Heritage Financial 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007 — Commission File Number 000-51305

HERITAGE FINANCIAL GROUP

(A United States Corporation)
IRS Employer Identification Number 45-0479535

721 N. Westover Blvd., Albany, GA 31707
229-420-0000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filero Accelerated filero Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each issuer’s classes of common equity, as of the latest practicable date:

At July 31, 2007 there were 10,870,296 shares of issuer’s common stock outstanding.

HERITAGE FINANCIAL GROUP

INDEX

	Page
	Number
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2007 AND DECEMBER 31, 2006		3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006		5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND THE YEAR ENDED DECEMBER 31, 2006		6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006		7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20
ITEM 4. CONTROLS AND PROCEDURES		20
PART II — OTHER INFORMATION		22
SIGNATURES		27
EXHIBITS
31.1 Rule 13a—14(a) Certification of Chief Executive Officer
31.2 Rule 13a—14(a) Certification of Chief Financial Officer
32    Section 1350 Certification
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32 Sections 906 Certification of the CEO and CFO

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Balance Sheets
June 30, 2007 and December 31, 2006

	Unaudited			Audited
	June 30,			December 31,
	2007			2006
Assets
Cash and due from banks	$	10,948,099		$	9,781,232
Interest-bearing deposits in banks		384,834			2,153,859
Federal funds sold		4,797,000			12,677,000
Securities available for sale, at fair value		108,431,935			84,571,767
Federal home loan bank stock, at cost		2,519,700			2,499,400
Loans		294,919,650			276,776,236
Less allowance for loan losses		4,513,921			4,075,997
Loans, net		290,405,729			272,700,239
Premises and equipment, net		13,113,156			12,815,482
Accrued interest receivable		2,418,189			2,288,827
Intangible assets		1,000,000			1,000,000
Foreclosed assets		318,286			322,449
Cash surrender value of bank owned life insurance		8,462,259			8,293,202
Other assets		5,261,482			4,226,365
	$	448,060,669		$	413,329,822
Liabilities and Stockholders’ Equity
Deposits Noninterest-bearing	$	23,618,671		$	14,784,180
Interest-bearing		304,147,617			284,404,324
Total deposits		327,766,288			299,188,504
Federal funds purchased and securities sold under repurchase agreements		10,493,979			5,531,394
Other borrowings		40,000,000			40,000,000
Other liabilities		6,818,719			5,801,146
Total liabilities		385,078,986			350,521,044
Commitments and contingencies
Stockholders’ equity
Preferred stock, par value $0.01; 1,000,000 shares authorized; no shares issued		—			—
Common stock, par value $0.01; 25,000,000 shares authorized; 11,449,155 issued and outstanding		114,492			114,492
Capital surplus		38,372,663			37,807,784
Retained earnings		41,151,737			40,248,349
Accumulated other comprehensive loss		(4,514,029	)		(3,097,880	)
Unearned employee stock ownership plan (ESOP) shares, 352,560 and 374,595 shares		(3,525,600	)		(3,745,950	)
		71,599,263			71,326,795
Treasury stock, at cost, 561,359 and 555,138 shares		(8,617,580	)		(8,518,017	)
Total stockholders’ equity		62,981,683			62,808,778
	$	448,060,669		$	413,329,822

See Notes to Consolidated Financial Statements.

3

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2007 and 2006

	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007			2006
Interest income
Interest and fees on loans	$	5,514,001	$	4,575,405		$	10,749,637		$	8,918,519
Interest on taxable securities		1,046,731		650,827			1,978,067			1,309,545
Interest on nontaxable securities		281,425		61,635			466,451			123,091
Interest on federal funds sold		155,978		107,471			377,058			219,573
Interest on deposits in other banks		6,122		11,185			16,708			26,866
		7,004,257		5,406,523			13,587,921			10,597,594
Interest expense
Interest on deposits		2,767,336		1,315,576			5,379,721			2,474,146
Interest on other borrowings		577,863		522,703			1,062,348			1,066,673
		3,345,199		1,838,279			6,442,069			3,540,819
Net interest income		3,659,058		3,568,244			7,145,852			7,056,775
Provision for loan losses		337,000		(30,000	)		495,000			60,000
Net interest income after provision for loan losses		3,322,058		3,598,244			6,650,852			6,996,775
Noninterest income
Service charges on deposit accounts		939,384		712,700			1,774,502			1,312,290
Other service charges, commissions and fees		259,724		234,390			616,275			453,537
Brokerage fees		264,181		140,870			441,407			266,576
Mortgage origination fees		92,766		121,258			194,311			222,138
Bank owned life insurance		87,260		75,004			169,056			146,902
Gain (loss) on sale of securities		287		—			(28,395	)		—
Other		65,213		58,211			129,782			153,178
		1,708,815		1,342,433			3,296,938			2,554,621
Noninterest expense
Salaries and employee benefits		2,371,388		2,047,199			4,654,209			4,213,160
Equipment		277,248		287,517			554,502			627,641
Occupancy		254,067		236,408			504,256			503,984
Advertising and marketing		105,747		78,996			195,811			158,217
Legal and accounting		93,091		138,021			190,899			340,322
Directors fees and retirement		131,202		115,198			259,404			204,307
Telephone		58,513		64,276			114,036			127,415
Supplies		56,461		46,416			110,711			111,315
Data processing fees		372,690		246,808			551,496			412,478
Other operating		626,092		476,881			1,117,187			911,161
		4,346,499		3,737,720			8,252,511			7,610,000
Income before income taxes		684,374		1,202,957			1,695,279			1,941,396
Applicable income taxes		135,363		368,322			427,327			610,316
Net income	$	549,011	$	834,635		$	1,267,952		$	1,331,080
Basic earnings per share	$	0.05	$	0.08		$	0.12		$	0.12
Diluted earnings per share	$	0.05	$	0.08		$	0.12		$	0.12

See Notes to Consolidated Financial Statements.

