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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**x****Quarterly report under Section 13or 15 (d) of the Securities Exchange Act of 1934**

** **

**For the quarterly period ended March 31,2009**

** **

**o****Transition report under Section 13or 15 (d) of the Exchange Act**

** **

**For the transition period from                 to                 **

** **

**Commission File Number 000-51112**

 

**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 

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

 

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

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

(Address of Principal Executive Offices)

 

**(478) 476-2170**

(Issuer’s Telephone Number, IncludingArea Code)

 

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

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

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes    x         No    o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).

 

Yes    o        No    o

 

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

 
| Large accelerated filer   o           | Accelerated  filer o         |
|------------------------------------------------------|------------------------------|
| Non-accelerated filer     o | Smaller  reporting company x |

 

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

 

Yes    o        No    x

 

 

 

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**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number of shares outstanding of eachof the issuer’s classes of common equity, as of the latest practicable date: CommonStock, $5 par value, 4,211,780 shares outstanding at May 1, 2009

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

 

INDEX

 
| ** **                                                                                                      | ** **                                                                                                                   | **PAGE**   |
|-----------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** **                                                                                                                   | ** ** |
| PART I:                                                                                                    | FINANCIAL  INFORMATION                                                                                                       |       |
| ITEM  1.                                                                                                        | FINANCIAL  STATEMENTS                                                                                                        |       |
|                                                                                                            |                                                                                                                         |       |
| The  following consolidated financial statements are provided for Atlantic  Southern Financial Group, Inc. |                                                                                                                         |
|                                                                                                            |                                                                                                                         |
|                                                                                                            | Consolidated  Balance Sheets – March 31, 2009  (unaudited) and December 31,  2008 (audited).                  | 2          |
|                                                                                                            |                                                                                                                         |       |
|                                                                                                            | Consolidated Statements of Earnings (unaudited) – For  the Three Months Ended March 31, 2009 and 2008.             | 3          |
|                                                                                                            |                                                                                                                         |       |
|                                                                                                            | Consolidated Statements of Comprehensive Income  (unaudited) – For the Three Months Ended March 31, 2009 and 2008. | 4          |
|                                                                                                            |                                                                                                                         |       |
|                                                                                                            | Consolidated Statements of Cash Flows (unaudited) –  For the Three Months Ended March 31,  2009 and 2008.          | 5          |
|                                                                                                            |                                                                                                                         |       |
|                                                                                                            | Notes to Consolidated Financial Statements (unaudited)                                                                       | 6          |
|                                                                                                            |                                                                                                                         |       |
| ITEM 2.                                                                                                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  | 11         |
|                                                                                                            |                                                                                                                         |       |
| ITEM 3.                                                                                                         | Quantitative  and Qualitative Disclosures About Market Risk                                                                  | 24         |
|                                                                                                            |                                                                                                                         |       |
| ITEM 4T.                                                                                                        | Controls and  Procedures                                                                                                     | 25         |
|                                                                                                            |                                                                                                                         |       |
| PART II:                                                                                                   | OTHER INFORMATION                                                                                                            | 26         |

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Balance Sheets**

**March 31, 2009****(Unaudited) and****December 31, 2008****(Audited)**

** **
| ** **                                                                                                    | ** ** | **As of**          | *** ***        |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------------|
| ** **                                                                                                    | ** ** | **March 31,** | ** **          | **December 31,** | *** *** |
| ** **                                                                                                    | ** ** | **2009**           | ** **          | **2008** | ** ** |
| **Assets**                                                                                                    | ** ** | ** **         | ** **          | ** ** | ** ** |
| Cash and due  from banks                                                                                      |       | $                  |  82,143,365    |   | $ |  14,010,580 |   |
| Interest-bearing  deposits in other banks                                                                     |       | 358,217            |                | 1,119,556 |   |
| Total cash and  cash equivalents                                                                              |       | 82,501,582         |                | 15,130,136 |   |
| Securities  available for sale, at fair value                                                                 |       | 89,663,407         |                | 100,619,437 |   |
| Federal Home  Loan Bank stock, restricted, at cost                                                            |       | 3,911,800          |                | 3,670,200 |   |
| Loans held for  sale                                                                                          |       | 599,176            |                | 1,291,352 |   |
| Loans, net of  unearned income                                                                                |       | 794,178,453        |                | 792,883,664 |   |
| Less - allowance  for loan losses                                                                             |       | (11,492,656        | )                   | (11,671,534 | ) |
| Loans, net                                                                                                    |       | 782,685,797        |                | 781,212,130 |   |
| Bank premises  and equipment, net                                                                             |       | 31,969,645         |                | 31,049,394 |   |
| Accrued interest  receivable                                                                                  |       | 5,998,272          |                | 6,342,138 |   |
| Cash surrender  value of life insurance                                                                       |       | 12,598,810         |                | 12,465,228 |   |
| Goodwill and  other intangible assets, net of amortization                                                    |       | 22,354,088         |                | 22,444,667 |   |
| Other real  estate owned                                                                                      |       | 12,129,784         |                | 10,196,165 |   |
| Other assets                                                                                                  |       | 6,254,613          |                | 7,320,743 |   |
| **Total  Assets**                                                                                             |       | $                  |  1,050,666,974 |   | $ |  991,741,590 |   |
|                                                                                                          |       |               |                |   |   |
| **Liabilities and Shareholders’ Equity**                                                                 | ** ** | ** **         | ** **          | ** ** | ** ** |
| Deposits:                                                                                                     |       |               |                |   |   |
| Non-interest  bearing                                                                                         |       | $                  |  55,343,004    |   | $ |  48,482,128 |   |
| Money market and  NOW accounts                                                                                |       | 149,680,459        |                | 141,224,574 |   |
| Savings                                                                                                       |       | 8,387,486          |                | 7,972,230 |   |
| Time deposits                                                                                                 |       | 680,439,723        |                | 638,772,511 |   |
| Total deposits                                                                                                |       | 893,850,672        |                | 836,451,443 |   |
| Federal Home  Loan Bank advances                                                                              |       | 47,300,000         |                | 47,500,000 |   |
| Subordinated  debentures                                                                                      |       | 1,400,000          |                | 1,400,000 |   |
| Junior  subordinated debentures                                                                               |       | 10,310,000         |                | 10,310,000 |   |
| Accrued interest  payable                                                                                     |       | 5,898,548          |                | 5,487,499 |   |
| Accrued expenses  and other liabilities                                                                       |       | 1,694,892          |                | 1,630,080 |   |
| Total liabilities                                                                                             |       | 960,454,112        |                | 902,779,022 |   |
| Commitments                                                                                                   |       |               |                |   |   |
| Shareholders’  Equity:                                                                                   |       |               |                |   |   |
| Preferred stock,  authorized 2,000,000 shares, no shares outstanding                                          |       | —             |                | — |   |
| Common stock, $5  par value, authorized 10,000,000 shares, issued and outstanding 4,211,780 in  2009 and 2008 |       | 21,058,900         |                | 21,058,900 |   |
| Additional  paid-in capital                                                                                   |       | 53,553,581         |                | 53,546,955 |   |
| Retained  earnings                                                                                            |       | 14,330,719         |                | 13,588,966 |   |
| Accumulated  other comprehensive income                                                                       |       | 1,269,662          |                | 767,747 |   |
| Total  shareholders’ equity                                                                              |       | 90,212,862         |                | 88,962,568 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                          |       | $                  |  1,050,666,974 |   | $ |  991,741,590 |   |

