##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission File Number: 000-51305
 HERITAGE FINANCIAL GROUP
  United States
    
    45-0479535(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)310 W. Oglethorpe Boulevard, Albany, Georgia
    
    31701(Address of principal executive offices)
    
    (Zip Code)
 (229) 883-5701
  Securities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, par value $0.01 per share(Title of Class)
 o
 þ o
 o
 o þ
 
   DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6.Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and ManagementItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESIndex to ExhibitsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2005 AND 2004CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004NOTES TO CONSOLIDATED FINANCIAL STATEMENTSEX-3.1 CHARTER OF HERITAGE FINANCIAL GROUPEX-10.9  NAMED EXECUTIVE OFFICER SALARIES AND BONUS PAYMENTSEX-10.10 CURRENT DIRECTOR FEE ARRANGEMENTSEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF ACCOUNTANTSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO & CFO    Table of Contents  
 PART I
 
 Item 1. Description of Business
 General
      Forward Looking Statements
  2




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
    
    further developments in the Companys ongoing review of and efforts
to resolve any problem credit relationships described in this report, which could
result in, among other things, further downgrades of aforementioned loans,
additional provisions to the loan loss reserve and the incurrence of other
material non-cash and cash charges;
    
    the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;
    
    the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
    
    inflation, interest rate, market and monetary fluctuations;
    
    the timely development of and acceptance of our new products and
services and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors products and
services;
    
    the willingness of users to substitute our products and services
for products and services of our competitors;
    
    the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
    
    the impact of technological changes;
    
    acquisitions;
    
    changes in consumer spending and saving habits; and
    
    our success at managing the risks involved in the foregoing.
  Market Area
    Market Area Expansion
  3




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##### Table of Contents



Competition
   Internet Website
  Selected Consolidated Financial Information
 At December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands)Selected Financial Condition Data:Total assets
    
    $
    363,797
    
    
    $
    343,468
    
    
    $
    335,668
    
    
    $
    310,902
    
    
    $
    293,218Loans, net
    
    
    250,493
    
    
    
    235,275
    
    
    
    240,794
    
    
    
    227,490
    
    
    
    229,448Securities available for sale, at fair value:U.S. government and agency securities
    
    
    14,044
    
    
    
    11,528
    
    
    
    8,960
    
    
    
    4,983
    
    
    
    6,581Corporate debt securities
    
    
    3,786
    
    
    
    4,364
    
    
    
    2,965
    
    
    
    3,617
    
    
    
    Mortgage-backed securities
    
    
    31,098
    
    
    
    26,478
    
    
    
    24,481
    
    
    
    16,922
    
    
    
    15,121State, county and municipal
    
    
    6,869
    
    
    
    8,874
    
    
    
    7,210
    
    
    
    7,118
    
    
    
    6,792Equity and other investments
    
    
    9,069
    
    
    
    8,044
    
    
    
    7,896
    
    
    
    2,994
    
    
    
    Federal Home Loan Bank stock, at cost
    
    
    2,927
    
    
    
    2,957
    
    
    
    2,000
    
    
    
    1,750
    
    
    
    1,282Deposits
    
    
    238,640
    
    
    
    248,543
    
    
    
    255,321
    
    
    
    237,294
    
    
    
    215,786Federal Home Loan Bank advances
and other borrowings
    
    
    50,000
    
    
    
    51,000
    
    
    
    40,000
    
    
    
    35,000
    
    
    
    42,890Total equity
    
    
    68,983
    
    
    
    39,134
    
    
    
    36,987
    
    
    
    34,288
    
    
    
    33,072
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For the Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Selected Operations Data:Total interest income
    
    $
    19,243
    
    
    $
    17,780
    
    
    $
    18,720
    
    
    $
    19,591
    
    
    $
    20,842Total interest expense
    
    
    5,935
    
    
    
    4,898
    
    
    
    5,853
    
    
    
    6,756
    
    
    
    9,200Net interest income
    
    
    13,308
    
    
    
    12,882
    
    
    
    12,867
    
    
    
    12,835
    
    
    
    11,642Provision for loan losses
    
    
    1,014
    
    
    
    200
    
    
    
    650
    
    
    
    2,750
    
    
    
    4,362Net interest income after provision for loan losses
    
    
    12,294
    
    
    
    12,682
    
    
    
    12,217
    
    
    
    10,085
    
    
    
    7,280Fees and service charges
    
    
    3,836
    
    
    
    3,932
    
    
    
    2,969
    
    
    
    2,603
    
    
    
    2,555Gain (loss) on sales of investment securities
    
    
    (5
    )
    
    
    139
    
    
    
    403
    
    
    
    1,649
    
    
    
    (11
    )Other noninterest income
    
    
    1,504
    
    
    
    1,384
    
    
    
    1,589
    
    
    
    1,003
    
    
    
    907Total noninterest income
    
    
    5,335
    
    
    
    5,455
    
    
    
    4,961
    
    
    
    5,255
    
    
    
    3,451Total noninterest expense
    
    
    13,584
    
    
    
    13,054
    
    
    
    13,849
    
    
    
    12,932
    
    
    
    12,169Income (loss) before taxes and extraordinary items
    
    
    4,045
    
    
    
    5,083
    
    
    
    3,329
    
    
    
    2,407
    
    
    
    (1,438
    )Income tax provision (benefit)
    
    
    1,095
    
    
    
    1,550
    
    
    
    1,053
    
    
    
    839
    
    
    
    (1)(1,164
    )Net income (loss)
    
    $
    2,950
    
    
    $
    3,533
    
    
    $
    2,276
    
    
    $
    1,568
    
    
    $
    (274
    )
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##### Table of Contents



Year Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Selected Financial Ratios and Other Data:Performance Ratios:Return on assets (ratio of net income to average total assets)
    
    
    0.83
    %
    
    
    1.04
    %
    
    
    0.70
    %
    
    
    0.52
    %
    
    
    (0.10
    )%Return on equity (ratio of net income to average equity)
    
    
    5.18
    %
    
    
    9.28
    %
    
    
    6.39
    %
    
    
    4.66
    %
    
    
    (0.82
    )% (1)Return on assets, net of tax
    
    
    0.83
    %
    
    
    1.04
    %
    
    
    0.70
    %
    
    
    0.52
    %
    
    
    (0.35
    )% (1)Return on equity, net of tax
    
    
    5.18
    %
    
    
    9.28
    %
    
    
    6.39
    %
    
    
    4.66
    %
    
    
    (2.94
    )%Dividend payout ratio
    
    
    16.13
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest Rate Spread Information:Average during period
    
    
    3.86
    %
    
    
    4.08
    %
    
    
    4.14
    %
    
    
    4.57
    %
    
    
    4.45
    %End of period
    
    
    3.97
    %
    
    
    3.92
    %
    
    
    4.24
    %
    
    
    4.60
    %
    
    
    4.19
    %Net interest margin(2)
    
    
    4.15
    %
    
    
    4.24
    %
    
    
    4.31
    %
    
    
    4.71
    %
    
    
    4.35
    %Operating expense to average total assets
    
    
    3.81
    %
    
    
    3.84
    %
    
    
    4.28
    %
    
    
    4.28
    %
    
    
    4.33
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    115.95
    %
    
    
    110.10
    %
    
    
    108.63
    %
    
    
    109.00
    %
    
    
    104.55
    %Efficiency ratio(3)
    
    
    72.86
    %
    
    
    71.19
    %
    
    
    77.68
    %
    
    
    71.49
    %
    
    
    80.63
    %Asset Quality Ratios:Nonperforming assets to total assets at end of period
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %
    
    
    0.44
    %
    
    
    1.51
    %Nonperforming loans to total loans
    
    
    0.33
    %
    
    
    0.24
    %
    
    
    0.19
    %
    
    
    0.37
    %
    
    
    1.22
    %Allowance for loan losses to nonperforming loans
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %
    
    
    402.00
    %
    
    
    82.81
    %Allowance for loans losses to net loans
    
    
    1.44
    %
    
    
    1.24
    %
    
    
    1.43
    %
    
    
    1.48
    %
    
    
    1.01
    %Net charge offs to average loans outstanding
    
    
    0.15
    %
    
    
    0.30
    %
    
    
    0.24
    %
    
    
    0.71
    %
    
    
    1.94
    %Capital Ratios:Equity to total assets at end of period
    
    
    18.96
    %
    
    
    11.39
    %
    
    
    11.02
    %
    
    
    11.03
    %
    
    
    11.28
    %Average equity to average assets
    
    
    15.98
    %
    
    
    11.21
    %
    
    
    11.02
    %
    
    
    11.15
    %
    
    
    11.86
    %Other Data:Number of full-service offices
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    8
    
    
    
    8
 
 (1)
    
    The Bank was a federal credit union prior to June 2001 and was exempt from federal
and state income tax. Had the Bank been subject to federal and state income taxes for the
full fiscal year ended December 31, 2001, income tax expense (benefit), assuming an effective
tax rate of 32.0%, would have been $(460,000) and net income (loss) would have been
$(978,000).(2)
    
    Net interest income divided by average interest-earning assets.(3)
    
    Total noninterest expense as a percentage of net interest income plus non-interest
income. 6




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Lending Activities
  December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real EstateOne- to four-family
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    74,324
    
    
    
    31.20
    %
    
    $
    77,342
    
    
    
    31.66
    %
    
    $
    61,389
    
    
    
    26.59
    %
    
    $
    74,910
    
    
    
    32.32
    %Multi-family
    
    
    15,918
    
    
    
    6.26
    
    
    
    17,049
    
    
    
    7.16
    
    
    
    17,013
    
    
    
    6.96
    
    
    
    17,483
    
    
    
    7.57
    
    
    
    11,850
    
    
    
    5.11Commercial
    
    
    37,985
    
    
    
    14.95
    
    
    
    38,581
    
    
    
    16.19
    
    
    
    42,112
    
    
    
    17.24
    
    
    
    44,908
    
    
    
    19.45
    
    
    
    25,187
    
    
    
    10.87Construction and
development
    
    
    16,505
    
    
    
    6.50
    
    
    
    8,248
    
    
    
    3.46
    
    
    
    11,382
    
    
    
    4.66
    
    
    
    11,489
    
    
    
    4.98
    
    
    
    11,861
    
    
    
    5.12Total real estate loans
    
    
    144,529
    
    
    
    56.88
    
    
    
    138,202
    
    
    
    58.01
    
    
    
    147,849
    
    
    
    60.52
    
    
    
    135,269
    
    
    
    58.58
    
    
    
    123,808
    
    
    
    53.41Other loansConsumer loans:Student
    
    
    1,110
    
    
    