4

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Six Months Ended June 30, 2007 and 2006

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

See Notes to Consolidated Financial Statements.

5

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2007 (Unaudited) and the Year Ended December 31, 2006

																	Accumulated
											Unearned						Other
	Common Stock				Capital			Retained			ESOP			Treasury			Comprehensive
	Shares		Par Value		Surplus			Earnings			Shares			Stock			Income (Loss)			Total
Balance, December 31, 2005		11,241,250	$	112,413	$	37,126,877		$	38,717,576		$	(4,186,650	)	$	—		$	(2,786,569	)	$	68,983,647
Net income		—		—		—			2,353,637			—			—			—			2,353,637
Cash dividend declared, $0.20 per share		—		—		—			(673,936	)		—			—			—			(673,936	)
Issuance of restricted shares of common stock		207,905		2,079		(2,079	)		—			—			—			—			—
Adjustments related to initial adoption of SFAS 158, net of tax		—		—		—			—			—			—			(748,049	)		(748,049	)
Effects of changing pension plan measurement date pursuant to SFAS 158:
Service cost, internal cost and expected return on plan assets October 1 - December 31, net of tax		—		—		—			(147,561	)		—			—			—			(147,561	)
Amortization of prior service cost for October 1 - December 31, net of tax		—		—		—			(1,367	)		—			—			1,367			—
Stock based compensation		—		—		—			—			—			—			—			—
expense						521,715			—			—			—			—			521,715
Repurchase of 555,328 shares of stock for the treasury		—		—		—			—			—			(8,520,680	)		—			(8,520,680	)
Issuance of 190 shares of common stock from the treasury						432			—			—			2,663			—			3,095
Other comprehensive income															—			435,371			435,371
ESOP shares earned, 44,070 shares		—		—		160,839			—			440,700			—			—			601,539
Balance, December 31, 2006		11,449,155		114,492		37,807,784			40,248,349			(3,745,950	)		(8,518,017	)		(3,097,880	)		62,808,778
Net income		—		—					1,267,952			—			—			—			1,267,952
Cash dividends declared, $0.12 per share		—		—					(364,564	)		—			—			—			(364,564	)
Repurchase of 6,451 shares of stock for the treasury		—		—					—			—			(103,093	)		—			(103,093	)
ESOP shares earned, 22,035 shares		—		—		135,550			—			220,350			—			—			355,900
Issuance of 230 shares of common stock from the treasury		—		—		278			—			—			3,530			—			3,808
Other comprehensive loss		—		—		—			—			—			—			(1,416,149	)		(1,416,149	)
Stock-based compensation expense		—		—		429,051			—			—			—			—			429,051
Balance, June 30, 2007		11,449,155	$	114,492	$	38,372,663		$	41,151,737		$	(3,525,600	)	$	(8,617,580	)	$	(4,514,029	)	$	62,981,683

See Notes to Consolidated Financial Statements.

6

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2007 and 2006

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

See Notes to Consolidated Financial Statements.

7

HERITAGE FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES

The accompanying consolidated financial information of the Company is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three and six months ended June 30, 2007, are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, contingent assets and liabilities and deferred tax assets.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period, excluding unallocated shares of the Employee Stock Ownership Plan. The table below sets forth our earnings per share for the periods indicated:

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

8

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 — SHARE BASED COMPENSATION

On May 17, 2006, our stockholders approved the 2006 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to promote the long-term growth and profitability of Heritage Financial Group, to provide directors, advisory directors, officers and employees of Heritage Financial Group and its affiliates with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence and to provide such individuals with an equity interest in Heritage Financial Group. Under the Plan, the Compensation Committee of the Board of Directors has discretion to award up to 771,149 shares, of which 550,281 were available as stock options or stock appreciation rights and 220,328 shares were available as restricted stock awards. During 2006, the Compensation Committee of the Board of Directors granted stock options and tandem stock appreciation rights totaling 520,605 shares and granted restricted stock awards totaling 207,905 shares. All stock options, stock appreciation rights and restricted stock awards vest over a period of five years.

The Company granted restricted awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The share based expense for these awards was determined based on the market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest, amortized over the vesting period. As of June 30, 2007, there was approximately $2,039,000 of unrecognized compensation associated with these awards, which is expected to be recognized over the next 4 years. For the three and six months ended June 30, 2007, we recognized compensation expense of $130,970 and $261,940.

We recognized compensation expense related to stock options of $83,556 and $167,111 for the three and six months ended June 30, 2007. At June 30, 2007, there was approximately $1,301,000 of unrecognized compensation related to stock options, which is expected to be recognized over the next 4 years.

9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward-Looking Statements.

