Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

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

** **

**For the quarterly period ended      June 30,2008**

 

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

 

**For the transition period from                   to                  **

 

**Commission File Number 000-51112**

 

**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 

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

 

###### **1701 Bass Road**

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

(Address of Principal Executive Offices)

 

**(478) 476-2170**

(Issuer’s Telephone Number, IncludingArea Code)

 

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

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

    Yes   x    No   o

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” (in Rule 12b-2 of the Exchange Act).

 
| Large accelerated filer | o | Accelerated  filer  x               |   |   |
|-------------------------|---|-----------------------------------------------|--------|--------|
| Non-accelerated filer   | o | Smaller  reporting company   x |   |   |

 

Indicate by checkmark whether the registrant isa shell company (as defined by Rule 12b-2 of the Exchange Act).

 

Yes   o   No   x

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date: Common Stock $5 par value, 4,151,780 sharesoutstanding at August 11, 2008

 

 

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

 

INDEX

 
| ** **                                                                                                      | ** **                                                                                                                                 | **PAGE** |
|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I:                                                                                                    | FINANCIAL  INFORMATION                                                                                                                     |     |
| ITEM  1.                                                                                                        | FINANCIAL STATEMENTS                                                                                                                       |     |
|                                                                                                            |                                                                                                                                       |     |
| The  following consolidated financial statements are provided for Atlantic  Southern Financial Group, Inc. |                                                                                                                                       |
|                                                                                                            |                                                                                                                                       |     |
|                                                                                                            | Consolidated Balance Sheets – June 30, 2008 (unaudited) and December 31, 2007 (audited)                                     | 2        |
|                                                                                                            |                                                                                                                                       |     |
|                                                                                                            | Consolidated Statements of  Earnings (unaudited) – For the Three Months And Six Months Ended  June 30, 2008 and 2007             | 3        |
|                                                                                                            |                                                                                                                                       |     |
|                                                                                                            | Consolidated Statements of  Comprehensive Income (unaudited) – For the Three Months and Six Months Ended  June 30, 2008 and 2007 | 4        |
|                                                                                                            |                                                                                                                                       |     |
|                                                                                                            | Consolidated  Statements of Cash Flows (unaudited) – For the Six Months Ended June 30, 2008 and 2007                             | 5        |
|                                                                                                            |                                                                                                                                       |     |
|                                                                                                            | Notes to  Consolidated Financial Statements (unaudited)                                                                                    | 6        |
|                                                                                                            |                                                                                                                                       |     |
| ITEM 2.                                                                                                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                | 12       |
|                                                                                                            |                                                                                                                                       |     |
| ITEM 3.                                                                                                         | Quantitative  and Qualitative Disclosures About Market Risk                                                                                | 27       |
|                                                                                                            |                                                                                                                                       |     |
| ITEM 4T.                                                                                                        | Controls and Procedures                                                                                                                    | 28       |
|                                                                                                            |                                                                                                                                       |     |
| PART II:                                                                                                   | OTHER INFORMATION                                                                                                                          | 29       |

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedBalance Sheets**

**June 30,2008****(Unaudited) and December 31, 2007 (Audited)**

** **
| ** **                                                                                                    | ** ** | **As of**    | ** **  |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                    | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                    | ** ** | **2008**          | ** **  | **2007** | ** ** |
| **Assets**                                                                                                    |       |              |        |   |   |
| Cash and due  from banks                                                                                      |       | $                 | 10,120,217  |   | $ | 8,059,524 |   |
| Interest-bearing  deposits in other banks                                                                     |       | 664,611           |        | 514,654 |   |
| Federal funds  sold                                                                                           |       | 16,670,000        |        | 11,350,000 |   |
| Total cash and  cash equivalents                                                                              |       | 27,454,828        |        | 19,924,178 |   |
| Securities  available for sale, at fair value                                                                 |       | 85,247,666        |        | 74,387,100 |   |
| Federal Home  Loan Bank stock, restricted, at cost                                                            |       | 3,175,200         |        | 3,153,000 |   |
| Loans held for  sale                                                                                          |       | 2,126,056         |        | 679,427 |   |
| Loans, net of  unearned income                                                                                |       | 792,617,742       |        | 697,145,715 |   |
| Less - allowance  for loan losses                                                                             |       | (9,734,329        | )           | (8,878,795 | ) |
| Loans, net                                                                                                    |       | 782,883,413       |        | 688,266,920 |   |
| Bank premises  and equipment, net                                                                             |       | 28,677,874        |        | 27,899,376 |   |
| Accrued interest  receivable                                                                                  |       | 6,984,980         |        | 7,239,571 |   |
| Cash surrender  value of life insurance                                                                       |       | 12,195,900        |        | 4,442,044 |   |
| Goodwill and  other intangible assets, net of amortization                                                    |       | 22,625,825        |        | 22,806,983 |   |
| Other assets                                                                                                  |       | 8,200,760         |        | 3,680,465 |   |
| **Total  Assets**                                                                                             |       | $                 | 979,572,502 |   | $ | 852,479,064 |   |
|                                                                                                          |       |              |        |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                | ** ** | ** **        | ** **  | ** ** | ** ** |
| Deposits:                                                                                                     |       |              |        |   |   |
| Non-interest  bearing                                                                                         |       | $                 | 50,293,776  |   | $ | 46,075,374 |   |
| Money market and  NOW accounts                                                                                |       | 118,020,320       |        | 111,029,210 |   |
| Savings                                                                                                       |       | 7,989,867         |        | 7,808,443 |   |
| Time deposits                                                                                                 |       | 658,996,235       |        | 540,318,896 |   |
| Total deposits                                                                                                |       | 835,300,198       |        | 705,231,923 |   |
| Federal Home  Loan Bank advances                                                                              |       | 36,500,000        |        | 40,500,000 |   |
| Junior  subordinated debentures                                                                               |       | 10,310,000        |        | 10,310,000 |   |
| Accrued interest  payable                                                                                     |       | 5,668,304         |        | 5,446,473 |   |
| Accrued expenses  and other liabilities                                                                       |       | 1,736,782         |        | 1,908,156 |   |
| Total  liabilities                                                                                            |       | 889,515,284       |        | 763,396,552 |   |
| Shareholders’  Equity:                                                                                   |       |              |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, outstanding -0- shares                                         |       | —            |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, 4,151,780 issued and outstanding in  2008 and 2007 |       | 20,758,900        |        | 20,758,900 |   |
| Paid-in capital  surplus                                                                                      |       | 53,425,170        |        | 53,413,202 |   |
| Retained  earnings                                                                                            |       | 16,255,005        |        | 14,606,121 |   |
| Accumulated  other comprehensive income (loss)                                                                |       | (381,857          | )           | 304,289 |   |
| Total  shareholders’ equity                                                                              |       | 90,057,218        |        | 89,082,512 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                          |       | $                 | 979,572,502 |   | $ | 852,479,064 |   |

 

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

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Earnings**

**For the Three Months and SixMonths Ended June 30, 2008 and 2007**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest  and Dividend Income:**                     |       |                             |       |                           |       |   |   |   |   |
| Interest and  fees on loans                            |       | $                                | 12,436,315 |                           | $          | 13,830,216 |   | $ | 25,865,554 |   | $ | 26,644,272 |   |
| Interest on  securities:                               |       |                             |       |                           |       |   |   |   |   |
| Taxable income                                         |       | 706,552                          |       | 612,064                        |       | 1,343,574 |   | 1,175,411 |   |
| Non-taxable  income                                    |       | 225,165                          |       | 179,976                        |       | 425,437 |   | 337,436 |   |
| Income on  federal funds sold                          |       | 32,830                           |       | 123,067                        |       | 113,383 |   | 365,796 |   |
| Other interest  and dividend income                    |       | 76,863                           |       | 60,838                         |       | 155,746 |   | 149,216 |   |
| Total interest  and dividend income                    |       | 13,477,725                       |       | 14,806,161                     |       | 27,903,694 |   | 28,672,131 |   |
| **Interest  Expense:**                                 |       |                             |       |                           |       |   |   |   |   |
| Deposits                                               |       | 7,031,657                        |       | 7,130,543                      |       | 14,578,492 |   | 13,732,156 |   |
| Junior  subordinated debentures                        |       | 126,296                          |       | 193,005                        |       | 302,390 |   | 383,974 |   |
| Federal funds  purchased                               |       | 19,868                           |       | 18,145                         |       | 44,760 |   | 42,993 |   |
| FHLB borrowings  and other interest expense            |       | 334,107                          |       | 399,920                        |       | 734,844 |   | 794,069 |   |
| Total interest  expense                                |       | 7,511,928                        |       | 7,741,613                      |       | 15,660,486 |   | 14,953,192 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net interest  income                                   |       | 5,965,797                        |       | 7,064,548                      |       | 12,243,208 |   | 13,718,939 |   |
| **Provision  for loan losses**                         |       | 946,000                          |       | 148,000                        |       | 1,348,000 |   | 592,000 |   |
| Net interest  income after provision for loan losses   |       | 5,019,797                        |       | 6,916,548                      |       | 10,895,208 |   | 13,126,939 |   |
| **Noninterest  Income:**                               |       |                             |       |                           |       |   |   |   |   |
| Service charges  on deposit accounts                   |       | 440,776                          |       | 306,380                        |       | 857,218 |   | 587,388 |   |
| Other service  charges, commissions and fees           |       | 118,848                          |       | 97,942                         |       | 228,731 |   | 159,278 |   |
| Gain (loss) on  sales / calls of investment securities |       | 8,405                            |       | (382                           | )          | 40,245 |   | (307 | ) |
| Gain (loss) on  sale of other assets                   |       | 165                              |       | 93,272                         |       | (13,485 | ) | 94,559 |   |
| Mortgage  origination income                           |       | 192,206                          |       | 243,126                        |       | 430,032 |   | 449,246 |   |
| Other income                                           |       | 470,149                          |       | 169,435                        |       | 677,231 |   | 308,987 |   |
| Total  noninterest income                              |       | 1,230,549                        |       | 909,773                        |       | 2,219,972 |   | 1,599,151 |   |
| **Noninterest  Expense:**                              |       |                             |       |                           |       |   |   |   |   |
| Salaries                                               |       | 2,340,097                        |       | 1,855,616                      |       | 4,469,953 |   | 3,534,887 |   |
| Employee  benefits                                     |       | 483,437                          |       | 654,432                        |       | 1,217,662 |   | 1,209,352 |   |
| Occupancy  expense                                     |       | 462,873                          |       | 356,709                        |       | 911,671 |   | 680,038 |   |
| Equipment rental  and depreciation of equipment        |       | 280,296                          |       | 211,478                        |       | 544,310 |   | 391,654 |   |
| Other expenses                                         |       | 1,766,184                        |       | 1,591,644                      |       | 3,363,258 |   | 2,855,857 |   |
| Total  noninterest expense                             |       | 5,332,887                        |       | 4,669,879                      |       | 10,506,854 |   | 8,671,788 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| **Earnings  Before Income Taxes**                      |       | 917,459                          |       | 3,156,442                      |       | 2,608,326 |   | 6,054,302 |   |
| Provision for  income taxes                            |       | 209,183                          |       | 1,098,220                      |       | 710,334 |   | 2,112,822 |   |
| **Net  Earnings**                                      |       | $                                | 708,276    |                           | $          | 2,058,222 |   | $ | 1,897,992 |   | $ | 3,941,480 |   |
| **Earnings  per share:**                               |       |                             |       |                           |       |   |   |   |   |
| Basic                                                  |       | $                                | 0.17       |                           | $          | 0.50 |   | $ | 0.46 |   | $ | 0.97 |   |
| Diluted                                                |       | $                                | 0.16       |                           | $          | 0.46 |   | $ | 0.43 |   | $ | 0.90 |   |
| **Dividends  declared per share:**                     |       | $                                | 0.03       |                           | $          | — |   | $ | 0.06 |   | $ | — |   |

