##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006  Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
   310 W. Oglethorpe Blvd., Albany, GA 31701
229-420-0000
 þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
   o þ




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##### 



HERITAGE FINANCIAL GROUP
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2006 AND DECEMBER 31, 2005
    
    
    3CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    5CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE
30, 2006 AND THE YEAR ENDED DECEMBER 31, 2005
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    7CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    10ITEM 3. CONTROLS AND PROCEDURES
    
    
    19PART II  OTHER INFORMATION
    
    
    20SIGNATURES
    
    
    22EXHIBITS10.11 Heritage Financial Group 2006 Equity Incentive Plan31.1 Rule 13a14(a) Certification of Chief Executive Officer31.2 Rule 13a14(a) Certification of Chief Financial Officer32 Section 1350 CertificationEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
 Unaudited
    
    
    AuditedJune 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    9,883,651
    
    
    $
    10,499,084Interest-bearing deposits in banks
    
    
    489,606
    
    
    
    1,387,046Federal funds sold
    
    
    18,717,000
    
    
    
    6,820,000Securities available for sale, at fair value
    
    
    61,504,718
    
    
    
    64,866,021Federal home loan bank stock, at cost
    
    
    2,949,400
    
    
    
    2,927,000Loans
    
    
    262,566,171
    
    
    
    254,110,534Less allowance for loan losses
    
    
    3,563,828
    
    
    
    3,617,678Loans, net
    
    
    259,002,343
    
    
    
    250,492,856Premises and equipment, net
    
    
    11,737,411
    
    
    
    12,004,468Accrued interest receivable
    
    
    1,656,686
    
    
    
    1,666,629Foreclosed assets
    
    
    128,103
    
    
    
    59,272Cash surrender value of bank owned life insurance
    
    
    8,134,344
    
    
    
    7,987,442Other assets
    
    
    7,133,966
    
    
    
    5,086,968$
    381,337,228
    
    
    $
    363,796,786Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    13,133,405
    
    
    $
    14,059,406Interest-bearing
    
    
    243,440,379
    
    
    
    224,580,863Total deposits
    
    
    256,573,784
    
    
    
    238,640,269Federal funds purchased and securities sold under
repurchase agreements
    
    
    655,986
    
    
    
    237,222Other borrowings
    
    
    50,000,000
    
    
    
    50,000,000Other liabilities
    
    
    6,334,452
    
    
    
    5,935,648Total liabilities
    
    
    313,564,222
    
    
    
    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;
11,446,155 and 11,241,250 issued and outstanding
    
    
    114,462
    
    
    
    112,413Capital surplus
    
    
    39,789,423
    
    
    
    37,126,877Retained earnings
    
    
    39,711,418
    
    
    
    38,717,576Accumulated other comprehensive loss
    
    
    (3,279,752
    )
    
    
    (2,786,569
    )Unearned compensation
    
    
    (2,508,725
    )
    
    
    Unearned employee stock ownership plan (ESOP) shares,
396,630 and 418,665 shares
    
    
    (3,966,300
    )
    
    
    (4,186,650
    )69,860,526
    
    
    
    68,983,647Treasury stock, at cost, 158,200 shares
    
    
    (2,087,520
    )
    
    
    Total stockholders equity
    
    
    67,773,006
    
    
    
    68,983,647$
    381,337,228
    
    
    $
    363,796,786
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2006 and 2005
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    4,575,405
    
    
    $
    3,877,015
    
    
    $
    8,918,519
    
    
    $
    7,671,333Interest on taxable securities
    
    
    650,827
    
    
    
    567,693
    
    
    
    1,309,545
    
    
    
    1,155,319Interest on nontaxable securities
    
    
    61,635
    
    
    
    79,421
    
    
    
    123,091
    
    
    
    160,975Interest on federal funds sold
    
    
    107,471
    
    
    
    89,363
    
    
    
    219,573
    
    
    
    143,242Interest on deposits in other banks
    
    
    11,185
    
    
    
    6,920
    
    
    
    26,866
    
    
    
    15,7895,406,523
    
    
    
    4,620,412
    
    
    
    10,597,594
    
    
    
    9,146,658Interest expenseInterest on deposits
    
    
    1,315,576
    
    
    
