**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 
| **x**      | **Quarterly  report under Section 13 or 15 (d) of the Securities Exchange Act of  1934**                                                 | ** ** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                                                                         | ** ** |
| ** ** | **For the quarterly period ended March 31, 2008**                                                                                             | ** ** |
| ** ** | ** **                                                                                                                                         | ** ** |
| **o**      | **Transition report under Section 13  or 15 (d) of the Exchange Act**                                                                    | ** ** |
| ** ** | ** **                                                                                                                                         | ** ** |
| ** ** | **For the transition period from           to         ** | ** ** |
|       |                                                                                                                                               |       |
|       | **Commission File Number  000-51112**                                                                                                              |       |

** **

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

 

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

 

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

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

(Address ofPrincipal Executive Offices)

 

**(478)476-2170**

(Issuer’sTelephone Number, Including Area Code)

 

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

(Former Name,Former Address and Former Fiscal 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 markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmarkwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act).Yes o No x

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

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

 

 

----

 

**ATLANTIC SOUTHERN FINANCIALGROUP, 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 – March 31, 2008  (unaudited) and December 31,  2007 (audited).                   |       | 2        |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
|                                                                                                            |       | Consolidated  Statements of Earnings (unaudited) – For the Three Months Ended  March 31, 2008 and 2007.             |       | 3        |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
|                                                                                                            |       | Consolidated Statements of  Comprehensive Income (unaudited) – For the Three Months Ended March 31,  2008 and 2007. |       | 4        |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
|                                                                                                            |       | Consolidated Statements of  Cash Flows (unaudited) – For the Three Months Ended March 31, 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                                   |       | 11       |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
| ITEM 3.                                                                                                         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                   |       | 22       |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
| ITEM 4.                                                                                                         |       | Controls and  Procedures                                                                                                      |       | 23       |       |
|                                                                                                            |       |                                                                                                                          |       |     |       |
| PART II:                                                                                                   |       | OTHER INFORMATION                                                                                                             |       | 24       |       |

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Balance Sheets**

**March 31, 2008****(Unaudited) and****December 31, 2007****(Audited)**

** **
| ** **                                                                                                    | ** ** | **As of**     | ** **  |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|
| ** **                                                                                                    | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                    | ** ** | **2008**           | ** **  | **2007** | ** ** |
| **Assets**                                                                                                    | ** ** | ** **         | ** **  | ** ** | ** ** |
| Cash and due  from banks                                                                                      |       | $                  | 7,964,103   |   | $ | 8,059,524 |   |
| Interest-bearing  deposits in other banks                                                                     |       | 465,175            |        | 514,654 |   |
| Federal funds  sold                                                                                           |       | 15,928,000         |        | 11,350,000 |   |
| Total cash and  cash equivalents                                                                              |       | 24,357,278         |        | 19,924,178 |   |
| Securities  available for sale, at fair value                                                                 |       | 76,170,524         |        | 74,387,100 |   |
| Federal Home  Loan Bank stock, restricted, at cost                                                            |       | 3,355,200          |        | 3,153,000 |   |
| Loans held for  sale                                                                                          |       | 2,068,296          |        | 679,427 |   |
| Loans, net of  unearned income                                                                                |       | 721,416,116        |        | 697,145,715 |   |
| Less - allowance  for loan losses                                                                             |       | (9,158,280         | )           | (8,878,795 | ) |
| Loans, net                                                                                                    |       | 712,257,836        |        | 688,266,920 |   |
| Bank premises  and equipment, net                                                                             |       | 28,224,519         |        | 27,899,376 |   |
| Accrued interest  receivable                                                                                  |       | 6,810,915          |        | 7,239,571 |   |
| Cash surrender  value of life insurance                                                                       |       | 12,054,178         |        | 4,442,044 |   |
| Goodwill and  other intangible assets, net of amortization                                                    |       | 22,716,404         |        | 22,806,983 |   |
| Other assets                                                                                                  |       | 3,899,628          |        | 3,680,465 |   |
| **Total  Assets**                                                                                             |       | $                  | 891,914,778 |   | $ | 852,479,064 |   |
|                                                                                                          |       |               |        |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                | ** ** | ** **         | ** **  | ** ** | ** ** |
| Deposits:                                                                                                     |       |               |        |   |   |
| Non-interest  bearing                                                                                         |       | $                  | 47,663,881  |   | $ | 46,075,374 |   |
| Money market and  NOW accounts                                                                                |       | 111,982,883        |        | 111,029,210 |   |
| Savings                                                                                                       |       | 8,013,676          |        | 7,808,443 |   |
| Time deposits                                                                                                 |       | 574,954,851        |        | 540,318,896 |   |
| Total deposits                                                                                                |       | 742,615,291        |        | 705,231,923 |   |
| Federal Home  Loan Bank advances                                                                              |       | 40,500,000         |        | 40,500,000 |   |
| Junior  subordinated debentures                                                                               |       | 10,310,000         |        | 10,310,000 |   |
| Accrued interest  payable                                                                                     |       | 6,015,278          |        | 5,446,473 |   |
| Accrued expenses  and other liabilities                                                                       |       | 1,878,765          |        | 1,908,156 |   |
| Total  liabilities                                                                                            |       | 801,319,334        |        | 763,396,552 |   |
| Shareholders’  Equity:                                                                                   |       |               |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, no outstanding shares                                          |       | —             |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, issued and outstanding 4,151,780 in  2008 and 2007 |       | 20,758,900         |        | 20,758,900 |   |
| Paid-in capital  surplus                                                                                      |       | 53,419,186         |        | 53,413,202 |   |
| Retained  earnings                                                                                            |       | 15,671,283         |        | 14,606,121 |   |
| Accumulated  other comprehensive income                                                                       |       | 746,075            |        | 304,289 |   |
| Total  shareholders’ equity                                                                              |       | 90,595,444         |        | 89,082,512 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                          |       | $                  | 891,914,778 |   | $ | 852,479,064 |   |

 

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

 