 

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

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Comprehensive Income**

**For the Three Months and SixMonths Ended June 30, 2008 and 2007**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net earnings                                                                                  |       | $                                                   | 708,276    |                                              | $          | 2,058,222 |   | $ | 1,897,992 |   | $ | 3,941,480 |   |
| Other  comprehensive loss:                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized  holding losses on investment securities available for sale                        |       | (1,700,583                                          | )          | (1,215,233                                        | )          | (999,370 | ) | (1,031,650 | ) |
| Unrealized  holding gains on derivative financial instruments classified as cash flow  hedges |       | —                                              |       | 29,824                                            |       | — |   | 84,235 |   |
| Reclassification  adjustment for (gains) losses realized in net earnings                      |       | (8,405                                              | )          | 382                                               |       | (40,245 | ) | 307 |   |
| Total other  comprehensive loss, before tax                                                   |       | (1,708,988                                          | )          | (1,185,027                                        | )          | (1,039,615 | ) | (947,108 | ) |
| Income taxes  related to other comprehensive loss:                                            |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized  holding losses on investment securities available for sale                        |       | 578,198                                             |       | 413,179                                           |       | 339,786 |   | 350,761 |   |
| Unrealized  holding gains on derivative financial instruments classified as cash flow  hedges |       | —                                              |       | (10,140                                           | )          | — |   | (28,640 | ) |
| Reclassification  adjustment for (gains) losses realized in net earnings                      |       | 2,858                                               |       | (130                                              | )          | 13,683 |   | (104 | ) |
| Total income  taxes related to other comprehensive loss                                       |       | 581,056                                             |       | 402,909                                           |       | 353,469 |   | 322,017 |   |
| Total other  comprehensive loss, net of tax                                                   |       | (1,127,932                                          | )          | (782,118                                          | )          | (686,146 | ) | (625,091 | ) |
| Total  comprehensive income (loss)                                                            |       | $                                                   | (419,656   | )                                                 | $          | 1,276,104 |   | $ | 1,211,846 |   | $ | 3,316,389 |   |

 

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

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Cash Flows**

**For the Six Months Ended June 30,2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash  Flows from Operating Activities:**                                                  |       |                                              |       |   |   |
| Net earnings                                                                                |       | $                                                 | 1,897,992  |   | $ | 3,941,480 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:        |       |                                              |       |   |   |
| Provision for  loan losses                                                                  |       | 1,348,000                                         |       | 592,000 |   |
| Depreciation                                                                                |       | 697,209                                           |       | 490,439 |   |
| Stock based  compensation                                                                   |       | 11,968                                            |       | 11,968 |   |
| Amortization and  (accretion), net                                                          |       | 157,063                                           |       | 98,659 |   |
| Loss (gain) on  sales of assets                                                             |       | 13,485                                            |       | (94,559 | ) |
| (Gain) loss on  sales / calls of investment securities                                      |       | (40,245                                           | )          | 307 |   |
| Earnings on cash  surrender value of life insurance                                         |       | (253,856                                          | )          | (81,866 | ) |
| Changes in  assets and liabilities, net of effects of purchase acquisition in 2007:         |       |                                              |       |   |   |
| Loans held for  sale                                                                        |       | (1,446,629                                        | )          | (3,010,878 | ) |
| Changes in  accrued income and other assets                                                 |       | (1,253,308                                        | )          | (19,655 | ) |
| Changes in  accrued expenses and other liabilities                                          |       | 403,926                                           |       | 874,529 |   |
| Net cash  provided by operating activities                                                  |       | 1,535,605                                         |       | 2,802,424 |   |
| **Cash  Flows from Investing Activities, net of effects of purchase acquisition in  2007:** |       |                                              |       |   |   |
| Net change in  loans to customers                                                           |       | (99,288,142                                       | )          | (53,469,031 | ) |
| Purchase of  available for sale securities                                                  |       | (22,589,987                                       | )          | (8,536,661 | ) |
| Proceeds from  sales, calls, maturities and paydowns of available for sale securities       |       | 10,734,605                                        |       | 5,893,455 |   |
| Cash received  from First Community, net of cash paid of $235,034                           |       | —                                            |       | 5,556,520 |   |
| Cash paid to  Sapelo shareholders                                                           |       | —                                            |       | (5,322,492 | ) |
| Purchase of FHLB  stock                                                                     |       | (22,200                                           | )          | (292,900 | ) |
| Purchase of cash  surrender value of life insurance                                         |       | (7,500,000                                        | )          | — |   |
| Property and  equipment expenditures                                                        |       | (1,475,707                                        | )          | (5,641,140 | ) |
| Proceeds from  sales of assets                                                              |       | 317,309                                           |       | 312,996 |   |
| Net cash used in  investing activities                                                      |       | (119,824,122                                      | )          | (61,499,253 | ) |
| **Cash  Flows from Financing Activities, net of effects of purchase acquisition in  2007:** |       |                                              |       |   |   |
| Net change in  deposits                                                                     |       | 130,068,275                                       |       | 39,083,561 |   |
| Net increase in  federal funds purchased                                                    |       | —                                            |       | 100,200 |   |
| Advances on FHLB  borrowings                                                                |       | 20,200,000                                        |       | 17,200,000 |   |
| Payments on FHLB  borrowings                                                                |       | (24,200,000                                       | )          | (17,200,000 | ) |
| Payment for  fractional shares                                                              |       | —                                            |       | (10,320 | ) |
| Payment for  issuance of common stock                                                       |       | —                                            |       | (87,726 | ) |
| Dividends paid                                                                              |       | (249,108                                          | )          | — |   |
| Net cash  provided by financing activities                                                  |       | 125,819,167                                       |       | 39,085,715 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                   |       | 7,530,650                                         |       | (19,611,114 | ) |
| **Cash  and Cash Equivalents, Beginning of Year**                                           |       | 19,924,178                                        |       | 42,911,477 |   |
| **Cash  and Cash Equivalents, End of Quarter**                                              |       | $                                                 | 27,454,828 |   | $ | 23,300,363 |   |

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

# ***(1)   Basis of Presentation***

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include allinformation and footnotes necessary for a fair presentation of financialposition, results of operations, and changes in financial position inconformity with generally accepted accounting principles.  The interim financial statements furnishedreflect all adjustments, which are, in the opinion of management, necessary toa fair statement of the results for the interim periods presented.  The interim consolidated financial statementsshould be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

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

 

TheCompany granted 8,000 options during the first quarter 2007.  The Company did not grant any options duringthe second quarter of 2008.  The Company recognized $11,968 ofstock-based employee compensation expense during the first six months of 2008associated with its stock option grants. The Company is recognizing the compensation expense for stock optiongrants with graded vesting schedules on a straight-line basis over therequisite service period of the award as permitted by SFAS No. 123 (R).  As of June 30, 2008, there was $83,776of unrecognized compensation cost related to stock option grants.  The cost is expected to be recognized overthe vesting period of approximately four years.

 

The weighted average grant-date fair value of eachoption granted during the first quarter 2007 was $14.96.  The fair value of each option is estimated onthe date of grant using the Black-Scholes Model.  The following weighted average assumptionswere used for grants in the first quarter 2007:

 
| Dividend yield           |   | 0.00      | %      |
|--------------------------|--------|-----------|--------|
| Expected  volatility     |   | 21.58     | %      |
| Risk-free  interest rate |   | 4.75      | %      |
| Expected term            |   | 7.5 years |   |

 

# ***(3)****        **Net Earnings per Share*

 

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.

 

The reconciliation of the amountsused in the computation of both “basic earnings per share” and “dilutedearnings per share” for each period is presented as follows:

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net earnings                                                                |       | $                                | 708,276    |                           | $          | 2,058,222 |   | $ | 1,897,992 |   | $ | 3,941,480 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average  common shares outstanding                                 |       | 4,151,780                        |       | 4,151,780                      |       | 4,151,780 |   | 4,061,939 |   |
| Shares issued  from assumed exercise of common stock equivalents            |       | 255,008                          |       | 341,223                        |       | 257,984 |   | 339,869 |   |
| Weighted average  number of common and common equivalent shares outstanding |       | 4,406,788                        |       | 4,493,003                      |       | 4,409,764 |   | 4,401,808 |   |
| Earnings per  share:                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                       |       | $                                | 0.17       |                           | $          | 0.50 |   | $ | 0.46 |   | $ | 0.97 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Diluted                                                                     |       | $                                | 0.16       |                           | $          | 0.46 |   | $ | 0.43 |   | $ | 0.90 |   |

 

***(4)   FairValue***

 

Effective January 1,2008, the Company adopted Financial Accounting Standards Board (“FASB”)Statement No. 157, *Fair Value Measurements*(“SFAS No. 157”), which provides a framework for measuring fair valueunder generally accepted accounting principles. SFAS No. 157 applies to all financial instruments that are beingmeasured and reported on a fair value basis.

 

The Company utilizes fairvalue measurements to record fair value adjustments to certain assets andliabilities and to determine fair value disclosures.  Securities available-for-sale, derivativeinstruments and certain brokered deposits are recorded at fair value on a recurringbasis.  Additionally, from time to time,the Company may be required to record at fair value other assets on anonrecurring basis, such as loans held for sale, loans held for investment andcertain other assets.  These nonrecurringfair value adjustments typically involve application of lower of cost or marketaccounting or write-downs of individual assets.

