**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-Q**
| x      | ** ** | **Quarterly report under Section 13 or 15 (d) of  the Securities Exchange Act of 1934** |
|--------|------------|-----------------------------------------------------------------------------------------|
|   |       |                                                                                    |
|   | ** ** | **For the  quarterly period ended June 30, 2006**                                       |
|   |       |                                                                                    |
| o      | ** ** | **Transition report under Section 13 or 15 (d) of  the Exchange Act**                   |
|   |       |                                                                                    |

**For thetransition 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.) |

 

**4077 Forsyth Road**

**Macon, Georgia 31210**

(Address of PrincipalExecutive Offices)

** **

**(478) 757-8181**

(Issuer’sTelephone Number, Including Area Code)

**Not Applicable**

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

Indicate by checkmark whether 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” (in Rule 12b-2 ofthe Exchange Act).
| Large accelerated filer |   | o |   |   |   | Accelerated filer |   | o |   | Non-accelerated filer |   | x |
|-------------------------|--------|---|--------|--------|--------|-------------------|--------|---|--------|-----------------------|--------|---|

 

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

Yes   o        No   x

**APPLICABLEONLY TO CORPORATE ISSUERS**

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date: Common Stock $5 par value, 3,304,052 sharesoutstanding at August 1, 2006

 

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

INDEX
| PART I:                                                                                                   |   | FINANCIAL INFORMATION                                                                                                                  |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1.                                                                                                   |   | FINANCIAL STATEMENTS                                                                                                                   |   |   |
|                                                                                                      |   |                                                                                                                                   |   |   |
| The following consolidated financial statements are  provided for Atlantic Southern Financial Group, Inc. |   |                                                                                                                                   |
|                                                                                                      |   |                                                                                                                                   |   |   |
|                                                                                                      |   | Consolidated Balance  Sheets — June 30, 2006  (unaudited) and December 31, 2005 (audited).                                        |   | 2      |
|                                                                                                      |   |                                                                                                                                   |   |   |
|                                                                                                      |   | Consolidated  Statements of Earnings (unaudited) — For the Three Months and Six Months  Ended June 30, 2006 and 2005.             |   | 3      |
|                                                                                                      |   |                                                                                                                                   |   |   |
|                                                                                                      |   | Consolidated  Statements of Comprehensive Income (unaudited) — For the Three Months and Six  Months Ended June 30, 2006 and 2005. |   | 4      |
|                                                                                                      |   |                                                                                                                                   |   |   |
|                                                                                                      |   | Consolidated  Statements of Cash Flows (unaudited) — For the Six Months Ended June 30, 2006 and 2005.                             |   | 5      |
|                                                                                                      |   |                                                                                                                                   |   |   |
|                                                                                                      |   | Notes to  Consolidated Financial Statements (unaudited)                                                                                |   | 6      |
|                                                                                                      |   |                                                                                                                                   |   |   |
| ITEM 2.                                                                                                   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            |   | 8      |
|                                                                                                      |   |                                                                                                                                   |   |   |
| ITEM 3.                                                                                                   |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                            |   | 14     |
|                                                                                                      |   |                                                                                                                                   |   |   |
| ITEM 4.                                                                                                   |   | Controls and  Procedures                                                                                                               |   | 15     |
|                                                                                                      |   |                                                                                                                                   |   |   |
| PART II:                                                                                                  |   | OTHER INFORMATION                                                                                                                      |   | 16     |

 

