**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,DC 20549**

**FORM 10-Q**

**x**** Quarterly report underSection 13 or 15 (d) of the Securities Exchange Act of 1934**

**For the quarterly period ended****June 30, 2007**

**o**** Transition report under Section 13 or 15 (d) of the Exchange Act**

**For thetransition period from                 to                 **

**CommissionFile Number  000-51112**

**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

(Exact Name ofSmall Business Issuer as Specified in Its Charter)

| **GEORGIA**                      | ** ** | **20-2118147**       |
|----------------------------------|------------|----------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer     |
| Incorporation or  Organization)  |       | Identification  No.) |

 

###### **4077 Forsyth Road**

###### **Macon, Georgia 31210**

(Address of Principal Executive Offices)

**(478) 757-8181**

(Issuer’s Telephone Number, Including Area Code)

###### **Not Applicable**

(Former Name, Former Address and Former Fiscal Year,if Changed Since Last Report)

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x       No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” (inRule 12b-2 of the Exchange Act).
| Large accelerated filer | o |   |   | Accelerated filer | x |   |   | Non-accelerated filer | o |   |
|-------------------------|---|--------|--------|-------------------|---|--------|--------|-----------------------|---|--------|

 

Indicateby checkmark whether the registrant is a shell company (as defined by Rule12b-2 of the Exchange Act).

Yes  o        No x

**APPLICABLE ONLY TO CORPORATE ISSUERS**

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date: **Common Stock $5 par value,4,151,779 shares outstanding at July31, 2007**

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

INDEX
| ** **                                                                                                | ** ** | ** **                                                                                                                             | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I:                                                                                                   |       | FINANCIAL INFORMATION                                                                                                                  |       |     |
| ITEM 1.                                                                                                   |       | FINANCIAL STATEMENTS                                                                                                                   |       |     |
|                                                                                                      |       |                                                                                                                                   |       |     |
| The following consolidated financial statements are  provided for Atlantic Southern Financial Group, Inc. |       |                                                                                                                                   |
|                                                                                                      |       |                                                                                                                                   |       |     |
|                                                                                                      |       | Consolidated Balance  Sheets – June 30, 2007  (unaudited) and  December 31, 2006 (audited).                                       |       | 2        |
|                                                                                                      |       |                                                                                                                                   |       |     |
|                                                                                                      |       | Consolidated  Statements of Earnings (unaudited) – For the Three Months  And Six Months Ended June 30, 2007 and 2006.             |       | 3        |
|                                                                                                      |       |                                                                                                                                   |       |     |
|                                                                                                      |       | Consolidated  Statements of Comprehensive Income (unaudited) – For the  Three Months and Six Months Ended June 30, 2007 and 2006. |       | 4        |
|                                                                                                      |       |                                                                                                                                   |       |     |
|                                                                                                      |       | Consolidated  Statements of Cash Flows (unaudited) – For the Six Months  Ended June 30, 2007 and 2006.                            |       | 5        |
|                                                                                                      |       |                                                                                                                                   |       |     |
|                                                                                                      |       | Notes to  Consolidated Financial Statements (unaudited)                                                                                |       | 6        |
|                                                                                                      |       |                                                                                                                                   |       |     |
| ITEM 2.                                                                                                   |       | Management’s  Discussion and Analysis of Financial Condition and  Results of Operations                                           |       | 9        |
|                                                                                                      |       |                                                                                                                                   |       |     |
| ITEM 3.                                                                                                   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                            |       | 24       |
|                                                                                                      |       |                                                                                                                                   |       |     |
| ITEM 4.                                                                                                   |       | Controls and  Procedures                                                                                                               |       | 25       |
|                                                                                                      |       |                                                                                                                                   |       |     |
| PART II:                                                                                                  |       | OTHER INFORMATION                                                                                                                      |       | 26       |

 

 

                                                                                                                                                                                                         

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedBalance Sheets**

**June 30, 2007****(Unaudited) and****December 31, 2006****(Audited)**
| ** **                                                                                                                 | ** ** | **As of**    | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                                 | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                                 | ** ** | **2007**          | ** **  | **2006** | ** ** |
| **Assets**                                                                                                                 |       |              |        |   |   |
| Cash and due from banks                                                                                                    |       | $                 | 18,860,904  |   | $ | 13,130,014 |   |
| Interest-bearing  deposits in other banks                                                                                  |       | 797,459           |        | 259,463 |   |
| Federal funds sold and  repurchase agreements                                                                              |       | 3,642,000         |        | 29,522,000 |   |
| Total cash and  cash equivalents                                                                                           |       | 23,300,363        |        | 42,911,477 |   |
| Securities available  for sale, at fair value                                                                              |       | 71,123,123        |        | 57,596,002 |   |
| Federal Home Loan Bank  stock, restricted, at cost                                                                         |       | 2,892,000         |        | 2,327,600 |   |
| Loans held for sale                                                                                                        |       | 4,542,971         |        | 1,532,093 |   |
| Loans, net of unearned  income                                                                                             |       | 635,488,976       |        | 533,128,702 |   |
| Less - allowance for  loan losses                                                                                          |       | (9,163,429        | )           | (7,258,371 | ) |
| Loans, net                                                                                                                 |       | 626,325,547       |        | 525,870,331 |   |
| Bank premises and  equipment, net                                                                                          |       | 24,742,589        |        | 17,425,344 |   |
| Accrued interest  receivable                                                                                               |       | 6,298,718         |        | 5,570,115 |   |
| Cash surrender value of  life insurance                                                                                    |       | 4,346,261         |        | 4,264,395 |   |
| Goodwill and other  intangible assets, net of amortization                                                                 |       | 21,894,263        |        | 10,600,276 |   |
| Other assets                                                                                                               |       | 3,964,266         |        | 2,977,859 |   |
| **Total  Assets**                                                                                                          |       | $                 | 789,430,101 |   | $ | 671,075,492 |   |
|                                                                                                                       |       |              |        |   |   |
| **Liabilities and Shareholders’  Equity**                                                                             | ** ** | ** **        | ** **  | ** ** | ** ** |
| Deposits:                                                                                                                  |       |              |        |   |   |
| Non-interest  bearing                                                                                                      |       | $                 | 48,341,761  |   | $ | 34,453,507 |   |
| Money market and  NOW accounts                                                                                             |       | 113,715,803       |        | 94,942,442 |   |
| Savings                                                                                                                    |       | 8,458,245         |        | 4,200,929 |   |
| Time deposits                                                                                                              |       | 484,116,723       |        | 423,397,729 |   |
| Total deposits                                                                                                             |       | 654,632,532       |        | 556,994,607 |   |
| Federal funds purchased                                                                                                    |       | 100,200           |        | — |   |
| Federal Home Loan Bank  advances                                                                                           |       | 34,700,000        |        | 31,700,000 |   |
| Junior subordinated  debentures                                                                                            |       | 10,310,000        |        | 10,310,000 |   |
| Accrued interest  payable                                                                                                  |       | 4,135,800         |        | 3,202,163 |   |
| Accrued expenses and  other liabilities                                                                                    |       | 1,698,701         |        | 6,636,790 |   |
| Total  liabilities                                                                                                         |       | 705,577,233       |        | 608,843,560 |   |
| Shareholders’ Equity:                                                                                                 |       |              |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, outstanding -0- shares                                                      |       | —            |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares,  issued and outstanding 4,151,779 in 2007 and 3,609,747 in 2006 |       | 20,758,895        |        | 18,048,735 |   |
| Paid-in capital  surplus                                                                                                   |       | 53,401,239        |        | 37,806,852 |   |
| Retained  earnings                                                                                                         |       | 10,803,726        |        | 6,862,246 |   |
| Accumulated  other comprehensive income (loss)                                                                             |       | (1,110,992        | )           | (485,901 | ) |
| Total  shareholders’ equity                                                                                           |       | 83,852,868        |        | 62,231,932 |   |
| **Total Liabilities and  Shareholders’ Equity**                                                                       |       | $                 | 789,430,101 |   | $ | 671,075,492 |   |

 