This report contains certain ‘forward-looking statements’ that may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” with respect to our financial condition. Results of operations and business are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

General

Heritage Financial Group (“the Company”) is the parent holding company of HeritageBank of the South (“the Bank”). The Company is in a mutual holding company structure and 72% of its outstanding common stock is owned by Heritage, MHC (“MHC”), a federal mutual holding company.

The principal business of the Company is operating our wholly owned subsidiary, the Bank. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans and investments, and the interest we pay on our interest-bearing liabilities, consisting of savings and checking accounts, money market accounts, time deposits, federal funds purchased and securities sold under agreements to repurchase and other borrowings. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of service charges on deposit accounts, mortgage origination fees, transaction fees, bank-owned life insurance, and commissions from investment services. Noninterest expense consists primarily of salaries and employee benefits, occupancy, equipment and data processing, advertising, professional fees and other costs. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Evolution of Business Strategy

We originally were chartered as a federal credit union in 1955. In 1998, we became a community chartered credit union. We accepted deposits and made loans to members who lived, worked or worshiped in the approved counties for the credit union charter. In 2001, we converted to a mutual thrift charter in order to better serve our customers and communities through a broader lending ability and an expanded customer base beyond the field of membership permitted for our credit union. The mutual holding company structure was established in 2002, and we converted from a thrift charter to a state savings bank charter in 2005. We feel this structure best suits our continued efforts to grow and expand our commercial business.

The Company completed an initial public stock offering on June 29, 2005. We sold 3,372,375 shares of common stock in that offering for $10.00 per share. The Company’s employee stock ownership plan (the “ESOP”) purchased 440,700 shares with the proceeds of a loan from the Company. The Company received net proceeds of $32.4 million in the public offering, 50% of which was contributed to the Bank and $4.4 million of which was loaned to the ESOP for its purchase of shares in the offering. The Company also issued an additional 7,867,875 shares of common stock to MHC, so that MHC would own 70% of the outstanding common stock at the close of the offering.

10

Evolution of Business Strategy (Continued)

Our current business strategy is to operate a well-capitalized and profitable commercial and retail financial institution dedicated to serving the needs of our customers. We strive to be the primary financial institution in the market areas we serve. We offer a broad range of products and services, while stressing personalized and efficient customer service and convenient access to these products and services. We intend to continue to operate as a commercial and consumer lender. We have structured operations around a branch system that is staffed with knowledgeable and well-trained employees. Subject to capital requirements and our ability to grow in a reasonable and prudent manner, we may open additional branches as opportunities arise. In addition to our branch system, we continue to expand electronic services for our customers. We attempt to differentiate ourselves from our competitors by providing a higher level of customer service.

We continue to implement our business strategy, as set forth in our Form 10-KSB, which was filed with the Securities and Exchange Commission on March 27, 2007. A critical component of this strategy includes increasing our commercial loan portfolio. During the first six months of 2007, our commercial real estate, business and multifamily loans increased $14.7 million or 11.2% to $145.6 million at June 30, 2007. Our ability to continue to grow our commercial loan portfolio is an important element of our long-term business strategy.

Another key component of our business strategy is the expansion of our operations outside of the Southwest Georgia market. On August 8, 2006, we commenced operating a branch in Ocala, Florida. As of June 30, 2007, we had total loans of $15.2 million and total deposits of $22.5 million at our Ocala, Florida branch. We are currently operating this branch out of a leased storefront facility. The construction of a permanent, retail oriented facility in Ocala started during the second quarter of 2007. We have also purchased another facility that we will renovate for our main office and commercial center in Ocala. We expect to occupy both of these facilities in late 2007 or early 2008. At that time, we will no longer operate our current leased facility.

Operating a branch outside of the Southwest Georgia market subjects us to additional risk factors. These risk factors include, but are not limited to the following: management of employees from a distance, lack of knowledge of the local market, additional credit risks, logistical operational issues, and time constraints of management. These risk factors, as well as others we have not identified, may affect our ability to successfully operate outside of our current market area.

For more information on risk factors please see Item IA under Part II of this 10-Q.

Critical Accounting Policies

We have not changed any of our critical accounting policies since those disclosed in our Form 10-KSB, which was filed with the Securities and Exchange Commission on March 27, 2007. Those accounting policies relate to the judgments and estimates used in the preparation of our financial statements in the calculation of the allowance for loan losses, the accounting for impaired loans and the provision for income taxes.

Off Balance Sheet Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. We use the same credit policies in making these commitments as we do for on-balance sheet instruments. A summary of the Company’s commitments as of June 30, 2007, is as follows:

	(In thousands)
Commitments to extend credit	$	46,579
Financial stand-by letters of credit		1,302
	$	47,881

11

Comparison of Financial Condition at June 30, 2007 and December 31, 2006

Total assets increased $34.7 million or 8.4% to $448.0 million at June 30, 2007, from $413.3 million at December 31, 2006. Total interest earning assets increased $32.3 million or 8.6% to $408.5 million at June 30, 2007, from $376.2 million at December 31, 2006. Total loans increased $18.1 million or 6.6% to $294.9 million at June 30, 2007, while securities increased $23.9 million at June 30, 2007 as compared to December 31, 2006. Other earning assets decreased $9.7 million during the first half of 2007. The increase in securities was partially due to the introduction of a $10 million leverage strategy that was implemented during the first quarter of 2007. This strategy, which added long term fixed rate bonds funded by short term floating rate borrowings, was implemented in order to better position our balance sheet for potential changes in interest rates. The additional increase in securities occurred as deposit growth has outpaced loan growth during the year. However, we have seen this trend begin to level, and we are currently seeing loan and deposit growth at similar levels.