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedBalance Sheets**

**June30, 2006****(Unaudited) and****December 31, 2005****(Audited)**

 
| ** **                                                                                                                 | ** ** | **As of**    | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                                 | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                                                 | ** ** | **2006**          | ** **  | **2005** | ** ** |
| **Assets**                                                                                                                 |       |              |        |   |   |
| Cash and due from banks                                                                                                    |       | $                 | 10,754,255  |   | $ | 4,202,851 |   |
| Interest-bearing  deposits in other banks                                                                                  |       | 121,345           |        | 129,543 |   |
| Federal funds sold                                                                                                         |       | 9,736,000         |        | 1,450,000 |   |
| Total cash and  cash equivalents                                                                                           |       | 20,611,600        |        | 5,782,394 |   |
| Securities available  for sale, at fair value                                                                              |       | 43,079,838        |        | 34,525,648 |   |
| Federal Home Loan Bank  stock, restricted, at cost                                                                         |       | 1,775,700         |        | 1,255,700 |   |
| Loans held for sale                                                                                                        |       | 1,628,117         |        | 1,226,353 |   |
| Loans, net of unearned  income                                                                                             |       | 407,770,705       |        | 331,440,956 |   |
| Less - allowance for  loan losses                                                                                          |       | (5,139,841        | )           | (4,150,000 | ) |
| Loans, net                                                                                                                 |       | 402,630,864       |        | 327,290,956 |   |
| Bank premises and  equipment, net                                                                                          |       | 11,339,106        |        | 9,140,566 |   |
| Accrued interest  receivable                                                                                               |       | 3,960,832         |        | 2,709,386 |   |
| Cash surrender value of  life insurance                                                                                    |       | 4,182,529         |        | 4,100,663 |   |
| Other assets                                                                                                               |       | 3,271,761         |        | 2,678,818 |   |
| **Total  Assets**                                                                                                          |       | $                 | 492,480,347 |   | $ | 388,710,484 |   |
| ** **                                                                                                                 |       |              |        |   |   |
| **Liabilities and Shareholders’  Equity**                                                                             | ** ** | ** **        | ** **  | ** ** | ** ** |
| Deposits:                                                                                                                  |       |              |        |   |   |
| Non-interest  bearing                                                                                                      |       | $                 | 25,470,173  |   | $ | 21,599,726 |   |
| Interest bearing                                                                                                           |       | 383,737,809       |        | 312,975,398 |   |
| Total deposits                                                                                                             |       | 409,207,982       |        | 334,575,124 |   |
| FHLB borrowings                                                                                                            |       | 22,200,000        |        | 16,200,000 |   |
| Junior subordinated  debentures                                                                                            |       | 10,310,000        |        | 10,310,000 |   |
| Accrued interest  payable                                                                                                  |       | 1,729,178         |        | 1,648,664 |   |
| Accrued expenses and  other liabilities                                                                                    |       | 869,088           |        | 590,397 |   |
| Total  liabilities                                                                                                         |       | 444,316,248       |        | 363,324,185 |   |
| Shareholders’ Equity:                                                                                                 |       |              |        |   |   |
| Preferred stock,  authorized 2,000,000 shares, no shares outstanding                                                       |       | —            |        | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, issued and outstanding 3,304,052 in  2006 and 2,604,052 in 2005 |       | 16,520,260        |        | 13,020,260 |   |
| Paid-in capital surplus                                                                                                    |       | 29,345,181        |        | 12,047,356 |   |
| Retained earnings                                                                                                          |       | 3,319,403         |        | 898,117 |   |
| Accumulated other  comprehensive income (loss)                                                                             |       | (1,020,745        | )           | (579,434 | ) |
| Total  shareholders’ equity                                                                                           |       | 48,164,099        |        | 25,386,299 |   |
| **Total Liabilities and  Shareholders’ Equity**                                                                       |       | $                 | 492,480,347 |   | $ | 388,710,484 |   |

 

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

 

2

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** **

**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Earnings**

**Forthe Three Months and Six Months Ended June 30****, 2006****and 2005**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Interest  and Dividend Income:**                     | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans                             |       | $                                | 8,326,618  |                           | $          | 4,732,648 |   | $ | 15,466,874 |   | $ | 8,649,342 |   |
| Interest on securities:                                |       |                             |       |                           |       |   |   |   |   |
| Taxable income                                         |       | 347,548                          |       | 184,322                        |       | 652,874 |   | 340,111 |   |
| Non-taxable income                                     |       | 54,004                           |       | 30,274                         |       | 100,791 |   | 50,016 |   |
| Income on federal funds sold                           |       | 82,486                           |       | 28,877                         |       | 131,280 |   | 50,058 |   |
| Other interest and dividend income                     |       | 27,393                           |       | 14,943                         |       | 47,814 |   | 24,427 |   |
| Total interest and dividend income                     |       | 8,838,049                        |       | 4,991,064                      |       | 16,399,633 |   | 9,113,954 |   |
| **Interest  Expense:**                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                               |       | 3,700,200                        |       | 1,684,387                      |       | 6,799,044 |   | 2,983,003 |   |
| FHLB borrowings                                        |       | 254,723                          |       | 136,839                        |       | 427,224 |   | 243,715 |   |
| Federal funds purchased                                |       | 28,581                           |       | 9,358                          |       | 56,150 |   | 18,531 |   |
| Junior subordinated debentures                         |       | 185,108                          |       | 94,543                         |       | 353,708 |   | 94,543 |   |
| Total interest expense                                 |       | 4,168,612                        |       | 1,925,127                      |       | 7,636,126 |   | 3,339,792 |   |
| Net interest income before provision for loan losses   |       | 4,669,437                        |       | 3,065,937                      |       | 8,763,507 |   | 5,774,162 |   |
| Provision for loan losses                              |       | 483,000                          |       | 345,000                        |       | 921,000 |   | 840,000 |   |
| Net interest income after provision for loan losses    |       | 4,186,437                        |       | 2,720,937                      |       | 7,842,507 |   | 4,934,162 |   |
| **Noninterest  Income:**                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                    |       | 112,565                          |       | 100,694                        |       | 224,299 |   | 186,086 |   |
| Other service charges, commissions and fees            |       | 26,049                           |       | 18,275                         |       | 49,392 |   | 33,173 |   |
| Gain (loss) on sales / calls of investment  securities |       | —                           |       | —                         |       | (9,753 | ) | — |   |
| Gain (loss) on sale of other assets                    |       | 2,895                            |       | —                         |       | 2,895 |   | — |   |
| Income from mortgage fees                              |       | 162,064                          |       | 76,706                         |       | 280,329 |   | 127,787 |   |
| Other income                                           |       | 134,101                          |       | 33,499                         |       | 255,284 |   | 60,340 |   |
| Total noninterest income                               |       | 437,674                          |       | 229,174                        |       | 802,446 |   | 407,386 |   |
| **Noninterest  Expense:**                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries                                               |       | 944,874                          |       | 589,634                        |       | 1,744,634 |   | 1,102,247 |   |
| Employee benefits                                      |       | 353,873                          |       | 197,294                        |       | 703,060 |   | 438,882 |   |
| Occupancy expense                                      |       | 192,893                          |       | 95,018                         |       | 382,186 |   | 164,876 |   |
| Equipment rental and depreciation of equipment         |       | 111,697                          |       | 66,322                         |       | 195,681 |   | 128,713 |   |
| Other expenses                                         |       | 886,754                          |       | 633,100                        |       | 1,802,950 |   | 1,157,631 |   |
| Total noninterest expense                              |       | 2,490,091                        |       | 1,581,368                      |       | 4,828,511 |   | 2,992,349 |   |
| ** **                                             |       |                             |       |                           |       |   |   |   |   |
| **Earnings  Before Income Taxes**                      |       | 2,134,020                        |       | 1,368,743                      |       | 3,816,442 |   | 2,349,199 |   |
| Provision for income taxes                             |       | 773,088                          |       | 498,847                        |       | 1,395,156 |   | 856,623 |   |
| **Net  Earnings**                                      |       | $                                | 1,360,932  |                           | $          | 869,896 |   | $ | 2,421,286 |   | $ | 1,492,576 |   |
| **Earnings  per share:**                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  |       | $                                | 0.48       |                           | $          | 0.33 |   | $ | 0.89 |   | $ | 0.57 |   |
| Diluted                                                |       | $                                | 0.43       |                           | $          | 0.31 |   | $ | 0.79 |   | $ | 0.53 |   |