*See Accompanying Notes to Consolidated FinancialStatements (Unaudited).*

2

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Earnings**

**Forthe Three Months and Six Months Ended June 30, 2007 and 2006**

**(Unaudited)**
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest  and Dividend Income:**                  |       |                             |       |                           |       |   |   |   |   |
| Interest and fees on loans                          |       | $                           | 13,830,216 |                           | $     | 8,326,618 |   | $ | 26,644,272 |   | $ | 15,466,874 |   |
| Interest on securities:                             |       |                             |       |                           |       |   |   |   |   |
| Taxable income                                      |       | 612,064                          |       | 347,548                        |       | 1,175,411 |   | 652,874 |   |
| Non-taxable income                                  |       | 179,976                          |       | 54,004                         |       | 337,436 |   | 100,791 |   |
| Income on federal funds sold                        |       | 123,067                          |       | 82,486                         |       | 365,796 |   | 131,280 |   |
| Other interest and dividend income                  |       | 60,838                           |       | 27,393                         |       | 149,216 |   | 47,814 |   |
| Total interest and dividend income                  |       | 14,806,161                       |       | 8,838,049                      |       | 28,672,131 |   | 16,399,633 |   |
| **Interest  Expense:**                              |       |                             |       |                           |       |   |   |   |   |
| Deposits                                            |       | 7,130,543                        |       | 3,825,118                      |       | 13,732,156 |   | 7,041,938 |   |
| Junior subordinated debentures                      |       | 193,005                          |       | 185,108                        |       | 383,974 |   | 353,708 |   |
| Federal funds purchased                             |       | 18,145                           |       | 28,581                         |       | 42,993 |   | 56,150 |   |
| FHLB borrowings and other interest expense          |       | 399,920                          |       | 254,723                        |       | 794,069 |   | 427,224 |   |
| Total interest expense                              |       | 7,741,613                        |       | 4,293,530                      |       | 14,953,192 |   | 7,879,020 |   |
|                                                |       |                             |       |                           |       |   |   |   |   |
| Net interest income                                 |       | 7,064,548                        |       | 4,544,519                      |       | 13,718,939 |   | 8,520,613 |   |
| **Provision  for loan losses**                      |       | 148,000                          |       | 483,000                        |       | 592,000 |   | 921,000 |   |
| Net interest income after provision for loan losses |       | 6,916,548                        |       | 4,061,519                      |       | 13,126,939 |   | 7,599,613 |   |
| **Noninterest  Income:**                            |       |                             |       |                           |       |   |   |   |   |
| Service charges on deposit accounts                 |       | 306,380                          |       | 112,565                        |       | 587,388 |   | 224,299 |   |
| Other service charges, commissions and fees         |       | 97,942                           |       | 26,049                         |       | 159,278 |   | 49,392 |   |
| Gain on sale of other assets                        |       | 93,272                           |       | 2,895                          |       | 94,559 |   | 2,895 |   |
| Mortgage origination income                         |       | 243,126                          |       | 162,064                        |       | 449,246 |   | 280,329 |   |
| Other income                                        |       | 169,435                          |       | 134,101                        |       | 308,987 |   | 255,284 |   |
| Total noninterest income                            |       | 910,155                          |       | 437,674                        |       | 1,599,458 |   | 812,199 |   |
| **Noninterest  Expense:**                           |       |                             |       |                           |       |   |   |   |   |
| Salaries                                            |       | 1,855,616                        |       | 944,874                        |       | 3,534,887 |   | 1,744,634 |   |
| Employee benefits                                   |       | 654,432                          |       | 353,873                        |       | 1,209,352 |   | 703,060 |   |
| Occupancy expense                                   |       | 356,709                          |       | 192,893                        |       | 680,038 |   | 382,186 |   |
| Equipment rental and depreciation of equipment      |       | 203,919                          |       | 111,697                        |       | 378,060 |   | 195,681 |   |
| Loss on sales / calls of investment securities      |       | 382                              |       | —                         |       | 307 |   | 9,753 |   |
| Other expenses                                      |       | 1,599,203                        |       | 761,836                        |       | 2,869,451 |   | 1,560,056 |   |
| Total noninterest expense                           |       | 4,670,261                        |       | 2,365,173                      |       | 8,672,095 |   | 4,595,370 |   |
|                                                |       |                             |       |                           |       |   |   |   |   |
| **Earnings Before Income Taxes**                    |       | 3,156,442                        |       | 2,134,020                      |       | 6,054,302 |   | 3,816,442 |   |
| Provision for  income taxes                         |       | 1,098,220                        |       | 773,088                        |       | 2,112,822 |   | 1,395,156 |   |
| **Net Earnings**                                    |       | $                                | 2,058,222  |                           | $          | 1,360,932 |   | $ | 3,941,480 |   | $ | 2,421,286 |   |
| **Earnings  per share:**                            |       |                             |       |                           |       |   |   |   |   |
| Basic                                               |       | $                                | 0.50       |                           | $          | 0.48 |   | $ | 0.97 |   | $ | 0.89 |   |
| Diluted                                             |       | $                                | 0.46       |                           | $          | 0.43 |   | $ | 0.90 |   | $ | 0.79 |   |

 

*See Accompanying Notes toConsolidated Financial Statements (Unaudited).*

3

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Comprehensive Income**

**Forthe Three Months and Six Months Ended June 30, 2007 and 2006**

**(Unaudited)**
| ** **                                                                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings                                                                                          |       | $                                                   | 2,058,222  |                                              | $          | 1,360,932 |   | $ | 3,941,480 |   | $ | 2,421,286 |   |
| Other  comprehensive loss:                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding losses on investment securities  available for sale                                |       | (1,215,233                                          | )          | (508,300                                          | )          | (1,031,650 | ) | (608,271 | ) |
| Unrealized holding gains (losses) on derivative  financial instruments classified as cash flow hedges |       | 29,824                                              |       | (35,635                                           | )          | 84,235 |   | (70,135 | ) |
| Reclassification adjustment for losses realized in  net earnings                                      |       | 382                                                 |       | —                                            |       | 307 |   | 9,753 |   |
| Total other comprehensive loss, before tax                                                            |       | (1,185,027                                          | )          | (543,935                                          | )          | (947,108 | ) | (668,653 | ) |
| Income taxes  related to other comprehensive income:                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding losses on investment securities  available for sale                                |       | 413,179                                             |       | 172,822                                           |       | 350,761 |   | 206,812 |   |
| Unrealized holding (gains) losses on derivative  financial instruments classified as cash flow hedges |       | (10,140                                             | )          | 12,116                                            |       | (28,640 | ) | 23,846 |   |
| Reclassification adjustment for losses realized in  net earnings                                      |       | (130                                                | )          | —                                            |       | (104 | ) | (3,316 | ) |
| Total income taxes related to other comprehensive  loss                                               |       | 402,909                                             |       | 184,938                                           |       | 322,017 |   | 227,342 |   |
| Total other comprehensive loss, net of tax                                                            |       | (782,118                                            | )          | (358,997                                          | )          | (625,091 | ) | (441,311 | ) |
| Total  comprehensive income                                                                           |       | $                                                   | 1,276,104  |                                              | $          | 1,001,935 |   | $ | 3,316,389 |   | $ | 1,979,975 |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

4

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated****Statements of Cash Flows**

**Forthe Six Months Ended June 30, 2007 and 2006**

**(Unaudited)**
| ** **                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                                  |       |                                              |       |   |   |
| Net earnings                                                                                |       | $                                                 | 3,941,480  |   | $ | 2,421,286 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:        |       |                                              |       |   |   |
| Provision for loan losses                                                                   |       | 592,000                                           |       | 921,000 |   |
| Depreciation                                                                                |       | 490,439                                           |       | 250,432 |   |
| Stock based compensation                                                                    |       | 11,968                                            |       | — |   |
| Amortization and (accretion), net                                                           |       | 98,659                                            |       | 13,129 |   |
| Gain on sales of assets                                                                     |       | (94,559                                           | )          | (2,895 | ) |
| Loss on sales / calls of investment securities                                              |       | 307                                               |       | 9,753 |   |
| Change in cash surrender value of life insurance                                            |       | (81,866                                           | )          | (81,866 | ) |
| Changes in assets and liabilities, net of effects of  purchase acquisition in 2007:         |       |                                              |       |   |   |
| Loans held for sale                                                                         |       | (3,010,878                                        | )          | (401,764 | ) |
| Changes in accrued income and other assets                                                  |       | (19,655                                           | )          | (1,684,287 | ) |
| Changes in accrued expenses and other liabilities                                           |       | 874,529                                           |       | 359,205 |   |
| Net cash provided by operating activities                                                   |       | 2,802,424                                         |       | 1,803,993 |   |
| **Cash  Flows from Investing Activities, net of effects of purchase acquisition in  2007:** |       |                                              |       |   |   |
| Net change in loans to customers                                                            |       | (53,469,031                                       | )          | (76,260,908 | ) |
| Purchase of available for sale securities                                                   |       | (8,536,661                                        | )          | (10,645,584 | ) |
| Proceeds from sales, calls, maturities and paydowns  of available for sale securities       |       | 5,893,455                                         |       | 1,469,994 |   |
| Cash received from First Community, net of cash paid  of $235,034                           |       | 5,556,520                                         |       | — |   |
| Cash paid to Sapelo shareholders                                                            |       | (5,322,492                                        | )          | — |   |
| Purchase of FHLB stock                                                                      |       | (292,900                                          | )          | (520,000 | ) |
| Property and equipment expenditures                                                         |       | (5,641,140                                        | )          | (2,448,972 | ) |
| Proceeds from sales of assets                                                               |       | 312,996                                           |       | — |   |
| Net cash used in investing activities                                                       |       | (61,499,253                                       | )          | (88,405,470 | ) |
| **Cash  Flows from Financing Activities, net of effects of purchase acquisition in  2007:** |       |                                              |       |   |   |
| Net change in deposits                                                                      |       | 39,083,561                                        |       | 74,632,858 |   |
| Net increase in federal funds purchased                                                     |       | 100,200                                           |       | — |   |
| Advances on FHLB borrowings                                                                 |       | 17,200,000                                        |       | 6,000,000 |   |
| Payments on FHLB borrowings                                                                 |       | (17,200,000                                       | )          | — |   |
| Payment for fractional shares                                                               |       | (10,320                                           | )          | — |   |
| Payment for issuance of common stock                                                        |       | (87,726                                           | )          | — |   |
| Proceeds from issuance of common stock, net of  issuance cost of $202,175                   |       | —                                            |       | 20,797,825 |   |
| Net cash provided by financing activities                                                   |       | 39,085,715                                        |       | 101,430,683 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                   |       | (19,611,114                                       | )          | 14,829,206 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                           |       | 42,911,477                                        |       | 5,782,394 |   |
| **Cash and Cash Equivalents, End  of Quarter**                                              |       | $                                                 | 23,300,363 |   | $ | 20,611,600 |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

5

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

***(1)******        ******Basisof Presentation***

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include all informationand footnotes necessary for a fair presentation of financial position, resultsof operations, and changes in financial position in conformity with generallyaccepted accounting principles.  Theinterim financial statements furnished reflect all adjustments, which are, inthe opinion of management, necessary to a fair statement of the results for theinterim periods presented.  The interimconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006.   Certain reclassifications have been made tothe 2006 financial statement presentation to correspond to the current year’sformat.

***(2)******        ******Stock-BasedCompensation***

TheCompany granted 8,000 options during the first quarter 2007.  There were no grants issued during the secondquarter of 2007.  The Company recognized $11,968 ofstock-based employee compensation expense during the first six months of 2007associated with its stock option grants. The Company is recognizing the compensation expense for stock optiongrants with graded vesting schedules on a straight-line basis over therequisite service period of the award as permitted by SFAS No. 123 (R).  As of June 30, 2007, there was $107,712 of unrecognizedcompensation cost related to stock option grants.  The cost is expected to be recognized overthe vesting period of approximately five years.

The weighted average grant-date fair value of eachoption granted during the first quarter 2007 was $14.96.  The fair value of each option is estimated onthe date of grant using the Black-Scholes Model.  The following weighted average assumptionswere used for grants in the first quarter 2007:
| Dividend yield           |   | 0.00     | %      |
|--------------------------|--------|----------|--------|
| Expected volatility      |   | 21.58    | %      |
| Risk-free  interest rate |   | 4.75     | %      |
| Expected term            |   | 10 years |   |

 

# ***(3)******        ******Net Earningsper Share***

Basic earnings per share are based on the weightedaverage number of common shares outstanding during the period while the effectsof potential shares outstanding during the period are included in dilutedearnings per share.