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Earnings**

**Forthe Three Months Ended March 31, 2009 and 2008**

**(Unaudited)**

 
| *** ***                                         | *** *** | **Three Months Ended March 31,** | *** *** |
|------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                           | ** **   | **2009**                              | ** **   | **2008** | ** ** |
| **Interest  and Dividend Income:**                   | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Interest and  fees on loans                          |         | $                                     | 11,401,737   |   | $ | 13,429,239 |   |
| Interest on  securities:                             |         |                                  |         |   |   |
| Taxable income                                       |         | 974,247                               |         | 637,022 |   |
| Non-taxable  income                                  |         | 166,732                               |         | 200,272 |   |
| Income on  federal funds sold                        |         | —                                |         | 80,553 |   |
| Other interest  and dividend income                  |         | 4,158                                 |         | 78,883 |   |
| Total interest  and dividend income                  |         | 12,546,874                            |         | 14,425,969 |   |
| **Interest  Expense:**                               | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Deposits                                             |         | 6,654,763                             |         | 7,546,835 |   |
| Junior  subordinated debentures                      |         | 101,387                               |         | 176,094 |   |
| Federal funds  purchased                             |         | 97                                    |         | 24,892 |   |
| FHLB borrowings  and other interest expense          |         | 393,385                               |         | 400,737 |   |
| Total interest  expense                              |         | 7,149,632                             |         | 8,148,558 |   |
|                                                 |         |                                  |         |   |   |
| Net interest  income                                 |         | 5,397,242                             |         | 6,277,411 |   |
| **Provision  for loan losses**                       |         | 350,000                               |         | 402,000 |   |
| Net interest  income after provision for loan losses |         | 5,047,242                             |         | 5,875,411 |   |
| **Noninterest  Income:**                             | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Service charges  on deposit accounts                 |         | 421,581                               |         | 416,442 |   |
| Other service  charges, commissions and fees         |         | 112,591                               |         | 109,883 |   |
| Loss on sale of  other assets                        |         | (62,935                               | )            | (13,650 | ) |
| Gain on sales /  calls of investment securities      |         | 220,428                               |         | 31,840 |   |
| Mortgage  origination income                         |         | 206,956                               |         | 237,826 |   |
| Other income                                         |         | 301,143                               |         | 207,082 |   |
| Total  noninterest income                            |         | 1,199,764                             |         | 989,423 |   |
| **Noninterest  Expense:**                            | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Salaries and  employee benefits                      |         | 2,776,767                             |         | 2,864,081 |   |
| Occupancy  expense                                   |         | 454,897                               |         | 448,798 |   |
| Equipment rental  and depreciation of equipment      |         | 305,301                               |         | 264,014 |   |
| Other expenses                                       |         | 1,715,101                             |         | 1,597,074 |   |
| Total  noninterest expense                           |         | 5,252,066                             |         | 5,173,967 |   |
|                                                 |         |                                  |         |   |   |
| **Earnings  Before Income Taxes**                    |         | 994,940                               |         | 1,690,867 |   |
| Provision for  income taxes                          |         | 253,187                               |         | 501,151 |   |
| **Net  Earnings**                                    |         | $                                     | 741,753      |   | $ | 1,189,716 |   |
| **Earnings  per share:**                             | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Basic                                                |         | $                                     | 0.18         |   | $ | 0.29 |   |
| Diluted                                              |         | $                                     | 0.18         |   | $ | 0.27 |   |
| **Dividends  declared per share**                    |         | $                                     | —       |   | $ | 0.03 |   |

 

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

 

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** **

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Comprehensive Income**

**Forthe Three Months Ended March 31, 2009 and 2008**

**(Unaudited)**

 
| *** ***                                                                                       | *** *** | **Three Months Ended March 31,** | *** *** |
|----------------------------------------------------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                                                                         | ** **   | **2009**                              | ** **   | **2008** | ** ** |
| Net earnings                                                                                       |         | $                                     | 741,753      |   | $ | 1,189,716 |   |
|                                                                                               |         |                                  |         |   |   |
| Other  comprehensive income:                                                                       |         |                                  |         |   |   |
| Unrealized  holding gains on investment securities available for sale                              |         | 980,905                               |         | 701,213 |   |
| Reclassification  adjustment for gains on investments available for sale realized in net  earnings |         | (220,428                              | )            | (31,840 | ) |
| Total other  comprehensive income, before tax                                                      |         | 760,477                               |         | 669,373 |   |
| Income taxes  related to other comprehensive income:                                               |         |                                  |         |   |   |
| Unrealized  holding gains on investment securities available for sale                              |         | (333,508                              | )            | (238,413 | ) |
| Reclassification  adjustment for gains on investments available for sale realized in net  earnings |         | 74,946                                |         | 10,826 |   |
| Total income  taxes related to other comprehensive income                                          |         | (258,562                              | )            | (227,587 | ) |
| Total other  comprehensive income, net of tax                                                      |         | 501,915                               |         | 441,786 |   |
| Total  comprehensive income                                                                        |         | $                                     | 1,243,668    |   | $ | 1,631,502 |   |

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Cash Flows**

**Forthe Three Months Ended March 31, 2009 and 2008**

**(Unaudited)**

** **
| *** ***                                                                          | *** *** | **Three Months Ended March 31,** | *** *** |
|---------------------------------------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                                                            | ** **   | **2009**                              | ** **   | **2008** | ** ** |
| **Cash  Flows from Operating Activities:**                                            | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Net earnings                                                                          |         | $                                     | 741,753      |   | $ | 1,189,716 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:  |         |                                  |         |   |   |
| Provision for  loan losses                                                            |         | 350,000                               |         | 402,000 |   |
| Depreciation                                                                          |         | 397,597                               |         | 339,221 |   |
| Stock based compensation                                                              |         | 6,626                                 |         | 5,984 |   |
| Amortization and  (accretion), net                                                    |         | 208,979                               |         | 80,492 |   |
| Loss on sale of  other assets                                                         |         | 62,935                                |         | 13,650 |   |
| Gain on sales /  calls of investment securities                                       |         | (220,428                              | )            | (31,840 | ) |
| Earnings on cash  surrender value of life insurance                                   |         | (133,582                              | )            | (112,134 | ) |
| Change in:                                                                            |         |                                  |         |   |   |
| Loans held for  sale                                                                  |         | 692,176                               |         | (1,388,869 | ) |
| Accrued income  and other assets                                                      |         | 1,143,105                             |         | 466,983 |   |
| Accrued expenses  and other liabilities                                               |         | 217,299                               |         | 311,827 |   |
| Net cash  provided by operating activities                                            |         | 3,466,460                             |         | 1,277,030 |   |
| **Cash  Flows from Investing Activities:**                                            | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Net change in  loans to customers                                                     |         | (4,473,846                            | )            | (24,654,286 | ) |
| Purchase of  available for sale securities                                            |         | (7,465,725                            | )            | (9,794,389 | ) |
| Proceeds from  sales, calls, maturities and paydowns of available for sale securities |         | 19,284,260                            |         | 8,712,495 |   |
| Purchase of  other investments                                                        |         | (475,600                              | )            | (202,200 | ) |
| Proceeds from  sales of other investments                                             |         | 447,526                               |         | — |   |
| Purchase of cash  surrender value of life insurance                                   |         | —                                |         | (7,500,000 | ) |
| Property and  equipment expenditures                                                  |         | (1,317,848                            | )            | (664,364 | ) |
| Proceeds from  sales of assets                                                        |         | 706,990                               |         | — |   |
| Net cash  provided by (used in) investing activities                                  |         | 6,705,757                             |         | (34,102,744 | ) |
| **Cash  Flows from Financing Activities:**                                            | ** **   | ** **                            | ** **   | ** ** | ** ** |
| Net change in  deposits                                                               |         | 57,399,229                            |         | 37,383,368 |   |
| Advances on FHLB  borrowings                                                          |         | 22,000,000                            |         | 6,000,000 |   |
| Payments on FHLB  borrownings                                                         |         | (22,200,000                           | )            | (6,000,000 | ) |
| Dividends paid                                                                        |         | —                                |         | (124,554 | ) |
| Net cash  provided by financing activities                                            |         | 57,199,229                            |         | 37,258,814 |   |
| **Net  Increase in Cash and Cash Equivalents**                                        |         | 67,371,446                            |         | 4,433,100 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                     |         | 15,130,136                            |         | 19,924,178 |   |
| **Cash  and Cash Equivalents, End of Quarter**                                        |         | $                                     | 82,501,582   |   | $ | 24,357,278 |   |

