**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                    | **Quarterly report under Section 13 or 15 (d) of the  Securities Exchange Act of 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                                                                                                                          | **For the quarterly period ended  March 31, 2006**                                 |
|                                                                                                                                                          |                                                                                              |
| **o**                                                                                                                                                         | **Transition report under Section 13 or 15 (d) of the  Exchange Act**                   |
| **For the transition period  from          to          ** |
| ** **                                                                                                                                                    |
| **Commission File Number  000-51112**                                                                                                                    |

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

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

 

###### **4077 Forsyth Road**

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

(Address of Principal Executive Offices)

 

**(478) 757-8181**

(Issuer’s Telephone Number, Including Area Code)

 

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

(Former Name, Former Address and Former Fiscal Year, if Changed SinceLast Report)

 

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

 

Yes  ý                                                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).

 

Largeaccelerated filer  o                                                Acceleratedfiler  o                                       Non-acceleratedfiler  ý

 

Indicate by checkmarkwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act).

 

Yes  o                                                No  ý

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: Common Stock $5 par value, 2,604,052shares outstanding at May 12, 2006

 

 

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

 

INDEX

 
| ** **                                                                                                      | ** **                                                                                                                    | **PAGE** |
|-----------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I:                                                                                                    | FINANCIAL  INFORMATION                                                                                                        |     |
| ITEM 1.                                                                                                         | FINANCIAL  STATEMENTS                                                                                                         |     |
|                                                                                                            |                                                                                                                          |     |
| The following  consolidated financial statements are provided for Atlantic Southern  Financial Group, Inc. |                                                                                                                          |
|                                                                                                            |                                                                                                                          |     |
|                                                                                                            | Consolidated Balance Sheets – March 31, 2006 (unaudited) andDecember 31, 2005 (audited).                       | 2        |
|                                                                                                            |                                                                                                                          |     |
|                                                                                                            | Consolidated Statements of  Earnings (unaudited) – For the Three Months  Ended March 31, 2006 and 2005.             | 3        |
|                                                                                                            |                                                                                                                          |     |
|                                                                                                            | Consolidated Statements of  Comprehensive Income (unaudited) – For the  Three Months Ended March 31, 2006 and 2005. | 4        |
|                                                                                                            |                                                                                                                          |     |
|                                                                                                            | Consolidated Statements of  Cash Flows (unaudited) – For the Three Months  Ended March 31, 2006 and  2005.          | 5        |
|                                                                                                            |                                                                                                                          |     |
|                                                                                                            | Notes to Consolidated  Financial Statements (unaudited)                                                                       | 6        |
|                                                                                                            |                                                                                                                          |     |
| ITEM 2.                                                                                                         | Management’s Discussion and  Analysis of Financial Condition and  Results of Operations                                  | 8        |
|                                                                                                            |                                                                                                                          |     |
| ITEM 3.                                                                                                         | Quantitative and Qualitative  Disclosures About Market Risk                                                                   | 13       |
|                                                                                                            |                                                                                                                          |     |
| ITEM 4.                                                                                                         | Controls and Procedures                                                                                                       | 14       |
|                                                                                                            |                                                                                                                          |     |
| PART II:                                                                                                   | OTHER INFORMATION                                                                                                             | 15       |

 