    0.44
    
    
    
    1,190
    
    
    
    0.50
    
    
    
    1,307
    
    
    
    0.54
    
    
    
    1,721
    
    
    
    0.75
    
    
    
    1,899
    
    
    
    0.82Automobile
    
    
    50,137
    
    
    
    19.73
    
    
    
    47,455
    
    
    
    19.92
    
    
    
    44,280
    
    
    
    18.13
    
    
    
    51,057
    
    
    
    22.11
    
    
    
    59,699
    
    
    
    25.76Home equity
    
    
    15,591
    
    
    
    6.14
    
    
    
    13,837
    
    
    
    5.81
    
    
    
    12,807
    
    
    
    5.24
    
    
    
    12,420
    
    
    
    5.38
    
    
    
    11,739
    
    
    
    5.06Other
    
    
    9,058
    
    
    
    3.56
    
    
    
    9,212
    
    
    
    3.87
    
    
    
    9,534
    
    
    
    3.90
    
    
    
    10,932
    
    
    
    4.73
    
    
    
    20,913
    
    
    
    9.02Total consumer loans
    
    
    75,896
    
    
    
    29.87
    
    
    
    71,694
    
    
    
    30.09
    
    
    
    67,928
    
    
    
    27.81
    
    
    
    76,130
    
    
    
    32.96
    
    
    
    94,250
    
    
    
    40.66Commercial business
loans
    
    
    33,686
    
    
    
    13.26
    
    
    
    28,346
    
    
    
    11.90
    
    
    
    28,520
    
    
    
    11.67
    
    
    
    19,504
    
    
    
    8.45
    
    
    
    13,736
    
    
    
    5.93Total other loans
    
    
    109,582
    
    
    
    43.12
    
    
    
    100,040
    
    
    
    41.99
    
    
    
    96,448
    
    
    
    39.48
    
    
    
    95,634
    
    
    
    41.42
    
    
    
    107,986
    
    
    
    46.59Total loans
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %
    
    
    244,297
    
    
    
    100.00
    %
    
    
    230,903
    
    
    
    100.00
    %
    
    
    231,794
    
    
    
    100.00
    %Less allowance for
loan losses
    
    
    3,618
    
    
    
    
    
    
    
    2,965
    
    
    
    
    
    
    
    3,503
    
    
    
    
    
    
    
    3,413
    
    
    
    
    
    
    
    2,346$
    250,493
    
    
    
    
    
    
    $
    235,275
    
    
    
    
    
    
    $
    240,794
    
    
    
    
    
    
    $
    227,490
    
    
    
    
    
    
    $
    229,448
 7




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Fixed Rate Loans:Real EstateOne- to four-family
    
    $
    69,928
    
    
    
    27.52
    %
    
    $
    71,373
    
    
    
    29.96
    %
    
    $
    74,784
    
    
    
    30.61
    %Multi-family
    
    
    15,113
    
    
    
    5.95
    
    
    
    16,385
    
    
    
    6.88
    
    
    
    15,885
    
    
    
    6.50Commercial
    
    
    26,293
    
    
    
    10.35
    
    
    
    33,562
    
    
    
    14.09
    
    
    
    34,888
    
    
    
    14.28Construction and development
    
    
    8,299
    
    
    
    3.27
    
    
    
    3,687
    
    
    
    1.55
    
    
    
    4,293
    
    
    
    1.76Total real estate loans
    
    
    119,633
    
    
    
    47.08
    
    
    
    125,007
    
    
    
    52.48
    
    
    
    129,850
    
    
    
    53.15Consumer
    
    
    55,970
    
    
    
    22.02
    
    
    
    53,908
    
    
    
    22.63
    
    
    
    51,827
    
    
    
    21.21Commercial business
    
    
    12,098
    
    
    
    4.76
    
    
    
    9,073
    
    
    
    3.81
    
    
    
    6,497
    
    
    
    2.66Total fixed-rate loans
    
    
    187,701
    
    
    
    73.86
    
    
    
    187,988
    
    
    
    78.90
    
    
    
    188,174
    
    
    
    77.02Adjustable Rate Loans:Real EstateOne- to four-family
    
    
    4,193
    
    
    
    1.65
    
    
    
    2,951
    
    
    
    1.24
    
    
    
    2,558
    
    
    
    1.05Multi-family
    
    
    805
    
    
    
    0.32
    
    
    
    664
    
    
    
    0.28
    
    
    
    1,128
    
    
    
    0.46Commercial
    
    
    11,692
    
    
    
    4.60
    
    
    
    5,018
    
    
    
    2.11
    
    
    
    7,223
    
    
    
    2.96Construction and development
    
    
    8,206
    
    
    
    3.23
    
    
    
    4,562
    
    
    
    1.91
    
    
    
    7,089
    
    
    
    2.90Total real estate loans
    
    
    24,896
    
    
    
    9.80
    
    
    
    13,195
    
    
    
    5.54
    
    
    
    17,998
    
    
    
    7.37Consumer
    
    
    19,926
    
    
    
    7.84
    
    
    
    17,785
    
    
    
    7.47
    
    
    
    16,101
    
    
    
    6.59Commercial business
    
    
    21,588
    
    
    
    8.50
    
    
    
    19,272
    
    
    
    8.09
    
    
    
    22,024
    
    
    
    9.02Total adjustable rate loans
    
    
    66,410
    
    
    
    26.14
    
    
    
    50,252
    
    
    
    21.10
    
    
    
    56,123
    
    
    
    22.98Total loans
    
    
    254,111
    
    
    
    100.00
    %
    
    
    238,240
    
    
    
    100.00
    %
    
    
    244,297
    
    
    
    100.00
    %Less allowance for loan losses
    
    
    3,618
    
    
    
    
    
    
    
    2,965
    
    
    
    
    
    
    
    3,503Total loans, net
    
    $
    250,493
    
    
    
    
    
    
    $
    235,275
    
    
    
    
    
    
    $
    240,794
 8




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##### Table of Contents



Real EstateMulti-Family andOne-to-Four Family
    
    
    Commercial
    
    
    Construction
    
    
    Consumer
    
    
    Commercial Business
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedDue During Years Ending
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    

    AverageDecember 31,(1)
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)Anytime
    
    $
    419
    
    
    
    6.62
    %
    
    $
    1,983
    
    
    
    6.34
    %
    
    $
    652
    
    
    
    6.06
    %
    
    $
    664
    
    
    
    14.61
    %
    
    $
    125
    
    
    
    7.65
    %
    
    $
    3,843
    
    
    
    7.79
    %2006
    
    
    6,941
    
    
    
    7.18
    
    
    
    14,006
    
    
    
    7.03
    
    
    
    11,114
    
    
    
    7.47
    
    
    
    4,143
    
    
    
    8.60
    
    
    
    14,891
    
    
    
    7.65
    
    
    
    51,095
    
    
    
    7.452007
    
    
    3,982
    
    
    
    6.47
    
    
    
    14,093
    
    
    
    6.33
    
    
    
    1,099
    
    
    
    6.23
    
    
    
    6,256
    
    
    
    8.96
    
    
    
    1,071
    
    
    
    6.98
    
    
    
    26,501
    
    
    
    6.992008 and
2009
    
    
    10,748
    
    
    
    6.74
    
    
    
    22,504
    
    
    
    6.52
    
    
    
    2,664
    
    
    
    6.85
    
    
    
    22,143
    
    
    
    7.24
    
    
    
    12,419
    
    
    
    6.93
    
    
    
    70,478
    
    
    
    6.862010 and
2011
    
    
    4,811
    
    
    
    7.06
    
    
    
    900
    
    
    
    6.56
    
    
    
    209
    
    
    
    8.17
    
    
    
    27,170
    
    
    
    6.65
    
    
    
    3,428
    
    
    
    7.56
    
    
    
    36,518
    
    
    
    6.802012 to
2026
    
    
    30,717
    
    
    
    6.22
    
    
    
    417
    
    
    
    6.98
    
    
    
    767
    
    
    
    7.78
    
    
    
    15,520
    
    
    
    8.05
    
    
    
    1,752
    
    
    
    7.25
    
    
    
    49,173
    
    
    
    6.872027 and
following
    
    
    16,503
    
    
    
    5.62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,503
    
    
    
    5.62Total
    
    $
    74,121
    
    
    
    
    
    
    $
    53,903
    
    
    
    
    
    
    $
    16,505
    
    
    
    
    
    
    $
    75,896
    
    
    
    
    
    
    $
    33,686
    
    
    
    
    
    
    $
    254,111
 
 (1)
    
    The total amount of loans due after December 31, 2006 which have predetermined
interest rates is $165 million, while the total amount of loans due after such dates which
have floating or adjustable interest rates is $34 million.(2)
    
    Includes demand loans, loans having no stated maturity and overdraft loans. 9




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##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Commercial Business Lending
   Consumer Lending
     12




---



##### Table of Contents



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




---



##### Table of Contents



Delinquent Loans.
 Loans Delinquent For:60-90 Days
    
    90 Days and Over
    
    Total Delinquent LoansPercent
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    Percentof Loan
    
    
    
    
    
    
    
    
    
    of Loan
    
    
    
    
    
    
    
    
    
    of LoanNumber
    
    Amount
    
    Category
    
    Number
    
    Amount
    
    Category
    
    Number
    
    Amount
    
    Category(Dollars in ThousandsReal Estate:One- to four-family
    
    
    2
    
    
    $
    112
    
    
    
    0.15
    %
    
    
    1
    
    
    $
    98
    
    
    
    0.13
    %
    
    
    3
    
    
    $
    210
    
    
    
    0.28
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    198
    
    
    
    0.52
    
    
    
    1
    
    
    
    198
    
    
    
    0.52Construction and
development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    11
    
    
    
    88
    
    
    
    0.12
    
    
    
    24
    
    
    
    198
    
    
    
    0.26
    
    
    
    35
    
    
    
    286
    
    
    
    0.38Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    13
    
    
    $
    200
    
    
    
    0.08
    %
    
    
    26
    
    
    $
    494
    
    
    
    0.19
    %
    
    
    39
    
    
    $
    694
    
    
    
    0.27
    %
 Non-performing Assets.
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in Thousands)Nonaccruing Loans:One- to four-family
    
    $
    102
    
    
    $
    62
    
    
    $
    130
    
    
    $
    182
    
    
    $
    363Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    241
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711Consumer
    
    
    524
    
    
    
    301
    
    
    
    334
    
    
    
    483
    
    
    
    746Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    13Total
    
    
    867
    
    
    
    564
    
    
    
    464
    
    
    
