**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,DC 20549**

**FORM 10-Q**
| **x**                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Quarterly report under Section 13 or 15 (d) of  the Securities Exchange Act of 1934** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **For the  quarterly period ended March 31, 2007**                                                                                                                                                                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Transition report under Section 13 or 15 (d) of  the Exchange Act**                   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **For the  transition period  from                              to                              ** |

 

**Commission File Number 000-51112**

**ATLANTIC SOUTHERN FINANCIAL GROUP,INC.**

(Exact Name of Small Business Issuer as Specified inIts 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 ofPrincipal Executive Offices)

**(478) 757-8181**

(Issuer’sTelephone 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).

Largeaccelerated filer  o     Acceleratedfiler  x     Non-acceleratedfiler  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 sharesoutstanding at April 30, 2007

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

INDEX
| PART I:                                                                                                   |     | FINANCIAL INFORMATION                                                                                                    |    |
|-----------------------------------------------------------------------------------------------------------|----------|--------------------------------------------------------------------------------------------------------------------------|---------|
| ITEM 1.                                                                                                   |     | FINANCIAL STATEMENTS                                                                                                     |    |
|                                                                                                      |     |                                                                                                                     |    |
| The following consolidated financial statements are  provided for Atlantic Southern Financial Group, Inc. |     |
|                                                                                                      | **Page** |
|                                                                                                      |     | Consolidated  Balance Sheets – March 31, 2007  (unaudited) and December 31, 2006  (audited).                        |  2 |
|                                                                                                      |     |
|                                                                                                      |     | Consolidated  Statements of Earnings (unaudited) – For the Three Months Ended March 31,  2007 and 2006.             |  3 |
|                                                                                                      |     |
|                                                                                                      |     | Consolidated  Statements of Comprehensive Income (unaudited) – For the Three Months Ended  March 31, 2007 and 2006. |  4 |
|                                                                                                      |     |
|                                                                                                      |     | Consolidated  Statements of Cash Flows (unaudited) – For the Three Months Ended March 31, 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                              |  8 |
|                                                                                                      |     |
| ITEM 3.                                                                                                   |     | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 19      |
|                                                                                                      |     |                                                                                                                     |    |
| ITEM 4.                                                                                                   |     | Controls and  Procedures                                                                                                 | 20      |
|                                                                                                      |     |                                                                                                                     |    |
| PART II:                                                                                                  |     | OTHER INFORMATION                                                                                                        | 21      |

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Balance Sheets**

**March31, 2007****(Unaudited) and****December 31, 2006****(Audited)**
| ** **                                                                                                                 | ** ** | **As of**     | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|
| ** **                                                                                                                 | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                                 | ** ** | **2007**           | ** **  | **2006** | ** ** |
| **Assets**                                                                                                                 |       |               |        |   |   |
| Cash and due from banks                                                                                                    |       | $                  | 15,362,275  |   | $ | 13,130,014 |   |
| Interest-bearing  deposits in other banks                                                                                  |       | 695,946            |        | 259,463 |   |
| Federal funds sold                                                                                                         |       | 12,682,000         |        | 29,522,000 |   |
| Total cash and  cash equivalents                                                                                           |       | 28,740,221         |        | 42,911,477 |   |
| Securities available  for sale, at fair value                                                                              |       | 68,759,289         |        | 57,596,002 |   |
| Federal Home Loan Bank  stock, restricted, at cost                                                                         |       | 2,892,000          |        | 2,327,600 |   |
| Loans held for sale                                                                                                        |       | 3,647,718          |        | 1,532,093 |   |
| Loans, net of unearned  income                                                                                             |       | 628,079,510        |        | 533,128,702 |   |
| Less - allowance for  loan losses                                                                                          |       | (8,830,308         | )           | (7,258,371 | ) |
| Loans, net                                                                                                                 |       | 619,249,202        |        | 525,870,331 |   |
| Bank premises and  equipment, net                                                                                          |       | 22,376,122         |        | 17,425,344 |   |
| Accrued interest  receivable                                                                                               |       | 5,858,904          |        | 5,570,115 |   |
| Cash surrender value of  life insurance                                                                                    |       | 4,305,328          |        | 4,264,395 |   |
| Goodwill and other  intangible assets, net of amortization                                                                 |       | 21,984,842         |        | 10,600,276 |   |
| Other assets                                                                                                               |       | 3,264,267          |        | 2,977,859 |   |
| **Total  Assets**                                                                                                          |       | $                  | 781,077,893 |   | $ | 671,075,492 |   |
|                                                                                                                       |       |               |        |   |   |
| **Liabilities and Shareholders’  Equity**                                                                             | ** ** | ** **         | ** **  | ** ** | ** ** |
| Deposits:                                                                                                                  |       |               |        |   |   |
| Non-interest  bearing                                                                                                      |       | $                  | 48,332,116  |   | $ | 34,453,507 |   |
| Money market and  NOW accounts                                                                                             |       | 116,514,185        |        | 94,942,442 |   |
| Savings                                                                                                                    |       | 8,408,399          |        | 4,200,929 |   |
| Time deposits                                                                                                              |       | 475,629,500        |        | 423,397,729 |   |
| Total deposits                                                                                                             |       | 648,884,200        |        | 556,994,607 |   |
| Federal Home Loan Bank  advances                                                                                           |       | 33,700,000         |        | 31,700,000 |   |
| Junior subordinated  debentures                                                                                            |       | 10,310,000         |        | 10,310,000 |   |
| Accrued interest  payable                                                                                                  |       | 3,957,709          |        | 3,202,163 |   |
| Accrued expenses and  other liabilities                                                                                    |       | 1,644,356          |        | 6,636,790 |   |
| Total  liabilities                                                                                                         |       | 698,496,265        |        | 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                                                                                                   |       | 53,406,103         |        | 37,806,852 |   |
| Retained  earnings                                                                                                         |       | 8,745,504          |        | 6,862,246 |   |
| Accumulated  other comprehensive income (loss)                                                                             |       | (328,874           | )           | (485,901 | ) |
| Total  shareholders’ equity                                                                                           |       | 82,581,628         |        | 62,231,932 |   |
| **Total Liabilities and  Shareholders’ Equity**                                                                       |       | $                  | 781,077,893 |   | $ | 671,075,492 |   |