    994,114
    
    
    
    2,474,146
    
    
    
    1,960,544Interest on other borrowings
    
    
    522,703
    
    
    
    452,051
    
    
    
    1,066,673
    
    
    
    921,8991,838,279
    
    
    
    1,446,165
    
    
    
    3,540,819
    
    
    
    2,882,443Net interest income
    
    
    3,568,244
    
    
    
    3,174,247
    
    
    
    7,056,775
    
    
    
    6,264,215Provision for loan losses
    
    
    (30,000
    )
    
    
    364,555
    
    
    
    60,000
    
    
    
    464,555Net interest income after provision for
loan losses
    
    
    3,598,244
    
    
    
    2,809,692
    
    
    
    6,996,775
    
    
    
    5,799,660Noninterest incomeService charges on deposit accounts
    
    
    712,700
    
    
    
    811,519
    
    
    
    1,312,290
    
    
    
    1,472,593Other service charges, commissions and fees
    
    
    234,390
    
    
    
    218,635
    
    
    
    453,537
    
    
    
    438,540Brokerage fees
    
    
    140,870
    
    
    
    151,939
    
    
    
    266,576
    
    
    
    280,724Mortgage origination fees
    
    
    121,258
    
    
    
    129,423
    
    
    
    222,138
    
    
    
    176,074Bank owned life insurance
    
    
    75,004
    
    
    
    74,364
    
    
    
    146,902
    
    
    
    145,760Loss on sale of securities
    
    
    
    
    
    
    (3,731
    )
    
    
    
    
    
    
    (4,653
    )Other
    
    
    58,211
    
    
    
    62,368
    
    
    
    153,178
    
    
    
    164,3071,342,433
    
    
    
    1,444,517
    
    
    
    2,554,621
    
    
    
    2,673,345Noninterest expenseSalaries and employee benefits
    
    
    2,047,199
    
    
    
    1,751,126
    
    
    
    4,213,160
    
    
    
    3,428,143Equipment
    
    
    287,517
    
    
    
    451,834
    
    
    
    627,641
    
    
    
    912,203Occupancy
    
    
    236,408
    
    
    
    238,813
    
    
    
    503,984
    
    
    
    471,658Advertising and marketing
    
    
    78,996
    
    
    
    66,095
    
    
    
    158,217
    
    
    
    133,822Legal and accounting
    
    
    138,021
    
    
    
    89,946
    
    
    
    340,322
    
    
    
    196,398Directors fees and retirement
    
    
    115,198
    
    
    
    73,644
    
    
    
    204,307
    
    
    
    144,888Telephone
    
    
    64,276
    
    
    
    62,017
    
    
    
    127,415
    
    
    
    123,662Supplies
    
    
    46,416
    
    
    
    51,725
    
    
    
    111,315
    
    
    
    112,289Data processing fees
    
    
    246,808
    
    
    
    101,243
    
    
    
    412,478
    
    
    
    192,600Other operating
    
    
    476,881
    
    
    
    370,959
    
    
    
    911,161
    
    
    
    677,3313,737,720
    
    
    
    3,257,402
    
    
    
    7,610,000
    
    
    
    6,392,994Income before income taxes
    
    
    1,202,957
    
    
    
    996,807
    
    
    
    1,941,396
    
    
    
    2,080,011Applicable income taxes
    
    
    368,322
    
    
    
    330,839
    
    
    
    610,316
    
    
    
    682,618Net income
    
    $
    834,635
    
    
    $
    665,968
    
    
    $
    1,331,080
    
    
    $
    1,397,393Basic earnings per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Six Months Ended June 30, 2006 and 2005
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    834,635
    
    
    $
    665,968
    
    
    $
    1,331,080
    
    
    $
    1,397,393Other comprehensive income (loss):Reclassification adjustment for (gains) losses
included in net income, net of tax (benefit)
of $- and $(1,479) for the quarter and $-
and $(1,845) for the year to date
    
    
    
    
    
    
    2,252
    
    
    
    
    
    
    
    2,808Unrealized holding gains (losses) arising
during period, net of tax (benefit) of
$(269,717) and $291,164 for the
quarter and $(324,162) and $(118,876)
for the year to date
    