2

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Earnings**

**For the Three Months Ended March 31, 2008 and2007**

**(Unaudited)**

** **
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Interest  and Dividend Income:**                   |       |                                                 |       |   |   |
| Interest and  fees on loans                          |       | $                                                    | 13,429,239 |   | $ | 12,814,056 |   |
| Interest on  securities:                             |       |                                                 |       |   |   |
| Taxable income                                       |       | 637,022                                              |       | 563,347 |   |
| Non-taxable  income                                  |       | 200,272                                              |       | 157,460 |   |
| Income on  federal funds sold                        |       | 80,553                                               |       | 242,729 |   |
| Other interest  and dividend income                  |       | 78,883                                               |       | 88,378 |   |
| Total interest  and dividend income                  |       | 14,425,969                                           |       | 13,865,970 |   |
| **Interest  Expense:**                               |       |                                                 |       |   |   |
| Deposits                                             |       | 7,546,835                                            |       | 6,601,613 |   |
| Junior  subordinated debentures                      |       | 176,094                                              |       | 190,969 |   |
| Federal funds  purchased                             |       | 24,892                                               |       | 24,848 |   |
| FHLB borrowings  and other interest expense          |       | 400,737                                              |       | 394,149 |   |
| Total interest  expense                              |       | 8,148,558                                            |       | 7,211,579 |   |
|                                                 |       |                                                 |       |   |   |
| Net interest  income                                 |       | 6,277,411                                            |       | 6,654,391 |   |
| **Provision  for loan losses**                       |       | 402,000                                              |       | 444,000 |   |
| Net interest  income after provision for loan losses |       | 5,875,411                                            |       | 6,210,391 |   |
| **Noninterest  Income:**                             |       |                                                 |       |   |   |
| Service charges  on deposit accounts                 |       | 416,442                                              |       | 281,008 |   |
| Other service  charges, commissions and fees         |       | 109,883                                              |       | 61,336 |   |
| (Loss) gain on  sale of other assets                 |       | (13,650                                              | )          | 1,287 |   |
| Gain on sales /  calls of investment securities      |       | 31,840                                               |       | 75 |   |
| Mortgage  origination income                         |       | 237,826                                              |       | 206,120 |   |
| Other income                                         |       | 207,082                                              |       | 139,552 |   |
| Total  noninterest income                            |       | 989,423                                              |       | 689,378 |   |
| **Noninterest  Expense:**                            |       |                                                 |       |   |   |
| Salaries                                             |       | 2,129,856                                            |       | 1,679,271 |   |
| Employee  benefits                                   |       | 734,225                                              |       | 554,920 |   |
| Occupancy  expense                                   |       | 448,798                                              |       | 323,329 |   |
| Equipment rental  and depreciation of equipment      |       | 264,014                                              |       | 180,176 |   |
| Other expenses                                       |       | 1,597,074                                            |       | 1,264,213 |   |
| Total  noninterest expense                           |       | 5,173,967                                            |       | 4,001,909 |   |
|                                                 |       |                                                 |       |   |   |
| **Earnings  Before Income Taxes**                    |       | 1,690,867                                            |       | 2,897,860 |   |
| Provision for  income taxes                          |       | 501,151                                              |       | 1,014,602 |   |
| **Net  Earnings**                                    |       | $                                                    | 1,189,716  |   | $ | 1,883,258 |   |
| **Earnings  per share:**                             |       |                                                 |       |   |   |
| Basic                                                |       | $                                                    | 0.29       |   | $ | 0.47 |   |
| Diluted                                              |       | $                                                    | 0.27       |   | $ | 0.44 |   |
| **Dividends  declared per share:**                   |       | $                                                    | 0.03       |   | $ | — |   |

 

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

 

3

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Comprehensive Income**

**For the Three Months Ended March 31, 2008 and2007**

**(Unaudited)**

** **
| ** **                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net earnings                                                                                  |       | $                                                    | 1,189,716  |   | $ | 1,883,258 |   |
| ** **                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Other  comprehensive income:                                                                  |       |                                                 |       |   |   |
| Unrealized  holding gains on investment securities available for sale                         |       | 701,213                                              |       | 183,583 |   |
| Unrealized  holding gains on derivative financial instruments classified as cash flow  hedges |       | —                                               |       | 54,411 |   |
| Reclassification  adjustment for gains realized in net earnings                               |       | (31,840                                              | )          | (75 | ) |
| Total other  comprehensive income, before tax                                                 |       | 669,373                                              |       | 237,919 |   |
| Income taxes  related to other comprehensive income:                                          |       |                                                 |       |   |   |
| Unrealized  holding gains on investment securities available for sale                         |       | (238,413                                             | )          | (62,418 | ) |
| Unrealized  holding gains on derivative financial instruments classified as cash flow  hedges |       | —                                               |       | (18,500 | ) |
| Reclassification  adjustment for gains realized in net earnings                               |       | 10,826                                               |       | 26 |   |
| Total income  taxes related to other comprehensive income                                     |       | (227,587                                             | )          | (80,892 | ) |
| Total other  comprehensive income, net of tax                                                 |       | 441,786                                              |       | 157,027 |   |
| Total  comprehensive income                                                                   |       | $                                                    | 1,631,502  |   | $ | 2,040,285 |   |

 

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

 