 

*SeeAccompanying Notes to Consolidated Financial Statements (Unaudited).*

2

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Earnings**

**Forthe Three Months Ended March 31, 2007 and 2006**

**(Unaudited)**
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Interest  and Dividend Income:**                     |       |                                                 |       |   |   |
| Interest and fees on loans                             |       | $                                                    | 12,814,056 |   | $ | 7,140,256 |   |
| Interest on securities:                                |       |                                                 |       |   |   |
| Taxable income                                         |       | 563,347                                              |       | 305,326 |   |
| Non-taxable income                                     |       | 157,460                                              |       | 46,787 |   |
| Income on federal funds sold                           |       | 242,729                                              |       | 48,794 |   |
| Other interest and dividend income                     |       | 88,378                                               |       | 20,421 |   |
| Total interest and dividend income                     |       | 13,865,970                                           |       | 7,561,584 |   |
| **Interest  Expense:**                                 |       |                                                 |       |   |   |
| Deposits                                               |       | 6,601,613                                            |       | 3,216,820 |   |
| Junior subordinated debentures                         |       | 190,969                                              |       | 168,600 |   |
| Federal funds purchased                                |       | 24,848                                               |       | 27,569 |   |
| FHLB borrowings and other interest expense             |       | 394,149                                              |       | 172,501 |   |
| Total interest expense                                 |       | 7,211,579                                            |       | 3,585,490 |   |
|                                                   |       |                                                 |       |   |   |
| Net interest income                                    |       | 6,654,391                                            |       | 3,976,094 |   |
| **Provision for loan losses**                          |       | 444,000                                              |       | 438,000 |   |
| Net interest income after provision for loan losses    |       | 6,210,391                                            |       | 3,538,094 |   |
| **Noninterest  Income:**                               |       |                                                 |       |   |   |
| Service charges on deposit accounts                    |       | 281,008                                              |       | 111,734 |   |
| Other service charges, commissions and fees            |       | 61,336                                               |       | 23,343 |   |
| Gain on sale of other assets                           |       | 1,287                                                |       | — |   |
| Gain (loss) on sales / calls of investment  securities |       | 75                                                   |       | (9,753 | ) |
| Mortgage origination income                            |       | 206,120                                              |       | 118,265 |   |
| Other income                                           |       | 139,552                                              |       | 121,183 |   |
| Total noninterest income                               |       | 689,378                                              |       | 364,772 |   |
| **Noninterest  Expense:**                              |       |                                                 |       |   |   |
| Salaries                                               |       | 1,679,271                                            |       | 799,760 |   |
| Employee benefits                                      |       | 554,920                                              |       | 349,187 |   |
| Occupancy expense                                      |       | 323,329                                              |       | 189,293 |   |
| Equipment rental and depreciation of equipment         |       | 174,141                                              |       | 83,984 |   |
| Other expenses                                         |       | 1,270,248                                            |       | 798,220 |   |
| Total noninterest expense                              |       | 4,001,909                                            |       | 2,220,444 |   |
|                                                   |       |                                                 |       |   |   |
| **Earnings Before Income Taxes**                       |       | 2,897,860                                            |       | 1,682,422 |   |
| Provision for  income taxes                            |       | 1,014,602                                            |       | 622,068 |   |
| **Net Earnings**                                       |       | $                                                    | 1,883,258  |   | $ | 1,060,354 |   |
| **Earnings  per share:**                               |       |                                                 |       |   |   |
| Basic                                                  |       | $                                                    | 0.47       |   | $ | 0.41 |   |
| Diluted                                                |       | $                                                    | 0.44       |   | $ | 0.36 |   |

 

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

3

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Comprehensive Income**

**For the Three Months Ended March31, 2007 and 2006**

**(Unaudited)**
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net earnings                                                                                          |       | $                                                    | 1,883,258  |   | $ | 1,060,354 |   |
|                                                                                                  | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Other  comprehensive income (loss):                                                                   |       |                                                 |       |   |   |
| Unrealized holding gains (losses) on investment securities  available for sale                        |       | 183,583                                              |       | (99,971 | ) |
| Unrealized holding gains (losses) on derivative  financial instruments classified as cash flow hedges |       | 54,411                                               |       | (34,500 | ) |
| Reclassification adjustment for (gains) losses  realized in net earnings                              |       | (75                                                  | )          | 9,753 |   |
| Total other comprehensive income (loss), before tax                                                   |       | 237,919                                              |       | (124,718 | ) |
| Income taxes  related to other comprehensive income (loss):                                           |       |                                                 |       |   |   |
| Unrealized holding (gains) losses on investment securities  available for sale                        |       | (62,418                                              | )          | 33,990 |   |
| Unrealized holding (gains) losses on derivative  financial instruments classified as cash flow hedges |       | (18,500                                              | )          | 11,730 |   |
| Reclassification adjustment for gains (losses)  realized in net earnings                              |       | 26                                                   |       | (3,316 | ) |
| Total income taxes related to other comprehensive  income (loss)                                      |       | (80,892                                              | )          | 42,404 |   |
| Total other comprehensive income (loss), net of tax                                                   |       | 157,027                                              |       | (82,314 | ) |
| Total  comprehensive income                                                                           |       | $                                                    | 2,040,285  |   | $ | 978,040 |   |