    849
    
    
    
    2,833Foreclosed Assets:One- to four-family
    
    
    44
    
    
    
    127
    
    
    
    337
    
    
    
    370
    
    
    
    273Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,244Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    15
    
    
    
    74
    
    
    
    85
    
    
    
    151
    
    
    
    80Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    59
    
    
    
    201
    
    
    
    422
    
    
    
    521
    
    
    
    1,597Total nonperforming assets
    
    $
    926
    
    
    $
    765
    
    
    $
    886
    
    
    $
    1,370
    
    
    $
    4,430Total as a percentage of total assets
    
    
    0.25
    %
    
    
    0.22
    %
    
    
    0.26
    %
    
    
    0.44
    %
    
    
    1.51
    %
 14




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##### Table of Contents



Other Loans of Concern.
  Classified Assets.
   15




---



##### Table of Contents



Provision for Loan Losses Item 6. Managements Discussion and Analysis of Financial Condition and Results
of Operation.
 Allowance for Loan Losses
  16




---



##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in Thousands)Balance at beginning of period
    
    $
    2,965
    
    
    $
    3,503
    
    
    $
    3,413
    
    
    $
    2,346
    
    
    $
    2,356Charge-offs:One- to four-family
    
    
    27
    
    
    
    60
    
    
    
    62
    
    
    
    141
    
    
    
    81Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    2,690Commercial real estate
    
    
    
    
    
    
    369
    
    
    
    
    
    
    
    25
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    Consumer
    
    
    567
    
    
    
    557
    
    
    
    710
    
    
    
    1,352
    
    
    
    1,162Commercial business
    
    
    
    
    
    
    4
    
    
    
    182
    
    
    
    264
    
    
    
    664594
    
    
    
    990
    
    
    
    954
    
    
    
    2,026
    
    
    
    4,597Recoveries:One- to four-family
    
    
    8
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    Consumer
    
    
    224
    
    
    
    247
    
    
    
    291
    
    
    
    293
    
    
    
    225Commercial business
    
    
    
    
    
    
    4
    
    
    
    98
    
    
    
    
    
    
    
    232
    
    
    
    252
    
    
    
    394
    
    
    
    343
    
    
    
    225Net charge-offs
    
    
    362
    
    
    
    738
    
    
    
    560
    
    
    
    1,683
    
    
    
    4,372Additions charged to operations
    
    
    1,015
    
    
    
    200
    
    
    
    650
    
    
    
    2,750
    
    
    
    4,362Balance at end of period
    
    $
    3,618
    
    
    $
    2,965
    
    
    $
    3,503
    
    
    $
    3,413
    
    
    $
    2,346Ratio of net charge-offs during the
period to average loans
outstanding during period
    
    
    0.24
    %
    
    
    0.30
    %
    
    
    0.24
    %
    
    
    0.71
    %
    
    
    1.94
    %Ratio of net charge-offs during the period
to average nonperforming assets
    
    
    43.46
    %
    
    
    96.47
    %
    
    
    63.21
    %
    
    
    122.85
    %
    
    
    98.69
    %Allowance as a percentage of
nonperforming loans
    
    
    473.18
    %
    
    
    525.71
    %
    
    
    754.96
    %
    
    
    402.00
    %
    
    
    93.65
    %Allowance as a percentage of total
loans (end of period)
    
    
    1.42
    %
    
    
    1.24
    %
    
    
    1.43
    %
    
    
    1.48
    %
    
    
    1.01
    %
 17




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percentof Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    
    
    
    
    of LoansLoan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in Each
    
    
    
    
    
    
    Loan
    
    
    in EachAmount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    Category
    
    
    Amount of
    
    
    Amounts
    
    
    CategoryLoan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to Total
    
    
    Loan Loss
    
    
    By
    
    
    to TotalAllowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    Loans
    
    
    Allowance
    
    
    Category
    
    
    LoansSecured by
one-to four-
family
residential
real estate
    
    $
    983
    
    
    $
    74,121
    
    
    
    29.17
    %
    
    $
    378
    
    
    $
    74,324
    
    
    
    31.20
    %
    
    $
    355
    
    
    $
    77,342
    
    
    
    31.66
    %
    
    $
    220
    
    
    $
    61,389
    
    
    
    26.59
    %Secured by
multi-
family
residential
real estate
    
    
    166
    
    
    
    15,918
    
    
    
    6.26
    
    
    
    387
    
    
    
    17,049
    
    
    
    7.16
    
    
    
    313
    
    
    
    17,013
    
    
    
    6.96
    
    
    
    241
    
    
    
    17,483
    
    
    
    7.57Secured by
commercial
real estate
    
    
    711
    
    
    
    37,985
    
    
    
    14.95
    
    
    
    713
    
    
    
    38,851
    
    
    
    16.19
    
    
    
    1,029
    
    
    
    42,112
    
    
    
    17.24
    
    
    
    1,187
    
    
    
    44,908
    
    
    
    19.45Construction
and
development
    
    
    218
    
    
    
    16,505
    
    
    
    6.50
    
    
    
    112
    
    
    
    8,248
    
    
    
    3.46
    
    
    
    251
    
    
    
    11,382
    
    
    
    4.66
    
    
    
    150
    
    
    
    11,489
    
    
    
    4.98Consumer
    
    
    858
    
    
    
    75,896
    
    
    
    29.87
    
    
    
    756
    
    
    
    71,694
    
    
    
    30.09
    
    
    
    850
    
    
    
    67,928
    
    
    
    27.81
    
    
    
    992
    
    
    
    76,130
    
    
    
    32.97Commercial
business
    
    
    682
    
    
    
    33,686
    
    
    
    13.26
    
    
    
    434
    
    
    
    28,346
    
    
    
    11.90
    
    
    
    568
    
    
    
    28,520
    
    
    
    11.67
    
    
    
    450
    
    
    
    19,504
    
    
    
    8.45Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    Total
    
    $
    3,618
    
    
    $
    254,111
    
    
    
    100.00
    %
    
    $
    2,965
    
    
    $
    238,242
    
    
    
    100.00
    %
    
    $
    3,503
    
    
    $
    244,297
    
    
    
    100.00
    %
    
    $
    3,413
    
    
    $
    230,903
    
    
    
    100.00
    %
 Investment Activities
     18




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Carrying
    
    
    % of
    
    
    Carrying
    
    
    % of
    
    
    Carrying
    
    
    % ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in Thousands)Securities available for sale:U. S. government and federal agency securities
    
    $
    14,044
    
    
    
    21.65
    %
    
    $
    11,528
    
    
    
    19.44
    %
    
    $
    8,960
    
    
    
    17.39
    %Corporate debt securities (1)
    
    
    3,786
    
    
    
    5.84
    
    
    
    4,364
    
    
    
    7.36
    
    
    
    2,965
    
    
    
    5.76Mortgage-backed securities
    
    
    31,098
    
    
    
    47.94
    
    
    
    26,478
    
    
    
    44.66
    
    
    
    24,481
    
    
    
    47.52State, county and municipal securities
    
    
    6,869
    
    
    
    10.59
    
    
    
    8,874
    
    
    
    14.97
    
    
    
    7,210
    
    
    
    14.00Equity and other (2)
    
    
    9,069
    
    
    
    13.98
    
    
    
    8,044
    
    
    
    13.57
    
    
    
    7,896
    
    
    
    15.33$
    64,866
    
    
    
    100.00
    %
    
    $
    59,228
    
    
    
    100.00
    %
    
    $
    51,512
    
    
    
    100.00
    %Other earning assets:Interest-bearing deposits with banks
    
    $
    1,387
    
    
    
    12.46
    %
    
    $
    421
    
    
    
    2.60
    %
    
    $
    395
    
    
    
    4.40
    %Federal funds sold
    
    
    6,820
    
    
    
    61.25
    
    
    
    12,783
    
    
    
    79.10
    
    
    
    6,593
    
    
    
    73.35FHLB stock
    
    
    2,927
    
    
    
    26.29
    
    
    
    2,957
    
    
    
    18.30
    
    
    
    2,000
    
    
    
    22.25$
    11,134
    
    
    
    100.00
    %
    
    $
    16,161
    
    
    
    100.00
    %
    
    $
    8,988
    
    
    
    100.00
    %
 
 (1)
    
    Includes $2.0 million in non-rated debt securities issued by United Community Banks,
Inc. in Georgia, $0.9 million in Ford Motor Credit bonds rated Baaa3, $0.8 million in General
Motors bonds rated Ba2 and $0.2 million in Sears Roebuck Acceptance Corp. bonds rated Ba1.(2)
    
    Consists primarily of an investment in a mutual fund that invests in adjustable rate
mortgages. 19




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##### Table of Contents



Less than One Year
    
    
    One to Five Years
    
    
    Over Five to Ten Years
    
    
    Over Ten Years
    
    
    Total SecuritiesWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    FairCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    ValueSecurities Available
for Sale:U.S. government and
agency securities
    
    $
    
    
    
    
    
    %
    
    $
    4,625
    
    
    
    4.00
    %
    
    $
    9,763
    
    
    
    4.83
    %
    
    $
    
    
    
    
    
    %
    
    $
    14,388
    
    
    
    4.54
    %
    
    $
    14,044Corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,265
    
    
    
    6.40
    
    
    
    1,224
    
    
    
    7.28
    
    
    
    4,489
    
    
    
    6.64
    
    
    
    3,786Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    3,111
    
    
    
    3.48
    
    
    
    1,330
    
    
    
    4.57
    
    
    
    27,661
    
    
    
    4.29
    
    
    
    32,102
    
    
    
    4.23
    
    
    
    31,098State, county and
municipal
    
    
    
    
    
    
    
    
    
    
    481
    
    
    
    3.12
    
    
    
    2,933
    
    
    
    3.73
    
    
    
    3,536
    
    
    
    3.87
    
    
    
    6,950
    
    
    
    3.76
    
    
    
    6,869Equity and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,435
    
    
    
    3.69
    
    
    
    9,069Total investment
securities
    
    $
    
    
    
    
    
    %
    
    $
    8,217
    
    
    
    3.75
    %
    
    $
    17,291
    
    
    
    4.90
    %
    
    $
    32,421
    
    
    
    4.36
    %
    
    $
    67,364
    
    
    
    4.33
    %
    
    $
    64,866
 Sources of Funds
 General.
 Deposits .
   20




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest-bearing deposits:Interest-bearing demand deposits and
NOW accounts
    
    $
    46,062
    
    
    
    0.75
    %
    
    $
    50,922
    
    
    
    0.68
    %
    
    $
    44,034
    
    
    