4

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Cash Flows**

**For the Three Months Ended March 31, 2008 and2007**

**(Unaudited)**

** **
| ** **                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash  Flows from Operating Activities:**                                                  |       |                                                 |       |   |   |
| Net earnings                                                                                |       | $                                                    | 1,189,716  |   | $ | 1,883,258 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:        |       |                                                 |       |   |   |
| Provision for  loan losses                                                                  |       | 402,000                                              |       | 444,000 |   |
| Depreciation                                                                                |       | 339,221                                              |       | 225,053 |   |
| Stock based  compensation                                                                   |       | 5,984                                                |       | 5,984 |   |
| Amortization and  (accretion), net                                                          |       | 80,492                                               |       | 59,424 |   |
| Loss (gain) on  sales of assets                                                             |       | 13,650                                               |       | (1,287 | ) |
| Gain on sales /  calls of investment securities                                             |       | (31,840                                              | )          | (75 | ) |
| Earnings on cash  surrender value of life insurance                                         |       | (112,134                                             | )          | (40,933 | ) |
| Changes in  assets and liabilities, net of effects of purchase acquisition in 2007:         |       |                                                 |       |   |   |
| Loans held for  sale                                                                        |       | (1,388,869                                           | )          | (2,115,625 | ) |
| Changes in  accrued income and other assets                                                 |       | 466,983                                              |       | 905,603 |   |
| Changes in  accrued expenses and other liabilities                                          |       | 311,827                                              |       | 239,183 |   |
| Net cash  provided by operating activities                                                  |       | 1,277,030                                            |       | 1,604,585 |   |
| **Cash  Flows from Investing Activities, net of effects of purchase acquisition in  2007:** |       |                                                 |       |   |   |
| Net change in  loans to customers                                                           |       | (24,654,286                                          | )          | (46,217,409 | ) |
| Purchase of  available for sale securities                                                  |       | (9,794,389                                           | )          | (2,588,124 | ) |
| Proceeds from  sales, calls, maturities and paydowns of available for sale securities       |       | 8,712,495                                            |       | 3,573,561 |   |
| Purchase of FHLB  stock                                                                     |       | (202,200                                             | )          | (292,900 | ) |
| Purchase of cash  surrender value of life insurance                                         |       | (7,500,000                                           | )          | — |   |
| Cash received  from First Community, net of cash paid of $235,034                           |       | —                                               |       | 5,556,520 |   |
| Cash paid to  Sapelo shareholders                                                           |       | —                                               |       | (5,322,492 | ) |
| Property and  equipment expenditures                                                        |       | (664,364                                             | )          | (2,700,963 | ) |
| Proceeds from  sales of assets                                                              |       | —                                               |       | 4,672 |   |
| Net cash used in  investing activities                                                      |       | (34,102,744                                          | )          | (47,987,135 | ) |
| **Cash  Flows from Financing Activities, net of effects of purchase acquisition in  2007:** |       |                                                 |       |   |   |
| Net change in  deposits                                                                     |       | 37,383,368                                           |       | 33,298,492 |   |
| Advances on FHLB  borrowings                                                                |       | 6,000,000                                            |       | 6,000,000 |   |
| Payments on FHLB  borrownings                                                               |       | (6,000,000                                           | )          | (7,000,000 | ) |
| Payment for  fractional shares                                                              |       | —                                               |       | (10,320 | ) |
| Proceeds from  issuance of common stock, net of Payment for issuance cost of common stock   |       | —                                               |       | (76,878 | ) |
| Dividends paid                                                                              |       | (124,554                                             | )          | — |   |
| Net cash  provided by financing activities                                                  |       | 37,258,814                                           |       | 32,211,294 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                   |       | 4,433,100                                            |       | (14,171,256 | ) |
| **Cash  and Cash Equivalents, Beginning of Year**                                           |       | 19,924,178                                           |       | 42,911,477 |   |
| **Cash  and Cash Equivalents, End of Quarter**                                              |       | $                                                    | 24,357,278 |   | $ | 28,740,221 |   |

 

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

 

5

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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 first quarter of 2008.  The Company recognized $5,984 ofstock-based employee compensation expense during the first quarter of 2008 and2007 associated 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 March 31, 2008, therewas $89,760 of unrecognized compensation cost related to stock optiongrants.  The cost is expected to berecognized over the remaining 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:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                  | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                        |       |                             |       |   |   |
| Net  earnings                                                               |       | $                                | 1,189,716  |   | $ | 1,883,258 |   |
|                                                                        |       |                             |       |   |   |
| Weighted  average common shares outstanding                                 |       | 4,151,780                        |       | 3,971,102 |   |
| Shares  issued from assumed exercise of common stock equivalents            |       | 261,041                          |       | 340,609 |   |
| Weighted  average number of common and common equivalent shares outstanding |       | 4,412,821                        |       | 4,311,711 |   |
| Earnings  per share:                                                        |       |                             |       |   |   |
| Basic                                                                       |       | $                                | 0.29       |   | $ | 0.47 |   |
|                                                                        |       |                             |       |   |   |
| Diluted                                                                     |       | $                                | 0.27       |   | $ | 0.44 |   |

 

6

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***(4)   Fair Value***

 

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 are recorded atfair value on a recurring basis. Additionally, from time to time, the Company may be required to recordat fair value other assets on a nonrecurring basis, such as loans held for sale,loans held for investment and certain other assets.  These nonrecurring fair value adjustmentstypically involve application of lower of cost or market accounting orwrite-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:

 

Level1 – Valuation is based upon quoted prices for identical instruments traded inactive markets.

 

Level2 – Valuation is based upon quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active, and model-based valuation techniques for which all significantassumptions are observable in the market.

 

Level3 – Valuation is generated from model-based techniques that use at least onesignificant assumption not observable in the market.  These unobservable assumptions reflectestimates of assumptions that market participants would use in pricing theasset or liability.  Valuation techniquesinclude use of option pricing models, discounted cash flow models and similartechniques.

 

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, such asthe New York Stock Exchange and U.S. Treasury securities that are traded bydealers or brokers 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 subjected 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

 

7

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

of impaired loans isestimated using one of several methods, including collateral value, marketvalue of similar 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 March 31, 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 identifiedintangible assets are subject to impairment testing.  A projected cash flow valuation method isused in the completion of impairment testing. This valuation method requires a significant degree of managementjudgment.  In the event the projectedundiscounted net operating cash flows are less than the carrying value, theasset is recorded at fair value as determined by the valuation model.  As such, the Company classifies goodwill andother intangible assets subjected to nonrecurring fair value adjustments asLevel 3.

 

Assets Recorded atFair Value on a Recurring Basis

 

The table below presentsthe recorded amount of assets measured at fair value on a recurring basis.

 
| ** **                     | ** ** | **As of March 31,** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **2008**                 | ** ** |
| ** **                     | ** ** | **Total**                | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securities  available-for-sale |       | $                        | 76,170,524 |   | $ | 20,293,790 |   | $ | 55,626,734 |   | $ | 250,000 |   |
|                           |       |                     |       |   |   |   |   |   |   |
| **Total assets at fair value** |       | $                        | 76,170,524 |   | $ | 20,293,790 |   | $ | 55,626,734 |   | $ | 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.