Total liabilities increased $34.6 million or 9.9% to $385.1 million at June 30, 2007 compared with $350.5 million at December 31, 2006. The majority of the increase was in interest bearing liabilities, which increased $24.7 million or 7.5%, to $354.6 million at June 30, 2007, from $329.9 million at December 31, 2006. Interest bearing deposits increased $19.7 million or 6.9% to $304.1 million at June 30, 2007 compared with $284.4 million at December 31, 2006. Non-interest bearing deposits increased significantly, rising 59.8% or $8.8 million, to $23.6 million at June 30, 2007. This increase is due to our continued effort to develop deposit relationships with our commercial customers. The total amount of other borrowings stayed consistent at $40.0 million. Federal funds purchased and securities sold under repurchase agreements increased $5.0 million during the first six months of 2007. This increase was due to the previously mentioned leverage strategy implemented during the first quarter. Our deposit growth has remained strong as we have competitively priced our deposit products, especially in our Ocala market. To the extent we can continue to profitably fund loans and securities, we plan to continue to maintain competitive deposit rates.

Total equity increased $173,000 to $63.0 million at June 30, 2007, compared with $62.8 million at December 31, 2006. Net income of $1.3 million for the first six months of 2007 and the allocation of $220,000 in ESOP shares increased equity, which was offset by dividends of $365,000, an increase in unrealized losses on available for sale securities of $1.5 million, and the purchase of treasury stock for $103,000. The significant increase in unrealized losses on securities is due primarily to an increase in long term interest rates during the second quarter.

Comparison of Operating Results

General

For the three months ended June 30, 2007 and 2006

During the quarter ended June 30, 2007, our net income decreased $286,000 or 34.2% to $549,000 compared to $835,000 for the quarter ended June 30, 2006. The decrease was due primarily to an increase in provision for loan losses and interest expense during the period.

For the six months ended June 30, 2007 and 2006

During the first half of 2007, our net income decreased $63,000 or 4.7% to $1.27 million compared to $1.33 million for the first half of 2006. Net interest income increased slightly, while increases in noninterest income outpaced increases in noninterest expense. The provision for loan losses was significantly higher during the first half of 2007 when compared to the first of 2006.

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Interest Income

For the three months ended June 30, 2007 and 2006

Total interest income for the three months ended June 30, 2007, increased $1.6 million or 29.6% to $7.0 million, compared to $5.4 million during the second quarter of 2006. The increase was the result of a 42 basis points increase in yield on average earning assets to 7.01% during the second quarter of 2007 as compared to the yield of 6.59% earned during the same period in 2006. This increase was due to an overall rise in interest rates, and a shift in the loan portfolio to higher yielding commercial loans. We expect the yield on our earning assets to increase slightly during the remainder of 2007 as we continue to see a shift in the mix of our loan portfolio. Average interest earning assets increased $78.1 million for the quarter ending June 30, 2007, compared with the same period in 2006.

For the six months ended June 30, 2007 and 2006

Total interest income for the six months ended June 30, 2007, increased $3.0 million or 28.2% to $13.6 million, compared to $10.6 million during the second quarter of 2006. The increase was the result of a 43 basis points increase in yield on average earning assets to 6.97% during the first half of 2007 as compared to the yield of 6.54% earned during the first half of 2006. This increase was due to the overall rise in interest rates, and a shift in the loan portfolio to higher yielding commercial loans. We expect the yield on our earning assets to increase slightly during the remainder of 2007 as we continue to see a shift in the mix of our loan portfolio. Average interest earning assets increased $71.1 million for the six month period ending June 30, 2007, compared with the same period in 2006.

Interest Expense

For the three months ended June 30, 2007 and 2006

Total interest expense increased $1.5 million or 82.0% to $3.3 million for the quarter ended June 30, 2007, compared to $1.8 million during the same period in 2006. The average cost of funds increased 103 basis points to 3.59% during the second quarter of 2007 compared with the same period in 2006, due to efforts to more competitively price our deposits.

For the six months ended June 30, 2007 and 2006

Total interest expense increased $2.9 million or 81.9% to $6.4 million for the six months ended June 30, 2007, compared to $3.5 million during the same period in 2006. The average cost of funds increased 108 basis points to 3.56% during the first half of 2007 compared with the same period in 2006, due to a general rise in interest rates, and our efforts to more competitively price our deposits.

Net Interest Income

For the three months ended June 30, 2007 and 2006

Net interest income of $3.7 million was an increase from the $3.6 million shown during the same period in 2006. The net interest spread decreased 68 basis points for the second quarter of 2007 compared with the comparable period in 2006. The net interest margin fell 63 basis points to 3.73% for the three months ended June 30, 2007 compared to the same period in 2006.

For the six months ended June 30, 2007 and 2006

Net interest income of $7.1 million was a slight increase from the $7.0 million shown during the same period in 2006. The net interest spread decreased 70 basis points for the first half of 2007 compared with the comparable period in 2006. The net interest margin fell 64 basis points to 3.72% for the six months ended June 30, 2007 compared to 4.36% during the first half of 2006.

