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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 March 31, 2006  Commission File Number 000-51305
 
 
 HERITAGE FINANCIAL GROUP
 
 310 W. Oglethorpe Blvd., Albany, GA 31701
229-420-0000
 x o
 o x
 APPLICABLE ONLY TO CORPORATE ISSUERS
   o x




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HERITAGE FINANCIAL GROUP
 INDEX
 PageNumberPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2006 AND DECEMBER 31, 2005
    
    
    3CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
    
    
    4CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
    
    
    6 & 7CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
    
    
    8CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    9ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    10ITEM 3. CONTROLS AND PROCEDURES
    
    
    16PART II  OTHER INFORMATION
    
    
    17SIGNATURES
    
    
    18EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32  SECTION 906 CERTIFICATION OF THE CEO AND CFO




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PART IFINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED
BALANCE SHEETS AS OF 
MARCH 31, 2006 AND DECEMBER 31, 2005
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    7,601,933
    
    
    $
    10,499,084Interest-bearing deposits in banks
    
    
    1,596,184
    
    
    
    1,387,046Federal funds sold
    
    
    7,724,000
    
    
    
    6,820,000Securities available for sale, at fair value
    
    
    63,527,904
    
    
    
    64,866,021Federal home loan bank stock, at cost
    
    
    2,724,400
    
    
    
    2,927,000Loans
    
    
    256,718,670
    
    
    
    254,110,534Less allowance for loan losses
    
    
    3,648,850
    
    
    
    3,617,678Loans, net
    
    
    253,069,820
    
    
    
    250,492,856Premises and equipment, net
    
    
    11,788,944
    
    
    
    12,004,468Accrued interest receivable
    
    
    1,551,024
    
    
    
    1,666,629Foreclosed assets
    
    
    112,385
    
    
    
    59,272Cash surrender value of bank owned life insurance
    
    
    8,059,340
    
    
    
    7,987,442Other assets
    
    
    5,197,210
    
    
    
    5,086,968$
    362,953,144
    
    
    $
    363,796,786Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    14,510,613
    
    
    $
    14,059,406Interest-bearing
    
    
    228,470,467
    
    
    
    224,580,863Total deposits
    
    
    242,981,080
    
    
    
    238,640,269Other borrowings
    
    
    45,000,000
    
    
    
    50,000,000Federal funds purchased and securities sold under
agreements to repurchase
    
    
    275,626
    
    
    
    237,222Other liabilities
    
    
    5,341,184
    
    
    
    5,935,648Total liabilities
    
    
    293,597,890
    
    
    
    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;
11,241,250 shares issued and outstanding
    
    
    112,413
    
    
    
    112,413Capital
surplus
    
    
    37,143,315
    
    
    
    37,126,877Retained earnings
    
    
    39,045,402
    
    
    
    38,717,576Accumulated other comprehensive loss
    
    
    (2,869,401
    )
    
    
    (2,786,569
    )Unearned employee stock ownership (ESOP) shares,
407,648 and 418,665 shares
    
    
    (4,076,475
    )
    
    
    (4,186,650
    )Total stockholders equity
    
    
    69,355,254
    
    
    
    68,983,647$
    362,953,144
    
    
    $
    363,796,786
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 2006 AND 2005
 (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    4,343,114
    
    
    $
    3,794,317Interest on taxable securities
    
    
    658,718
    
    
    
    587,626Interest on nontaxable securities
    
    
    61,456
    
    
    
    81,554Interest on federal funds sold
    
    
    112,102
    
    
    
    53,878Interest on deposits in other banks
    
    
    15,681
    
    
    
    8,8695,191,071
    
    
    
    4,526,244Interest expenseInterest on deposits
    
    
    1,158,570
    
    
    
    966,430Interest on other borrowings
    
    
    543,970
    
    
    
    469,8481,702,540
    
    
    
    1,436,278Net interest income
    
    
    3,488,531
    
    
    
    3,089,966Provision for loan losses
    
    
    90,000
    
    
    
    100,000Net interest income after provision for
loan losses
    
    
    3,398,531
    
    
    
    2,989,966Noninterest incomeService charges on deposit accounts
    
    
    599,590
    
    
    
    661,074Other service charges, commissions and fees
    
    
    219,147
    
    
    
    219,905Brokerage fees
    
    
    125,706
    
    
    