    1.07
    %Savings and money market accounts
    
    
    88,624
    
    
    
    0.91
    
    
    
    87,607
    
    
    
    0.67
    
    
    
    92,014
    
    
    
    1.25Time deposits
    
    
    97,457
    
    
    
    2.96
    
    
    
    96,771
    
    
    
    2.41
    
    
    
    102,572
    
    
    
    2.79Total interest bearing deposits
    
    $
    232,143
    
    
    
    1.73
    %
    
    $
    235,300
    
    
    
    1.39
    %
    
    $
    238,620
    
    
    
    1.83
    %
  Maturity3 Months
    
    
    Over 3-6
    
    
    Over 6-12
    
    
    Over 12or Less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total Total(In Thousands)Time deposits of less than $100,000
    
    $
    11,919
    
    
    $
    9,697
    
    
    $
    21,136
    
    
    $
    21,768
    
    
    $
    64,520Time deposits of $100,000 or more
    
    
    4,309
    
    
    
    4,359
    
    
    
    13,996
    
    
    
    10,819
    
    
    
    33,483Total time deposits
    
    $
    16,228
    
    
    $
    14,056
    
    
    $
    35,132
    
    
    $
    32,587
    
    
    $
    98,003
 Borrowings .
    21




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003(In Thousands)Maximum BalanceFederal Home Loan Bank advances
    
    $
    51,000
    
    
    $
    51,000
    
    
    $
    40,000Average BalanceFederal Home Loan Bank advances
    
    $
    45,821
    
    
    $
    42,110
    
    
    $
    37,769Average interest rate paid during the year
    
    
    4.15
    %
    
    
    3.85
    %
    
    
    3.88
    %End of Year BalanceFederal Home Loan Bank advances
    
    $
    50,000
    
    
    $
    51,000
    
    
    $
    40,000Weighted average interest rate of Federal Home
Loan Bank advances
    
    
    4.40
    %
    
    
    3.85
    %
    
    $
    3.88
    %
 Subsidiary and Other Activities
   How We Are Regulated
  22




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##### Table of Contents



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




---



##### Table of Contents



Heritage Financial Group and Heritage, MHC .
 Regulation by the Office of Thrift Supervision.
    Georgia Regulation.
 Regulatory Capital Requirements for the Bank .
  24




---



##### Table of Contents



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




---



##### Table of Contents



Federal Securities Law.
   Federal Taxation .
   Method of Accounting.
 Minimum Tax.
 26




---



##### Table of Contents



Net Operating Loss Carryovers
 Corporate Dividends-Received Deduction.
 State Taxation
  Employees
  27




---



##### Table of Contents



Item 2.
Description of Properties
   Net BookValue atDecember 312005Owned
or
    
    
    (Dollars inLocation
    
    Leased
    
    
    Thousands)MAIN OFFICE:721 North Westover BoulevardAlbany, GA 31721
    
    Owned
    
    $
    5,138,190BRANCH OFFICES:Downtown Office310 W. Oglethorpe BoulevardAlbany, GA 31701
    
    Owned
    
    $
    1,719,235East Albany Branch200 Loftus DriveAlbany GA 31705
    
    Owned
    
    $
    973,979Slappey Branch2801 North Slappey BoulevardAlbany, GA 31707
    
    Owned
    
    $
    512,200Lee County Branch(1)119 Robert B. Lee DriveLeesburg, GA 31763
    
    Owned
    
    $
    338,786Worth County Branch504 North Main StreetSylvester, GA 31791
    
    Owned
    
    $
    728,861
 
 (1)
    
    We currently own the land and expect to build a full branch at the location.
We currently operate at this location out of a leased modular temporary office unit
pending the construction of the branch office.   28




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##### Table of Contents



Item 3.
Legal Proceedings
  
 Item 4.
Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities
 Market and Dividend Information
  DividendsPaidHigh
    
    Low
    
    Per ShareSecond quarter
    
    $
    10.75
    
    
    $
    10.75
    
    
    $
    Third quarter
    
    
    11.15
    
    
    
    10.70
    
    
    
    Fourth quarter
    
    
    11.52
    
    
    
    10.60
    
    
    
    0.05
   29




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##### Table of Contents



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




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##### Table of Contents



1. Commercial Banking:
 2. Private Banking:
 3. Indirect Auto Lending:
 4. Retail Banking:
 5. Brokerage/Investment Services:
 6. Mortgage Lending:
    31




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##### Table of Contents



Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change
 How We Measure Our Risk of Interest Rate Changes
   
    
    Limiting the percentage of long-term fixed-rate loans within our portfolio;
    
    Originating a mix of variable-rate and shorter term fixed-rate loans;
    
    Originating prime-based home equity lines of credit;
    
    Managing deposit relationships for stability and a lower cost of funds position;
    
    Using Federal Home Loan Bank advances to align maturities and repricing terms of
funding sources with loans; and
    
    Continuing the origination of consumer loans.
  32




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##### Table of Contents



Over Six
    
    
    Over One
    
    
    Over ThreeSix Months
    
    
    Months to
    
    
    to Three
    
    
    to Five
    
    
    Over FiveOr Less
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in Thousands)Loans
    
    $
    80,976
    
    
    $
    9,327
    
    
    $
    53,035
    
    
    $
    53,448
    
    
    $
    57,325
    
    
    $
    254,111Investments securities
    
    
    7,665
    
    
    
    
    
    
    
    2,806
    
    
    
    5,192
    
    
    
    49,203
    
    
    
    64,866Other short term investments
    
    
    8,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,207Total interest-earning assets
    
    
    96,848
    
    
    
    9,327
    
    
    
    55,841
    
    
    
    58,640
    
    
    
    106,528
    
    
    
    327,184Savings, demand and NOW accounts(1)
    
    
    126,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,549Time deposits
    
    
    30,284
    
    
    
    35,132
    
    
    
    28,184
    
    
    
    3,016
    
    
    
    1,387
    
    
    
    98,003Other borrowings
    
    
    10,000
    
    
    
    25,000
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    
    
    
    
    50,000Total interest-bearing liabilities
    
    
    166,833
    
    
    
    60,132
    
    
    
    33,184
    
    
    
    13,016
    
    
    
    1,387
    
    
    
    274,552Interest-earning assets less interest-bearing
liabilities (interest rate gap)
    
    $
    (69,985
    )
    
    $
    (50,805
    )
    
    $
    22,657
    
    
    $
    45,624
    
    
    $
    105,141
    
    
    $
    52,632Cumulative interest-rate sensitivity gap
    
    $
    (69,985
    )
    
    $
    (120,790
    )
    
    $
    (98,133
    )
    
    $
    (52,509
    )
    
    $
    52,632
    
    
    $
    52,632Interest rate sensitivity gap ratio
    
    
    .58
    %
    
    
    .16
    %
    
    
    1.68
    %
    
    
    4.51
    %
    
    
    76.80
    %Cumulative interest-rate sensitivity gap ratio
    
    
    .58
    %
    
    
    .47
    %
    
    
    .62
    %
    
    
    .81
    %
    
    
    1.19
    %
 
 (1)
    
    While interest-bearing deposits (including NOW accounts, MMDA and savings
accounts) have the ability to reprice immediately, it is our experience that these reprice
with much less intensity than the indices to which they follow. Although we show the entire
balance in the six month or less time period, we believe these will reprice over a longer
period. 33




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##### Table of Contents



Comparison of Financial Condition at December 31, 2005 and December 31, 2004
   Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in Thousands)Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-Earning Assets:Loans
    
    $
    245,432
    
    
    $
    16,203
    
    
    
    6.60
    %
    
    $
    239,857
    
    
    $
    15,444
    
    
    
    6.44
    %
    
    $
    247,177
    
    
    $
    17,094
    
    
    
    6.92
    %Investment securities
    
    
    65,169
    
    
    
    2,754
    
    
    
    4.23
    
    
    
    55,938
    
    
    
    2,237
    
    
    
    3.99
    
    
    
    40,498
    
    
    
    1,510
    
    
    
    3.72Other short-term investments
    
    
    10,410
    
    
    
    286
    
    
    
    2.75
    
    
    
    8,068
    
    
    
    99
    
    
    
    1.23
    
    
    
    10,595
    
    
    
    116
    
    
    
    1.18Total interest-earning
assets
    
    
    321,011
    
    
    
    19,243
    
    
    
    5.99
    
    
    
    303,863
    
    
    
    17,780
    
    
    
    5.85
    
    
    
    298,270
    
    
    
    18,720
    
    
    
    6.27Interest-Bearing Liabilities:Demand and NOW accounts
    
    
    46,062
    
    
    
    346
    
    
    
    0.75
    
    
    
    50,922
    
    
    
    598
    
    
    
    0.68
    
    
    
    44,034
    
    
    
    549
    
    
    
    1.07Savings accounts
    
    
    88,624
    
    
    
    803
    
    
    
    0.91
    
    
    
    87,607
    
    
    
    342
    
    
    
    0.67
    
    
    
    92,014
    
    
    
    980
    
    
    
    1.25Time deposits
    
    
    97,457
    
    
    
    2,883
    
    
    
    2.96
    
    
    
    96,771
    
    
    
    2,337
    
    
    
    2.41
    
    
    
    102,572
    
    
    
    2,859
    
    
    
    2.79Borrowings
    
    
    45,821
    
    
    
    1,903
    
    
    
    4.15
    
    
    
    42,110
    
    
    
    1,621
    
    
    
    3.85
    
    
    
    37,769
    
    
    
    1,465
    
    
    
    3.88Total interest-bearing
liabilities
    
    
    277,964
    
    
    
    5,935
    
    
    
    2.14
    
    
    
    277,410
    
    
    
    4,898
    
    
    
    1.77
    
    
    
    276,389
    
    
    
    5,853
    
    
    
    2.12Net interest income
    
    
    
    
    
    $
    13,308
    
    
    
    
    
    
    
    
    
    
    $
    12,882
    
    
    
    
    
    
    
    
    
    
    $
    12,867Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.85
    %
    
    
    
    
    
    
    
    
    
    
    4.08
    %
    
    
    
    
    
    
    
    
    
    
    4.15
    %Net earning assets
    
    $
    43,047
    
    
    
    
    
    
    
    
    
    
    $
    26,453
    
    
    
    
    
    
    
    
    
    
    $
    21,881Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.31
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    1.15
    x
    
    
    
    
    
    
    
    
    
    
    1.10
    x
    
    
    
    
    
    
    
    
    
    
    1.08
    x
 34




---



##### Table of Contents



Rate/Volume Analysis
  Year Ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Increase (Decrease)
    