6

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The reconciliation of the amountsused in the computation of both “basic earnings per share” and “dilutedearnings per share” for each period is presented as follows:
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net earnings                                                                |       | $                                | 2,058,222  |                           | $          | 1,360,932 |   | $ | 3,941,480 |   | $ | 2,421,286 |   |
| Weighted average  common shares outstanding                                 |       | 4,151,779                        |       | 2,854,144                      |       | 4,061,939 |   | 2,728,407 |   |
| Shares issued  from assumed exercise of common stock equivalents            |       | 341,224                          |       | 334,282                        |       | 339,869 |   | 330,270 |   |
| Weighted average  number of common and common equivalent shares outstanding |       | 4,493,003                        |       | 3,188,426                      |       | 4,401,808 |   | 3,058,677 |   |
| Earnings per  share:                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                       |       | $                                | 0.50       |                           | $          | 0.48 |   | $ | 0.97 |   | $ | 0.89 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Diluted                                                                     |       | $                                | 0.46       |                           | $          | 0.43 |   | $ | 0.90 |   | $ | 0.79 |   |

 

# ***(4)******        ******Mergers andAcquisitions***

On January 31, 2007, theCompany consummated an agreement to acquire all of the outstanding shares ofFirst Community Bank for $18.6 million in Atlantic Southern common stockincluding certain acquisition costs totaling $235,034.  Under the terms of the merger agreement, theCompany issued, and shareholders of First Community Bank were entitled toreceive their pro rata portion of 542,032 shares of Atlantic Southern commonstock.  First Community Bank was acommunity bank headquartered in Roberta, Georgia.  First Community Bank had total assets of$69.3 million, including total loans of $50 million and total investments of$11.9 million.  Additionally, FirstCommunity Bank had $58.6 million in deposits. With the acquisition of First Community Bank, the Company was able toexpand their presence in the middle Georgia area.  First Community Bank operated three fullservice banking offices in Crawford, Bibb and Peach counties of Georgia.  The Company accounted for the transactionusing the purchase method and accordingly, the purchase price was allocated toassets and liabilities acquired based upon their fair values at the date of theacquisition.  The excess of the purchaseprice over the fair value of the net assets acquired (goodwill) wasapproximately $9.9 million, none of which will be deductible for income taxpurposes.  Operations of First CommunityBank are included in the consolidated statements of earnings since itsacquisition.

In conjunctionwith the acquisition, assets were acquired and liabilities were assumed asfollows:
| Fair value of assets  acquired                    |   | $          | 81,005,897 |   |
|---------------------------------------------------|--------|------------|------------|--------|
| Fair value of  liabilities assumed                |   | 62,381,121 |       |
|                                              |   |       |       |
| Cash and common stock  consideration to be given  |   | 18,624,776 |       |
| Acquisition cost paid                             |   | 235,034    |       |
| Stock issued to First Community Bank shareholders |   | $          | 18,389,742 |   |

 

# ***(5)******        ******RecentAccounting Pronouncements***

*The Fair Value Option for Financial Assets and Financial Liabilities*

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*.  SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The statement is expected to expand the useof fair value measurement, which is consistent with FASB’s long-termmeasurement objectives for accounting for financial instruments.  The statement is effective for financial statements issued for

7

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fiscal years beginning after November 15, 2007;however, it includes an early adoption provision allowing entities to adoptwithin 120 days of their most recent fiscal year-end.  The Company has decided not to implement SFASNo. 159 until January 2008.

8

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

**For Each of the Three Months and Six Months in the Period Ended**

**June 30, 2007 and 2006**

Thefollowing discussion of financial condition as of June 30, 2007 compared to December31, 2006, and the results of operations for the three months and sixmonths ended June 30, 2007compared to the three months and six months ended June 30, 2006 should be read in conjunction with the condensedfinancial statements and accompanying footnotes appearing in this report.

##### **Advisory NoteRegarding Forward-Looking Statements**

The statements contained in this reporton Form 10-Q that are not historical facts are forward-looking statementssubject to the safe harbor created by the Private Securities Litigation ReformAct of 1995.  We caution readers of thisreport that such forward-looking statements involve known and unknown risks,uncertainties and other factors which may cause the actual results, performanceor achievements to be materially different from those expressed or implied bysuch forward-looking statements. Although we believe that our expectations of future performance is basedon reasonable assumptions within the bounds of our knowledge of our businessand operations, there can be no assurance that actual results will not differmaterially from our expectations.

Factors which could cause actual resultsto differ from expectations include, among other things:

·                  the challenges, costs andcomplications associated with the continued development of our branches;

·                  the potential that loancharge-offs may exceed the allowance for loan losses or that such allowancewill be increased as a result of factors beyond our control;

·                  our dependence on seniormanagement;

·                  competition from existingfinancial institutions operating in our market areas as well as the entry intosuch areas of new competitors with greater resources, broader branch networksand more comprehensive services;

·                  adverse conditions in the stockmarket, the public debt market, and other capital markets (including changes ininterest rate conditions);

·                  the effect of any mergers,acquisitions or other transactions to which we or our subsidiary may from timeto time be a party, including, without limitation, our ability to successfullyintegrate any businesses that we acquire;

·                  changes in deposit rates, the netinterest margin, and funding sources;

·                  inflation, interest rate, market,and monetary fluctuations;

·                  risks inherent in making loansincluding repayment risks and value of collateral;

·                  the strength of the United Stateseconomy in general and the strength of the local economies in which we conductoperations may be different than expected resulting in, among other things, adeterioration in credit quality or a reduced demand for credit, including theresultant effect on our loan portfolio and allowance for loan losses;

·                  fluctuations in consumer spendingand saving habits;

·                  the demand for our products andservices;

·                  technological changes;

·                  the challenges and uncertaintiesin the implementation of our expansion and development strategies;

·                  the ability to increase marketshare;

·                  the adequacy of expenseprojections and estimates of impairment loss;

·                  the impact of changes inaccounting policies by the Securities and Exchange Commission;

·                  unanticipated regulatory orjudicial proceedings;

·                  the potential negative effects offuture legislation affecting financial institutions (including, withoutlimitation, laws concerning taxes, banking, securities, and insurance);

·                  the effects of, and changes in,trade, monetary and fiscal policies and laws, including interest rate policiesof the Board of Governors of the Federal Reserve System;

·                  the timely development and acceptanceof products and services, including products and services offered throughalternative delivery channels such as the Internet;

·                  the impact on our business, aswell as on the risks set forth above, of various domestic or internationalmilitary or terrorist activities or conflicts;

·                  other factors described in thisreport and in other reports we have filed with the Securities and Exchange 

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Commission; and

·                  Our success at managing the risksinvolved in the foregoing.

#### Forward-looking statementsspeak only as of the date on which they are made.  We undertake no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich the statement is made to reflect the occurrence of unanticipated events.

**ExecutiveSummary and Recent Developments**

### The Company’s total assetsat June 30, 2007, were approximately $789,430,000, which represented anincrease of approximately $118,355,000 or 18% from December 31, 2006.  Net earnings increased 63% for the six monthsended June 30, 2007 to $3,941,000 or $0.90 per diluted share compared to$2,421,000 or $0.79 per diluted share for the six months ended June 30, 2006.

On December 15,2006, we consummated an agreement to acquire all of the outstanding shares ofSapelo Bancshares, Inc. (“Sapelo”) for $15.4 million using a combination ofstock and cash.  Under the terms of themerger agreement, we issued, and shareholders of Sapelo were entitled toreceive their pro rata portion of $6,239,972 and 305,695 shares of AtlanticSouthern common stock.  The cash proceedswere obtained from a public offering in 2006. Sapelo was a bank holding company with one subsidiary, Sapelo NationalBank, based in Darien, Georgia.  Sapelooperated four full service banking offices in the coastal Georgia cities ofDarien, Brunswick and St. Simons Island. Sapelo had total assets of $77.7 million, including total loans of $52million and total investments of $1.8 million. Additionally, Sapelo had $66.7 million in deposits.  We accounted for the transaction using thepurchase method and accordingly, the purchase price was allocated to assets andliabilities acquired based upon their fair values at the date of theacquisition.  The excess of the purchaseprice over the fair value of the net assets acquired (goodwill) wasapproximately $8.5 million, none of which will be deductible for income taxpurchases.  Operations of Sapelo areincluded in the consolidated statements of earnings since its acquisition.

On January 31,2007, the Company consummated an agreement to acquire all of the outstandingshares of First Community Bank for $18.6 million in Atlantic Southern commonstock including certain acquisition costs totaling $235,034.  Under the terms of the merger agreement, theCompany issued, and shareholders of First Community Bank were entitled toreceive their pro rata portion of 542,032 shares of Atlantic Southern commonstock.  First Community Bank was acommunity bank headquartered in Roberta, Georgia.  First Community Bank operated three fullservice banking offices in Crawford, Bibb and Peach counties of Georgia.  First Community Bank had total assets of$69.3 million, including total loans of $50 million and total investments of$11.9 million.  Additionally, FirstCommunity Bank had $58.6 million in deposits. With the acquisition of First Community Bank, the Company was able toexpand their presence in the middle Georgia area.  The Company accounted for the transactionusing the purchase method and accordingly, the purchase price was allocated toassets and liabilities acquired based upon their fair values at the date of theacquisition.  The excess of the purchaseprice over the fair value of the net assets acquired (goodwill) wasapproximately $9.9 million, none of which will be deductible for income taxpurposes.  Operations of First CommunityBank are included in the consolidated statements of earnings since itsacquisition.

OnApril 16, 2007, the Company began trading on the NASDAQ Global Market under thesymbol “ASFN.”  Our Board of Directorsand management believe that this will improve the liquidity of the stock.

Managementhas developed a strategy for asset growth and expansion of its financialservices through branching into selective markets in the middle Georgia regionand in the coastal Georgia region.   Inthe middle Georgia region, we opened our new branch in Bonaire in efforts toincrease our presence in the growing Houston County area.  In August, we plan to open our new corporatecenter, Northwinds, in north Bibb County. As for the coastal Georgia region, our Rincon office moved to itspermanent location upon the completion of its building in May.  We also have plans to start construction onour Pooler branch, near Savannah, Georgia, by the end of the year.