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***(1)******        ******Basisof Presentation***

# ** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include allinformation and footnotes necessary for a fair presentation of financialposition, results of operations, and changes in financial position inconformity with generally accepted accounting principles.  The interim financial statements furnishedreflect all adjustments, which are, in the opinion of management, necessary toa fair statement of the results for the interim periods presented.  The interim consolidated financial statementsshould be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

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

 

TheCompany did not grant any options during the first quarter of 2009.  The Company granted 7,000 options during thefirst quarter of 2008.  The Company recognized $6,626 and$5,984 of stock-based employee compensation expense during the three monthsended March 31, 2009 and 2008, respectively, associated with its stockoption grants.  The Company isrecognizing the compensation expense for stock option grants with gradedvesting schedules on a straight-line basis over the requisite service period ofthe award as permitted by SFAS No. 123 (R).  As of March 31, 2009, there was $76,397of unrecognized compensation cost related to stock option grants.  The cost is expected to be recognized overthe vesting period of approximately four years.

 

The weighted average grant-datefair value of the options granted during 2008 was $8.11.  The fair value of each option is estimated onthe date of grant using the Black-Scholes Model.  The following weighted average assumption wasused for grants in 2008:

 
| ** **               | ** ** | **2008** | ** ** |
|--------------------------|------------|----------|------------|
| Dividend yield           |       | 0.80     | %          |
| Expected  volatility     |       | 32.90    | %          |
| Risk-free interest  rate |       | 3.64     | %          |
| Expected term            |       | 7 years  |       |

 

# ***(3)****        **Net Earnings per Share*

# ** **

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

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net earnings                                                                |       | $                                      | 741,753    |   | $ | 1,189,716 |   |
|                                                                        |       |                                   |       |   |   |
| Weighted average  common shares outstanding                                 |       | 4,211,780                              |       | 4,151,780 |   |
| Shares issued  from assumed exercise of common stock equivalents            |       | —                                 |       | 261,041 |   |
| Weighted average  number of common and common equivalent shares outstanding |       | 4,211,780                              |       | 4,412,821 |   |
| Earnings per  share:                                                        |       |                                   |       |   |   |
| Basic                                                                       |       | $                                      | 0.18       |   | $ | 0.29 |   |
|                                                                        |       |                                   |       |   |   |
| Diluted                                                                     |       | $                                      | 0.18       |   | $ | 0.27 |   |

 

# ***(4)****        **FAIR VALUE MEASUREMENTS AND DISCLOSURES*

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

Thetable below presents the recorded amount of assets and liabilities measured atfair value on a recurring basis.

 
| *** ***                   | *** *** | **As of March 31,** | *** *** |
|--------------------------------|--------------|--------------------------|--------------|
| ** **                     | ** **   | **2009**                 | ** **   |
| ** **                     | ** **   | **Total**                | ** **   | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                     | ** **   | ** **               | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securities  available-for-sale |         | $                        | 89,663,407   |   | $ | — |   | $ | 89,663,407 |   | $ | — |   |
|                                |              |                          |              |  |  |  |  |  |  |  |  |  |  |

 

Duringthe first quarter of 2009, the Company changed its investment bondaccountants.  Therefore, the level ofmeasurement techniques to evaluate some of the securities available-for-salechanged to include all in the Level 2 category since they are using differentpricing sources and different matrixes for the securities available-for-sale.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

TheCompany may be required, from time to time, to measure certain assets at fairvalue on a nonrecurring basis in accordance with U.S. generally acceptedaccounting principles.  These includeassets that are measured at the lower of cost or market that were recognized atfair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included inthe table below.

 
| *** ***                    | *** *** | **As of March 31,** | *** *** |
|---------------------------------|--------------|--------------------------|--------------|
| ** **                      | ** **   | **2009**                 | ** **   |
| ** **                      | ** **   | **Total**                | ** **   | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                            |         |                     |         |   |   |   |   |   |   |
| Loans                           |         | $                        | 37,344,286   |   | $ | — |   | $ | 37,344,286 |   | $ | — |   |
| Loans held for  sale            |         | 599,176                  |         | — |   | 599,176 |   | — |   |
| Other real  estate owned        |         | 12,129,784               |         | — |   | 12,129,784 |   | — |   |
|                            |         |                     |         |   |   |   |   |   |   |
| **Total  assets at fair value** |         | $                        | 50,073,246   |   | $ | — |   | $ | 50,073,246 |   | $ | — |   |

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

The carrying amountand estimated fair values of the Company’s assets and liabilities which arerequired to be either disclosed or recorded at fair value at March 31,2009 and December 31, 2008 are as follows:

 
| ** **                              | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Carrying  Amount**    | ** ** | **Estimated  Fair Value**  | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Assets:**                             | ** ** | ** **              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents              |       | $                       | 82,501,582 |                       | $          | 82,501,582 |   | $ | 15,130,136 |   | $ | 15,130,136 |   |
| Securities  available for sale          |       | 89,663,407              |       | 89,663,407                 |       | 100,619,437 |   | 100,619,437 |   |
| Federal Home  Loan Bank Stock           |       | 3,911,800               |       | 3,911,800                  |       | 3,670,200 |   | 3,670,200 |   |
| Loans held for  sale                    |       | 599,176                 |       | 599,176                    |       | 1,291,352 |   | 1,291,352 |   |
| Loans, net                              |       | 782,685,797             |       | 785,418,164                |       | 781,212,130 |   | 783,884,588 |   |
| Other real  estate owned                |       | 12,129,784              |       | 12,129,784                 |       | 10,196,165 |   | 10,196,165 |   |
| Cash surrender  value of life insurance |       | 12,598,810              |       | 12,598,810                 |       | 12,465,228 |   | 12,465,228 |   |
| **Liabilities:**                        | ** ** | ** **              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                |       | 893,850,672             |       | 898,421,302                |       | 836,451,443 |   | 838,965,232 |   |
| FHLB borrowings                         |       | 47,300,000              |       | 48,107,776                 |       | 47,500,000 |   | 48,403,420 |   |
| Subordinated  debentures                |       | 1,400,000               |       | 1,400,000                  |       | 1,400,000 |   | 1,400,000 |   |
| Junior subordinated  debentures         |       | 10,310,000              |       | 10,310,000                 |       | 10,310,000 |   | 10,310,000 |   |
|                                         |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

***Limitations*** - Fair value estimates aremade at a specific point in time, based on relevant market information andinformation about the financial statement elements.  These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision.  Changes inassumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-balance sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the fair value of assets and liabilities that are notrequired to be recorded or disclosed at fair value like the mortgage bankingoperation, brokerage network and premises and equipment.

 

***(5)   Nonperforming Assets***

 

### **Nonperforming assets consist ofnon-accrual loans, accruing loans 90 days past due, repossessed assets andother real estate owned. The following summarizes non-performing assets:**

 
| ** **                            | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|  Accruing loans 90 days past due |       | $                        | —     |                        | $          | — |   |
|  Non-accrual loans               |       | 24,612,496               |       | 21,103,468                  |       |
|  Repossessed assets              |       | 26,000                   |       | 34,783                      |       |
|  Other real estate               |       | 12,129,784               |       | 10,196,165                  |       |
|  Total non-performing assets     |       | $                        | 36,768,280 |                        | $          | 31,334,416 |   |

 

Nonperforming assetsincreased $5.4 million or 17% from December 31, 2008 to March 31,2009.  On March 31, 2009, managementplaced one loan with a balance of approximately $3.5 million on non-accrualthat is secured by assignments of liquid assets and residential constructionand land development real estate appraised at approximately $2.9 million.  Management is continuously monitoring the non-accrualloans to minimize any losses.