 

8

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                     | ** ** | **As of March 31,** | ** ** |
|--------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **2008**                           | ** ** |
| ** **                     | ** ** | **Total**                          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                           |       |                               |       |   |   |   |   |   |   |
| Loans                          |       | $                                  | 8,857,300  |   | $ | — |   | $ | 8,857,300 |   | $ | — |   |
| Other  assets (1)              |       | 186,100                            |       | — |   | 186,100 |   | — |   |
|                           |       |                               |       |   |   |   |   |   |   |
| **Total assets at fair value** |       | $                                  | 9,043,400  |   | $ | — |   | $ | 9,043,400 |   | $ | — |   |

 

----

(1) Includesforeclosed assets.

 

***(5)   Nonperforming Assets***

 

### **Nonperforming assets consist of non-accrual loans,accruing loans 90 days past due and other real estate owned. The followingsummarizes non-performing assets:**

### ** **

| ** **                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Accruing  loans 90 days past due |       | $                  | —     |                  | $          | 504,783 |   |
| Non-accrual  loans               |       | 3,891,819          |       | 4,276,950             |       |
| Other  real estate               |       | 747,225            |       | 758,787               |       |
| Total  non-performing assets     |       | $                  | 4,639,044  |                  | $          | 5,540,520 |   |

 

Nonperforming assetsdecreased $901,476 or 16.3% from December 31, 2007 to March 31, 2008due to several non-accrual loans tied to one customer relationship being paidoff during the first quarter of 2008. The nonperforming assets mainly consist of one loan acquired from ouracquisition of Sapelo National Bank with a balance of approximately $2.9million on non-accrual that is secured by single-family residential real estateappraised at approximately $5.1 million. The borrower filed for bankruptcy protection on April 2, 2007.  On May 6, 2008, the Bank foreclosed onthe property and is currently marketing the property for sale.

 

OnApril 25, 2008, management placed two loans with a balance ofapproximately $4.5 million on non-accrual that were secured by 708 acres ofland and timber appraised at approximately $6.0 million.  In addition, on April 28, 2008,management placed five loans from one customer relationship with a balance ofapproximately $739 thousand on non-accrual that were secured by severalresidential construction and land development properties and two single familyresidential properties appraised at approximately $1.0 million.  The customer has marketed thecollateral for sale in order to pay off the loans.  Theseloans are not reflected in the table above. Management is continuously monitoring these loans in order tominimize any losses.

 

Other real estateconsists of nine properties totaling $747,225 at March 31, 2008.  At March 31, 2008, the Company’s otherreal estate consisted of the following:

 

| 1-4  Family residential properties                   |   | $       | 57,305  |   |
|------------------------------------------------------|--------|---------|---------|--------|
| Construction &  land development properties |   | 689,920 |    |
| Total                                                |   | $       | 747,225 |   |

 

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

 

9

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** **

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

 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)   Recent Accounting 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 relatedinterpretations; and how derivative instruments and related hedged items affectan entity’s financial position, financial performance and cash flows.  The statement is effective for financialstatements issued for fiscal years beginning after November 15, 2008.  The Companydoes not anticipate the new accounting principle to have a material effect onits financial position or results of operation.

 

10

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

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

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

**March 31, 2008****and****2007**

** **

The following discussion of financialcondition as of March 31, 2008compared to December 31, 2007,and the results of operations for the three months ended March 31, 2008 compared to the threemonths ended March 31, 2007should be read in conjunction with the condensed financial statements andaccompanying 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 allowance willbe 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 

 

11

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Commission; and

·                  Our success at managing the risksinvolved in the foregoing.

 

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

#### ** **

**ExecutiveSummary and Recent Developments**

 

### **The Company’s total assets at March 31,2008, were approximately $891,915,000, which represented an increase ofapproximately $39,436,000 or 5% from December 31, 2007.  Net earnings decreased 37% for the threemonths ended March 31, 2008 to $1,189,716 or $0.27 per diluted sharecompared to $1,833,258 or $0.44 per diluted share for the three months ended March 31,2007.**

### ** **

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 has announced a second quarterdividend of $0.03 per share to all shareholders of record as of May 1, 2008.  While the dividends are small in comparisonto overall earnings, the Company expects to continue to grow the Bank and wantsto retain appropriate amounts of capital to facilitate that sustained growth.  Any future determination relating to theCompany declaring dividends will be made at the discretion of our Board ofDirectors and will depend on any statutory and regulatory 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 haveexpanded our loan production office in Valdosta, Georgia into a full-servicebranch during 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 with plans to move to a permanent location during thesecond quarter of 2008.  Our seniormanagement team in northeast Florida is looking at a possible second locationin Duval County in hopes of increasing our presence in this region.

 

12

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**Financial Condition**

 

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

 
| ** **                              | ** ** | **March 31,** | ** **  | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|-----------------------------------------|------------|--------------------|-------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2008**           | ** **  | **2007**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                             |       |               |        |                  |       |              |       |              |       |
| Cash  and due from banks                |       | $                  | 7,964,103   |                  | $          | 8,059,524         |       | $                 | (95,421    | ) | -1.18 | % |
| Federal  funds sold                     |       | 15,928,000         |        | 11,350,000            |       | 4,578,000         |       | 40.33             | %          |
| Securities  available for sale          |       | 76,170,524         |        | 74,387,100            |       | 1,783,424         |       | 2.40              | %          |
| Loans,  net of unearned income          |       | 721,416,116        |        | 697,145,715           |       | 24,270,401        |       | 3.48              | %          |
| Cash  surrender value of life insurance |       | 12,054,178         |        | 4,442,044             |       | 7,612,134         |       | 171.37            | %          |
| Goodwill  and other intangible assets   |       | 22,716,404         |        | 22,806,983            |       | (90,579           | )          | -0.40             | %          |
| Total  assets                           |       | 891,914,778        |        | 852,479,064           |       | 39,435,714        |       | 4.63              | %          |
| **Liabilities:**                        |       |               |        |                  |       |              |       |              |       |
| Deposits                                |       | $                  | 742,615,291 |                  | $          | 705,231,923       |       | $                 | 37,383,368 |   | 5.30 | % |
| FHLB  advances                          |       | 40,500,000         |        | 40,500,000            |       | —            |       | —            |       |
| Accrued  expenses and other liabilities |       | 1,878,765          |        | 1,908,156             |       | (29,391           | )          | -1.54             | %          |
|                                    |       |               |        |                  |       |              |       |              |       |
| Loan  to Deposit Ratio                  |       | 97.15              | %           | 98.85                 | %          |              |       |              |       |

 

One significant change inthe composition of assets was the increase in loans of $24.3 million due tocontinued growth of the Company.  We wereable to generate loan growth by increasing loan growth in the middle Georgia,coastal Georgia and south Georgia regions. Another significant change in the composition of assets was the $7.6million increase in the cash surrender value of life insurance.  The majority of the increase is due to theCompany’s purchase of $7.5 million additional life insurance policies onseveral senior bank officers.  The mostsignificant change in the composition of liabilities was the increase indeposits, especially time deposits, to fund loan growth.  Time deposits, including wholesale and coredeposits, are our principal source of funds for loans and investing insecurities.