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For the three months and six months ended June 30, 2007 and 2006

After experiencing net interest margin compression since July of 2006, we finally saw net interest margins level off and increase slightly during the second quarter of 2007. If the yield curve remains flat or if long term rates remain higher than short term rates, we expect this trend to continue. If the yield curve becomes inverted, we may see margin compression return.

Provision for Loan Losses

For the three months and six months ended June 30, 2007 and 2006

During the quarter ended June 30, 2007, we recorded a $337,000 provision for loan losses, which was an increase compared to the $30,000 positive adjustment to the provision during the same period in 2006. Approximately 80% of the provision expense for the quarter was due to deterioration in credit quality, as measured by our internal credit risk rating system, while 17% of the expense was due to loan growth, and 2% was to cover net charge-offs for the period. Annualized net charge-offs to average outstanding loans declined to 0.01% for the three months ending June 30, 2007 compared to 0.09% during the same period of 2006.

During the six month period ended June 30, 2007, we recorded a $495,000 provision for loan losses, which was an increase compared to the $60,000 provision during the same period in 2006. Approximately 53% of the provision expense for the quarter was due to deterioration in credit quality, as measured by our internal credit risk rating system, while 38% of the expense was due to loan growth, and 9% was to cover net charge-offs for the period. Annualized net charge-offs to average outstanding loans declined to 0.04% for the six months ending June 30, 2007 compared to 0.09% during the same period of 2006.

Nonperforming loans decreased $191,000 to $546,000 at June 30, 2007 compared to June 30, 2006. Nonperforming loans to total loans decreased to 0.19% at June 30, 2007 from 0.28% at June 30, 2006. Nonperforming assets remained consistent at $865,000. Nonperforming assets to total assets decreased to 0.19% at June 30, 2007 as compared to 0.23% in 2006. The allowance for loan losses as a percentage of total loans increased to 1.53% for June 30, 2007 compared with 1.36% at June 30, 2006.

Management establishes provisions for loan losses, which are charged to operations, at a level management believes will reflect probable credit losses based on historical loss trends and an evaluation of specific credits in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and past due status and trends.

Management assesses the allowance for loan losses on a monthly basis and makes provisions for loan losses as necessary in order to maintain the proper level of allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses is maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

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Noninterest Income

A summary of noninterest income follows:

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

We have continued to see an increase in service charges on deposit accounts due to increases in non-sufficient fund charges. This increase is due to our implementation of a program that allows customers to receive cash ATM withdrawals and make debit card purchases on overdrawn accounts within defined limits for a fee. This product is increasing overdraft fees, which is responsible for the increase in our service charges on deposit accounts in the current quarter and for the year. The increase in other service charges, commissions and fees was due primarily to an increase in fees from debit and ATM transactions of $25,000 for the quarter and $95,000 for the year to date. We expect to continue to see strong income from debit and ATM transactions as our customers are increasing debit and ATM usage compared with traditional check writing. In addition, we saw an increase in check printing commissions of $70,000 in the first quarter, due entirely to a one time payment from our vendor on renegotiation of our check printing contract. We do not expect this to continue in the future, and will likely see decreases in our check printing commissions as customers use more electronic forms of transactions. Effective August 1, 2007, we implemented a new fee schedule which we expect to help continue to increase service charges and fees.

The increase in brokerage fees was due to a change in our third party broker/dealer that took place in the second half of 2006. Under our new agreement, we receive a higher percentage of the commissions we produce from our investment customers. In addition, we have benefited from an overall increase in equity markets. In addition, our investment department has increased the number and amount of assets under management because of the enhanced product offering with our new third party broker/dealer.

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Mortgage fees have decreased due to an increase in long term rates, credit tightening in the overall secondary mortgage market due to the collapse of sub-prime lending programs and a general slow down in the housing market. Although we did not participate significantly in sub-prime mortgage lending, we do believe the tightening of the secondary market for these loans will have a negative impact on the overall housing market, and thus cause us to see mortgage activity below normal levels.

The increase in earnings on bank owned life insurance is due to an increased level of interest on our policies, due to general rises in rates and exchanges we have made into higher yielding policies.

The loss on sales of securities for the year to date is due to portfolio adjustments we have made to increase yield and better position our balance sheet for potential changes in interest rates. For the quarter, we had a slight gain on the sale of securities. We may take additional losses during the year to increase yields and for asset-liability management purposes.

Noninterest Expense

A summary of noninterest expense follows:

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

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The majority of the increases in our noninterest expense were due to increases in salaries and employee benefits. The number of full time equivalent employees has decreased to 124 at June 30, 2007, compared with 131 at June 30, 2006; however, we have experienced increases in pay and significant increases in our benefit programs, including our stock based compensation plans which began in May 2006. As we expand our market area and add branches, we expect these expenses to continue to increase. Specifically, the addition of six employees in our Florida location will increase these expenses, with little offset to income until we grow our business in that market. Also, as we open two full service branches in Ocala during the last quarter of 2007 or the first quarter of 2008, we will see this expense increase.