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**FinancialCondition**

Thecomposition of assets and liabilities for the Company is as follows:
|                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                                  |       |              |       |                  |       |              |       |              |       |
| Cash and due from banks                      |       | $                 | 18,860,904 |                  | $          | 13,130,014        |       | $                 | 5,730,890  |   | 43.65 | % |
| Federal funds sold and repurchase agreements |       | 3,642,000         |       | 29,522,000            |       | (25,880,000       | )          | -87.66            | %          |
| Securities available for sale                |       | 71,123,123        |       | 57,596,002            |       | 13,527,121        |       | 23.49             | %          |
| Loans, net of unearned income                |       | 635,488,976       |       | 533,128,702           |       | 102,360,274       |       | 19.20             | %          |
| Cash surrender value of life insurance       |       | 4,346,261         |       | 4,264,395             |       | 81,866            |       | 1.92              | %          |
| Goodwill and other intangible assets         |       | 21,894,263        |       | 10,600,276            |       | 11,293,987        |       | 106.54            | %          |
| Total assets                                 |       | 789,430,101       |       | 671,075,492           |       | 118,354,609       |       | 17.64             | %          |
| **Liabilities:**                             |       |              |       |                  |       |              |       |              |       |
| Deposits                                     |       | 654,632,532       |       | 556,994,607           |       | 97,637,925        |       | 17.53             | %          |
| FHLB advances                                |       | 34,700,000        |       | 31,700,000            |       | 3,000,000         |       | 9.46              | %          |
| Accrued expenses and other liabilities       |       | 1,698,701         |       | 6,636,790             |       | (4,938,089        | )          | -74.40            | %          |
|                                         |       |              |       |                  |       |              |       |              |       |
| Loan to Deposit  Ratio                       |       | 97.08             | %          | 95.72                 | %          |              |       |              |       |
|                                              |            |                   |            |                       |            |                   |            |                   |            |  |  |  |

 

Themost significant change in the composition of assets was the increase in loansof $102.4 million due to continued growth of the Company.  Growth in Atlantic Southern Bank’s loanportfolio was divided between internally generated growth of approximately$52.4 million and the addition of approximately $50.0 million from the mergerwith First Community Bank.  We were ableto generate loan growth by expanding in new markets with a loan productionoffice in Valdosta, Georgia; opening new de novo branches in existing marketswith a branch in Bonaire, Georgia and a full service branch in Savannah,Georgia; and increasing loan growth in the middle Georgia, coastal Georgia andGolden Isles regions.  The mostsignificant change in the composition of liabilities was the increase indeposits, especially time deposits, to fund loan growth.  Time deposits, including wholesale and coredeposits, are our principal source of funds for loans and investing insecurities.

Becauseof the historically low interest rate environment in the last two years, wehave chosen to obtain a portion of our deposits from outside our market. Our wholesale time deposits represented 39.3% of our deposits as of June 30,2007 when compared to 47.4% of our deposits as of December 31, 2006.  The Company’s Fund Management Policy allowsfor the ratio of wholesale deposits to total deposits to be 60%.  The Company has been successful in replacingmaturing brokered deposits and does not expect to experience significantdisintermediation as the brokered deposits mature.

**Investment Securities**

Securities in our portfolio totaled $71.1 million atJune 30, 2007, compared to $57.6 million at December 31, 2006.  The most significant growth in the securitiesportfolio occurred as a result from the merger with First Community Bank, whichhad total investments of approximately $11.9 million.  At June 30, 2007, the securities portfoliohad unrealized net losses of approximately $1.7 million.  During the second quarter, the bond markethad a sale off towards the end of June which caused the bond prices todecrease.

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The following table shows the carrying value of theinvestment securities at June 30, 2007 and December 31, 2006.
|                                         | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                              | ** ** | **(Amounts in Thousands)** | ** ** |
| Securities available  for sale:         |       |                                 |       |                  |       |
| U. S. Government  Sponsored Enterprises |       | $                                    | 27,508     |                  | $          | 25,240 |   |
| U. S. Treasury  Securities              |       | 248                                  |       | —                |       |
| State, County  and Municipal            |       | 18,856                               |       | 13,653                |       |
| Mortgage-backed  Securities             |       | 24,030                               |       | 18,453                |       |
| Other  Investments                      |       | 481                                  |       | 250                   |       |
| Total                                   |       | $                                    | 71,123     |                  | $          | 57,596 |   |

 

### **Loans**

Our loan demand continues to be strong.  Total loans increased $102.4 million or 19%from December 31, 2006 to June 30, 2007. The increase in loans in 2007 is attributable to the $50.0 million inloans acquired from the acquisition of First Community Bank in January, ourbranching efforts along with the lending efforts of our senior managementlending team.  The following tablepresents a summary of the loan portfolio by category.
|                                                    | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
|                                               |       |                                 |       |                  |       |
| Commercial and  agricultural                       |       | $                                    | 60,662     |                  | $          | 54,898 |   |
| Real estate -  commercial                          |       | 242,943                              |       | 192,876               |       |
| Real estate -  construction                        |       | 267,343                              |       | 224,540               |       |
| Real estate - mortgage                             |       | 56,789                               |       | 54,003                |       |
| Obligations of  political subdivisions in the U.S. |       | 279                                  |       | 1,728                 |       |
| Consumer                                           |       | 7,802                                |       | 5,380                 |       |
| Total Loans                                        |       | 635,818                              |       | 533,425               |       |
| Less:                                              |       |                                 |       |                  |       |
| Unearned loan  fees                                |       | (329                                 | )          | (297                  | )          |
| Allowance for  loan losses                         |       | (9,163                               | )          | (7,258                | )          |
| Loans, net                                         |       | $                                    | 626,326    |                  | $          | 525,870 |   |

 

### **AssetQuality**

Management considersasset quality to be of primary importance. Management has a credit administration and loan review process whichmonitor, control and measure our credit risk. In addition, management has standardized credit analyses and acomprehensive credit policy.  As aresult, management believes they have a good understanding of the assetquality, have an established warning and early detection system regarding theloans and have a comprehensive analysis of the allowance for loan losses.

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The following table presents a summary of changes inthe allowance for loan losses for the three and six-month periods ended June30, 2007 and 2006.

**Analysis of Changes in Allowance for Loan Losses**
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                | ** ** |
| Balance beginning of period                        |       | $                                                   | 8,830      |                                              | $          | 4,601 |   | $ | 7,258 |   | $ | 4,150 |   |
| Loans charged-off                                  |       | (17                                                 | )          | (20                                               | )          | (546 | ) | (20 | ) |
| Recoveries                                         |       | 202                                                 |       | 76                                                |       | 219 |   | 89 |   |
| Net charge-offs                                    |       | 185                                                 |       | 56                                                |       | (327 | ) | 69 |   |
| Provision for loan losses                          |       | 148                                                 |       | 483                                               |       | 592 |   | 921 |   |
| Allowance from purchase acquisition                |       | —                                              |       | —                                            |       | 1,640 |   | — |   |
| Balance end of period                              |       | $                                                   | 9,163      |                                              | $          | 5,140 |   | $ | 9,163 |   | $ | 5,140 |   |
|                                               |       |                                                |       |                                              |       |   |   |   |   |
| Total Loans:                                       |       |                                                |       |                                              |       |   |   |   |   |
| At period end                                      |       | $                                                   | 635,489    |                                              | $          | 407,771 |   | $ | 635,489 |   | $ | 407,771 |   |
| Average                                            |       | 631,237                                             |       | 387,182                                           |       | 619,282 |   | 369,251 |   |
|                                               |       |                                                |       |                                              |       |   |   |   |   |
| As a percentage of average loans (annualized):     |       |                                                |       |                                              |       |   |   |   |   |
| Net charge-offs                                    |       | -0.12                                               | %          | -0.06                                             | %          | 0.11 | % | -0.04 | % |
| Provision for loan losses                          |       | 0.09                                                | %          | 0.50                                              | %          | 0.19 | % | 0.50 | % |
| Allowance as a percentage of period end loans      |       | 1.44                                                | %          | 1.26                                              | %          | 1.44 | % | 1.26 | % |
| Allowance as a  percentage of non-performing loans |       | 285.81                                              | %          | 2595.96                                           | %          | 285.81 | % | 2595.96 | % |

 

### Management believes that theallowance for loan losses at June 30, 2007 is adequate to absorb lossesinherent in the loan portfolio.  Thisassessment involves uncertainty and judgment; therefore, the adequacy of theallowance for loan losses cannot be determined with precision and may besubject to change in future periods.  Inaddition, bank regulatory authorities, as part of their periodic examination ofthe Bank, may require adjustments to the provision for loan losses in futureperiods if, in their opinion, the results of their review warrant suchadditions.

Ourpolicy is to place loans on non-accrual status when it appears that thecollection of interest in accordance with the terms of the loan isdoubtful.  Any loan which becomes 90 dayspast due as to principal or interest is automatically placed onnon-accrual.  Exceptions are allowed for90-day past due loans when such loans are well secured and in process ofcollection.  Other Real Estate is definedas real estate acquired as salvage on uncollectible loans.  At the time of foreclosure, an appraisal isobtained on the real estate.  The amountcharged to Other Real Estate will be the lower of appraised value or “recordedinvestment” in the loan satisfied.  Therecorded investment is the unpaid balance of the loan, increased by accrued anduncollected interest, unamortized premium, finance charges, and loanacquisition costs, if any, and decreased by previous direct write down andunamortized discount.  Any excess of therecorded investment in the loan satisfied over the appraised value of theproperty must be charged to allowance for loan losses.

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Nonperformingassets consist of non-accrual loans, accruing loans 90 days past due,repossessed assets and other real estate owned. The following summarizesnon-performing assets:
|                                 | ** ** | **June 30.  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accruing loans 90 days past due |       | $                       | 84,248     |                        | $          | 30,621 |   |
| Non-accrual loans               |       | 3,121,778               |       | 617,420                     |       |
| Repossessed assets              |       | 14,086                  |       | —                      |       |
| Other real estate               |       | 698,547                 |       | —                      |       |
| Total non-performing assets     |       | $                       | 3,918,659  |                        | $          | 648,041 |   |

 

Nonperformingassets increased $3,270,618 or 504.69% from December 31, 2006 to June 30,2007.  On January 31, 2007, managementplaced one loan acquired from our acquisition of Sapelo National Bank with abalance of approximately $3.0 million on non-accrual that was secured bysingle-family residential real estate appraised at approximately $5.1 million.  The borrower filed for bankruptcy protectionon April 2, 2007.  However, management iscontinuously monitoring this loan in order to minimize any losses.