 

Because of our strongloan demand, we have chosen to obtain a portion of our deposits from outsideour market.  Our wholesale time deposits represented 44.0% of our depositsas of March 31, 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.

 

### **Asset Quality**

### ** **

### **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 credit policy.  As a result, management believes they have agood understanding of the asset quality, an established warning and earlydetection system regarding the loans and a comprehensive analysis of theallowance for loan losses.**

### ** **

13

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** **

Thefollowing table presents a summary of changes in the allowance for loan lossesfor the three-month periods ended March 31, 2008 and 2007.

 

**Analysisof Changes in Allowance for Loan Losses**

 
| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                 | ** ** |
|                                               |       |                                                 |       |   |   |
| Balance  beginning of period                       |       | $                                                    | 8,879      |   | $ | 7,258 |   |
| Loans  charged-off                                 |       | (132                                                 | )          | (529 | ) |
| Recoveries                                         |       | 9                                                    |       | 17 |   |
| Net  charge-offs                                   |       | (123                                                 | )          | (512 | ) |
| Provision  for loan losses                         |       | 402                                                  |       | 444 |   |
| Allowance  from purchase acquisition               |       | —                                               |       | 1,640 |   |
| Balance  end of period                             |       | $                                                    | 9,158      |   | $ | 8,830 |   |
|                                               |       |                                                 |       |   |   |
| Total  Loans:                                      |       |                                                 |       |   |   |
| At  period end                                     |       | $                                                    | 721,416    |   | $ | 628,080 |   |
| Average                                            |       | 704,639                                              |       | 607,327 |   |
|                                               |       |                                                 |       |   |   |
| As a  percentage of average loans (annualized):    |       |                                                 |       |   |   |
| Net  charge-offs                                   |       | 0.07                                                 | %          | 0.34 | % |
| Provision  for loan losses                         |       | 0.23                                                 | %          | 0.29 | % |
| Allowance  as a percentage of period end loans     |       | 1.27                                                 | %          | 1.41 | % |
| Allowance  as a percentage of non-performing loans |       | 235.32                                               | %          | 259.47 | % |

 

### **Management believes that the allowance for loanlosses at March 31, 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 and other real estate owned. The followingsummarizes non-performing assets:**

### ** **

| ** **                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
|                             | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Accruing loans 90 days  past due |       | $                  | —     |                  | $          | 504,783 |   |
| Non-accrual loans                |       | 3,891,819          |       | 4,276,950             |       |
| Other real estate                |       | 747,225            |       | 758,787               |       |
| Total  non-performing assets     |       | $                  | 4,639,044  |                  | $          | 5,540,520 |   |

 

Nonperforming assetsdecreased $901,476 or 16.3% from December 31, 2007 to March 31, 2008due to several non-accrual loans tied to one customer relationship being paidoff during the first quarter of 2008. The nonperforming assets mainly consist of one loan acquired from ouracquisition of Sapelo National Bank with a balance of approximately $2.9million on non-accrual that is secured by single-family residential real estateappraised at approximately $5.1 million. The borrower filed for bankruptcy protection on April 2, 2007.  On May 6, 2008, the Bank foreclosed onthe property and is currently marketing the property for sale.

 

OnApril 25, 2008, management placed two loans with a balance of approximately$4.5 million on non-accrual that were secured by 708 acres of land and timberappraised at approximately $6.0 million. In addition, on April 28, 2008, management placed five loans fromone customer relationship with a balance of approximately $739 thousand 

 

14

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onnon-accrual that were secured by several residential construction and landdevelopment properties and two single family residential properties appraisedat approximately $ 1.0 million.  Thecustomer has marketed the collateral for sale in order to pay off theloans.  These loans are not reflected in the table above.  Management is continuously monitoringthese loans in order to minimize any losses.

 

Other real estateconsists of nine properties totaling $747,225 at March 31, 2008.  At March 31, 2008, the Company’s otherreal estate consisted of the following:

 

 
| 1-4  Family residential properties                   |   | $       | 57,305  |   |
|------------------------------------------------------|--------|---------|---------|--------|
| Construction &  land development properties |   | 689,920 |    |
| Total                                                |   | $       | 747,225 |   |

 

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

 

Ourpolicy is to place loans on non-accrual status when it appears that the collectionof interest in accordance with the terms of the loan is doubtful.  Any loan which becomes 90 days past due as toprincipal or interest is automatically placed on non-accrual.  Exceptions are allowed for 90-day past dueloans when such loans are well secured and in process of collection.  Other Real Estate is defined as real estateacquired as salvage on uncollectible loans. At the time of foreclosure, an appraisal is obtained on the realestate.  The amount charged to Other RealEstate will be the lower of appraised value or recorded investment in the loansatisfied.  The recorded investment isthe unpaid balance of the loan, increased by accrued and uncollected interest,unamortized premium, finance charges, and loan acquisition costs, if any, and decreasedby previous direct write down and unamortized discount.  Any excess of the recorded investment in theloan satisfied over the appraised value of the property must be charged toallowance for loan losses.

