**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**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 September  30, 2006**                                 |
|                                                                                                                                                                                                  |                                                                                    |
| **o**                                                                                                                                                                                                 | **Transition report under Section 13 or 15 (d) of  the Exchange Act**                   |
|                                                                                                                                                                                                  |                                                                                    |
| **For the  transition period from                              to** |

 

**CommissionFile Number 000-51112**

**ATLANTICSOUTHERN 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.) |

 

###### **4077Forsyth RoadMacon, Georgia 31210**(Address of Principal Executive Offices)

**(478) 757-8181**(Issuer’s Telephone Number, Including Area Code)

###### **NotApplicable**(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  o      Non-acceleratedfiler  x

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**

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: Common Stock $5 par value, 3,304,052shares outstanding at November 13, 2006

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

INDEX
| PART I: | FINANCIAL INFORMATION |   |
|---------|-----------------------|--------|
| ITEM 1. | FINANCIAL STATEMENTS  |   |

 

The following consolidatedfinancial statements are provided for Atlantic Southern Financial Group, Inc.
|           | ** **                                                                                                                                  | **PAGE** |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------|----------|
|      |                                                                                                                                        |     |
|      | Consolidated  Balance Sheets – September 30, 2006  (unaudited)  and December 31, 2005 (audited)                                        | 2        |
|      |                                                                                                                                        |     |
|      | Consolidated Statements of Earnings (unaudited) – For  the Three Months and  Nine Months Ended September 30, 2006 and 2005             | 3        |
|      |                                                                                                                                        |     |
|      | Consolidated Statements of Comprehensive Income  (unaudited) – For the Three Months and  Nine Months Ended September 30, 2006 and 2005 | 4        |
|      |                                                                                                                                        |     |
|      | Consolidated Statements of Cash Flows (unaudited) –  For the  Nine Months Ended September 30, 2006 and 2005                            | 5        |
|      |                                                                                                                                        |     |
|      | Notes to Consolidated Financial Statements (unaudited)                                                                                      | 6        |
|      |                                                                                                                                        |     |
| ITEM 2.   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                 | 9        |
|      |                                                                                                                                        |     |
| ITEM 3.   | Quantitative and Qualitative Disclosures About Market  Risk                                                                                 | 17       |
|      |                                                                                                                                        |     |
| ITEM 4.   | Controls and Procedures                                                                                                                     | 18       |
|      |                                                                                                                                        |     |
| PART  II: | OTHER  INFORMATION                                                                                                                          | 19       |

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, Inc.**

**ConsolidatedBalance Sheets**

**September30, 2006****(Unaudited) and December 31, 2005 (Audited)**
| ** **                                                                                                                 | ** ** | **As of**         | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                                                                 | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                                 | ** ** | **2006**               | ** **  | **2005** | ** ** |
| ** **                                                                                                                 |       |                   |        |   |   |
| **Assets**                                                                                                                 |       |                   |        |   |   |
| Cash and due from banks                                                                                                    |       | $                      | 6,250,206   |   | $ | 4,202,851 |   |
| Interest-bearing  deposits in other banks                                                                                  |       | 79,676                 |        | 129,543 |   |
| Federal funds sold                                                                                                         |       | 21,959,000             |        | 1,450,000 |   |
| Total cash and  cash equivalents                                                                                           |       | 28,288,882             |        | 5,782,394 |   |
| Securities available  for sale, at fair value                                                                              |       | 48,471,859             |        | 34,525,648 |   |
| Federal Home Loan Bank  stock, restricted, at cost                                                                         |       | 2,045,700              |        | 1,255,700 |   |
| Loans held for sale                                                                                                        |       | 3,059,035              |        | 1,226,353 |   |
| Loans, net of unearned  income                                                                                             |       | 446,960,178            |        | 331,440,956 |   |
| Less - allowance for  loan losses                                                                                          |       | (5,617,313             | )           | (4,150,000 | ) |
| Loans, net                                                                                                                 |       | 441,342,865            |        | 327,290,956 |   |
| Bank premises and  equipment, net                                                                                          |       | 11,567,152             |        | 9,140,566 |   |
| Accrued interest  receivable                                                                                               |       | 4,375,827              |        | 2,709,386 |   |
| Cash surrender value of  life insurance                                                                                    |       | 4,223,462              |        | 4,100,663 |   |
| Other assets                                                                                                               |       | 3,182,270              |        | 2,678,818 |   |
| **Total  Assets**                                                                                                          |       | $                      | 546,557,052 |   | $ | 388,710,484 |   |
|                                                                                                                       |       |                   |        |   |   |
| **Liabilities and Shareholders’  Equity**                                                                             | ** ** | ** **             | ** **  | ** ** | ** ** |
| Deposits:                                                                                                                  |       |                   |        |   |   |
| Non-interest  bearing                                                                                                      |       | $                      | 25,454,199  |   | $ | 21,599,726 |   |
| Interest bearing                                                                                                           |       | 429,136,796            |        | 312,975,398 |   |
| Total deposits                                                                                                             |       | 454,590,995            |        | 334,575,124 |   |
| FHLB borrowings                                                                                                            |       | 28,200,000             |        | 16,200,000 |   |
| Junior subordinated  debentures                                                                                            |       | 10,310,000             |        | 10,310,000 |   |
| Accrued interest  payable                                                                                                  |       | 2,386,878              |        | 1,648,664 |   |
| Accrued expenses and  other liabilities                                                                                    |       | 865,116                |        | 590,397 |   |
| Total  liabilities                                                                                                         |       | 496,352,989            |        | 363,324,185 |   |
| Shareholders’ Equity:                                                                                                 |       |                   |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, no shares outstanding                                                       |       | —                 |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, issued and outstanding 3,304,052 in  2006 and 2,604,052 in 2005 |       | 16,520,260             |        | 13,020,260 |   |
| Paid-in capital  surplus                                                                                                   |       | 29,336,044             |        | 12,047,356 |   |
| Retained earnings                                                                                                          |       | 4,997,434              |        | 898,117 |   |
| Accumulated  other comprehensive income (loss)                                                                             |       | (649,675               | )           | (579,434 | ) |
| Total  shareholders’ equity                                                                                           |       | 50,204,063             |        | 25,386,299 |   |
| **Total Liabilities and  Shareholders’ Equity**                                                                       |       | $                      | 546,557,052 |   | $ | 388,710,484 |   |

