UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

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

1701 Bass Road

Macon, Georgia 31210

(Address of Principal Executive Offices)

(478) 476-2170

(Issuer’s Telephone Number, Including Area Code)

Not Applicable

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

INDEX

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Balance Sheets

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

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

2

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Earnings

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

3

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

4

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

5

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)          Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles.  The interim financial statements furnished reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

(2)          Stock-Based Compensation

The Company granted 8,000 options during the first quarter 2007.  The Company did not grant any options during the first quarter of 2008.  The Company recognized $5,984 of stock-based employee compensation expense during the first quarter of 2008 and 2007 associated with its stock option grants.  The Company is recognizing the compensation expense for stock option grants with graded vesting schedules on a straight-line basis over the requisite service period of the award as permitted by SFAS No. 123 (R).  As of March 31, 2008, there was $89,760 of unrecognized compensation cost related to stock option grants.  The cost is expected to be recognized over the remaining vesting period of approximately four years.

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

(3)          Net Earnings per Share

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

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

6

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(4)   Fair Value

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

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available-for-sale are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale

Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and municipal bonds.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans Held for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan , (“SFAS 114”).  The fair value

7

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At March 31, 2008, only a small portion of the impaired loans were evaluated based on the fair value of the collateral.  In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market prices, the Company records the foreclosed asset as nonrecurring Level 3.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing.  A projected cash flow valuation method is used in the completion of impairment testing.  This valuation method requires a significant degree of management judgment.  In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.  As such, the Company classifies goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Assets Recorded at Fair Value on a Recurring Basis

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

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

Assets Recorded at Fair Value on a Nonrecurring Basis

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

8

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1) Includes foreclosed assets.

(5)   Nonperforming Assets

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

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

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

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

All properties are being actively marketed for sale and management is continuously monitoring these properties in order to minimize any losses.

The Company’s policy is to place loans on non-accrual status when it appears that the collection of interest in accordance with the terms of the loan is doubtful.  Any loan which becomes 90 days past due as to principal or interest is automatically placed on non-accrual.  Exceptions are allowed for 90-day past due loans when such

9

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 loans are well secured and in process of collection.  Other Real Estate is defined as real estate acquired as salvage on uncollectible loans.  At the time of foreclosure, an appraisal is obtained on the real estate.  The amount charged to Other Real Estate will be the lower of appraised value or recorded investment in the loan satisfied.  The recorded investment is the unpaid balance of the loan, increased by accrued and uncollected interest, unamortized premium, finance charges, and loan acquisition costs, if any, and decreased by previous direct write down and unamortized discount.  Any excess of the recorded investment in the loan satisfied over the appraised value of the property must be charged to allowance for loan losses.

(6)   Recent Accounting Pronouncements

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities .  SFAS No. 161 is an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities .  The objective of SFAS No. 161 is to expand the disclosure requirements of SFAS No. 133 with the intent to improve the financial reporting of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  The statement is effective for financial statements issued for fiscal years beginning after November 15, 2008.  The Company does not anticipate the new accounting principle to have a material effect on its financial position or results of operation.

10

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

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

For Each of the Three Months in the Period Ended

March 31, 2008 and 2007

The following discussion of financial condition as of March 31, 2008 compared to December 31, 2007, and the results of operations for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 should be read in conjunction with the condensed financial statements and accompanying footnotes appearing in this report.

Advisory Note Regarding Forward-Looking Statements

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

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

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

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

·                   our dependence on senior management;

·                   competition from existing financial institutions operating in our market areas as well as the entry into such areas of new competitors with greater resources, broader branch networks and more comprehensive services;

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

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

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

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

·                   risks inherent in making loans including repayment risks and value of collateral;

·                   the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses;

·                   fluctuations in consumer spending and saving habits;

·                   the demand for our products and services;

·                   technological changes;

·                   the challenges and uncertainties in the implementation of our expansion and development strategies;

·                   the ability to increase market share;

·                   the adequacy of expense projections and estimates of impairment loss;

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

·                   unanticipated regulatory or judicial proceedings;

·                   the potential negative effects of future legislation affecting financial institutions (including, without limitation, laws concerning taxes, banking, securities, and insurance);

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

·                   the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet;

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

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

11

Commission; and

·                   Our success at managing the risks involved in the foregoing.

Forward-looking statements speak only as of the date on which they are made.  We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.