Otherreal estate consists of two properties totaling $698,547 at June 30, 2007.  At June 30, 2007, the Company’s other realestate consisted of the following:

**OTHER REAL ESTATE**
| 1-4 Family residential  properties |   | $       | 22,961  |   |
|------------------------------------|--------|---------|---------|--------|
| Nonfarm nonresidential properties  |   | 675,586 |    |
| Total                              |   | $       | 698,547 |   |

 

Otherreal estate consisted of one foreclosure on a nonresidential property with avalue of $675,586 and one foreclosure on a 1-4 family residential property witha value of $22,961.  All properties arebeing actively marketed for sale and management is continuously monitoringthese properties in order to minimize any losses.

**Deposits**

Totaldeposits at June 30, 2007 were $654.6 million, increase of $97.6 million, or18%, from December 31, 2006.  Totalnon-interest bearing demand deposit accounts of $48.3 million increased $13.9million, or 40%, and interest bearing demand and savings account of $122.2million increased $23.0 million, or 23%, resulting mainly from our acquisitionof First Community Bank in January.

Totaltime deposits as of June 30, 2007 were $484.1 million, an increase of $60.7million, or 14%, from December 31, 2006. Total retail time deposits at June 30, 2007 increased approximately$63.8 million, or 15% of total time deposits, from December 31, 2006 resultingfrom $34.2 million from our acquisition of First Community Bank, our management team drawing customers awayfrom other financial institutions and from our branching efforts.  Total wholesale deposits at June 30, 2007decreased approximately $3.1 million, or 1% of total time deposits, from December31, 2006 reflecting the maturity of the wholesale deposits being replaced byretail deposits.

### **Results ofOperations**

# **General**

The Company’sresults of operations are determined by its ability to effectively manageinterest income and expense, to minimize loan and investment losses, togenerate noninterest income and to control noninterest expense.  Since interest rates are determined by marketforces and economic conditions beyond the control of the Company, the abilityto generate interest income is dependent upon the Bank’s ability to obtain anadequate spread between the rate earned on earning assets and the rate paid oninterest-bearing liabilities.

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# The following table shows the significantcomponents of net earnings:

|                                | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                     | ** ** | **2007**                                      | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                           | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Interest Income                |       | $                                             | 28,672,131 |       | $          | 16,399,633        |       | $ | 12,272,498 |   | 74.83 | % |
| Interest Expense               |       | 14,953,192                                    |       | 7,879,020  |       | 7,074,172         |       | 89.78 | % |
| Net Interest Income            |       | 13,718,939                                    |       | 8,520,613  |       | 5,198,326         |       | 61.01 | % |
| Provision for Loan Losses      |       | 592,000                                       |       | 921,000    |       | (329,000          | )          | -35.72 | % |
| Net Earnings                   |       | 3,941,480                                     |       | 2,421,286  |       | 1,520,194         |       | 62.78 | % |
| Net Earnings Per Diluted Share |       | $                                             | 0.90       |       | $          | 0.79              |       | 0.11 |   | 13.92 | % |
|                                |            |                                               |            |            |            |                   |            |  |  |  |  |  |

 

 
|                                 | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **2007**                                        | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                            |       |                                            |       |       |       |              |       |   |   |
| Interest Income                 |       | $                                               | 14,806,161 |       | $          | 8,838,049         |       | $ | 5,968,112 |   | 67.53 | % |
| Interest Expense                |       | 7,741,613                                       |       | 4,293,530  |       | 3,448,083         |       | 80.31 | % |
| Net Interest Income             |       | 7,064,548                                       |       | 4,544,519  |       | 2,520,029         |       | 55.45 | % |
| Provision for Loan Losses       |       | 148,000                                         |       | 483,000    |       | (335,000          | )          | -69.36 | % |
| Net Earnings                    |       | 2,058,222                                       |       | 1,360,932  |       | 697,290           |       | 51.24 | % |
| Net Earnings Per Diluted Shares |       | $                                               | 0.46       |       | $          | 0.43              |       | 0.03 |   | 6.98 | % |
|                                 |            |                                                 |            |            |            |                   |            |  |  |  |  |  |

 

# **Net Interest Income**

Ourprimary source of income is interest income from loans and investmentsecurities.  Our profitability depends largelyon net interest income, which is the difference between the interest receivedon interest-earning assets and the interest paid on deposits, borrowings, andother interest-bearing liabilities.  Netinterest income increased $5.2 million, or 61%, for the six months ended June30, 2007 compared to the six months ended June 30, 2006.  Net interest income increased $2.5 million,or 55%, for the second quarter of 2007 compared to the same period in 2006.

Totalinterest and dividend income for the three and six months ended June 30, 2007increased $6.0 million, or 68%, and $12.3 million, or 75%, respectively, whencompared to the three and six months ended June 30, 2006 primarily due toincreases in loan interest and fees on loans. This increase is partially the result of the average loan and loan heldfor sale portfolios for the three and six months ended June 30, 2007 increasingapproximately $245.5 million, or 63%, and $250.7 million, or 68%, respectively,when compared to average loan and loan held for sale portfolios for the threeand six months ended June 30, 2006. Additionally, the average yield on loans increased during the three andsix months ended June 30, 2007 to 8.75% and 8.60%, respectively, compared to anaverage yield of 8.60% and 8.38% for the three and six months ended June 30,2006, respectively.

Totalinterest expense for the three and six months ended June 30, 2007 increased$3.4 million, or 80%, and $7.1 million, or 90%, respectively, when compared tothe three and six months ended June 30, 2006. Two factors impact interest expense: average balances of deposit andborrowing portfolios and average rates paid on each.  Average deposit balances increased approximately$255.3 million and $261.3 million when comparing the three and six months endedJune 30, 2007 to the three and six months ended June 30, 2006.  These increases include approximately $22.2million and $22.3 million in non-interest bearing balances in regular demanddeposit accounts when comparing the three and six months ended June 30, 2007 tothe same periods in 2006, respectively. The average rate paid on the deposit portfolios for the three monthsended June 30, 2007 increased to 4.78% from 4.21% when compared to the threemonths ended June 30, 2006.   The averagerate paid on the deposits for the six months ended June 30, 2007 increased to4.68% from 4.05% when compared to the six months ended June 30, 2006.  Average borrowing balances increasedapproximately $11.2 million and $14.4 million when comparing the three and sixmonths ended June 30, 2007 to the six months ended June 30, 2006,respectively.  Average interest ratespaid on 

15

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borrowingswere 5.41% and 5.32% for the three and six months ended June 30, 2007,respectively, compared to 5.52% and 5.32% for the three and six months endedJune 30, 2006, respectively.

Thebanking industry uses two key ratios to measure relative profitability of netinterest income, which are net interest spread and net interest margin.  The interest rate spread measures thedifference between the average yield on earning assets and the average ratepaid on interest-bearing liabilities. The interest rate spread eliminates the impact of non-interest-bearingfunding sources and gives a direct perspective on the effect of market interestrate movements.  The net interest marginis an indication of the profitability of our investments, and is defined as netinterest revenue as a percentage of total average earning assets which includesthe positive impact of funding a portion of earning assets with customers’non-interest-bearing deposits and with stockholders’ equity.

Forthe three months ended June 30, 2007 and 2006, our tax equivalent net interestspread was 3.49% and 3.77%, respectively, while the tax equivalent net interestmargin was 4.00% and 4.18%, respectively. For the six months ended June 30, 2007 and 2006, our tax equivalent netinterest spread was 3.42% and 3.76%, respectively, while the tax equivalent netinterest margin was 3.92% and 4.12%, respectively.  The decreases in net interest spread and netinterest margin from the three and six months ended June 30, 2006 to the threeand six months ended June 30, 2007 were due to the interest bearing liabilitiesrepricing faster than our earning assets in an increasing interest rateenvironment.  Also, our net interestmargin has decreased due to our promotions of higher short-term yields onretail time deposits in order to reduce our dependency on wholesale timedeposits to fund loan growth and to invest in investment securities.

16

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Thefollowing table shows the relationship between interest revenue and interestexpense and the average balances of interest-earning assets andinterest-earning liabilities for the three months ended June 30, 2007 and 2006.