    
    Total
    
    
    Increase (Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)(Dollars in Thousands)Interest-earning assets:Loans
    
    $
    359
    
    
    $
    400
    
    
    $
    759
    
    
    $
    (507
    )
    
    $
    (1,143
    )
    
    $
    (1,650
    )Investment securities
    
    
    369
    
    
    
    148
    
    
    
    517
    
    
    
    586
    
    
    
    141
    
    
    
    727Other
    
    
    29
    
    
    
    158
    
    
    
    187
    
    
    
    (30
    )
    
    
    13
    
    
    
    (17
    )Total interest-earning assets
    
    $
    757
    
    
    $
    706
    
    
    
    1,463
    
    
    $
    49
    
    
    $
    (989
    )
    
    
    (940
    )Interest-bearing liabilities:Savings and money market accounts
    
    $
    (57
    )
    
    $
    (195
    )
    
    
    (252
    )
    
    $
    (47
    )
    
    $
    (335
    )
    
    
    (382
    )Demand and NOW deposits
    
    
    4
    
    
    
    457
    
    
    
    461
    
    
    
    86
    
    
    
    (292
    )
    
    
    (206
    )Certificates of deposit
    
    
    17
    
    
    
    529
    
    
    
    546
    
    
    
    (162
    )
    
    
    (360
    )
    
    
    (522
    )Borrowings
    
    
    147
    
    
    
    135
    
    
    
    282
    
    
    
    168
    
    
    
    (13
    )
    
    
    155Total interest-bearing liabilities
    
    $
    111
    
    
    $
    926
    
    
    
    1,037
    
    
    $
    45
    
    
    $
    (1,000
    )
    
    
    (955
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    426
    
    
    
    
    
    
    
    
    
    
    $
    15
 Comparison of Operating Results for the Years Ended December 31, 2005 and December 31, 2004
 General.
 35




---



##### Table of Contents



Interest Income and Expense.
 Provision for Loan Losses.
   Noninterest Income.
 36




---



##### Table of Contents



Noninterest Expense.
 Income Tax Expense.
 Liquidity and Commitments
    37




---



##### Table of Contents



Off-Balance-Sheet Liabilities
  (In Thousands)Commitments to extend credit
    
    $
    28,919Financial stand-by letters of credit
    
    
    1,209$
    30,128
 Capital
    Actual
    
    Required
    
    ExcessPercent
    
    
    
    
    
    Percent
    
    
    
    
    
    PercentAmount
    
    of Assets
    
    Amount
    
    of Assets
    
    Amount
    
    of Assets(Dollars in Millions)Tier 1 leverage
    
    $
    53.6
    
    
    
    15.6
    %
    
    $
    17.2
    
    
    
    5.0
    %
    
    $
    36.4
    
    
    
    10.6
    %Tier 1 risk-based
    
    
    53.6
    
    
    
    19.6
    
    
    
    16.5
    
    
    
    6.0
    
    
    
    37.1
    
    
    
    13.6Total risk-based
    
    
    57.1
    
    
    
    20.8
    
    
    
    27.4
    
    
    
    10.0
    
    
    
    29.7
    
    
    
    10.8
 Critical Accounting Policies
  38




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##### Table of Contents



Allowance for Loan Losses
    Income Taxes
   39




---



##### Table of Contents



Item 7. Financial Statements
  (a)
    
    Report from Independent Registered Public Accounting Firm;(b)
    
    Consolidated Balance Sheets as of December 31, 2005 and 2004;(c)
    
    Consolidated Statements of Income for the Years Ended December 31, 2005 and 2004;(d)
    
    Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005 and 2004;(e)
    
    Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2005 and 2004;(f)
    
    Consolidated Statements of Cash Flows For the Years Ended December 31, 2005 and 2004;(g)
    
    Notes to Consolidated Financial Statements.
 
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures
    40




---



##### Table of Contents



Other Information
  41




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##### Table of Contents



PART III
 
 Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
 Directors
  Executive Officers
  Section 16(a) Compliance
  Code of Ethics
  
 Executive Compensation
  
 Security Ownership of Certain Beneficial Owners and Management
  42




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##### Table of Contents



Certain Relationships and Related Transactions
  
 Exhibits
 Reference toPrior FilingRegulation S-B
    
    
    
    or Exhibit NumberExhibit Number
    
    Document
    
    Attached Hereto3(i)
    
    Charter of the Registrant
    
    3.13(ii)
    
    Bylaws of the Registrant
    
    *10
    
    Material contracts:(1) Employment Agreements:(a) (i) O. Leonard Dorminey  Bank
    
    *(a) (ii) O. Leonard Dorminey  Holding
    
    *(b) (i) Tammy W. Burdette- Bank
    
    *(b) (ii) Tammy W. Burdette  Holding Company
    
    *(c) Carol W. Slappey
    
    *(2) Deferred Compensation and Excess/Matching Contribution Plans
    
    *(3) Supplemental Executive Retirement Plan
    
    *(4) Directors Retirement Plan
    
    *(5) 401(k) Savings Plan
    
    **(6) Employee Stock Ownership Plan
    
    *10.9
    
    Named Executive Officer Salaries and Bonus Payments
    
    10.910.10
    
    Current Director Fee Arrangements
    
    10.1021
    
    Subsidiaries of the Company
    
    2123
    
    Consent of Accountants
    
    2331
    
    Rule 13a-14(a)/15d-14(a) Certifications
    
    3132
    
    Section 1350 Certifications
    
    32
 
 *
    
    Filed as an exhibit to the Registrants Registration Statement on
Form SB-2 (File No. 333-123581), declared effective by the
Securities and Exchange Commission on May 16, 2005.**
    
    Filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registrants Registration Statement on Form SB-2. (File No.
333-123581) declared effective by the Securities and Exchange
Commission on May 16, 2005. 
 Item 14. Principal Accountant Fees and Services
  43




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##### Table of Contents



SIGNATURES
  HERITAGE FINANCIAL GROUPDate:March 30, 2006
    
    By:
    
    /s/ O. Leonard DormineyO. Leonard Dorminey, President andChief Executive Officer(Duly Authorized Representative)
 KNOW ALL MEN BY THESE PRESENTS
  /s/ O. Leonard Dorminey
    
    /s/ Antone D. LehrO. Leonard Dorminey
    
    Antone D. LehrPresident, Chief Executive Officer
    
    Chairman of the Boardand Director(Principal Executive Officer)Date: March 30, 2006
    
    Date:March 30, 2006/s/ Joseph C. Burger
    
    /s/ Douglas J. McGinleyJoseph C. Burger
    
    Douglas J. McGinleyVice Chairman of the Board
    
    DirectorDate: March 30, 2006
    
    Date:March 30, 2006/s/ Carol W. Slappey
    
    /s/ Tammy W. BurdetteCarol W. Slappey
    
    Tammy W. BurdetteDirector
    
    Executive Vice President and Chief
Financial Officer(Principal Financial and Accounting Officer)Date: March 30, 2006
    
    Date: March 30, 2006
 44




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##### Table of Contents



Index to Exhibits
 3.1
    
    Charter of Heritage Financial Group10.9
    
    Named Executive Officer Salaries and Bonus Payments10.10
    
    Current Director Fee Arrangements21
    
    Subsidiaries of the Company23
    
    Consent of Accountants31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of President and Chief
Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer32
    
    Section 1350 Certifications




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##### Table of Contents



HERITAGE FINANCIAL GROUP
 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
  Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets  December 31, 2005 and 2004Consolidated Statements of Income  Years ended December 31, 2005 and 2004Consolidated Statements of Comprehensive Income  Years ended December 31, 2005 and 2004Consolidated Statements of Stockholders Equity  Years ended December 31, 2005 and 2004Consolidated Statements of Cash Flows  Years ended December 31, 2005 and 2004Notes to Consolidated Financial Statements
  F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors
Heritage Financial Group
and Subsidiary
Albany, Georgia
 Heritage Financial Group and
Subsidiary
   /s/ Mauldin & Jenkins, LLC
 
  F-2




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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004AssetsCash and due from banks
    
    $
    10,499,084
    
    
    $
    6,621,232Interest-bearing deposits in banks
    
    
    1,387,046
    
    
    
    420,677Federal funds sold
    
    
    6,820,000
    
    
    
    12,783,000Securities available for sale, at fair value
    
    
    64,866,021
    
    
    
    59,287,595Federal home loan bank stock, at cost
    
    
    2,927,000
    
    
    
    2,957,300Corporate credit union membership shares
    
    
    
    
    
    
    553,834Loans, net
    
    
    250,492,856
    
    
    
    235,275,202Premises and equipment, net
    
    
    12,004,468
    
    
    
    12,684,152Accrued interest receivable
    
    
    1,666,629
    
    
    
    1,425,871Foreclosed assets
    
    
    59,272
    
    
    
    200,554Cash surrender value of bank owned life insurance
    
    
    7,987,442
    
    
    
    7,690,065Other assets
    
    
    5,086,968
    
    
    
    3,568,994$
    363,796,786
    
    
    $
    343,468,476Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    14,059,406
    
    
    $
    14,447,423Interest-bearing
    
    
    224,580,863
    
    
    
    234,095,297Total deposits
    
    
    238,640,269
    
    
    
    248,542,720Federal funds purchased and securities sold under
agreements to repurchase
    
    
    237,222
    
    
    
    Other borrowings
    
    
    50,000,000
    
    
    
    51,000,000Other liabilities
    
    
    5,935,648
    
    
    
    4,792,002Total liabilities
    
    
    294,813,139
    
    
    
    304,334,722Commitments 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 and 1,000 issued and outstanding
    
    
    112,413
    
    
    
    10Capital surplus
    
    
    37,126,877
    
    
    
    4,799,990Retained earnings
    
    
    38,717,576
    
    
    
    35,935,700Accumulated other comprehensive loss
    
    
    (2,786,569
    )
    
    
    (1,601,946
    )Unearned employee stock ownership plan (ESOP) shares, 418,665
shares
    
    
    (4,186,650
    )
    
    
    Total stockholders equity
    
    
    68,983,647
    
    
    
    39,133,754$
    363,796,786
    
    
    $
    343,468,476
 See Notes to Consolidated Financial Statements.
 F-3




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##### Table of Contents





HERITAGE FINANCIAL GROUP AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004


2005
    
    
    2004Interest incomeInterest and fees on loans
    
    $
    16,203,254
    
    
    $
    15,444,341Interest on taxable securities
    
    
    2,479,443
    
    
    
    1,897,757Interest on nontaxable securities
    
    
    274,552
    
    
    
    339,128Interest on federal funds sold
    
    
    245,227
    
    
    
