2005Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    257,649
    
    
    
    866,701Total impaired loans
    
    $
    257,649
    
    
    $
    866,701Valuation allowance related to impaired loans
    
    $
    38,485
    
    
    $
    127,777Average investment in impaired loans
    
    $
    576,662
    
    
    $
    899,675Forgone interest income on impaired loans
    
    $
    43,717
    
    
    $
    54,447
   December 31,2006
    
    
    2005Balance, beginning of year
    
    $
    3,617,678
    
    
    $
    2,964,589Provision for loan losses
    
    
    695,000
    
    
    
    1,014,555Loans charged off
    
    
    (398,353
    )
    
    
    (593,691
    )Recoveries of loans previously charged off
    
    
    161,672
    
    
    
    232,225Balance, end of year
    
    $
    4,075,997
    
    
    $
    3,617,678
 F-18




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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
    
    $
    709,388Advances
    
    
    200,351Repayments
    
    
    (364,737
    )Changes in Officer/Director
    
    
    3,025,193Balance, end of year
    
    $
    3,570,195
 NOTE 4. PREMISES AND EQUIPMENT
  December 31,2006
    
    
    2005Land
    
    $
    4,792,361
    
    
    $
    3,382,288Buildings
    
    
    9,185,086
    
    
    
    9,138,479Furniture and equipment
    
    
    8,198,236
    
    
    
    7,851,30322,175,683
    
    
    
    20,372,070Accumulated depreciation
    
    
    (9,360,201
    )
    
    
    (8,367,602
    )$
    12,815,482
    
    
    $
    12,004,468
  NOTE 5. DEPOSITS
  2007
    
    $
    109,376,0392008
    
    
    14,861,4392009
    
    
    5,404,1602010
    
    
    1,203,5082011 and beyond
    
    
    4,173,443$
    135,018,589
   F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS
 Pension Plan
  December 31,2006
    
    
    2005Changes in benefit obligations:Obligations at beginning of year
    
    $
    6,190,265
    
    
    $
    4,640,817Service cost
    
    
    618,266
    
    
    
    537,017Interest cost
    
    
    350,297
    
    
    
    277,739Benefits paid
    
    
    (396,766
    )
    
    
    (196,278
    )Actuarial losses
    
    
    599,062
    
    
    
    930,970Obligations at end of year
    
    $
    7,361,124
    
    
    $
    6,190,265Changes in plan assets:Fair value of assets at beginning of year
    
    $
    3,991,420
    
    
    $
    2,938,378Actual return on assets
    
    
    605,587
    
    
    
    249,320Company contributions
    
    
    1,850,000
    
    
    
    1,000,000Benefits paid
    
    
    (396,766
    )
    
    
    (196,278
    )Fair value of assets at end of year
    
    $
    6,050,241
    
    
    $
    3,991,420Funded status
    
    $
    (1,310,883
    )
    
    $
    (2,198,845
    )Unrecognized losses
    
    
    
    
    
    
    3,457,912Unrecognized prior service cost
    
    
    
    
    
    
    205,554Additional minimum liability
    
    
    
    
    
    
    (2,325,719
    )Net amount recognized
    
    $
    (1,310,883
    )
    
    $
    (861,098
    )Accumulated benefit obligation
    
    $
    5,874,388
    
    
    $
    4,852,518Costs recognized during the year:Service cost
    
    $
    618,266
    
    
    $
    537,017Interest cost
    
    
    350,297
    
    
    
    277,739Expected return on plan assets
    
    
    (291,996
    )
    
    
    (205,604
    )Amortization of prior losses
    
    
    333,986
    
    
    
    280,877Amortization of service costs
    
    
    9,114
    
    
    
    9,114Amortization of transition obligation
    
    
    
    
    
    
    672Total costs recognized in expense
    
    $
    1,019,667
    
    
    $
    899,815
 F-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
   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 31,2006
    
    2005Assumptions 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)
  2006
    
    2005Fixed income
    
    
    34.5
    %
    
    
    27
    %Equities
    
    
    56.1
    %
    
    
    70
    %Cash and cash equivalents
    
    
    9.4
    %
    
    
    3
    %
    Prior service cost
    
    $
    9,114Net loss
    
    
    282,250$
    291,364
  Fiscal Year
    
    Amount2007
    
    $
    19,1522008
    
    
    19,0262009
    
    
    18,8882010
    
    
    32,0112011
    
    
    68,4712012-2016
    
    
    863,795
 F-22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 401(K) Plan
  EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
 st st
   2006
    
    
    2005Shares released for allocation
    
    
    66,105
    
    
    
    22,035Unearned
    
    
    374,595
    
    
    
    418,665Total ESOP shares
    
    
    440,700
    
    
    