 

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** **

**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

As of March 31, 2009and December 31, 2008, the Company’s other real estate consisted of thefollowing:

 
| ** **                                           | ** ** | **As of March 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| 1-4 Family  residential properties                   |       | 12                            |       | $                                | 3,780,510  |   | 8 |   | 3,574,090 |   |
| Nonfarm  nonresidential properties                   |       | 6                             |       | 668,601                          |       | 5 |   | 520,101 |   |
| Multifamily  residential properties                  |       | 1                             |       | 31,675                           |       | — |   | — |   |
| Construction &  land development properties |       | 18                            |       | 7,648,998                        |       | 15 |   | 6,101,974 |   |
| Total                                                |       | 37                            |       | $                                | 12,129,784 |   | 28 |   | 10,196,165 |   |

 

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

 

TheCompany’s policy is to place loans on non-accrual status when it appears thatthe collection of interest in accordance with the terms of the loan isdoubtful.  Any loan which becomes 90 dayspast due as to principal or interest is automatically placed onnon-accrual.  Exceptions are allowed for90-day past due loans when such loans are well secured and in process ofcollection.  Other Real Estate is definedas real estate acquired through or in lieu of foreclosure.  At the time of foreclosure, an appraisal isobtained on the real estate.  The amountcharged to Other Real Estate will be the estimated fair value less costs tosell.  The recorded investment is theunpaid balance of the loan, increased by accrued and uncollected interest,unamortized premium, finance charges, and loan acquisition costs, if any, anddecreased by previous direct write down and unamortized discount.  Any excess of the recorded investment in theloan satisfied over the appraised value of the property must be charged to allowancefor loan losses.

 

***(6)   Recent Accounting Pronouncements***

 

InApril 2009, the FASB issued FSP FAS 141 (R)-1, *Accountingfor Assets Acquired and Liabilities Assumed in a Business Combination ThatArise from Contingencies*. This FASB Staff Position amends and clarifies SFAS No. 141 (R), *Business Combinations*, to address application issues on theinitial recognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a business combination.  This statement is effective for financialstatements issued for fiscal years beginning after December 15, 2008.  The Company cannot determine what impact thiswill have until the transactions occur.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly*.  ThisFASB Staff Position provides additional guidance for estimating fair value in accordancewith SFAS No. 157, *Fair Value Measurements*,when the volume and level of activity for the asset or liability havesignificantly decreased.  It alsoincludes guidance on identifying circumstances that indicate a transaction isnot orderly.  It emphasizes that even ifthere has been a significant decrease in the volume and level of activity forthe asset or liability and regardless of the valuation technique used, theobjective of a fair value measurement remains the same.  Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date under currentmarket conditions.  This FASB StaffPosition is effective for interim and annual reporting periods ending after June 15,2009 with early adoption being permitted for periods ending after March 15,2009 and shall be applied prospectively. TheCompany does not anticipate the new accounting principle to have a materialeffect on its financial position or results of operations.

 

In April 2009, the FASB issued FSP FAS 115-2and FAS 124-2, *Recognition and Presentation ofOther-Than-Temporary Impairments*. This FASB Staff Position amends the other-than-temporary impairmentguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities in the financial statements and doesnot amend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities.  This FASB Staff Position is effective forinterim and annual reporting periods ending after June 15, 2009 with earlyadoption being permitted for periods ending after March 15, 2009.  The Company does

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

notanticipate the new accounting principle to have a material effect on itsfinancial position or results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*.  This FASB Staff Position amends SFAS No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Italso amends APB No. 28, *Interim FinancialReporting*, to require those disclosures in summarized financialinformation at interim reporting periods. This FASB Staff Position is effective for interim and annual reportingperiods ending after June 15, 2009 with early adoption being permitted forperiods ending after March 15, 2009. TheCompany does not anticipate the new accounting principle to have a materialeffect on its financial position or results of operations.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

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

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

**March 31, 2009 and 2008**

 

The following discussion of financialcondition as of March 31, 2009compared to December 31, 2008,and the results of operations for the three months ended March 31, 2009 compared to thethree months ended March 31, 2008 should be read in conjunction with thecondensed financial statements and accompanying footnotes appearing in thisreport.

 

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

##### *** ***

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

 

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

 

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

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

·                  our dependenceon senior management;

·                  competition fromexisting financial institutions operating in our market areas as well as theentry into such areas of new competitors with greater resources, broader branchnetworks and more comprehensive services;

·                  adverseconditions in the stock market, the public debt market, and other capitalmarkets (including changes in interest rate conditions);

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

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

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

·                  risks inherentin making loans including repayment risks and value of collateral;

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

·                  fluctuations inconsumer spending and saving habits;

·                  the demand forour products and services;

·                  technologicalchanges;

·                  the challengesand uncertainties in the implementation of our expansion and developmentstrategies;

·                  the ability toincrease market share;

·                  the adequacy ofexpense projections and estimates of impairment loss;

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

·                  unanticipatedregulatory or judicial proceedings;

·                  the potentialnegative effects of future legislation affecting financial institutions(including, without limitation, laws concerning taxes, banking, securities, andinsurance);

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

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

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

 

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·                  other factorsdescribed in this report and in other reports we have filed with the Securitiesand Exchange Commission; and

·                  Our success atmanaging the risks involved in the foregoing.

 

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

#### ** **

**ExecutiveSummary and Recent Developments**

 

### **The Company’s total assets at March 31, 2009,were approximately $1.1 billion, which represented an increase of approximately$58.9 million or 6% from December 31, 2008.  Net earnings decreased 38% for the threemonths ended March 31, 2009 to $742 thousand or $0.18 per diluted sharecompared to $1.2 million or $0.27 per diluted share for the three months ended March 31,2008.**

### ** **

**Financial Condition**

 

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

 
| ** **                              | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|-------------------|------------|--------------|------------|
| **Assets:**                             | ** ** | ** **               | ** **    | ** **                  | ** ** | ** **        | ** ** | ** **   | ** ** |
| Cash and due  from banks                |       | $                        | 82,143,365    |                        | $          | 14,010,580        |       | $            | 68,132,785 |   | 486.30 | % |
| Securities  available for sale          |       | 89,663,407               |          | 100,619,437                 |       | (10,956,030       | )          | -10.89       | %          |
| Loans, net of  unearned income          |       | 794,178,453              |          | 792,883,664                 |       | 1,294,789         |       | 0.16         | %          |
| Cash surrender  value of life insurance |       | 12,598,810               |          | 12,465,228                  |       | 133,582           |       | 1.07         | %          |
| Goodwill and  other intangible assets   |       | 22,354,088               |          | 22,444,667                  |       | (90,579           | )          | -0.40        | %          |
| Total assets                            |       | $                        | 1,050,666,974 |                        | $          | 991,741,590       |       | $            | 58,925,384 |   | 5.94 | % |
| **Liabilities:**                        | ** ** | ** **               | ** **    | ** **                  | ** ** | ** **        | ** ** | ** **   | ** ** |
| Deposits                                |       | $                        | 893,850,672   |                        | $          | 836,451,443       |       | $            | 57,399,229 |   | 6.86 | % |
| FHLB advances                           |       | 47,300,000               |          | 47,500,000                  |       | (200,000          | )          | -0.42        | %          |
| Subordinated  debentures                |       | 1,400,000                |          | 1,400,000                   |       | —            |       | —       |       |
| Junior  subordinated debentures         |       | 10,310,000               |          | 10,310,000                  |       | —            |       | —       |       |
| Accrued expenses  and other liabilities |       | $                        | 1,694,892     |                        | $          | 1,630,080         |       | $            | 64,812     |   | 3.98 | % |
|                                    |       |                     |          |                        |       |              |       |         |       |
| Loan to Deposit  Ratio                  |       | 88.85                    | %             | 94.79                       | %          |              |       |         |       |

 

The most significantchange in the composition of assets was the increase in cash and due from banksdue to the growth of deposits of the Company. The most significant change in the composition of liabilities was theincrease in deposits, especially time deposits. Time deposits, including wholesale (brokered and internet) and coredeposits, are our principal source of funds for loans and investing in securities.  Local retail time deposits at March 31,2009 increased approximately $48.0 million due to managements’ aggressiveefforts to increase core deposits and reduce reliance on wholesaledeposits.  The Company was able todecrease wholesale deposits approximately $6.3 million at March 31, 2009primarily due to its ability to replace them with retail deposits.  Other core deposits (non-interest bearing,interest bearing and saving accounts) increased approximately $15.7 million at March 31,2009 compared to December 31, 2009.