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Balance Sheets**

**March 31, 2006****(Unaudited) and****December 31, 2005****(Audited)**

 
| *** ***                                                                                                 | *** *** | **As of**          | *** *** |
|--------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|
| *** ***                                                                                                 | *** *** | **March 31,** | ** **   | **December 31,** | *** *** |
| ** **                                                                                                   | ** **   | **2006**           | ** **   | **2005** | ** ** |
| **Assets**                                                                                                   |         |               |         |   |   |
| Cash and due from banks                                                                                      |         | $                  | 6,031,658    |   | $ | 4,202,851 |   |
| Interest-bearing deposits in other banks                                                                     |         | 199,178            |         | 129,543 |   |
| Federal funds sold                                                                                           |         | 4,125,000          |         | 1,450,000 |   |
| Total cash and cash equivalents                                                                              |         | 10,355,836         |         | 5,782,394 |   |
| Securities available for sale, at fair value                                                                 |         | 38,410,913         |         | 34,525,648 |   |
| Federal Home Loan Bank stock, restricted, at cost                                                            |         | 1,505,700          |         | 1,255,700 |   |
| Loans held for sale                                                                                          |         | 702,920            |         | 1,226,353 |   |
| Loans, net of unearned income                                                                                |         | 368,075,687        |         | 331,440,956 |   |
| Less - allowance for loan losses                                                                             |         | (4,601,453         | )            | (4,150,000 | ) |
| Loans, net                                                                                                   |         | 363,474,234        |         | 327,290,956 |   |
| Bank premises and equipment, net                                                                             |         | 11,066,982         |         | 9,140,566 |   |
| Accrued interest receivable                                                                                  |         | 3,192,896          |         | 2,709,386 |   |
| Cash surrender value of life insurance                                                                       |         | 4,141,596          |         | 4,100,663 |   |
| Other assets                                                                                                 |         | 2,948,582          |         | 2,678,818 |   |
| **Total Assets**                                                                                             |         | $                  | 435,799,659  |   | $ | 388,710,484 |   |
| ** **                                                                                                   |         |               |         |   |   |
| **Liabilities and Shareholders’ Equity**                                                                |         |               |         |   |   |
| Deposits:                                                                                                    |         |               |         |   |   |
| Non-interest bearing                                                                                         |         | $                  | 24,460,802   |   | $ | 21,599,726 |   |
| Interest bearing                                                                                             |         | 355,636,643        |         | 312,975,398 |   |
| Total deposits                                                                                               |         | 380,097,445        |         | 334,575,124 |   |
| FHLB borrowings                                                                                              |         | 16,200,000         |         | 16,200,000 |   |
| Junior subordinated debentures                                                                               |         | 10,310,000         |         | 10,310,000 |   |
| Accrued interest payable                                                                                     |         | 1,729,142          |         | 1,648,664 |   |
| Accrued expenses and other liabilities                                                                       |         | 1,098,733          |         | 590,397 |   |
| Total liabilities                                                                                            |         | 409,435,320        |         | 363,324,185 |   |
| Shareholders’ Equity:                                                                                   |         |               |         |   |   |
| Preferred stock, authorized 2,000,000 shares, no  shares outstanding                                         |         | —             |         | — |   |
| Common stock, $5 par value, authorized 10,000,000  shares, issued and outstanding 2,604,052 in 2006 and 2005 |         | 13,020,260         |         | 13,020,260 |   |
| Paid-in capital surplus                                                                                      |         | 12,047,356         |         | 12,047,356 |   |
| Retained earnings                                                                                            |         | 1,958,471          |         | 898,117 |   |
| Accumulated other comprehensive income (loss)                                                                |         | (661,748           | )            | (579,434 | ) |
| Total shareholders’ equity                                                                              |         | 26,364,339         |         | 25,386,299 |   |
| **Total Liabilities and Shareholders’ Equity**                                                          |         | $                  | 435,799,659  |   | $ | 388,710,484 |   |

 

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

 