 

Fair ValueHierarchy

 

Under SFAS 157, theCompany groups assets and liabilities at fair value in three levels, based onthe markets in which the assets and liabilities are traded and the reliabilityof the assumptions used to determine fair value.  These levels are:

 
| Level 1 – | Valuation  is based upon quoted prices for identical instruments traded in active  markets.                                                                                                                                                                                                                                                                                             |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 2 – | Valuation is based upon  quoted prices for similar instruments in active markets, quoted prices for  identical or similar instruments in markets that are not active, and  model-based valuation techniques for which all significant assumptions are  observable in the market.                                                                                                        |
|           |                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 3 – | Valuation is generated  from model-based techniques that use at least one significant assumption not  observable in the market. These unobservable assumptions reflect estimates of  assumptions that market participants would use in pricing the asset or  liability. Valuation techniques include use of option pricing models,  discounted cash flow models and similar techniques. |

 

Following is adescription of valuation methodologies used for assets and liabilities recordedat fair value.

 

SecuritiesAvailable-for-Sale

 

Securitiesavailable-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quotedprices, if available.  If quoted pricesare not available, fair values are measured using independent pricing models orother model-based valuation techniques such as the present value of future cashflows, adjusted for the security’s credit rating, prepayment assumptions andother factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange,

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

such as the New YorkStock Exchange and U.S. Treasury securities that are traded by dealers orbrokers in active over-the-counter market funds.  Level 2 securities include mortgage-backedsecurities issued by government sponsored enterprises and municipal bonds.  Securities classified as Level 3 includeasset-backed securities in less liquid markets.

 

Loans Held forSale

 

Loans held for sale arerecorded at the lower of cost or market value. The fair value of loans held for sale is based on what secondary marketsare currently offering for portfolios with similar characteristics.  As such, the Company classifies loans heldfor sale subject to nonrecurring fair value adjustments as Level 2.

 

Loans

 

The Company does notrecord loans at fair value on a recurring basis.  However, from time to time, a loan isconsidered impaired and an allowance for loan losses is established.  Loans for which it is probable that paymentof interest and principal will not be made in accordance with the contractualterms of the loan agreement are considered impaired.  Once a loan is identified as individuallyimpaired, management measures impairment in accordance with SFAS 114, *Accounting by Creditors for Impairment of a Loan*, (“SFAS 114”).  The fair value of impaired loans is estimatedusing one of several methods, including collateral value, market value ofsimilar debt, enterprise value, liquidation value and discounted cashflows.  Those impaired loans notrequiring an allowance represent loans for which the fair value of the expectedrepayments or collateral exceed the recorded investments in such loans.  At June 30, 2008, only a small portionof the impaired loans were evaluated based on the fair value of thecollateral.  In accordance with SFAS 157,impaired loans where an allowance is established based on the fair value ofcollateral require classification in the fair value hierarchy.  When the fair value of the collateral isbased on an observable market price or a current appraised value, the Companyrecords the impaired loan as nonrecurring Level 2.  When an appraised value is not available ormanagement determines the fair value of the collateral is further impairedbelow the appraised value and there is no observable market price, the Companyrecords the impaired loan as nonrecurring Level 3.

 

Foreclosed Assets

 

Foreclosed assets areadjusted to fair value upon transfer of the loans to foreclosed assets.  Subsequently, foreclosed assets are carriedat the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values ofthe collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral isbased on an observable market price or a current appraised value, the Companyrecords the foreclosed asset as nonrecurring Level 2.  When an appraised value is not available ormanagement determines the fair value of the collateral is further impairedbelow the appraised value and there is no observable market prices, the Companyrecords the foreclosed asset as nonrecurring Level 3.

 

Goodwill and OtherIntangible Assets

 

Goodwill and identified intangible assets are subjectto impairment testing.  A current marketvaluation model is used to analyze the carrying value of goodwill forimpairment.  This valuation methodestimates the fair value of the Bank based on the price that would be receivedto sell the Bank as a whole in an orderly transaction between marketparticipants at the measurement date. This valuation method requires a significant degree of management judgement.  In the event the valuation value for the Bankis less than the carrying value of goodwill, the asset amount is recorded atfair value as determined by the valuation model.  As such, the Company classifies goodwill andother intangible assets subjected to nonrecurring fair value adjustments asLevel 3.

 

DerivativeFinancial Instruments

 

From time to time, theCompany uses interest rate swaps to manage its interest rate risk.  The fair value of the interest rate swaps arebased on what secondary markets are currently offering for portfolios withsimilar characteristics.  As such, theCompany classifies the interest rate swaps subjected to recurring fair valueadjustments as Level 2 with the fair values being provided by valuation experts.

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Assets andLiabilities Recorded at Fair Value on a Recurring Basis

 

The table below presentsthe recorded amount of assets and liabilities measured at fair value on arecurring basis.

 
| ** **                        | ** ** | **As of June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2008**                          | ** ** |
| ** **                        | ** ** | **Total**                         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                        |       |                              |       |   |   |   |   |   |   |
| Securities  available-for-sale    |       | $                                 | 85,247,666 |   | $ | 2,355,053 |   | $ | 82,642,613 |   | $ | 250,000 |   |
| Derivative  financial instruments |       |                              | 170,919    |   |   | — |   |   | 170,919 |   |   | — |   |
| **Total  assets at fair value**   |       | $                                 | 85,418,585 |   | $ | 2,355,053 |   | $ | 82,813,532 |   | $ | 250,000 |   |

 

There was no change inthe unrealized gain/loss for the Level 3 assets during the period.

 

Assets Recorded atFair Value on a Nonrecurring Basis

 

The Company may berequired, from time to time, to measure certain assets at fair value on anonrecurring basis in accordance with U.S. generally accepted accountingprinciples.  These include assets thatare measured at the lower of cost or market that were recognized at fair valuebelow cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included inthe table below.

 
| ** **                        | ** ** | **As of June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2008**                          | ** ** |
| ** **                        | ** ** | **Total**                         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                              |       |                              |       |   |   |   |   |   |   |
| Loans                             |       | $                                 | 8,948,300  |   | $ | — |   | $ | 8,948,300 |   | $ | — |   |
| Other assets -  foreclosed assets |       | 2,728,759                         |       | — |   | 2,728,759 |   | — |   |
| ** **                        |       |                              |       |   |   |   |   |   |   |
| **Total  assets at fair value**   |       | $                                 | 11,677,059 |   | $ | — |   | $ | 11,677,059 |   | $ | — |   |

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***(5)   NonperformingAssets***

 

### **Nonperforming assets consist ofnon-accrual loans, accruing loans 90 days past due, repossessed assets andother real estate owned. The following summarizes non-performing assets:**

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Accruing loans  90 days past due |       | $                 | 2,955      |                  | $          | 504,783 |   |
| Non-accrual  loans               |       | 3,975,028         |       | 4,276,950             |       |
| Repossessed  assets              |       | 15,000            |       | —                |       |
| Other real  estate               |       | 3,837,671         |       | 758,787               |       |
| Total  non-performing assets     |       | $                 | 7,830,654  |                  | $          | 5,540,520 |   |

 

Nonperforming assetsincreased $2,290,134 or 41.33% from December 31, 2007 to June 30,2008.  In April 2008, managementplaced two loans with a balance of approximately $2.8 million on non-accrualthat were secured by 708 acres of land and timber appraised at approximately$6.0 million.  Management is continuouslymonitoring these loans in order to minimize any losses.

 

OnJuly 25, 2008, management placed one loan with a balance of approximately$5.5 million on non-accrual that is secured by a condominium complex and othercommercial real estate property appraised at approximately $7.3 million.  The loan is not reflected in the tableabove.  Management is continuouslymonitoring this loan in order to minimize any losses.

 

At June 30, 2008,the Company’s other real estate consisted of the following:

 
| ** **                                           | ** ** | **Number of Properties** | ** ** | **June 30, 2008** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| 1-4 Family  residential properties                   |       | 4                                  |       | $                           | 2,593,410  |   |
| Construction &  land development properties |       | 10                                 |       | 1,244,261                   |       |
| Total                                                |       | 14                                 |       | $                           | 3,837,671  |   |

 

All properties are beingactively marketed for sale and management is continuously monitoring theseproperties in order to minimize any losses.

 

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

 

***(6)   RecentAccounting Pronouncements***

 

*Disclosures about Derivative Instruments andHedging Activities*

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*.  SFAS No. 161 is an amendment to SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*.  The objective ofSFAS No. 161 is to expand the disclosure requirements of SFAS No. 133with the intent to improve the financial reporting of how and why an entityuses derivative instruments; how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 and its related interpretations;and how derivative instruments and related hedged items affect an entity’sfinancial position, financial performance and cash flows.  The statement is effective for financialstatements issued for fiscal years

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

beginningafter November 15, 2008.  TheCompany does not anticipate the new accounting principle to have a materialeffect on its financial position or results of operation.

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

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

**June 30, 2008 and 2007**

 

The following discussion of financialcondition as of June 30, 2008compared to December 31, 2007,and the results of operations for the three months and six months ended June 30, 2008 compared to thethree months and six months ended June 30,2007 should be read in conjunction with the condensed financialstatements and accompanying footnotes appearing in this report.

 

##### ***Advisory Note Regarding Forward-Looking Statements***

##### *** ***

The statements contained in this report on Form 10-Q thatare not historical facts are forward-looking statements subject to the safeharbor created by the Private Securities Litigation Reform Act of 1995.  We caution readers of this report that suchforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievementsto be materially different from those expressed or implied by suchforward-looking statements.  Although webelieve that our expectations of future performance is based on reasonableassumptions within the bounds of our knowledge of our business and operations,there can be no assurance that actual results will not differ materially fromour expectations.

 

Factors which could cause actual results to differ fromexpectations include, among other things:

 

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

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

·                  our dependence on seniormanagement;

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

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

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

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

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

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

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

·                  fluctuations in consumer spendingand saving habits;

·                  the demand for our products andservices;

·                  technological changes;

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

·                  the ability to increase marketshare;

·                  the adequacy of expenseprojections and estimates of impairment loss;

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

·                  unanticipated regulatory orjudicial proceedings;

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

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

·                  the timely development andacceptance of products and services, including products and services offeredthrough alternative delivery channels such as the Internet;

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

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

 

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Commission; and

·                  Our success at managing the risksinvolved in the foregoing.

 

Forward-looking statements speak only as of the date on which they aremade.  We undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made to reflect the occurrence ofunanticipated events.

