##### Table of Contents



UNITED STATES SECURIT1ES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from ___ to ___
 Commission file number ________________________________
 HERITAGE FINANCIAL GROUP
  United States
    
    45-0479535(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 310 W. Oglethorpe Blvd., Albany, Georgia 31701
 
  (229) 883-5701
 
  
  þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
   o þ
 SEC2334 (1-04)
    
    Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.




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HERITAGE FINANCIAL GROUP
 INDEX
 PageNumberPart I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Income For the Three Months Ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Comprehensive Income For the Three Months Ended September 30, 2005 and 2004
    
    
    5Consolidated Statements of Income For the Nine Months Ended September 30, 2005 and 2004
    
    
    6Consolidated Statements of Comprehensive Income For the Nine Months Ended September 30, 2005 and 2004
    
    
    7Consolidated Statements of Cash Flow For the Nine Months ended September 30, 2005 and 2004
    
    
    8Consolidated Statements of Stockholders Equity
    
    
    9Notes to Condensed Consolidated Financial Statements
    
    
    10Item 2. Managements Discussion and Analysis
    
    
    11Item 3. Controls and Procedures
    
    
    17Part II  OTHER INFORMATION
    
    
    18SIGNATURES
    
    
    19EXHIBITS31.1 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 CERTIFICATIONS OF THE CEO & CFO
  
 2




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
 September 30,2005
    
    
    December 31, 2004(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    9,392,787
    
    
    $
    6,621,232Interest-bearing deposits in banks
    
    
    1,285,007
    
    
    
    420,677Federal funds sold
    
    
    8,788,000
    
    
    
    12,783,000Securities available for sale, at fair value
    
    
    64,765,198
    
    
    
    59,287,595Federal home loan bank stock, at cost
    
    
    2,702,000
    
    
    
    2,957,300Corporate credit union membership shares
    
    
    
    
    
    
    553,834Loans, net
    
    
    246,890,297
    
    
    
    235,276,942Premises and equipment, net
    
    
    11,977,713
    
    
    
    12,684,152Accrued interest receivable
    
    
    1,522,682
    
    
    
    1,425,871Foreclosed assets
    
    
    119,436
    
    
    
    200,554Cash surrender value of bank owned life insurance
    
    
    7,911,951
    
    
    
    7,690,065Other assets
    
    
    4,297,803
    
    
    
    3,567,254$
    359,652,874
    
    
    $
    343,468,476Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    13,723,972
    
    
    $
    14,447,423Interest-bearing
    
    
    225,588,369
    
    
    
    234,095,297Total deposits
    
    
    239,312,341
    
    
    
    248,542,720Other borrowings
    
    
    45,000,000
    
    
    
    51,000,000Other liabilities
    
    
    6,115,709
    
    
    
    4,792,002Total liabilities
    
    
    290,428,050
    
    
    
    304,334,722Commitments and contingenciesStockholders equityPreferred stock, par value $0.01; 1,000,000 shares authorized;
no shares issuedCommon stock, par value $0.01; 25,000,000 shares authorized;
11,241,250 and 1,000 shares issued and outstanding
    
    
    112,413
    
    
    
    10Paid-in capital
    
    
    37,192,067
    
    
    
    4,799,990Retained earnings
    
    
    38,325,090
    
    
    
    35,935,700Accumulated other comprehensive loss
    
    
    (1,997,746
    )
    
    
    (1,601,946
    )Unearned ESOP shares
    
    
    (4,407,000
    )
    
    
    Total stockholders equity
    
    
    69,224,824
    
    
    
    39,133,754$
    359,652,874
    
    
    $
    343,468,476
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
 Three Months Ended September 30,2005
    
    
    2004Interest incomeInterest and fees on loans
    
    $
    4,217,212
    
    
    $
    3,795,155Interest on taxable securities
    
    
    644,093
    
    
    