 

*SeeAccompanying Notes to Consolidated Financial Statements (Unaudited).*

4

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Cash Flows**

**For the Three Months Ended March31, 2007 and 2006**

**(Unaudited)**
| ** **                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                                  |       |                                                 |       |   |   |
| Net earnings                                                                                |       | $                                                    | 1,883,258  |   | $ | 1,060,354 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:        |       |                                                 |       |   |   |
| Provision for loan losses                                                                   |       | 444,000                                              |       | 438,000 |   |
| Depreciation                                                                                |       | 225,053                                              |       | 109,637 |   |
| Stock based compensation                                                                    |       | 5,984                                                |       | — |   |
| Amortization and (accretion), net                                                           |       | 59,424                                               |       | 7,017 |   |
| Gain on sales of assets                                                                     |       | (1,287                                               | )          | — |   |
| (Gain) loss on sales / calls of investment  securities                                      |       | (75                                                  | )          | 9,753 |   |
| Change in cash surrender value of life insurance                                            |       | (40,933                                              | )          | (40,933 | ) |
| Changes in assets and liabilities, net of effects of  purchase acquisition in 2007:         |       |                                                 |       |   |   |
| Loans held for sale                                                                         |       | (2,115,625                                           | )          | 523,433 |   |
| Changes in accrued income and other assets                                                  |       | 905,603                                              |       | (753,274 | ) |
| Changes in accrued expenses and other liabilities                                           |       | 239,183                                              |       | 631,218 |   |
| Net cash provided by operating activities                                                   |       | 1,604,585                                            |       | 1,985,205 |   |
| **Cash  Flows from Investing Activities, net of effects of purchase acquisition in  2007:** |       |                                                 |       |   |   |
| Net change in loans to customers                                                            |       | (46,217,409                                          | )          | (36,621,278 | ) |
| Purchase of available for sale securities                                                   |       | (2,588,124                                           | )          | (4,991,315 | ) |
| Proceeds from sales, calls, maturities and paydowns  of available for sale securities       |       | 3,573,561                                            |       | 964,562 |   |
| Purchase of FHLB stock                                                                      |       | (292,900                                             | )          | (250,000 | ) |
| Cash received from First Community, net of cash paid  of $235,034                           |       | 5,556,520                                            |       | — |   |
| Cash paid to Sapelo shareholders                                                            |       | (5,322,492                                           | )          | — |   |
| Property and equipment expenditures                                                         |       | (2,700,963                                           | )          | (2,036,053 | ) |
| Proceeds from sales of assets                                                               |       | 4,672                                                |       | — |   |
| Net cash used in investing activities                                                       |       | (47,987,135                                          | )          | (42,934,084 | ) |
| **Cash  Flows from Financing Activities, net of effects of purchase acquisition in  2007:** |       |                                                 |       |   |   |
| Net change in deposits                                                                      |       | 33,298,492                                           |       | 45,522,321 |   |
| Advances on FHLB borrowings                                                                 |       | 6,000,000                                            |       | — |   |
| Payments on FHLB borrowings                                                                 |       | (7,000,000                                           | )          | — |   |
| Payment for fractional shares                                                               |       | (10,320                                              | )          | — |   |
| Payment for issuance cost of common stock                                                   |       | (76,878                                              | )          | — |   |
| Net cash provided by financing activities                                                   |       | 32,211,294                                           |       | 45,522,321 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                   |       | (14,171,256                                          | )          | 4,573,442 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                           |       | 42,911,477                                           |       | 5,782,394 |   |
| **Cash and Cash Equivalents, End  of Quarter**                                              |       | $                                                    | 28,740,221 |   | $ | 10,355,836 |   |

 

*SeeAccompanying Notes to Consolidated Financial Statements (Unaudited).*

5

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

# ***(1)******        ******Basis ofPresentation***

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 the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006.   Certainreclassifications have been made to the 2006 financial statement presentationto correspond to the current year’s format.

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

TheCompany granted 8,000 options during the first quarter 2007.  The Company recognized $5,984 ofstock-based employee compensation expense during the first quarter 2007associated with its stock option grants. The Company is recognizing the compensation expense for stock option grantswith graded vesting schedules on a straight-line basis over the requisiteservice period of the award as permitted by SFAS No. 123 (R).  As of March 31, 2007, there was $113,696 ofunrecognized compensation 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.

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** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                  |       |                             |       |   |   |
| Net earnings                                                                |       | $                                | 1,883,258  |   | $ | 1,060,354 |   |
|                                                                        |       |                             |       |   |   |
| Weighted average common  shares outstanding                                 |       | 3,971,102                        |       | 2,604,052 |   |
| Shares issued from  assumed exercise of common stock equivalents            |       | 340,609                          |       | 324,099 |   |
| Weighted average number  of common and common equivalent shares outstanding |       | 4,311,711                        |       | 2,928,151 |   |
| Earnings per share:                                                         |       |                             |       |   |   |
| Basic                                                                       |       | $                                | 0.47       |   | $ | 0.41 |   |
|                                                                        |       |                             |       |   |   |
| Diluted                                                                     |       | $                                | 0.44       |   | $ | 0.36 |   |

 

6

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***(4)****   **Mergers and Acquisitions***

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 a communitybank headquartered in Roberta, Georgia. First Community Bank had total assets of $69.3 million, including totalloans of $50 million and total investments of $11.9 million.  Additionally, First Community Bank had $58.6million in deposits.  With theacquisition of First Community Bank, the Company was able to expand theirpresence in the middle Georgia area. First Community Bank operated three full service banking offices inCrawford, Bibb and Peach counties of Georgia. The Company accounted for the transaction using the purchase method andaccordingly, the purchase price was allocated to assets and liabilitiesacquired based upon their fair values at the date of the acquisition.  The excess of the purchase price over thefair value of the net assets acquired (goodwill) was approximately $9.9million, none of which will be deductible for income tax purposes.  Operations of First Community Bank areincluded in the consolidated statements of earnings since its acquisition.