 

**ExecutiveSummary and Recent Developments**

 

### **The Company’s total assets at June 30, 2008,were approximately $979,573,000, which represented an increase of approximately$127,093,000 or 15% from December 31, 2007.  Net earnings decreased 52% for the six monthsended June 30, 2008 to $1,898,000 or $0.43 per diluted share compared to$3,941,000 or $0.90 per diluted share for the six months ended June 30,2007.**

### ** **

OnJanuary 10, 2008, the Company declared its first dividend of $0.03 pershare to all shareholders of record as of February 1, 2008.  The Company announced a second quarterdividend of $0.03 per share to all shareholders of record as of May 1,2008.  While the dividends are small incomparison to overall earnings, the Company expects to continue to grow theBank and wants to retain appropriate amounts of capital to facilitate thatsustained growth.  Any futuredetermination relating to the Company declaring dividends will be made at thediscretion of our Board of Directors and will depend on any statutory andregulatory limitations.

 

Duringthe first quarter of 2008, the Company added a wealth management division inanticipation of increasing non-interest income. The Company has hired a seasoned financial advisor to provide financialservices including retirement planning, estate planning and asset allocationstrategies.

 

Managementhas developed a strategy for asset growth and expansion of its financialservices through branching into selective markets in the South Georgia region,in the coastal Georgia region and in the northeast Florida region.   In the South Georgia region, we have expandedour loan production office in Valdosta, Georgia into a full-service branchduring the first quarter of 2008. Construction on a permanent branch location has now started and shouldbe completed in early 2009.  In thecoastal Georgia region, we have started construction on our Pooler branch, nearSavannah, Georgia.  In the northeastFlorida region, our Jacksonville branch opened December 3, 2007 in atemporary branch location and moved to its permanent location during the secondquarter of 2008.  Our senior managementteam in northeast Florida is looking at a possible second location in DuvalCounty in hopes of increasing our presence in this region.

 

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**Financial Condition**

 

The composition of assetsand liabilities for the Company is as follows:

 
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2008**          | ** ** | **2007**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                             |       |              |       |                  |       |              |       |              |       |
| Cash and due  from banks                |       | $                 | 10,120,217 |                  | $          | 8,059,524         |       | $                 | 2,060,693  |   | 25.57 | % |
| Federal funds  sold                     |       | 16,670,000        |       | 11,350,000            |       | 5,320,000         |       | 46.87             | %          |
| Securities  available for sale          |       | 85,247,666        |       | 74,387,100            |       | 10,860,566        |       | 14.60             | %          |
| Loans, net of  unearned income          |       | 792,617,742       |       | 697,145,715           |       | 95,472,027        |       | 13.69             | %          |
| Cash surrender  value of life insurance |       | 12,195,900        |       | 4,442,044             |       | 7,753,856         |       | 174.56            | %          |
| Goodwill and  other intangible assets   |       | 22,625,825        |       | 22,806,983            |       | (181,158          | )          | -0.79             | %          |
| Total assets                            |       | 979,572,502       |       | 852,479,064           |       | 127,093,438       |       | 14.91             | %          |
| **Liabilities:**                        |       |              |       |                  |       |              |       |              |       |
| Deposits                                |       | 835,300,198       |       | 705,231,923           |       | 130,068,275       |       | 18.44             | %          |
| FHLB advances                           |       | 36,500,000        |       | 40,500,000            |       | (4,000,000        | )          | -9.88             | %          |
| Accrued expenses  and other liabilities |       | 1,736,782         |       | 1,908,156             |       | (171,374          | )          | -8.98             | %          |
|                                    |       |              |       |                  |       |              |       |              |       |
| Loan to Deposit  Ratio                  |       | 94.89             | %          | 98.85                 | %          |              |       |              |       |
|                                         |            |                   |            |                       |            |                   |            |                   |            |  |  |  |

 

One significant change inthe composition of assets was the increase in loans of $95.5 million due tocontinued growth of the Company.  We wereable to generate loan growth by increasing loan growth in all regions with themajority of the increase in the middle Georgia region.  Another significant change in the compositionof assets was the $7.8 million increase in the cash surrender value of lifeinsurance.  The majority of the increaseis due to the Company’s purchase of $7.5 million additional life insurance policieson several senior bank officers.  Themost significant change in the composition of liabilities was the increase indeposits, especially time deposits, to fund loan growth.  Time deposits, including wholesale and coredeposits, are our principal source of funds for loans and investing insecurities.

 

Because of our strongloan demand, we have chosen to obtain a portion of our deposits from outsideour market.  Our wholesale time deposits represented 49.0% of our depositsas of June 30, 2008 when compared to 40.2% of our deposits as of December 31,2007.  The Company’s Fund ManagementPolicy allows for the ratio of wholesale deposits to total deposits to be60%.  The Company has been successful inreplacing maturing brokered deposits and does not expect to experiencesignificant disintermediation as the brokered deposits mature.

 

**InvestmentSecurities**

 

Securitiesin our portfolio totaled $85.2 million at June 30, 2008, compared to $74.4million at December 31, 2007.  Themost significant growth in the securities portfolio has resulted from thepurchase of $19.1 million in mortgage backed securities that have been offsetby $8.6 million in U.S. Government Sponsored Enterprises securities beingcalled.  At June 30, 2008, thesecurities portfolio had unrealized net losses of approximately $579 thousand.

 

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Thefollowing table shows the carrying value of the investment securities at June 30,2008 and December 31, 2007.

 
| ** **                              | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                              | ** ** | **(Amounts in Thousands)** | ** ** |
| Securities  available for sale:         |       |                                 |       |                  |       |
| U. S. Government  Sponsored Enterprises |       | $                                    | 18,839     |                  | $          | 27,493 |   |
| U. S. Treasury  Securities              |       | 253                                  |       | 254                   |       |
| State, County  and Municipal            |       | 24,416                               |       | 21,346                |       |
| Mortgage-backed  Securities             |       | 40,339                               |       | 23,844                |       |
| Other  Investments                      |       | 1,401                                |       | 1,450                 |       |
| Total                                   |       | $                                    | 85,248     |                  | $          | 74,387 |   |

 

### **Loans**

 

Ourloan demand continues to be strong. Total loans increased $95.5 million or 14% from December 31, 2007to June 30, 2008.  The increase inloans in 2008 is attributable to our branching efforts along with the lendingefforts of our senior management lending team. The following table presents a summary of the loan portfolio bycategory.

 
| ** **                                         | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)** | ** ** |
|                                               |       |                                 |       |                  |       |
| Commercial                                         |       | $                                    | 77,999     |                  | $          | 69,079 |   |
| Real estate -  commercial                          |       | 301,120                              |       | 259,070               |       |
| Real estate -  construction                        |       | 324,844                              |       | 292,152               |       |
| Real estate -  mortgage                            |       | 81,006                               |       | 67,898                |       |
| Obligations of  political subdivisions in the U.S. |       | 298                                  |       | 290                   |       |
| Consumer                                           |       | 7,837                                |       | 8,934                 |       |
| Total Loans                                        |       | 793,104                              |       | 697,423               |       |
| Less:                                              |       |                                 |       |                  |       |
| Unearned loan  fees                                |       | (486                                 | )          | (277                  | )          |
| Allowance for  loan losses                         |       | (9,734                               | )          | (8,879                | )          |
| Loans, net                                         |       | $                                    | 782,884    |                  | $          | 688,267 |   |

 

### **AssetQuality**

 

### **Management considers asset quality to be of primaryimportance.  Management has a creditadministration and loan review process, which monitor, control and measure ourcredit risk, standardized credit analyses and our comprehensive creditpolicy.  As a result, management believesthey have a good understanding of the asset quality, an established warning andearly detection system regarding the loans and a comprehensive analysis of theallowance for loan losses.**

 

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Thefollowing table presents a summary of changes in the allowance for loan lossesfor the three and six-month periods ended June 30, 2008 and 2007.

 

**Analysisof Changes in Allowance for Loan Losses**

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                | ** ** |
| Balance  beginning of period                       |       | $                                                   | 9,158      |                                              | $          | 8,830 |   | $ | 8,879 |   | $ | 7,258 |   |
| Loans  charged-off                                 |       | (453                                                | )          | (17                                               | )          | (585 | ) | (546 | ) |
| Recoveries                                         |       | 83                                                  |       | 202                                               |       | 92 |   | 219 |   |
| Net charge-offs                                    |       | (370                                                | )          | 185                                               |       | (493 | ) | (327 | ) |
| Provision for  loan losses                         |       | 946                                                 |       | 148                                               |       | 1,348 |   | 592 |   |
| Allowance from  purchase acquisition               |       | —                                              |       | —                                            |       | — |   | 1,640 |   |
| Balance end of  period                             |       | $                                                   | 9,734      |                                              | $          | 9,163 |   | $ | 9,734 |   | $ | 9,163 |   |
|                                               |       |                                                |       |                                              |       |   |   |   |   |
| Total Loans:                                       |       |                                                |       |                                              |       |   |   |   |   |
| At period end                                      |       | $                                                   | 792,618    |                                              | $          | 635,489 |   | $ | 792,618 |   | $ | 635,489 |   |
| Average                                            |       | 758,009                                             |       | 631,237                                           |       | 731,324 |   | 619,282 |   |
|                                               |       |                                                |       |                                              |       |   |   |   |   |
| As a percentage  of average loans (annualized):    |       |                                                |       |                                              |       |   |   |   |   |
| Net charge-offs                                    |       | 0.20                                                | %          | -0.12                                             | %          | 0.13 | % | 0.11 | % |
| Provision for  loan losses                         |       | 0.50                                                | %          | 0.09                                              | %          | 0.37 | % | 0.19 | % |
| Allowance as a  percentage of period end loans     |       | 1.23                                                | %          | 1.44                                              | %          | 1.23 | % | 1.44 | % |
| Allowance as a  percentage of non-performing loans |       | 244.71                                              | %          | 285.81                                            | %          | 244.71 | % | 285.81 | % |

 

### **Management believes that the allowance for loanlosses at June 30, 2008 is adequate to absorb losses inherent in the loanportfolio.  This assessment involvesuncertainty and judgment; therefore, the adequacy of the allowance for loanlosses cannot be determined with precision and may be subject to change infuture periods.  In addition, bankregulatory authorities, as part of their periodic examination of the Bank, mayrequire adjustments to the provision for loan losses in future periods if, intheir opinion, the results of their review warrant such additions.**

### ** **

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

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Accruing loans  90 days past due |       | $                 | 2,955      |                  | $          | 504,783 |   |
| Non-accrual  loans               |       | 3,975,028         |       | 4,276,950             |       |
| Repossessed  assets              |       | 15,000            |       | —                |       |
| Other real  estate               |       | 3,837,671         |       | 758,787               |       |
| Total  non-performing assets     |       | $                 | 7,830,654  |                  | $          | 5,540,520 |   |

 

Nonperforming assetsincreased $2,290,134 or 41.33% from December 31, 2007 to June 30,2008.  In April 2008, managementplaced two loans with a balance of approximately $2.8 million on non-accrualthat were secured by 708 acres of land and timber appraised at approximately$6.0 million.  Management is continuouslymonitoring these loans in order to minimize any losses.