**Average Consolidated Balance Sheet and Net InterestMargin Analysis**
| ** **                                       | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |   |
| ** **                                       | ** ** | **(Dollar amounts in thousands)**                      | ** ** |
| ** **                                       | ** ** | **Average  Balance**                                                  | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| Earning Assets                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned  income (4) (5) (6)       |       | $                                                                     | 632,648    |   | $ | 13,830 |   | 8.75 | % | $ | 387,182 |   | $ | 8,327 |   | 8.60 | % |
| Federal funds sold                               |       | 9,374                                                                 |       | 123 |   | 5.25 | % | 6,768 |   | 82 |   | 4.85 | % |
| Investment securities -  taxable (7)             |       | 52,204                                                                |       | 612 |   | 4.69 | % | 35,134 |   | 348 |   | 3.96 | % |
| Investment securities -  tax-exempt (6) (7)      |       | 18,273                                                                |       | 180 |   | 5.97 | % | 6,143 |   | 54 |   | 5.33 | % |
| Other interest and  dividend income              |       | 3,796                                                                 |       | 61 |   | 6.43 | % | 2,499 |   | 27 |   | 4.32 | % |
| Total Earning Assets                             |       | 716,295                                                               |       | 14,806 |   | 8.32 | % | 437,726 |   | 8,838 |   | 8.10 | % |
|                                             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                     |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                        |       | -9,086                                                                |       |   |   |   |   | -4,824 |   |   |   |   |   |
| Cash and due from banks                          |       | 13,650                                                                |       |   |   |   |   | 6,175 |   |   |   |   |   |
| Premises and equipment                           |       | 23,726                                                                |       |   |   |   |   | 11,241 |   |   |   |   |   |
| Accrued interest  receivable                     |       | 6,108                                                                 |       |   |   |   |   | 3,563 |   |   |   |   |   |
| Other assets                                     |       | 28,959                                                                |       |   |   |   |   | 5,824 |   |   |   |   |   |
| Total Assets                                     |       | $                                                                     | 779,652    |   |   |   |   |   | $ | 459,705 |   |   |   |   |   |
|                                             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand                          |       | $                                                                     | 112,680    |   | $ | 906 |   | 3.22 | % | $ | 55,254 |   | $ | 417 |   | 3.02 | % |
| Savings                                          |       | 8,413                                                                 |       | 11 |   | 0.52 | % | 1,603 |   | 2 |   | 0.50 | % |
| Time deposits                                    |       | 474,968                                                               |       | 6,213 |   | 5.23 | % | 306,063 |   | 3,405 |   | 4.45 | % |
| Total interest bearing  deposits                 |       | 596,061                                                               |       | 7,130 |   | 4.78 | % | 362,920 |   | 3,824 |   | 4.21 | % |
| Federal Home Loan Bank  advances                 |       | 33,522                                                                |       | 400 |   | 4.77 | % | 21,490 |   | 255 |   | 4.75 | % |
| Other borrowings                                 |       | 1,345                                                                 |       | 18 |   | 5.35 | % | 2,189 |   | 29 |   | 5.30 | % |
| Trust Preferred  Securities                      |       | 10,310                                                                |       | 193 |   | 7.49 | % | 10,310 |   | 185 |   | 7.18 | % |
| Total borrowed funds                             |       | 45,177                                                                |       | 611 |   | 5.41 | % | 33,989 |   | 469 |   | 5.52 | % |
| Total interest-bearing  liabilities              |       | 641,238                                                               |       | 7,741 |   | 4.83 | % | 396,909 |   | 4,293 |   | 4.33 | % |
|                                             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing  deposits                   |       | 48,752                                                                |       |   |   |   |   | 26,568 |   |   |   |   |   |
| Other liabilities                                |       | 6,042                                                                 |       |   |   |   |   | 6,433 |   |   |   |   |   |
| Stockholder's equity                             |       | 83,620                                                                |       |   |   |   |   | 29,795 |   |   |   |   |   |
| Total Liabilities and  Stockholder’s Equity |       | $                                                                     | 779,652    |   |   |   |   |   | $ | 459,705 |   |   |   |   |   |
| Net interest revenue  (1)                        |       |                                                                  |       | $ | 7,065 |   |   |   |   |   | $ | 4,545 |   |   |   |
| Net interest spread (2)                          |       |                                                                  |       |   |   | 3.49 | % |   |   |   |   | 3.77 | % |
| Net interest margin (3)                          |       |                                                                  |       |   |   | 4.00 | % |   |   |   |   | 4.18 | % |
|                                             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
|                                                  |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)Net interest revenue is computed by subtracting the expense from the averageinterest-bearing liabilities from the income from the average earning assets.

(2)Net interest spread is computed by subtracting the yield from the expense ofthe average interest-bearing liabilities from the yield from the averageearning assets.

(3)Net interest margin is computed by dividing net interest revenue by averagetotal earning assets.

(4)Average loans are shown net of unearned income. Included in the average balance of loans outstanding are loans where theaccrual of interest has been discounted.

(5)Interest income includes loan fees as follows (in thousands): 2007 - $507; 2006- $460

(6)Average rate reflects taxable equivalent adjustments using a tax rate of 34percent.

(7) Investment securities are stated at amortized or accreted cost.

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Thefollowing table shows the relationship between interest revenue and interestexpense and the average balances of interest-earning assets andinterest-earning liabilities for the six months ended June 30, 2007 and 2006.

**Average Consolidated Balance Sheet and NetInterest Margin Analysis**
| ** **                                  | ** ** | **For the Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |   |
| ** **                                  | ** ** | **(Dollar amounts in thousands)**                    | ** ** |
| ** **                                  | ** ** | **Average  Balance**                                                | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| Earning Assets                              |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned  income (4) (5) (6)  |       | $                                                                   | 619,988    |   | $ | 26,644 |   | 8.60 | % | $ | 369,251 |   | $ | 15,467 |   | 8.38 | % |
| Federal funds sold                          |       | 14,254                                                              |       | 366 |   | 5.14 | % | 5,465 |   | 131 |   | 4.79 | % |
| Investment securities -  taxable (7)        |       | 52,172                                                              |       | 1,175 |   | 4.50 | % | 33,570 |   | 653 |   | 3.89 | % |
| Investment securities -  tax-exempt (6) (7) |       | 18,289                                                              |       | 338 |   | 5.60 | % | 5,674 |   | 101 |   | 5.39 | % |
| Other interest and  dividend income         |       | 3,899                                                               |       | 149 |   | 7.64 | % | 2,089 |   | 48 |   | 4.60 | % |
| Total Earning Assets                        |       | 708,602                                                             |       | 28,672 |   | 8.15 | % | 416,049 |   | 16,400 |   | 7.91 | % |
|                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan  losses                  |       | -8,974                                                              |       |   |   |   |   | -4,604 |   |   |   |   |   |
| Cash and due from banks                     |       | 13,362                                                              |       |   |   |   |   | 5,452 |   |   |   |   |   |
| Premises and equipment                      |       | 22,322                                                              |       |   |   |   |   | 10,718 |   |   |   |   |   |
| Accrued interest  receivable                |       | 6,038                                                               |       |   |   |   |   | 3,245 |   |   |   |   |   |
| Other assets                                |       | 24,986                                                              |       |   |   |   |   | 5,792 |   |   |   |   |   |
| Total Assets                                |       | $                                                                   | 766,336    |   |   |   |   |   | $ | 436,652 |   |   |   |   |   |
|                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand                     |       | $                                                                   | 110,925    |   | $ | 1,738 |   | 3.13 | % | $ | 51,780 |   | $ | 711 |   | 2.75 | % |
| Savings                                     |       | 8,385                                                               |       | 22 |   | 0.52 | % | 1,522 |   | 4 |   | 0.53 | % |
| Time deposits                               |       | 467,576                                                             |       | 11,972 |   | 5.12 | % | 294,513 |   | 6,327 |   | 4.30 | % |
| Total interest bearing  deposits            |       | 586,886                                                             |       | 13,732 |   | 4.68 | % | 347,815 |   | 7,042 |   | 4.05 | % |
| Federal Home Loan Bank  advances            |       | 33,939                                                              |       | 794 |   | 4.68 | % | 18,845 |   | 427 |   | 4.53 | % |
| Other borrowings                            |       | 1,651                                                               |       | 43 |   | 5.21 | % | 2,335 |   | 56 |   | 4.80 | % |
| Trust Preferred  Securities                 |       | 10,310                                                              |       | 384 |   | 7.45 | % | 10,310 |   | 354 |   | 6.87 | % |
| Total borrowed funds                        |       | 45,900                                                              |       | 1,221 |   | 5.32 | % | 31,490 |   | 837 |   | 5.32 | % |
| Total interest-bearing  liabilities         |       | 632,786                                                             |       | 14,953 |   | 4.73 | % | 379,305 |   | 7,879 |   | 4.15 | % |
|                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing  deposits              |       | 47,245                                                              |       |   |   |   |   | 24,987 |   |   |   |   |   |
| Other liabilities                           |       | 6,793                                                               |       |   |   |   |   | 4,470 |   |   |   |   |   |
| Stockholder’s equity                   |       | 79,512                                                              |       |   |   |   |   | 27,890 |   |   |   |   |   |
| Total Liabilities and  Stockholder's Equity |       | $                                                                   | 766,336    |   |   |   |   |   | $ | 436,652 |   |   |   |   |   |
| Net interest revenue  (1)                   |       |                                                                |       | $ | 13,719 |   |   |   |   |   | $ | 8,521 |   |   |   |
| Net interest spread (2)                     |       |                                                                |       |   |   | 3.42 | % |   |   |   |   | 3.76 | % |
| Net interest margin (3)                     |       |                                                                |       |   |   | 3.92 | % |   |   |   |   | 4.12 | % |
|                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
|                                             |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)Net interest revenue is computed by subtracting the expense from the averageinterest-bearing liabilities from the income from the average earning assets.

(2)Net interest spread is computed by subtracting the yield from the expense ofthe average interest-bearing liabilities from the yield from the averageearning assets.

(3)Net interest margin is computed by dividing net interest revenue by averagetotal earning assets.

(4)Average loans are shown net of unearned income. Included in the average balance of loans outstanding are loans where theaccrual of interest has been discounted.

(5)Interest income includes loan fees as follows (in thousands): 2007 - $1,058;2006 - $840

(6)Average rate reflects taxable equivalent adjustments using a tax rate of 34percent.

(7) Investment securities are stated at amortized or accreted cost.

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The followingtable provides a detailed analysis of the changes in interest income andinterest expense due to changes in rate and volume for the three months and sixmonths ended June 30, 2007 compared to June 30, 2006.

**Change in InterestRevenue and Expense on a Taxable Equivalent Basis**
| ** **                                   | ** ** | **Three Months Ended June 30, 2007** | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Compared to 2006**                                | ** ** | **Compared to 2006**                              | ** ** |
| ** **                                   | ** ** | **Changes due to (a)**                         | ** ** | **Changes due to (a)**                       | ** ** |
| ** **                                   | ** ** | ** **                                                    | ** ** | **Yield/**                                                  | ** ** | **Net** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                   | ** ** | **Volume**                                                    | ** ** | **Rate**                                                    | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| ** **                                   | ** ** | **(Amounts in thousands)**                          | ** ** |
| Interest earned on:                          |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Loans                                        |       | $                                                             | 5,360      |                                                        | $          | 143 |   | $ | 5,503 |   | $ | 10,771 |   | $ | 406 |   | $ | 11,177 |   |
| Investment securities:                       |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Taxable investment securities                |       | 192                                                           |       | 72                                                          |       | 264 |   | 406 |   | 116 |   | 522 |   |
| Tax-exempt investment securities             |       | 119                                                           |       | 7                                                           |       | 126 |   | 233 |   | 4 |   | 237 |   |
| Interest earning deposits and fed funds sold |       | 61                                                            |       | 14                                                          |       | 75 |   | 313 |   | 23 |   | 336 |   |
| Total interest income                        |       | 5,732                                                         |       | 236                                                         |       | 5,968 |   | 11,723 |   | 549 |   | 12,272 |   |
|                                         |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest paid on:                            |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deposits:                                    |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest bearing demand deposits             |       | 461                                                           |       | 28                                                          |       | 489 |   | 914 |   | 113 |   | 1,027 |   |
| Savings                                      |       | 9                                                             |       | —-                                                     |       | 9 |   | 18 |   | — |   | 18 |   |
| Time deposits                                |       | 2,136                                                         |       | 672                                                         |       | 2,808 |   | 4,235 |   | 1,410 |   | 5,645 |   |
| Other borrowings and FHLB advances           |       | 104                                                           |       | 30                                                          |       | 134 |   | 292 |   | 62 |   | 354 |   |
| Trust Preferred Securities                   |       | —                                                        |       | 8                                                           |       | 8 |   | — |   | 30 |   | 30 |   |
| Total interest expense                       |       | 2,710                                                         |       | 738                                                         |       | 3,448 |   | 5,459 |   | 1,615 |   | 7,074 |   |
|                                         |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |
| Increase in net interest revenue             |       | $                                                             | 3,022      |                                                        | $          | (502 | ) | $ | 2,520 |   | $ | 6,264 |   | $ | (1,066 | ) | $ | 5,198 |   |

 

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(a)Volume and rate components are in proportion to the relationship of theabsolute dollar amount of the change in each.