 

*See Accompanying Notes to ConsolidatedFinancial Statements (Unaudited).*

2

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**ATLANTIC SOUTHERN FINANCIAL GROUP, Inc.**

**ConsolidatedStatements of Earnings**

**For the Three Months and NineMonths Ended September 30, 2006and 2005**

**(Unaudited)**
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Interest  and Dividend Income:**                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans                           |       | $                                | 9,587,933  |                            | $          | 5,538,806 |   | $ | 25,054,807 |   | $ | 14,188,148 |   |
| Interest on securities:                              |       |                             |       |                            |       |   |   |   |   |
| Taxable income                                       |       | 419,658                          |       | 225,691                         |       | 1,072,532 |   | 565,802 |   |
| Non-taxable income                                   |       | 63,208                           |       | 36,095                          |       | 163,999 |   | 86,111 |   |
| Income on federal funds sold                         |       | 85,696                           |       | 31,634                          |       | 216,976 |   | 81,692 |   |
| Other interest and dividend income                   |       | 31,227                           |       | 19,741                          |       | 79,041 |   | 44,168 |   |
| Total interest and dividend income                   |       | 10,187,722                       |       | 5,851,967                       |       | 26,587,355 |   | 14,965,921 |   |
| ** **                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest  Expense:**                               | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                             |       | 4,461,486                        |       | 2,084,508                       |       | 11,260,530 |   | 5,067,511 |   |
| FHLB borrowings                                      |       | 313,418                          |       | 145,742                         |       | 740,642 |   | 389,457 |   |
| Federal funds purchased                              |       | 9,270                            |       | 17,449                          |       | 65,420 |   | 35,980 |   |
| Junior subordinated debentures                       |       | 194,691                          |       | 146,779                         |       | 548,399 |   | 241,322 |   |
| Total interest expense                               |       | 4,978,865                        |       | 2,394,478                       |       | 12,614,991 |   | 5,734,270 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net interest income before provision for loan losses |       | 5,208,857                        |       | 3,457,489                       |       | 13,972,364 |   | 9,231,651 |   |
| Provision for  loan losses                           |       | 468,000                          |       | 247,000                         |       | 1,389,000 |   | 1,087,000 |   |
| Net interest income after provision for loan losses  |       | 4,740,857                        |       | 3,210,489                       |       | 12,583,364 |   | 8,144,651 |   |
| ** **                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Noninterest  Income:**                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                  |       | 127,016                          |       | 106,880                         |       | 351,315 |   | 292,966 |   |
| Other service charges, commissions and fees          |       | 26,205                           |       | 19,922                          |       | 75,597 |   | 53,095 |   |
| Loss on sales / calls of investment securities       |       | —                           |       | —                          |       | (9,753 | ) | — |   |
| Gain (loss) on sale of other assets                  |       | (1,022                           | )          | —                          |       | 1,873 |   | — |   |
| Mortgage origination fees                            |       | 154,317                          |       | 159,936                         |       | 434,646 |   | 287,723 |   |
| Other income                                         |       | 92,493                           |       | 66,080                          |       | 347,777 |   | 126,420 |   |
| Total noninterest income                             |       | 399,009                          |       | 352,818                         |       | 1,201,455 |   | 760,204 |   |
| ** **                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Noninterest  Expense:**                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries                                             |       | 1,050,909                        |       | 655,414                         |       | 2,795,543 |   | 1,757,661 |   |
| Employee benefits                                    |       | 277,567                          |       | 252,178                         |       | 980,627 |   | 691,060 |   |
| Occupancy expense                                    |       | 188,029                          |       | 99,946                          |       | 570,215 |   | 264,822 |   |
| Equipment rental and depreciation of equipment       |       | 102,562                          |       | 70,117                          |       | 298,243 |   | 198,830 |   |
| Other expenses                                       |       | 931,768                          |       | 648,628                         |       | 2,734,718 |   | 1,806,259 |   |
| Total noninterest expense                            |       | 2,550,835                        |       | 1,726,283                       |       | 7,379,346 |   | 4,718,632 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| **Earnings Before Income Taxes**                     |       | 2,589,031                        |       | 1,837,024                       |       | 6,405,473 |   | 4,186,223 |   |
| Provision for  income taxes                          |       | 911,000                          |       | 685,413                         |       | 2,306,156 |   | 1,542,036 |   |
| **Net Earnings**                                     |       | $                                | 1,678,031  |                            | $          | 1,151,611 |   | $ | 4,099,317 |   | $ | 2,644,187 |   |
| ** **                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings  per share:**                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                |       | $                                | 0.51       |                            | $          | 0.44 |   | $ | 1.40 |   | $ | 1.02 |   |
| Diluted                                              |       | $                                | 0.46       |                            | $          | 0.40 |   | $ | 1.26 |   | $ | 0.92 |   |

 

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

3

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**ATLANTIC SOUTHERN FINANCIAL GROUP, Inc.**