    440,700Fair value of unearned shares
    
    $
    6,237,007
    
    
    $
    4,823,021
 NOTE 7. DEFERRED COMPENSATION PLANS
  F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7. DEFERRED COMPENSATION PLANS (Continued)
  NOTE 8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
  NOTE 9. OTHER BORROWINGS
  December 31,2006
    
    
    2005Advance from Federal Home Loan Bank with interest at a fixed rate of
4.70% until September 14, 2006, due September 14, 2011
    
    $
    
    
    
    $
    25,000,000Advance from Federal Home Loan Bank with interest at a fixed rate of
5.16% until June 22, 2007, due June 22, 2009
    
    
    10,000,000
    
    
    
    Advance from Federal Home Loan Bank with interest at a daily
variable
rate, currently 4.59%, due November 27, 2006
    
    
    
    
    
    
    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
    
    
    5,000,000
    
    
    
    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
    
    
    
    $
    40,000,000
    
    
    $
    50,000,000
 F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9. OTHER BORROWINGS (Continued)
   2007
    
    $
    2008
    
    
    2009
    
    
    15,000,0002010
    
    
    2011
    
    
    Later years
    
    
    25,000,000$
    40,000,000
  NOTE 10. INCOME TAXES
  Years Ended December 31,2006
    
    
    2005Current
    
    $
    1,148,583
    
    
    $
    1,814,607Deferred
    
    
    (416,106
    )
    
    
    (720,088
    )$
    732,477
    
    
    $
    1,094,519
  Years Ended December 31,2006
    
    
    2005Tax at federal income tax rate
    
    $
    1,049,279
    
    
    $
    1,375,305Increase (decrease) resulting from:Tax-exempt interest
    
    
    (83,430
    )
    
    
    (85,846
    )Bank owned life insurance
    
    
    (103,958
    )
    
    
    (101,108
    )State income taxes
    
    
    38,075
    
    
    
    21,888Employee Stock Ownership Plan
    
    
    15,248
    
    
    
    (12,501
    )Other
    
    
    (182,737
    )
    
    
    (103,219
    )Provision for income taxes
    
    $
    732,477
    
    
    $
    1,094,519
 F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10. INCOME TAXES (Continued)
  December 31,2006
    
    
    2005Deferred tax assets:Loan loss reserves
    
    $
    1,038,110
    
    
    $
    848,437Deferred compensation
    
    
    899,421
    
    
    
    731,918Organizational cost
    
    
    14,374
    
    
    
    26,469Pension liability
    
    
    1,448,657
    
    
    
    1,046,411Unrealized loss on securities available for sale
    
    
    702,840
    
    
    
    990,702Stock-based compensation
    
    
    41,671
    
    
    
    Nonaccrual loans
    
    
    6,293
    
    
    
    33,588Other
    
    
    5,628
    
    
    
    5,6284,156,994
    
    
    
    3,683,153Deferred tax liabilities:Depreciation and amortization
    
    
    178,368
    
    
    
    199,948Deferred pension costs
    
    
    238,446
    
    
    
    306,004Prepaid expenses
    
    
    
    
    
    
    66,797416,814
    
    
    
    572,749Net deferred tax assets
    
    $
    3,740,180
    
    
    $
    3,110,404
 NOTE 11. EARNINGS PER SHARE
  Years Ended December 31,2006
    
    
    2005Basic Earnings and Shares:Net Income
    
    $
    2,353,637
    
    
    $
    2,950,495Weighted-average basic shares outstanding
    
    
    10,700,190
    
    
    
    9,373,416Basic Earnings Per Share:Net Income
    
    $
    0.22
    
    
    $
    0.31Diluted Earnings and Shares:Net Income
    
    $
    2,353,637
    
    
    $
    2,950,495Weighted-average basic shares outstanding
    
    
    10,700,190
    
    
    
    9,373,416Add: Stock options and nonvested shares
    
    
    17,801
    
    
    
    Weighted-average diluted shares outstanding
    
    
    10,717,991
    
    
    
    9,373,416Diluted Earnings Per Share:Net Income
    
    $
    0.22
    
    
    $
    0.31
 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
    2006Weighted-AverageExerciseNumber
    
    
    PriceUnder option, beginning of year
    
    
    
    
    
    
    Granted
    
    
    520,605
    
    
    $
    12.60Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Under option, end of year
    
    
    520,605
    
    
    $
    12.60Exercisable at end of year
    
    
    
    
    
    
    Weighted-average fair value per option of options granted during year
    
    
    
    
    
    
    3.19Total grant-date fair value of options vested during the year
    
    
    
    
    
    
    Total intrinsic value of options exercised during the year
    
    
    
    
    