    469,274Interest on nontaxable securities
    
    
    56,749
    
    
    
    89,148Interest on federal funds sold
    
    
    63,261
    
    
    
    17,893Interest on deposits in other banks
    
    
    13,397
    
    
    
    3,7034,994,712
    
    
    
    4,375,173Interest expenseInterest on deposits
    
    
    1,002,725
    
    
    
    777,301Interest on other borrowings
    
    
    473,603
    
    
    
    401,7161,476,328
    
    
    
    1,179,017Net interest income
    
    
    3,518,384
    
    
    
    3,196,156Provision for loan losses
    
    
    250,000
    
    
    
    50,000Net interest income after provision for
loan losses
    
    
    3,268,384
    
    
    
    3,146,156Noninterest incomeService charges on deposit accounts
    
    
    859,058
    
    
    
    859,910Other service charges, commissions and fees
    
    
    121,330
    
    
    
    196,829Brokerage fees
    
    
    172,470
    
    
    
    148,415Mortgage origination fees
    
    
    122,927
    
    
    
    83,889Bank owned life insurance
    
    
    76,126
    
    
    
    77,509Loss on sale of securities
    
    
    0
    
    
    
    36,644Other
    
    
    38,846
    
    
    
    29,5021,390,755
    
    
    
    1,432,698Noninterest expenseSalaries and employee benefits
    
    
    1,814,602
    
    
    
    1,667,458Equipment
    
    
    335,283
    
    
    
    409,626Occupancy
    
    
    267,327
    
    
    
    250,210Advertising and marketing
    
    
    48,666
    
    
    
    71,155Legal and accounting
    
    
    93,783
    
    
    
    159,700Directors fees and retirement
    
    
    73,644
    
    
    
    116,000Telephone
    
    
    63,509
    
    
    
    78,520Supplies
    
    
    61,398
    
    
    
    46,332Data processing fees
    
    
    161,161
    
    
    
    93,425Other operating
    
    
    281,196
    
    
    
    398,5093,200,569
    
    
    
    3,290,935Income before income taxes
    
    
    1,458,570
    
    
    
    1,287,924Applicable income taxes
    
    
    466,573
    
    
    
    419,205Net income
    
    $
    991,997
    
    
    $
    868,719Basic earnings per share
    
    $
    .09
    
    
    $
    0.11Diluted earnings per share
    
    $
    .09
    
    
    $
    0.11
 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 SEPTEMBER 30, 2005 AND 2004
(Unaudited)
 Three Months Ended September 30,2005
    
    
    2004Net income
    
    $
    991,997
    
    
    $
    868,719Other comprehensive income (loss):Net unrealized holding gains (losses) arising during period,
net of tax benefits of $(141,420) and $(679,647)
    
    
    (212,130
    )
    
    
    1,019,470Reclassification adjustment for (gains) losses included in net
income, net of tax of (-) and $14,658
    
    
    0
    
    
    
    (21,986
    )Total other comprehensive gain (loss)
    
    
    (212,130
    )
    
    
    997,484Comprehensive income
    
    $
    779,867
    
    
    $
    1,866,203
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004Interest incomeInterest and fees on loans
    
    $
    11,888,545
    
    
    $
    11,597,089Interest on taxable securities
    
    
    1,799,412
    
    
    
    1,427,376Interest on nontaxable securities
    
    
    217,724
    
    
    
    258,705Interest on federal funds sold
    
    
    206,503
    
    
    
    48,082Interest on deposits in other banks
    
    
    29,186
    
    
    
    4,52014,141,370
    
    
    
    13,335,772Interest expenseInterest on deposits
    
    
    2,963,269
    
    
    
    2,396,701Interest on other borrowings
    
    
    1,395,502
    
    
    
    1,168,4314,358,771
    
    
    
    3,565,132Net interest income
    
    
    9,782,599
    
    
    
    9,770,640Provision for loan losses
    
    
    714,555
    
    
    