**ConsolidatedStatements of Comprehensive Income**

**For the Three Months and NineMonths Ended September 30, 2006and 2005**

**(Unaudited)**

|                                                                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings                                                                                         |       | $                                                        | 1,678,031  |                                                    | $          | 1,151,611 |   | $ | 4,099,317 |   | $ | 2,644,187 |   |
| Other  comprehensive income (loss):                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized holding gain (losses) on investment securities  available for sale                        |       | 543,379                                                  |       | (269,918                                                | )          | (64,892 | ) | (347,038 | ) |
| Unrealized holding gain (losses) on derivative financial  instruments classified as cash flow hedges |       | 18,848                                                   |       | (71,166                                                 | )          | (51,287 | ) | (71,166 | ) |
| Reclassification adjustment for losses realized in  net earnings                                     |       | —                                                   |       | —                                                  |       | 9,753 |   | — |   |
| Total other comprehensive income (loss), before tax                                                  |       | 562,227                                                  |       | (341,084                                                | )          | (106,426 | ) | (418,204 | ) |
| Income taxes  related to other comprehensive income:                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized holding (gain) losses on investment securities  available for sale                        |       | (184,749                                                 | )          | 91,772                                                  |       | 22,063 |   | 117,993 |   |
| Unrealized holding (gain) losses on derivative  financial instruments classified as cash flow hedges |       | (6,408                                                   | )          | 24,000                                                  |       | 17,438 |   | 24,000 |   |
| Reclassification adjustment for losses realized in  net earnings                                     |       | —                                                   |       | —                                                  |       | (3,316 | ) | — |   |
| Total income taxes related to other comprehensive  income (loss)                                     |       | (191,157                                                 | )          | 115,772                                                 |       | 36,185 |   | 141,993 |   |
| Total other comprehensive income (loss), net of tax                                                  |       | 371,070                                                  |       | (225,312                                                | )          | (70,241 | ) | (276,211 | ) |
| Total  comprehensive income                                                                          |       | $                                                        | 2,049,101  |                                                    | $          | 926,299 |   | $ | 4,029,076 |   | $ | 2,367,976 |   |

 

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

4

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**ATLANTIC SOUTHERN FINANCIAL GROUP, inc.**

**ConsolidatedStatements of Cash Flows**

**For the Nine Months EndedSeptember 30, 2006 and 2005**

**(Unaudited)**
| ** **                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net earnings                                                                         |       | $                                                       | 4,099,317  |   | $ | 2,644,187 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                                    |       |   |   |
| Provision for loan losses                                                            |       | 1,389,000                                               |       | 1,087,000 |   |
| Depreciation                                                                         |       | 379,128                                                 |       | 236,799 |   |
| Net amortization of securities                                                       |       | 22,051                                                  |       | 44,831 |   |
| Gain on sales of other assets                                                        |       | (1,873                                                  | )          | — |   |
| Loss on sales / calls of investment securities                                       |       | 9,753                                                   |       | — |   |
| Loans held for sale                                                                  |       | (1,832,682                                              | )          | (1,236,780 | ) |
| Change in cash surrender value of life insurance                                     |       | (122,799                                                | )          | (4,059,730 | ) |
| Changes in accrued income and other assets                                           |       | (2,131,835                                              | )          | (1,868,770 | ) |
| Changes in accrued expenses and other liabilities                                    |       | 1,012,933                                               |       | 864,194 |   |
| Net cash provided by (used in) operating activities                                  |       | 2,822,993                                               |       | (2,288,269 | ) |
| ** **                                                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Cash  Flows from Investing Activities:**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net change in loans to customers                                                     |       | (115,440,909                                            | )          | (77,452,424 | ) |
| Purchase of available for sale securities                                            |       | (17,644,693                                             | )          | (10,582,577 | ) |
| Sales of securities available for sale                                               |       | 491,415                                                 |       | — |   |
| Proceeds from maturities/calls of available for sale  securities                     |       | 1,500,000                                               |       | 500,000 |   |
| Purchase of mortgage backed securities                                               |       | —                                                  |       | (4,507,430 | ) |
| Proceeds from paydowns on mortgage-backed securities                                 |       | 1,568,837                                               |       | 1,313,999 |   |
| Purchase of interest rate floors                                                     |       | —                                                  |       | (237,667 | ) |
| Purchase of FHLB stock                                                               |       | (790,000                                                | )          | (69,100 | ) |
| Property and equipment expenditures                                                  |       | (2,805,714                                              | )          | (1,527,917 | ) |
| Net cash used in investing activities                                                |       | (133,121,064                                            | )          | (92,563,116 | ) |
| ** **                                                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Cash  Flows from Financing Activities:**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net change in deposits                                                               |       | 120,015,871                                             |       | 83,908,159 |   |
| FHLB borrowings                                                                      |       | 12,000,000                                              |       | (3,000,000 | ) |
| Proceeds from junior subordinated debentures                                         |       | —                                                  |       | 10,310,000 |   |
| Payment for fractional shares                                                        |       | —                                                  |       | (464 | ) |
| Proceeds from issuance of common stock, net of  issuance cost of $211,312            |       | 20,788,688                                              |       | — |   |
| Net cash provided by financing activities                                            |       | 152,804,559                                             |       | 91,217,695 |   |
| **Net  Change in Cash and Cash Equivalents**                                         |       | 22,506,488                                              |       | (3,633,690 | ) |
| **Cash  and Cash Equivalents, Beginning of Year**                                    |       | 5,782,394                                               |       | 9,831,001 |   |
| **Cash and Cash Equivalents, End  of Quarter**                                       |       | $                                                       | 28,288,882 |   | $ | 6,197,311 |   |

 

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

5

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

# **(Unaudited)**

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

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include all informationand footnotes necessary for a fair presentation of financial position, resultsof operations, and changes in financial position in conformity with generallyaccepted accounting principles.  Theinterim financial statements furnished reflect all adjustments, which are, inthe opinion of management, necessary to a fair statement of the results for theinterim periods presented.  The interimconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.  Certain reclassifications have been made tothe 2005 financial statement presentation to correspond to the current year’sformat.

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

The Company sponsorsstock-based compensation plans. The Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004) “Share-Based Payment” (SFAS No.123(R)) on the required effective date of January 1, 2006.  Prior to January 1, 2006, the Companyaccounted for these plans under the recognition and measurement principles ofAPB Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedInterpretations and used the minimum value method of measuring the fair valueof options granted for the proforma disclosures under SFAS No. 123.  As provided in SFAS No. 123(R), the Companywill continue to account for the options outstanding at December 31, 2005,using the measurement principals of APB No. 25 and the proforma disclosuresunder SFAS 123(R).  All stock awardsgranted subsequent to January 1, 2006 will use the fair value measurements inaccordance with SFAS 123(R), which will require the Company to recognizecompensation expense upon the grant date of the option and over any vestingperiod.