 

Due to our strong loandemand in the past, we chose to obtain a portion of our deposits from outsideour market.  The deposits obtained outside of our market area generallyhave lower rates than rates being offered for certificates of deposits in ourlocal market.  We have also utilizedout-of-market deposits in certain instances to obtain longer term deposits thanare readily available in our local market. Our wholesale time deposits represented 42.5% of our deposits as of March 31,2009 when compared to 46.2% of our deposits as of December 31, 2008.

 

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We generally obtainout-of-market time deposits of $100,000 or more through brokers with whom wemaintain ongoing relationships.  We haveadopted guidelines regarding our use of brokered CDs that limit our brokeredCDs as a percentage of total deposits and dictate that we leverage our branchnetwork in order to further reduce our reliance on brokered deposits.

 

**InvestmentSecurities**

 

Securitiesin our portfolio totaled $89.7 million at March 31, 2009, compared to$100.6 million at December 31, 2008. The most significant decrease in the securities portfolio has resultedfrom the sale of $4.2 million in state, county and municipal bonds and from thesales and/or paydowns of $13.1 million in mortgage-backed securities beingoffset by the purchase of $7.5 million in mortgage-backed securities.  The majority of the mortgage backedsecurities purchased consist of U.S. Government National Mortgage Association (“GinnieMae”) securities.  At March 31,2009, the securities portfolio had unrealized net gains of approximately $1.9million.

 

Thefollowing table shows the carrying value of the investment securities at March 31,2009 and December 31, 2008.

 
| ** **                              | ** ** | **March 31,  2009**   | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Securities  available for sale:         |       |                       |       |                        |       |
| U. S. Government  Sponsored Enterprises |       | $                          | 16,279     |                        | $          | 17,761 |   |
| U. S. Treasury  Securities              |       | —                     |       | 251                         |       |
| State, County  and Municipal            |       | 16,246                     |       | 20,298                      |       |
| Mortgage-backed  Securities             |       | 56,842                     |       | 62,036                      |       |
| Other  Investments                      |       | 296                        |       | 273                         |       |
| Total                                   |       | $                          | 89,663     |                        | $          | 100,619 |   |

### ** **

### **Loans**

### ** **

Ourloan growth remained stable at March 31, 2009 as management has made aneffort to limit loan growth in order to preserve capital for the Company.  Total loans, net of unearned income increased$1.3 million or 0.16% from December 31, 2008 to March 31, 2009.  The following table presents a summary of theloan portfolio by category.

 
| ** **                                         | ** ** | **March 31,  2009**   | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
|                                               |       |                       |       |                        |       |
| Commercial                                         |       | $                          | 63,490     |                        | $          | 70,187 |   |
| Real estate -  commercial                          |       | 313,062                    |       | 310,459                     |       |
| Real estate -  construction                        |       | 316,282                    |       | 314,405                     |       |
| Real estate -  mortgage                            |       | 92,239                     |       | 89,102                      |       |
| Obligations of  political subdivisions in the U.S. |       | 402                        |       | 347                         |       |
| Consumer                                           |       | 9,148                      |       | 8,905                       |       |
| Total Loans                                        |       | 794,623                    |       | 793,405                     |       |
| Less:                                              |       |                       |       |                        |       |
| Unearned loan  fees                                |       | (444                       | )          | (521                        | )          |
| Allowance for  loan losses                         |       | (11,493                    | )          | (11,672                     | )          |
| Loans, net                                         |       | $                          | 782,686    |                        | $          | 781,212 |   |

 

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### **AssetQuality**

### ** **

### **Management considers asset quality to be of primaryimportance.  Management has a creditadministration and loan review process, which monitors, controls and measuresour credit risk, standardized credit analyses and our comprehensive creditpolicy.  As a result, management believesthey have a good understanding of the asset quality, an established warning andearly detection system regarding the loans and a comprehensive analysis of theallowance for loan losses.**

### ** **

Thefollowing table presents a summary of changes in the allowance for loan lossesfor the three month periods ended March 31, 2009 and 2008.

 

**Analysisof Changes in Allowance for Loan Losses**

 
| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**            | ** ** |
|                                               |       |                                  |       |   |   |
| Balance  beginning of period                       |       | $                                     | 11,672     |   | $ | 8,879 |   |
| Loans  charged-off                                 |       | (594                                  | )          | (132 | ) |
| Recoveries                                         |       | 65                                    |       | 9 |   |
| Net charge-offs                                    |       | (529                                  | )          | (123 | ) |
| Provision for  loan losses                         |       | 350                                   |       | 402 |   |
| Balance end of  period                             |       | $                                     | 11,493     |   | $ | 9,158 |   |
|                                               |       |                                  |       |   |   |
| Total Loans:                                       |       |                                  |       |   |   |
| At period end                                      |       | $                                     | 794,178    |   | $ | 721,416 |   |
| Average                                            |       | 795,633                               |       | 704,639 |   |
|                                               |       |                                  |       |   |   |
| As a percentage  of average loans (annualized):    |       |                                  |       |   |   |
| Net charge-offs                                    |       | 0.27                                  | %          | 0.07 | % |
| Provision for  loan losses                         |       | 0.18                                  | %          | 0.23 | % |
| Allowance as a  percentage of period end loans     |       | 1.45                                  | %          | 1.27 | % |
| Allowance as a  percentage of non-performing loans |       | 46.69                                 | %          | 235.32 | % |

 

### **Management believes that the allowance for loanlosses at March 31, 2009 is adequate to absorb losses inherent in the loanportfolio.  This assessment involvesuncertainty and judgment; therefore, the adequacy of the allowance for loanlosses cannot be determined with precision and may be subject to change in futureperiods.  Significant increases to theprovision for loan losses may be necessary if material adverse changes ingeneral economic conditions occur or the performance of our loan portfoliodeteriorates.  In addition, bankregulatory authorities, as part of their periodic examination of the Bank, mayrequire adjustments to the provision for loan losses in future periods if, intheir opinion, the results of their review warrant such additions.  Because of these factors, it is reasonablypossible that the estimated losses on loans may change materially in the nearterm.  However, the amount of the changecannot be estimated.**

 

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### **Nonperforming assets consist of non-accrual loans,accruing loans 90 days past due, repossessed assets and other real estateowned. The following summarizes non-performing assets:**

 
| ** **                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accruing loans  90 days past due |       | $                        | —     |                        | $          | — |   |
| Non-accrual  loans               |       | 24,612,496               |       | 21,103,468                  |       |
| Repossessed  assets              |       | 26,000                   |       | 34,783                      |       |
| Other real  estate               |       | 12,129,784               |       | 10,196,165                  |       |
| Total  non-performing assets     |       | $                        | 36,768,280 |                        | $          | 31,334,416 |   |

 

Nonperforming assetsincreased $5.4 million or 17% from December 31, 2008 to March 31,2009.  On March 31, 2009, managementplaced one loan with a balance of approximately $3.5 million on non-accrualthat is secured by assignment of liquid assets and residential construction andland development real estate appraised at approximately $2.9 million.  Management is continuously monitoring the non-accrualloans to minimize any losses.