    50,000Net interest income after provision for
loan losses
    
    
    9,068,044
    
    
    
    9,720,640Noninterest incomeService charges on deposit accounts
    
    
    2,331,651
    
    
    
    2,394,616Other service charges, commissions and fees
    
    
    559,870
    
    
    
    520,131Brokerage fees
    
    
    453,194
    
    
    
    449,500Mortgage origination fees
    
    
    299,001
    
    
    
    220,221Bank owned life insurance
    
    
    221,886
    
    
    
    229,865Gain (loss) on sale of securities
    
    
    (4,653
    )
    
    
    106,776Other
    
    
    203,152
    
    
    
    131,5284,064,100
    
    
    
    4,052,732Noninterest expenseSalaries and employee benefits
    
    
    5,242,745
    
    
    
    5,031,243Equipment
    
    
    1,247,486
    
    
    
    1,154,858Occupancy
    
    
    738,985
    
    
    
    704,496Advertising and marketing
    
    
    182,488
    
    
    
    195,255Legal and accounting
    
    
    290,181
    
    
    
    372,585Directors fees and retirement
    
    
    218,332
    
    
    
    322,100Telephone
    
    
    187,171
    
    
    
    250,926Supplies
    
    
    173,687
    
    
    
    172,235Data processing fees
    
    
    353,761
    
    
    
    262,134Other operating
    
    
    958,728
    
    
    
    1,261,7999,593,564
    
    
    
    9,727,631Income before income taxes
    
    
    3,538,581
    
    
    
    4,045,761Applicable income taxes
    
    
    1,149,191
    
    
    
    1,352,662Net income
    
    $
    2,389,390
    
    
    $
    2,693,099Basic earnings per share
    
    $
    .27
    
    
    $
    .34Diluted earnings per share
    
    $
    .27
    
    
    $
    .34
 See Notes to Consolidated Financial Statements.
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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004Net income
    
    $
    2,389,391
    
    
    $
    2,693,099Other comprehensive income (loss):Net unrealized holding losses arising during period,
net of tax benefits of $(256,728) and $$66,778
    
    
    (398,592
    )
    
    
    (100,167
    )Reclassification adjustment for (gains) losses included in net
income, net of tax benefits of $(1,861) and $(42,710)
    
    
    2,792
    
    
    
    (64,066
    )Total other comprehensive loss
    
    
    (395,800
    )
    
    
    (164,233
    )Comprehensive income
    
    $
    1,993,590
    
    
    $
    2,528,866
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    2,389,390
    
    
    $
    2,693,099Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    982,354
    
    
    
    918,920Provision for loan losses
    
    
    714,555
    
    
    
    50,000Provision for deferred taxes
    
    
    (325,139
    )
    
    
    (326,941
    )Net (gains) losses on sale of securities available for sale
    
    
    4,653
    
    
    
    (106,776
    )Net losses on sale or disposal of premises and equipment
    
    
    
    
    
    
    18,684Net decrease in foreclosed assets
    
    
    81,118
    
    
    
    354,886Increase in bank owned life insurance
    
    
    (221,885
    )
    
    
    (229,965
    )(Increase) decrease in interest receivable
    
    
    (96,811
    )
    
    
    199,620Increase (decrease) in interest payable
    
    
    (2,095
    )
    
    
    32,010Increase (decrease) in taxes payable
    
    
    473,284
    
    
    
    263,869Net other operating activities
    
    
    707,259
    
    
    
    1,809,790Total adjustments
    
    
    2,317,293
    
    
    
    2,984,097Net cash provided by operating activities
    
    
    4,706,683
    
    
    
    5,677,196INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    (864,330
    )
    
    
    (4,581,846Purchases of securities available for sale
    
    
    (31,079,327
    )
    
    
    (19,641,888
    )Proceeds from maturities of securities available for sale
    
    
    22,066,425
    
    
    