 

OnJuly 25, 2008, management placed one loan with a balance of approximately$5.5 million on non-accrual that is secured by a condominium complex and othercommercial real estate property appraised at approximately $7.3 million.  The loan is not reflected

 

16

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inthe table above.  Management iscontinuously monitoring this loan in order to minimize any losses.

 

At June 30, 2008,the Company’s other real estate consisted of the following:

 

| ** **                                           | ** ** | **Number of Properties** | ** ** | **June 30, 2008** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-------------------|------------|
| 1-4 Family  residential properties                   |       | 4                        |       | $                 | 2,593,410  |   |
| Construction &  land development properties |       | 10                       |       | 1,244,261         |       |
| Total                                                |       | 14                       |       | $                 | 3,837,671  |   |

 

All properties are beingactively marketed for sale and management is continuously monitoring theseproperties in order to minimize any losses.

 

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

 

**Goodwill**

 

TheCompany reviews its goodwill for impairment annually, or more frequently ifcircumstances indicate that goodwill has been impaired.  During the last three quarters, the Company’sstock price has traded below its per-share book value and it has also fallenbelow tangible book value for a short period of time.  Management believes that the low stock priceis more indicative of uncertainty about the economic cycle rather than thevalue of the Company’s underlying business. Although the Company has not performed a complete goodwill impairmentassessment, management does not believe that goodwill is impaired.  The current economic environment has resultedin lower earnings due mainly to the effect of the Federal Reserve’s action inlowering short-term rates starting in the second quarter of 2007.  Management believes that the value of theCompany’s business remains intact and that earnings will return to past levelswhen the economic environment recovers. The Company will complete a full goodwill impairment assessment duringthe fourth quarter of 2008.

 

**Deposits**

 

Totaldeposits at June 30, 2008 were $835.3 million, an increase of $130.1million, or 18%, from December 31, 2007. Total non-interest bearing demand deposit accounts of $50.3 millionincreased $4.2 million, or 9%, and interest bearing demand and savings accountsof $126.0 million increased $7.2 million, or 6%, resulting mainly from ourbranching efforts and our emphasis on increasing core deposits.

 

Totaltime deposits as of June 30, 2008 were $659.0 million, an increase of$118.7 million, or 22%, from December 31, 2007.  Total retail time deposits at June 30,2008 decreased approximately $6.5 million, or 3% of total time deposits, from December 31,2007 due to competitive rates drawing customers to other financial institutions. The weighted average rates paid for retail time deposits for the threeand six months ended June 30, 2008 were 4.52% and 4.79%, respectively,compared to 5.24% and 5.08% for the three and six months ended June 30,2007, respectively.  Total wholesaledeposits at June 30, 2008 increased approximately $125.1 million, or 44%of total time deposits, from December 31, 2007 resulting mainly from ourneed to fund our loan growth during the second quarter.  The weighted average rates paid for wholesaledeposits for the three and six months ended June 30, 2008 were 4.21% and4.56%, respectively, compared to 5.25% and 5.23% for the three and six monthsended June 30, 2007, respectively.

 

17

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### **Resultsof Operations**

### ** **

# **General**

# ** **

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

 

# **The following table shows the significantcomponents of net earnings:**

 
| ** **                      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                      | ** ** | **2008**                       | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest and  Dividend Income   |       | $                              | 27,903,694 |       | $          | 28,672,131        |       | $ | (768,437 | ) | -2.68 | % |
| Interest Expense                |       | 15,660,486                     |       | 14,953,192 |       | 707,294           |       | 4.73 | % |
| Net Interest  Income            |       | 12,243,208                     |       | 13,718,939 |       | (1,475,731        | )          | -10.76 | % |
| Provision for  Loan Losses      |       | 1,348,000                      |       | 592,000    |       | 756,000           |       | 127.70 | % |
| Net Earnings                    |       | 1,897,992                      |       | 3,941,480  |       | (2,043,488        | )          | -51.85 | % |
| Net Earnings Per  Diluted Share |       | $                              | 0.43       |       | $          | 0.90              |       | (0.47 | ) | -52.22 | % |
|                                 |            |                                |            |            |            |                   |            |  |  |  |  |  |

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                       | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest and  Dividend Income    |       | $                                | 13,477,725 |       | $          | 14,806,161        |       | $ | (1,328,436 | ) | -8.97 | % |
| Interest Expense                 |       | 7,511,928                        |       | 7,741,613  |       | (229,685          | )          | -2.97 | % |
| Net Interest Income              |       | 5,965,797                        |       | 7,064,548  |       | (1,098,751        | )          | -15.55 | % |
| Provision for  Loan Losses       |       | 946,000                          |       | 148,000    |       | 798,000           |       | 539.19 | % |
| Net Earnings                     |       | 708,276                          |       | 2,058,222  |       | (1,349,946        | )          | -65.59 | % |
| Net Earnings Per  Diluted Shares |       | $                                | 0.16       |       | $          | 0.46              |       | (0.30 | ) | -65.22 | % |
|                                  |            |                                  |            |            |            |                   |            |  |  |  |  |  |

# ** **

# **NetInterest Income**

# ** **

Our primary source ofincome is interest income from loans and investment securities.  Our profitability depends largely on netinterest income, which is the difference between the interest received oninterest-earning assets and the interest paid on deposits, borrowings, andother interest-bearing liabilities.  Netinterest income decreased $1.5 million, or 11%, for the six months ended June 30,2008 compared to the six months ended June 30, 2007.  Net interest income decreased $1.1 million,or 16%, for the second quarter of 2008 compared to the same period in 2007.

 

Total interest anddividend income for the three and six months ended June 30, 2008 decreased$1.3 million, or 9%, and $768 thousand, or 3%, respectively, when compared tothe three and six months ended June 30, 2007, primarily due to the effectof the Federal Reserve decreasing the federal funds rate, which affects amajority of the interest rates for our loans. The average loan and loan held for sale portfolios for the three and sixmonths ended June 30, 2008 increased approximately $125.4 million, or 20%,and $111.3 million, or 18%, respectively, when compared to average loan andloan held for sale portfolios for the three and six months ended June 30,2007.  Additionally, the average yield onloans decreased during the three and six months ended June 30, 2008 to6.56% and 7.08%, respectively, compared to an average yield of 8.75% and 8.60%for the three and six months ended June 30, 2007, respectively.

 

Total interest expense forthe three months ended June 30, 2008 decreased $230 thousand, or 3%, whencompared to the three months ended June 30, 2007.  Total interest expense for the six monthsended June 30, 2008 increased $707 thousand, or 5%, when compared to thesix months ended June 30, 2007.  Twofactors impact interest expense: 

 

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average balances ofdeposit and borrowing portfolios and average rates paid on each.  Average deposit balances increasedapproximately $126.0 million and $108.3 million when comparing the three andsix months ended June 30, 2008 to the three and six months ended June 30,2007.  The average rate paid on the depositportfolios for the three months ended June 30, 2008 decreased to 3.89%from 4.78% when compared to the three months ended June 30, 2007.   The average rate paid on the deposits forthe six months ended June 30, 2008 decreased to 4.20% from 4.68% whencompared to the six months ended June 30, 2007.  Average borrowing balances increasedapproximately $9.0 million and $8.1 million when comparing the three and sixmonths ended June 30, 2008 to the three and six months ended June 30,2007, respectively.  Average interestrates paid on borrowings were 3.54% and 5.41% for the three and six monthsended June 30, 2008, respectively, compared to 4.00% and 5.32% for thethree and six months ended June 30, 2007, respectively.

 

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

 

For the three monthsended June 30, 2008 and 2007, our tax equivalent net interest spread was2.55% and 3.49%, respectively, while the tax equivalent net interest margin was2.87% and 4.00%, respectively.  For thesix months ended June 30, 2008 and 2007, our tax equivalent net interestspread was 2.69% and 3.42%, respectively, while the tax equivalent net interestmargin was 3.04% and 3.92%, respectively. The decreases in net interest spread and net interest margin from thethree and six months ended June 30, 2007 to the three and six months endedJune 30, 2008 were due to our promotions of higher short-term yields onretail time deposits in order to fund loan growth and to invest in investmentsecurities and the effect of the Federal Reserve’s action in loweringshort-term rates starting in the second quarter of 2007 and continuing in thefirst quarter of 2008 on the Company’s slightly asset-sensitive balance sheet.

 

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The following table showsthe relationship between interest revenue and interest expense and the averagebalances of interest-earning assets and interest-earning liabilities for thethree months ended June 30, 2008 and 2007.

 