Executive Summary and Recent Developments

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

On January 10, 2008, the Company declared its first dividend of $0.03 per share to all shareholders of record as of February 1, 2008.  The Company has announced a second quarter dividend of $0.03 per share to all shareholders of record as of May 1, 2008.  While the dividends are small in comparison to overall earnings, the Company expects to continue to grow the Bank and wants to retain appropriate amounts of capital to facilitate that sustained growth.  Any future determination relating to the Company declaring dividends will be made at the discretion of our Board of Directors and will depend on any statutory and regulatory limitations.

During the first quarter of 2008, the Company added a wealth management division in anticipation of increasing non-interest income.  The Company has hired a seasoned financial advisor to provide financial services including retirement planning, estate planning and asset allocation strategies.

Management has developed a strategy for asset growth and expansion of its financial services through branching into selective markets in the South Georgia region, in the coastal Georgia region and in the northeast Florida region.   In the South Georgia region, we have expanded our loan production office in Valdosta, Georgia into a full-service branch during the first quarter of 2008.  Construction on a permanent branch location has now started and should be completed in early 2009.  In the coastal Georgia region, we have started construction on our Pooler branch, near Savannah, Georgia.  In the northeast Florida region, our Jacksonville branch opened December 3, 2007 in a temporary branch location with plans to move to a permanent location during the second quarter of 2008.  Our senior management team in northeast Florida is looking at a possible second location in Duval County in hopes of increasing our presence in this region.

12

Financial Condition

The composition of assets and liabilities for the Company is as follows:

One significant change in the composition of assets was the increase in loans of $24.3 million due to continued growth of the Company.  We were able to generate loan growth by increasing loan growth in the middle Georgia, coastal Georgia and south Georgia regions.  Another significant change in the composition of assets was the $7.6 million increase in the cash surrender value of life insurance.  The majority of the increase is due to the Company’s purchase of $7.5 million additional life insurance policies on several senior bank officers.  The most significant change in the composition of liabilities was the increase in deposits, especially time deposits, to fund loan growth.  Time deposits, including wholesale and core deposits, are our principal source of funds for loans and investing in securities.

Because of our strong loan demand, we have chosen to obtain a portion of our deposits from outside our market.  Our wholesale time deposits represented 44.0% of our deposits as of March 31, 2008 when compared to 40.2% of our deposits as of December 31, 2007.  The Company’s Fund Management Policy allows for the ratio of wholesale deposits to total deposits to be 60%.  The Company has been successful in replacing maturing brokered deposits and does not expect to experience significant disintermediation as the brokered deposits mature.

Asset Quality

Management considers asset quality to be of primary importance.  Management has a credit administration and loan review process, which monitor, control and measure our credit risk, standardized credit analyses and our comprehensive credit policy.  As a result, management believes they have a good understanding of the asset quality, an established warning and early detection system regarding the loans and a comprehensive analysis of the allowance for loan losses.

13

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

Analysis of Changes in Allowance for Loan Losses

Management believes that the allowance for loan losses at March 31, 2008 is adequate to absorb losses inherent in the loan portfolio.  This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods.  In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.

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

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

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

14

on non-accrual that were secured by several residential construction and land development properties and two single family residential properties appraised at approximately $ 1.0 million.  The customer has marketed the collateral for sale in order to pay off the loans.  These loans are not reflected in the table above.  Management is continuously monitoring these loans in order to minimize any losses.

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

All properties are being actively marketed for sale and management is continuously monitoring these properties in order to minimize any losses.

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

Results of Operations

General

The Company’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense.  Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate interest income is dependent upon the Bank’s ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities.

The following table shows the significant components of net earnings:

15

Net Interest Income

Our primary source of income is interest income from loans and investment securities.  Our profitability depends largely on net interest income, which is the difference between the interest received on interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities.  Net interest income decreased $377,000 or 6% for the three months ended March 31, 2008 compared to March 31, 2007.

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

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

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

For the three months ended March 31, 2008 and 2007, our tax equivalent net interest spread was 2.82% and 3.35%, respectively, while the tax equivalent net interest margin was 3.22% and 3.85%, respectively.  The decreases in net interest spread and net interest margin from first quarter 2007 to first quarter 2008 were due to our promotions of higher short-term yields on retail time deposits in order to fund loan growth and to invest in investment securities and the effect of the Federal Reserve’s action in lowering short-term rates starting in the second quarter of 2007 and continuing in the first quarter of 2008 on the Company’s slightly asset-sensitive balance sheet.

16

The following table shows the relationship between interest revenue and interest expense and the average balances of interest-earning assets and interest-earning liabilities.

Average Consolidated Balance Sheet and Net Interest Margin Analysis