 

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

3

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Comprehensive Income**

**Forthe Three Months and Six Months Ended June 30****, 2006****and 2005**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings                                                                                  |       | $                                                   | 1,360,932  |                                              | $          | 869,896 |   | $ | 2,421,286 |   | $ | 1,492,576 |   |
| Other  comprehensive loss:                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding losses on investment securities  available for sale                        |       | (508,300                                            | )          | (23,728                                           | )          | (608,271 | ) | (77,120 | ) |
| Unrealized holding losses on derivative financial instruments  classified as cash flow hedges |       | (35,635                                             | )          | —                                            |       | (70,135 | ) | — |   |
| Reclassification adjustment for losses realized in  net earnings                              |       | —                                              |       | —                                            |       | 9,753 |   | — |   |
| Total other comprehensive loss, before tax                                                    |       | (543,935                                            | )          | (23,728                                           | )          | (668,653 | ) | (77,120 | ) |
| Income taxes  related to other comprehensive income:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding losses on investment                                                       |       | 172,822                                             |       | 8,068                                             |       | 206,812 |   | 26,221 |   |
| securities available for sale                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding losses on derivative financial instruments  classified as cash flow hedges |       | 12,116                                              |       | —                                            |       | 23,846 |   | — |   |
| Reclassification  adjustment for losses realized in net earnings                              |       | —                                              |       | —                                            |       | (3,316 | ) | — |   |
| Total income taxes related to other comprehensive  loss                                       |       | 184,938                                             |       | 8,068                                             |       | 227,342 |   | 26,221 |   |
| Total other comprehensive loss, net of tax                                                    |       | (358,997                                            | )          | (15,660                                           | )          | (441,311 | ) | (50,899 | ) |
| Total  comprehensive income                                                                   |       | $                                                   | 1,001,935  |                                              | $          | 854,236 |   | $ | 1,979,975 |   | $ | 1,441,677 |   |

* *

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

4

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Cash Flows**

**Forthe Six Months Ended June 30, 2006 and 2005**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net earnings                                                                         |       | $                                                 | 2,421,286  |   | $ | 1,492,576 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                              |       |   |   |
| Provision for loan losses                                                            |       | 921,000                                           |       | 840,000 |   |
| Depreciation                                                                         |       | 250,432                                           |       | 157,866 |   |
| Net amortization of securities                                                       |       | 13,129                                            |       | 29,388 |   |
| (Gain) Loss on sales of other assets                                                 |       | (2,895                                            | )          | — |   |
| (Gain) Loss on sales / calls of investment  securities                               |       | 9,753                                             |       | — |   |
| Loans held for sale                                                                  |       | (401,764                                          | )          | 63,901 |   |
| Change in cash surrender value of life insurance                                     |       | (81,866                                           | )          | (4,018,796 | ) |
| Changes in accrued income and other assets                                           |       | (1,684,287                                        | )          | (1,281,175 | ) |
| Changes in accrued expenses and other liabilities                                    |       | 359,205                                           |       | 598,041 |   |
| Net cash provided by (used in) operating activities                                  |       | 1,803,993                                         |       | (2,118,199 | ) |
| **Cash  Flows from Investing Activities:**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net change in loans to customers                                                     |       | (76,260,908                                       | )          | (56,066,715 | ) |
| Purchase of available for sale securities                                            |       | (10,645,584                                       | )          | (6,915,946 | ) |
| Sales of securities available for sale                                               |       | 491,415                                           |       | — |   |
| Proceeds from maturities/calls of available for sale  securities                     |       | —                                            |       | 500,000 |   |
| Purchase of mortgage backed securities                                               |       | —                                            |       | (2,511,751 | ) |
| Proceeds from paydowns on mortgage-backed securities                                 |       | 978,579                                           |       | 797,053 |   |
| Purchase of FHLB stock                                                               |       | (520,000                                          | )          | (69,100 | ) |
| Property and equipment expenditures                                                  |       | (2,448,972                                        | )          | (1,293,676 | ) |
| Net cash used in investing activities                                                |       | (88,405,470                                       | )          | (65,560,135 | ) |
| **Cash  Flows from Financing Activities:**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net change in deposits                                                               |       | 74,632,858                                        |       | 64,208,169 |   |
| FHLB borrowings                                                                      |       | 6,000,000                                         |       | (3,000,000 | ) |
| Proceeds from junior subordinated debentures                                         |       | —                                            |       | 10,310,000 |   |
| Proceeds from issuance of common stock, net of  issuance cost of $202,175            |       | 20,797,825                                        |       | — |   |
| Net cash provided by financing activities                                            |       | 101,430,683                                       |       | 71,518,169 |   |
| **Net  Change in Cash and Cash Equivalents**                                         |       | 14,829,206                                        |       | 3,839,835 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                    |       | 5,782,394                                         |       | 9,831,001 |   |
| **Cash and Cash Equivalents, End  of Quarter**                                       |       | $                                                 | 20,611,600 |   | $ | 13,670,836 |   |

