** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 
| **x**** ** | **Quarterly report under Section  13 or 15 (d) of the Securities Exchange Act of 1934**                                                                                                                                                     |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | **For the quarterly period  ended September 30, 2007**                                                                                                                                                                                 |
| ** **      | ** **                                                                                                                                                                                                                                  | ** ** |
| **o**           | **Transition report under Section  13 or 15 (d) of the Exchange Act**                                                                                                                                                                       |
| ** **      | **For the transition period  from                   to              ** |

 

**CommissionFile Number  000-51112**

 

**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

(Exact Name 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)757-8181**

(Issuer’sTelephone Number, Including Area Code)

 

###### **4077 Forsyth Road, Macon,Georgia 31210**

(Former Address,if Changed Since Last Report)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes   x     No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” (in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   o       Acceleratedfiler  x       Non-acceleratedfiler  o

 

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,4,151,779 shares outstanding at October  31, 2007**

 

 

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**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 – September 30, 2007  (unaudited) and December 31, 2006  (audited).                                        | 2        |
|                                                                                                       |                                                                                                                                         |     |
|                                                                                                       | Consolidated Statements  of Earnings (unaudited) – For the Three Months And Nine Months Ended  September 30, 2007 and 2006.             | 3        |
|                                                                                                       |                                                                                                                                         |     |
|                                                                                                       | Consolidated Statements  of Comprehensive Income (unaudited) – For the Three Months and Nine Months  Ended September 30, 2007 and 2006. | 4        |
|                                                                                                       |                                                                                                                                         |     |
|                                                                                                       | Consolidated Statements  of Cash Flows (unaudited) – For the Nine Months Ended September 30, 2007 and 2006.                             | 5        |
|                                                                                                       |                                                                                                                                         |     |
|                                                                                                       | Notes to Consolidated  Financial Statements (unaudited)                                                                                      | 6        |
|                                                                                                       |                                                                                                                                         |     |
| ITEM 2.                                                                                                    | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                                  | 9        |
|                                                                                                       |                                                                                                                                         |     |
| ITEM 3.                                                                                                    | Quantitative and  Qualitative Disclosures About Market Risk                                                                                  | 24       |
|                                                                                                       |                                                                                                                                         |     |
| ITEM 4.                                                                                                    | Controls and Procedures                                                                                                                      | 25       |
|                                                                                                       |                                                                                                                                         |     |
| PART II:                                                                                                   | OTHER INFORMATION                                                                                                                            | 26       |

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Balance Sheets**

**September 30, 2007****(Unaudited) and****December 31, 2006****(Audited)**

 
| ** **                                                                                                                 | ** ** | **As of**         | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                                                                 | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                                 | ** ** | **2007**               | ** **  | **2006** | ** ** |
| **Assets**                                                                                                                 |       |                   |        |   |   |
| ** **                                                                                                                 |       |                   |        |   |   |
| Cash and due  from banks                                                                                                   |       | $                      | 12,677,862  |   | $ | 13,130,014 |   |
| Interest-bearing  deposits in other banks                                                                                  |       | 730,007                |        | 259,463 |   |
| Federal funds  sold                                                                                                        |       | 12,126,000             |        | 29,522,000 |   |
| Total cash and  cash equivalents                                                                                           |       | 25,533,869             |        | 42,911,477 |   |
| Securities  available for sale, at fair value                                                                              |       | 76,148,287             |        | 57,596,002 |   |
| Federal Home  Loan Bank stock, restricted, at cost                                                                         |       | 2,892,000              |        | 2,327,600 |   |
| Loans held for  sale                                                                                                       |       | 3,191,365              |        | 1,532,093 |   |
| Loans, net of  unearned income                                                                                             |       | 662,604,756            |        | 533,128,702 |   |
| Less - allowance  for loan losses                                                                                          |       | (9,174,591             | )           | (7,258,371 | ) |
| Loans, net                                                                                                                 |       | 653,430,165            |        | 525,870,331 |   |
| Bank premises  and equipment, net                                                                                          |       | 27,144,847             |        | 17,425,344 |   |
| Accrued interest  receivable                                                                                               |       | 7,065,837              |        | 5,570,115 |   |
| Cash surrender  value of life insurance                                                                                    |       | 4,395,988              |        | 4,264,395 |   |
| Goodwill and  other intangible assets, net of amortization                                                                 |       | 21,803,684             |        | 10,600,276 |   |
| Other assets                                                                                                               |       | 3,284,165              |        | 2,977,859 |   |
| **Total  Assets**                                                                                                          |       | $                      | 824,890,207 |   | $ | 671,075,492 |   |
|                                                                                                                       |       |                   |        |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                             | ** ** | ** **             | ** **  | ** ** | ** ** |
| Deposits:                                                                                                                  |       |                   |        |   |   |
| Non-interest  bearing                                                                                                      |       | $                      | 44,428,562  |   | $ | 34,453,507 |   |
| Money market and  NOW accounts                                                                                             |       | 111,870,090            |        | 94,942,442 |   |
| Savings                                                                                                                    |       | 8,556,109              |        | 4,200,929 |   |
| Time deposits                                                                                                              |       | 521,015,572            |        | 423,397,729 |   |
| Total deposits                                                                                                             |       | 685,870,333            |        | 556,994,607 |   |
| Federal Home  Loan Bank advances                                                                                           |       | 34,700,000             |        | 31,700,000 |   |
| Junior  subordinated debentures                                                                                            |       | 10,310,000             |        | 10,310,000 |   |
| Accrued interest  payable                                                                                                  |       | 5,201,548              |        | 3,202,163 |   |
| Accrued expenses  and other liabilities                                                                                    |       | 2,127,918              |        | 6,636,790 |   |
| Total  liabilities                                                                                                         |       | 738,209,799            |        | 608,843,560 |   |
| Shareholders’  Equity:                                                                                                |       |                   |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, no shares outstanding                                                       |       | —                 |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, issued and outstanding 4,151,779 in  2007 and 3,609,747 in 2006 |       | 20,758,895             |        | 18,048,735 |   |
| Paid-in capital  surplus                                                                                                   |       | 53,407,223             |        | 37,806,852 |   |
| Retained  earnings                                                                                                         |       | 12,864,599             |        | 6,862,246 |   |
| Accumulated  other comprehensive income (loss)                                                                             |       | (350,309               | )           | (485,901 | ) |
| Total  shareholders’ equity                                                                                           |       | 86,680,408             |        | 62,231,932 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                                       |       | $                      | 824,890,207 |   | $ | 671,075,492 |   |

 

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

** **

2

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Earnings**

**For the Three Months and Nine Months EndedSeptember 30, 2007 and 2006**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest  and Dividend Income:**                     |       |                             |       |                            |       |   |   |   |   |
| Interest and  fees on loans                            |       | $                                | 14,303,957 |                            | $          | 9,587,933 |   | $ | 40,948,229 |   | $ | 25,054,807 |   |
| Interest on  securities:                               |       |                             |       |                            |       |   |   |   |   |
| Taxable income                                         |       | 677,118                          |       | 419,658                         |       | 1,852,529 |   | 1,072,532 |   |
| Non-taxable  income                                    |       | 177,072                          |       | 63,208                          |       | 514,508 |   | 163,999 |   |
| Income on  federal funds sold                          |       | 79,698                           |       | 85,696                          |       | 445,494 |   | 216,976 |   |
| Other interest  and dividend income                    |       | 62,363                           |       | 31,227                          |       | 211,579 |   | 79,041 |   |
| Total interest  and dividend income                    |       | 15,300,208                       |       | 10,187,722                      |       | 43,972,339 |   | 26,587,355 |   |
| **Interest  Expense:**                                 |       |                             |       |                            |       |   |   |   |   |
| Deposits                                               |       | 7,524,581                        |       | 4,597,347                       |       | 21,256,737 |   | 11,639,285 |   |
| Junior  subordinated debentures                        |       | 196,482                          |       | 194,691                         |       | 580,456 |   | 548,399 |   |
| Federal funds  purchased                               |       | 23,369                           |       | 9,270                           |       | 66,362 |   | 65,420 |   |
| FHLB borrowings  and other interest expense            |       | 414,983                          |       | 313,418                         |       | 1,209,052 |   | 740,642 |   |
| Total interest  expense                                |       | 8,159,415                        |       | 5,114,726                       |       | 23,112,607 |   | 12,993,746 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net interest  income                                   |       | 7,140,793                        |       | 5,072,996                       |       | 20,859,732 |   | 13,593,609 |   |
| **Provision  for loan losses**                         |       | 48,000                           |       | 468,000                         |       | 640,000 |   | 1,389,000 |   |
| Net interest  income after provision for loan losses   |       | 7,092,793                        |       | 4,604,996                       |       | 20,219,732 |   | 12,204,609 |   |
| **Noninterest  Income:**                               |       |                             |       |                            |       |   |   |   |   |
| Service charges  on deposit accounts                   |       | 403,522                          |       | 127,016                         |       | 990,910 |   | 351,315 |   |
| Other service  charges, commissions and fees           |       | 101,147                          |       | 26,205                          |       | 260,425 |   | 75,597 |   |
| Gain (loss) on  sales / calls of investment securities |       | 3,408                            |       | —                          |       | 3,101 |   | (9,753 | ) |
| Gain (loss) on  sale of other assets                   |       | 1,946                            |       | (1,022                          | )          | 96,505 |   | 1,873 |   |
| Mortgage  origination income                           |       | 276,288                          |       | 154,317                         |       | 725,534 |   | 434,646 |   |
| Other income                                           |       | 162,163                          |       | 92,493                          |       | 471,150 |   | 347,777 |   |
| Total  noninterest income                              |       | 948,474                          |       | 399,009                         |       | 2,547,625 |   | 1,201,455 |   |
| **Noninterest  Expense:**                              |       |                             |       |                            |       |   |   |   |   |
| Salaries                                               |       | 1,950,593                        |       | 1,050,909                       |       | 5,485,480 |   | 2,795,543 |   |
| Employee  benefits                                     |       | 669,720                          |       | 277,567                         |       | 1,879,072 |   | 980,627 |   |
| Occupancy  expense                                     |       | 367,025                          |       | 188,029                         |       | 1,047,063 |   | 570,215 |   |
| Equipment rental  and depreciation of equipment        |       | 237,285                          |       | 102,671                         |       | 628,939 |   | 299,158 |   |
| Other expenses                                         |       | 1,658,511                        |       | 795,798                         |       | 4,514,368 |   | 2,355,048 |   |
| Total  noninterest expense                             |       | 4,883,134                        |       | 2,414,974                       |       | 13,554,922 |   | 7,000,591 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| **Earnings  Before Income Taxes**                      |       | 3,158,133                        |       | 2,589,031                       |       | 9,212,435 |   | 6,405,473 |   |
| Provision for  income taxes                            |       | 1,097,260                        |       | 911,000                         |       | 3,210,082 |   | 2,306,156 |   |
| **Net  Earnings**                                      |       | $                                | 2,060,873  |                            | $          | 1,678,031 |   | $ | 6,002,353 |   | $ | 4,099,317 |   |
| **Earnings  per share:**                               |       |                             |       |                            |       |   |   |   |   |
| Basic                                                  |       | $                                | 0.50       |                            | $          | 0.51 |   | $ | 1.47 |   | $ | 1.40 |   |
| Diluted                                                |       | $                                | 0.46       |                            | $          | 0.46 |   | $ | 1.35 |   | $ | 1.26 |   |