 

### **Results of 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.

 

# **Thefollowing table shows the significant components of net earnings:**

# ** **

| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                      | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest  and Dividend Income   |       | $                                | 14,425,969 |       | $          | 13,865,970        |       | $ | 559,999 |   | 4.04 | % |
| Interest  Expense               |       | 8,148,558                        |       | 7,211,579  |       | 936,979           |       | 12.99 | % |
| Net  Interest Income            |       | 6,277,411                        |       | 6,654,391  |       | (376,980          | )          | -5.67 | % |
| Provision  for Loan Losses      |       | 402,000                          |       | 444,000    |       | (42,000           | )          | -9.46 | % |
| Net  Earnings                   |       | 1,189,716                        |       | 1,883,258  |       | (693,542          | )          | -36.83 | % |
| Net  Earnings Per Diluted Share |       | $                                | 0.27       |       | $          | 0.44              |       | (0.17 | ) | -38.64 | % |
|                                 |            |                                  |            |            |            |                   |            |  |  |  |  |  |

 

15

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# **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 $377,000 or 6% for the three months ended March 31,2008 compared to March 31, 2007.

 

Total interest anddividend income for the three months ended March 31, 2008 increasedapproximately $560,000 or 4% when compared to the three months ended March 31,2007.  This increase is partially theresult of the average loan portfolio for the three months ended March 31,2008 increasing approximately $97 million or 16% when compared to average loanportfolio for the three months ended March 31, 2007.  The average yield on loans decreased duringthe three months ended March 31, 2008 to 7.62% compared to an averageyield of 8.45 % for the three months ended March 31, 2007 primarily due tothe Federal Reserve decreasing the federal funds rate which affects a majorityof the interest rates for our loans.

 

Total interest expensefor the three months ended March 31, 2008 increased approximately $937,000or 13% when compared to the three months ended March 31, 2007.  Two factors impact interest expense: averagebalances of deposit and borrowing portfolios and average rates paid oneach.  Average deposit balances increasedapproximately $90.6 million when comparing the three months ended March 31,2008 to the three months ended March 31, 2007.  The increase of $90.6 million includesapproximately $1.4 million in non-interest bearing balances in regular demanddeposit accounts.  The average rate paidon the deposit portfolios for the three months ended March 31, 2008decreased to 4.53% from 4.57% when compared to the three months ended March 31,2007.   Average borrowing balancesincreased approximately $7.3 million when comparing the three months ended March 31,2008 to the three months ended March 31, 2007.  Average interest rates paid on borrowingswere 4.47% for the three months ended March 31, 2008 compared to 5.23% forthe three months ended March 31, 2007.

 

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, whichincludes the positive impact of funding a portion of earning assets withcustomers’ non-interest-bearing deposits and with shareholders’ equity.

 

For the three monthsended March 31, 2008 and 2007, our tax equivalent net interest spread was2.82% and 3.35%, respectively, while the tax equivalent net interest margin was3.22% and 3.85%, respectively.  Thedecreases in net interest spread and net interest margin from first quarter2007 to first quarter 2008 were due to our promotions of higher short-termyields on retail time deposits in order to fund loan growth and to invest ininvestment securities and the effect of the Federal Reserve’s action inlowering short-term rates starting in the second quarter of 2007 and continuingin the first quarter of 2008 on the Company’s slightly asset-sensitive balancesheet.

 

16

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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.

 

**Average Consolidated BalanceSheet and Net Interest Margin Analysis**

 
| ** **                                           | ** ** | **For the Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(Dollar amounts in thousands)**                       | ** ** |
| ** **                                           | ** ** | **Average**                                                            | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                           | ** ** | **Balance**                                                            | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                       |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6) |       | $                                                                      | 704,639    |   | $ | 13,429 |   | 7.62 | % | $ | 607,327 |   | $ | 12,814 |   | 8.45 | % |
| Federal funds  sold                                  |       | 10,927                                                                 |       | 81 |   | 2.97 | % | 19,134 |   | 243 |   | 5.08 | % |
| Investment  securities - taxable (7)                 |       | 51,045                                                                 |       | 637 |   | 4.99 | % | 52,141 |   | 563 |   | 4.32 | % |
| Investment  securities - tax-exempt (6) (7)     |       | 20,271                                                                 |       | 200 |   | 5.98 | % | 18,304 |   | 158 |   | 5.23 | % |
| Other interest  and dividend income                  |       | 5,111                                                                  |       | 79 |   | 6.18 | % | 3,941 |   | 88 |   | 8.93 | % |
| Total Earning  Assets                                |       | 791,993                                                                |       | 14,426 |   | 7.34 | % | 700,847 |   | 13,866 |   | 7.97 | % |
|                                                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                         |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                           |       | -9,054                                                                 |       |   |   |   |   | -8,862 |   |   |   |   |   |
| Cash and due  from banks                             |       | 9,274                                                                  |       |   |   |   |   | 13,074 |   |   |   |   |   |
| Premises and  equipment                              |       | 28,050                                                                 |       |   |   |   |   | 20,919 |   |   |   |   |   |
| Accrued interest  receivable                         |       | 7,420                                                                  |       |   |   |   |   | 5,967 |   |   |   |   |   |
| Other assets                                         |       | 38,451                                                                 |       |   |   |   |   | 20,759 |   |   |   |   |   |
| Total Assets                                         |       | $                                                                      | 866,134    |   |   |   |   |   | $ | 752,704 |   |   |   |   |   |
|                                                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                        |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                             |       | $                                                                      | 108,038    |   | $ | 648 |   | 2.40 | % | $ | 109,170 |   | $ | 832 |   | 3.05 | % |
| Savings                                              |       | 7,864                                                                  |       | 11 |   | 0.56 | % | 8,357 |   | 11 |   | 0.53 | % |
| Time deposits                                        |       | 550,936                                                                |       | 6,888 |   | 5.00 | % | 460,184 |   | 5,759 |   | 5.01 | % |
| Total interest  bearing deposits                     |       | 666,838                                                                |       | 7,547 |   | 4.53 | % | 577,711 |   | 6,602 |   | 4.57 | % |
| Federal Home  Loan Bank advances                     |       | 40,440                                                                 |       | 401 |   | 3.97 | % | 34,355 |   | 394 |   | 4.59 | % |
| Other borrowings                                     |       | 3,149                                                                  |       | 25 |   | 3.18 | % | 1,957 |   | 25 |   | 5.11 | % |
| Trust Preferred  Securities                          |       | 10,310                                                                 |       | 176 |   | 6.83 | % | 10,310 |   | 191 |   | 7.41 | % |
| Total borrowed  funds                                |       | 53,899                                                                 |       | 602 |   | 4.47 | % | 46,622 |   | 610 |   | 5.23 | % |
| Total  interest-bearing liabilities                  |       | 720,737                                                                |       | 8,149 |   | 4.52 | % | 624,333 |   | 7,212 |   | 4.62 | % |
|                                                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 47,175                                                                 |       |   |   |   |   | 45,737 |   |   |   |   |   |
| Other  liabilities                                   |       | 8,413                                                                  |       |   |   |   |   | 7,230 |   |   |   |   |   |
| Stockholder’s  equity                           |       | 89,809                                                                 |       |   |   |   |   | 75,404 |   |   |   |   |   |
| Total  Liabilities and Stockholder’s Equity     |       | $                                                                      | 866,134    |   |   |   |   |   | $ | 752,704 |   |   |   |   |   |
| Net interest  revenue (1)                            |       |                                                                   |       | $ | 6,277 |   |   |   |   |   | $ | 6,654 |   |   |   |
| Net interest  spread (2) (6)                    |       |                                                                   |       |   |   | 2.82 | % |   |   |   |   | 3.35 | % |
| Net interest  margin (3) (6)                    |       |                                                                   |       |   |   | 3.22 | % |   |   |   |   | 3.85 | % |