The decrease in equipment expenses was partially offset by the increase in data processing fees. This was due to the change in our core processing system from an in-house system to a third-party system. In addition, we have implemented cost controls to reduce both equipment and occupancy expenses. The increase in advertising and marketing is due to additional marketing expenses incurred with our expansion into Ocala and the implementation of a branding campaign in our Albany market. The decrease in legal and accounting fees was due primarily to a decrease in legal fees, which was higher in 2006 because of the fees we incurred related to our Florida expansion and our first year of public company reporting. Directors fees and retirement fees increased primarily due to the implementation of stock based compensation during May 2006. Also, we increased the number of directors at the Bank and added an advisory Board in Ocala. The increase in other operating expenses was due primarily to an increase in consulting services related to an organizational operating efficiency program we are implementing. We finished this project in July of this year and we expect this program to help minimize the increase in operating expenses as we continue to grow our Company.

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Income Tax Expense.

Income tax expense was $233,000 less during the three months ended June 30, 2007, when compared to the three months ended June 30, 2006, as a result of the decrease in net income before taxes. The effective tax rate was 19.8% for the 2007 quarter, compared to 30.6% for the 2006 quarter. For the six months ended June 30, 2007, income tax expense was $183,000 lower than the 2006 period. The effective tax rate was 25.2% for the first six months of 2007, compared to 31.4% for the first six months of 2006.

The lower tax amounts are due to lower net income and a lower effective tax rate, which is due primarily to a significant increase in the amount of tax exempt income the Company receives from the purchase of municipal securities.

At the time we converted from a credit union to a taxable entity, we recorded a contingent liability for uncertain federal and state tax positions of approximately $1.0 million. We expect this contingency to be resolved by the third quarter of 2007.

Liquidity and Capital Resources

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credits needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest earning assets and interest bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term notice if needed.

The liquidity and capital resources of the Company are monitored continuously by the Company’s Board-authorized Asset Liability Management Committee and on a periodic basis by state and federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company’s and the Bank’s liquidity ratios at June 30, 2007, were considered satisfactory. At that date, the Bank’s short-term investments were adequate to cover any reasonably immediate need for funds. The Company is aware of no events or trends likely to result in a material change in liquidity.

The consolidated statement of cash flows for the six months ended June 30, 2007 and 2006, detail cash flows from operating, investing and financing activities. For the six months ended June 30, 2007, net cash provided by operating activities was $3.7 million while investing activities used $35.6 million, primarily due to the purchase of securities and to fund loan growth, and financing activities provided $33.1 million primarily from an increase in deposits, resulting in a net increase in cash during the six month period of $1.2 million.

In July of 2007, we purchased a building for our main office in Ocala for $1.1 million. We expect to spend approximately $400,000 to $600,000 by the end of the year renovating this building. In addition, we are constructing another branch facility in Ocala, which we expect to complete by the end of the year. As of June 30, 2007, we have spent approximately $1.9 million on this location, including the cost of land. We expect to spend approximately $1.0 to $1.3 million to complete this branch.

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Contractual Obligations

Summarized below are our contractual obligations as of June 30, 2007.

			Less than		1 to 3		3 to 5		More than 5
	Total		1 year		years		years		years
	(Dollars in Thousands)
Federal Home Loan Bank Advances	$	40,000	$	—	$	15,000	$	—	$	25,000
Operating Lease Obligations		188		70		86		32		—
Construction Contracts		1,450		1,450		—		—		—
Total	$	41,638	$	1,520	$	15,086	$	32	$	25,000

Regulatory Capital Ratios for HeritageBank of the South at June 30, 2007

The Company’s and the Bank’s regulatory capital levels exceed the minimums required by state and federal authorities. The following table reflects the Bank’s compliance at June 30, 2007, with regulatory capital requirements. These calculations are based on total risk weighted assets of $337.3 million as of June 30, 2007, and average total assets of $432.5 million for the six months ended June 30, 2007.

											Minimum Required to Be
						For Capital					Well Capitalized Under
						Adequacy					Prompt Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets	$	57,964		17.1	%	$	26,980		8.0	%	$	33,725		10.0	%
Tier I Capital to Risk Weighted Assets		53,475		15.9			13,490		4.0			20,235		6.0
Tier I Capital to Average Total Assets		53,475		12.4			17,302		4.0			21,627		5.0

Heritage Financial Group is subject to Georgia capital requirements for bank holding companies. At June 30, 2007, Heritage Financial Group had total equity of $63.0 million or 14.1% of total assets as of that date. Under Georgia capital requirements for holding companies, Heritage Financial Group had Tier I leverage capital of $64.2 million or 15.1%, which was $47.1 million above the 4.0% requirement.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed only to U.S. dollar interest rate changes, and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company monitors its sensitivity to changes in interest rates and may use derivative instruments to hedge this risk. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Finally, the Company has no exposure to foreign currency exchange rate risk and commodity price risk.

Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as “interest rate risk”. The repricing of interest-earning assets and interest-bearing liabilities can influence the changes in net interest income.

The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis. We also monitor regulatory required interest rate risk analysis which simulates more dramatic changes to rates.

The Company’s strategy is to mitigate interest risk to the greatest extent possible. Based on our analysis of the Company’s overall risk to changes in interest rates, we structure investment and funding transactions to reduce this risk. In addition, we may enter into off-balance sheet transactions to mitigate this risk, although we have not done so as of June 30, 2007. These strategies aim to achieve neutrality to interest rate risk. Although we strive to have our net interest income neutral to changes in rates, due to the inherent nature of our business, we will never be completely neutral to changes in rates. As of June 30, 2007, a drop in interest rates would reduce our net interest income. However, we feel that the level of interest rate risk is at a tolerable level.