 

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

 

3

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Comprehensive Income**

**For the Three Months and Nine Months EndedSeptember 30, 2007 and 2006**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings                                                                                           |       | $                                                        | 2,060,873  |                                                    | $          | 1,678,031 |   | $ | 6,002,353 |   | $ | 4,099,317 |   |
| Other  comprehensive income (loss):                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized  holding gain (losses) on investment securities available for sale                          |       | 1,125,727                                                |       | 543,379                                                 |       | 94,076 |   | (64,892 | ) |
| Unrealized  holding gains (losses) on derivative financial instruments classified as cash  flow hedges |       | 30,230                                                   |       | 18,848                                                  |       | 114,465 |   | (51,287 | ) |
| Reclassification  adjustment for (gains) losses realized in net earnings                               |       | (3,408                                                   | )          | —                                                  |       | (3,101 | ) | 9,753 |   |
| Total other  comprehensive income (loss), before tax                                                   |       | 1,152,549                                                |       | 562,227                                                 |       | 205,440 |   | (106,426 | ) |
| Income taxes  related to other comprehensive (income) loss:                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized  holding (gains) losses on investment securities available for sale                         |       | (382,748                                                 | )          | (184,749                                                | )          | (31,985 | ) | 22,063 |   |
| Unrealized  holding (gains) losses on derivative financial instruments classified as cash  flow hedges |       | (10,277                                                  | )          | (6,408                                                  | )          | (38,918 | ) | 17,438 |   |
| Reclassification  adjustment for gains (losses) realized in net earnings                               |       | 1,159                                                    |       | —                                                  |       | 1,055 |   | (3,316 | ) |
| Total income  taxes related to other comprehensive (income) loss                                       |       | (391,866                                                 | )          | (191,157                                                | )          | (69,848 | ) | 36,185 |   |
| Total other  comprehensive income (loss), net of tax                                                   |       | 760,683                                                  |       | 371,070                                                 |       | 135,592 |   | (70,241 | ) |
| Total  comprehensive income                                                                            |       | $                                                        | 2,821,556  |                                                    | $          | 2,049,101 |   | $ | 6,137,945 |   | $ | 4,029,076 |   |

 

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

* *

4

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Consolidated Statements of Cash Flows**

**For the Nine Months Ended September 30, 2007 and2006**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                                  |       |                                                    |       |   |   |
| Net earnings                                                                                |       | $                                                       | 6,002,353  |   | $ | 4,099,317 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:        |       |                                                    |       |   |   |
| Provision for  loan losses                                                                  |       | 640,000                                                 |       | 1,389,000 |   |
| Depreciation                                                                                |       | 781,144                                                 |       | 379,128 |   |
| Stock based  compensation                                                                   |       | 17,952                                                  |       | — |   |
| Amortization and  (accretion), net                                                          |       | 147,752                                                 |       | 22,051 |   |
| Gain on sales of  assets                                                                    |       | (96,505                                                 | )          | (1,873 | ) |
| (Gain) loss on  sales / calls of investment securities                                      |       | (3,101                                                  | )          | 9,753 |   |
| Change in cash  surrender value of life insurance                                           |       | (131,593                                                | )          | (122,799 | ) |
| Changes in assets  and liabilities, net of effects of purchase acquisition in 2007:         |       |                                                    |       |   |   |
| Loans held for  sale                                                                        |       | (1,659,272                                              | )          | (1,832,682 | ) |
| Changes in  accrued income and other assets                                                 |       | 358,745                                                 |       | (2,131,835 | ) |
| Changes in  accrued expenses and other liabilities                                          |       | 1,977,627                                               |       | 1,012,933 |   |
| Net cash  provided by operating activities                                                  |       | 8,035,102                                               |       | 2,822,993 |   |
| **Cash  Flows from Investing Activities, net of effects of purchase acquisition in  2007:** |       |                                                    |       |   |   |
| Net change in  loans to customers                                                           |       | (81,045,120                                             | )          | (115,440,909 | ) |
| Purchase of  available for sale securities                                                  |       | (14,336,829                                             | )          | (17,644,693 | ) |
| Proceeds from  sales, calls, maturities and paydowns of available for sale securities       |       | 7,789,165                                               |       | 3,560,252 |   |
| Cash received  from First Community, net of cash paid of $235,034                           |       | 5,556,520                                               |       | — |   |
| Cash paid to Sapelo  shareholders                                                           |       | (5,322,492                                              | )          | — |   |
| Purchase of FHLB  stock                                                                     |       | (292,900                                                | )          | (790,000 | ) |
| Property and  equipment expenditures                                                        |       | (8,434,964                                              | )          | (2,805,714 | ) |
| Proceeds from  sales of assets                                                              |       | 413,857                                                 |       | — |   |
| Net cash used in  investing activities                                                      |       | (95,672,763                                             | )          | (133,121,064 | ) |
| **Cash  Flows from Financing Activities, net of effects of purchase acquisition in  2007:** |       |                                                    |       |   |   |
| Net change in  deposits                                                                     |       | 70,358,099                                              |       | 120,015,871 |   |
| Advances on FHLB  borrowings                                                                |       | 28,400,000                                              |       | 12,000,000 |   |
| Payments on FHLB  borrowings                                                                |       | (28,400,000                                             | )          | — |   |
| Payment for  fractional shares                                                              |       | (10,320                                                 | )          | — |   |
| Payment for  issuance of common stock                                                       |       | (87,726                                                 | )          | — |   |
| Proceeds from  issuance of common stock, net of issuance cost of $211,312                   |       | —                                                  |       | 20,788,688 |   |
| Net cash  provided by financing activities                                                  |       | 70,260,053                                              |       | 152,804,559 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                   |       | (17,377,608                                             | )          | 22,506,488 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                           |       | 42,911,477                                              |       | 5,782,394 |   |
| **Cash  and Cash Equivalents, End of Quarter**                                              |       | $                                                       | 25,533,869 |   | $ | 28,288,882 |   |

 

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

* *

5

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** **

**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

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

# ** **

The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and therefore do not include all information andfootnotes necessary for a fair presentation of financial position, results ofoperations, and changes in financial position in conformity with generallyaccepted 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 interimconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006. Certainreclassifications have been made to the 2006 financial statement presentationto correspond to the current year’s format.

 

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

 

The Company granted 8,000 options during thefirst quarter 2007. There were no grants issued during the second or thirdquarter of 2007. The Company recognized $17,952 of stock-based employeecompensation expense during the first nine months of 2007 associated with itsstock option grants. The Company is recognizing the compensation expense forstock option grants with graded vesting schedules on a straight-line basis overthe requisite service period of the award as permitted by SFAS No. 123 (R). Asof September 30, 2007, there was $101,728 of unrecognized compensation costrelated to stock option grants. The cost is expected to be recognized over thevesting period of approximately five years.