2

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements ofEarnings**

**For the Three Months Ended March 31****, 2006****and 2005**

**(Unaudited)**

 
| *** ***                                           | *** *** | **Three Months Ended March 31,** | *** *** |
|--------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                             | ** **   | **2006**                              | ** **   | **2005** | ** ** |
| **Interest and Dividend Income:**                      | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Interest and fees on loans                             |         | $                                     | 7,140,256    |   | $ | 3,916,694 |   |
| Interest on securities:                                |         |                                  |         |   |   |
| Taxable income                                         |         | 305,326                               |         | 155,789 |   |
| Non-taxable income                                     |         | 46,787                                |         | 19,742 |   |
| Income on federal funds sold                           |         | 48,794                                |         | 21,181 |   |
| Other interest and dividend income                     |         | 20,421                                |         | 9,484 |   |
| Total interest and dividend income                     |         | 7,561,584                             |         | 4,122,890 |   |
| **Interest Expense:**                                  | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Deposits                                               |         | 3,098,844                             |         | 1,298,616 |   |
| FHLB borrowings                                        |         | 172,501                               |         | 106,876 |   |
| Federal funds purchased                                |         | 27,569                                |         | 9,173 |   |
| Junior subordinated debentures                         |         | 168,600                               |         | — |   |
| Total interest expense                                 |         | 3,467,514                             |         | 1,414,665 |   |
|                                                   |         |                                  |         |   |   |
| Net interest income before provision for loan losses   |         | 4,094,070                             |         | 2,708,225 |   |
| Less - provision for loan losses                       |         | 438,000                               |         | 495,000 |   |
| Net interest income after provision for loan losses    |         | 3,656,070                             |         | 2,213,225 |   |
| **Noninterest Income:**                                | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Service charges on deposit accounts                    |         | 111,734                               |         | 85,392 |   |
| Other service charges, commissions and fees            |         | 23,343                                |         | 14,898 |   |
| Gain (loss) on sales / calls of investment  securities |         | (9,753                                | )            | — |   |
| Income from mortgage fees                              |         | 118,265                               |         | 51,081 |   |
| Other income                                           |         | 121,183                               |         | 26,841 |   |
| Total noninterest income                               |         | 364,772                               |         | 178,212 |   |
| **Noninterest Expense:**                               | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Salaries                                               |         | 799,760                               |         | 512,613 |   |
| Employee benefits                                      |         | 349,187                               |         | 241,588 |   |
| Occupancy expense                                      |         | 189,293                               |         | 69,858 |   |
| Equipment rental and depreciation of equipment         |         | 83,984                                |         | 62,391 |   |
| Other expenses                                         |         | 916,196                               |         | 524,531 |   |
| Total noninterest expense                              |         | 2,338,420                             |         | 1,410,981 |   |
|                                                   |         |                                  |         |   |   |
| **Earnings Before Income Taxes**                       |         | 1,682,422                             |         | 980,456 |   |
| Provision for income taxes                             |         | 622,068                               |         | 357,776 |   |
| **Net Earnings**                                       |         | $                                     | 1,060,354    |   | $ | 622,680 |   |
| **Earnings per share:**                                | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Basic                                                  |         | $                                     | 0.41         |   | $ | 0.24 |   |
| Diluted                                                |         | $                                     | 0.36         |   | $ | 0.23 |   |

 

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

 

3

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements ofComprehensive Income**

**For the Three Months Ended March 31****, 2006****and 2005**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net earnings                                                                                  |       | $                                     | 1,060,354  |   | $ | 622,680 |   |
|                                                                                          |       |                                  |       |   |   |
| Other comprehensive loss:                                                                     |       |                                  |       |   |   |
| Unrealized holding losses on investment securities  available for sale                        |       | (99,971                               | )          | (53,392 | ) |
| Unrealized holding losses on derivative financial  instruments classified as cash flow hedges |       | (34,500                               | )          | — |   |
| Reclassification adjustment for losses realized in  net earnings                              |       | 9,753                                 |       | — |   |
| Total other comprehensive loss, before tax                                                    |       | (124,718                              | )          | (53,392 | ) |
| Income taxes related to other comprehensive income:                                           |       |                                  |       |   |   |
| Unrealized holding losses on investment securities  available for sale                        |       | 33,990                                |       | 18,153 |   |
| Unrealized holding losses on derivative financial  instruments classified as cash flow hedges |       | 11,730                                |       | — |   |
| Reclassification adjustment for losses realized in  net earnings                              |       | (3,316                                | )          | — |   |
| Total income taxes related to other comprehensive  loss                                       |       | 42,404                                |       | 18,153 |   |
| Total other comprehensive loss, net of tax                                                    |       | (82,314                               | )          | (35,239 | ) |
| Total comprehensive income                                                                    |       | $                                     | 978,040    |   | $ | 587,441 |   |

 

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

 