 

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

 

5

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.Notes to Consolidated Financial Statements(Unaudited)**

 

 

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

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

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

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

Giventhe application of the minimum value method for measuring the fair value of theoptions, no stock-based employee compensation cost is reflected in net earningsfor the three months and six months ended June 30, 2006 and 2005.  The following table illustrates the effect onnet earnings and earnings per share as if the Company had applied the fair valuerecognition provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation for the three months and six months ended June 30, 2006 and 2005.

 
| ** **                                                                   | ** ** | **For the three months ended June 30,** | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                              | ** ** | **2005**                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings, as  reported                                                   |       | $                                                                     | 1,360,932  |                                                                | $          | 869,896 |   | $ | 2,421,286 |   | $ | 1,492,576 |   |
| Proforma  expensing based on options valuedapplying the minimum value method |       | (13,390                                                               | )          | (13,390                                                             | )          | (26,780 | ) | (26,780 | ) |
| Related tax  benefit                                                         |       | 5,356                                                                 |       | 5,356                                                               |       | 10,712 |   | 10,712 |   |
| Pro forma net  earnings                                                      |       | $                                                                     | 1,352,898  |                                                                | $          | 861,862 |   | $ | 2,405,218 |   | $ | 1,476,508 |   |
| Earnings per share:                                                          |       |                                                                  |       |                                                                |       |   |   |   |   |
| Basic, as reported                                                           |       | $                                                                     | 0.48       |                                                                | $          | 0.33 |   | $ | 0.89 |   | $ | 0.57 |   |
| Basic, pro forma                                                             |       | $                                                                     | 0.47       |                                                                | $          | 0.33 |   | $ | 0.88 |   | $ | 0.57 |   |
| Diluted, as reported                                                         |       | $                                                                     | 0.43       |                                                                | $          | 0.31 |   | $ | 0.79 |   | $ | 0.53 |   |
| Diluted, pro  forma                                                          |       | $                                                                     | 0.42       |                                                                | $          | 0.31 |   | $ | 0.79 |   | $ | 0.53 |   |

 

#  

6

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

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

The reconciliation of the amounts used in the computation of both “basicearnings per share” and “diluted earnings per share” for each period ispresented as follows:

 

 

|                                              | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                   | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Three Months Ended June 30, 2006** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings per  share                    |       | $            | 1,360,932  |        | 2,854,144  |               | 0.48       |   |
| Effect of  dilutive common stock issuances:  |       |         |       |        |       |               |       |
| Stock options                                |       | —       |       | 334,282     |       | (0.05              | )          |
| Diluted earnings per share                   |       | $            | 1,360,932  |        | 3,188,426  |               | 0.43       |   |

 

** **

 

|                                               | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
|-----------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                    | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Three  Months Ended June 30, 2005** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings per  share                     |       | $            | 869,896    |        | 2,604,052  |               | 0.33       |   |
| Effect of  dilutive common stock issuances:   |       |         |       |        |       |               |       |
| Stock options                                 |       | —       |       | 190,875     |       | (0.02              | )          |
| Diluted earnings per share                    |       | $            | 869,896    |        | 2,794,927  |               | 0.31       |   |

** **

** **

 

|                                             | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
|---------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                  | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Six  Months Ended June 30, 2006** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings per  share                   |       | $            | 2,421,286  |        | 2,728,407  |               | 0.89       |   |
| Effect of  dilutive common stock issuances: |       |         |       |        |       |               |       |
| Stock options                               |       | —       |       | 330,270     |       | (0.10              | )          |
| Diluted earnings per share                  |       | $            | 2,421,286  |        | 3,058,677  |               | 0.79       |   |