 

The weighted average grant-date fair value of eachoption granted during the first quarter 2007 was $14.96. The fair value of eachoption is estimated on the date of grant using the Black-Scholes Model. Thefollowing weighted average assumptions were used for grants in the firstquarter 2007:

 
| Dividend yield           |   | 0.00     | %      |
|--------------------------|--------|----------|--------|
| Expected  volatility     |   | 21.58    | %      |
| Risk-free  interest rate |   | 4.75     | %      |
| Expected term            |   | 10 years |   |

 

# ***(3)****        **Net Earningsper 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:

 

6

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| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Net earnings                                                                |       | $                                | 2,060,873  |                            | $          | 1,678,031 |   | $ | 6,002,353 |   | $ | 4,099,317 |   |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common shares outstanding                                 |       | 4,151,779                        |       | 3,304,052                       |       | 4,092,215 |   | 2,922,397 |   |
| Shares issued  from assumed exercise of common stock equivalents            |       | 331,888                          |       | 339,341                         |       | 342,049 |   | 333,512 |   |
| Weighted average  number of common and common equivalent shares outstanding |       | 4,483,667                        |       | 3,643,393                       |       | 4,434,264 |   | 3,255,909 |   |
| Earnings per  share:                                                        |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                       |       | $                                | 0.50       |                            | $          | 0.51 |   | $ | 1.47 |   | $ | 1.40 |   |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Diluted                                                                     |       | $                                | 0.46       |                            | $          | 0.46 |   | $ | 1.35 |   | $ | 1.26 |   |

*** ***

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

 

On January 31, 2007, theCompany consummated an agreement to acquire all of the outstanding shares ofFirst Community Bank for $18.6 million in Atlantic Southern common stockincluding certain acquisition costs totaling $235,034. Under the terms of themerger agreement, the Company issued, and shareholders of First Community Bankwere entitled to receive their pro rata portion of 542,032 shares of AtlanticSouthern common stock. First Community Bank was a community bank headquarteredin Roberta, Georgia. First Community Bank had total assets of $69.3 million,including total loans of $50 million and total investments of $11.9 million. Additionally,First Community Bank had $58.6 million in deposits. With the acquisition ofFirst Community Bank, the Company was able to expand their presence in themiddle Georgia area. First Community Bank operated three full service bankingoffices in Crawford, Bibb and Peach counties of Georgia. The Company accountedfor the transaction using the purchase method and accordingly, the purchaseprice was allocated to assets and liabilities acquired based upon their fairvalues at the date of the acquisition. The excess of the purchase price overthe fair value of the net assets acquired (goodwill) was approximately $9.9million, none of which will be deductible for income tax purposes. Operationsof First Community Bank are included in the consolidated statements of earningssince its acquisition.

 

In conjunction with theacquisition, assets were acquired and liabilities were assumed as follows:

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

 

On August 10, 2007, the Company and CenterState Banksof Florida, Inc. (“CSB”) and its wholly owned subsidiary CenterState Bank MidFlorida (“Target”) entered into an agreement pursuant to which CenterState BankWest Florida, National Association (“West Florida”) will purchase all theassets and assume the liabilities of Target, except for Target’s main officeand a minimum amount of capital and deposits required by banking laws. Target will then be acquired by the Company.  Under the terms of theagreement, the Company will pay CSB in immediately available funds, an amountequal to the sum of $1,000,000, less the $100,000 deposit CSB received from theCompany when the agreement was executed, plus an amount equal to the aggregatecapital remaining at closing.  Immediately after consummation of theacquisition of Target by the Company, the Company will sell Target’s mainoffice to West Florida. The transaction, which is subject to bank regulatoryapproval and customary representations, warranties and covenants of bothparties, will facilitate the Company’s 

 

7

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expansion into Florida.  The transaction has beenapproved by the boards of directors of both the Company and CSB, and isexpected to close on November 30, 2007. After consummation of the transactions,the Company plans to open a full-service branch location at 13474 AtlanticBoulevard in Jacksonville, Florida. The Jacksonville metro area is home to overone million people and has approximately $29 billion in bank deposits.

 

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

 

*TheFair Value Option for Financial Assets and Financial Liabilities*

 

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*.SFAS No. 159 permits entities to choose to measure many financial instrumentsand certain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. Thestatement is expected to expand the use of fair value measurement, which isconsistent with FASB’s long-term measurement objectives for accounting forfinancial instruments. The statementis effective for financial statements issued for fiscal years beginning afterNovember 15, 2007; however, it includes an early adoption provision allowingentities to adopt within 120 days of their most recent fiscal year-end. TheCompany does not intend to implement the provisions of SFAS No. 159 upon theadoption date.

 

8

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

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

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

**September 30, 2007 and 2006**

 

Thefollowing discussion of financial condition as of September 30, 2007 compared to December 31, 2006, and the results of operations for the threemonths and nine months ended September30, 2007 compared to the three months and nine months ended September 30, 2006 should be read inconjunction with the condensed financial statements and accompanying footnotesappearing in this report.

 

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

##### *** ***

The statements contained in this report on Form 10-Q that arenot historical facts are forward-looking statements subject to the safe harborcreated by the Private Securities Litigation Reform Act of 1995. We cautionreaders of this report that such forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements to be materially different from thoseexpressed or implied by such forward-looking statements. Although we believethat our expectations of future performance is based on reasonable assumptionswithin the bounds of our knowledge of our business and operations, there can beno assurance that actual results will not differ materially from ourexpectations.

 

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

 

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

 

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

 

•                  our dependence on seniormanagement;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                  fluctuations in consumer spendingand saving habits;

 

•                  the demand for our products andservices;

 

•                  technological changes;

 

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

 

•                  the ability to increase marketshare;

 

•                  the adequacy of expense projectionsand 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 

 

9

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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 noobligation to update any forward-looking statement to reflect events or circumstancesafter the date on which the statement is made to reflect the occurrence ofunanticipated events.**

#### ** **

**ExecutiveSummary and Recent Developments**

 

### **The Company’s total assets at September 30, 2007,were approximately $824,890,000, which represented an increase of approximately$153,815,000 or 23% from December 31, 2006. Net earnings increased 46% for thenine months ended September 30, 2007 to $6,002,000 or $1.35 per diluted sharecompared to $4,099,000 or $1.26 per diluted share for the nine months ended September30, 2006. Net earnings increased 23% for the three months ended September 30,2007 to $2,061,000 or $0.46 per diluted share compared to $1,678,000 or $0.46per diluted share for the three months ended September 30, 2006.**

### ** **

On December 15, 2006, we consummatedan agreement to acquire all of the outstanding shares of Sapelo Bancshares,Inc. (“Sapelo”) for $15.4 million using a combination of stock and cash. Underthe terms of the merger agreement, we issued, and shareholders of Sapelo wereentitled to receive their pro rata portion of $6,239,972 and 305,695 shares ofAtlantic Southern common stock. The cash proceeds were obtained from a publicoffering in 2006. Sapelo was a bank holding company with one subsidiary, SapeloNational Bank, based in Darien, Georgia. Sapelo operated four full servicebanking offices in the coastal Georgia cities of Darien, Brunswick and St.Simons Island. Sapelo had total assets of $77.7 million, including total loansof $52 million and total investments of $1.8 million. Additionally, Sapelo had$66.7 million in deposits. We accounted for the transaction using the purchasemethod and accordingly, the purchase price was allocated to assets andliabilities acquired based upon their fair values at the date of theacquisition. The excess of the purchase price over the fair value of the netassets acquired (goodwill) was approximately $8.5 million, none of which willbe deductible for income tax purchases. Operations of Sapelo are included inthe consolidated statements of earnings since its acquisition.

 

On January 31, 2007, theCompany consummated an agreement to acquire all of the outstanding shares ofFirst Community Bank for $18.6 million in Atlantic Southern common stockincluding certain acquisition costs totaling $235,034. Under the terms of themerger agreement, the Company issued, and shareholders of First Community Bankwere entitled to receive their pro rata portion of 542,032 shares of AtlanticSouthern common stock. First Community Bank was a community bank headquarteredin Roberta, Georgia. First Community Bank operated three full service bankingoffices in Crawford, Bibb and Peach counties of Georgia. First Community Bankhad total assets of $69.3 million, including total loans of $50 million andtotal investments of $11.9 million. Additionally, First Community Bank had$58.6 million in deposits. With the acquisition of First Community Bank, theCompany was able to expand their presence in the middle Georgia area. TheCompany accounted for the transaction using the purchase method andaccordingly, the purchase price was allocated to assets and liabilitiesacquired based upon their fair values at the date of the acquisition. Theexcess of the purchase price over the fair value of the net assets acquired(goodwill) was approximately $9.9 million, none of which will be deductible forincome tax purposes. Operations of First Community Bank are included in theconsolidated statements of earnings since its acquisition.

 

On April 16, 2007, theCompany began trading on the NASDAQ Global Market under the symbol “ASFN.”  Our Board of Directors and management believethat this will improve the liquidity of the stock.

 

Management has developeda strategy for asset growth and expansion of its financial services throughbranching into selective markets in the middle Georgia region and in thecoastal Georgia region. In the middle Georgia region, we opened our new branchin Bonaire in efforts to increase our presence in the growing Houston Countyarea. In August, we opened our new corporate center, Northwinds, in north BibbCounty. As for the coastal Georgia region, our Rincon office moved to itspermanent location upon the completion of its building in May. Construction isnow scheduled for our Pooler branch, near Savannah, Georgia, during the firstquarter of 2008. In the South Georgia 

 

10

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region, we have plans toexpand our loan production office in Valdosta, Georgia into a full-servicebranch during the first quarter of 2008.