Given the application ofthe minimum value method for measuring the fair value of the options, nostock-based employee compensation cost is reflected in net earnings for thethree months and nine months ended September 30, 2006 and 2005.  The following table illustrates the effect onnet earnings and earnings per share as if the Company had applied the fairvalue recognition provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation for the three months and nine months ended September 30, 2006 and2005.
|                                                                               | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                                                   | ** ** | **2005**                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                          |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Net earnings, as  reported                                                    |       | $                                                                          | 1,678,031  |                                                                      | $          | 1,151,611 |   | $ | 4,099,317 |   | $ | 2,644,187 |   |
| Proforma  expensing based on options valued applying the minimum value method |       | (13,390                                                                    | )          | (13,390                                                                   | )          | (40,170 | ) | (40,170 | ) |
| Related tax  benefit                                                          |       | 5,356                                                                      |       | 5,356                                                                     |       | 16,068 |   | 16,068 |   |
| Pro forma net  earnings                                                       |       | $                                                                          | 1,669,997  |                                                                      | $          | 1,143,577 |   | $ | 4,075,215 |   | $ | 2,620,085 |   |
| Earnings per  share:                                                          |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Basic, as reported                                                            |       | $                                                                          | 0.51       |                                                                      | $          | 0.44 |   | $ | 1.40 |   | $ | 1.02 |   |
| Basic, pro forma                                                              |       | $                                                                          | 0.51       |                                                                      | $          | 0.44 |   | $ | 1.39 |   | $ | 1.01 |   |
| Diluted, as reported                                                          |       | $                                                                          | 0.46       |                                                                      | $          | 0.40 |   | $ | 1.26 |   | $ | 0.92 |   |
| Diluted, pro  forma                                                           |       | $                                                                          | 0.46       |                                                                      | $          | 0.40 |   | $ | 1.25 |   | $ | 0.91 |   |

 

6

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# ***(3)******        ******Earnings PerShare***

Basicearnings per share are based on the weighted average number of common sharesoutstanding during the period while the effects of potential shares outstandingduring the period are included in diluted earnings per share. 

Thereconciliation of the amounts used in the computation of both “basic earningsper share” and “diluted earnings per share” for each period is presented asfollows: 
| ** **                                                                           | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                           | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Three Months Ended September 30, 2006** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings  per share                                                            |       | $            | 1,678,031  |        | 3,304,052  |               | 0.51       |   |
| Effect of dilutive common stock issuances:                                           |       |         |       |        |       |               |       |
| Stock options                                                                        |       | —       |       | 339,341     |       | (0.05              | )          |
| Diluted earnings per  share                                                          |       | $            | 1,678,031  |        | 3,643,393  |               | 0.46       |   |

 
| ** **                                                                          | ** ** | ** **   | ** ** | ** **  | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                          | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
| ** **                                                                          | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Nine Months Ended September 30, 2006** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings  per share                                                           |       | $            | 4,099,317  |        | 2,922,397  |               | 1.40       |   |
| Effect of dilutive common stock issuances:                                          |       |         |       |        |       |               |       |
| Stock options                                                                       |       | —       |       | 333,512     |       | (0.14              | )          |
| Diluted earnings per  share                                                         |       | $            | 4,099,317  |        | 3,255,909  |               | 1.26       |   |

 
| ** **                                                                           | ** ** | ** **   | ** ** | ** **  | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                           | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
| ** **                                                                           | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Three Months Ended September 30, 2005** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings  per share                                                            |       | $            | 1,151,611  |        | 2,604,052  |               | 0.44       |   |
| Effect of dilutive common stock issuances:                                           |       |         |       |        |       |               |       |
| Stock options                                                                        |       | —       |       | 274,439     |       | (0.04              | )          |
| Diluted earnings per  share                                                          |       | $            | 1,151,611  |        | 2,878,491  |               | 0.40       |   |

 
| ** **                                                                          | ** ** | ** **   | ** ** | ** **  | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                          | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
| ** **                                                                          | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Nine Months Ended September 30, 2005** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings  per share                                                           |       | $            | 2,644,187  |        | 2,604,052  |               | 1.02       |   |
| Effect of dilutive common stock issuances:                                          |       |         |       |        |       |               |       |
| Stock options                                                                       |       | —       |       | 274,439     |       | (0.10              | )          |
| Diluted earnings per  share                                                         |       | $            | 2,644,187  |        | 2,878,491  |               | 0.92       |   |

 

# ***(4)******        ******Offering ofCommon Stock***

### On June 12, 2006, the Company closed its public offering of a total of700,000 shares of common stock at a price of $30.00 per share.  The Company received net proceeds of $20.8million after deducting offering expenses. The Company plans to use the proceeds of the offering to fund futuregrowth, including opening de novo branches and the acquisitions of existingbanks, purchasing additional land in south Macon, funding future loan demandand ensuring sufficient risk-based capital and liquidity for continued growth.

# ***(5)******        ******BusinessCombinations***

OnJuly 27, 2006, Atlantic Southern Financial Group, Inc. announced the signing ofa definitive agreement to acquire Sapelo Bancshares, Inc. (“Sapelo”) and itssubsidiary, Sapelo National Bank, a community bank headquartered in Darien,Georgia, with approximately $61 million in assets, $49 million in loans, $50million in deposits and $7 million in stockholders’ equity as of June 30, 2006.Sapelo National Bank operates four full service banking offices in McIntosh andGlynn Counties.  The transaction isvalued at $15.4 million and is expected to be completed by the fourth quarterof 2006, subject to regulatory approval, the approval of Sapelo shareholdersand other customary closing conditions. Under the terms of the merger agreement, Atlantic Southern will issue,and shareholders of Sapelo will be entitled to receive their pro rata portionof $6,239,972 and 305,695 shares of Atlantic Southern common stock.