**AverageConsolidated Balance Sheet and Net Interest Margin Analysis**

 
| ** **                                           | ** ** | **For the Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(Amounts in thousands)**                                  | ** ** |
| ** **                                           | ** ** | **Average**                                                           | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                           | ** ** | **Balance**                                                           | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6) |       | $                                                                     | 758,009    |   | $ | 12,436 |   | 6.56 | % | $ | 632,648 |   | $ | 13,830 |   | 8.75 | % |
| Federal funds  sold                                  |       | 6,258                                                                 |       | 33 |   | 2.11 | % | 9,374 |   | 123 |   | 5.25 | % |
| Investment  securities - taxable (7)                 |       | 55,260                                                                |       | 707 |   | 5.12 | % | 52,204 |   | 612 |   | 4.69 | % |
| Investment  securities - tax-exempt (6) (7)     |       | 22,639                                                                |       | 225 |   | 6.02 | % | 18,273 |   | 180 |   | 5.97 | % |
| Other interest  and dividend income                  |       | 4,990                                                                 |       | 77 |   | 6.17 | % | 3,796 |   | 61 |   | 6.43 | % |
| Total Earning  Assets                                |       | 847,156                                                               |       | 13,478 |   | 6.42 | % | 716,295 |   | 14,806 |   | 8.32 | % |
|                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                         |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                           |       | -9,356                                                                |       |   |   |   |   | -9,086 |   |   |   |   |   |
| Cash and due  from banks                             |       | 9,095                                                                 |       |   |   |   |   | 13,650 |   |   |   |   |   |
| Premises and  equipment                              |       | 28,476                                                                |       |   |   |   |   | 23,726 |   |   |   |   |   |
| Accrued interest  receivable                         |       | 6,750                                                                 |       |   |   |   |   | 6,108 |   |   |   |   |   |
| Other assets                                         |       | 41,258                                                                |       |   |   |   |   | 28,959 |   |   |   |   |   |
| Total Assets                                         |       | $                                                                     | 923,379    |   |   |   |   |   | $ | 779,652 |   |   |   |   |   |
|                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                        |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                             |       | $                                                                     | 116,242    |   | $ | 557 |   | 1.92 | % | $ | 112,680 |   | $ | 906 |   | 3.22 | % |
| Savings                                              |       | 8,082                                                                 |       | 12 |   | 0.59 | % | 8,413 |   | 11 |   | 0.52 | % |
| Time deposits                                        |       | 598,053                                                               |       | 6,463 |   | 4.32 | % | 474,968 |   | 6,213 |   | 5.23 | % |
| Total interest  bearing deposits                     |       | 722,377                                                               |       | 7,032 |   | 3.89 | % | 596,061 |   | 7,130 |   | 4.78 | % |
| Federal Home  Loan Bank advances                     |       | 40,456                                                                |       | 334 |   | 3.30 | % | 33,522 |   | 400 |   | 4.77 | % |
| Other borrowings                                     |       | 3,425                                                                 |       | 20 |   | 2.34 | % | 1,345 |   | 18 |   | 5.35 | % |
| Trust Preferred  Securities                          |       | 10,310                                                                |       | 126 |   | 4.89 | % | 10,310 |   | 193 |   | 7.49 | % |
| Total borrowed  funds                                |       | 54,191                                                                |       | 480 |   | 3.54 | % | 45,177 |   | 611 |   | 5.41 | % |
| Total  interest-bearing liabilities                  |       | 776,568                                                               |       | 7,512 |   | 3.87 | % | 641,238 |   | 7,741 |   | 4.83 | % |
|                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 48,468                                                                |       |   |   |   |   | 48,752 |   |   |   |   |   |
| Other  liabilities                                   |       | 7,439                                                                 |       |   |   |   |   | 6,042 |   |   |   |   |   |
| Stockholder’s  equity                           |       | 90,904                                                                |       |   |   |   |   | 83,620 |   |   |   |   |   |
| Total  Liabilities and Stockholder’s Equity     |       | $                                                                     | 923,379    |   |   |   |   |   | $ | 779,652 |   |   |   |   |   |
| Net interest  revenue (1)                            |       |                                                                  |       | $ | 5,966 |   |   |   |   |   | $ | 7,065 |   |   |   |
| Net interest  spread (2)                             |       |                                                                  |       |   |   | 2.55 | % |   |   |   |   | 3.49 | % |
| Net interest  margin (3) (6)                    |       |                                                                  |       |   |   | 2.87 | % |   |   |   |   | 4.00 | % |

 

----

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

(2) Netinterest spread is computed by subtracting the yield from the expense of theaverage interest-bearing liabilities from the yield from the average earningassets.

(3) Netinterest margin is computed by dividing net interest revenue by average totalearning assets.

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

(5) Interestincome includes loan fees as follows (in thousands): 2008 - $484; 2007 - $507

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

(7) Investmentsecurities are stated at amortized or accreted cost.

 

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The following table showsthe relationship between interest revenue and interest expense and the averagebalances of interest-earning assets and interest-earning liabilities for thesix months ended June 30, 2008 and 2007.

 

**Average Consolidated Balance Sheet and Net Interest Margin Analysis**

 
| ** **                                           | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(Amounts in thousands)**                                | ** ** |
| ** **                                           | ** ** | **Average**                                                         | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                           | ** ** | **Balance**                                                         | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                       |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6) |       | $                                                                   | 731,324    |   | $ | 25,866 |   | 7.08 | % | $ | 619,988 |   | $ | 26,644 |   | 8.60 | % |
| Federal funds  sold                                  |       | 8,592                                                               |       | 113 |   | 2.63 | % | 14,254 |   | 366 |   | 5.14 | % |
| Investment  securities - taxable (7)                 |       | 53,152                                                              |       | 1,344 |   | 5.06 | % | 52,172 |   | 1,175 |   | 4.50 | % |
| Investment  securities - tax-exempt (6) (7)     |       | 21,455                                                              |       | 425 |   | 6.00 | % | 18,289 |   | 338 |   | 5.60 | % |
| Other interest  and dividend income                  |       | 4,896                                                               |       | 156 |   | 6.37 | % | 3,899 |   | 149 |   | 7.64 | % |
| Total Earning  Assets                                |       | 819,419                                                             |       | 27,904 |   | 6.87 | % | 708,602 |   | 28,672 |   | 8.15 | % |
|                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                         |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                           |       | -9,205                                                              |       |   |   |   |   | -8,974 |   |   |   |   |   |
| Cash and due  from banks                             |       | 9,184                                                               |       |   |   |   |   | 13,362 |   |   |   |   |   |
| Premises and  equipment                              |       | 28,263                                                              |       |   |   |   |   | 22,322 |   |   |   |   |   |
| Accrued interest  receivable                         |       | 7,085                                                               |       |   |   |   |   | 6,038 |   |   |   |   |   |
| Other assets                                         |       | 40,011                                                              |       |   |   |   |   | 24,986 |   |   |   |   |   |
| Total Assets                                         |       | $                                                                   | 894,757    |   |   |   |   |   | $ | 766,336 |   |   |   |   |   |
|                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                             |       | $                                                                   | 112,140    |   | $ | 1,205 |   | 2.15 | % | $ | 110,925 |   | $ | 1,738 |   | 3.13 | % |
| Savings                                              |       | 7,973                                                               |       | 23 |   | 0.58 | % | 8,385 |   | 22 |   | 0.52 | % |
| Time deposits                                        |       | 574,495                                                             |       | 13,351 |   | 4.65 | % | 467,576 |   | 11,972 |   | 5.12 | % |
| Total interest  bearing deposits                     |       | 694,608                                                             |       | 14,579 |   | 4.20 | % | 586,886 |   | 13,732 |   | 4.68 | % |
| Federal Home  Loan Bank advances                     |       | 40,448                                                              |       | 735 |   | 3.63 | % | 33,939 |   | 794 |   | 4.68 | % |
| Other borrowings                                     |       | 3,287                                                               |       | 45 |   | 2.74 | % | 1,651 |   | 43 |   | 5.21 | % |
| Trust Preferred  Securities                          |       | 10,310                                                              |       | 302 |   | 5.86 | % | 10,310 |   | 384 |   | 7.45 | % |
| Total borrowed  funds                                |       | 54,045                                                              |       | 1,082 |   | 4.00 | % | 45,900 |   | 1,221 |   | 5.32 | % |
| Total  interest-bearing liabilities                  |       | 748,653                                                             |       | 15,661 |   | 4.18 | % | 632,786 |   | 14,953 |   | 4.73 | % |
|                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 47,822                                                              |       |   |   |   |   | 47,245 |   |   |   |   |   |
| Other  liabilities                                   |       | 7,926                                                               |       |   |   |   |   | 6,793 |   |   |   |   |   |
| Stockholder’s  equity                           |       | 90,356                                                              |       |   |   |   |   | 79,512 |   |   |   |   |   |
| Total  Liabilities and Stockholder’s Equity     |       | $                                                                   | 894,757    |   |   |   |   |   | $ | 766,336 |   |   |   |   |   |
| Net interest  revenue (1)                            |       |                                                                |       | $ | 12,243 |   |   |   |   |   | $ | 13,719 |   |   |   |
| Net interest  spread (2)                             |       |                                                                |       |   |   | 2.69 | % |   |   |   |   | 3.42 | % |
| Net interest  margin (3) (6)                    |       |                                                                |       |   |   | 3.04 | % |   |   |   |   | 3.92 | % |

 

----

(1) Netinterest revenue is computed by subtracting the expense from the average interest-bearingliabilities from the income from the average earning assets.

(2) Netinterest spread is computed by subtracting the yield from the expense of theaverage interest-bearing liabilities from the yield from the average earningassets.

(3) Netinterest margin is computed by dividing net interest revenue by average totalearning assets.

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

(5) Interestincome includes loan fees as follows (in thousands): 2008 - $932; 2007 - $1,058

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

(7) Investmentsecurities are stated at amortized or accreted cost.

 

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The following table provides a detailed analysis of the changes ininterest income and interest expense due to changes in rate and volume for thethree months and six months ended June 30, 2008 compared to June 30, 2007.

 

**Changein Interest Revenue and Expense on a Taxable Equivalent Basis**

 
| ** **                                    | ** ** | **Three Months Ended June 30, 2008** | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **Compared to 2007**                      | ** ** | **Compared to 2007**                    | ** ** |
| ** **                                    | ** ** | **Changes due to (a)**                    | ** ** | **Changes due to (a)**                  | ** ** |
| ** **                                    | ** ** | ** **                                | ** ** | **Yield/**                              | ** ** | **Net** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Volume**                                | ** ** | **Rate**                                | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
|                                          |       | **(Amounts  in thousands)**               |       |
| Interest earned  on:                          |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans                                         |       | $                                         | 2,383      |                                    | $          | (3,777 | ) | $ | (1,394 | ) | $ | 4,298 |   | $ | (5,076 | ) | $ | (778 | ) |
| Investment  securities:                       |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Taxable  investment securities                |       | 48                                        |       | 47                                      |       | 95 |   | 39 |   | 130 |   | 169 |   |
| Tax-exempt  investment securities             |       | 43                                        |       | 2                                       |       | 45 |   | 61 |   | 26 |   | 87 |   |
| Interest earning  deposits and fed funds sold |       | (16                                       | )          | (58                                     | )          | (74 | ) | (86 | ) | (160 | ) | (246 | ) |
| Total interest  income                        |       | 2,458                                     |       | (3,786                                  | )          | (1,328 | ) | 4,312 |   | (5,080 | ) | (768 | ) |
|                                          |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest paid  on:                            |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Deposits:                                     |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand deposits             |       | 14                                        |       | (363                                    | )          | (349 | ) | 9 |   | (542 | ) | (533 | ) |
| Savings                                       |       | —                                    |       | 1                                       |       | 1 |   | (1 | ) | 2 |   | 1 |   |
| Time deposits                                 |       | 1,174                                     |       | (924                                    | )          | 250 |   | 2,292 |   | (913 | ) | 1,379 |   |
| Other borrowings  and FHLB advances           |       | 89                                        |       | (153                                    | )          | (64 | ) | 171 |   | (228 | ) | (57 | ) |
| Trust Preferred  Securities                   |       | —                                    |       | (67                                     | )          | (67 | ) | — |   | (82 | ) | (82 | ) |
| Total interest  expense                       |       | 1,277                                     |       | (1,506                                  | )          | (229 | ) | 2,471 |   | (1,763 | ) | 708 |   |
|                                          |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Decrease in net  interest revenue             |       | $                                         | 1,181      |                                    | $          | (2,280 | ) | $ | (1,099 | ) | $ | 1,841 |   | $ | (3,317 | ) | $ | (1,476 | ) |

 

----

(a) Volume and ratecomponents are in proportion to the relationship of the absolute dollar amountof the change in each.