The Company maintains an Asset-Liability Committee which monitors and analyzes interest rate risk. This Committee is comprised of members of senior management and outside directors. This Committee meets on a monthly basis and reviews the simulations listed above, as well as other interest rate risk reports.

Additional information required by Item 305 of Regulation S-K is set forth under Item 2 of this report.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of the Company’s disclosure controls and procedures as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the “Act”) as of June 30, 2007, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no changes in our internal control over financial reporting (as defined in Rule 13a -15(f) under the Act) that occurred during the quarter ended June 30, 2007, that has materially affected, or is likely to materially affect our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that

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judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting. In addition, our independent accountants must report on management’s evaluation. We are in the process of evaluating, documenting and testing our system of internal control over financial reporting to provide the basis for our report that is anticipated to be a required part of our annual report on Form 10-K for the fiscal year ending December 31, 2007. Due to the ongoing evaluation and testing of our internal controls, there can be no assurance that if any control deficiencies are identified they will be remediated before the end of the 2007 fiscal year, or that there may not be significant deficiencies or material weaknesses that would be required to be reported. In addition, we expect the evaluation process and any required remediation, if applicable, to increase our accounting, legal and other costs and divert management resources from core business operations.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

ITEM 1A. RISK FACTORS

Our business, financial condition, and results of operations are subject to certain risks, including those described below. The risks below do not describe all risks applicable to our business and are intended only as a summary of certain material factors that affect our operations in our industry and markets. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance in which we operate. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures in this Quarterly Report on Form 10-Q (particularly the forward-looking statements.) These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If the risks we face, including those listed below, actually occur, our business, financial condition or results of operations could be negatively impacted, and the trading price of our common stock could decline, which may cause you to lose all or part of your investment in our stock.

Our loan portfolio possesses increased risk due to our substantial number of multi-family, commercial real estate, commercial business and consumer loans.

Our multi-family, commercial real estate and commercial business loans accounted for approximately 49.1% of our total loan portfolio as of June 30, 2007. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one-to-four family, owner-occupied residential properties. In addition, we plan to increase our emphasis on multi-family, commercial real estate and commercial business lending. Because of our planned increased emphasis on and increased investment in multi-family and commercial real estate and commercial business lending, it may become necessary to increase the level of our provision for loan losses, which could decrease our net profits.

We plan to increase residential and commercial construction lending activities, which will increase the risk in our loan portfolio.

Our construction and land loan portfolio represented 14.9% of our total loan portfolio at June 30, 2007. Generally, we consider construction loans to involve a higher degree of risk than one-to-four family residential loans, because funds are advanced on the security of projects under construction and of uncertain value until completed. We intend to increase our residential and commercial construction lending, to the extent opportunities are available in our market area and meet our underwriting criteria. This increased emphasis on construction lending, particularly on commercial projects, may require us to increase the level of our provision for loan losses, which could decrease net profits.

If economic conditions deteriorate, our results of operations and financial condition could be adversely impacted as borrowers’ ability to repay loans declines and the value of the collateral securing our loans decreases.

Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates that cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events. Because the majority of our borrowers are individuals and businesses located and doing business in the Georgia counties of Dougherty, Lee and Worth, and the Florida county of Marion, our success will depend significantly upon the economic conditions in those and the surrounding counties. Due to our limited market areas, these negative conditions may have a more noticeable effect on us than would be experienced by a larger institution more able to spread these risks of unfavorable local economic conditions

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across a large number of diversified economies. In addition, at June 30, 2007, approximately 66.7% of our total loans were secured by real estate. Accordingly, decreases in real estate values could adversely affect the value of collateral securing our loans. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans. In this regard, a substantial majority of our loans are to individuals and businesses in Southwest Georgia and North Central Florida. These factors could expose us to an increased risk of loan defaults and losses and have an adverse impact on our earnings.

If our allowance for loan losses is not sufficient to cover actual loan losses, or if credit delinquencies increase, our earnings could decrease.

Like other financial institutions, we face the risk that our customers will not repay their loans, that the collateral securing the payment of those loans may be insufficient to assure repayment, and that we may be unsuccessful in recovering the remaining loan balances. Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Based in part on those assumptions and judgments, we maintain an allowance for loan losses in an attempt to cover any loan losses which may occur. In determining the size of the allowance, we also rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, delinquencies and non-accruals, national and local economic conditions and other pertinent information. Material additions to our allowance could materially decrease our net income. Furthermore, if those established loan loss reserves are insufficient and we are unable to raise revenue to compensate for these losses, such losses could have a material adverse effect on our operating results. Our allowance for loan losses was 1.53% of total loans and 522.0% of non-performing assets at June 30, 2007. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Higher charge-off rates and an increase in our allowance for loan losses may hurt our overall financial performance and may increase our cost of funds. As of June 30, 2007, we believe that the current allowance level is our best estimate of losses inherent in our loan portfolio.

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide. In addition, at least one proposed new bank has recently indicated its intention to open in our market area. Our profitability depends upon our continued ability to successfully compete in our market.

We may face risks with respect to the future expansion of our business.