    
    (410,351
    )
    
    
    443,171
    
    
    
    (493,183
    )
    
    
    (180,862
    )Total other comprehensive income (loss)
    
    
    (410,351
    )
    
    
    445,423
    
    
    
    (493,183
    )
    
    
    (183,670
    )Comprehensive income
    
    $
    424,284
    
    
    $
    1,111,391
    
    
    $
    837,897
    
    
    $
    1,213,723
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Stockholders Equity
For the Six Months Ended June 30, 2006 (Unaudited) and the Year Ended December 31, 2005
 AccumulatedUnearned
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    ESOP
    
    
    Unearned
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Surplus
    
    
    Earnings
    
    
    Shares
    
    
    Compensation
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2004
    
    
    1,000
    
    
    $
    10
    
    
    $
    4,799,990
    
    
    $
    35,935,700
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,601,946
    )
    
    $
    39,133,754Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,950,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,950,495Cash dividends declared,
$.05 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168,619
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168,619
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,184,623
    )
    
    
    (1,184,623
    )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
    
    
    
    32,384,337
    
    
    
    
    
    
    
    (4,407,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,011,061ESOP shares earned,
22,035 shares
    
    
    
    
    
    
    
    
    
    
    21,229
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241,579Balance, December 31, 2005
    
    
    11,241,250
    
    
    
    112,413
    
    
    
    37,126,877
    
    
    
    38,717,576
    
    
    
    (4,186,650
    )
    
    
    
    
    
    
    
    
    
    
    (2,786,569
    )
    
    
    68,983,647Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,331,080
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,331,080Cash dividends declared,
$0.10 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (337,238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (337,238
    )Issuance of restricted shares
of common stock
    
    
    204,905
    
    
    
    2,049
    
    
    
    2,567,460
    
    
    
    
    
    
    
    
    
    
    
    (2,569,509
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned
compensation, net of
forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,784
    
    
    
    
    
    
    
    
    
    
    
    60,784Compensation expense related to stock option plans
    
    
    
    
    
    
    
    
    
    
    48,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,066Repurchase of 158,200 shares for the treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,087,520
    )
    
    
    
    
    
    
    (2,087,520
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (493,183
    )
    
    
    (493,183
    )ESOP shares earned,
22,035 shares
    
    
    
    
    
    
    
    
    
    
    47,020
    
    
    
    
    
    
    
    220,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267,370Balance, June 30, 2006
    
    
    11,446,155
    
    
    $
    114,462
    
    
    $
    39,789,423
    
    
    $
    39,711,418
    
    
    $
    (3,966,300
    )
    
    $
    (2,508,725
    )
    
    $
    (2,087,520
    )
    
    $
    (3,279,752
    )
    
    $
    67,773,006
 See Notes to Consolidated Financial Statements.
 6




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
 Six Months Ended June 30,2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    1,331,080
    
    
    $
    1,397,393Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    543,623
    
    
    
    743,413Provision for loan losses
    
    
    60,000
    
    
    
    464,555ESOP compensation expense
    
    
    267,370
    
    
    
    Stock option plan expenses
    
    
    48,066
    
    
    
    Amortization of unearned compensation
    
    
    60,784
    
    
    
    Net losses on sale of securities available for sale
    
    
    
    
    
    
    4,653Net (increase) decrease in foreclosed assets
    
    
    (68,831
    )
    
    
    162,810Increase in bank owned life insurance
    
    
    (146,902
    )
    
    
    (145,760
    )(Increase) decrease in interest receivable
    
    
    9,943
    
    
    
    (61,763
    )Increase (decrease) in interest payable
    
    
    36,160
    
    
    
    (16,786
    )Increase (decrease) in taxes payable
    
    
    (204,679
    )
    
    
    446,712Net other operating activities
    
    
    (1,155,513
    )
    
    
    (110,046
    )Total adjustments
    
    
    (549,979
    )
    
    
    1,487,788Net cash provided by operating activities
    
    
    781,101
    
    
    
    2,885,181INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    897,440
    
    
    
    (768,872
    )Purchases of securities available for sale
    
    
    (1,995,157
    )
    