    128,785Mortgage origination fees
    
    
    100,880
    
    
    
    46,651Bank owned life insurance
    
    
    71,898
    
    
    
    71,396Loss on sale of securities
    
    
    
    
    
    
    (922
    )Other
    
    
    94,967
    
    
    
    101,9381,212,188
    
    
    
    1,228,827Noninterest expenseSalaries and employee benefits
    
    
    2,165,961
    
    
    
    1,677,017Equipment
    
    
    340,124
    
    
    
    460,369Occupancy
    
    
    267,576
    
    
    
    232,845Advertising and marketing
    
    
    79,221
    
    
    
    67,727Legal and accounting
    
    
    202,301
    
    
    
    106,452Directors fees and retirement
    
    
    89,109
    
    
    
    71,244Telephone
    
    
    63,139
    
    
    
    61,645Supplies
    
    
    64,899
    
    
    
    60,565Data processing fees
    
    
    165,670
    
    
    
    91,357Other operating
    
    
    434,280
    
    
    
    306,3723,872,280
    
    
    
    3,135,593Income before income taxes
    
    
    738,439
    
    
    
    1,083,200Applicable income taxes
    
    
    241,994
    
    
    
    351,779Net income
    
    $
    496,445
    
    
    $
    731,421Basic earnings per share
    
    $
    0.05
    
    
    $
    0.09Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.09
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2006 AND 2005
 (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005Net income
    
    $
    496,445
    
    
    $
    731,421Other comprehensive income (loss):Net unrealized holding losses arising during period,
net of tax benefits of $54,445 and $413,128
    
    
    (82,832
    )
    
    
    (629,649
    )Reclassification adjustment for losses included in net
income, net of tax benefit of $366
    
    
    
    
    
    
    556Total other comprehensive loss
    
    
    (82,832
    )
    
    
    (629,093
    )Comprehensive income
    
    $
    413,613
    
    
    $
    102,328
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
THE YEAR ENDED DECEMBER 31, 2005
 (Unaudited)
 Common StockCapitalShares
    
    
    Par Value
    
    
    SurplusBalance, December 31, 2004
    
    
    1,000
    
    
    $
    10
    
    
    $
    4,799,990Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared,
$.05 per shareOther comprehensive lossIssuance of 7,867,875 shares
of common stock to
Heritage, MHC
    
    
    7,867,875
    
    
    
    78,679
    
    
    
    (78,679
    )Sale of 3,372,375 shares of
common stock in an initial
public offering, net of
issuance costs
    
    
    3,372,375
    
    
    
    33,724
    
    
    
    32,384,337ESOP shares earned, 22,035 shares
    
    
    
    
    
    
    
    
    
    
    21,229Balance, December 31, 2005
    
    
    11,241,250
    
    
    
    112,413
    
    
    
    37,126,877Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividend declared,
$.05 per share
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    ESOP shares earned, 11,017 shares
    
    
    
    
    
    
    
    
    
    
    16,438Balance, March 31, 2006
    
    
    11,241,250
    
    
    $
    112,413
    
    
    $
    37,143,315
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
THE YEAR ENDED DECEMBER 31, 2005
(Unaudited)
 AccumulatedOtherUnearned
    
    
    ComprehensiveRetained
    
    
    ESOP
    
    
    IncomeEarnings
    
    
    Shares
    
    
    (Loss)
    
    
    Total$
    35,935,700
    
    
    $
    
    
    
    $
    (1,601,946
    )
    
    $
    39,133,7542,950,495
    
    
    
    
    
    
    
    
    
    
    
    2,950,495(168,619
    )
    
    
    
    
    
    
    
    
    
    
    (168,619
    )(1,184,623
    )
    
    
    (1,184,623
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,407,000
    )
    
    
    
    
    
    
    28,011,061
    
    
    
    220,350
    
    
    
    
    
    
    
    241,57938,717,576
    
    
    
    (4,186,650
    )
    
    
    (2,786,569
    )
    
    
    68,983,647496,445
    
    
    
    
    
    
    
    
    
    
    
    496,445(168,619
    )
    
    
    
    
    
    
    
    
    
    
    (168,619
    )
    
    
    
    
    
    
    
    (82,832
    )
    
    
    (82,832
    )
    
    
    
    110,175
    
    
    
    
    
    
    
    126,613$
    39,045,402
    
    
    $
    (4,076,475
    )
    