# **Provision for Loan Losses**

Theprovision for loan losses for the six months ended June 30, 2007, was $592,000compared to $921,000 for the same period of 2006.  The provision for loan losses for the secondquarter of 2007 was $148,000 compared to $483,000 for the same period of2006.  The decrease in the provision forloan losses is due to a slower loan growth during the second quarter which isattributable to a sluggish real estate market. Net charge-offs as an annualized percentage of average outstanding loansfor the six months ended June 30, 2007 were 0.11%, as compared with -0.04% forthe same period of 2006.  Net loancharge-offs increased significantly this year as compared to the same period in2006 due to the Company charging off $300,000 for one participation purchasedloan from the Company’s portion of the foreclosed property being recorded toother real estate at fair market value. Net charge-offs as an annualized percentage of average outstanding loansfor the second quarter of 2007 were -0.12%, as compared with -0.06% for thesame period of 2006.  During the secondquarter of 2007, the Company had minimal charge-offs and received over $200thousand from charged-off loans from prior year.

Theprovision for loan losses is based on management’s evaluation of inherent risksin the loan portfolio and the corresponding analysis of the allowance for loanlosses.  Additional discussion on loanquality and the allowance for loan losses are included in the Asset Qualitysection of this report.

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# **Non-interest Income**

Compositionof other noninterest income is as follows: 
| ** **                                   | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                   | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                   | ** ** | **2007**                       | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on  deposit accounts         |       | $                              | 587,388    |       | $          | 224,299           |       | $ | 363,089 |   | 161.88 | % |
| Other service charges, commissions  and fees |       | 159,278                        |       | 49,392     |       | 109,886           |       | 222.48 | % |
| Gain on sale of other  assets                |       | 94,559                         |       | 2,895      |       | 91,664            |       | 3166.29 | % |
| Mortgage origination  income                 |       | 449,246                        |       | 280,329    |       | 168,917           |       | 60.26 | % |
| Other income                                 |       | 308,987                        |       | 255,284    |       | 53,703            |       | 21.04 | % |
| Total  noninterest income                    |       | $                              | 1,599,458  |       | $          | 812,199           |       | $ | 787,259 |   | 96.93 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on  deposit accounts         |       | $                                | 306,380    |       | $          | 112,565           |       | $ | 193,815 |   | 172.18 | % |
| Other service charges,  commissions and fees |       | 97,942                           |       | 26,049     |       | 71,893            |       | 275.99 | % |
| Gain on sale of other  assets                |       | 93,272                           |       | 2,895      |       | 90,377            |       | 3121.83 | % |
| Mortgage origination  income                 |       | 243,126                          |       | 162,064    |       | 81,062            |       | 50.02 | % |
| Other income                                 |       | 169,435                          |       | 134,101    |       | 35,334            |       | 26.35 | % |
| Total  noninterest income                    |       | $                                | 910,155    |       | $          | 437,674           |       | $ | 472,481 |   | 107.95 | % |

 

Service charges on deposit accounts are evaluatedagainst service charges from other banks in the local market and against theBank's own cost structure in providing the deposit services.  This income should grow with the growth in theBank's demand deposit account base. Total service charges, including non-sufficient funds fees, were $306thousand, or 34% of total noninterest income for the second quarter of 2007compared with $113 thousand, or 26% for the second quarter of 2006.  Total service charges, includingnon-sufficient funds fees, were $587 thousand, or 37% of total noninterestincome for the six months ended June 30, 2007 compared with $224 thousand, or28% for the same period of 2006.  Theyear-over-year increase in service charges on deposit accounts is directlyrelated to the increase in the number of our core transaction depositaccounts.  The number of deposit accountsfor the six months ended June 30, 2007 was 12,354 accounts when compared to thesame period of 2006 with 3,724 accounts. The increase in the number of deposit accounts includes 3,549transaction and savings accounts from the purchase of Sapelo National Bank onDecember 15, 2006 and 4,147 transaction and savings accounts from the purchaseof First Community Bank on January 31, 2007. The increase in mortgage origination fees for the six months ended June30, 2007 is primarily due to the mortgage loan brokerage activity which wasstarted in late 2004 and the volume of mortgages originated for the three and sixmonths ended June 30, 2007 was larger than the same period of 2006. Mortgageloan closings for the six months ended June 30, 2007 were approximately 143closings compared to 102 closings for the six months ended June 30, 2006.  Mortgage loan closings for the three monthsended June 30, 2007 were approximately 88 closings compared to 62 closings forthe three months ended June 30, 2006.  The increase on the gain on sale of other assets for the three and sixmonths ended June 30, 2007 is primarily due to the sale of two foreclosedproperties and the sale of one location during the second quarter.

20

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**Non-interest Expense**

Compositionof other noninterest expense is as follows:
| ** **                                     | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                     | ** ** | **2007**                       | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                       |       | $                              | 3,534,887  |       | $          | 1,744,634         |       | $ | 1,790,253 |   | 102.61 | % |
| Employee benefits                              |       | 1,209,352                      |       | 703,060    |       | 506,292           |       | 72.01 | % |
| Occupancy expense                              |       | 680,038                        |       | 382,186    |       | 297,852           |       | 77.93 | % |
| Equipment rental and depreciation of equipment |       | 378,060                        |       | 195,681    |       | 182,379           |       | 93.20 | % |
| Loss on sales / calls of investment securities |       | 307                            |       | 9,753      |       | (9,446            | )          | -96.85 | % |
| Other expenses                                 |       | 2,869,451                      |       | 1,560,056  |       | 1,309,395         |       | 83.93 | % |
| Total noninterest expense                      |       | $                              | 8,672,095  |       | $          | 4,595,370         |       | $ | 4,076,725 |   | 88.71 | % |

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | **June 30,**                | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                       |       | $                                | 1,855,616  |       | $          | 944,874           |       | $ | 910,742 |   | 96.39 | % |
| Employee benefits                              |       | 654,432                          |       | 353,873    |       | 300,559           |       | 84.93 | % |
| Occupancy expense                              |       | 356,709                          |       | 192,893    |       | 163,816           |       | 84.93 | % |
| Equipment rental and depreciation of equipment |       | 203,919                          |       | 111,697    |       | 92,222            |       | 82.56 | % |
| Loss on sales / calls of investment securities |       | 382                              |       | —     |       | 382               |       | 100.00 | % |
| Other expenses                                 |       | 1,599,203                        |       | 761,836    |       | 837,367           |       | 109.91 | % |
| Total noninterest expense                      |       | $                                | 4,670,261  |       | $          | 2,365,173         |       | $ | 2,305,088 |   | 97.46 | % |

 

Theincreases in noninterest expenses are primarily due to the growth of thebank.  The most significant increases inthe first half of 2007 are increases in salaries and employee benefits.  The increase in salaries and employeesbenefits represents normal increases in salaries and an increase in the numberof employees.  At June 30, 2007, thenumber of full-time equivalent employees was 163 compared to 77 at June 30,2006.  The increase in the number offull-time equivalent employees is directly related to the purchase of SapeloNational Bank and First Community Bank, growth of the bank and the hiring fortwo new branches in Rincon and Bonaire and one loan production center inValdosta.  The bank operates from fifteenfacilities as of June 30, 2007 compared to seven facilities as of June 30,2006.  The increases in other expensesare not attributable to any one particular item, but represent increasesrelated to physical facility expansion.

# **Income Tax Expense**

Incometax expense expressed as a percentage of earnings before income taxes was 34.90%and 36.56% for the six months ended June 30, 2007 and 2006, respectively.  Income tax expense was 34.79% and 36.23% forthe three months ended June 30, 2007 and 2006, respectively.  The fluctuation in the percentage can beattributed to the tax-free income versus the pretax income.  For the six months ended June 30, 2007, thetax-free income expressed as a percentage of earnings before income taxes was6.00% when compared to 2.64% for the six months ended June 30, 2006.  For the three months ended June 30, 2007, thetax-free income expressed as a percentage of earnings before income taxes was5.88% when compared to 2.53% for the three months ended June 30, 2006.   The increase in tax-free income is due to anincrease in the interest revenue on certain investment securities and loansthat are exempt from income taxes.  Theaverage balances of these certain investment securities and loans that areexempt from income taxes increased significantly when comparing the first sixmonths of 2007 to the same period of 2006. We acquired the tax – exempt loans through our acquisitions of SapeloNational Bank and First Community Bank. For our tax – exempt investment securities, the average balance for thesix months ended June 30, 2007 increased $12.6 million when compared to thesame period of 2006.

21

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Wepurchased approximately $6.7 million since the second quarter of 2006 and weacquired approximately $5.0 million from our acquisition of First CommunityBank

### **Liquidity**

Liquiditymanagement involves the matching of the cash flow requirements of customers,either depositors withdrawing funds or borrowers needing loans, and the abilityof the Company to meet those requirements.

TheCompany’s liquidity program is designed and intended to provide guidance infunding the credit and investment activities of the Company while at the sametime ensuring that the deposit obligations of the Company are met on a timelybasis. In order to permit active and timely management of assets andliabilities, these accounts are monitored regularly in regard to volume, mix,and maturity.

TheCompany’s liquidity position depends primarily upon the liquidity of its assetsrelative to its need to respond to short-term demand for funds caused by withdrawalsfrom deposit accounts and loan funding commitments. Primary sources ofliquidity are scheduled repayments on the Company’s loans and interest on andmaturities of its investment securities. Sales of investment securitiesavailable for sale represent another source of liquidity to the Company. TheCompany may also utilize its cash and due from banks and federal funds sold tomeet liquidity requirements as needed.