    
    Shares available for grant
    
    
    
    
    
    
    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 endedDecember 31, 2006Stock options vested and expected to vest:Number
    
    
    520,605Weighted average exercise price
    
    $
    12.60Aggregate intrinsic value
    
    $
    2,109,012Weighted average contractual term of options
    
    7.5 years
   Options Outstanding
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Contractual
    
    Exercise
    
    
    
    
    
    ExercisePrices
    
    Number
    
    Life in Years
    
    Price
    
    Number
    
    Price$12.54
    
    
    513,105
    
    
    
    9.3
    
    
    $
    12.54
    
    
    
    
    
    
    
    $12.63
    
    
    7,500
    
    
    
    9.9
    
    
    $
    12.63
    
    
    
    
    
    
    
    520,605
    
    
    
    9.3
    
    
    $
    12.60
    
    
    
    
    
    
    
    
  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
    %
 F-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. STOCK PLANS AND STOCK-BASED COMPENSATION (Continued)
  Average2006
    
    
    MarketRestricted
    
    
    PriceShares
    
    
    at GrantBalance, beginning of year
    
    $
    
    
    
    $
    Granted
    
    
    207,905
    
    
    
    14.79Forfeited/vested
    
    
    
    
    
    
    Balance, end of year
    
    $
    207,905
    
    
    $
    14.79
   NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
 Loan Commitments
   December 31,2006
    
    
    2005Commitments to extend credit
    
    $
    32,902,890
    
    
    $
    28,918,623Financial standby letters of credit
    
    
    1,053,531
    
    
    
    1,209,242$
    33,956,421
    
    
    $
    30,127,865
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
 Loan Commitments (Continued)
    Contingencies
  NOTE 14. CONCENTRATIONS OF CREDIT
    F-30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. REGULATORY MATTERS
      For Capital
    
    To Be Well CapitalizedAdequacy
    
    Under Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2006Total Capital to Risk Weighted Assets
HeritageBank of the South
    
    $
    57,136,000
    
    
    
    18.53
    %
    
    $
    24,668,000
    
    
    
    8.0
    %
    
    $
    30,835,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
HeritageBank of the South
    
    $
    53,279,000
    
    
    
    17.28
    %
    
    $
    12,334,000
    
    
    
    4.0
    %
    
    $
    18,501,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    53,279,000
    
    
    
    13.94
    %
    
    $
    15,284,000
    
    
    
    4.0
    %
    
    $
    19,105,000
    
    
    
    5.0
    %As of December 31, 2005Total Capital to Risk Weighted Assets
HeritageBank of the South
    
    $
    57,073,000
    
    
    
    20.81
    %
    
    $
    21,938,000
    
    
    
    8.0
    %
    
    $
    27,422,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
HeritageBank of the South
    
    $
    53,643,000
    
    
    
    19.56
    %
    
    $
    10,969,000
    
    
    
    4.0
    %
    
    $
    16,453,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    53,643,000
    
    
    
    15.63
    %
    
    $
    13,724,000
    
    
    
    4.0
    %
    
    $
    17,156,000
    
    
    
    5.0
    %
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15. REGULATORY MATTERS (Continued)
    NOTE 16. 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:
 Deposits:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 Federal Funds Purchased, Repurchase Agreements and Other Borrowings:
 Accrued Interest:
 Off-Balance-Sheet Instruments:
  December 31, 2006
    
    
    December 31, 2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    11,935,091
    
    
    $
    11,935,091
    
    
    $
    11, 886,133
    
    
    $
    11,886,133Federal funds sold
    
    $
    12,677,000
    
    
    $
    12,677,000
    
    
    $
    6,820,000
    
    
    $
    6,820,000Securities available for sale
    
    $
    84,571,767
    
    
    $
    84,571,767
    
    
    $
    64,866,021
    
    
    $
    64,866,021Federal home loan bank stock
    
    $
    2,499,400
    
    
    $
    2,499,400
    
    
    $
    2,927,000
    
    
    $
    2,927,000Loans
    
    $
    276,776,236
    
    
    $
    264,862,866
    
    
    $
    254,110,534
    
    
    $
    242,739,000Allowance for loan losses
    
    
    4,075,997
    
    
    
    
    
    
    
    3,617,678
    
    
    
    Loans, net
    
    $
    272,700,239
    
    
    $
    264,862,866
    
    
    $
    250,492,856
    
    
    $
    242,739,000Accrued interest receivable
    
    $
    2,288,827
    
    
    $
    2,288,827
    
    
    $
    1,666,629
    
    
    $
    1,666,629Financial liabilities:Deposits
    
    $
    299,188,504
    
    
    $
    298,931,076
    
    
    $
    238,640,269
    
    
    $
    239,249,764Federal funds purchased and securities
sold under agreements to repurchase
    