 

On August 10, 2007, theCompany and CenterState Banks of Florida, Inc. (“CSB”) and its wholly ownedsubsidiary CenterState Bank Mid Florida (“Target”) entered into an agreementpursuant to which CenterState Bank West Florida, National Association (“WestFlorida”) will purchase all the assets and assume the liabilities of Target,except for Target’s main office and a minimum amount of capital and depositsrequired by banking laws.  Target will then be acquired by theCompany.  Under the terms of the agreement, the Company will pay CSB inimmediately available funds, an amount equal to the sum of $1,000,000, less the$100,000 deposit CSB received from the Company when the agreement was executed,plus an amount equal to the aggregate capital remaining at closing.  Immediatelyafter consummation of the acquisition of Target by the Company, the Companywill sell Target’s main office to West Florida. The transaction, which issubject to bank regulatory approval and customary representations, warrantiesand covenants of both parties, will facilitate the Company’s expansion intoFlorida.  The transaction has been approved by the boards of directors ofboth the Company and CSB, and is expected to close on November 30, 2007. Afterconsummation of the transactions, the Company plans to open a full-servicebranch location at 13474 Atlantic Boulevard in Jacksonville, Florida. TheJacksonville metro area is home to over one million people and hasapproximately $29 billion in bank deposits.

 

**Financial Condition**

 

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

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**               | ** ** | **2006**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                             |       |                   |       |                  |       |              |       |              |       |
| Cash and due  from banks                |       | $                      | 12,677,862 |                  | $          | 13,130,014        |       | $                 | (452,152   | ) | -3.44 | % |
| Federal funds  sold                     |       | 12,126,000             |       | 29,522,000            |       | (17,396,000       | )          | -58.93            | %          |
| Securities  available for sale          |       | 76,148,287             |       | 57,596,002            |       | 18,552,285        |       | 32.21             | %          |
| Loans, net of  unearned income          |       | 662,604,756            |       | 533,128,702           |       | 129,476,054       |       | 24.29             | %          |
| Cash surrender  value of life insurance |       | 4,395,988              |       | 4,264,395             |       | 131,593           |       | 3.09              | %          |
| Goodwill and  other intangible assets   |       | 21,803,684             |       | 10,600,276            |       | 11,203,408        |       | 105.69            | %          |
| Total assets                            |       | 824,890,207            |       | 671,075,492           |       | 153,814,715       |       | 22.92             | %          |
| **Liabilities:**                        |       |                   |       |                  |       |              |       |              |       |
| Deposits                                |       | 685,870,333            |       | 556,994,607           |       | 128,875,726       |       | 23.14             | %          |
| FHLB advances                           |       | 34,700,000             |       | 31,700,000            |       | 3,000,000         |       | 9.46              | %          |
| Accrued expenses  and other liabilities |       | 2,127,918              |       | 6,636,790             |       | (4,508,872        | )          | -67.94            | %          |
|                                    |       |                   |       |                  |       |              |       |              |       |
| Loan to Deposit  Ratio                  |       | 96.61                  | %          | 95.72                 | %          |              |       |              |       |
|                                         |            |                        |            |                       |            |                   |            |                   |            |  |  |  |

 

The most significantchange in the composition of assets was the increase in loans of $129.5 milliondue to continued growth of the Company. Growth in Atlantic Southern Bank’s loanportfolio was divided between internally generated growth of approximately$79.5 million and the addition of approximately $50.0 million from the mergerwith First Community Bank. We were able to generate loan growth by primarilyexpanding in new markets including a loan production office in Valdosta,Georgia, which provided an increase of $10.9 million; opening new de novobranches in existing markets with a branch in Bonaire, Georgia, full servicebranches in Savannah, Georgia and Macon, Georgia; and increasing loan growth of$39.5 million in the Central Georgia, $9.6 million in the Mid-South Georgia and$28.1 million in the Coastal Georgia regions. The most significant change inthe composition of liabilities was the increase in deposits, especially timedeposits, 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 40.8% of our depositsas of September 30, 2007 when compared to 47.4% of our deposits as of December31, 

 

11

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2006. The Company’s FundManagement Policy allows for the ratio of wholesale deposits to total depositsto be 60%. The Company has been successful in replacing maturing brokereddeposits and does not expect to experience significant disintermediation as thebrokered deposits mature.

 

**InvestmentSecurities**

 

Securitiesin our portfolio totaled $76.1 million at September 30, 2007, compared to $57.6million at December 31, 2006. The most significant growth in the securitiesportfolio occurred as a result from the merger with First Community Bank, whichhad total investments of approximately $11.9 million. At September 30, 2007,the securities portfolio had unrealized net losses of approximately $531thousand.

 

Thefollowing table shows the carrying value of the investment securities atSeptember 30, 2007 and December 31, 2006.

 
| ** **                              | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                              | ** ** | **(Amounts in Thousands)** | ** ** |
| Securities available  for sale:         |       |                                 |       |                  |       |
| U. S. Government  Sponsored Enterprises |       | $                                    | 28,582     |                  | $          | 25,240 |   |
| U. S. Treasury  Securities              |       | 251                                  |       | —                |       |
| State, County  and Municipal            |       | 20,579                               |       | 13,653                |       |
| Mortgage-backed  Securities             |       | 26,265                               |       | 18,453                |       |
| Other  Investments                      |       | 471                                  |       | 250                   |       |
| Total                                   |       | $                                    | 76,148     |                  | $          | 57,596 |   |

 

### **Loans**

### ** **

Ourloan demand continues to be strong. Total loans increased $129.5 million or 24%from December 31, 2006 to September 30, 2007. The increase in loans in 2007 isattributable to the $50.0 million in loans acquired from the acquisition ofFirst Community Bank in January, our branching efforts along with the lendingefforts of our senior management lending team. The following table presents asummary of the loan portfolio by category.

 

**Loans Outstanding**

 
| ** **                                         | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
|                                               |       |                                 |       |                  |       |
| Commercial and  agricultural                       |       | $                                    | 62,482     |                  | $          | 54,898 |   |
| Real estate -  commercial                          |       | 247,470                              |       | 192,876               |       |
| Real estate -  construction                        |       | 284,705                              |       | 224,540               |       |
| Real estate -  mortgage                            |       | 60,055                               |       | 54,003                |       |
| Obligations of  political subdivisions in the U.S. |       | 315                                  |       | 1,728                 |       |
| Consumer                                           |       | 7,869                                |       | 5,380                 |       |
| Total Loans                                        |       | 662,896                              |       | 533,425               |       |
| Less:                                              |       |                                 |       |                  |       |
| Unearned loan  fees                                |       | (291                                 | )          | (297                  | )          |
| Allowance for  loan losses                         |       | (9,175                               | )          | (7,258                | )          |
| Loans, net                                         |       | $                                    | 653,430    |                  | $          | 525,870 |   |

 

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### **Asset Quality**

### ** **

### **Management considers asset quality to be of primaryimportance. Management has a credit administration and loan review processwhich monitor, control and measure our credit risk. In addition, management hasstandardized credit analyses and a comprehensive credit policy. As a result,management believes they have a good understanding of the asset quality, havean established warning and early detection system regarding the loans and havea comprehensive analysis of the allowance for loan losses.**

### ** **

Thefollowing table presents a summary of changes in the allowance for loan lossesfor the three and nine-month periods ended September 30, 2007 and 2006.

 

**Analysisof Changes in Allowance for Loan Losses**

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                     | ** ** |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Balance  beginning of period                       |       | $                                                        | 9,163      |                                                    | $          | 5,140 |   | $ | 7,258 |   | $ | 4,150 |   |
| Loans  charged-off                                 |       | (75                                                      | )          | (5                                                      | )          | (621 | ) | (25 | ) |
| Recoveries                                         |       | 39                                                       |       | 14                                                      |       | 258 |   | 103 |   |
| Net charge-offs                                    |       | (36                                                      | )          | 9                                                       |       | (363 | ) | 78 |   |
| Provision for  loan losses                         |       | 48                                                       |       | 468                                                     |       | 640 |   | 1,389 |   |
| Allowance from  purchase acquisition               |       | —                                                   |       | —                                                  |       | 1,640 |   | — |   |
| Balance end of  period                             |       | $                                                        | 9,175      |                                                    | $          | 5,617 |   | $ | 9,175 |   | $ | 5,617 |   |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Total Loans:                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| At period end                                      |       | $                                                        | 662,605    |                                                    | $          | 446,960 |   | $ | 662,605 |   | $ | 446,960 |   |
| Average                                            |       | 654,236                                                  |       | 432,270                                                 |       | 631,404 |   | 390,257 |   |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| As a percentage  of average loans (annualized):    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net charge-offs                                    |       | 0.02                                                     | %          | -0.01                                                   | %          | 0.08 | % | -0.03 | % |
| Provision for  loan losses                         |       | 0.03                                                     | %          | 0.43                                                    | %          | 0.14 | % | 0.47 | % |
| Allowance as a  percentage of period end loans     |       | 1.38                                                     | %          | 1.26                                                    | %          | 1.38 | % | 1.26 | % |
| Allowance as a  percentage of non-performing loans |       | 261.57                                                   | %          | 1895.72                                                 | %          | 261.57 | % | 1895.72 | % |

 

### **Management believes that the allowance for loanlosses at September 30, 2007 is adequate to absorb losses inherent in the loanportfolio. This assessment involves uncertainty and judgment; therefore, theadequacy of the allowance for loan losses cannot be determined with precisionand may be subject to change in future periods. In addition, bank regulatoryauthorities, as part of their periodic examination of the Bank, may requireadjustments to the provision for loan losses in future periods if, in theiropinion, the results of their review warrant such additions.**

### ** **

Our policy is to placeloans on non-accrual status when it appears that the collection of interest inaccordance with the terms of the loan is doubtful. Any loan which becomes 90days past due as to principal or interest is automatically placed onnon-accrual. Exceptions are allowed for 90-day past due loans when such loansare well secured and in process of collection. Other Real Estate is defined asreal estate acquired as salvage on uncollectible loans. At the time offoreclosure, an appraisal is obtained on the real estate. The amount charged toOther Real Estate will be the lower of appraised value or “recorded investment”in the loan satisfied. The recorded investment is the unpaid balance of theloan, increased by accrued and uncollected interest, unamortized premium,finance charges, and loan acquisition costs, if any, and decreased by previousdirect write down and unamortized discount. Any excess of the recordedinvestment in the loan satisfied over the appraised value of the property mustbe charged to allowance for loan losses.