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)   Recent AccountingPronouncements***

*The Fair Value Option for Financial Assets and FinancialLiabilities*

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities*.  SFASNo. 159 permits entities to choose to measure many financial instruments andcertain other items at fair value.  Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  Thestatement is expected to expand the use of fair value measurement, which isconsistent with FASB’s long-term measurement objectives for accounting forfinancial instruments.  The statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007; however, it includesan early adoption provision allowing entities to adopt within 120 days of theirmost recent fiscal year-end.  The Companyhas decided not to implement SFAS No. 159 until January 2008.

7

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

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

**March 31, 2007****and****2006**

The following discussion of financialcondition as of March 31, 2007compared to December 31, 2006,and the results of operations for the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006should be read in conjunction with the condensed financial statements andaccompanying 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 andacceptance of products and services, including products and services offeredthrough alternative 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 

8

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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 March 31, 2007, were approximately $781,078,000, which represented an increaseof approximately $110,002,000 or 16% from December 31, 2006.  Net earnings increased 78% for the threemonths ended March 31, 2007 to $1,833,258 or $0.44 per diluted share comparedto $1,060,354 or $0.36 per diluted share for the three months ended March 31,2006.

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) was approximately$8.5 million, none of which will be deductible for income tax purchases.  Operations of Sapelo are included in theconsolidated 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 region,coastal Georgia region and in the south Georgia region.  During January 2007, we opened a loanproduction office in Valdosta, Georgia to expand our presence in the southGeorgia region and have two parcels of land placed under contract to constructfull service branches in Lowndes County, Georgia.  Also in January 2007, a new branch was openedin Savannah, Georgia to further strengthen the expansion to the coastal Georgiaregion.  In April 2007, a de novo branchwas opened in Bonaire, Georgia which continues to expand our presence in themiddle Georgia region.

9

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**FinancialCondition**

The compositionof assets and liabilities for the Company is as follows:
| ** **                             | ** ** | **March 31,** | ** **  | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|----------------------------------------|------------|--------------------|-------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2007**           | ** **  | **2006**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                            |       |               |        |                  |       |              |       |              |       |
| Cash and due from banks                |       | $                  | 15,362,275  |                  | $          | 13,130,014        |       | $                 | 2,232,261  |   | 17.00 | % |
| Federal funds sold                     |       | 12,682,000         |        | 29,522,000            |       | (16,840,000       | )          | -57.04            | %          |
| Securities available for sale          |       | 68,759,289         |        | 57,596,002            |       | 11,163,287        |       | 19.38             | %          |
| Loans, net of unearned income          |       | 628,079,510        |        | 533,128,702           |       | 94,950,808        |       | 17.81             | %          |
| Cash surrender value of life insurance |       | 4,305,328          |        | 4,264,395             |       | 40,933            |       | 0.96              | %          |
| Goodwill and other intangible assets   |       | 21,984,842         |        | 10,600,276            |       | 11,384,566        |       | 107.40            | %          |
| Total assets                           |       | 781,077,893        |        | 671,075,492           |       | 110,002,401       |       | 16.39             | %          |
| **Liabilities:**                       |       |               |        |                  |       |              |       |              |       |
| Deposits                               |       | $                  | 648,884,200 |                  | $          | 556,994,607       |       | $                 | 91,889,593 |   | 16.50 | % |
| FHLB advances                          |       | 33,700,000         |        | 31,700,000            |       | 2,000,000         |       | 6.31              | %          |
| Accrued expenses and other liabilities |       | 1,644,356          |        | 6,636,790             |       | (4,992,434        | )          | -75.22            | %          |
|                                   |       |               |        |                  |       |              |       |              |       |
| Loan to Deposit Ratio                  |       | 96.79              | %           | 95.72                 | %          |              |       |              |       |

 

Themost significant change in the composition of assets was the increase in loansof $95.0 million due to continued growth of the Company.  Growth in Atlantic Southern Bank’s loanportfolio was divided between internally generated growth of approximately$45.0 million and the addition of approximately $50.0 million from the mergerwith First Community Bank.  We were ableto generate loan growth by expanding into new markets with a loan productionoffice in Lowndes County, opening new de novo branches in existing markets andincreasing loan growth in the middle Georgia, coastal Georgia and Golden Islesregions.  The most significant change inthe composition of liabilities was the increase in deposits, especially timedeposits, to fund loan growth.  Timedeposits, including wholesale and core deposits, are our principal source offunds for loans and investing in securities.

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 39.2% of our deposits as of March 31,2007 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 replacing maturingbrokered deposits and does not expect to experience significantdisintermediation as the brokered deposits mature.

### **AssetQuality**

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

10

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The following table presents a summary of changes inthe allowance for loan losses for the three-month periods ended March 31, 2007and 2006.