4

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of CashFlows**

**For the Three Months Ended March 31, 2006 and2005**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net earnings                                                                         |       | $                                     | 1,060,354  |   | $ | 622,680 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                  |       |   |   |
| Provision for loan losses                                                            |       | 438,000                               |       | 495,000 |   |
| Depreciation                                                                         |       | 109,637                               |       | 75,945 |   |
| Net amortization of securities                                                       |       | 7,017                                 |       | 15,663 |   |
| (Gain) Loss on sales / calls of investment  securities                               |       | 9,753                                 |       | — |   |
| Loans held for sale                                                                  |       | 523,433                               |       | 463,753 |   |
| Change in cash surrender value of life insurance                                     |       | (40,933                               | )          | — |   |
| Changes in accrued income and other assets                                           |       | (753,274                              | )          | (808,787 | ) |
| Changes in accrued expenses and other liabilities                                    |       | 631,218                               |       | 490,505 |   |
| Net cash provided by operating activities                                            |       | 1,985,205                             |       | 1,354,759 |   |
| **Cash  Flows from Investing Activities:**                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net change in loans to customers                                                     |       | (36,621,278                           | )          | (34,832,191 | ) |
| Purchase of available for sale securities                                            |       | (4,991,315                            | )          | (3,189,079 | ) |
| Sales of securities available for sale                                               |       | 491,415                               |       | — |   |
| Purchase of mortgage backed securities                                               |       | —                                |       | (512,376 | ) |
| Proceeds from paydowns on mortgage-backed securities                                 |       | 473,147                               |       | 534,257 |   |
| Purchase of FHLB stock                                                               |       | (250,000                              | )          | (69,100 | ) |
| Property and equipment expenditures                                                  |       | (2,036,053                            | )          | (455,368 | ) |
| Net cash used in investing activities                                                |       | (42,934,084                           | )          | (38,523,857 | ) |
| **Cash  Flows from Financing Activities:**                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net change in deposits                                                               |       | 45,522,321                            |       | 32,910,558 |   |
| FHLB borrowings                                                                      |       | —                                |       | 4,300,000 |   |
| Net cash provided by financing activities                                            |       | 45,522,321                            |       | 37,210,558 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                            |       | 4,573,442                             |       | 41,460 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                    |       | 5,782,394                             |       | 9,831,001 |   |
| **Cash  and Cash Equivalents, End of Quarter**                                       |       | $                                     | 10,355,836 |   | $ | 9,872,461 |   |

 

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

 

5

----

 

**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

# **(Unaudited)**

# ** **

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

# ** **

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-Q and therefore do not includeall information and footnotes necessary for a fair presentation of financialposition, results of operations, and changes in financial position inconformity with generally accepted accounting principles. The interim financialstatements reflect all adjustments, consisting only of normal recurringaccruals, which are, in the opinion of management, necessary for a fair presentationof the results for the interim periods presented. The interim consolidatedfinancial statements should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005.

 

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

 

The Company sponsorsstock-based compensation plans. The Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004) “Share-Based Payment” (SFAS No. 123(R))on the required effective date of January 1, 2006. Prior to January 1,2006, the Company accounted for these plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issuedto Employees”*,* and related Interpretations andused the minimum value method of measuring the fair value of options grantedfor the proforma disclosure purposes under SFAS No. 123. As provided inSFAS No, 123(R) the Company will continue to account for the optionsoutstanding at December 31, 2005, using the measurement principals of APB No. 25and the proforma disclosures under SFAS No. 123. All stock awards grantedsubsequent to January 1, 2006 will use the fair value measurements inaccordance with SFAS 123(R), which will require the Company to recognizecompensation expense upon the grant date of the option and over any vestingperiod.

 

Given the application ofthe minimum value method for measuring the fair value of the options, nostock-based employee compensation cost is reflected in net earnings for thethree months ended March 31, 2006 and 2005. The following table illustratesthe effect on net earnings and earnings per share as if the Company had appliedthe fair value recognition provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation for the three months ended March 31,2006 and 2005. 

 
| ** **                                                                    | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net earnings, as reported                                                     |       | $                       | 1,060,354  |                    | $          | 622,680 |   |
|                                                                          |       |                    |       |                    |       |
| Proforma expensing based on options valued applying  the minimum value method |       | (13,390                 | )          | (13,390                 | )          |
| Related tax benefit                                                           |       | 5,356                   |       | 5,356                   |       |
| Pro forma net earnings                                                        |       | $                       | 1,052,320  |                    | $          | 614,646 |   |
| Earnings per share:                                                           |       |                    |       |                    |       |
| Basic, as reported                                                            |       | $                       | 0.41       |                    | $          | 0.24 |   |
| Basic, pro forma                                                              |       | $                       | 0.40       |                    | $          | 0.24 |   |
| Diluted, as reported                                                          |       | $                       | 0.36       |                    | $          | 0.23 |   |
| Diluted, pro forma                                                            |       | $                       | 0.36       |                    | $          | 0.22 |   |

 

6

----

 

***(3)******        ******Earnings Per Share***

# ** **

Basic earnings per share are based on the weightedaverage number of common shares outstanding during the period while the effectsof potential shares outstanding during the period are included in dilutedearnings per share.