 

As of March 31, 2009and December 31, 2008, the Company’s other real estate consisted of thefollowing:

 
| ** **                                           | ** ** | **As of March 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| 1-4 Family  residential properties                   |       | 12                            |       | $                                | 3,780,510  |   | 8 |   | 3,574,090 |   |
| Nonfarm  nonresidential properties                   |       | 6                             |       | 668,601                          |       | 5 |   | 520,101 |   |
| Multifamily  residential properties                  |       | 1                             |       | 31,675                           |       | — |   | — |   |
| Construction &  land development properties |       | 18                            |       | 7,648,998                        |       | 15 |   | 6,101,974 |   |
| Total                                                |       | 37                            |       | $                                | 12,129,784 |   | 28 |   | 10,196,165 |   |

 

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

 

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

 

**Deposits**

 

Totaldeposits at March 31, 2009 were $893.9 million, an increase of $57.4million, or 7%, from December 31, 2008. Total interest bearing demand and savings accounts of $158.1 millionincreased $8.9 million, or 6%, resulting mainly from our branching efforts andour emphasis on increasing core deposits.

 

Totaltime deposits as of March 31, 2009 were $680.4 million, an increase of$41.7 million, or 7%, from December 31, 2008.  Total retail time deposits at March 31,2009 increased approximately $48.0 million, or 8% of total time deposits, from December 31,2008 due to managements’ aggressive efforts to increase core deposits andreduce reliance on wholesale deposits.  Theweighted average rates paid for retail time deposits for the three months endedMarch 31, 2009 was 3.65% compared to 5.06% for the three months ended March 31,2008.  Total wholesale deposits at March 31,2009 decreased approximately $6.3 million, or 1% of total time deposits, from December 31,2008,

 

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resulting mainly from our ability toreplace wholesale deposits with retail deposits during the first quarter of2009.  The weighted average rates paidfor wholesale deposits for the three months ended March 31, 2009 was 3.80%compared to 4.97% for the three months ended March 31, 2008.

 

### **Resultsof Operations**

### ** **

# **General**

# ** **

The Company’sresults of operations are determined by its ability to effectively manageinterest income and expense, to minimize loan and investment losses, togenerate noninterest income and to control noninterest expense.  Since interest rates are determined by marketforces and economic conditions beyond the control of the Company, the abilityto generate interest income is dependent upon the Bank’s ability to obtain anadequate spread between the rate earned on earning assets and the rate paid oninterest-bearing liabilities.

 

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

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------|------------|----------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest and  Dividend Income   |       | $                                      | 12,546,874 |       | $          | 14,425,969        |       | $ | (1,879,095 | ) | -13.03 | % |
| Interest Expense                |       | 7,149,632                              |       | 8,148,558  |       | (998,926          | )          | -12.26 | % |
| Net Interest Income             |       | 5,397,242                              |       | 6,277,411  |       | (880,169          | )          | -14.02 | % |
| Provision for  Loan Losses      |       | 350,000                                |       | 402,000    |       | (52,000           | )          | -12.94 | % |
| Net Earnings                    |       | 741,753                                |       | 1,189,716  |       | (447,963          | )          | -37.65 | % |
| Net Earnings Per  Diluted Share |       | $                                      | 0.18       |       | $          | 0.27              |       | (0.09 | ) | -33.33 | % |
|                                 |            |                                        |            |            |            |                   |            |  |  |  |  |  |

 

# **NetInterest Income**

# ** **

Our primary source ofincome is interest income from loans and investment securities.  Our profitability depends largely on netinterest income, which is the difference between the interest received oninterest-earning assets and the interest paid on deposits, borrowings, andother interest-bearing liabilities.  Netinterest income decreased $880 thousand, or 14%, for the three months ended March 31,2009 compared to the three months ended March 31, 2008.

 

Total interest anddividend income for the three months ended March 31, 2009 decreased $1.9million, or 13%, when compared to the three months ended March 31,2008.  This decrease is primarily due tothe effect of the Federal Reserve decreasing the federal funds rate, whichaffects a majority of the interest rates for our loans.  The average loan and loan held for saleportfolios for the three months ended March 31, 2009 increasedapproximately $91.0 million, or 13%, when compared to average loan and loanheld for sale portfolios for the three months ended March 31, 2008.  Additionally, the average yield on loansdecreased during the three months ended March 31, 2009 to 5.73% comparedto an average yield of 7.62% for the three months ended March 31, 2008.

 

Total interest expensefor the three months ended March 31, 2009 decreased $999 thousand, or 12%,when compared to the three months ended March 31, 2008.  Two factors impact interest expense: averagebalances of deposit and borrowing portfolios and average rates paid oneach.  Average deposit balances increasedapproximately $144.3 million when comparing the three months ended March 31,2009 to the three months ended March 31, 2008.  The average rate paid on the depositportfolios for the three months ended March 31, 2009 decreased to 3.29%from 4.53% when compared to the three months ended March 31, 2008.  Average borrowing balances increasedapproximately $7.2 million when comparing the three months ended March 31,2009 to the three months ended March 31, 2008.  Average interest rates paid on borrowingswere 3.24% for the three months ended March 31, 2009 compared to 4.47% forthe three months ended March 31, 2008.

 

The banking industry usestwo key ratios to measure relative profitability of net interest income, whichare net interest spread and net interest margin.  The interest rate spread measures thedifference between the average yield

 

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on earning assets and theaverage rate paid on interest-bearing liabilities.  The interest rate spread eliminates theimpact of non-interest-bearing funding sources and gives a direct perspectiveon the effect of market interest rate movements.  The net interest margin is an indication ofthe profitability of our investments, and is defined as net interest revenue asa percentage of total average earning assets which includes the positive impactof funding a portion of earning assets with customers’ non-interest-bearingdeposits and with stockholders’ equity.

 

For the three monthsended March 31, 2009 and 2008, our tax equivalent net interest spread was2.33% and 2.82%, respectively, while the tax equivalent net interest margin was2.44% and 3.22%, respectively.  Thedecreases in net interest spread and net interest margin from the three monthsended March 31, 2008 to the three months ended March 31, 2009, weredue to our promotion of higher short-term yields on retail time deposits inorder to fund loan growth and to invest in investment securities and the effectof the Federal Reserve’s action in lowering short-term rates, starting in thesecond quarter of 2007 and continuing through the fourth quarter of 2008, onthe Company’s slightly asset-sensitive balance sheet.

 

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The following table showsthe relationship between interest revenue and interest expense and the averagebalances of interest-earning assets and interest-earning liabilities for thethree months ended March 31, 2009 and 2008.

 