**Analysis of Changes inAllowance for Loan Losses**
|                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                 | ** ** |
| Balance  beginning of period                       |       | $                                                    | 7,258      |   | $ | 4,150 |   |
| Loans  charged-off                                 |       | (529                                                 | )          | — |   |
| Recoveries                                         |       | 17                                                   |       | 13 |   |
| Net charge-offs                                    |       | (512                                                 | )          | 13 |   |
| Provision for  loan losses                         |       | 444                                                  |       | 438 |   |
| Allowance from  purchase acquisition               |       | 1,640                                                |       | — |   |
| Balance end of period                              |       | $                                                    | 8,830      |   | $ | 4,601 |   |
|                                               |       |                                                 |       |   |   |
| Total Loans:                                       |       |                                                 |       |   |   |
| At period end                                      |       | $                                                    | 628,080    |   | $ | 368,076 |   |
| Average                                            |       | 607,327                                              |       | 351,320 |   |
|                                               |       |                                                 |       |   |   |
| As a percentage  of average loans (annualized):    |       |                                                 |       |   |   |
| Net charge-offs                                    |       | 0.34                                                 | %          | -0.02 | % |
| Provision for loan losses                          |       | 0.29                                                 | %          | 0.50 | % |
| Allowance as a  percentage of period end loans     |       | 1.41                                                 | %          | 1.25 | % |
| Allowance as a  percentage of non-performing loans |       | 259.47                                               | %          | 2149.17 | % |

 

### Management believes that theallowance for loan losses at March 31, 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.

### Nonperforming assets consistof non-accrual loans, accruing loans 90 days past due and other real estateowned. The following summarizes non-performing assets:

|                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Accruing loans  90 days past due |       | $                  | 81,190     |                  | $          | 30,621 |   |
| Non-accrual  loans               |       | 3,322,044          |       | 617,420               |       |
| Other real  estate               |       | 722,337            |       | —                |       |
| Total  non-performing assets     |       | $                  | 4,125,571  |                  | $          | 648,041 |   |

 

Nonperformingassets increased $3,477,530 or 536.6% from December 31, 2006 to March 31,2007.  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 $5.1million.  The borrower filed forbankruptcy protection on April 2, 2007. However, management is continuously monitoring this loan in order tominimize any losses.

11

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Otherreal estate consists of four properties totaling $722,337 at March 31,2007.  At March 31, 2007, the Company’sother real estate consisted of the following:

| 1-4 Family residential  properties |   | $       | 46,751  |   |
|------------------------------------|--------|---------|---------|--------|
| Nonfarm  nonresidential properties |   | 675,586 |    |
| Total                              |   | $       | 722,337 |   |

 

Weassumed one residential property for $10,000 on January 31, 2007 from ouracquisition of First Community Bank. Other increases to our other real estate were the result of oneforeclosure of a residential property with a value of $36,751 and oneforeclosure on a nonresidential property with a value of $675,586.  All properties are being actively marketedfor sale and management is continuously monitoring these properties in order tominimize any losses.

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 on non-accrual.  Exceptions are allowed for 90-day past dueloans when such loans are well secured and in process of collection.  Other Real Estate is defined as real estateacquired as salvage on uncollectible loans. At the time of foreclosure, an appraisal is obtained on the real estate.  The amount charged to Other Real Estate willbe the lower of appraised value of “recorded investment” in the loansatisfied.  The recorded investment isthe unpaid balance of the loan, increased by accrued and uncollected interest,unamortized premium, finance charges, and loan acquisition costs, if any, anddecreased by previous direct write down and unamortized discount.  Any excess of the recorded investment in theloan satisfied over the appraised value of the property must be charged to allowancefor loan losses.

### **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.

# The following table shows the significantcomponents of net earnings:

|                                 | ** ** | **Three Months Ended** | ** **       | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|----------------------------------|------------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** **       | ** ** | ** ** | ** **        | ** ** |
| ** **                      | ** ** | **2007**                         | ** **       | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                 |       | $                                |  13,865,970 |       | $          | 7,561,584         |       | $ | 6,304,386 |   | 83.37 | % |
| Interest Expense                |       | 7,211,579                        |             | 3,585,490  |       | 3,626,089         |       | 101.13 | % |
| Net Interest  Income            |       | 6,654,391                        |             | 3,976,094  |       | 2,678,297         |       | 67.36 | % |
| Provision for  Loan Losses      |       | 444,000                          |             | 438,000    |       | 6,000             |       | 1.37 | % |
| Net Earnings                    |       | 1,883,258                        |             | 1,060,354  |       | 822,904           |       | 77.61 | % |
| Net Earnings Per  Diluted Share |       | $                                | 0.44             |       | $          | 0.36              |       | 0.08 |   | 22.22 | % |
|                                 |            |                                  |                  |            |            |                   |            |  |  |  |  |  |

 

# **Net Interest Income**

Ourprimary source of income is interest income from loans and investmentsecurities.  Our profitability dependslargely on net interest income, which is the difference between the interestreceived on interest-earning assets and the interest paid on deposits,borrowings, and other interest-bearing liabilities.  Net interest income increased $2,678,000 or67% for the three months ended March 31, 2007 compared to March 31, 2006.

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Totalinterest and dividend income for the three months ended March 31, 2007increased $6,304,000 or 83% when compared to the three months ended March 31,2006 primarily due to increases in loan interest and fees on loans.  This increase is partially the result of theaverage loan portfolio for the three months ended March 31, 2007 increasingapproximately $256 million or 73% when compared to average loan portfolio forthe three months ended March 31, 2006. Additionally, the average yield on loans increased during the threemonths ended March 31, 2007 to 8.45% compared to an average yield of 8.13 % forthe three months ended March 31, 2006.