    80,027Interest on deposits in other banks
    
    
    40,597
    
    
    
    18,90319,243,073
    
    
    
    17,780,156Interest expenseInterest on deposits
    
    
    4,031,710
    
    
    
    3,277,652Interest on other borrowings
    
    
    1,902,869
    
    
    
    1,620,2795,934,579
    
    
    
    4,897,931Net interest income
    
    
    13,308,494
    
    
    
    12,882,225Provision for loan losses
    
    
    1,014,555
    
    
    
    200,000Net interest income after provision for
loan losses
    
    
    12,293,939
    
    
    
    12,682,225Noninterest incomeService charges on deposit accounts
    
    
    3,051,757
    
    
    
    3,212,749Other service charges, commissions and fees
    
    
    784,216
    
    
    
    719,033Brokerage fees
    
    
    618,636
    
    
    
    582,476Mortgage origination fees
    
    
    403,535
    
    
    
    326,758Bank owned life insurance
    
    
    297,377
    
    
    
    306,999Gain (loss) on sale of securities
    
    
    (4,653
    )
    
    
    138,564Other
    
    
    183,810
    
    
    
    168,1625,334,678
    
    
    
    5,454,741Noninterest expenseSalaries and employee benefits
    
    
    7,499,674
    
    
    
    6,623,210Equipment
    
    
    1,577,343
    
    
    
    1,599,588Occupancy
    
    
    999,725
    
    
    
    912,637Advertising and marketing
    
    
    270,831
    
    
    
    275,362Legal and accounting
    
    
    492,239
    
    
    
    483,778Directors fees and retirement
    
    
    291,976
    
    
    
    411,700Telephone
    
    
    251,653
    
    
    
    316,594Supplies
    
    
    237,657
    
    
    
    224,677Data processing fees
    
    
    468,899
    
    
    
    356,171Other operating
    
    
    1,493,606
    
    
    
    1,849,85813,583,603
    
    
    
    13,053,575Income before income taxes
    
    
    4,045,014
    
    
    
    5,083,391Applicable income taxes
    
    
    1,094,519
    
    
    
    1,550,141Net income
    
    $
    2,950,495
    
    
    $
    3,533,250Basic earnings per share
    
    $
    0.31
    
    
    $
    0.45Diluted earnings per share
    
    $
    0.31
    
    
    $
    0.45


See Notes to Consolidated Financial Statements. F-4




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##### Table of Contents





HERITAGE FINANCIAL GROUP AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004


2005
    
    
    2004Net income
    
    $
    2,950,495
    
    
    $
    3,533,250Other comprehensive loss:Net unrealized holding losses arising during period,
net of tax benefits of $650,940 and $145,211
    
    
    (990,361
    )
    
    
    (220,929
    )Reclassification adjustment for (gains) losses included in net
income, net of tax (benefit) of $(1,845) and $54,954
    
    
    2,808
    
    
    
    (83,610
    )Minimum pension liability adjustment net of
tax (benefits) of $(129,528) and $(711,329)
    
    
    (197,070
    )
    
    
    (1,082,238
    )Total other comprehensive loss
    
    
    (1,184,623
    )
    
    
    (1,386,777
    )Comprehensive income
    
    $
    1,765,872
    
    
    $
    2,146,473


See Notes to Consolidated Financial Statements.


F-5



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##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
 Common Stock
    
    
    CapitalShares
    
    
    Par Value
    
    
    SurplusBalance, December 31, 2003
    
    
    1,000
    
    
    $
    10
    
    
    $
    4,799,990Net income
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2004
    
    
    1,000
    
    
    
    10
    
    
    
    4,799,990Net income
    
    
    
    
    
    
    
    
    
    
    Cash dividends declared, $.05 per share
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    Issuance of 7,867,875 shares of common stock to Heritage, MHC
    
    
    7,867,875
    
    
    
    78,679
    
    
    
    (78,679
    )Sale of 3,372,375 shares of common stock in an initial
public offering, net of issuance costs
    
    
    3,372,375
    
    
    
    33,724
    
    
    
    32,384,337ESOP shares earned, 22,035 shares
    
    
    
    
    
    
    
    
    
    
    21,229Balance, December 31, 2005
    
    
    11,241,250
    
    
    $
    112,413
    
    
    $
    37,126,877
 See Notes to Consolidated Financial Statements.
 F-6(a)




---



##### Table of Contents



AccumulatedUnearned
    
    
    OtherRetained
    
    ESOP
    
    
    ComprehensiveEarnings
    
    Shares
    
    
    Loss
    
    
    Total$
    32,402,450
    
    $
    
    
    
    $
    (215,169
    )
    
    $
    36,987,2813,533,250
    
    
    
    
    
    
    
    
    
    
    3,533,250
    
    
    
    
    
    
    (1,386,777
    )
    
    
    (1,386,777
    )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
    
    
    
    
    
    
    
    241,579$
    38,717,576
    
    $
    (4,186,650
    )
    
    $
    (2,786,569
    )
    
    $
    68,983,647
 F-6(b)




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    2,950,495
    
    
    $
    3,533,250Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,244,079
    
    
    
    1,291,733Provision for loan losses
    
    
    1,014,555
    
    
    
    200,000ESOP compensation expense
    
    
    241,579
    
    
    
    Provision for deferred taxes
    
    
    (720,088
    )
    
    
    385,939Net (gains) losses on sale of securities available for sale
    
    
    4,653
    
    
    
    (138,564
    )Net (gains) losses on sale or disposal of premises and equipment
    
    
    (2,555
    )
    
    
    495Net decrease in foreclosed assets
    
    
    141,282
    
    
    
    395,100Increase in bank owned life insurance
    
    
    (297,377
    )
    
    
    (306,999
    )(Increase) decrease in interest receivable
    
    
    (240,758
    )
    
    
    153,148Increase in interest payable
    
    
    15,000
    
    
    
    39,987(Increase) decrease in taxes payable
    
    
    751,221
    
    
    
    (901,970
    )Net other operating activities
    
    
    29,834
    
    
    
    1,083,502Total adjustments
    
    
    2,181,425
    
    
    
    2,202,371Net cash provided by operating activities
    
    
    5,131,920
    
    
    
    5,735,621INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (966,369
    )
    
    
    (25,237
    )Purchases of securities available for sale
    
    
    (35,082,914
    )
    
    
    (33,600,239
    )Proceeds from maturities of securities available for sale
    
    
    14,740,327
    
    
    
    12,247,532Proceeds from sale of securities available for sale
    
    
    13,122,850
    
    
    
    13,217,287Net change in Federal Home Loan Bank stock
    
    
    30,300
    
    
    
    (957,300
    )Redemption of corporate credit union membership shares
    
    
    553,834
    
    
    
    (Increase) decrease in federal funds sold
    
    
    5,963,000
    
    
    
    (6,190,000
    )(Increase) decrease in loans, net
    
    
    (16,230,469
    )
    
    
    5,143,564Purchase of premises and equipment
    
    
    (576,053
    )
    
    
    (439,185
    )Proceeds from sale of premises and equipment
    
    
    14,213
    
    
    
    91,700Proceeds from sale of premises and equipment held for sale
    
    
    
    
    
    
    736,587Net cash used in investing activities
    
    
    (18,431,281
    )
    
    
    (9,775,291
    )FINANCING ACTIVITIESDecrease in deposits
    
    
    (9,902,451
    )
    
    
    (6,778,136
    )Increase in federal funds purchased and securities sold
under agreements to repurchase
    
    
    237,222
    
    
    
    Proceeds from other borrowings
    
    
    20,000,000
    
    
    
    16,000,000Repayment of other borrowings
    
    
    (21,000,000
    )
    
    
    (5,000,000
    )Dividends paid to stockholders
    
    
    (168,619
    )
    
    
    Proceeds from sale of common stock, net of stock issuance costs
    
    
    28,011,061
    
    
    
    Net cash provided by financing activities
    
    
    17,177,213
    
    
    
    4,221,864Net increase in cash and due from banks
    
    
    3,877,852
    
    
    
    182,194Cash and due from banks at beginning of year
    
    
    6,621,232
    
    
    
    6,439,038Cash and due from banks at end of year
    
    $
    10,499,084
    
    
    $
    6,621,232
 F-7




---



##### Table of Contents



HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    2004SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATIONCash paid during the year for:Interest
    
    $
    5,919,579
    
    
    $
    4,857,944Income taxes
    
    $
    1,063,386
    
    
    $
    2,066,172NONCASH TRANSACTIONSPrincipal balances of loans transferred to other
real estate owned
    
    $
    125,737
    
    
    $
    173,979Minimum pension liability adjustment
    
    $
    316,812
    
    
    $
    2,008,907
 See Notes to Consolidated Financial Statements. F-8
    Table of Contents   HERITAGE FINANCIAL GROUP AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
  Minority Stock Offering
  Basis of Presentation and Accounting Estimates
    Cash, Due from Banks and Cash Flows
   F-9    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Securities
    Loans
    F-10
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Allowance for Loan Losses
     Mortgage Origination Fees
  Premises and Equipment
  YearsBuildings
    
    
    39Furniture and equipment
    
    
    3-7
 F-11
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Foreclosed Assets
  Pension Plan
  Employee Stock Ownership Plan (ESOP)
   Income Taxes
  F-12
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Earnings Per Share
   Comprehensive Income
  Reclassification of Certain Items
  F-13
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2005:U. S. Government and federal agencies
    
    $
    14,388,447
    
    
    $
    
    
    
    $
    (344,029
    )
    
    $
    14,044,418State and municipal securities
    
    
    6,949,742
    
    
    
    22,343
    
    
    
    (102,996
    )
    
    
    6,869,089Corporate debt securities
    
    
    4,488,970
    
    
    
    
    
    
    
    (703,393
    )
    
    
    3,785,577Mortgage-backed securities
    
    
    32,102,023
    
    
    
    188
    
    
    
    (1,004,710
    )
    
    
    31,097,501Total debt securities
    
    
    57,929,182
    
    
    
    22,531
    
    
    
    (2,155,128
    )
    
    
    55,796,585Equity securities
    
    
    9,434,800
    
    
    
    
    
    
    
    (365,364
    )
    
    
    9,069,436Total securities
    
    $
    67,363,982
    
    
    $
    22,531
    
    
    $
    (2,520,492
    )
    
    $
    64,866,021December 31, 2004:U. S. Government and federal agencies
    
    $
    11,651,084
    
    
    $
    
    
    
    $
    (122,960
    )
    
    $
    11,528,124State and municipal securities
    
    
    8,954,637
    
    
    
    28,968
    
    
    