 

# **Provisionfor Loan Losses**

 

The provision for loanlosses for the six months ended June 30, 2008, was $1,348,000 compared to$592,000 for the same period of 2007. The provision for loan losses for the second quarter of 2008 was$946,000 compared to $148,000 for the same period of 2007.  The increase in the provision for loan lossesis due to the strong loan growth occurring in the second quarter of 2008.  Net charge-offs as an annualized percentageof average outstanding loans for the six months ended June 30, 2008 were0.13%, as compared with 0.11% for the same period of 2007.  Net charge-offs as an annualized percentageof average outstanding loans for the second quarter of 2008 were 0.20%, ascompared with -0.12% for the same period of 2007.  Net loan charge-offs increased during thethree months and six months ended June 30, 2008 as compared to the threemonths and six months ended June 30, 2007 due mainly to the Companycharging off $375,000 for one single-family residential real estate loan whenthe foreclosed property was recorded to other real estate at net realizable value.

 

The provision for loanlosses is based on management’s evaluation of inherent risks in the loanportfolio and the corresponding analysis of the allowance for loan losses.  Additional discussion on loan quality and theallowance for loan losses are included in the Asset Quality section of thisreport.

 

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# **Non-interestIncome**

# ** **

Composition of othernoninterest income is as follows:

 
| ** **                                             | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|------------|------------|-------------------|------------|
| ** **                                             | ** ** | **June 30,**    | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                             | ** ** | **2008**             | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts                   |       | $                    | 857,218    |       | $          | 587,388           |       | $ | 269,830 |   | 45.94 | % |
| Other service  charges, commissions and fees           |       | 228,731              |       | 159,278    |       | 69,453            |       | 43.60 | % |
| Gain (loss) on  sales / calls of investment securities |       | 40,245               |       | (307       | )          | 40,552            |       | -13209.12 | % |
| Gain (loss) on  sale of other assets                   |       | (13,485              | )          | 94,559     |       | (108,044          | )          | -114.26 | % |
| Mortgage  origination income                           |       | 430,032              |       | 449,246    |       | (19,214           | )          | -4.28 | % |
| Other income                                           |       | 677,231              |       | 308,987    |       | 368,244           |       | 119.18 | % |
| Total  noninterest income                              |       | $                    | 2,219,972  |       | $          | 1,599,151         |       | $ | 620,821 |   | 38.82 | % |

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                             | ** ** | **2008**               | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts                   |       | $                      | 440,776    |       | $          | 306,380           |       | $ | 134,396 |   | 43.87 | % |
| Other service  charges, commissions and fees           |       | 118,848                |       | 97,942     |       | 20,906            |       | 21.35 | % |
| Gain (loss) on  sales / calls of investment securities |       | 8,405                  |       | (382       | )          | 8,787             |       | -2300.26 | % |
| Gain (loss) on  sale of other assets                   |       | 165                    |       | 93,272     |       | (93,107           | )          | -99.82 | % |
| Mortgage origination  income                           |       | 192,206                |       | 243,126    |       | (50,920           | )          | -20.94 | % |
| Other income                                           |       | 470,149                |       | 169,435    |       | 300,714           |       | 177.48 | % |
| Total  noninterest income                              |       | $                      | 1,230,549  |       | $          | 909,773           |       | $ | 320,776 |   | 35.26 | % |

 

Service charges ondeposit accounts are evaluated against service charges from other banks in thelocal market 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.  Total service charges, includingnon-sufficient funds fees, were $441 thousand, or 36% of total noninterestincome for the second quarter of 2008 compared with $306 thousand, or 34% forthe second quarter of 2007.  Totalservice charges, including non-sufficient funds fees, were $857 thousand, or39% of total noninterest income for the six months ended June 30, 2008compared with $587 thousand, or 37% for the same period of 2007.  The year-over-year increase in servicecharges on deposit accounts is directly related to the increase in the numberof our core transaction deposit accounts. The number of deposit accounts for the six months ended June 30,2008 was 12,970 accounts when compared to the same period of 2007 with 12,354accounts.  The most significant change inother income for the three months and six months ended June 30, 2008 isthe additional income from the net earnings on cash surrender value of lifeinsurance from the additional $7.5 million bank owned life insurance (“BOLI”)policies on several senior bank officers purchased during the first quarter of2008.  The Bank also recognized $171thousand in other income from the fair value adjustments to an interest rateswap during the second quarter of 2008. The increase in the gain on sales/calls of investment securities for thethree months and six months ended June 30, 2008 is due to severalinvestment securities being called before their maturity date.  The decrease of the gain (loss) on the saleof other assets for the three months and six months ended June 30, 2008,is primarily due to the loss on the sale of two foreclosed properties; incomparison, during the three months and six months ended June 30, 2007there was a gain on the sale of two foreclosed properties and the sale of onelocation that was acquired from our purchase of First Community Bank during thesecond quarter of 2007.

 

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# **Non-interestExpense**

# ** **

Composition of othernoninterest expense is as follows:

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **June 30,**    | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2008**             | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                    | 4,469,953  |       | $          | 3,534,887         |       | $ | 935,066 |   | 26.45 | % |
| Employee  benefits                              |       | 1,217,662            |       | 1,209,352  |       | 8,310             |       | 0.69 | % |
| Occupancy  expense                              |       | 911,671              |       | 680,038    |       | 231,633           |       | 34.06 | % |
| Equipment rental  and depreciation of equipment |       | 544,310              |       | 391,654    |       | 152,656           |       | 38.98 | % |
| Other expenses                                  |       | 3,363,258            |       | 2,855,857  |       | 507,401           |       | 17.77 | % |
| Total  noninterest expense                      |       | $                    | 10,506,854 |       | $          | 8,671,788         |       | $ | 1,835,066 |   | 21.16 | % |

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2008**               | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                      | 2,340,097  |       | $          | 1,855,616         |       | $ | 484,481 |   | 26.11 | % |
| Employee  benefits                              |       | 483,437                |       | 654,432    |       | (170,995          | )          | -26.13 | % |
| Occupancy  expense                              |       | 462,873                |       | 356,709    |       | 106,164           |       | 29.76 | % |
| Equipment rental  and depreciation of equipment |       | 280,296                |       | 211,478    |       | 68,818            |       | 32.54 | % |
| Other expenses                                  |       | 1,766,184              |       | 1,591,644  |       | 174,540           |       | 10.97 | % |
| Total  noninterest expense                      |       | $                      | 5,332,887  |       | $          | 4,669,879         |       | $ | 663,008 |   | 14.20 | % |

 

The increases innoninterest expenses are primarily due to the growth of the Bank.  The most significant increases in the firsthalf of 2008 are increases in salaries and employee benefits.  The increase in salaries and employeesbenefits represents normal increases in salaries and an increase in the numberof employees.  At June 30, 2008, thenumber of full-time equivalent employees was 183 compared to 163 at June 30,2007.  The increase in the number offull-time equivalent employees is directly related to the growth of the bankand the hiring for two new branches in Macon, Georgia and Jacksonville, Florida.  The Bank operates from seventeen facilitiesas of June 30, 2008 compared to fifteen facilities as of June 30,2007.  The increases in other expensesare not attributable to any one particular item, but represent increasesrelated to physical facility expansion.

 

# **IncomeTax Expense**

# ** **

Income tax expenseexpressed as a percentage of earnings before income taxes was 27.23% and 34.90%for the six months ended June 30, 2008 and 2007, respectively.  Income tax expense was 22.80% and 34.79% forthe three months ended June 30, 2008 and 2007, respectively.  The fluctuation in the percentage can beattributed to the tax-free income versus the pretax income and tax creditsreceived from affordable housing investments. For the six months ended June 30, 2008, the tax-free incomeexpressed as a percentage of earnings before income taxes was 16.67% whencompared to 6.00% for the six months ended June 30, 2007.  For the three months ended June 30,2008, the tax-free income expressed as a percentage of earnings before incometaxes was 25.08% when compared to 5.88% for the three months ended June 30,2007.   The increase in tax-free incomeis due to an increase in the interest revenue on certain investment securitiesand loans that are exempt from income taxes.

 

### **Liquidity**

### ** **

Liquidity managementinvolves the matching of the cash flow requirements of customers, eitherdepositors withdrawing funds or borrowers needing loans, and the ability of theCompany to meet those requirements.

 

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The Company’s liquidityprogram is designed and intended to provide guidance in funding the credit andinvestment activities of the Company while at the same time ensuring that thedeposit obligations of the Company are met on a timely basis. In order topermit active and timely management of assets and liabilities, these accountsare monitored regularly in regard to volume, mix and maturity.

 

The Company’s liquidityposition depends primarily upon the liquidity of its assets relative to itsneed to respond to short-term demand for funds caused by withdrawals fromdeposit accounts and loan funding commitments. Primary sources of liquidity arescheduled repayments on the Company’s loans and interest on and maturities ofits investment securities. Sales of investment securities available for salerepresent another source of liquidity to the Company. The Company may alsoutilize its cash and due from banks and federal funds sold to meet liquidityrequirements as needed.

 

The Company also has theability, on a short-term basis, to purchase federal funds from other financialinstitutions up to $34 million. At June 30, 2008, the Company had nofederal funds purchased. The Company has a total available line of $47.8million, subject to available collateral, from the Federal Home Loan Bank. TheCompany has $36.5 million in advances on this line at June 30, 2008.

 

The Bank’s liquiditypolicy requires that the ratio of cash and certain short-term investments tonet withdrawable deposit accounts be at least 10%. The Bank’s liquidity ratiosat June 30, 2008 and 2007 were 12.83% and 13.09%, respectively.

 

### **CapitalResources**

### ** **

We are subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimalcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on our financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, we must meet specific capital guidelines that involvequantitative measures of our assets, liabilities and certain off-balance sheetitems as calculated under regulatory accounting practices.  Our capital amounts and classification arealso subject to qualitative judgments by the regulators about components, riskweightings and other factors.

 

Quantitative measuresestablished by regulations to ensure capital adequacy require us to maintainminimum amounts and ratios (set forth below in the table) of total and Tier Icapital (as defined in the regulations) to risk-weighted assets (as defined),and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of June 30, 2008and as of December 31, 2007, that the Company and the Bank met all capitaladequacy requirements to which they are subject.