 

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(1) Net interest revenue is computed bysubtracting the expense from the average interest-bearing liabilities from theincome from the average earning assets.

(2) Net interest spread is computed bysubtracting the yield from the expense of the average interest-bearingliabilities from the yield from the average earning assets.

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

(4) Average loans are shown net of unearnedincome.  Included in the average balanceof loans outstanding are loans where the accrual of interest has beendiscounted.

(5) Interestincome includes loan fees as follows (in thousands): 2008 - $447; 2007 - $551

(6) Reflectstaxable equivalent adjustments using a tax rate of 34 percent.

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

 

17

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The following tableprovides a detailed analysis of the changes in interest income and interestexpense due to changes in rate and volume for the three months ended March 31,2008 compared to March 31, 2007.

 

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

 
| ** **                                    | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Compared to 2007**                                 | ** ** |
| ** **                                    | ** ** | **Changes due to (a)**                          | ** ** |
| ** **                                    | ** ** | ** **                                                     | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Volume**                                                     | ** ** | **Rate** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **(Amounts in thousands)**                           | ** ** |
| Interest earned  on:                          |       |                                                           |       |   |   |   |   |
| Loans                                         |       | $                                                              | 2,049      |   | $ | (1,434 | ) | $ | 615 |   |
| Investment  securities:                       |       |                                                           |       |   |   |   |   |
| Taxable  investment securities                |       | (12                                                            | )          | 86 |   | 74 |   |
| Tax-exempt  investment securities             |       | 18                                                             |       | 24 |   | 42 |   |
| Interest earning  deposits and fed funds sold |       | (68                                                            | )          | (103 | ) | (171 | ) |
| Total interest  income                        |       | 1,987                                                          |       | (1,427 | ) | 560 |   |
|                                          |       |                                                           |       |   |   |   |   |
| Interest paid  on:                            |       |                                                           |       |   |   |   |   |
| Deposits:                                     |       |                                                           |       |   |   |   |   |
| Interest bearing  demand deposits             |       | (21                                                            | )          | (163 | ) | (184 | ) |
| Savings                                       |       | (1                                                             | )          | 1 |   | — |   |
| Time deposits                                 |       | 1,199                                                          |       | (70 | ) | 1,129 |   |
| Other borrowings  and FHLB advances           |       | 77                                                             |       | (70 | ) | 7 |   |
| Trust Preferred  Securities                   |       | —                                                         |       | (15 | ) | (15 | ) |
| Total interest  expense                       |       | 1,254                                                          |       | (317 | ) | 937 |   |
|                                          |       |                                                           |       |   |   |   |   |
| Increase in net  interest revenue             |       | $                                                              | 733        |   | $ | (1,110 | ) | $ | (377 | ) |

 

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(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 three months ended March 31, 2008, was $402,000 compared to$444,000 for the same period of 2007. This is due to continued loan growth for the respective periods.  Net charge-offs as an annualized percentageof average outstanding loans for the three months ended March 31, 2008were 0.07%, as compared with 0.34% for the first quarter of 2007.  Net loan charge-offs decreased significantlythis quarter as compared to the first quarter of 2007 due to the Companycharging off $300,000 in the first quarter of 2007 for one participationpurchased loan with the Company’s portion of the foreclosed property beingrecorded to other real estate at fair market 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:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts            |       | $                                | 416,442    |       | $          | 281,008           |       | $ | 135,434 |   | 48.20 | % |
| Other service  charges, commissions and fees    |       | 109,883                          |       | 61,336     |       | 48,547            |       | 79.15 | % |
| (Loss) gain on  sale of other assets            |       | (13,650                          | )          | 1,287      |       | (14,937           | )          | -1160.61 | % |
| Gain on sales /  calls of investment securities |       | 31,840                           |       | 75         |       | 31,765            |       | 42353.33 | % |
| Mortgage  origination income                    |       | 237,826                          |       | 206,120    |       | 31,706            |       | 15.38 | % |
| Other income                                    |       | 207,082                          |       | 139,552    |       | 67,530            |       | 48.39 | % |
| Total  noninterest income                       |       | $                                | 989,423    |       | $          | 689,378           |       | $ | 300,045 |   | 43.52 | % |

 

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, including non-sufficientfunds fees, were $416 thousand, or 42% of total noninterest income for thefirst quarter of 2008 compared with $281 thousand, or 41% for the first quarterof 2007.  The year-over-year increase inservice charges on deposit accounts is directly related to the increase in thenumber of our core transaction deposit accounts.  The number of deposit accounts for the threemonths ended March 31, 2008 was 12,709 accounts when compared to the sameperiod of 2007 with 12,223 accounts.  Themost significant change in other income for the first quarter of 2008 is$112,134 of income from the net earnings on cash surrender value of lifeinsurance on bank owned life insurance (“BOLI”) policies as compared to $40,933for the three months ended March 31, 2007. During the first quarter of 2008, the Bank purchased an additional $7.5million in BOLI policies on several senior bank officers.  The increase in the gain on sales/calls ofinvestment securities is due to several investment securities being calledbefore their maturity date.