    (109,876
    )
    
    
    8,873,729Corporate debt securities
    
    
    4,508,057
    
    
    
    1,871
    
    
    
    (145,895
    )
    
    
    4,364,033Mortgage-backed securities
    
    
    26,785,122
    
    
    
    23,141
    
    
    
    (330,585
    )
    
    
    26,477,678Total debt securities
    
    
    51,898,900
    
    
    
    53,980
    
    
    
    (709,316
    )
    
    
    51,243,564Equity securities
    
    
    8,250,000
    
    
    
    5,071
    
    
    
    (211,040
    )
    
    
    8,044,031Total securities
    
    $
    60,148,900
    
    
    $
    59,051
    
    
    $
    (920,356
    )
    
    $
    59,287,595
  Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    1,019,052
    
    
    $
    1,019,052Due from one year to five years
    
    
    7,510,232
    
    
    
    7,334,653Due from five to ten years
    
    
    14,531,982
    
    
    
    14,050,700Due after ten years
    
    
    2,765,893
    
    
    
    2,294,679Mortgage-backed securities
    
    
    32,102,023
    
    
    
    31,097,501$
    57,929,182
    
    
    $
    55,796,585
   December 31,2005
    
    
    2004Gross gains on sales of securities
    
    $
    16,155
    
    
    $
    143,003Gross losses on sales of securities
    
    
    (20,808
    )
    
    
    (4,439
    )Net realized gains (losses) on sales of securities available for sale
    
    $
    (4,653
    )
    
    $
    138,564
 F-14
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (Continued)
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2005:U. S. Government and federal
agencies
    
    $
    5,120,786
    
    
    $
    (99,979
    )
    
    $
    7,904,580
    
    
    $
    (244,050
    )
    
    $
    13,025,366
    
    
    $
    (344,029
    )State and municipal securities
    
    
    3,120,853
    
    
    
    (38,871
    )
    
    
    1,967,098
    
    
    
    (64,125
    )
    
    
    5,087,951
    
    
    
    (102,996
    )Corporate debt securities
    
    
    793,820
    
    
    
    (251,694
    )
    
    
    2,329,613
    
    
    
    (451,699
    )
    
    
    3,123,433
    
    
    
    (703,393
    )Mortgage-backed securities
    
    
    17,647,550
    
    
    
    (425,669
    )
    
    
    13,047,108
    
    
    
    (579,041
    )
    
    
    30,694,658
    
    
    
    (1,004,710
    )Subtotal, debt securities
    
    
    26,683,009
    
    
    
    (816,213
    )
    
    
    25,248,399
    
    
    
    (1,338,915
    )
    
    
    51,931,408
    
    
    
    (2,155,128
    )Equity securities
    
    
    404,635
    
    
    
    (30,165
    )
    
    
    7,664,801
    
    
    
    (335,199
    )
    
    
    8,069,436
    
    
    
    (365,364
    )Total temporarily impaired
securities
    
    $
    27,087,644
    
    
    $
    (846,378
    )
    
    $
    32,913,200
    
    
    $
    (1,674,114
    )
    
    $
    60,000,844
    
    
    $
    (2,520,492
    )December 31, 2004:U. S. Government and federal
agencies
    
    $
    9,069,835
    
    
    $
    (82,949
    )
    
    $
    958,289
    
    
    $
    (40,011
    )
    
    $
    10,028,124
    
    
    $
    (122,960
    )State and municipal securities
    
    
    5,085,266
    
    
    
    (109,876
    )
    
    
    
    
    
    
    
    
    
    
    5,085,266
    
    
    
    (109,876
    )Corporate debt securities
    
    
    2,788,305
    
    
    
    (145,895
    )
    
    
    
    
    
    
    
    
    
    
    2,788,305
    
    
    
    (145,895
    )Mortgage-backed securities
    
    
    18,489,439
    
    
    
    (232,757
    )
    
    
    3,829,953
    
    
    
    (97,828
    )
    
    
    22,319,392
    
    
    
    (330,585
    )Subtotal, debt securities
    
    
    35,432,845
    
    
    
    (571,477
    )
    
    
    4,788,242
    
    
    
    (137,839
    )
    
    
    40,221,087
    
    
    
    (709,316
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    7,788,960
    
    
    
    (211,040
    )
    
    
    7,788,960
    
    
    
    (211,040
    )Total temporarily impaired
securities
    
    $
    35,432,845
    
    
    $
    (571,477
    )
    
    $
    12,577,202
    
    
    $
    (348,879
    )
    
    $
    48,010,047
    
    
    $
    (920,356
    )
  F-15
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
  December 31,2005
    
    
    2004Commercial real estate, business and multifamily
    
    $
    100,602,235
    
    
    $
    92,164,091Mortgage one-to-four family and land
    
    
    77,612,880
    
    
    
    74,639,776Consumer and other:Auto
    
    
    50,136,934
    
    
    
    47,454,975Student
    
    
    1,109,697
    
    
    
    1,190,443Home equity
    
    
    15,591,165
    
    
    
    13,836,665Other
    
    
    9,057,623
    
    
    
    8,953,841254,110,534
    
    
    
    238,239,791Allowance for loan losses
    
    
    (3,617,678
    )
    
    
    (2,964,589
    )$
    250,492,856
    
    
    $
    235,275,202
  As of and For the Years EndedDecember 31,2005
    
    
    2004Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    866,701
    
    
    
    563,978Total impaired loans
    
    $
    866,701
    
    
    $
    563,978Valuation allowance related to impaired loans
    
    $
    127,777
    
    
    $
    140,713Average investment in impaired loans
    
    $
    899,675
    
    
    $
    595,494Forgone interest income on impaired loans
    
    $
    54,447
    
    
    $
    84,562
   December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    2,964,589
    
    
    $
    3,502,579Provision for loan losses
    
    
    1,014,555
    
    
    
    200,000Loans charged off
    
    
    (593,691
    )
    
    
    (990,430
    )Recoveries of loans previously charged off
    
    
    232,225
    
    
    
    252,440Balance, end of year
    
    $
    3,617,678
    
    
    $
    2,964,589
 F-16
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
  Balance, beginning of year
    
    $
    734,720Advances
    
    
    235,456Repayments
    
    
    (260,788
    )Balance, end of year
    
    $
    709,388
 NOTE 4. PREMISES AND EQUIPMENT
  December 31,2005
    
    
    2004Land
    
    $
    3,382,288
    
    
    $
    3,374,813Buildings
    
    
    9,138,479
    
    
    
    9,138,479Furniture and equipment
    
    
    7,851,303
    
    
    
    7,534,76820,372,070
    
    
    
    20,048,060Accumulated depreciation
    
    
    (8,367,602
    )
    
    
    (7,363,908
    )$
    12,004,468
    
    
    $
    12,684,152
  NOTE 5. DEPOSITS
  2006
    
    $
    65,416,6972007
    
    
    20,246,5382008
    
    
    7,936,9442009
    
    
    3,016,3122010 and beyond
    
    
    1,386,524$
    98,003,015
  F-17
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS
 Pension Plan
  December 31,2005
    
    
    2004Changes in benefit obligations:Obligations at beginning of year
    
    $
    4,640,817
    
    
    $
    3,493,483Service cost
    
    
    537,017
    
    
    
    451,267Interest cost
    
    
    277,739
    
    
    
    227,076Benefits paid
    
    
    (196,278
    )
    
    
    (393,981
    )Actuarial losses
    
    
    930,970
    
    
    
    862,972Obligations at end of year
    
    $
    6,190,265
    
    
    $
    4,640,817Changes in plan assets:Fair value of assets at beginning of year
    
    $
    2,938,378
    
    
    $
    3,317,249Actual return on assets
    
    
    249,320
    
    
    
    15,110Company contributions
    
    
    1,000,000
    
    
    
    Benefits paid
    
    
    (196,278
    )
    
    
    (393,981
    )Fair value of assets at end of year
    
    $
    3,991,420
    
    
    $
    2,938,378Funded status at end of year:Plan assets less than obligations
    
    $
    (2,198,845
    )
    
    $
    (1,702,439
    )Unrecognized losses
    
    
    3,457,912
    
    
    
    2,851,535Unrecognized prior service cost
    
    
    205,554
    
    
    
    214,668Unrecognized transition obligation
    
    
    
    
    
    
    672Additional minimum liability adjustment
    
    
    (2,325,719
    )
    
    
    (2,008,907
    )Prepaid (accrued) pension cost on balance sheet
    
    $
    (861,098
    )
    
    $
    (644,471
    )Accumulated benefit obligation
    
    $
    4,852,518
    
    
    $
    3,582,849Costs recognized during the year:Service cost
    
    $
    537,017
    
    
    $
    451,267Interest cost
    
    
    277,739
    
    
    
    227,076Expected return on plan assets
    
    
    (205,604
    )
    
    
    (248,793
    )Amortization of prior losses
    
    
    280,877
    
    
    
    213,212Amortization of service costs
    
    
    9,114
    
    
    
    9,114Amortization of transition obligation
    
    
    672
    
    
    
    8,124Total costs recognized in expense
    
    $
    899,815
    
    
    $
    660,000
 F-18
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 Pension Plan (Continued)
  December 31,2005
    
    2004Assumptions used in computations:In computing ending obligations:Discount rate
    
    
    5.75
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %In computing expected return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
  2005
    
    2004Fixed income
    
    
    27
    %
    
    
    25
    %Equities
    
    
    70
    %
    
    
    70
    %Cash and cash equivalents
    
    
    3
    %
    
    
    5
    %
    Fiscal Year
    
    Amount2006
    
    $
    13,4992007
    
    
    13,4992008
    
    
    13,4992009
    
    
    13,4992010
    
    
    42,8132011-2015
    
    
    772,789
 F-19
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)
 401(K) Plan
  Employee Stock Ownership Plan
 st st
   Shares released for allocation
    
    
    220,350Unearned
    
    
    4,186,650Total ESOP shares
    
    
    4,407,000Fair value of unearned shares
    
    $
    4,823,021
 NOTE 7. DEFERRED COMPENSATION PLANS
   F-20
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
  NOTE 9. OTHER BORROWINGS
  December 31,2005
    
    
    2004Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    $
    25,000,000
    
    
    $
    25,000,0004.70% until September 14, 2006, due September 14, 2011Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    
    
    
    
    5,000,0003.02%, due October 18, 2007Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    
    
    
    
    5,000,0002.12%, due August 8, 2005Advance from Federal Home Loan Bank with interest at a daily
    
    
    10,000,000
    
    
    
    variable rate, 4.44% at December 31, 2005, due November 27, 2006Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    5,000,000
    