OnSeptember 15, 2006, Atlantic Southern Financial Group, Inc. announced thesigning of a definitive agreement to acquire First Community Bank, a communitybank headquartered in Roberta, Georgia, with approximately $73 million inassets, $55 million in loans, $60 million in deposits and $7.5 million instockholders’ equity as of June 30, 2006. First Community Bank operates threefull service banking offices in Crawford, Bibb and Peach Counties ofGeorgia.  The transaction is valued at$18.3 million and is expected to be completed by the first quarter of 2007,

7

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subjectto regulatory approval, the approval of First Community shareholders and othercustomary closing conditions.

***(6) Commitments***

TheCompany entered into construction contracts during the year to builda branch office in Rincon, Georgia and a corporate center in Macon,Georgia.  These construction contracts total approximately $2.6million.  The Company anticipates that it will sign an additionalcontract for approximately $1.2 million for the completion of the corporatecenter.  Construction on the Rincon office is expected to be completedduring the first quarter of 2007, and the corporate center construction isexpected to be completed during the third quarter of 2007.

***(7) RecentAccounting Pronouncements***

*Accounting for Uncertainty in Income Taxes*

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FinancialInterpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin the financial statements and prescribes a recognition threshold andmeasurement attribute for a tax position taken or expected to be taken in a taxreturn. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. This interpretation will be effective for theCompany beginning in January of 2007. The Company is in the process ofassessing the impact of this interpretation on its financial position andresults of operations.

8

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**For Eachof the Three and Nine Months in the Period Ended**

**September30, 2006****and 2005**

The following discussion of financialcondition as of September 30, 2006compared to December 31, 2005,and the results of operations for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 should be read inconjunction with the condensed financial statements and accompanying footnotesappearing 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 of us to be materially different from those expressed orimplied by such 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 the control of us;

·                  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);

·                  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;

·                  we may face risks with respect tofuture expansion and acquisitions or mergers;

·                  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 ExchangeCommission; and

·                  Our success at managing the risksinvolved in the foregoing.

9

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#### 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 September 30, 2006, were approximately $546,557,000, which represented anincrease of approximately $157,847,000 or 41% from December 31, 2005.  Net earnings increased 55% for the ninemonths ended September 30, 2006 to $4,099,317 or $1.26 per diluted sharecompared to $2,644,187 or $0.92 per diluted share for the nine months endedSeptember 30, 2005. Net earnings increased 46% for the three months endedSeptember 30, 2006 to $1,678,031 or $0.46 per diluted share compared to$1,151,611 or $0.40 per diluted share for the three months ended September 30,2005.

### On June 12, 2006, the Company closed its public offering of a total of700,000 shares of common stock at a price of $30.00 per share.  The Company received net proceeds of $20.8million after deducting offering expenses. The Company plans to use the proceeds of the offering to fund futuregrowth, including opening de novo branches and the acquisitions of existingbanks, purchasing additional land in south Macon, funding future loan demandand ensuring sufficient risk-based capital and liquidity for continued growth.

OnJuly 27, 2006, Atlantic Southern Financial Group, Inc. announced the signing ofa definitive agreement to acquire Sapelo Bancshares, Inc. (“Sapelo”) and itssubsidiary, Sapelo National Bank, a community bank headquartered in Darien,Georgia, with approximately $61 million in assets, $49 million in loans, $50million in deposits and $7 million in stockholders’ equity as of June 30, 2006.Sapelo National Bank operates four full service banking offices in McIntosh andGlynn Counties.  The transaction isvalued at $15.4 million and is expected to be completed by the fourth quarterof 2006, subject to regulatory approval, the approval of Sapelo shareholdersand other customary closing conditions. Under the terms of the merger agreement, Atlantic Southern will issue, andshareholders of Sapelo will be entitled to receive their pro rata portion of$6,239,972 and 305,695 shares of Atlantic Southern common stock.

OnSeptember 15, 2006, Atlantic Southern Financial Group, Inc. announced thesigning of a definitive agreement to acquire First Community Bank, a communitybank headquartered in Roberta, Georgia, with approximately $73 million inassets, $55 million in loans, $60 million in deposits and $7.5 million instockholders’ equity as of June 30, 2006. First Community Bank operates threefull service banking offices in Crawford, Bibb and Peach Counties.  Under the terms of the merger agreement,First Community shareholders will receive 0.742555 shares of Atlantic SouthernFinancial Group, Inc. common stock for each share of First Community Bankcommon stock.  The transaction is valuedat $18.3 million and is expected to be completed by the first quarter of 2007,subject to regulatory approval, the approval of First Community shareholdersand other customary closing conditions.

10

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**Financial Condition**

The composition of assets and liabilities for theCompany is as follows:
|                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2006**               | ** ** | **2005**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                    | ** ** | ** **             | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** |
| Cash and due from banks        |       | $                      | 6,250,206  |                  | $          | 4,202,851         |       | $                 | 2,047,355  |   | 48.71 | % |
| Federal funds sold             |       | 21,959,000             |       | 1,450,000             |       | 20,509,000        |       | 1414.41           | %          |
| Securities available for sale  |       | 48,471,859             |       | 34,525,648            |       | 13,946,211        |       | 40.39             | %          |
| Loans, net of unearned income  |       | 446,960,178            |       | 331,440,956           |       | 115,519,222       |       | 34.85             | %          |
| Total assets                   |       | 546,557,052            |       | 388,710,484           |       | 157,846,568       |       | 40.61             | %          |
| **Liabilities:**               | ** ** | ** **             | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** |
| Deposits                       |       | 454,590,995            |       | 334,575,124           |       | 120,015,871       |       | 35.87             | %          |
| FHLB borrowings                |       | 28,200,000             |       | 16,200,000            |       | 12,000,000        |       | 74.07             | %          |
| Junior subordinated debentures |       | 10,310,000             |       | 10,310,000            |       | —            |       | —            |       |
|                           |       |                   |       |                  |       |              |       |              |       |
| Loan to Deposit  Ratio         |       | 98.32                  | %          | 99.06                 | %          |              |       |              |       |
|                                |            |                        |            |                       |            |                   |            |                   |            |  |  |  |

                                                                                                

The most significant change in the composition ofassets was the increase in loans due to continued growth of the Company.  The most significant change in thecomposition of liabilities was the increase in deposits, especially timedeposits, to fund loan growth.  Timedeposits, including out-of-market and core deposits, are the Company’sprincipal source of funds for loans and investing in securities.