Totalinterest expense for the three months ended March 31, 2007 increased $3,626,000or 101% when compared to the three months ended March 31, 2006.  Two factors impact interest expense: averagebalances of deposit and borrowing portfolios and average rates paid oneach.  Average deposit balances increasedapproximately $267.3 million when comparing the three months ended March 31,2007 to the three months ended March 31, 2006. The increase of $267.3 million includes approximately $22.3 million innon-interest bearing balances in regular demand deposit accounts.  The average rate paid on the depositportfolios for the three months ended March 31, 2007 increased to 4.57% from 3.87%when compared to the three months ended March 31, 2006.   Average borrowing balances increasedapproximately $17.6 million when comparing the three months ended March 31,2007 to the three months ended March 31, 2006. Average interest rates paid on borrowings were 5.23% for the threemonths ended March 31, 2007 compared to 5.09% for the three months ended March31, 2006.

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 March 31, 2007 and 2006, our tax equivalent net interestspread was 3.35% and 3.72%, respectively, while the tax equivalent net interestmargin was 3.85% and 4.06%, respectively. The decreases in net interest spread and net interest margin from firstquarter 2006 to first quarter 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.

13

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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.

**Average Consolidated Balance Sheet and Net Interest MarginAnalysis**
| ** **                                      | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(Dollar amounts in thousands)**                       | ** ** |
| ** **                                      | ** ** | **Average**                                                            | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Balance**                                                            | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned income (4) (5) (6)       |       | $                                                                      | 607,327    |   | $ | 12,814 |   | 8.45 | % | $ | 351,320 |   | $ | 7,140 |   | 8.13 | % |
| Federal funds sold                              |       | 19,134                                                                 |       | 243 |   | 5.08 | % | 4,161 |   | 49 |   | 4.71 | % |
| Investment securities - taxable (7)             |       | 52,141                                                                 |       | 563 |   | 4.32 | % | 32,007 |   | 305 |   | 3.81 | % |
| Investment securities - tax-exempt (6) (7)      |       | 18,304                                                                 |       | 158 |   | 5.23 | % | 5,204 |   | 47 |   | 5.47 | % |
| Other interest and dividend income              |       | 3,941                                                                  |       | 88 |   | 8.93 | % | 1,688 |   | 21 |   | 4.98 | % |
| Total Earning Assets                            |       | 700,847                                                                |       | 13,866 |   | 7.97 | % | 394,380 |   | 7,562 |   | 7.69 | % |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                    |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                       |       | -8,862                                                                 |       |   |   |   |   | -4,384 |   |   |   |   |   |
| Cash and due from banks                         |       | 13,074                                                                 |       |   |   |   |   | 4,730 |   |   |   |   |   |
| Premises and equipment                          |       | 20,919                                                                 |       |   |   |   |   | 10,195 |   |   |   |   |   |
| Accrued interest receivable                     |       | 5,967                                                                  |       |   |   |   |   | 2,927 |   |   |   |   |   |
| Other assets                                    |       | 20,759                                                                 |       |   |   |   |   | 5,732 |   |   |   |   |   |
| Total Assets                                    |       | $                                                                      | 752,704    |   |   |   |   |   | $ | 413,580 |   |   |   |   |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                   |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand                         |       | $                                                                      | 109,170    |   | $ | 832 |   | 3.05 | % | $ | 48,306 |   | $ | 294 |   | 2.43 | % |
| Savings                                         |       | 8,357                                                                  |       | 11 |   | 0.53 | % | 1,440 |   | 2 |   | 0.56 | % |
| Time deposits                                   |       | 460,184                                                                |       | 5,759 |   | 5.01 | % | 282,964 |   | 2,921 |   | 4.13 | % |
| Total interest bearing deposits                 |       | 577,711                                                                |       | 6,602 |   | 4.57 | % | 332,710 |   | 3,217 |   | 3.87 | % |
| Federal Home Loan Bank advances                 |       | 34,355                                                                 |       | 394 |   | 4.59 | % | 16,200 |   | 172 |   | 4.25 | % |
| Other borrowings                                |       | 1,957                                                                  |       | 25 |   | 5.11 | % | 2,480 |   | 28 |   | 4.52 | % |
| Trust Preferred Securities                      |       | 10,310                                                                 |       | 191 |   | 7.41 | % | 10,310 |   | 169 |   | 6.57 | % |
| Total borrowed funds                            |       | 46,622                                                                 |       | 610 |   | 5.23 | % | 28,990 |   | 369 |   | 5.09 | % |
| Total interest-bearing liabilities              |       | 624,333                                                                |       | 7,212 |   | 4.62 | % | 361,700 |   | 3,586 |   | 3.97 | % |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                  |       | 45,737                                                                 |       |   |   |   |   | 23,405 |   |   |   |   |   |
| Other  liabilities                              |       | 7,230                                                                  |       |   |   |   |   | 2,490 |   |   |   |   |   |
| Stockholder’s  equity                      |       | 75,404                                                                 |       |   |   |   |   | 25,985 |   |   |   |   |   |
| Total Liabilities and Stockholder’s Equity |       | $                                                                      | 752,704    |   |   |   |   |   | $ | 413,580 |   |   |   |   |   |
| Net interest  revenue (1)                       |       |                                                                   |       | $ | 6,654 |   |   |   |   |   | $ | 3,976 |   |   |   |
| Net interest  spread (2)                        |       |                                                                   |       |   |   | 3.35 | % |   |   |   |   | 3.72 | % |
| Net interest margin (3)                         |       |                                                                   |       |   |   | 3.85 | % |   |   |   |   | 4.06 | % |

 

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(1) Net interest revenue is computed by subtracting the expense from theaverage interest-bearing liabilities from the income from the average earningassets.