    
    (21,100,116
    )Proceeds from maturities of securities available for sale
    
    
    2,539,115
    
    
    
    8,460,026Proceeds from sale of securities available for sale
    
    
    2,000,000
    
    
    
    12,153,248Net change in Federal home loan bank stock
    
    
    (22,400
    )
    
    
    255,300Redemption of corporate credit union membership shares
    
    
    
    
    
    
    553,834Increase in federal funds sold
    
    
    (11,897,000
    )
    
    
    (17,294,000
    )Increase in loans, net
    
    
    (8,569,487
    )
    
    
    (6,849,248
    )Purchase of premises and equipment
    
    
    (276,566
    )
    
    
    (249,703
    )Net cash used in investing activities
    
    
    (17,324,055
    )
    
    
    (24,839,531
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    17,933,515
    
    
    
    (126,000
    )Increase in federal funds purchased and securities sold
under agreement to repurchase
    
    
    418,764
    
    
    
    191,923Proceeds from other borrowings
    
    
    10,000,000
    
    
    
    550,000Repayment of other borrowings
    
    
    (10,000,000
    )
    
    
    (6,000,000
    )Proceed from sale of common stock, net of issuance costs
    
    
    
    
    
    
    28,110,085Purchase of treasury shares
    
    
    (2,087,520
    )
    
    
    Dividends paid to stockholders
    
    
    (337,238
    )
    
    
    Net cash provided by financing activities
    
    
    15,927,521
    
    
    
    22,726,008Net increase (decrease) in cash and due from banks
    
    
    (615,433
    )
    
    
    771,658Cash and due from banks at beginning of period
    
    
    10,499,084
    
    
    
    6,621,232Cash and due from banks at end of period
    
    $
    9,883,651
    
    
    $
    7,392,890
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1  BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
     NOTE 2  EARNINGS PER SHARE
    Three Months EndedJune 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic earnings per share:Net income
    
    $
    834,635
    
    
    $
    665,968
    
    
    $
    1,331,080
    
    
    $
    1,397,393Weighted average common shares outstanding
    
    
    10,801,659
    
    
    
    7,943,817
    
    
    
    10,815,717
    
    
    
    7,906,346Total basic earnings per common share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18Diluted earnings per share:Net income
    
    $
    834,635
    
    
    $
    665,968
    
    
    $
    1,331,080
    
    
    $
    1,397,393Weighted average common shares outstanding
    
    
    10,801,659
    
    
    
    7,943,817
    
    
    
    10,815,717
    
    
    
    7,906,346Effect of dilutive stock options and restricted stock
    
    
    3,787
    
    
    
    
    
    
    
    1,894
    
    
    
    Weighted average dilutive common shares outstanding
    
    
    10,805,446
    
    
    
    7,943,817
    
    
    
    10,817,611
    
    
    
    7,906,346Total diluted earnings per common share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18
 8




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##### Table of Contents



CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3  STOCK BASED COMPENSATION
   Share Based Payment
  For the Three Monthsand Six Months EndedJune 30, 2006Risk-free interest rate
    
    
    4.5
    %Expected life of the options
    
    10 yearsExpected annual dividend rate
    
    
    2.0
    %Expected volatility
    
    
    24.0
    %
  9




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##### Table of Contents



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




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##### Table of Contents



Evolution of Business Strategy (Continued)
    Critical Accounting Policies
 Accounting for Stock-Based Compensation.
 Off Balance Sheet Liabilities
  (In thousands)Commitments to extend credit
    
    $
    31,354Financial stand-by letters of credit
    
    
    770$
    32,124
 11




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##### Table of Contents



Comparison of Financial Condition at June 30, 2006 and December 31, 2005
    Results of operations
 For the three months ended June 30, 2006 and 2005
  For the six months ended June 30, 2006 and 2005
   12




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##### Table of Contents



Net Interest Income
 For the three months ended June 30, 2006 and 2005
  For the six months ended June 30, 2006 and 2005
  General comments on net interest income
   13




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##### Table of Contents



Provision for Loan Losses
 For the three months ended June 30, 2006 and 2005
  For the six months ended June 30, 2006 and 2005
  General comments on the provision for loan losses
   14