** **

** **

 

|                                             | ** ** | ** **   | ** ** | **Average** | ** ** | ** **         | ** ** |
|---------------------------------------------|------------|--------------|------------|-------------|------------|--------------------|------------|
| ** **                                  | ** ** | **Net**      | ** ** | **Common**  | ** ** | **Per Share** | ** ** |
| **For the Six  Months Ended June 30, 2005** | ** ** | **Earnings** | ** ** | **Shares**  | ** ** | **Amount**         | ** ** |
| Basic earnings per  share                   |       | $            | 1,492,576  |        | 2,604,052  |               | 0.57       |   |
| Effect of  dilutive common stock issuances: |       |         |       |        |       |               |       |
| Stock options                               |       | —       |       | 190,875     |       | (0.04              | )          |
| Diluted earnings per share                  |       | $            | 1,492,576  |        | 2,794,927  |               | 0.53       |   |

 

 

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

On June 12, 2006,the Company closed its public offering of a total of 700,000 shares of commonstock at a price of $30.00 per share. The Company received net proceeds of$20.8 million after deducting offering expenses. The Company plans to use theproceeds of the offering to fund future growth, including opening de novobranches and the acquisitions of existing banks, purchasing additional land insouth Macon, funding future loan demand and ensuring sufficient risk-basedcapital and liquidity for continued growth.

***(5) Subsequent Event***

On July 27, 2006,Atlantic Southern Financial Group, Inc. announced the signing of a definitiveagreement to acquire Sapelo Bancshares, Inc. (“Sapelo”) and its subsidiary, SapeloNational Bank, a community bank headquartered in Darien, Georgia, withapproximately $61 million in assets, $49 million in loans, $50 million indeposits and $7 million in stockholders’ equity as of June 30, 2006. SapeloNational Bank operates four full service banking offices in McIntosh and GlynnCounties. The transaction is valued at approximately $15.4 million and isexpected to be completed during the fourth quarter of 2006, subject toregulatory approval, the approval of Sapelo shareholders and other customaryclosing conditions.

7

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof OperationsFor Each of the Six Months in the Period EndedJune 30, 2006 and 2005**

The following discussion of financialcondition as of June 30, 2006compared to December 31, 2005,and the results of operations for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 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 of us 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 such allowancewill be increased as a result of factors beyond the control of us;

·                  our dependence on seniormanagement;

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

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

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

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

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

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

·                  fluctuations in consumer spendingand saving habits;

·                  the demand for our products andservices;

·                  technological changes;

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

·                  the ability to increase marketshare;

·                  the adequacy of expenseprojections and estimates of impairment loss;

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

·                  unanticipated regulatory orjudicial proceedings;

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

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

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

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

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

·                  Our success at managing the risksinvolved in the foregoing.

8

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### Forward-looking statements speak only as ofthe date on which they are made. We undertake no obligation to update anyforward-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 June 30, 2006,were approximately $492,480,000, which represented an increase of approximately$103,770,000 or 27% from December 31, 2005. Net earnings increased 62% for thesix months ended June 30, 2006 to $2,421,286 or $0.79 per diluted sharecompared to $1,492,576 or $0.53 per diluted share for the six months ended June30, 2005.

### On June 12, 2006, the Companyclosed its public offering of a total of 700,000 shares of common stock at aprice of $30.00 per share. The Company received net proceeds of $20.8 millionafter deducting offering expenses. The Company plans to use the proceeds of theoffering to fund future growth, including opening de novo branches and theacquisitions of existing banks, purchasing additional land in south Macon,funding future loan demand and ensuring sufficient risk-based capital andliquidity for continued growth.

On July 27, 2006,the Company announced the signing of a definitive agreement to acquire SapeloBancshares, Inc. and its subsidiary, Sapelo National Bank, a community bankheadquartered in Darien, Georgia, with approximately $61 million in assets, $49million in loans, $50 million in deposits and $7 million in stockholders’equity as of June 30, 2006. Sapelo National Bank operates four full servicebanking offices in McIntosh and Glynn Counties. Under the terms of the mergeragreement, Sapelo Bancshares shareholders can elect to receive $63.00 per sharecash, or 2.10 shares of Atlantic Southern Financial Group, Inc. common stock ora combination of both for each share of Sapelo Bancshares Inc. common stock. However,the aggregate merger consideration is fixed at approximately 60 percent stockand 40 percent cash. The transaction is valued at approximately $15.4 millionand is expected to be completed during the fourth quarter of 2006, subject toregulatory approval, the approval of Sapelo shareholders and other customaryclosing conditions.

**FinancialCondition**

The composition of assets and liabilities for the Company is as follows:
| ** **                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **        | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2006**          | ** ** | **2005**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                    | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** |
| Cash and due from banks        |       | $                 | 10,754,255 |                  | $          | 4,202,851         |       | $                 | 6,551,404  |   | 155.88 | % |
| Federal funds sold             |       | 9,736,000         |       | 1,450,000             |       | 8,286,000         |       | 571.45            | %          |
| Securities available for sale  |       | 43,079,838        |       | 34,525,648            |       | 8,554,190         |       | 24.78             | %          |
| Loans, net of unearned income  |       | 407,770,705       |       | 331,440,956           |       | 76,329,749        |       | 23.03             | %          |
| Total assets                   |       | 492,480,347       |       | 388,710,484           |       | 103,769,863       |       | 26.70             | %          |
| **Liabilities:**               | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** |
| Deposits                       |       | 409,207,982       |       | 334,575,124           |       | 74,632,858        |       | 22.31             | %          |
| FHLB borrowings                |       | 22,200,000        |       | 16,200,000            |       | 6,000,000         |       | 37.04             | %          |
| Junior subordinated debentures |       | 10,310,000        |       | 10,310,000            |       | —            |       | —            |       |
|                           |       |              |       |                  |       |              |       |              |       |
| Loan to Deposit  Ratio         |       | 99.65             | %          | 99.06                 | %          |              |       |              |       |
|                                |            |                   |            |                       |            |                   |            |                   |            |  |  |  |