(2) Net interest spread is computed by subtracting the yield from theexpense of the average interest-bearing liabilities from the yield from theaverage earning assets.

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

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

(5) Interest income includes loan fees as follows (in thousands): 2007 -$551; 2006 - $380

(6) 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 endedMarch 31, 2007 compared to March 31, 2006.

**Change in Interest Revenue and Expense on a TaxableEquivalent Basis**

|                                              | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Compared to 2006**                                 | ** ** |
| ** **                                   | ** ** | **Changes due to (a)**                          | ** ** |
| ** **                                   | ** ** | ** **                                                     | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                   | ** ** | **Volume**                                                     | ** ** | **Rate** | ** ** | **Change** | ** ** |
| ** **                                   | ** ** | **(Amounts in thousands)**                           | ** ** |
| Interest earned  on:                         |       |                                                           |       |   |   |   |   |
| Loans                                        |       | $                                                              | 5,380      |   | $ | 294 |   | $ | 5,674 |   |
| Investment securities:                       |       |                                                           |       |   |   |   |   |
| Taxable investment securities                |       | 214                                                            |       | 44 |   | 258 |   |
| Tax-exempt investment securities             |       | 115                                                            |       | (4 | ) | 111 |   |
| Interest earning deposits and fed funds sold |       | 215                                                            |       | 46 |   | 261 |   |
| Total interest income                        |       | 5,924                                                          |       | 380 |   | 6,304 |   |
|                                         |       |                                                           |       |   |   |   |   |
| Interest paid  on:                           |       |                                                           |       |   |   |   |   |
| Deposits:                                    |       |                                                           |       |   |   |   |   |
| Interest bearing demand deposits             |       | 449                                                            |       | 89 |   | 538 |   |
| Savings                                      |       | 9                                                              |       | — |   | 9 |   |
| Time deposits                                |       | 2,094                                                          |       | 744 |   | 2,838 |   |
| Other borrowings and FHLB advances           |       | 214                                                            |       | 5 |   | 219 |   |
| Trust Preferred Securities                   |       | —                                                         |       | 22 |   | 22 |   |
| Total interest expense                       |       | 2,766                                                          |       | 860 |   | 3,626 |   |
|                                         |       |                                                           |       |   |   |   |   |
| Increase in net  interest revenue            |       | $                                                              | 3,158      |   | $ | (480 | ) | $ | 2,678 |   |

 

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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 three months ended March 31, 2007, was $444,000compared to $438,000 for the same period of 2006.  This is due to continued loan growth for therespective periods.  Net charge-offs asan annualized percentage of average outstanding loans for the three monthsended March 31, 2007 were 0.34%, as compared with -0.02% for the first quarterof 2006.  Net loan charge-offs increasedsignificantly this quarter as compared to this quarter in 2006 due to theCompany charging off $300,000 for one participation purchased loan with theCompany’s portion of the foreclosed property being recorded to other realestate at fair market value.

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:
|                                                        | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts                   |       | $                                | 281,008    |       | $          | 111,734           |       | $ | 169,274 |   | 151.50 | % |
| Other service  charges, commissions and fees           |       | 61,336                           |       | 23,343     |       | 37,993            |       | 162.76 | % |
| Gain (loss) on  sales / calls of investment securities |       | 75                               |       | (9,753     | )          | 9,828             |       | -100.77 | % |
| Gain on sale of  other assets                          |       | 1,287                            |       | —     |       | 1,287             |       | 100.00 | % |
| Mortgage  origination fees                             |       | 206,120                          |       | 118,265    |       | 87,855            |       | 74.29 | % |
| Other income                                           |       | 139,552                          |       | 121,183    |       | 18,369            |       | 15.16 | % |
| Total noninterest  income                              |       | $                                | 689,378    |       | $          | 364,772           |       | $ | 324,606 |   | 88.99 | % |

 

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 inthe Bank’s demand deposit account base.  Totalservice charges, including non-sufficient funds fees, were $281 thousand, or 41%of total noninterest income for the first quarter of 2007 compared with $112thousand, or 31% for the first quarter of 2006. The year-over-year increase in service charges on deposit accounts isdirectly related to the increase in the number of our core transaction depositaccounts.  The number of deposit accountsfor the three months ended March 31, 2007 was 12,223 accounts when compared tothe same period of 2006 with 3,426 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 three months ended March31, 2007 is primarily due to the mortgage loan brokerage activity which wasstarted in late 2004 and the volume of mortgages originated for the threemonths ended March 31, 2007 was larger than the same period of 2006.

# **Non-interest Expense**

Compositionof other noninterest expense is as follows:
|                                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                | 1,679,271  |       | $          | 799,760           |       | $ | 879,511 |   | 109.97 | % |
| Employee  benefits                              |       | 554,920                          |       | 349,187    |       | 205,733           |       | 58.92 | % |
| Occupancy  expense                              |       | 323,329                          |       | 189,293    |       | 134,036           |       | 70.81 | % |
| Equipment rental  and depreciation of equipment |       | 174,141                          |       | 83,984     |       | 90,157            |       | 107.35 | % |
| Other expenses                                  |       | 1,270,248                        |       | 798,220    |       | 472,028           |       | 59.14 | % |
| Total  noninterest expense                      |       | $                                | 4,001,909  |       | $          | 2,220,444         |       | $ | 1,781,465 |   | 80.23 | % |

 

Theincreases in noninterest expenses are primarily due to the growth of thebank.  The most significant increases inthe first quarter 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 March 31, 2007, thenumber of full-time equivalent employees was 151 compared to 70 at March 31,2006.  The increase in the number offull-time equivalent employees is directly related to the purchase of SapeloNational Bank, the purchase of First Community Bank, growth of the bank and thehiring for two new branches in Rincon and Bonaire and one loan productioncenter in Valdosta.  The bank operatesfrom fifteen facilities as of March 31, 2007 compared to seven 

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facilitiesas of March 31, 2006.  The increases inother expenses are 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 35.01%and 36.97% for the three months ended March 31, 2007 and 2006, respectively.  The fluctuation in the percentage can beattributed to the tax-free income versus the pretax income.  For the three months ended March 31, 2007,the tax-free income expressed as a percentage of earnings before income taxeswas 6.35% when compared to 2.78% for the three months ended March 31, 2007.  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.