As we expand our business in the future into new and emerging markets, we may also consider and enter into new lines of business or offer new products or services. Such expansion involves risks, including:

• entry into new markets where we lack experience;

• the introduction of new products or services into our business with which we lack experience;

• the time and cost associated with identifying and evaluating potential markets, products and services, hiring experienced local management and opening new offices;

• potential time lags between preparatory activities and the generation of sufficient assets and deposits to support the costs of expansion; and

• the estimates and judgments used to evaluate market risks with respect to new markets, products and services may not be accurate.

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We operate in a highly regulated environment, and we may be adversely affected by changes in laws and regulations.

The Bank is subject to extensive regulation, supervision and examination by the Georgia Department of Banking and Finance, its chartering authority, and by the FDIC, its primary federal regulator. Both MHC and the Company are subject to regulation and supervision by the Office of Thrift Supervision and the Georgia Department of Banking and Finance. This regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in this regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC and Nasdaq, that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audit and maintaining our internal controls.

There is a limited market for our common stock.

Our common stock is listed for trading on the Nasdaq Global Market under the symbol “HBOS”. The trading volume in our common stock on has been relatively low when compared with larger companies listed on the Nasdaq Global Market or other stock exchanges. We cannot say with any certainty that a more active and liquid trading market for our common stock will develop. Because of this, it may be more difficult for you to sell a substantial number of shares for the same price at which you could sell a smaller number of shares. We, therefore, can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.

Our ability to pay dividends is limited and we may be unable to pay future dividends.

Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our Bank subsidiary to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to our Bank and banks that are regulated by the Office of Thrift Supervision. If we do not satisfy these regulatory requirements, we will be unable to pay dividends on our common stock.

MHC owns more than half of the common stock of the Company. As a result, MHC has enough votes to control what happens on most matters submitted to a vote of stockholders.

MHC is required by the regulations of the Office of Thrift Supervision to own more than half of our common stock of Heritage Financial Group. At June 30, 2007, MHC owned approximately 72% of our shares. The board of directors of MHC has the power to direct the voting of this stock. Depositors of the Bank, who elect the board of MHC, generally have assigned this right of election to the board by proxy. Therefore, the board of MHC will control the results of most matters submitted to a vote of stockholders of the Company. We cannot assure you that the votes cast by MHC will be in the personal best interests of our public stockholders.

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The amount of common stock we control, our charter and bylaws, and state and federal statutory provisions could discourage hostile acquisitions of control.

In addition to the shares owned by MHC, our board of directors, executive officers and our employee stock ownership plan controlled approximately 12.7% of our common stock at June 30, 2007. This inside ownership together with provisions in our charter and bylaws may have the effect of discouraging attempts to acquire the Company, pursue a proxy contest for control of the Company, assume control of the Company by a holder of a large block of common stock and remove the Company’s management, all of which certain stockholders might think are in their best interests. These provisions include, among other things:

• staggered terms of the members of the board of directors;

• restrictions on the acquisition of our equity securities without regulatory approval; and

• the authorization of 1,000,000 shares of serial preferred stock that could be issued without stockholder approval on terms or in circumstances that could deter a future takeover attempt.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

There were no unregistered sales of equity securities during the quarter ended June 30, 2007.

Below is a summary of issuer purchases of equity securities during the quarter ended June 30, 2007.

					Number of		Maximum
					Shares		Number of
					Purchased as		Shares that
					Part of		may yet be
	Total				Publicly		Purchased
	Number				Announced		Under the
	of Shares		Average Price		Plans or		Plans or
	Purchased		Paid Per Share		Programs		Programs
April		—	$	—		—		295,000
May		—		—		—		—
June		1,451		16.26		1,451		293,549
Total		1,451	$	16.26		1,451		293,549

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of the Shareholders of the Company was held on May 16, 2007. At this meeting, proxies were solicited pursuant to Regulation 14A under the Exchange Act. Total shares outstanding amounted to 10,889,017. A total of 10,467,141 shares (96.1% of total shares outstanding) were represented by shareholders in attendance at the meeting or by proxy.

The following director nominees were elected to serve as directors for terms to expire in 2010:

J. Keith Land, 10,426,850 votes for, 40,291 votes withheld, representing 99.6% in favor. There were no broker non-votes.

Douglas J. McGinley, 10,413,407 votes for, 53,734 votes withheld, representing 99.5% in favor. There were no broker non-votes.

J. Lee Stanley, 10,426,350 votes for, 40,791 votes withheld, representing 99.6% in favor. There were no broker non-votes.

Ratification of the appointment of Mauldin & Jenkins, Certified Public Accountants and Consultants, LLC, as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2007: by 10,466,111 votes for, 500 votes against, and 530 abstentions, representing 99.9% in favor. There were no broker non-votes.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

		Reference to
		Prior Filing
Regulation S-K		or Exhibit Number
Exhibit Number	Document	Attached Hereto
31	Rule 13a-14(a)/15d-14(a) Certifications		31
32	Section 1350 Certifications		32

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HERITAGE FINANCIAL GROUP
Date: August 13, 2007	By:	/s/ O. Leonard Dorminey
		O. Leonard Dorminey
		President and Chief Executive Officer

Date: August 13, 2007	By:	/s/ T. Heath Fountain
		T. Heath Fountain
		Senior Vice President and Chief Financial Officer

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