    8,877,771Proceeds from sale of securities available for sale
    
    
    2,874,694
    
    
    
    10,732,123Redemption (Purchase) of Restricted Equity Securities
    
    
    809,135
    
    
    
    (250,000
    )(Increase) decrease in federal funds sold
    
    
    3,995,000
    )
    
    
    (6,206,000
    )(Increase) decrease in loans, net
    
    
    (12,327,910
    )
    
    
    5,745,432Purchase of premises and equipment
    
    
    (275,916
    )
    
    
    (482,957
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    90,200Proceeds from sale of premises and equipment held for sale
    
    
    
    
    
    
    736,587Net cash provided by (used in) investing activities
    
    
    (14,802,229
    )
    
    
    (4,980,576
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    (9,014,997
    )
    
    
    (5,702,265
    )Proceeds from other borrowings
    
    
    550,000
    
    
    
    5,000,000Repayment of other borrowings
    
    
    (6,550,000
    )
    
    
    Issuance of common stock, net
    
    
    32,504,480
    
    
    
    Leverage ESOP
    
    
    (4,407,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    12,867,101
    
    
    
    (702,265
    )Net increase
(decrease) in cash and due from banks
    
    
    2,771,555
    
    
    
    (5,645
    )Cash and due from banks at beginning of year
    
    
    6,621,232
    
    
    
    6,439,038Cash and due from banks at end of year
    
    $
    9,392,787
    
    
    $
    6,433,393
 See Notes to Consolidated Financial Statements.
 8




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedUnearned
    
    
    OtherCommon Stock
    
    
    Paidin
    
    
    Retained
    
    
    ESOP
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2003
    
    
    1,000
    
    
    $
    10
    
    
    $
    4,799,990
    
    
    $
    32,402,450
    
    
    
    
    
    
    $
    (215,169
    )
    
    $
    36,987,281Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,693,099
    
    
    
    
    
    
    
    
    
    
    
    2,694,099Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (164,233
    )
    
    
    (164,233
    )Balance, September 30, 2004
    
    
    1,000
    
    
    
    10
    
    
    
    4,799,990
    
    
    
    34,226,830
    
    
    
    
    
    
    
    (379,402
    )
    
    
    39,517,147Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    840,151
    
    
    
    
    
    
    
    
    
    
    
    840,151Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,222,544
    
    
    
    (1,222,544
    )Balance, December 31, 2004
    
    
    1,000
    
    
    
    10
    
    
    
    4,799,990
    
    
    
    35,935,700
    
    
    
    
    
    
    
    (1,601,946
    )
    
    
    39,133,754Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389,390
    
    
    
    
    
    
    
    
    
    
    
    2,389,390Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (395,800
    )
    
    
    (395,800
    )Issuance of common stock, net
    
    
    11,240,250
    
    
    
    112,403
    
    
    
    32,392,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,504,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,407,000
    )
    
    
    
    
    
    
    (4,407,000
    )Balance,
September 30, 2005
    
    
    11,241,250
    
    
    $
    112,413
    
    
    $
    37,192,067
    
    
    $
    38,325,090
    
    
    $
    (4,407,000
    )
    
    $
    (1,997,746
    )
    
    $
    69,224,824
 9




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HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
    NOTE 2  EARNINGS PER SHARE
   10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Forward-Looking Statements.
 Critical Accounting Policies. .
 Off Balance Sheet Liabilities.
 (InThousands)Commitments to extend credit
    
    $
    26,371Financial stand-by letters of credit
    
    
    1,166$
    27,537
 Overview
  11




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Comparison of Financial Condition at September 30, 2005 and December 31, 2004
       12




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Comparison of Operating Results for the Three Months Ended September 30, 2005 and 2004
 General
 Interest Income
 Interest Expense
 Net Interest Income
 Provision for Loan Losses
  13