 

Thereconciliation of the amounts used in the computation of both “basic earningsper share” and “diluted earnings per share” for each period is presented asfollows:  

 

**For the Three Months Ended March 31, 2006**

 
| ** **                                 | ** ** | ** **   | ** ** | **Average** | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|--------------|------------|-------------|------------|---------------|------------|
| ** **                                 | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| ** **                                 | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**    | ** ** |
| Basic earnings  per share                  |       | $            | 1,060,354  |        | 2,604,052  |          | $          | 0.41 |   |
| Effect of dilutive common stock issuances: |       |         |       |        |       |          |       |
| Stock options                              |       | —       |       | 324,099     |       | (0.05         | )          |
| Diluted earnings per share                 |       | $            | 1,060,354  |        | 2,928,151  |          | $          | 0.36 |   |

 

**For the Three Months Ended March 31,2005**

 
| ** **                                 | ** ** | ** **   | ** ** | **Average** | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|--------------|------------|-------------|------------|---------------|------------|
| ** **                                 | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| ** **                                 | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**    | ** ** |
| Basic earnings  per share                  |       | $            | 622,680    |        | 2,604,052  |          | $          | 0.24 |   |
| Effect of dilutive common stock issuances: |       |         |       |        |       |          |       |
| Stock options                              |       | —       |       | 169,862     |       | (0.01         | )          |
| Diluted earnings per share                 |       | $            | 622,680    |        | 2,773,914  |          | $          | 0.23 |   |

 

***(4)******        ******Offering of Common Stock***

# ** **

On April 14,2006, the Company filed a registration statement on Form S-1 with the Securitiesand Exchange Commission to register a maximum of 666,666 shares of its $5 parvalue common stock to be sold to the public at $30 per share. The offering willend no later than December 31, 2006. The Company plans to use the proceedsof the offering to fund future growth, including new branches. Officers anddirectors of the Company will offer and sell the common stock on a best-effortsbasis without compensation.

 

7

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

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

**March 31,2006****and****2005**

 

The following discussion of financial condition as of March 31, 2006 compared to December 31, 2005, and theresults of operations for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 should be read inconjunction with the condensed financial statements and accompanying footnotesappearing in this report.

 

##### ***Advisory NoteRegarding Forward-Looking Statements***

##### *** ***

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

 

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

 

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

•                  the potential that loancharge-offs may exceed the allowance for loan losses or that suchallowance will 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);

•                  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 otherthings, a deterioration in credit quality or a reduced demand for credit,including the resultant effect on our loan portfolio and allowance for loanlosses;

•                  fluctuations in consumer spendingand saving habits;

•                  the demand for our products andservices;

•                  technological changes;

•                  the challenges and uncertainties inthe implementation of our expansion and development strategies;

•                  the ability to increase marketshare;

•                  the adequacy of expenseprojections and estimates of impairment loss;

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

•                  unanticipated regulatory orjudicial proceedings;

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

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

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

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

•                  other factors described in this reportand in other reports we have filed with the Securities and Exchange Commission;and

•                  Our success at managing the risksinvolved in the foregoing.

 

8

----

 

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

#### ** **

**Executive Summary and Recent Developments**

 

### **The Company’s total assets at March 31,2006, were approximately $435,800,000, which represented an increase ofapproximately $47,089,000 or 12% from December 31, 2005. Net earningsincreased 70% for the three months ended March 31, 2006 to $1,060,354 or$.36 per diluted share compared to $622,680 or $.23 per diluted share for thethree months ended March 31, 2005.**

### ** **

On April 14, 2006,the Company filed a registration statement on Form S-1 with the Securitiesand Exchange Commission to register a maximum of 666,666 shares of its $5 parvalue common stock to be sold to the public at $30 per share. The offering willend no later than December 31, 2006. The Company plans to use the proceedsof the offering to fund future growth, including new branches. Officers anddirectors of the Company will offer and sell the common stock on a best-effortsbasis without compensation.