 

13

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Nonperforming assetsconsist of non-accrual loans, accruing loans 90 days past due, repossessedassets and other real estate owned. The following summarizes non-performingassets:

 
| ** **                       | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accruing loans  90 days past due |       | $                            | —     |                        | $          | 30,621 |   |
| Non-accrual  loans               |       | 3,242,871                    |       | 617,420                     |       |
| Other real  estate               |       | 264,636                      |       | —                      |       |
| Total  non-performing assets     |       | $                            | 3,507,507  |                        | $          | 648,041 |   |

 

Nonperforming assetsincreased $2,859,466 or 441.25% from December 31, 2006 to September 30, 2007. OnJanuary 31, 2007, management placed one loan acquired from our acquisition ofSapelo National Bank with a balance of approximately $3.0 million onnon-accrual that was secured by single-family residential real estate appraisedat approximately $5.1 million. The borrower filed for bankruptcy protection onApril 2, 2007. Based on a recent court hearing, it appears that our collateralwill be released from the bankruptcy court no later than the first quarter of2008. However, management is continuously monitoring this loan in order tominimize any losses.

 

On October 15, 2007,management placed four loans from one customer relationship with a balance ofapproximately $1.2 million on non-accrual. The loans are secured by variouscommercial real estate and a residential property with a total appraisal valueof approximately $1.9 million. The customer has marketed the collateral forsale in order to pay off the loans. However, management is continuouslymonitoring these loans in order to minimize any losses.

 

Other real estateconsists of two real estate construction properties totaling $264,636 atSeptember 30, 2007. All properties are being actively marketed for sale andmanagement is continuously monitoring these properties in order to minimize anylosses.

 

**Deposits**

 

Total deposits atSeptember 30, 2007 were $685.9 million, an increase of $128.9 million, or 23%,from December 31, 2006. Total non-interest bearing demand deposit accounts of$44.4 million increased $10.0 million, or 29%, and interest bearing demand andsavings account of $120.4 million increased $21.3 million, or 22%, resultingmainly from our acquisition of First Community Bank in January.

 

Total time deposits asof September 30, 2007 were $521.0 million, an increase of $97.6 million, or23%, from December 31, 2006. Total retail time deposits at September 30, 2007increased approximately $78.3 million, or 18% of total time deposits, fromDecember 31, 2006 resulting from $34.2 million from our acquisition of FirstCommunity Bank, our managementteam drawing customers away from other financial institutions and from ourbranching efforts. Total wholesale deposits at September 30, 2007 increasedapproximately $19.4 million, or 3% of total time deposits, from December 31,2006 resulting mainly from our need to fund our loan growth during the thirdquarter. During the third quarter, we obtained $12.3 million of our wholesaledeposits from a new brokered deposit service called Certificate of DepositAccount Registry Service (CDARS). CDARS system serves two purposes for us byproviding less volatile deposits versus the traditional brokered deposits thattend to be highly sensitive to interest rates on CDs and by providing FDICInsurance to our customers’ deposits that exceed $100,000 by exchanging theuninsured portion of their deposits with another member bank of the CDARSsystem which would entitle the entire deposit to be covered by FDIC DepositInsurance.

 

### **Results of Operations**

### ** **

# **General**

# ** **

The Company’s results ofoperations are determined by its ability to effectively manage interest incomeand expense, to minimize loan and investment losses, to generate noninterestincome and to control noninterest expense. Since interest rates are determinedby market forces and economic conditions beyond the control of the Company, the

 

14

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ability to generateinterest income is dependent upon the Bank’s ability to obtain an adequatespread between the rate earned on earning assets and the rate paid oninterest-bearing liabilities.

 

# **The following table shows thesignificant components of net earnings:**

# ** **

| ** **                      | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                 |       | $                                                   | 43,972,339 |       | $          | 26,587,355        |       | $ | 17,384,984 |   | 65.39 | % |
| Interest Expense                |       | 23,112,607                                          |       | 12,993,746 |       | 10,118,861        |       | 77.87 | % |
| Net Interest  Income            |       | 20,859,732                                          |       | 13,593,609 |       | 7,266,123         |       | 53.45 | % |
| Provision for  Loan Losses      |       | 640,000                                             |       | 1,389,000  |       | (749,000          | )          | -53.92 | % |
| Net Earnings                    |       | 6,002,353                                           |       | 4,099,317  |       | 1,903,036         |       | 46.42 | % |
| Net Earnings Per  Diluted Share |       | $                                                   | 1.35       |       | $          | 1.26              |       | 0.09 |   | 7.14 | % |
|                                 |            |                                                     |            |            |            |                   |            |  |  |  |  |  |

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                       | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                  |       | $                                                    | 15,300,208 |       | $          | 10,187,722        |       | $ | 5,112,486 |   | 50.18 | % |
| Interest Expense                 |       | 8,159,415                                            |       | 5,114,726  |       | 3,044,689         |       | 59.53 | % |
| Net Interest  Income             |       | 7,140,793                                            |       | 5,072,996  |       | 2,067,797         |       | 40.76 | % |
| Provision for  Loan Losses       |       | 48,000                                               |       | 468,000    |       | (420,000          | )          | -89.74 | % |
| Net Earnings                     |       | 2,060,873                                            |       | 1,678,031  |       | 382,842           |       | 22.81 | % |
| Net Earnings Per  Diluted Shares |       | $                                                    | 0.46       |       | $          | 0.46              |       | — |   | — |   |
|                                  |            |                                                      |            |            |            |                   |            |  |  |  |  |  |

 

# **Net Interest Income**

# ** **

Our primary source ofincome is interest income from loans and investment securities. Ourprofitability depends largely on net interest income, which is the differencebetween the interest received on interest-earning assets and the interest paidon deposits, borrowings, and other interest-bearing liabilities. Net interestincome increased $7.3 million, or 53%, for the nine months ended September 30,2007 compared to the nine months ended September 30, 2006. Net interest incomeincreased $2.1 million, or 41%, for the second quarter of 2007 compared to thesame period in 2006.

 

Total interest anddividend income for the three and nine months ended September 30, 2007increased $5.1 million, or 50%, and $17.4 million, or 65%, respectively, whencompared to the three and nine months ended September 30, 2006 primarily due toincreases in loan interest and fees on loans. This increase is partially theresult of the average loan and loan held for sale portfolios for the three andnine months ended September 30, 2007 increasing approximately $222.0 million,or 51%, and $241.1 million, or 62%, respectively, when compared to average loanand loan held for sale portfolios for the three and nine months ended September30, 2006. Additionally, the average yield on loans increased during the ninemonths ended September 30, 2007 to 8.67% compared to an average yield of 8.58%for the nine months ended September 30, 2006. However, the average yield onloans decreased during the three months ended September 30, 2007 to 8.68%compared to an average yield of 8.80% for the three months ended September 30,2006, which is due in part from the Federal Reserve lowering the prime rateduring September 2007 by 50 basis points.

 

Total interest expensefor the three and nine months ended September 30, 2007 increased $3.0 million,or 60%, and $10.1 million, or 78%, respectively, when compared to the three andnine months ended September 30, 2006. Two factors impact interest expense:average balances of deposit and borrowing portfolios and average rates paid oneach. 

 

15

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Average deposit balancesincreased approximately $241.4 million and $254.7 million when comparing thethree and nine months ended September 30, 2007 to the three and nine monthsended September 30, 2006. These increases include approximately $22.5 millionand $21.3 million in non-interest bearing balances in regular demand depositaccounts when comparing the three and nine months ended September 30, 2007 tothe same periods in 2006, respectively. The average rate paid on the depositportfolios for the three months ended September 30, 2007 increased to 4.83%from 4.57% when compared to the three months ended September 30, 2006. Theaverage rate paid on the deposits for the nine months ended September 30, 2007increased to 4.75% from 4.26% when compared to the nine months ended September30, 2006. Average borrowing balances increased approximately $11.5 million and$13.4 million when comparing the three and nine months ended September 30, 2007to the three and nine months ended September 30, 2006, respectively. Averageinterest rates paid on borrowings were 5.38% and 5.37% for the three and ninemonths ended September 30, 2007, respectively, compared to 5.82% and 5.53% forthe three and nine months ended September 30, 2006, respectively.

 

The banking industry usestwo key ratios to measure relative profitability of net interest income, whichare net interest spread and net interest margin. The interest rate spreadmeasures the difference between the average yield on earning assets and theaverage rate paid on interest-bearing liabilities. The interest rate spreadeliminates the impact of non-interest-bearing funding sources and gives adirect perspective on the effect of market interest rate movements. The netinterest margin is an indication of the profitability of our investments, andis defined as net interest revenue as a percentage of total average earningassets which includes the positive impact of funding a portion of earningassets with customers’ non-interest-bearing deposits and with shareholders’equity.