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##### Table of Contents



Noninterest Income
 Noninterest
Expense
 Income
Tax Expense
 Comparison of Operating Results for the Nine Months Ended September 30, 2005 and 2004
 General.
 Interest Income.
 14




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Interest Expense.
 Net Interest Income.
 Provision for Loan Losses.
 Noninterest
Income.
 Noninterest
Expense.
 Income Tax Expense.
 Liquidity and Capital Resources
   15




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Regulatory Capital Ratios for HeritageBank of the South at September 30, 2005
 Minimum Required toBe Well CapitalizedUnder PromptMinimum Capital
    
    Corrective ActionActual
    
    Requirements
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Leverage requirement (Tier 1)(1)  FDIC
    
    $
    53,142
    
    
    
    15.34
    %
    
    $
    13,856
    
    
    
    4.00
    %
    
    $
    17,319
    
    
    
    5.00
    %Leverage requirement (Tier 1)(1)  Georgia
    
    
    53,142
    
    
    
    15.34
    
    
    
    15,587
    
    
    
    4.50
    
    
    
    n/a
    
    
    
    n/aRisk-based requirement (Tier 1)(2)
    
    
    53,142
    
    
    
    19.84
    
    
    
    10,716
    
    
    
    4.00
    
    
    
    16,074
    
    
    
    6.00Risk-based requirement (Total 1)(2)
    
    
    56,492
    
    
    
    21.09
    
    
    
    21,431
    
    
    
    8.00
    
    
    
    26,789
    
    
    
    10.00
 
 (1)
    
    Based on adjusted quarterly average assets of $346.4 million for HeritageBank of
the South.(2)
    
    Based on adjusted risk-weighted average assets of $267.9 million for HeritageBank of
the South. 16




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
     17




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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
 Regulation
    
    
    
    
    
    
    
    Reference toSB
    
    
    
    
    
    
    
    Prior FilingExhibit
    
    
    
    
    
    
    
    or Exhibit NumberNumber
    
    Document
    
    
    
    
    
    Attached Hereto2
    
    Stock Issuance Plan
    
    
    **3(i)
    
    Charter of Heritage Financial Group
    
    
    *3(ii)
    
    Bylaws of Heritage Financial Group
    
    
    *4
    
    Stock Certificate
    
    
    *10.1
    
    Employment Agreements:(a)
    
    (i)
    
    O. Leonard Dorminey  Holding Company
    
    
    **(ii)
    
    O. Leonard Dorminey  Bank
    
    
    **(b)
    
    (i)
    
    Tammy W. Burdette  Holding Company
    
    
    **(ii)
    
    Tammy W. Burdette  Bank
    
    
    **(c)
    
    
    
    Carol W. Slappey
    
    
    **14
    
    Code of Conduct and Ethics
    
    
    ***21
    
    Subsidiaries of the Registrant
    
    
    *31.1
    
    Rule 13a14(a) Certification of Chief Executive Officer
    
    
    31.131.2
    
    Rule 13a14(a) Certification of Chief Financial Officer
    
    
    31.232
    
    Section 1350 Certification
    
    
    32
 
 *
    
    Filed as an exhibit to the Companys Form SB2 registration statement filed on March 25, 2005 (File No.333123581) pursuant to
Section 5 of the Securities Act of 1933.**
    
    Filed as an exhibit to Pre-effective Amendment No. 1 to the Companys Form SB2 registration statement filed on May 6, 2005 (File
No.333123581) pursuant to Section 5 of the Securities Act of 1933.***
    
    Filed as an exhibit to the Form 10-QSB Quarterly report for the quarterly period ended June 30, 2005. 18




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPBy:
    /s/      O. Leonard DormineyDate: November  14, 2005
    
    O. Leonard DormineyPresident and Chief Executive Officer By:
    /s/ Tammy W. BurdetteDate:November 14, 2005
    
    Tammy W. BurdetteExecutive Vice-President and
Chief Financial Officer 19