### **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 and liabilities,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 bywithdrawals from deposit accounts and loan funding commitments. Primary sourcesof liquidity are scheduled repayments on the Company’s loans and interest onand maturities 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 March 31, 2007, theCompany had no federal funds purchased. The Company has a total available lineof $34,483,000, subject to available collateral, from the Federal Home LoanBank. The Company has $33.7 million in advances on this line at March 31, 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 March 31, 2007 and 2006 were 12.54% and 12.38%,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 specificcapital guidelines that involve quantitative measures of our assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices.  Our capitalamounts and classification are also subject to qualitative judgments by theregulators about 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 ofMarch 31, 2007 and as of December 31, 2006, that the Company and the Bank metall capital adequacy requirements to which they are subject.

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As ofMarch 31, 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.

TheCompany’s and the Bank’s actual capital amounts and ratios as of March 31, 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** | ** ** |
| ***March  31, 2007***                              |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| * *                                           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Total Risk-Based  Capital To Risk Weighted Assets: |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 79,119,000 |                       | 12.08      | %                          | $          | 52,396,689                            |       | 3     |       | 8.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 75,597,000 |       | 11.57                      | %          | 52,271,046                 |       | 3                                |       | 8.0        | %          | 65,338,807                                     |       | 3 |   | 10.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Tier I Capital To  Risk Weighted Assets:           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 70,926,000 |                       | 10.83      | %                          | $          | 26,196,122                            |       | 3     |       | 4.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 68,203,000 |       | 10.44                      | %          | 26,131,418                 |       | 3                                |       | 4.0        | %          | 39,197,126                                     |       | 3 |   | 6.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Tier I Capital To  Average Assets                  |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 70,926,000 |                       | 9.43       | %                          | $          | 30,085,260                            |       | 3     |       | 4.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 68,203,000 |       | 9.32                       | %          | 29,271,674                 |       | 3                                |       | 4.0        | %          | 36,589,592                                     |       | 3 |   | 5.0 | % |
| *** ***                                       |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| ***December  31, 2006***                           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| * *                                           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Total Risk-Based  Capital To Risk Weighted Assets: |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 69,138,000 |                       | 12.31      | %                          | $          | 44,931,275                            |       | 3     |       | 8.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 66,183,000 |       | 11.81                      | %          | 44,831,837                 |       | 3                                |       | 8.0        | %          | 56,039,797                                     |       | 3 |   | 10.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Tier I Capital To  Risk Weighted Assets:           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 62,117,000 |                       | 11.06      | %                          | $          | 22,465,461                            |       | 3     |       | 4.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 59,163,000 |       | 10.55                      | %          | 22,431,469                 |       | 3                                |       | 4.0        | %          | 33,647,204                                     |       | 3 |   | 6.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Tier I Capital To  Average Assets                  |       |       |       |                       |       |                       |       |                                  |       |       |       |                                           |       |   |   |   |   |
| Consolidated                                       |       | $          | 62,117,000 |                       | 9.84       | %                          | $          | 25,250,813                            |       | 3     |       | 4.0                                            | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 59,163,000 |       | 9.38                       | %          | 25,229,424                 |       | 3                                |       | 4.0        | %          | 31,536,780                                     |       | 3 |   | 5.0 | % |

 

We haveoutstanding junior subordinated debentures commonly referred to as TrustPreferred Securities totaling $10.3 million at March 31, 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 March 31, 2007, all of the Trust PreferredSecurities qualify as a Tier I capital.

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Item 3. Quantitative andQualitative Disclosures about Market Risk**

**Forthe Three months Ended March 31, 2007**

As of March31, 2007, there were no substantial changes in the composition of the Company’smarket-sensitive assets and liabilities or their related market values fromthat reported as of December 31, 2006. The foregoing disclosures related to themarket risk of the Company should be read in conjunction with the Company’saudited consolidated financial statements, related notes and management’sdiscussion and analysis of financial condition and results of operations for theyear ended December 31, 2006 included in the Company’s 2006 Annual Report onForm 10-K.

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Item 4. Controls and Procedures**

**For the Three months Ended March 31, 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 that informationunder the Securities and Exchange Commission’s rules and forms and that the Company’sdisclosure controls and procedures are designed to ensure that the informationrequired to be disclosed in reports that are filed or submitted by the Companyunder the Securities Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

During the firstquarter of 2007, there were no significant changes in the Company’s internalcontrol over financial reporting or, to the Company’s knowledge, in otherfactors that could significantly affect those internal controls subsequent tothe date the Company carried out its evaluation that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover 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 thefirst 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.

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Part II. Other Information**

**For theThree months Ended March 31, 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

None

Item5. Other Information

None

Item6. Exhibits

(a)           Exhibits:

31.1         Certificationof Chief Executive Officer Pursuant to Rule 13a-14 under the SecuritiesExchange Act of 1934, as amended

31.2         Certificationof Chief Financial Officer Pursuant to Rule 13a-14 under the SecuritiesExchange Act of 1934, as amended

32            Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant 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: May 9,  2007                     |

 

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