**AverageConsolidated Balance Sheet and Net Interest Margin Analysis**

 
| ** **                                           | ** ** | **For the Three Months Ended March 31,** | ** **      |
|------------------------------------------------------|------------|-----------------------------------------------|-----------------|
| ** **                                           | ** ** | **2009**                                      | ** **      | **2008** | ** ** |
| ** **                                           | ** ** | **(Dollar amounts in thousands)**             | ** **      |
| ** **                                           | ** ** | **Average  Balance**                          | ** **      | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| Earning Assets                                       |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income (4) (5) (6) |       | $                                             |  795,633   |   | $ |  11,402 |   | 5.73 | % | $ | 704,639 |   | $ | 13,429 |   | 7.62 | % |
| Federal funds  sold                                  |       | —                                        |            | — |   | 0.00 | % | 10,927 |   | 81 |   | 2.97 | % |
| Investment  securities - taxable (7)                 |       | 79,930                                        |            | 974 |   | 4.88 | % | 51,045 |   | 637 |   | 4.99 | % |
| Investment  securities - tax-exempt (6) (7)     |       | 16,628                                        |            | 167 |   | 6.08 | % | 20,271 |   | 200 |   | 5.98 | % |
| Other interest  and dividend income                  |       | 6,883                                         |            | 4 |   | 0.24 | % | 5,111 |   | 79 |   | 6.18 | % |
| Total Earning  Assets                                |       | 899,074                                       |            | 12,547 |   | 5.62 | % | 791,993 |   | 14,426 |   | 7.34 | % |
|                                                 |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                         |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                           |       | -11,736                                       |            |   |   |   |   | -9,054 |   |   |   |   |   |
| Cash and due  from banks                             |       | 37,780                                        |            |   |   |   |   | 9,274 |   |   |   |   |   |
| Premises and  equipment                              |       | 31,534                                        |            |   |   |   |   | 28,050 |   |   |   |   |   |
| Accrued interest  receivable                         |       | 6,252                                         |            |   |   |   |   | 7,420 |   |   |   |   |   |
| Other assets                                         |       | 53,879                                        |            |   |   |   |   | 38,451 |   |   |   |   |   |
| Total Assets                                         |       | $                                             |  1,016,783 |   |   |   |   |   | $ | 866,134 |   |   |   |   |   |
|                                                 |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                        |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                             |       | $                                             |  143,516   |   | $ |  599 |   | 1.66 | % | $ | 108,038 |   | $ |  648 |   | 2.40 | % |
| Savings                                              |       | 8,117                                         |            | 7 |   | 0.34 | % | 7,864 |   | 11 |   | 0.56 | % |
| Time deposits                                        |       | 656,592                                       |            | 6,049 |   | 3.69 | % | 550,936 |   | 6,888 |   | 5.00 | % |
| Total interest  bearing deposits                     |       | 808,225                                       |            | 6,655 |   | 3.29 | % | 666,838 |   | 7,547 |   | 4.53 | % |
| Federal Home  Loan Bank advances                     |       | 49,336                                        |            | 352 |   | 2.85 | % | 40,440 |   | 401 |   | 3.97 | % |
| Other borrowings                                     |       | 1,443                                         |            | 42 |   | 11.67 | % | 3,149 |   | 25 |   | 3.18 | % |
| Trust Preferred  Securities                          |       | 10,310                                        |            | 101 |   | 3.93 | % | 10,310 |   | 176 |   | 6.83 | % |
| Total borrowed  funds                                |       | 61,089                                        |            | 495 |   | 3.24 | % | 53,899 |   | 602 |   | 4.47 | % |
| Total  interest-bearing liabilities                  |       | 869,314                                       |            | 7,150 |   | 3.29 | % | 720,737 |   | 8,149 |   | 4.52 | % |
|                                                 |       |                                          |            |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 50,118                                        |            |   |   |   |   | 47,175 |   |   |   |   |   |
| Other  liabilities                                   |       | 7,535                                         |            |   |   |   |   | 8,413 |   |   |   |   |   |
| Stockholder’s  equity                           |       | 89,816                                        |            |   |   |   |   | 89,809 |   |   |   |   |   |
| Total  Liabilities and Stockholder’s Equity     |       | $                                             |  1,016,783 |   |   |   |   |   | $ | 866,134 |   |   |   |   |   |
| Net interest  revenue (1)                            |       |                                          |            | $ |  5,397 |   |   |   |   |   | $ |  6,277 |   |   |   |
| Net interest  spread (2) (6)                    |       |                                          |            |   |   | 2.33 | % |   |   |   |   | 2.82 | % |
| Net interest  margin (3) (6)                    |       |                                          |            |   |   | 2.44 | % |   |   |   |   | 3.22 | % |

 

----

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

(2) Netinterest spread is computed by subtracting the yield from the expense of theaverage interest-bearing liabilities from the yield from the average earningassets.

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

(4) Averageloans are shown net of unearned income. Included in the average balance of loans outstanding are loans where theaccrual of interest has been discounted.

(5) Interestincome includes loan fees as follows (in thousands): 2009 - $338; 2008 - $447

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

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

 

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The following tableprovides a detailed analysis of the changes in interest income and interestexpense due to changes in rate and volume for the three months ended March 31,2009 compared to March 31, 2008.

 

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

 
| ** **                                    | ** ** | **Three Months Ended March 31, 2009** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **Compared to 2008  Changes due to (a)**   | ** ** |
| ** **                                    | ** ** | **Volume**                                 | ** ** | **Yield/  Rate** | ** ** | **Net  Change** | ** ** |
| ** **                                    | ** ** | **(Amounts in thousands)**                 | ** ** |
| Interest earned  on:                          |       |                                       |       |   |   |   |   |
| Loans                                         |       | $                                          | 1,281      |   | $ | (3,308 | ) | $ | (2,027 | ) |
| Investment  securities:                       |       |                                       |       |   |   |   |   |
| Taxable  investment securities                |       | 338                                        |       | (1 | ) | 337 |   |
| Tax-exempt  investment securities             |       | (40                                        | )          | 7 |   | (33 | ) |
| Interest earning  deposits and fed funds sold |       | (60                                        | )          | (96 | ) | (156 | ) |
| Total interest  income                        |       | 1,519                                      |       | (3,398 | ) | (1,879 | ) |
|                                          |       |                                       |       |   |   |   |   |
| Interest paid  on:                            |       |                                       |       |   |   |   |   |
| Deposits:                                     |       |                                       |       |   |   |   |   |
| Interest bearing  demand deposits             |       | 182                                        |       | (231 | ) | (49 | ) |
| Savings                                       |       | —                                     |       | (4 | ) | (4 | ) |
| Time deposits                                 |       | 1,166                                      |       | (2,005 | ) | (839 | ) |
| Other borrowings  and FHLB advances           |       | 105                                        |       | (137 | ) | (32 | ) |
| Trust Preferred  Securities                   |       | —                                     |       | (75 | ) | (75 | ) |
| Total interest  expense                       |       | 1,453                                      |       | (2,452 | ) | (999 | ) |
|                                          |       |                                       |       |   |   |   |   |
| Increase in net  interest income              |       | $                                          | 66         |   | $ | (946 | ) | $ | (880 | ) |

 

----

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

 

# **Provisionfor Loan Losses**

# ** **

The provision for loanlosses for the three months ended March 31, 2009 was $350 thousandcompared to $402 thousand for the same period of 2008.  The decrease in the provision for loan lossesis due to minimal loan growth during the first quarter of 2009.  Net charge-offs as an annualized percentageof average outstanding loans for the three months ended March 31, 2009were 0.27%, as compared with 0.07% for the first quarter of 2008.  Net loan charge-offs increased during thethree months ended March 31, 2009 as compared to the three months ended March 31,2008, due mainly to the Company charging off $594 thousand for several impairedloans in the first quarter of 2009.

 

The provision for loanlosses is based on management’s evaluation of inherent risks in the loanportfolio and the corresponding analysis of the allowance for loan losses.  Additional discussion on loan quality and theallowance for loan losses are included in the Asset Quality section of thisreport.

 

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# **Table of Contents**

 

# **Non-interestIncome**

# ** **

Composition of othernoninterest income is as follows:

 
| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges  on deposit accounts            |       | $                                      | 421,581    |       | $          | 416,442           |       | $ | 5,139 |   | 1.23 | % |
| Other service  charges, commissions and fees    |       | 112,591                                |       | 109,883    |       | 2,708             |       | 2.46 | % |
| Loss on sale of  other assets                   |       | (62,935                                | )          | (13,650    | )          | (49,285           | )          | 361.06 | % |
| Gain on sales /  calls of investment securities |       | 220,428                                |       | 31,840     |       | 188,588           |       | 592.30 | % |
| Mortgage  origination income                    |       | 206,956                                |       | 237,826    |       | (30,870           | )          | -12.98 | % |
| Other income                                    |       | 301,143                                |       | 207,082    |       | 94,061            |       | 45.42 | % |
| Total  noninterest income                       |       | $                                      | 1,199,764  |       | $          | 989,423           |       | $ | 210,341 |   | 21.26 | % |

 

Service charges ondeposit accounts are evaluated against service charges from other banks in thelocal market and against the Bank’s own cost structure in providing the depositservices.  This income should grow withthe growth in the Bank’s demand deposit account base.  Total service charges, includingnon-sufficient funds fees, were $422 thousand for the first quarter of 2009compared with $416 thousand for the first quarter of 2008.  The year-over-year increase in servicecharges on deposit accounts is directly related to the increase in the numberof our core transaction deposit accounts. The number of deposit accounts for the three months ended March 31,2009 was 13,712 accounts when compared to the same period of 2008 with 12,709accounts.  The increase in the gain onsales/ calls of investment securities relates to the sale of several state,county and municipal bonds and mortgage-backed securities during the firstquarter of 2009.  The most significantchanges in other income for the three months ended March 31, 2009 are theadditional income from cash surrender value of life insurance from theadditional $7.5 million bank owned life insurance (“BOLI”) policies on severalsenior bank officers purchased during the first quarter of 2008 and from therental income from properties foreclosed during the fourth quarter of2008.  The increase of the loss on thesale of other assets for the three months ended March 31, 2009 isprimarily due to the loss on the sale of four foreclosed properties and fromthe sale of an other asset compared to the three months ended March 31,2008 with the loss on the sale of two foreclosed properties.