 

The most significant change in the composition of assets was theincrease in loans due to continued growth of the Company. The most significantchange in the composition of liabilities was the increase in deposits to fundloan growth.

9

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### **Asset Quality**

### Therewere no material nonperforming assets at June 30, 2006 and at December 31,2005.

### **Results of Operations**

# The following table shows the significant componentsof net earnings:

| ** **                           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                           | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                           | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|  Interest Income                |       | $                              | 16,399,633 |       | $          | 9,113,954         |       | $ | 7,285,679 |   | 79.94 | % |
|  Interest Expense               |       | 7,636,126                      |       | 3,339,792  |       | 4,296,334         |       | 128.64 | % |
|  Net Interest Income            |       | 8,763,507                      |       | 5,774,162  |       | 2,989,345         |       | 51.77 | % |
|  Provision for Loan Losses      |       | 921,000                        |       | 840,000    |       | 81,000            |       | 9.64 | % |
|  Net Earnings                   |       | 2,421,286                      |       | 1,492,576  |       | 928,710           |       | 62.22 | % |
|  Net Earnings Per Diluted Share |       | $                              | 0.79       |       | $          | 0.53              |       | 0.26 |   | 49.06 | % |
|                                      |            |                                |            |            |            |                   |            |  |  |  |  |  |

 

# **General**

TheCompany’s results of operations are determined by its ability to effectivelymanage interest income and expense, to minimize loan and investment losses, togenerate noninterest income and to control noninterest expense. Since interestrates are determined by market forces and economic conditions beyond thecontrol of the Company, the ability to generate interest income is dependentupon the Bank’s ability to obtain an adequate spread between the rate earned onearning assets and the rate paid on interest-bearing liabilities.

# **Net Interest Income**

The Company’sprimary source of income is interest income from loans and investmentsecurities. Its profitability depends largely on net interest income, which isthe difference between the interest received on interest-earning assets and theinterest paid on deposits, borrowings, and other interest-bearing liabilities.

For the six monthsended June 30, 2006, total interest and dividend income increased $7,286,000 or80% when compared to the six months ended June 30, 2005. Total interest expensefor the six months ended June 30, 2006 increased 4,296,000 or 129% whencompared to the six months ended June 30, 2005. Net interest income increased2,989,000 or 52% for the six months ended June 30, 2006 compared to June 30,2005. Net margin for the six-months ended June 30, 2006, increased to 4.47%,from 4.13% in the six-months ended June 30, 2005. In the short term, due to apositive gap position and an asset sensitive balance sheet, the Bank willexperience an increase in net interest income during a rising rate environment.

Total interest anddividend income for the second quarter of 2006 increased $3,847,000 or 77% whencompared to the second 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 second quarter of 2006 increasing approximately$111 million or 40% when compared to average loan portfolio for the secondquarter of 2005. Additionally, the average yield on loans increased during thesecond quarter of 2006 to 8.63% compared to an average yield of 6.87 % for thesecond quarter of 2005.

Total interestexpense for the second quarter of 2006 increased $2,244,000 or 117%, whencompared to the second quarter of 2005. Two factors impact interest expense:average balances of deposit and borrowing portfolios and average rates paid oneach. Average deposit balances increased approximately $121 million whencomparing second quarter of 2006 to second quarter 2005. The increase of $121 millionincludes approximately $7 million in non-interest bearing balances in regulardemand deposit accounts. The average rate paid on the deposit portfolios forthe second quarter of 2006 increased to 4.09% from 2.72% when compared tosecond quarter of 2005. Average borrowing balances increased approximately $5million when comparing second quarter of 2006 to second quarter of

10

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2005. Averageinterest rates paid on borrowings was 4.80% for the second quarter of 2006compared to 3.18% for the second quarter of 2005.

Net interestincome increased $1,604,000 or 52%, for the second quarter of 2006 as comparedto the second quarter of 2005 as a result of the items discussed above.

# **Provision for Loan Losses**

The provision for loanlosses for the six months ended June 30, 2006, was $921,000 compared to$840,000 for the same period of 2006 as loan growth for the respective periodswas comparable and charge-offs for each period were minimal.