 

As of June 30, 2008,the most recent notifications from both the Federal Deposit InsuranceCorporation and the Federal Reserve Bank of Atlanta categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based, Tier I risk-basedand Tier I leverage ratios as set forth in the following table.  There are no conditions or events since thatnotification that management believes have changed the Bank’s categories.

 

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The Company’s and theBank’s actual capital amounts and ratios as of June 30, 2008 and December 31,2007 follow:

 
| ** **                                        | ** **   | ** **   | ** **   | ** **            | ** **   | ** **            | ** **   | ** **                  | ** **   | **To Be Well Capitalized** | ** **   |
|---------------------------------------------------|--------------|--------------|--------------|-----------------------|--------------|-----------------------|--------------|-----------------------------|--------------|----------------------------|--------------|
| ** **                                        | ** **   | ** **   | ** **   | ** **            | ** **   | **For Capital**       | ** **   | **Under Prompt Corrective** | ** **   |
| ** **                                        | ** **   | **Actual**   | ** **   | **Adequacy Purposes** | ** **   | **Action Provisions** | ** **   |
|                                              |         | **Amount**   | ** **   | **Ratio**             | ** **   | **Amount**            | ** **   | **Ratio**                   | ** **   | **Amount**                 | ** **   | **Ratio** |   |
| ***June 30,  2008***                         | *** *** | *** *** | *** *** | *** ***          | *** *** | *** ***          | *** *** | *** ***                | *** *** | *** ***               | *** *** | *** *** | *** *** |
| * *                                          | * *     | * *     | * *     | * *              | * *     | * *              | * *     | * *                    | * *     | * *                   | * *     | * * | * * |
| Total Risk-Based Capital To Risk Weighted Assets: |         |         |         |                  |         |                  |         |                        |         |                       |         |
| Consolidated                                      |         | $            | 87,448,000   |                  | 10.47        | %                     | $            | 66,817,956                  | >    | 8.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 85,715,000   |         | 10.27                 | %            | 66,769,231            | >    | 8.0                         | %            | 83,461,538                 | >    | 10.0 | % |
|                                              |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Tier I Capital To Risk Weighted Assets:           |         |         |         |                  |         |                  |         |                        |         |                       |         |
| Consolidated                                      |         | $            | 77,714,000   |                  | 9.30         | %                     | $            | 33,425,376                  | >    | 4.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 75,981,000   |         | 9.10                  | %            | 33,398,242            | >    | 4.0                         | %            | 50,097,363                 | >    | 6.0 | % |
|                                              |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Tier I Capital  To Average Assets                 |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Consolidated                                      |         | $            | 77,714,000   |                  | 8.63         | %                     | $            | 36,020,394                  | >    | 4.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 75,981,000   |         | 8.44                  | %            | 36,009,953            | >    | 4.0                         | %            | 45,012,441                 | >    | 5.0 | % |
| *** ***                                      | *** *** | *** *** | *** *** | *** ***          | *** *** | *** ***          | *** *** | *** ***                | *** *** | *** ***               | *** *** | *** *** | *** *** |
| ***December 31,  2007***                     | *** *** | *** *** | *** *** | *** ***          | *** *** | *** ***          | *** *** | *** ***                | *** *** | *** ***               | *** *** | *** *** | *** *** |
| * *                                          | * *     | * *     | * *     | * *              | * *     | * *              | * *     | * *                    | * *     | * *                   | * *     | * * | * * |
| Total Risk-Based Capital To Risk Weighted Assets: |         |         |         |                  |         |                  |         |                        |         |                       |         |
| Consolidated                                      |         | $            | 84,800,000   |                  | 11.62        | %                     | $            | 58,382,100                  | >    | 8.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 82,541,000   |         | 11.32                 | %            | 58,332,862            | >    | 8.0                         | %            | 72,916,078                 | >    | 10.0 | % |
|                                              |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Tier I Capital To Risk Weighted Assets:           |         |         |         |                  |         |                  |         |                        |         |                       |         |
| Consolidated                                      |         | $            | 75,921,000   |                  | 10.40        | %                     | $            | 29,200,385                  | >    | 4.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 73,662,000   |         | 10.11                 | %            | 29,144,214            | >    | 4.0                         | %            | 43,716,320                 | >    | 6.0 | % |
|                                              |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Tier I Capital  To Average Assets                 |         |         |         |                  |         |                  |         |                        |         |                       |         |   |   |
| Consolidated                                      |         | $            | 75,921,000   |                  | 9.34         | %                     | $            | 32,514,347                  | >    | 4.0                        | %            | N/A |   | N/A |   |
| Bank                                              |         | 73,662,000   |         | 9.08                  | %            | 32,450,220            | >    | 4.0                         | %            | 40,562,775                 | >    | 5.0 | % |

 

We haveoutstanding junior subordinated debentures commonly referred to as TrustPreferred Securities totaling $10.3 million at June 30, 2008.  The Trust Preferred Securities qualify as aTier I capital under risk-based capital guidelines provided that total TrustPreferred Securities do not exceed certain quantitative limits.  At June 30, 2008, all of the TrustPreferred Securities qualify as a Tier I capital.

 

### **RegulatoryMatters**

### ** **

From time to time,various bills are introduced in the United States Congress with respect to theregulation of financial institutions. Certain of these proposals, if adopted, could significantly change theregulation of banks and the financial services industry.  We cannot predict whether any of theseproposals will be adopted or, if adopted, how these proposals would affect us.

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

**For theSix Months Ended June 30, 2008**

 

Pursuant to Item 305(e) ofRegulation S-K, no disclosure under this item is required.

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Item 4T. Controls and Procedures**

**For theSix Months Ended June 30, 2008**

 

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, includingthe Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosures of that information underthe Securities and Exchange Commission’s rules and forms.  The Company’s disclosure controls andprocedures are designed to ensure that the information required to be disclosedin reports that are filed or submitted by the Company pursuant to theSecurities Exchange Act, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

#### **During the second quarter of 2008, 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 financialreporting.  However, the design of anysystem of controls and procedures is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions, regardless of how remote.**

 

28

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#### **Table of Contents**

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Part II. Other Information**

**For theSix Months Ended June 30, 2008**

 

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

#### ** **

Item1. Legal Proceedings

 

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

 

Item1A. Risk Factors

 

 Other than as noted below, we believethere have been no material changes from the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007.  You should carefully consider thefactors discussed below and in our Annual Report on Form 10-K, which couldmaterially affect our business, financial condition or future results. Therisks described below and in our Annual Report on Form 10-K are not theonly risks facing us. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

The following aresupplemental risk factors relating to the recent changes in the strength of theeconomy and the impact of publicperception on our performance.

 

*Weaknessin the economy and in the real estate market, including specific weaknesswithin our geographic footprint, has adversely affected us and may continue toadversely affect us.*

 

If the strength ofthe U.S. economy in general and the strength of the local economies in which weconduct operations decline, or continue to decline, this could result in, amongother things, a deterioration in credit quality or a reduced demand for credit,including a resultant adverse effect on our loan portfolio and allowance forloan and lease losses. Declines in the U.S. economy and the real estate marketmay contribute to an increase in provisions for loan losses for the remainderof 2008 and 2009. These factors could result in loan loss provisions in excessof charge-offs, delinquencies and/or greater charge-offs in future periods,which may adversely affect our financial condition and results of operations.In addition, deterioration of the U.S. economy may adversely impact ourtraditional banking business. Economic declines may be accompanied by adecrease in demand for consumer or commercial credit and declining real estateand other asset values. Declining real estate and other asset values may reducethe ability of borrowers to use such equity to support borrowings.Delinquencies, foreclosures and losses generally increase during economic slowdowns or recessions. Additionally, our servicing costs, collection costs andcredit losses may also increase in periods of economic slow down or recessions.The impact of recent events relating to subprime mortgages resulting in asubstantial housing recession has not been limited to those directly involvedin the real estate construction industry (such as builders and developers).Rather, it has impacted a number of related businesses such as buildingmaterials suppliers, equipment leasing firms, and real estate attorneys, amongothers. All of these affected businesses have banking relationships and whentheir businesses suffer from recession, the banking relationship suffers aswell.

 

*Theimpact of the current economic downturn on the performance of other financialinstitutions in our primary market area, actions taken by our competitors toaddress the current economic downturn, and the public perception of andconfidence in the economy generally, and the banking industry specifically,could negatively impact our performance and operations.*

 

All financialinstitutions are subject to the same risks resulting from a weakening economysuch as increased charge-offs and levels of past due loans and nonperformingassets. As troubled institutions in our market area continue to dispose ofproblem assets, the already excess inventory of residential homes and lots willcontinue to negatively impact home values and increase the time it takes us orour borrowers to sell existing inventory. The perception that troubled bankinginstitutions (and smaller banking institutions that are not “in trouble”) arerisky institutions for purposes of regulatory compliance or safeguardingdeposits may cause depositors nonetheless to move their funds to largerinstitutions. If our depositors should move their funds based on eventshappening at other financial institutions, our operating results would suffer.

 

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Item2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item3. Defaults Upon Senior Securities

NotApplicable

 

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

 

Theregular annual meeting of the shareholders of the Company was held on June 3,2008.

 

Atthe Annual Meeting, the shareholders elected the following Class IIIdirectors to serve for three-year terms or until their successors are dulyqualified and elected.  The followingtable sets forth the number of votes cast and withheld with respect to eachnominated director.

 
| **Name**                       | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** | **Votes Against** | ** ** |
|--------------------------------|------------|---------------|------------|--------------------|------------|-------------------|------------|
| Raymond O.  Ballard, Jr.  |       | 2,735,820     |       | 15,212             |       | 0                 |       |
| J. Douglas  Dunwody            |       | 2,735,970     |       | 15,062             |       | 0                 |       |
| William A.  Fickling, III |       | 2,717,945     |       | 33,087             |       | 0                 |       |
| Carl E.  Hofstadter            |       | 2,735,923     |       | 15,109             |       | 0                 |       |
| George  Waters, Jr.       |       | 2,642,790     |       | 108,242            |       | 0                 |       |

 

Thefollowing directors did not stand for reelection as their term of officecontinued:  Peter R. Cates, Dr. Laudis(Rick) H. Lanford, J. Russell Lipford, Jr., Dr. Hugh F. Smission, III,Donald L. Moore, Carolyn Crayton, Michael C. Griffin, Thomas J. McMichael,Tyler J. Rauls, Jr. and Mark A. Stevens.

 

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** |

 

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**SIGNATURES**

 

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

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

 

 

Date: August 11,2008

 

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