 

For the three monthsended September 30, 2007 and 2006, our tax equivalent net interest spread was3.40% and 3.63%, respectively, while the tax equivalent net interest margin was3.89% and 4.15%, respectively. For the nine months ended September 30, 2007 and2006, our tax equivalent net interest spread was 3.44% and 3.73%, respectively,while the tax equivalent net interest margin was 3.93% and 4.15%, respectively.The decreases in net interest spread and net interest margin from the three andnine months ended September 30, 2006 to the three and nine months endedSeptember 30, 2007 were due to the interest bearing liabilities repricingfaster than our earning assets in an increasing interest rate environment. Also,our net interest margin has decreased due to our promotions of highershort-term yields on retail time deposits in order to reduce our dependency onwholesale time deposits to fund loan growth and to invest in investmentsecurities.

 

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 for thethree months ended September 30, 2007 and 2006.

 

**Average Consolidated Balance Sheetand Net Interest Margin Analysis**

 
| ** **                                       | ** ** | **For the Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                                   | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(Dollar amounts in thousands)**                           | ** ** |
| ** **                                       | ** ** | **Average  Balance**                                                       | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| Earning Assets                                   |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6)       |       | $                                                                          | 654,236    |   | $ | 14,304 |   | 8.68 | % | $ | 432,270 |   | $ | 9,588 |   | 8.80 | % |
| Federal funds  sold                              |       | 6,303                                                                      |       | 80 |   | 5.04 | % | 6,895 |   | 86 |   | 4.95 | % |
| Investment  securities - taxable (7)             |       | 55,101                                                                     |       | 677 |   | 4.87 | % | 40,168 |   | 420 |   | 4.15 | % |
| Investment  securities - tax-exempt (6) (7)      |       | 18,601                                                                     |       | 177 |   | 5.72 | % | 6,958 |   | 63 |   | 5.44 | % |
| Other interest  and dividend income              |       | 4,208                                                                      |       | 62 |   | 5.85 | % | 2,289 |   | 31 |   | 5.37 | % |
| Total Earning  Assets                            |       | 738,449                                                                    |       | 15,300 |   | 8.27 | % | 488,580 |   | 10,188 |   | 8.30 | % |
|                                             |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                     |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                       |       | -9,160                                                                     |       |   |   |   |   | -5,398 |   |   |   |   |   |
| Cash and due  from banks                         |       | 13,908                                                                     |       |   |   |   |   | 6,789 |   |   |   |   |   |
| Premises and  equipment                          |       | 25,968                                                                     |       |   |   |   |   | 11,413 |   |   |   |   |   |
| Accrued interest  receivable                     |       | 6,540                                                                      |       |   |   |   |   | 4,197 |   |   |   |   |   |
| Other assets                                     |       | 28,447                                                                     |       |   |   |   |   | 5,896 |   |   |   |   |   |
| Total Assets                                     |       | $                                                                          | 804,152    |   |   |   |   |   | $ | 511,477 |   |   |   |   |   |
|                                             |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                         |       | $                                                                          | 113,692    |   | $ | 925 |   | 3.23 | % | $ | 62,807 |   | $ | 534 |   | 3.37 | % |
| Savings                                          |       | 8,352                                                                      |       | 12 |   | 0.57 | % | 1,572 |   | 2 |   | 0.50 | % |
| Time deposits                                    |       | 496,097                                                                    |       | 6,588 |   | 5.27 | % | 334,903 |   | 4,062 |   | 4.81 | % |
| Total interest  bearing deposits                 |       | 618,141                                                                    |       | 7,525 |   | 4.83 | % | 399,282 |   | 4,598 |   | 4.57 | % |
| Federal Home  Loan Bank advances                 |       | 34,700                                                                     |       | 415 |   | 4.75 | % | 24,264 |   | 313 |   | 5.12 | % |
| Other borrowings                                 |       | 1,737                                                                      |       | 23 |   | 5.25 | % | 660 |   | 9 |   | 5.41 | % |
| Junior  subordinated debentures                  |       | 10,310                                                                     |       | 196 |   | 7.54 | % | 10,310 |   | 195 |   | 7.50 | % |
| Total borrowed  funds                            |       | 46,747                                                                     |       | 634 |   | 5.38 | % | 35,234 |   | 517 |   | 5.82 | % |
| Total  interest-bearing liabilities              |       | 664,888                                                                    |       | 8,159 |   | 4.87 | % | 434,516 |   | 5,115 |   | 4.67 | % |
|                                             |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                   |       | 46,816                                                                     |       |   |   |   |   | 24,316 |   |   |   |   |   |
| Other  liabilities                               |       | 7,101                                                                      |       |   |   |   |   | 3,343 |   |   |   |   |   |
| Shareholders’  equity                       |       | 85,347                                                                     |       |   |   |   |   | 49,302 |   |   |   |   |   |
| Total  Liabilities and Shareholders’ Equity |       | $                                                                          | 804,152    |   |   |   |   |   | $ | 511,477 |   |   |   |   |   |
| Net interest  revenue (1)                        |       |                                                                       |       | $ | 7,141 |   |   |   |   |   | $ | 5,073 |   |   |   |
| Net interest  spread (2)                         |       |                                                                       |       |   |   | 3.40 | % |   |   |   |   | 3.63 | % |
| Net interest  margin (3)                         |       |                                                                       |       |   |   | 3.89 | % |   |   |   |   | 4.15 | % |

 

----

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

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

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

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

(5)Interest income includes loan fees as follows (in thousands): 2007 - $464; 2006- $448

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

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

 

17

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The following table showsthe relationship between interest revenue and interest expense and the averagebalances of interest-earning assets and interest-earning liabilities for thenine months ended September 30, 2007 and 2006.

 

**Average Consolidated Balance Sheetand Net Interest Margin Analysis**

 
| ** **                                       | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(Dollar amounts in thousands)**                          | ** ** |
| ** **                                       | ** ** | **Average**                                                               | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Balance**                                                               | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                   |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6)       |       | $                                                                         | 631,404    |   | $ | 40,948 |   | 8.67 | % | $ | 390,257 |   | $ | 25,055 |   | 8.58 | % |
| Federal funds  sold                              |       | 11,604                                                                    |       | 445 |   | 5.13 | % | 5,942 |   | 217 |   | 4.88 | % |
| Investment  securities - taxable (7)             |       | 53,149                                                                    |       | 1,853 |   | 4.66 | % | 35,769 |   | 1,073 |   | 4.01 | % |
| Investment  securities - tax-exempt (6) (7)      |       | 18,393                                                                    |       | 514 |   | 5.66 | % | 6,102 |   | 164 |   | 5.44 | % |
| Other interest  and dividend income              |       | 4,280                                                                     |       | 212 |   | 6.63 | % | 2,154 |   | 79 |   | 4.90 | % |
| Total Earning  Assets                            |       | 718,830                                                                   |       | 43,972 |   | 8.23 | % | 440,224 |   | 26,588 |   | 8.10 | % |
|                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                     |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                       |       | -9,036                                                                    |       |   |   |   |   | -4,869 |   |   |   |   |   |
| Cash and due  from banks                         |       | 13,544                                                                    |       |   |   |   |   | 5,898 |   |   |   |   |   |
| Premises and  equipment                          |       | 23,537                                                                    |       |   |   |   |   | 10,950 |   |   |   |   |   |
| Accrued interest  receivable                     |       | 6,205                                                                     |       |   |   |   |   | 3,562 |   |   |   |   |   |
| Other assets                                     |       | 25,861                                                                    |       |   |   |   |   | 5,829 |   |   |   |   |   |
| Total Assets                                     |       | $                                                                         | 778,941    |   |   |   |   |   | $ | 461,594 |   |   |   |   |   |
|                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                         |       | $                                                                         | 112,934    |   | $ | 2,662 |   | 3.15 | % | $ | 55,456 |   | $ | 1,245 |   | 3.00 | % |
| Savings                                          |       | 8,374                                                                     |       | 35 |   | 0.56 | % | 1,539 |   | 6 |   | 0.52 | % |
| Time deposits                                    |       | 477,083                                                                   |       | 18,560 |   | 5.20 | % | 307,976 |   | 10,388 |   | 4.51 | % |
| Total interest  bearing deposits                 |       | 598,391                                                                   |       | 21,257 |   | 4.75 | % | 364,971 |   | 11,639 |   | 4.26 | % |
| Federal Home  Loan Bank advances                 |       | 34,192                                                                    |       | 1,209 |   | 4.73 | % | 20,651 |   | 741 |   | 4.80 | % |
| Other borrowings                                 |       | 1,680                                                                     |       | 66 |   | 5.25 | % | 1,777 |   | 66 |   | 4.97 | % |
| Junior  subordinated debentures                  |       | 10,310                                                                    |       | 580 |   | 7.52 | % | 10,310 |   | 548 |   | 7.11 | % |
| Total borrowed  funds                            |       | 46,182                                                                    |       | 1,855 |   | 5.37 | % | 32,738 |   | 1,355 |   | 5.53 | % |
| Total  interest-bearing liabilities              |       | 644,573                                                                   |       | 23,112 |   | 4.79 | % | 397,709 |   | 12,994 |   | 4.37 | % |
|                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                   |       | 46,016                                                                    |       |   |   |   |   | 24,763 |   |   |   |   |   |
| Other  liabilities                               |       | 6,895                                                                     |       |   |   |   |   | 4,094 |   |   |   |   |   |
| Shareholders’  equity                       |       | 81,457                                                                    |       |   |   |   |   | 35,028 |   |   |   |   |   |
| Total  Liabilities and Shareholders’ Equity |       | $                                                                         | 778,941    |   |   |   |   |   | $ | 461,594 |   |   |   |   |   |
| Net interest  revenue (1)                        |       |                                                                      |       | $ | 20,860 |   |   |   |   |   | $ | 13,594 |   |   |   |
| Net interest  spread (2)                         |       |                                                                      |       |   |   | 3.44 | % |   |   |   |   | 3.73 | % |
| Net interest  margin (3)                         |       |                                                                      |       |   |   | 3.93 | % |   |   |   |   | 4.15 | % |
|                                                  |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

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

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

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

(5)Interest income includes loan fees as follows (in thousands): 2007 - $1,521;2006 - $1,288

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

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

 

18

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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 and nine monthsended September 30, 2007 compared to September 30, 2006.