 

### **FinancialCondition**

### ** **

The composition ofassets and liabilities for the Company is as follows:

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **   | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|--------------|------------|
| ** **                     | ** ** | **2006**           | ** ** | **2005**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                    | ** ** | ** **         | ** ** | ** **            | ** ** | ** **        | ** ** | ** **   | ** ** |
| Cash and due from banks        |       | $                  | 6,031,658  |                  | $          | 4,202,851         |       | $            | 1,828,807  |   | 43.51 | % |
| Federal funds sold             |       | 4,125,000          |       | 1,450,000             |       | 2,675,000         |       | 184.48       | %          |
| Securities available for sale  |       | 38,410,913         |       | 34,525,648            |       | 3,885,265         |       | 11.25        | %          |
| Loans, net of unearned income  |       | 368,075,687        |       | 331,440,956           |       | 36,634,731        |       | 11.05        | %          |
| Total assets                   |       | 435,799,659        |       | 388,710,484           |       | 47,089,175        |       | 12.11        | %          |
| **Liabilities:**               | ** ** | ** **         | ** ** | ** **            | ** ** | ** **        | ** ** | ** **   | ** ** |
| Deposits                       |       | 380,097,445        |       | 334,575,124           |       | 45,522,321        |       | 13.61        | %          |
| FHLB borrowings                |       | 16,200,000         |       | 16,200,000            |       | —            |       | —       |       |
| Junior subordinated debentures |       | 10,310,000         |       | 10,310,000            |       | —            |       | —       |       |
|                           |       |               |       |                  |       |              |       |         |       |
| Loan to Deposit Ratio          |       | 96.84              | %          | 99.06                 | %          |              |       |         |       |
|                                |            |                    |            |                       |            |                   |            |              |            |  |  |  |

 

The most significantchange in the composition of assets was the increase in loans due to continuedgrowth of the Company. The most significant change in the composition ofliabilities was the increase in deposits to fund loan growth.

 

### **AssetQuality**

### ** **

### **Therewere no material nonperforming assets at March 31, 2006 and at December 31,2005.**

 

9

----

 

### **Resultsof Operations**

### ** **

# **The following table shows the significant components of netearnings:**

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest Income                 |       | $                      | 7,561,584  |       | $          | 4,122,890         |       | $ | 3,438,694 |   | 83.40 | % |
| Interest Expense                |       | 3,467,514              |       | 1,414,665  |       | 2,052,849         |       | 145.11 | % |
| Net Interest  Income            |       | 4,094,070              |       | 2,708,225  |       | 1,385,845         |       | 51.17 | % |
| Provision for  Loan Losses      |       | 438,000                |       | 495,000    |       | (57,000           | )          | -11.52 | % |
| Net Earnings                    |       | 1,060,354              |       | 622,680    |       | 437,674           |       | 70.29 | % |
| Net Earnings Per  Diluted Share |       | $                      | 0.36       |       | $          | 0.23              |       | $ | 0.13 |   | 56.52 | % |

 

# **General**

# ** **

The Company’s resultsof operations are determined by its ability to effectively manage interestincome and expense, to minimize loan and investment losses, to generatenon-interest income and to control non-interest expense. Since interest ratesare determined by market forces and economic conditions beyond the control ofthe Company, the ability to generate interest income is dependent upon the Bank’sability to obtain an adequate spread between the rate earned on earning assetsand the rate paid on interest-bearing liabilities.

 

**Net Interest Income**

** **

The Company’s primarysource of income is interest income from loans and investment securities. Itsprofitability 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.

 

Total interest anddividend income for the first quarter of 2006 increased $3,438,694 or 83% whencompared to the first quarter of 2005 primarily due to increases in loaninterest and fees on loans. This increase is partially the result of theaverage loan portfolio for the first quarter of 2006 increasing approximately$106 million or 43% when compared to average loan portfolio for the firstquarter of 2005. Additionally, the average yield on loans increased during thefirst quarter of 2006 to 8.24% compared to an average yield of 6.47% for thefirst quarter of 2005.