    
    
    5,000,0003.71% until September 17, 2009, due September 17, 2014Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    5,000,000
    
    
    
    4.23% until August 17, 2010, due August 17, 2015Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    5,000,000
    
    
    
    5,000,0003.40% until December 10, 2007, due December 10, 2009Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    
    
    
    
    3,000,0002.71%, due March 23, 2005Advance from Federal Home Loan Bank with interest at a fixed rate of
    
    
    
    
    
    
    3,000,0002.93%, due June 23, 2005$
    50,000,000
    
    
    $
    51,000,000
   2006
    
    $
    10,000,0002007
    
    
    2008
    
    
    2009
    
    
    5,000,0002010 and beyond
    
    
    35,000,000$
    50,000,000
  F-21
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10. INCOME TAXES
  Years Ended December 31,2005
    
    
    2004Current
    
    $
    1,814,607
    
    
    $
    1,164,202Deferred
    
    
    (720,088
    )
    
    
    385,939$
    1,094,519
    
    
    $
    1,550,141
  Years Ended December 31,2005
    
    
    2004Tax at federal income tax rate
    
    $
    1,375,305
    
    
    $
    1,728,353Increase (decrease) resulting from:Tax-exempt interest
    
    
    (85,846
    )
    
    
    (104,696
    )Bank owned life insurance
    
    
    (101,108
    )
    
    
    (104,380
    )State income taxes
    
    
    21,888
    
    
    
    26,610Employee Stock Ownership Plan
    
    
    (12,501
    )
    
    
    Other
    
    
    (103,219
    )
    
    
    4,254Provision for income taxes
    
    $
    1,094,519
    
    
    $
    1,550,141
  December 31,2005
    
    
    2004Deferred tax assets:Loan loss reserves
    
    $
    848,437
    
    
    $
    543,098Deferred compensation
    
    
    731,918
    
    
    
    616,178Organizational cost
    
    
    26,469
    
    
    
    38,565Minimum pension liability
    
    
    1,046,411
    
    
    
    926,669Unrealized loss on securities available for sale
    
    
    990,702
    
    
    
    341,597Nonaccrual loans
    
    
    33,588
    
    
    
    49,102Other
    
    
    5,628
    
    
    
    15,2973,683,153
    
    
    
    2,530,506Deferred tax liabilities:Depreciation and amortization
    
    
    199,948
    
    
    
    484,360Deferred pension costs
    
    
    306,004
    
    
    
    365,420Prepaid expenses
    
    
    66,797
    
    
    
    59,257572,749
    
    
    
    909,037Net deferred tax assets
    
    $
    3,110,404
    
    
    $
    1,621,469
 F-22
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
 Loan Commitments
   December 31,2005
    
    
    2004Commitments to extend credit
    
    $
    28,918,623
    
    
    $
    24,256,995Financial standby letters of credit
    
    
    1,209,242
    
    
    
    1,099,765$
    30,127,865
    
    
    $
    25,356,760
    Contingencies
  F-23
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. CONCENTRATIONS OF CREDIT
    NOTE 13. REGULATORY MATTERS
     F-24
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. REGULATORY MATTERS (Continued)
  For Capital
    
    
    To Be Well CapitalizedAdequacy
    
    
    Under Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2005Total Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    57,073,000
    
    
    
    20.81
    %
    
    $
    21,938,000
    
    
    
    8.0
    %
    
    $
    27,422,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets:HeritageBank of the South
    
    $
    53,643,000
    
    
    
    19.56
    %
    
    $
    10,969,000
    
    
    
    4.0
    %
    
    $
    16,453,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    53,643,000
    
    
    
    15.63
    %
    
    $
    13,724,000
    
    
    
    4.0
    %
    
    $
    17,156,000
    
    
    
    5.0
    %As of December 31, 2004Total Capital to Risk Weighted AssetsHeritageBank of the South
    
    $
    37,182,000
    
    
    
    13.7
    %
    
    $
    21,768,000
    
    
    
    8.0
    %
    
    $
    27,211,000
    
    
    
    10.0
    %Tier I Capital to Risk Weighted Assets:HeritageBank of the South
    
    $
    34,217,000
    
    
    
    12.6
    %
    
    $
    10,884,000
    
    
    
    4.0
    %
    
    $
    16,326,000
    
    
    
    6.0
    %Tier I Capital to Average Assets:HeritageBank of the South
    
    $
    34,217,000
    
    
    
    10.1
    %
    
    $
    13,578,000
    
    
    
    4.0
    %
    
    $
    16,973,000
    
    
    
    5.0
    %
    NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures about Fair Value of Financial Instruments
  Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold:
 F-25
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 14.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 Securities:
 Loans:
 Deposits:
 Federal Funds Purchased, Repurchase Agreements and Other Borrowings:
 Accrued Interest:
 Off-Balance-Sheet Instruments:
  December 31, 2005
    
    
    December 31, 2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and
interest-bearing deposits in banks
    
    $
    11,886,133
    
    
    $
    11,886,133
    
    
    $
    7,041,909
    
    
    $
    7,041,919Federal funds sold
    
    $
    6,820,000
    
    
    $
    6,820,000
    
    
    $
    12,783,000
    
    
    $
    12,783,000Securities available for sale
    
    $
    64,866,021
    
    
    $
    64,866,021
    
    
    $
    59,287,595
    
    
    $
    59,287,595Federal home loan bank stock
    
    $
    2,927,000
    
    
    $
    2,927,000
    
    
    $
    2,957,300
    
    
    $
    2,957,300Loans
    
    $
    254,110,534
    
    
    $
    242,739,000
    
    
    $
    238,239,791
    
    
    $
    235,848,000Allowance for loan losses
    
    
    3,617,678
    
    
    
    
    
    
    
    2,964,589
    
    
    
    Loans, net
    
    $
    250,492,856
    
    
    $
    242,739,000
    
    
    $
    235,275,202
    
    
    $
    235,848,000Accrued interest receivable
    
    $
    1,666,629
    
    
    $
    1,666,629
    
    
    $
    1,425,871
    
    
    $
    1,425,871Corporate credit union membership
shares
    
    $
    
    
    
    $
    
    
    
    $
    553,834
    
    
    $
    553,834Financial liabilities:Deposits
    
    $
    238,640,269
    
    
    $
    239,249,764
    
    
    $
    248,542,720
    
    
    $
    249,014,000Federal funds purchased and securities
sold under agreements to repurchase
    
    $
    237,222
    
    
    $
    237,222
    
    
    $
    
    
    
    $
    Other borrowings
    
    $
    50,000,000
    
    
    $
    49,898,548
    
    
    $
    51,000,000
    
    
    $
    49,836,000Accrued interest payable
    
    $
    223,207
    
    
    $
    223,207
    
    
    $
    208,206
    
    
    $
    208,206
 F-26
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY)
 CONDENSED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004AssetsCash and due from banks
    
    $
    1,824,357
    
    
    $
    16,813Interest-bearing deposits in banks
    
    
    
    
    
    
    100,567Federal funds sold
    
    
    3,905,000
    
    
    
    Investment securities
    
    
    9,652,214
    
    
    
    4,030,567Investment in subsidiary
    
    
    52,918,259
    
    
    
    34,341,629Fixed assets
    
    
    512,945
    
    
    
    527,472Other assets
    
    
    170,872
    
    
    
    116,706Total assets
    
    $
    68,983,647
    
    
    $
    39,133,754Stockholders equity
    
    $
    68,983,647
    
    
    $
    39,133,754Total liabilities and stockholders equity
    
    $
    68,983,647
    
    
    $
    39,133,754
 CONDENSED STATEMENTS OF INCOME
 YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004IncomeInterest
    
    $
    351,247
    
    
    $
    207,273Gain (loss) on sale of securities
    
    
    (12,285
    )
    
    
    92,606Total income
    
    
    338,962
    
    
    
    299,879ExpenseDepreciation
    
    
    14,527
    
    
    
    14,527Other expense
    
    
    725,899
    
    
    
    286,556Total expense
    
    
    740,426
    
    
    
    301,083Loss before income tax benefits and equity
in undistributed earnings of subsidiary
    
    
    (401,464
    )
    
    
    (1,204
    )Income tax benefits
    
    
    133,845
    
    
    
    1,417Income (loss) before equity in undistributed
earnings of subsidiary
    
    
    (267,619
    )
    
    
    213Equity in undistributed earnings of subsidiary
    
    
    3,218,114
    
    
    
    3,533,037Net income
    
    $
    2,950,495
    
    
    $
    3,533,250
 F-27
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15.
    
    CONDENSED FINANCIAL INFORMATION OF HERITAGE FINANCIAL
GROUP (PARENT COMPANY ONLY) (Continued)
 CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    2,950,495
    
    
    $
    3,533,250Adjustments to reconcile net income to
net cash used in operating activities:Depreciation and amortization
    
    
    14,527
    
    
    
    14,527Gain (loss) on sale of securities
    
    
    12,285
    
    
    
    (92,606
    )Undistributed earnings of subsidiary
    
    
    (3,218,114
    )
    
    
    (3,533,037
    )Other operating activities
    
    
    132,894
    
    
    
    (12,523
    )Total adjustments
    
    
    (3,058,408
    )
    
    
    (3,623,639
    )Net cash used in operating activities
    
    
    (107,913
    )
    
    
    (90,389
    )INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    100,567
    
    
    
    (59,538
    )Increase in federal funds sold
    
    
    (3,905,000
    )
    
    
    Purchases of securities
    
    
    (8,423,529
    )
    
    
    (4,531,230
    )Proceeds from maturities of securities
    
    
    228,303
    
    
    
    1,186,865Proceeds from sale of securities
    
    
    2,089,637
    
    
    
    3,401,662Net cash used in investing activities
    
    
    (9,910,022
    )
    
    
    (2,241
    )FINANCING ACTIVITIESProceeds from sale of common stock, net of stock issuance costs
    
    
    28,011,061
    
    
    
    Shares released to employee stock ownership plan
    
    
    241,579
    
    
    
    Capital invested in subsidiary bank
    
    
    (16,258,542
    )
    
    
    Dividends paid to stockholders
    
    
    (168,619
    )
    
    
    Net cash provided by financing activities
    
    
    11,825,479
    
    
    
    Net increase (decrease) in cash and due from banks
    
    
    1,807,544
    
    
    
    (92,630
    )Cash and due from banks at beginning of year
    
    
    16,813
    
    
    
    109,443Cash and due from banks at end of year
    
    $
    1,824,357
    
    
    $
    16,813
 NOTE 16. SUBSEQUENT EVENT
  F-28