 

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

 
| ** **                                    | ** ** | **Three Months Ended September 30,**                    | ** ** | **Nine Months Ended September 30,**                     | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007 Compared to 2006  Changes due to (a)** | ** ** | **2007 Compared to 2006  Changes due to (a)** | ** ** |
| ** **                                    | ** ** | ** **                                                                  | ** ** | **Yield/**                                                                  | ** ** | **Net** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Volume**                                                                  | ** ** | **Rate**                                                                    | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
|                                          |       | **(Amounts in thousands)**                                        |       |
| Interest earned  on:                          |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Loans                                         |       | $                                                                           | 4,830      |                                                                        | $          | (114 | ) | $ | 4,716 |   | $ | 15,619 |   | $ | 274 |   | $ | 15,893 |   |
| Investment  securities:                       |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Taxable  investment securities                |       | 174                                                                         |       | 83                                                                          |       | 257 |   | 584 |   | 196 |   | 780 |   |
| Tax-exempt  investment securities             |       | 111                                                                         |       | 3                                                                           |       | 114 |   | 343 |   | 7 |   | 350 |   |
| Interest earning  deposits and fed funds sold |       | 20                                                                          |       | 5                                                                           |       | 25 |   | 315 |   | 46 |   | 361 |   |
| Total interest  income                        |       | 5,135                                                                       |       | (23                                                                         | )          | 5,112 |   | 16,861 |   | 523 |   | 17,384 |   |
|                                          |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Interest paid  on:                            |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Deposits:                                     |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand deposits             |       | 414                                                                         |       | (23                                                                         | )          | 391 |   | 1,352 |   | 65 |   | 1,417 |   |
| Savings                                       |       | 10                                                                          |       | —                                                                      |       | 10 |   | 29 |   | — |   | 29 |   |
| Time deposits                                 |       | 2,114                                                                       |       | 412                                                                         |       | 2,526 |   | 6,363 |   | 1,809 |   | 8,172 |   |
| Other borrowings  and FHLB advances           |       | 124                                                                         |       | (8                                                                          | )          | 116 |   | 415 |   | 53 |   | 468 |   |
| Junior  subordinated debentures               |       | —                                                                      |       | 1                                                                           |       | 1 |   | — |   | 32 |   | 32 |   |
| Total interest  expense                       |       | 2,662                                                                       |       | 382                                                                         |       | 3,044 |   | 8,159 |   | 1,959 |   | 10,118 |   |
|                                          |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Increase in net  interest revenue             |       | $                                                                           | 2,473      |                                                                        | $          | (405 | ) | $ | 2,068 |   | $ | 8,702 |   | $ | (1,436 | ) | $ | 7,266 |   |

 

----

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

 

# **Provision for Loan Losses**

# ** **

The provision for loanlosses for the nine months ended September 30, 2007, was $640,000 compared to$1,389,000 for the same period of 2006. The provision for loan losses for thethird quarter of 2007 was $48,000 compared to $468,000 for the same period of2006. The decrease in the provision for loan losses is mainly attributable tomanagement’s determination that our allowance for loan loss was well reservedand the Company had minimal credit quality issues from our loan portfolio as ofSeptember 30, 2007. Net charge-offs as an annualized percentage of averageoutstanding loans for the nine months ended September 30, 2007 were 0.08%, ascompared with -0.03% for the same period of 2006. Net loan charge-offsincreased significantly this year as compared to the same period in 2006 due tothe Company charging off $300,000 for one participation purchased loan from theCompany’s portion of the foreclosed property being recorded to other realestate at fair market value. Net charge-offs as an annualized percentage ofaverage outstanding loans for the third quarter of 2007 were 0.02%, as comparedwith -0.01% for the same period of 2006. During the third quarter of 2007 and2006, the Company had minimal charge-offs and recoveries.

 

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. Additionaldiscussion on loan quality and the allowance for loan losses are included inthe Asset Quality section of this report.

 

19

----

 

# **Non-interest Income**

# ** **

Composition of othernoninterest income is as follows:

** **
| ** **                                             | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts                   |       | $                                                   | 990,910    |       | $          | 351,315           |       | $ | 639,595 |   | 182.06 | % |
| Other service  charges, commissions and fees           |       | 260,425                                             |       | 75,597     |       | 184,828           |       | 244.49 | % |
| Gain (loss) on  sales / calls of investment securities |       | 3,101                                               |       | (9,753     | )          | 12,854            |       | -131.80 | % |
| Gain on sale of  other assets                          |       | 96,505                                              |       | 1,873      |       | 94,632            |       | 5052.43 | % |
| Mortgage  origination income                           |       | 725,534                                             |       | 434,646    |       | 290,888           |       | 66.93 | % |
| Other income                                           |       | 471,150                                             |       | 347,777    |       | 123,373           |       | 35.47 | % |
| Total  noninterest income                              |       | $                                                   | 2,547,625  |       | $          | 1,201,455         |       | $ | 1,346,170 |   | 112.04 | % |

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts                   |       | $                                                    | 403,522    |       | $          | 127,016           |       | $ | 276,506 |   | 217.69 | % |
| Other service  charges, commissions and fees           |       | 101,147                                              |       | 26,205     |       | 74,942            |       | 285.98 | % |
| Gain (loss) on  sales / calls of investment securities |       | 3,408                                                |       | —     |       | 3,408             |       | 100.00 | % |
| Gain (loss) on  sale of other assets                   |       | 1,946                                                |       | (1,022     | )          | 2,968             |       | -290.41 | % |
| Mortgage  origination income                           |       | 276,288                                              |       | 154,317    |       | 121,971           |       | 79.04 | % |
| Other income                                           |       | 162,163                                              |       | 92,493     |       | 69,670            |       | 75.32 | % |
| Total  noninterest income                              |       | $                                                    | 948,474    |       | $          | 399,009           |       | $ | 549,465 |   | 137.71 | % |

 

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 with the growth in the Bank’s demand depositaccount base. Total service charges, including non-sufficient funds fees, were$404 thousand, or 43% of total noninterest income for the third quarter of 2007compared with $127 thousand, or 32% for the third quarter of 2006. Totalservice charges, including non-sufficient funds fees, were $991 thousand, or39% of total noninterest income for the nine months ended September 30, 2007compared with $351 thousand, or 29% for the same period of 2006. Theyear-over-year increase in service charges on deposit accounts is directlyrelated to the increase in the number of our core transaction deposit accounts.The number of deposit accounts for the nine months ended September 30, 2007 was12,480 accounts when compared to the same period of 2006 with 4,002 accounts. Theincrease in the number of deposit accounts includes 3,549 transaction andsavings accounts from the purchase of Sapelo National Bank on December 15, 2006and 4,147 transaction and savings accounts from the purchase of First CommunityBank on January 31, 2007. The increase in mortgage origination fees for thenine months ended September 30, 2007 is primarily due to the mortgage loanbrokerage activity which was started in late 2004 and the volume of mortgagesoriginated for the three and nine months ended September 30, 2007 was largerthan the same period of 2006. Mortgage loan closings for the nine months endedSeptember 30, 2007 were approximately 217 closings compared to 156 closings forthe nine months ended September 30, 2006. Mortgage loan closings for the threemonths ended September 30, 2007 were approximately 74 closings compared to 54closings for the three months ended September 30, 2006. The increase on thegain on sale of other assets for the nine months ended September 30, 2007 isprimarily due to the sale of two foreclosed properties and the sale of onelocation during the second quarter.