    $
    (2,869,401
    )
    
    $
    69,355,254
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2006 AND 2005
 (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    496,445
    
    
    $
    731,421Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    278,886
    
    
    
    380,191Provision for loan losses
    
    
    90,000
    
    
    
    100,000ESOP compensation expense
    
    
    126,613
    
    
    
    Net losses on sale of securities available for sale
    
    
    
    
    
    
    922Net (increase) decrease in foreclosed assets
    
    
    (53,113
    )
    
    
    87,679Increase in bank owned life insurance
    
    
    (71,898
    )
    
    
    (71,396
    )(Increase) decrease in interest receivable
    
    
    115,605
    
    
    
    (52,623
    )Increase (decrease) in interest payable
    
    
    26,187
    
    
    
    (28,597
    )Increase in taxes payable
    
    
    121,983
    
    
    
    836,008Net other operating activities
    
    
    (798,431
    )
    
    
    (783,477
    )Total adjustments
    
    
    (164,168
    )
    
    
    468,707Net cash provided by operating activities
    
    
    332,277
    
    
    
    1,200,128INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (209,138
    )
    
    
    (720,910
    )Purchases of securities available for sale
    
    
    (995,156
    )
    
    
    (17,472,752
    )Proceeds from maturities of securities available for sale
    
    
    1,195,996
    
    
    
    1,627,458Proceeds from sale of securities available for sale
    
    
    1,000,000
    
    
    
    3,504,750Net change in Federal home loan bank stock
    
    
    202,600
    
    
    
    255,300(Increase) decrease in federal funds sold
    
    
    (904,000
    )
    
    
    9,314,000Increase in loans, net
    
    
    (2,666,964
    )
    
    
    (2,237,522
    )Purchase of premises and equipment
    
    
    (63,362
    )
    
    
    (101,319
    )Net cash used in investing activities
    
    
    (2,440,024
    )
    
    
    (5,830,995
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    4,340,811
    
    
    
    8,953,970Increase in federal funds purchased and securities sold
under agreements to repurchase
    
    
    38,404
    
    
    
    147,910Repayment of other borrowings
    
    
    (5,000,000
    )
    
    
    (6,000,000
    )Dividends paid to shareholders
    
    
    (168,619
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (789,404
    )
    
    
    3,101,880Net decrease in cash and due from banks
    
    
    (2,897,151
    )
    
    
    (1,528,987
    )Cash and due from banks at beginning of year
    
    
    10,499,084
    
    
    
    6,621,232Cash and due from banks at end of year
    
    $
    7,601,933
    
    
    $
    5,092,245
 See Notes to Consolidated Financial Statements.
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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
   9




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




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Critical Accounting Policies. .
 Off Balance Sheet Liabilities.
 (In thousands)Commitments to extend credit
    
    $
    30,885Financial stand-by letters of credit
    
    
    1,186$
    32,071
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Comparison of Financial Condition at March 31, 2006 and December 31, 2005
    Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005
 General
 Interest Income
 Interest Expense
 12




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Net Interest Income
 Provision for Loan Losses
   Noninterest Income
 13




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Noninterest Expense
 Income Tax Expense
 14




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Liquidity and Capital Resources
    Regulatory Capital Ratios for HeritageBank of the South at March 31, 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
    
    $
    57,692
    
    
    
    20.6
    %
    
    $
    22,371
    
    
    
    8.0
    %
    
    $
    27,964
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets
    
    
    54,195
    
    
    
    19.4
    
    
    
    11,186
    
    
    
    4.0
    
    
    
    16,778
    
    
    
    6.0Tier I Capital to Average Assets
    
    
    54,195
    
    
    
    15.5
    
    
    
    13,987
    
    
    
    4.0
    
    
    
    17,483
    
    
    
    5.0
  15




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ITEM 3. CONTROLS AND PROCEDURES
     16




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PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  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 Hereto31
    
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    
    3132
    
    
    Section 1350 Certifications
    
    
    32
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SIGNATURES
  HERITAGE FINANCIAL GROUPDate: May 15, 2006
    By:
    /s/ O. Leonard DormineyO. Leonard DormineyPresident and Chief Executive Officer Date: May 15, 2006
    By:
    /s/ Tammy W. BurdetteTammy W. BurdetteExecutive Vice President and
Chief Financial Officer 18