Because of the historically low interest rate environmentin the last two years, we have chosen to obtain a portion of our deposits fromoutside our market.  Our wholesale CDs (internet and brokered) represented53.5% of our deposits as of September 30, 2006 when compared to 51.4% of ourdeposits as of December 31, 2005.  TheCompany’s Fund Management Policy allows for the ratio of wholesale deposits tototal deposits to be 60%.  The Companyhas been successful in replacing maturing brokered deposits and does not expectto experience significant disintermediation as the wholesale deposits mature.

### **AssetQuality**

### There were no materialnonperforming assets at September 30, 2006 and at December 31, 2005.

### **Results ofOperations**

# The following table shows the significant componentsof net earnings:

|                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|---------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                      | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                 |       | $                               | 26,587,355 |       | $          | 14,965,921        |       | $ | 11,621,434 |   | 77.65 | % |
| Interest Expense                |       | 12,614,991                      |       | 5,734,270  |       | 6,880,721         |       | 119.99 | % |
| Net Interest  Income            |       | 13,972,364                      |       | 9,231,651  |       | 4,740,713         |       | 51.35 | % |
| Provision for  Loan Losses      |       | 1,389,000                       |       | 1,087,000  |       | 302,000           |       | 27.78 | % |
| Net Earnings                    |       | 4,099,317                       |       | 2,644,187  |       | 1,455,130         |       | 55.03 | % |
| Net Earnings Per  Diluted Share |       | $                               | 1.26       |       | $          | 0.92              |       | 0.34 |   | 36.96 | % |
|                                 |            |                                 |            |            |            |                   |            |  |  |  |  |  |

 

11

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|                                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                  |       | $                                | 10,187,722 |       | $          | 5,851,967         |       | $ | 4,335,755 |   | 74.09 | % |
| Interest Expense                 |       | 4,978,865                        |       | 2,394,478  |       | 2,584,387         |       | 107.93 | % |
| Net Interest  Income             |       | 5,208,857                        |       | 3,457,489  |       | 1,751,368         |       | 50.65 | % |
| Provision for  Loan Losses       |       | 468,000                          |       | 247,000    |       | 221,000           |       | 89.47 | % |
| Net Earnings                     |       | 1,678,031                        |       | 1,151,611  |       | 526,420           |       | 45.71 | % |
| Net Earnings Per  Diluted Shares |       | $                                | 0.46       |       | $          | 0.40              |       | 0.06 |   | 15.00 | % |
|                                  |            |                                  |            |            |            |                   |            |  |  |  |  |  |

 

# **General**

The Company’s results of operations are determined by its ability toeffectively manage interest income and expense, to minimize loan and investmentlosses, to generate 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.

# **Net Interest Income**

TheCompany’s primary source of income is interest income from loans and investmentsecurities.  Its 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.

Totalinterest and dividend income for the nine months ended September 30, 2006increased $11,621,000 or 78% when compared to the nine months ended September30, 2005 primarily due to increases in loan interest and fees on loans.  This increase is partially the result of theaverage loan portfolio for the nine months ended September 30, 2006 increasingapproximately $117 million or 43% when compared to average loan portfolio forthe nine months ended September 30, 2005. Additionally, the average yield on loans increased during the ninemonths ended September 30, 2006 to 8.59% compared to an average yield of 6.94 %for the nine months ended September 30, 2005.

Totalinterest expense for the nine months ended September 30, 2006 increased$6,881,000 or 120% when compared to the nine months ended September 30,2005.  Two factors impact interestexpense: average balances of deposit and borrowing portfolios and average ratespaid on each.  Average deposit balancesincreased approximately $120.2 million when comparing the nine months endedSeptember 30, 2006 to the nine months ended September 30, 2005.  The increase of $120.2 million includesapproximately $2.1 million in non-interest bearing balances in regular demanddeposit accounts.  The average rate paidon the deposit portfolios for the nine months ended September 30, 2006increased to 4.13% from 2.74% when compared to the nine months ended September30, 2005.   Average borrowing balancesincreased approximately $8.5 million when comparing the nine months endedSeptember 30, 2006 to the nine months ended September 30, 2005.  Average interest rates paid on borrowingswere 4.81% for the nine months ended September 30, 2006 compared to 3.15% forthe nine months ended September 30, 2005.

Netinterest income increased $4,741,000 or 51% for the nine months ended September30, 2006 compared to September 30, 2005 as a result of the items discussedabove.

Totalinterest and dividend income for the third quarter of 2006 increased $4,336,000or 74% when compared to the third quarter of 2005 primarily due to increases inloan interest and fees on loans.  Thisincrease is partially the result of the average loan portfolio for the thirdquarter of 2006 increasing approximately $134 million or 45% when compared toaverage loan portfolio for the third quarter of 2005.  Additionally, the average yield on loansincreased during the third quarter of 2006 to 8.80% compared to an averageyield of 7.37 % for the third quarter of 2005.