 

20

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# **Non-interest Expense**

# ** **

Composition of othernoninterest expense is as follows:

 
| ** **                                      | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                                   | 5,485,480  |       | $          | 2,795,543         |       | $ | 2,689,937 |   | 96.22 | % |
| Employee  benefits                              |       | 1,879,072                                           |       | 980,627    |       | 898,445           |       | 91.62 | % |
| Occupancy  expense                              |       | 1,047,063                                           |       | 570,215    |       | 476,848           |       | 83.63 | % |
| Equipment rental  and depreciation of equipment |       | 628,939                                             |       | 299,158    |       | 329,781           |       | 110.24 | % |
| Other expenses                                  |       | 4,514,368                                           |       | 2,355,048  |       | 2,159,320         |       | 91.69 | % |
| Total  noninterest expense                      |       | $                                                   | 13,554,922 |       | $          | 7,000,591         |       | $ | 6,554,331 |   | 93.63 | % |

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                                    | 1,950,593  |       | $          | 1,050,909         |       | $ | 899,684 |   | 85.61 | % |
| Employee  benefits                              |       | 669,720                                              |       | 277,567    |       | 392,153           |       | 141.28 | % |
| Occupancy  expense                              |       | 367,025                                              |       | 188,029    |       | 178,996           |       | 95.20 | % |
| Equipment rental  and depreciation of equipment |       | 237,285                                              |       | 102,671    |       | 134,614           |       | 131.11 | % |
| Other expenses                                  |       | 1,658,511                                            |       | 795,798    |       | 862,713           |       | 108.41 | % |
| Total  noninterest expense                      |       | $                                                    | 4,883,134  |       | $          | 2,414,974         |       | $ | 2,468,160 |   | 102.20 | % |

 

The increases innoninterest expenses are primarily due to the growth of the bank. The mostsignificant increases for the nine months ended September 30, 2007 areincreases in salaries and employee benefits. The increase in salaries andemployees benefits represents normal increases in salaries and an increase inthe number of employees. At September 30, 2007, the number of full-timeequivalent employees was 164 compared to 85 at September 30, 2006. The increasein the number of full-time equivalent employees is directly related to thepurchase of Sapelo National Bank and First Community Bank, growth of the bankand the hiring for the new branches in Rincon, Bonaire and Macon and our loanproduction center in Valdosta. The bank operates from sixteen facilities as ofSeptember 30, 2007 compared to seven facilities as of September 30, 2006. Theincreases in other expenses are not attributable to any one particular item,but represent increases related to physical facility expansion.

 

# **Income Tax Expense**

# ** **

Income tax expenseexpressed as a percentage of earnings before income taxes was 34.85% and 36.00%for the nine months ended September 30, 2007 and 2006, respectively. Income taxexpense was 34.74% and 35.19% for the three months ended September 30, 2007 and2006, respectively. The fluctuation in the percentage can be attributed to thetax-free income versus the pretax income. For the nine months ended September30, 2007, the tax-free income expressed as a percentage of earnings beforeincome taxes was 5.83% when compared to 2.56% for the nine months endedSeptember 30, 2006. For the three months ended September 30, 2007, the tax-freeincome expressed as a percentage of earnings before income taxes was 5.77% whencompared to 2.44% for the three months ended September 30, 2006. The increasein tax-free income is due to an increase in the interest revenue on certaininvestment securities and loans that are exempt from income taxes. The averagebalances of these certain investment securities and loans that are exempt fromincome taxes increased significantly when comparing the first nine months of2007 to the same period of 2006. We acquired the tax—exempt loans through ouracquisitions of Sapelo National Bank and First Community Bank. For our tax—exemptinvestment securities, the average balance for the nine months 

 

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ended September 30, 2007increased $12.3 million when compared to the same period of 2006. The increasein tax—exempt investment securities is mainly attributable to the $5.0 millionin tax-exempt investment securities from our acquisition of First CommunityBank and our continuous purchases of tax-exempt investment securities since thethird quarter of 2006.

 

### **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 $25,000,000. At September 30, 2007, the Company had nofederal funds purchased. The Company has a total available line of $38,572,000,subject to available collateral, from the Federal Home Loan Bank. The Companyhas $34.7 million in advances on this line at September 30, 2007.

 

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 September 30, 2007 and 2006 were 13.48% and 15.80%, respectively.

 

### **Capital Resources**

### ** **

We are subject to variousregulatory capital requirements administered by the federal banking agencies. Failureto meet minimal capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on our financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,we must meet specific capital guidelines that involve quantitative measures ofour assets, liabilities, and certain off-balance sheet items as calculatedunder regulatory accounting practices. Our capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings, and other factors.

 

Quantitative measuresestablished by regulations to ensure capital adequacy require us to maintainminimum amounts and ratios (set forth below in the table) of total and Tier Icapital (as defined in the regulations) to risk-weighted assets (as defined),and of Tier I capital (as defined) to average assets (as defined). Managementbelieves, as of September 30, 2007 and as of December 31, 2006, that theCompany and the Bank met all capital adequacy requirements to which they aresubject.

 

As of September 30, 2007,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 corrective action. Tobe categorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier I risk-based and Tier I leverage ratios as set forth in thefollowing table. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s categories.

 

22

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The Company’s and theBank’s actual capital amounts and ratios as of September 30, 2007 and December31, 2006 follow:

 
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                            | ** ** | **To Be Well Capitalized** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                                         | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                         | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount**                                | ** ** | **Ratio** | ** ** |
| ***September  30, 2007***                          |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Total Risk-Based  Capital To Risk Weighted Assets: |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 83,931,000 |                       | 12.03      | %                          | $          | 55,814,464                            |  > | 8.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 81,537,000 |       | 11.71                      | %          | 55,704,184                 |  > | 8.0                                   | %          | 69,630,231                                |  > | 10.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Tier I Capital  To Risk Weighted Assets:           |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 75,207,000 |                       | 10.78      | %                          | $          | 27,906,122                            |  > | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 72,824,000 |       | 10.45                      | %          | 27,875,215                 |  > | 4.0                                   | %          | 41,812,823                                |  > | 6.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Tier I Capital  To Average Assets                  |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 75,207,000 |                       | 9.61       | %                          | $          | 31,303,642                            |  > | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 72,824,000 |       | 9.32                       | %          | 31,254,936                 |  > | 4.0                                   | %          | 39,068,670                                |  > | 5.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| ***December  31, 2006***                           |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Total Risk-Based  Capital To Risk Weighted Assets: |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 69,138,000 |                       | 12.31      | %                          | $          | 44,931,275                            |  > | 8.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 66,183,000 |       | 11.81                      | %          | 44,831,837                 |  > | 8.0                                   | %          | 56,039,797                                |  > | 10.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Tier I Capital  To Risk Weighted Assets:           |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 62,117,000 |                       | 11.06      | %                          | $          | 22,465,461                            |  > | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 59,163,000 |       | 10.55                      | %          | 22,431,469                 |  > | 4.0                                   | %          | 33,647,204                                |  > | 6.0 | % |
|                                               |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Tier I Capital  To Average Assets                  |       |       |       |                       |       |                       |       |                                  |       |                                      |       |   |   |
| Consolidated                                       |       | $          | 62,117,000 |                       | 9.84       | %                          | $          | 25,250,813                            |  > | 4.0                                       | %          | N/A |   | N/A |   |
| Bank                                               |       | 59,163,000 |       | 9.38                       | %          | 25,229,424                 |  > | 4.0                                   | %          | 31,536,780                                |  > | 5.0 | % |

 

We have outstandingjunior subordinated debentures commonly referred to as Trust PreferredSecurities totaling $10.3 million at September 30, 2007. The Trust PreferredSecurities qualify as a Tier I capital under risk-based capital guidelinesprovided that total Trust Preferred Securities do not exceed certainquantitative limits. At September 30, 2007, all of the Trust PreferredSecurities qualify as a Tier I capital.

 

23

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

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

**For theNine Months Ended September 30, 2007**

 

As of September 30, 2007,there were no substantial changes in the composition of the Company’smarket-sensitive assets and liabilities or their related market values fromthat reported as of December 31, 2006. The foregoing disclosures related to themarket risk of the Company should be read in conjunction with the Company’saudited consolidated financial statements, related notes and management’sdiscussion and analysis of financial condition and results of operations forthe year ended December 31, 2006 included in the Company’s 2006 Annual Reporton Form 10-K.

 

24

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Item 4.Controls and Procedures**

**For the Nine Months EndedSeptember 30, 2007**

 

TheCompany’s management, including the Chief Executive Officer and Chief FinancialOfficer, supervised and participated in an evaluation of the effectiveness ofits disclosure controls and procedures (as defined in federal securities rules)as of the end of the period covered by this report. Based on, and as of thedate of, that evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures were effective in accumulating and communicating information tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures of thatinformation under the Securities and Exchange Commission’s rules and forms andthat the Company’s disclosure controls and procedures are designed to ensurethat the information required to be disclosed in reports that are filed orsubmitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

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

#### ** **

Asdiscussed in the Management’s Report on Internal Controls over FinancialReporting in the Annual Report on Form 10-K for the year ended December 31,2006, the Company elected to exclude Sapelo from the scope of its assessment ofinternal control over financial reporting as of December 31, 2006. Sapelo wasacquired by the Company on December 15, 2006, and was integrated into ourexisting internal controls over financial reporting via a data conversion. Basedon internal audits performed during the third quarter of 2007, we are not awareof any facts that lead us to believe the data conversions of Sapelo or FirstCommunity Bank will constitute, individually or collectively, a materialweakness to our internal control over financial reporting.

 

25

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Part II:Other Information**

**For the Nine Months EndedSeptember 30, 2007**

 

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

#### ** **

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, which could materially affect ourbusiness, financial condition or future results. The risks described in our AnnualReport on Form 10-K are not the only risks we face. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and / or operation results.

 

Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds

None

 

Item 3. Defaults Upon Senior Securities

NotApplicable

 

Item 4. Submission of Matters to a Voteof Security-Holders

None

 

Item 5. Other Information

None

 

Item 6. Exhibits

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

 

**SIGNATURES**

 

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

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

 

 

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