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##### Table of Contents



Noninterest Income
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    $ Chg
    
    
    % Chg
    
    
    2006
    
    
    2005
    
    
    $ Chg
    
    
    % ChgService charges on deposit accounts
    
    $
    712,700
    
    
    $
    811,519
    
    
    $
    (98,819
    )
    
    
    -12.18
    %
    
    $
    1,312,290
    
    
    $
    1,472,593
    
    
    $
    (160,303
    )
    
    
    -12.22
    %Other service charges, commissions
and fees
    
    
    234,390
    
    
    
    218,635
    
    
    
    15,755
    
    
    
    7.21
    %
    
    
    453,537
    
    
    
    438,540
    
    
    
    14,997
    
    
    
    3.31
    %Brokerage fees
    
    
    140,870
    
    
    
    151,939
    
    
    
    (11,069
    )
    
    
    -7.29
    %
    
    
    266,576
    
    
    
    280,724
    
    
    
    (14,148
    )
    
    
    -5.31
    %Mortgage origination fees
    
    
    121,258
    
    
    
    129,423
    
    
    
    (8,165
    )
    
    
    -6.31
    %
    
    
    222,138
    
    
    
    176,074
    
    
    
    46,064
    
    
    
    20.74
    %Bank owned life insurance
    
    
    75,004
    
    
    
    74,364
    
    
    
    640
    
    
    
    0.86
    %
    
    
    146,902
    
    
    
    145,760
    
    
    
    1,142
    
    
    
    0.78
    %Loss on sale of securities
    
    
    
    
    
    
    (3,731
    )
    
    
    3,731
    
    
    NM
    
    
    
    
    
    
    (4,653
    )
    
    
    4,653
    
    
    NMOther
    
    
    58,211
    
    
    
    62,368
    
    
    
    (4,157
    )
    
    
    -6.67
    %
    
    
    153,178
    
    
    
    164,307
    
    
    
    (11,129
    )
    
    
    -7.27
    %Total noninterest income
    
    $
    1,342,433
    
    
    $
    1,444,517
    
    
    $
    (102,084
    )
    
    
    -7.07
    %
    
    $
    2,554,621
    
    
    $
    2,673,345
    
    
    $
    (118,724
    )
    
    
    -4.44
    %Noninterest income as a percentage of
average assets (annualized)
    
    
    1.44
    %
    
    
    1.63
    %
    
    
    
    
    
    
    
    
    
    
    1.40
    %
    
    
    1.51
    %
   15




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##### Table of Contents



Noninterest Expense
  Three Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    $ Chg
    
    
    % Chg
    
    
    2006
    
    
    2005
    
    
    $ Chg
    
    
    % ChgSalaries and employee benefits
    
    $
    2,047,199
    
    
    $
    1,751,126
    
    
    $
    296,073
    
    
    
    16.91
    %
    
    $
    4,213,160
    
    
    $
    3,428,143
    
    
    $
    785,017
    
    
    
    22.9
    %Equipment
    
    
    287,517
    
    
    
    451,834
    
    
    
    (164,317
    )
    
    
    -36.37
    %
    
    
    627,641
    
    
    
    912,203
    
    
    
    (284,562
    )
    
    
    -31.20
    %Occupancy
    
    
    236,408
    
    
    
    238,813
    
    
    
    (2,405
    )
    
    
    -1.01
    %
    
    
    503,984
    
    
    
    471,658
    
    
    
    32,326
    
    
    
    6.85
    %Advertising and marketing
    
    
    78,996
    
    
    
    66,095
    
    
    
    12,901
    
    
    
    19.52
    %
    
    
    158,217
    
    
    
    133,822
    
    
    
    24,395
    
    
    
    18.23
    %Legal and accounting
    
    
    138,021
    
    
    
    89,946
    
    
    
    48,075
    
    
    
    53.45
    %
    
    
    340,322
    
    
    
    196,398
    
    
    
    43,924
    
    
    
    73.28
    %Directors fees and retirement
    
    
    115,198
    
    
    
    73,644
    
    
    
    41,554
    
    
    
    56.43
    %
    
    
    204,307
    
    
    
    144,888
    
    
    
    59,419
    
    
    
    41.01
    %Telephone
    
    
    64,276
    
    
    