# **Non-interest Income**

Composition of other noninterest income is as follows:

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on  deposit accounts            |       | $                              | 224,299    |       | $          | 186,086           |       | $ | 38,213 |   | 20.54 | % |
| Other service charges,  commissions and fees    |       | 49,392                         |       | 33,173     |       | 16,219            |       | 48.89 | % |
| Gain on sales / calls  of investment securities |       | (9,753                         | )          | —     |       | (9,753            | )          | -100.00 | % |
| Gain (loss) on sale of  other assets            |       | 2,895                          |       | —     |       | 2,895             |       | 100.00 | % |
| Income from mortgage  fees                      |       | 280,329                        |       | 127,787    |       | 152,542           |       | 119.37 | % |
| Other income                                    |       | 255,284                        |       | 60,340     |       | 194,944           |       | 323.08 | % |
| Total noninterest income                        |       | $                              | 802,446    |       | $          | 407,386           |       | $ | 395,060 |   | 96.97 | % |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on  deposit accounts         |       | $                                | 112,565    |       | $          | 100,694           |       | $ | 11,871 |   | 11.79 | % |
| Other service charges,  commissions and fees |       | 26,049                           |       | 18,275     |       | 7,774             |       | 42.54 | % |
| Gain (loss) on sale of  other assets         |       | 2,895                            |       | —     |       | 2,895             |       | 100.00 | % |
| Income from mortgage  fees                   |       | 162,064                          |       | 76,706     |       | 85,358            |       | 111.28 | % |
| Other income                                 |       | 134,101                          |       | 33,499     |       | 100,602           |       | 300.31 | % |
| Total noninterest income                     |       | $                                | 437,674    |       | $          | 229,174           |       | $ | 208,500 |   | 90.98 | % |

 

Service charges on deposit accounts are evaluatedagainst service charges from other banks in the local market and against theBank’s own cost structure in providing the deposit services. This income shouldgrow with the growth in the Bank’s demand deposit account base. The increase inmortgage fees is primarily due to the mortgage loan brokerage activity whichwas started in late 2004 and the volume of mortgages originated in 2006 waslarger than the same period of 2005. The two most significant changes in otherincome were $109,533 of rental income from a portion of a Bank owned facilityand $86,132 of income from the increase in cash surrender value of lifeinsurance on bank owned life insurance (“BOLI”) policies purchased in thesecond quarter of 2005.

**Non-interestExpense**

Composition of other noninterest expense is as follows:

 

11

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| ** **                                      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **June 30,**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                              | 1,744,634  |       | $          | 1,102,247         |       | $ | 642,387 |   | 58.28 | % |
| Employee benefits                               |       | 703,060                        |       | 438,882    |       | 264,178           |       | 60.19 | % |
| Occupancy expense                               |       | 382,186                        |       | 164,876    |       | 217,310           |       | 131.80 | % |
| Equipment rental and  depreciation of equipment |       | 195,681                        |       | 128,713    |       | 66,968            |       | 52.03 | % |
| Other expenses                                  |       | 1,802,950                      |       | 1,157,631  |       | 645,319           |       | 55.74 | % |
| Total noninterest  expense                      |       | $                              | 4,828,511  |       | $          | 2,992,349         |       | $ | 1,836,162 |   | 61.36 | % |

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                                | 944,874    |       | $          | 589,634           |       | $ | 355,240 |   | 60.25 | % |
| Employee benefits                               |       | 353,873                          |       | 197,294    |       | 156,579           |       | 79.36 | % |
| Occupancy expense                               |       | 192,893                          |       | 95,018     |       | 97,875            |       | 103.01 | % |
| Equipment rental and  depreciation of equipment |       | 111,697                          |       | 66,322     |       | 45,375            |       | 68.42 | % |
| Other expenses                                  |       | 886,754                          |       | 633,100    |       | 253,654           |       | 40.07 | % |
| Total noninterest  expense                      |       | $                                | 2,490,091  |       | $          | 1,581,368         |       | $ | 908,723 |   | 57.46 | % |

 

 

The increases in noninterest expenses are primarily due to the growth ofthe bank.  The most significant increasesin the second quarter of 2006 are increases in salaries and employeebenefits.  The increase in salaries andemployees benefits represents normal increases in salaries and an increase inthe number of employees.  At June 30,2006, the number of full-time equivalent employees was 77 compared to 54 atJune 30, 2005.  The increase in the numberof full-time equivalent employees is directly related to the growth of the bankand the hiring for one new branch and one loan production center.  The bank operates from seven facilities as ofJune 30, 2006 compared to four facilities as of June 2005.  The increases in other expenses are notattributable to any one particular item, but represent increases related tophysical facility expansion.

**Income Tax Expense**

Income tax expense expressed as a percentage of earnings before incometaxes was 36.56% and 36.46% for the six months ended June 30, 2006 and 2005,respectively.

**Liquidity**

Liquidity management involves the matching of the cash flow requirementsof customers, either depositors withdrawing funds or borrowers needing loans,and the ability of the Company to meet those requirements.

The Company’s liquidity program is designed and intended to provideguidance in funding the credit and investment activities of the Company whileat the same time ensuring that the deposit obligations of the Company are meton a timely basis. In order to permit active and timely management of assetsand liabilities, these accounts are monitored regularly in regard to volume,mix, and maturity.

The Company’s liquidity position depends primarily upon the liquidity ofits assets relative to its need to respond to short-term demand for fundscaused by withdrawals from deposit accounts and loan funding commitments.Primary sources of liquidity are scheduled repayments on the Company’s loansand interest on and maturities of its investment securities. Sales ofinvestment securities available for sale represent another source of liquidityto the Company. The Company may also utilize its cash and due from banks andfederal funds sold to meet liquidity requirements as needed.