TheCompany also has the ability, on a short-term basis, to purchase federal fundsfrom other financial institutions up to $21,400,000. At June 30, 2007, theCompany had $100,200 in federal funds purchased. The Company has a totalavailable line of $34,714,000, subject to available collateral, from theFederal Home Loan Bank. The Company has $34.7 million in advances on this lineat June 30, 2007.

TheBank’s liquidity policy requires that the ratio of cash and certain short-terminvestments to net withdrawable deposit accounts be at least 10%. The Bank’sliquidity ratios at June 30, 2007 and 2006 were 13.09% and 15.12%,respectively.

### **CapitalResources**

We aresubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimal capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on our financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, we must meet specific capitalguidelines that involve quantitative measures of our assets, liabilities, andcertain off-balance sheet items as calculated under regulatory accountingpractices.  Our capital amounts andclassification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

Quantitativemeasures established by regulations to ensure capital adequacy require us tomaintain minimum amounts and ratios (set forth below in the table) of total andTier I capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier I capital (as defined) to average assets (asdefined).  Management believes, as ofJune 30, 2007 and as of December 31, 2006, that the Company and the Bank metall capital adequacy requirements to which they are subject.

As ofJune 30, 2007, the most recent notifications from both the Federal DepositInsurance Corporation and the Federal Reserve Bank of Atlanta categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based, Tier I risk-basedand Tier I leverage ratios as set forth in the following table.  There are no conditions or events since thatnotification that management believes have changed the Bank’s categories.

22

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TheCompany’s and the Bank’s actual capital amounts and ratios as of June 30, 2007and December 31, 2006 follow:
| ** **                                        | ** **   | ** **   | ** **   | ** **                 | ** **   | ** **                 | ** ** | ** **                            | ** **   | **To Be Well Capitalized** | ** ** |
|---------------------------------------------------|--------------|--------------|--------------|----------------------------|--------------|----------------------------|------------|---------------------------------------|--------------|-------------------------------------------|------------|
| ** **                                        | ** **   | ** **   | ** **   | ** **                 | ** **   | **For Capital**       | ** ** | **Under Prompt Corrective** | ** **   |
| ** **                                        | ** **   | **Actual**   | ** **   | **Adequacy Purposes** | ** **   | **Action Provisions** | ** ** |
| ** **                                        | ** **   | **Amount**   | ** **   | **Ratio**                  | ** **   | **Amount**                 | ** ** | **Ratio**                             | ** **   | **Amount**                                | ** ** | **Ratio** | ** ** |
| ***June 30, 2007***                               | * *     | * *     | * *     | * *                   | * *     | * *                   | * *   | * *                              | * *     | * *                                  |       | * * | * * |
| * *                                          | * *     | * *     | * *     | * *                   | * *     | * *                   | * *   | * *                              | * *     | * *                                  |       | * * | * * |
| Total Risk-Based Capital To Risk Weighted Assets: |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 81,429,000   |                       | 12.16        | %                          | $          | 53,571,711                            | >    | 8.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 78,894,000   |         | 11.80                      | %            | 53,487,458                 | >  | 8.0                                   | %            | 66,859,322                                | >  | 10.0 | % |
|                                              |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Tier I Capital To Risk Weighted Assets:           |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 73,051,000   |                       | 10.91        | %                          | $          | 26,783,135                            | >    | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 70,516,000   |         | 10.55                      | %            | 26,735,924                 | >  | 4.0                                   | %            | 40,103,886                                | >  | 6.0 | % |
|                                              |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Tier I Capital To Average Assets                  |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 73,051,000   |                       | 9.64         | %                          | $          | 30,311,618                            | >    | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 70,516,000   |         | 9.32                       | %            | 30,264,378                 | >  | 4.0                                   | %            | 37,830,472                                | >  | 5.0 | % |
| *** ***                                      | *** *** | *** *** | *** *** | *** ***               | *** *** | *** ***               |       | *** ***                          | *** *** | *** ***                              |       | *** *** | *** *** |
| ***December 31, 2006***                           | *** *** | *** *** | *** *** | *** ***               | *** *** | *** ***               |       | *** ***                          | *** *** | *** ***                              |       | *** *** | *** *** |
| * *                                          | * *     | * *     | * *     | * *                   | * *     | * *                   |       | * *                              | * *     | * *                                  |       | * * | * * |
| Total Risk-Based Capital To Risk Weighted Assets: |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 69,138,000   |                       | 12.31        | %                          | $          | 44,931,275                            | >    | 8.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 66,183,000   |         | 11.81                      | %            | 44,831,837                 | >  | 8.0                                   | %            | 56,039,797                                | >  | 10.0 | % |
|                                              |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Tier I Capital To Risk Weighted Assets:           |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 62,117,000   |                       | 11.06        | %                          | $          | 22,465,461                            | >    | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 59,163,000   |         | 10.55                      | %            | 22,431,469                 | >  | 4.0                                   | %            | 33,647,204                                | >  | 6.0 | % |
|                                              |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Tier I Capital To Average Assets                  |         |         |         |                       |         |                       |       |                                  |         |                                      |       |   |   |
| Consolidated                                      |         | $            | 62,117,000   |                       | 9.84         | %                          | $          | 25,250,813                            | >    | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                              |         | 59,163,000   |         | 9.38                       | %            | 25,229,424                 | >  | 4.0                                   | %            | 31,536,780                                | >  | 5.0 | % |

 

We haveoutstanding junior subordinated debentures commonly referred to as TrustPreferred Securities totaling $10.3 million at June 30, 2007.  The Trust Preferred Securities qualify as aTier I capital under risk-based capital guidelines provided that total TrustPreferred Securities do not exceed certain quantitative limits.  At June 30, 2007, all of the Trust PreferredSecurities qualify as a Tier I capital.

23

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

**For the Six Months Ended June 30, 2007**

As ofJune 30, 2007, there were no substantial changes in the composition of theCompany’s market-sensitive assets and liabilities or their related marketvalues from that reported as of December 31, 2006. The foregoing disclosuresrelated to the market risk of the Company should be read in conjunction withthe Company’s audited consolidated financial statements, related notes andmanagement’s discussion and analysis of financial condition and results ofoperations for the year ended December 31, 2006 included in the Company’s 2006Annual Report on Form 10-K.

24

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Item 4. Controls and Procedures**

**For the Six Months Ended June 30,2007**

The Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, supervised and participated in an evaluation of theeffectiveness of its disclosure controls and procedures (as defined in federalsecurities rules) as of the end of the period covered by this report.  Based on, and as of the date of, thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures wereeffective in accumulating and communicating information to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosures of thatinformation under the Securities and Exchange Commission’s rules and forms andthat the Company’s disclosure controls and procedures are designed to ensurethat the information required to be disclosed in reports that are filed orsubmitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

#### During the second quarter of 2007, there were nosignificant changes in the Company’s internal control over financial reportingor, to the Company’s knowledge, in other factors that could significantlyaffect those internal controls subsequent to the date the Company carried outits evaluation that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

As discussed in the Management’s Report on InternalControls over Financial Reporting in the Annual Report on Form 10-K for theyear ended December 31, 2006, the Company elected to exclude Sapelo from thescope of its assessment of internal control over financial reporting as ofDecember 31, 2006.  Sapelo was acquiredby the Company on December 15, 2006, and was integrated into our existinginternal controls over financial reporting via a data conversion.  Based on internal audits performed during thesecond quarter of 2007, we are not aware of any facts that lead us to believethe data conversions of Sapelo or First Community Bank will constitute,individually or collectively, a material weakness to our internal control overfinancial reporting.

25

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Part II.Other Information**

**For theSix Months Ended June 30, 2007**

#### PART II: OTHER INFORMATION:

Item1. Legal Proceedings

Thereare no material legal proceedings to which the Company is a party or of whichtheir property is the subject.

Item1A. Risk Factors

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2006, whichcould materially affect our business, financial condition or futureresults.  The risks described in ourAnnual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and / oroperation results.

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item3. Defaults Upon Senior Securities

NotApplicable

Item4. Submission of Matters to a Vote of Security-Holders

Theregular annual meeting of the shareholders of the Company was held on May 22,2007.

Atthe Annual Meeting, the shareholders elected the following Class II directorsto serve for three-year terms or until their successors are duly qualified andelected.  The following table sets forththe number of votes cast and withheld with respect to each nominated director.
| Name                 | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|--------------------|------------|-------------------------|------------|
| Carolyn Crayton      |       | 3,071,729          |       | 92,593                  |       |
| Michael C.  Griffin  |       | 3,157,295          |       | 7,027                   |       |
| Thomas J.  McMichael |       | 3,075,075          |       | 89,247                  |       |
| Tyler J. Rauls,  Jr. |       | 3,075,075          |       | 89,247                  |       |
| Mark A. Stevens      |       | 3,074,775          |       | 89,547                  |       |

 

Shareholdersalso voted on the approval of the 2007 Stock Incentive Plan that was effectiveon January 1, 2007.  The 2007 StockIncentive Plan is an amendment and restatement of the New Southern Bank 2001Stock Incentive Plan.  The amended andrestated Stock Incentive Plan increases the number of shares of the Company’scommon stock from 80,000 to 180,000. This proposal was approved by the votes set forth in the followingtable.
| Other Proposals       | ** ** | **Shares Voted in Favor** | ** ** | **Shares Voted Against** | ** ** | **Shares Withheld** | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| 2007 Stock  Incentive Plan |       | 2,172,437                                |       | 144,362                            |       | 847,523                  |       |

 

Item5. Other Information

None

26

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Item6. Exhibits

| (a)    | Exhibits:                                                                                                                                           |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                |
| 31.1   | Certification of  Chief Executive Officer Pursuant to Rule 13a-14 under the Securities Exchange  Act of 1934, as amended                            |
|   |                                                                                                                                                |
| 31.2   | Certification of  Chief Financial Officer Pursuant to Rule 13a-14 under the Securities Exchange  Act of 1934, as amended                            |
|   |                                                                                                                                                |
| 32     | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

**SIGNATURES**

Inaccordance with the requirements of the Securities Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**
| /s/ Mark A. Stevens                   |   |
|---------------------------------------|--------|
|                                  |
| Mark A. Stevens                       |
| President and Chief Executive Officer |
|                                  |
|                                  |
| Date: July 31, 2007                   |

 

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