    $
    5,531,394
    
    
    $
    5,531,394
    
    
    $
    237,222
    
    
    $
    237,222Other borrowings
    
    $
    40,000,000
    
    
    $
    39,683,607
    
    
    $
    50,000,000
    
    
    $
    49,898,548Accrued interest payable
    
    $
    522,666
    
    
    $
    522,666
    
    
    $
    223,207
    
    
    $
    223,207
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 CONDENSED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005AssetsCash and due from banks
    
    $
    767,546
    
    
    $
    1,824,357Federal funds sold
    
    
    5,811,000
    
    
    
    3,905,000Investment securities
    
    
    7,593,852
    
    
    
    9,652,214Investment in subsidiary
    
    
    53,415,145
    
    
    
    52,918,259Premises and equipment, net
    
    
    498,418
    
    
    
    512,945Other assets
    
    
    217,005
    
    
    
    170,872Total assets
    
    $
    68,302,966
    
    
    $
    68,983,647LiabilitiesFederal funds purchased and securities sold under
agreements to repurchase
    
    $
    5,000,000
    
    
    $
    Other liabilities
    
    
    494,188
    
    
    
    5,494,188
    
    
    
    Stockholders equity
    
    
    62,808,778
    
    
    
    68,983,647Total liabilities and stockholders equity
    
    $
    68,302,966
    
    
    $
    68,983,647
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005IncomeDividends from subsidiaries
    
    $
    1,600,000
    
    
    $
    Interest
    
    
    658,829
    
    
    
    351,247Loss on sale of securities
    
    
    (3,761
    )
    
    
    (12,285
    )Total income
    
    
    2,255,068
    
    
    
    338,962ExpenseDepreciation
    
    
    14,527
    
    
    
    14,527Other expense
    
    
    786,027
    
    
    
    725,899Total expense
    
    
    800,554
    
    
    
    740,426Income (loss) before income taxes benefits and
equity in undistributed earnings of subsidiary
    
    
    1,454,514
    
    
    
    (401,464
    )Income tax benefits
    
    
    60,588
    
    
    
    133,845Income (loss) before equity in undistributed earnings
of subsidiary
    
    
    1,515,102
    
    
    
    (267,619
    )Equity in undistributed earnings of subsidiary
    
    
    838,535
    
    
    
    3,218,114Net income
    
    $
    2,353,637
    
    
    $
    2,950,495
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    2,353,637
    
    
    $
    2,950,495Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    14,527
    
    
    
    14,527Stock-based compensation expense
    
    
    521,715
    
    
    
    Loss on sale of securities
    
    
    3,761
    
    
    
    12,285Undistributed earnings of subsidiary
    
    
    (838,535
    )
    
    
    (3,218,114
    )Other operating activities
    
    
    56,160
    
    
    
    132,894Total adjustments
    
    
    (242,372
    )
    
    
    (3,058,408
    )Net cash provided by (used in) operating activities
    
    
    2,111,265
    
    
    
    (107,913
    )INVESTING ACTIVITIESDecrease in interest-bearing deposits in banks
    
    
    
    
    
    
    100,567Increase in federal funds sold
    
    
    (1,906,000
    )
    
    
    (3,905,000
    )Purchases of securities
    
    
    (2,500,000
    )
    
    
    (8,423,529
    )Proceeds from maturities of securities
    
    
    2,330,656
    
    
    
    228,303Proceeds from sale of securities
    
    
    2,497,250
    
    
    
    2,089,637Net cash provided by (used in) investing activities
    
    
    421,906
    
    
    
    (9,910,022
    )FINANCING ACTIVITIESIncrease in federal funds purchased and securities sold under
agreements to repurchase
    
    
    5,000,000
    
    
    
    Proceeds from sale of common stock, net of stock issuance costs
    
    
    
    
    
    
    28,011,061Shares released to employee stock ownership plan
    
    
    601,539
    
    
    
    241,579Capital invested in subsidiary bank
    
    
    
    
    
    
    (16,258,542
    )Purchase of treasury shares, net
    
    
    (8,517,585
    )
    
    
    Dividends paid to stockholders
    
    
    (673,936
    )
    
    
    (168,619
    )Net cash provided by (used in) financing activities
    
    
    (3,589,982
    )
    
    
    11,825,479Net increase (decrease) in cash and due from banks
    
    
    (1,056,811
    )
    
    
    1,807,544Cash and due from banks at beginning of year
    
    
    1,824,357
    
    
    
    16,813Cash and due from banks at end of year
    
    $
    767,546
    
    
    $
    1,824,357
 NOTE 18. STOCK REPURCHASE PLAN
  F-36