    62,017
    
    
    
    2,259
    
    
    
    3.64
    %
    
    
    127,415
    
    
    
    123,662
    
    
    
    3,753
    
    
    
    3.03
    %Supplies
    
    
    46,416
    
    
    
    51,725
    
    
    
    (5,309
    )
    
    
    -10.26
    %
    
    
    111,315
    
    
    
    112,289
    
    
    
    (974
    )
    
    
    -0.87
    %Data processing fees
    
    
    246,808
    
    
    
    101,243
    
    
    
    145,565
    
    
    
    143.78
    %
    
    
    412,478
    
    
    
    192,600
    
    
    
    219,878
    
    
    
    114.16
    %Other operating
    
    
    476,881
    
    
    
    370,959
    
    
    
    105,922
    
    
    
    28.55
    %
    
    
    911,161
    
    
    
    677,331
    
    
    
    233,830
    
    
    
    34.52
    %Total noninterest expenses
    
    $
    3,737,720
    
    
    $
    3,257,402
    
    
    $
    480,318
    
    
    
    14.75
    %
    
    $
    7,610,000
    
    
    $
    6,392,994
    
    
    $
    1,217,006
    
    
    
    19.04
    %Noninterest expenses as a percentage of
average assets (annualized)
    
    
    4.10
    %
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    4.18
    %
    
    
    3.62
    %
 16




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##### Table of Contents



Noninterest Expense (Continued)
   For The
    
    
    For TheThree Month
    
    
    Six MonthIncrease in:
    
    Period
    
    
    PeriodSalaries and benefits
    
    $
    33,000
    
    
    $
    289,000ESOP expense
    
    
    141,000
    
    
    
    267,000Stock based compensation
    
    
    80,000
    
    
    
    80,000Defined benefit pension plan
    
    
    26,000
    
    
    
    51,000Insurance and other benefits
    
    
    16,000
    
    
    
    98,000Total increase
    
    $
    296,000
    
    
    $
    785,000
 Income Tax Expense
 17




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##### Table of Contents



Liquidity and Capital Resources
    Regulatory Capital Ratios for HeritageBank of the South at June 30, 2006
  Minimum Required toBe Well CapitalizedFor Capital
    
    Under PromptAdequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total Capital to Risk Weighted Assets
    
    $
    58,581
    
    
    
    20.2
    %
    
    $
    23,191
    
    
    
    8.0
    %
    
    $
    28,988
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    55,017
    
    
    
    19.0
    
    
    
    11,595
    
    
    
    4.0
    
    
    
    17,393
    
    
    
    6.0Tier I Capital to Average Assets
    
    
    55,017
    
    
    
    15.7
    
    
    
    13,979
    
    
    
    4.0
    
    
    
    17,473
    
    
    
    5.0
  18




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
     19




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares thatPart of
    
    
    may yet beTotal
    
    
    
    
    
    
    Publicly
    
    
    PurchasedNumber
    
    
    
    
    
    
    Announced
    
    
    Under theof Shares
    
    
    Average Price
    
    
    Plans or
    
    
    Plans orPurchased
    
    
    Paid Per Share
    
    
    Programs
    
    
    ProgramsApril
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    May
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,328June
    
    
    158,200
    
    
    
    13.14
    
    
    
    158,200
    
    
    
    62,128Total
    
    
    158,200
    
    
    $
    13.14
    
    
    
    158,200
    
    
    
    62,128
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  20




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##### Table of Contents



ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ITEM 5 . OTHER INFORMATION
  ITEM 6 . EXHIBITS
 Reference toPrior FilingRegulation S-B
    
    
    
    or Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto10.11
    
    
    Heritage Financial Group 2006 Equity Incentive Plan
    
    
    *31
    
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    
    Section 1350 Certifications
    
    
    32
 
 *
    
    Incorporated by reference from Heritage Financial Groups Proxy Statement filed with the
Commission on April 14, 2006. 21




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate: August 11, 2006
    
    By:
    
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive OfficerDate: August 11, 2006
    
    By:
    
    /s/ Tammy W. BurdetteTammy W. BurdetteExecutive Vice President and
Chief Financial Officer
 22