 

# **Non-interestExpense**

 

Composition of othernoninterest expense is as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                | 2,129,856  |       | $          | 1,679,271         |       | $ | 450,585 |   | 26.83 | % |
| Employee  benefits                              |       | 734,225                          |       | 554,920    |       | 179,305           |       | 32.31 | % |
| Occupancy  expense                              |       | 448,798                          |       | 323,329    |       | 125,469           |       | 38.81 | % |
| Equipment rental  and depreciation of equipment |       | 264,014                          |       | 180,176    |       | 83,838            |       | 46.53 | % |
| Other expenses                                  |       | 1,597,074                        |       | 1,264,213  |       | 332,861           |       | 26.33 | % |
| Total  noninterest expense                      |       | $                                | 5,173,967  |       | $          | 4,001,909         |       | $ | 1,172,058 |   | 29.29 | % |

 

The increases innon-interest expenses are primarily due to the growth of the bank.  The most significant increases in the firstquarter 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 March 31, 2008,the number of full-time equivalent employees was 170 compared to 151 at March 31,2007.  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.  For the quarter ended March 31,2008, the Bank also experienced three full months of non-interest expense fromthe branches acquired from the First Community Bank acquisition in January 2007versus having two months of expenses for the quarter ending March 31,2007.  The Bank operates 

 

19

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from seventeen facilitiesas of March 31, 2008 compared to fifteen facilities as of March 31,2007.  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 29.64% and 35.01%for the three months ended March 31, 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 three months ended March 31, 2008, the tax-free incomeexpressed as a percentage of earnings before income taxes was 12.11% whencompared to 6.35% for the three months ended March 31, 2007.  The increase in tax-free income is due to anincrease in the interest revenue on certain investment securities and loansthat are exempt from income taxes.

 

### **Liquidity**

 

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.

 

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 $25 million. At March 31, 2008, the Company had nofederal funds purchased. The Company has a total available line of $42,290,000,subject to available collateral, from the Federal Home Loan Bank. The Companyhas $40,500,000 in advances on this line at March 31, 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 March 31, 2008 and 2007 were 12.62% and 12.54%, 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), andof Tier I capital (as defined) to average assets (as defined).  Management believes, 

 

20

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as of March 31, 2008and as of December 31, 2007, that the Company and the Bank met all capitaladequacy requirements to which they are subject.

 

As of March 31,2008, 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.

 

The Company’s and theBank’s actual capital amounts and ratios as of March 31, 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** | ** ** |
| ***March 31,  2008***                         |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Total Risk-Based  Capital To Risk Weighted Assets: |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Consolidated                                       |       | $          | 86,105,000 |                       | 11.30      | %                          | $          | 60,959,292                            |       | >  |       | 8.0                                       | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 84,116,000 |       | 11.05                      | %          | 60,898,462                 |       | >                             |       | 8.0        | %          | 76,123,077                                |       | >  |   | 10.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Tier I Capital  To Risk Weighted Assets:           |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Consolidated                                       |       | $          | 76,947,000 |                       | 10.10      | %                          | $          | 30,474,059                            |       | >  |       | 4.0                                       | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 74,958,000 |       | 9.85                       | %          | 30,439,797                 |       | >                             |       | 4.0        | %          | 45,659,695                                |       | >  |   | 6.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Tier I Capital  To Average Assets                  |       |       |       |                       |       |                       |       |                                  |       |       |       |                                      |       |   |   |   |   |
| Consolidated                                       |       | $          | 76,947,000 |                       | 9.12       | %                          | $          | 33,748,684                            |       | >  |       | 4.0                                       | %          | N/A |   |   |   | N/A |   |
| Bank                                               |       | 74,958,000 |       | 8.90                       | %          | 33,688,989                 |       | >                             |       | 4.0        | %          | 42,111,236                                |       | >  |   | 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 March 31, 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 March 31, 2008, all of the TrustPreferred Securities qualify as a Tier I capital.

 

21

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

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

**For the Three months Ended March 31, 2008**

 

As of March 31,2008, there were no substantial changes in the composition of the Company’smarket-sensitive assets and liabilities or their related market values fromthat reported as of December 31, 2007. The foregoing disclosures relatedto the market risk of the Company should be read in conjunction with theCompany’s audited consolidated financial statements, related notes andmanagement’s discussion and analysis of financial condition and results ofoperations for the year ended December 31, 2007 included in the Company’s2007 Annual Report on Form 10-K.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Item 4. Controls and Procedures**

**For the Three months Ended March 31, 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,including the Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosures of thatinformation under the Securities and Exchange Commission’s rules and formsand that the Company’s disclosure controls and procedures are designed toensure that the information required to be disclosed in reports that are filedor submitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

#### **During the first quarter of 2008, there were no significantchanges in the Company’s internal control over financial reporting or, to theCompany’s knowledge, in other factors that could significantly affect thoseinternal controls subsequent to the date the Company carried out its evaluationthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.**

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Part II.Other Information**

**For the Three months Ended March 31, 2008**

 

PART II: OTHERINFORMATION:

 

Item1. Legal Proceedings

 

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

 

Item1A. Risk Factors

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2007, which could materially affect our business, financial condition or futureresults.  The risks described in ourAnnual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and / oroperation results.

 

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item3. Defaults Upon Senior Securities

 

NotApplicable

 

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

 

None

 

Item5. Other Information

 

None

 

Item6. Exhibits

 

(a)            Exhibits:

 

31.1         Certification of Chief Executive OfficerPursuant to Rule 13a-14 under the Securities Exchange Act of 1934, asamended

 

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

 

32            Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

**SIGNATURES**

 

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

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

 

 
| /s/ Mark A. Stevens                   |   |
|---------------------------------------|--------|
|                                  |   |
| Mark A. Stevens                       |   |
| President and Chief Executive Officer |   |
|                                  |   |
|                                  |   |
| Date: May 9, 2008                |   |

 

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