12

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The Company also has the ability, on a short-term basis, to purchasefederal funds from other financial institutions up to $21,400,000. At June 30,2006, the Company had no federal funds purchased. The Company has a totalavailable line of $26,186,000, subject to available collateral, from theFederal Home Loan Bank. The Company has $22.2 million in advances on this lineat June 30, 2006.

The Bank’s liquidity policy requires that the ratio of cash and certainshort-term investments to net withdrawable deposit accounts be at least 10%.The Bank’s liquidity ratios at June 30, 2006 and 2005 were 15.12% and 14.18%,respectively.

**Capital**

The following table summarizes the capital ratios of the Company and theBank:

 

|                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|  Tier 1 Leverage Ratio - Bank                            |       | 12.72             | %          | 9.26                  | %          |
|  Tier 1 Leverage Ratio - Consolidated                    |       | 12.92             | %          | 8.88                  | %          |
|                                                          |       |              |       |                  |       |
|  Tier 1 Risk Weighted Capital Ratio — Bank          |       | 13.81             | %          | 10.65                 | %          |
|  Tier 1 Risk Weighted Capital Ratio —  Consolidated |       | 14.02             | %          | 10.21                 | %          |
|                                                          |       |              |       |                  |       |
|  Risk Weighted Total Capital Ratio — Bank           |       | 15.03             | %          | 11.88                 | %          |
|  Risk Weighted Total Capital Ratio —  Consolidated  |       | 15.23             | %          | 11.89                 | %          |

 

 

The capital of the Company exceeded all prescribed regulatory capitalguidelines.  Regulations require that themost highly rated banks maintain a Tier 1 leverage ratio of 3% plus anadditional cushion of at least 1 to 2 percentage points.  Tier 1 capital consists of commonshareholders’ equity, less certain intangibles. Regulations require that the Bank maintain a minimum total risk weightedcapital ratio of 8%, with one-half of this amount, or 4%, made up of Tier 1capital.

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**ATLANTICSOUTHER FINANCIAL GROUP, INC.Item 3. Quantitative and Qualitative Disclosures about Market RiskFor the Six months Ended June 30, 2006**

As of June 30, 2006, there were no substantial changes in thecomposition of the Company’s market-sensitive assets and liabilities or theirrelated market values from that reported as of December 31, 2005. The foregoingdisclosures related to the market risk of the Company should be read inconjunction with the Company’s audited consolidated financial statements,related notes and management’s discussion and analysis of financial conditionand results of operations for the year ended December 31, 2005 included in theCompany’s 2005 Annual Report on Form 10-K.

14

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**ATLANTICSOUTHER FINANCIAL GROUP, INC.Item 4. Controls and ProceduresFor the Six months Ended June 30, 2006**

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

#### During the secondquarter of 2006, there were no significant changes in the Company’s internalcontrol over financial reporting or, to the Company’s knowledge, in otherfactors that could significantly affect those internal controls subsequent tothe date the Company carried out its evaluation that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting, and there have been no corrective actions withrespect to significant deficiencies or material weaknesses.

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**ATLANTICSOUTHER FINANCIAL GROUP, INC.Part II. Other InformationFor the Six months Ended June 30, 2006**

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

Item1. Legal Proceedings

                There are no material legal proceedings to which theCompany is a party or of which their property is the subject.

Item1A. Risk Factors

                In addition to the other information set forth inthis report, you should carefully consider the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December31, 2005, which could materially affect our business, financial condition orfuture results.  The risks described inour Annual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and / oroperation results.

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

                None

Item3. Defaults Upon Senior Securities

                Not Applicable

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

The regular annualmeeting of the shareholders of the Company was held on April 25, 2006.

At the AnnualMeeting, the shareholders elected the following Class I directors to serve forthree-year terms or until their successors are duly qualified and elected.  The following table sets forth the number ofvotes cast and withheld with respect to each nominated director.
| **Name**                 | ** ** | **Votes For** | ** ** | **Votes Withheld** |
|--------------------------|------------|---------------|------------|--------------------|
| Peter R. Cates           |       | 1,615,209     |       | 4,500              |
| Laudis H.  Lanford       |       | 1,615,209     |       | 4,500              |
| J. Russell Lipford,  Jr. |       | 1,615,209     |       | 4,500              |
| Hugh F. Smisson,  III    |       | 1,615,209     |       | 4,500              |
| Donald L. Moore,  Jr.    |       | 1,615,209     |       | 4,500              |

 

Item5. Other Information

None

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| Item 6. Exhibits |   |
|------------------|--------|
|             | (a)    | Exhibits: |
|             | 31.1   | Certification  of Chief Executive Officer Pursuant to Rule 13a-15 under the Securities  Exchange Act of 1934, as amended |
|             | 31.2   | Certification  of Chief Financial Officer Pursuant to Rule 13a-15 under the Securities  Exchange Act of 1934, as amended |
|             | 32     | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

**SIGNATURES**

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

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

/s/Mark A. Stevens

MarkA. StevensPresident and Chief Executive Officer

Date: August 10,2006

 

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