 

Total interest expensefor the first quarter of 2006 increased $2,052,849 or 145%, when compared tothe first quarter of 2005. Two factors impact interest expense: averagebalances of deposit and borrowing portfolios and average rates paid on each.Average deposit balances increased approximately $118 million when comparingfirst quarter of 2006 to first quarter 2005. The increase of $118 millionincludes approximately $6 million in non-interest bearing balances in regulardemand deposit accounts. The average rate paid on the deposit portfolios forthe first quarter of 2006 increased to 3.78% from 2.39% when compared to firstquarter of 2005. Average borrowing balances increased approximately $770thousand when comparing first quarter of 2006 to first quarter of 2005. Averageinterest rates paid on borrowings was 4.34% for the first quarter of 2006compared to 2.63% for the first quarter of 2005.

 

Net interest incomeincreased $1,385,845 or 51%, for the first quarter of 2006 as compared to thefirst quarter of 2005 as a result of the items discussed above.

 

**Provisionfor Loan Losses**

 

The provision for loanlosses for the three months ended March 31, 2006, was $438,000 compared to$495,000 for the same period of 2006 as loan growth for the respective periodswas comparable and charge-offs for each period were minimal.

 

10

----

 

**Non-interest Income**

 

Composition of other non-interest income is as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**               | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts            |       | $                      | 111,734    |       | $          | 85,392            |       | $ | 26,342 |   | 30.85 | % |
| Other service  charges, commissions and fees    |       | 23,343                 |       | 14,898     |       | 8,445             |       | 56.69 | % |
| Gain on sales /  calls of investment securities |       | (9,753                 | )          | —     |       | (9,753            | )          | -100.00 | % |
| Income from  mortgage fees                      |       | 118,265                |       | 51,081     |       | 67,184            |       | 131.52 | % |
| Other income                                    |       | 121,183                |       | 26,841     |       | 94,342            |       | 351.48 | % |
| Total  noninterest income                       |       | $                      | 364,772    |       | $          | 178,212           |       | $ | 186,560 |   | 104.68 | % |

 

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. The increase in mortgage fees is primarily due to the mortgageloan brokerage activity, which was started in late 2004 and the volume ofmortgages originated in 2006 was larger than the same period of 2005. The twomost significant changes in other income were $52,306 of rental income from aportion of a Bank owned facility and $40,933 of income from the increase incash surrender value of life insurance on bank owned life insurance (“BOLI”)policies purchased in the second quarter of 2005.

 

**Non-interest Expense**

 

Compositionof other non-interest expense is as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**               | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                      | 799,760    |       | $          | 512,613           |       | $ | 287,147 |   | 56.02 | % |
| Employee  benefits                              |       | 349,187                |       | 241,588    |       | 107,599           |       | 44.54 | % |
| Occupancy expense                               |       | 189,293                |       | 69,858     |       | 119,435           |       | 170.97 | % |
| Equipment rental  and depreciation of equipment |       | 83,984                 |       | 62,391     |       | 21,593            |       | 34.61 | % |
| Other expenses                                  |       | 916,196                |       | 524,531    |       | 391,665           |       | 74.67 | % |
| Total noninterest expense                       |       | $                      | 2,338,420  |       | $          | 1,410,981         |       | $ | 927,439 |   | 65.73 | % |

 

Theincreases in non-interest expenses are primarily due to the growth of the bank.The most significant increases in the first quarter of 2006 are increases insalaries and employee benefits. The increase in salaries and employees benefitsrepresents normal increases in salaries and an increase in the number ofemployees. At March 31, 2006, the number of full-time equivalent employeeswas 70 compared to 50 at March 31, 2005. The increase in the number offull-time equivalent employees is directly related to the growth of the bankand the hiring for two new branches and one loan production center. Theincrease in occupancy expenses and equipment rental and depreciation onequipment is due to the fact that the Bank operates from seven facilities as ofMarch 31, 2006, compared to four facilities as of March 2005. Theincreases in other expenses are not attributable to any one particular item,but represent increases related to physical facility expansion.

 

**Income Tax Expense**

 

Incometax expense expressed as a percentage of earnings before income taxes was36.97% and 36.49% for the three months ended March 31, 2006 and 2005,respectively.

 

11

----

 

### **Liquidity**

### ** **

Liquiditymanagement involves the matching of the cash flow requirements of customers,either depositors withdrawing funds or borrowers needing loans, and the abilityof the Company to meet those requirements.