Totalinterest expense for the third quarter of 2006 increased $2,584,000 or 108%,when compared to the third quarter of 2005. Two factors impact interest expense: average balances of deposit andborrowing portfolios and

12

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averagerates paid on each.  Average depositbalances increased approximately $130.5 million when comparing third quarter of2006 to the third quarter of 2005.  Theincrease of $130.5 million includes approximately $2.5 million in non-interestbearing balances in regular demand deposit accounts.  The average rate paid on the depositportfolios for the third quarter of 2006 increased to 4.43% from 3.05% whencompared to third quarter of 2005.  Average borrowing balances increased approximately $7 million whencomparing the third quarter of 2006 to the third quarter of 2005.  Average interest rates paid on borrowings was5.14% for the third quarter of 2006 compared to 3.63% for the third quarter of2005.

Netinterest income increased $1,751,000 or 51%, for the third quarter of 2006 ascompared to the third quarter of 2005 as a result of the items discussed above.

# **Provision for Loan Losses**

Theprovision for loan losses for the nine months ended September 30, 2006, was$1,389,000 compared to $1,087,000 for the same period of 2006.  The provision for loan losses for the thirdquarter of 2006 was $468,000 compared to $247,000 for the third quarter of2005.  This is due to continued loangrowth for the respective periods and charge-offs for each period were minimal.

# **Non-interest Income**

Composition of other noninterest income is asfollows:
|                                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts            |       | $                               | 351,315    |       | $          | 292,966           |       | $ | 58,349 |   | 19.92 | % |
| Other service  charges, commissions and fees    |       | 75,597                          |       | 53,095     |       | 22,502            |       | 42.38 | % |
| Loss on sales /  calls of investment securities |       | (9,753                          | )          | —     |       | (9,753            | )          | -100.00 | % |
| Gain on sale of  other assets                   |       | 1,873                           |       | —     |       | 1,873             |       | 100.00 | % |
| Mortgage  origination fees                      |       | 434,646                         |       | 287,723    |       | 146,923           |       | 51.06 | % |
| Other income                                    |       | 347,777                         |       | 126,420    |       | 221,357           |       | 175.10 | % |
| Total  noninterest income                       |       | $                               | 1,201,455  |       | $          | 760,204           |       | $ | 441,251 |   | 58.04 | % |

 
|                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                   | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts         |       | $                                | 127,016    |       | $          | 106,880           |       | $ | 20,136 |   | 18.84 | % |
| Other service  charges, commissions and fees |       | 26,205                           |       | 19,922     |       | 6,283             |       | 31.54 | % |
| Loss on sale of  other assets                |       | (1,022                           | )          | —     |       | (1,022            | )          | -100.00 | % |
| Mortgage  origination fees                   |       | 154,317                          |       | 159,936    |       | (5,619            | )          | -3.51 | % |
| Other income                                 |       | 92,493                           |       | 66,080     |       | 26,413            |       | 39.97 | % |
| Total  noninterest income                    |       | $                                | 399,009    |       | $          | 352,818           |       | $ | 46,191 |   | 13.09 | % |

 

Service charges on depositaccounts are evaluated against service charges from other banks in the localmarket and against the Bank’s own cost structure in providing the depositservices.  This income should grow withthe growth in the Bank’s demand deposit account base.  The number of deposit accounts for the ninemonths ended September 30, 2006 was 4,002 accounts when compared to the sameperiod of 2005 with 3,098 accounts.  Theincrease in mortgage origination fees for the nine months ended September 30,2006 is primarily due to the mortgage loan brokerage activity which was startedin late 2004 and the volume of mortgages originated for the nine months endedSeptember 30, 2006

13

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was larger than the sameperiod of 2005.  The two most significantchanges in other income for the nine months ended September 30, 2006 were$124,334 of rental income from a portion of a Bank owned facility and $129,198of income from the increase in cash surrender value of life insurance on bankowned life insurance (“BOLI”) policies purchased in the second quarter of 2005.

The number of depositaccounts for the third quarter of 2006 increased by 278 accounts when comparedto the same period of 2005.  The decreasein mortgage origination fees for the three months ended September 30, 2006 isprimarily due to the timing of the funding of the mortgage loans towards theend of the month of September.  Some ofthe funding of the mortgage loans did not receive funding until early October2006.  The two most significant changesin other income for the third quarter of 2006 were $14,801 of rental incomefrom a portion of a Bank owned facility and $43,066 of income from the increasein cash surrender value life insurance on bank owned life insurance (“BOLI”)policies purchased in the second quarter of 2005.

# **Non-interest Expense**

Composition of other noninterest expense is asfollows:
|                                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                               | 2,795,543  |       | $          | 1,757,661         |       | $ | 1,037,882 |   | 59.05 | % |
| Employee  benefits                              |       | 980,627                         |       | 691,060    |       | 289,567           |       | 41.90 | % |
| Occupancy  expense                              |       | 570,215                         |       | 264,822    |       | 305,393           |       | 115.32 | % |
| Equipment rental  and depreciation of equipment |       | 298,243                         |       | 198,830    |       | 99,413            |       | 50.00 | % |
| Other expenses                                  |       | 2,734,718                       |       | 1,806,259  |       | 928,459           |       | 51.40 | % |
| Total  noninterest expense                      |       | $                               | 7,379,346  |       | $          | 4,718,632         |       | $ | 2,660,714 |   | 56.39 | % |

 
|                                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                | 1,050,909  |       | $          | 655,414           |       | $ | 395,495 |   | 60.34 | % |
| Employee  benefits                              |       | 277,567                          |       | 252,178    |       | 25,389            |       | 10.07 | % |
| Occupancy  expense                              |       | 188,029                          |       | 99,946     |       | 88,083            |       | 88.13 | % |
| Equipment rental  and depreciation of equipment |       | 102,562                          |       | 70,117     |       | 32,445            |       | 46.27 | % |
| Other expenses                                  |       | 931,768                          |       | 648,628    |       | 283,140           |       | 43.65 | % |
| Total  noninterest expense                      |       | $                                | 2,550,835  |       | $          | 1,726,283         |       | $ | 824,552 |   | 47.76 | % |

 

The increases in noninterest expenses are primarilydue to the growth of the bank.  The mostsignificant increases in the third quarter of 2006 are increases in salariesand employee benefits.  The increase insalaries and employees benefits represents normal increases in salaries and anincrease in the number of employees.  AtSeptember 30, 2006, the number of full-time equivalent employees was 85compared to 60 at September 30, 2005. The increase in the number of full-time equivalent employees is directlyrelated to the growth of the bank and the hiring for one new branch and oneloan production center.  The bankoperates from seven facilities as of September 30, 2006 compared to fivefacilities as of September 2005.  Theincreases in other expenses are not attributable to any one particular item,but represent increases related to physical facility expansion.