 

TheCompany’s liquidity program is designed and intended to provide guidance infunding the credit and investment activities of the Company while at the sametime ensuring that the deposit obligations of the Company are met on a timelybasis. In order to permit active and timely management of assets andliabilities, these accounts are monitored regularly in regard to volume, mix,and maturity.

 

TheCompany’s liquidity position depends primarily upon the liquidity of its assetsrelative to its need to respond to short-term demand for funds caused bywithdrawals from deposit accounts and loan funding commitments. Primary sourcesof liquidity are scheduled repayments on the Company’s loans and interest onand maturities of its investment securities. Sales of investment securitiesavailable for sale represent another source of liquidity to the Company. TheCompany may also utilize its cash and due from banks and federal fundssold to meet liquidity requirements as needed.

 

TheCompany also has the ability, on a short-term basis, to purchase federal fundsfrom other financial institutions up to $21,400,000. At March 31, 2006,the Company had no federal funds purchased. The Company has a total availableline of $26,186,000, subject to available collateral, from the Federal HomeLoan Bank. The Company has $16.2 million in advances on this line at March 31,2006.

 

TheBank’s liquidity policy requires that the ratio of cash and certain short-terminvestments to net withdrawable deposit accounts be at least 10%. The Bank’sliquidity ratios at March 31, 2006 and 2005 were 12.38% and 12.48%,respectively.

 

### **Capital**

### ** **

The following table summarizes the capital ratios ofthe Company and the Bank:

 
| ** **                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Tier 1 Leverage  Ratio - Bank                      |       | 8.85               | %          | 9.26                  | %          |
| Tier 1 Leverage  Ratio - Consolidated              |       | 8.62               | %          | 8.88                  | %          |
|                                               |       |               |       |                  |       |
| Tier 1 Risk  Weighted Capital Ratio - Bank         |       | 9.70               | %          | 10.65                 | %          |
| Tier 1 Risk  Weighted Capital Ratio - Consolidated |       | 9.43               | %          | 10.21                 | %          |
|                                               |       |               |       |                  |       |
| Total Risk  Weighted Capital Ratio - Bank          |       | 10.91              | %          | 11.88                 | %          |
| Total Risk  Weighted Capital Ratio - Consolidated  |       | 10.96              | %          | 11.89                 | %          |

 

The capital of theCompany and the Bank exceeded all prescribed regulatory capital guidelines. Regulationsrequire that the most highly rated banks maintain a Tier 1 leverage ratio of 3%plus an additional cushion of at least 1 to 2 percentage points. Tier 1 capitalconsists of common shareholders’ equity, less certain intangibles. Regulationsrequire that the Bank maintain a minimum total risk weighted capital ratio of8%, with one-half of this amount, or 4%, made up of Tier I capital.

 

12

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

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

**Forthe Three Months ended March 31, 2006**

 

As of March 31,2006, 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, 2005. The foregoing disclosures relatedto the market risk of the Company should be read in conjunction with theCompany’s audited consolidated financial statements, related notes andmanagement’s discussion and analysis of financial condition and results ofoperations for the year ended December 31, 2005 included in the Company’s2005 Annual Report on Form 10-K.

 

13

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Item 4. Controls and Procedures**

**For the Three months Ended March 31, 2006**

 

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 formsand that the Company’s disclosure controls and procedures are designed toensure that the information required to be disclosed in reports that are filedor submitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

#### **During the first quarter of 2006,there were no significant changes in the Company’s internal control overfinancial reporting or, to the Company’s knowledge, in other factors that couldsignificantly affect those internal controls subsequent to the date the Companycarried out its evaluation that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting, and there have been no corrective actions with respect tosignificant deficiencies or material weaknesses.**

 

14

----

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Part II. Other Information**

#### **Forthe Three months Ended March 31, 2006**

#### ** **

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

#### ** **

Item 1. LegalProceedings

 

There are no materiallegal proceedings to which the Company is a party or of which their property isthe subject.

 

Item 1A. Risk Factors

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2005, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not theonly risks we face. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/ or operation results.

 

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults UponSenior Securities

 

Not Applicable

 

Item 4. Submission ofMatters to a Vote of Security-Holders

 

There were no matterssubmitted to security holders for a vote during the three months ended March 31,2006.

 

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 therequirements of the Securities Exchange Act, the registrant caused this reportto be signed on its 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: May 12,  2006                         |

 

15

----