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# **Income Tax Expense**

Income tax expense expressed as a percentage ofearnings before income taxes was 36.00% and 36.84% for the nine months endedSeptember 30, 2006 and 2005, respectively. For the third quarter of 2006, the income tax expense expressed as a percentageof earnings before income taxes was 35.19% when compared to 37.31% for thethird quarter of 2005.  The fluctuationin the percentage can be attributed to the tax-free income versus the pretaxincome.  For the nine months endedSeptember 30, 2006, the tax-free income expressed as a percentage of earningsbefore income taxes was 2.56% when compared to 2.06% for the nine months endedSeptember 30, 2005.  For the thirdquarter of 2006, the tax-free income expressed as a percentage of earningsbefore income taxes was 2.44% when compared to 1.96% for the third quarter of2005.

### **Liquidity**

Liquidity management involves the matching of thecash flow requirements of customers, either depositors withdrawing funds orborrowers needing loans, and the ability of the Company to meet thoserequirements.

The Company’s liquidity program is designed andintended to provide guidance in funding the credit and investment activities ofthe Company while at the same time ensuring that the deposit obligations of theCompany are met on a timely basis. In order to permit active and timelymanagement of assets and liabilities, these accounts are monitored regularly inregard to volume, mix, and maturity.

The Company’s liquidity position depends primarilyupon the liquidity of its assets relative to its need to respond to short-termdemand for funds caused by withdrawals from deposit accounts and loan fundingcommitments. Primary sources of liquidity are scheduled repayments on theCompany’s loans and interest on and maturities of its investment securities.Sales of investment securities available for sale represent another source ofliquidity to the Company. The Company may also utilize its cash and due frombanks and federal funds sold to meet liquidity requirements as needed.

The Company also has the ability, on a short-termbasis, to purchase federal funds from other financial institutions up to$21,400,000. At September 30, 2006, the Company had no federal funds purchased.The Company has a total available line of $29,004,000, subject to availablecollateral, from the Federal Home Loan Bank. The Company has $28.2 million inadvances on this line at September 30, 2006.

The Bank’s liquidity policy requires that the ratioof cash and certain short-term investments to net withdrawable deposit accountsbe at least 10%. The Bank’s liquidity ratios at September 30, 2006 and 2005were 15.80% and 12.20%, respectively.

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### **Capital**

The following table summarizes the capital ratios ofthe Company and the Bank:
|                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                               |       |                   |       |                  |       |
| Tier 1 Leverage  Ratio - Bank                      |       | 11.76                  | %          | 9.26                  | %          |
| Tier 1 Leverage  Ratio - Consolidated              |       | 11.91                  | %          | 8.88                  | %          |
|                                               |       |                   |       |                  |       |
| Tier 1 Risk  Weighted Capital Ratio - Bank         |       | 12.87                  | %          | 10.65                 | %          |
| Tier 1 Risk  Weighted Capital Ratio - Consolidated |       | 13.02                  | %          | 10.21                 | %          |
|                                               |       |                   |       |                  |       |
| Risk Weighted  Total Capital Ratio - Bank          |       | 14.07                  | %          | 11.88                 | %          |
| Risk Weighted Total  Capital Ratio - Consolidated  |       | 14.22                  | %          | 11.89                 | %          |

 

The capital of the Company and the Bank exceeded allprescribed regulatory capital guidelines. Regulations require that the most highly rated banks maintain a Tier 1leverage ratio of 3% plus an additional cushion of at least 1 to 2 percentagepoints.  Tier 1 capital consists ofcommon shareholders’ equity, less certain intangibles.  Regulations require that the Bank maintain aminimum total risk weighted capital ratio of 8%, with one-half of this amount,or 4%, made up of Tier I capital.

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

**For the Nine months Ended September 30, 2006**

As of September 30, 2006, there were no substantialchanges in the composition of the Company’s market-sensitive assets andliabilities or their related market values from that reported as of December31, 2005. The foregoing disclosures related to the market risk of the Companyshould be read in conjunction with the Company’s audited consolidated financialstatements, related notes and management’s discussion and analysis of financialcondition and results of operations for the year ended December 31, 2005included in the Company’s 2005 Annual Report on Form 10-K. 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Item 4. Controls and Procedures**

**For the Nine months EndedSeptember 30, 2006**

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

#### During the third quarter of 2006, there were nosignificant changes in the Company’s internal control over financial reportingor, to the Company’s knowledge, in other factors that could significantlyaffect those internal controls subsequent to the date the Company carried outits evaluation that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, andthere have been no corrective actions with respect to significant deficienciesor material weaknesses. 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Part II. Other Information**

**For the Nine months Ended September 30, 2006**

#### **PART II: OTHER INFORMATION:**

Item 1. 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, 2005, 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 may materiallyadversely affect our business, financial condition and / or operation 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   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities  Exchange Act of 1934, as amended                            |
|   |                                                                                                                                                |
| 31.2   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities  Exchange Act of 1934, as amended                            |
|   |                                                                                                                                                |
| 32     | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

**SIGNATURES**

In accordance with the requirements ofthe Securities Exchange Act, the registrant caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**
| /s/ Mark A. Stevens                    |   |
|----------------------------------------|--------|
|                                   |
| Mark A. Stevens                        |
| President and  Chief Executive Officer |
|                                   |
|                                   |
| Date: November  13, 2006               |

 

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