 

# **Non-interestExpense**

# ** **

Composition of othernoninterest expense is as follows:

 
| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2009**                                    | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries and  employee benefits                 |       | $                                           | 2,776,767  |       | $          | 2,864,081         |       | $ | (87,314 | ) | -3.05 | % |
| Occupancy  expense                              |       | 454,897                                     |       | 448,798    |       | 6,099             |       | 1.36 | % |
| Equipment rental  and depreciation of equipment |       | 305,301                                     |       | 264,014    |       | 41,287            |       | 15.64 | % |
| Other expenses                                  |       | 1,715,101                                   |       | 1,597,074  |       | 118,027           |       | 7.39 | % |
| Total  noninterest expense                      |       | $                                           | 5,252,066  |       | $          | 5,173,967         |       | $ | 78,099 |   | 1.51 | % |

 

Since the fourth quarterof 2008, the Company has taken measures to decrease noninterest expense.  However, for the three months ended March 31,2009, there was an increase in noninterest expense of $78 thousand primarilydue to increases in equipment rental and depreciation of equipment and other expensesbeing offset by a decrease in salaries and employee benefits when compared tothe three months ended March 31, 2008. The decrease in salaries and employee benefits pertains to a reductionin the accrual of bonuses.  The increasesin equipment rental and

 

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depreciation of equipmentand other expenses are not attributable to any one particular item, but representincreases related to physical facility expansion.

 

# **IncomeTax Expense**

# ** **

Income tax expenseexpressed as a percentage of earnings before income taxes was 25.45% and 29.64%for the three months ended March 31, 2009 and 2008, respectively.  The fluctuation in the percentage can beattributed to the tax-free income versus the pretax income and tax creditsreceived from affordable housing investments. For the three months ended March 31, 2009, the tax-free incomeexpressed as a percentage of earnings before income taxes was 17.47% whencompared to 12.11% for the three months ended March 31, 2008.

 

### **Liquidity**

### ** **

Liquidity managementinvolves the matching of the cash flow requirements of customers, eitherdepositors withdrawing funds or borrowers needing loans, and the ability of theCompany to meet those requirements.

 

The Company’s liquidityprogram is designed and intended to provide guidance in funding the credit andinvestment activities of the Company while at the same time ensuring that thedeposit obligations of the Company are met on a timely basis. In order topermit active and timely management of assets and liabilities, these accountsare monitored regularly in regard to volume, mix and maturity.

 

The Company’s liquidityposition depends primarily upon the liquidity of its assets relative to itsneed to respond to short-term demand for funds caused by withdrawals fromdeposit accounts and loan funding commitments. Primary sources of liquidity arescheduled repayments on the Company’s loans and interest on and maturities ofits investment securities. Sales of investment securities available for salerepresent another source of liquidity to the Company. The Company may alsoutilize its cash and due from banks and federal funds sold to meet liquidityrequirements as needed.

 

The Company also has theability, on a short-term basis, to purchase federal funds from other financialinstitutions up to $36 million. At March 31, 2009, the Company had nofederal funds purchased. The Company has a total available line of $56.5million, subject to available collateral, from the Federal Home Loan Bank. TheCompany has $47.3 million in advances on this line at March 31, 2009.  The Company has a total available line of$105.2 million, subject to available collateral, from the Federal ReserveBank.  The Company had no advances onthis line at March 31, 2009.

 

The Bank’s liquiditypolicy requires that the ratio of cash and certain short-term investments tonet withdrawable deposit accounts be at least 10%. The Bank’s liquidity ratiosat March 31, 2009 and 2008 were 18.76% and 12.62%, respectively.

 

### **CapitalResources**

### ** **

In February andMarch, 2009, the Bank underwent a customary periodic regulatory examinationperformed by its state and federal bank regulators.  The final examination report is not expectedto be issued by the regulatory bodies until the second quarter of 2009.  Based on preliminary communications betweenBank management and the regulators, the Bank could be expected to enter into aprogram of corrective action.  If aprogram of corrective action is determined by the regulators, managementintends to fully and timely comply with all provisions.

 

We are subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimalcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on our financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, we must meet specific capital guidelines that involvequantitative measures of our assets, liabilities and certain off-balance sheetitems as calculated under

 

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regulatory accountingpractices.  Our capital amounts andclassification are also subject to qualitative judgments by the regulatorsabout components, risk weightings and other factors.

 

Quantitative measuresestablished by regulations to ensure capital adequacy require us to maintainminimum amounts and ratios (set forth below in the table) of total and Tier Icapital (as defined in the regulations) to risk-weighted assets (as defined),and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of March 31,2009 and as of December 31, 2008, that the Company and the Bank met allcapital adequacy requirements to which they are subject.

 

As of March 31,2009, the most recent notifications from both the Federal Deposit InsuranceCorporation and the Federal Reserve Bank of Atlanta categorized the Bank aswell capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, theBank must maintain minimum total risk-based, Tier I risk-based and Tier Ileverage ratios as set forth in the following table.  There are no conditions or events since thatnotification that management believes have changed the Bank’s categories.

 

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The Company’s and theBank’s actual capital amounts and ratios as of March 31, 2009 and December 31,2008 follow:

 
| ** **                                         | ** **   | **Actual**   | ** **   | **For Capital  Adequacy Purposes** | ** **   | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** | ** **   |
|----------------------------------------------------|--------------|--------------|--------------|------------------------------------|--------------|------------------------------------------------------------------------|--------------|
| ** **                                         | ** **   | **Amount**   | ** **   | **Ratio**                          | ** **   | **Amount**                                                             | ** **   | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ***March 31,  2009***                         | *** *** | *** *** | *** *** | *** ***                       | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| * *                                           | * *     | * *     | * *     | * *                           | * *     | * *                                                               | * *     | * * | * * | * * | * * | * * | * * |
| Total Risk-Based  Capital To Risk Weighted Assets: |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 88,547,000   |                               | 10.46        | %                                                                      | $            | 67,722,371 | >  | 8.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 87,275,000   |         | 10.32                              | %            | 67,655,039                                                             | >    | 8.0 | % | $ | 84,568,798 | >  | 10.0 | % |
|                                               |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Tier I Capital  To Risk Weighted Assets:           |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 76,556,000   |                               | 9.04         | %                                                                      | $            | 33,874,336 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 75,295,000   |         | 8.91                               | %            | 33,802,469                                                             | >    | 4.0 | % | $ | 50,703,704 | >  | 6.0 | % |
|                                               |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Tier I Capital  To Average Assets                  |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 76,556,000   |                               | 7.70         | %                                                                      | $            | 39,769,351 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 75,295,000   |         | 7.59                               | %            | 39,681,159                                                             | >    | 4.0 | % | $ | 49,601,449 | >  | 5.0 | % |
| *** ***                                       | *** *** | *** *** | *** *** | *** ***                       | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| ***December 31,  2008***                      | *** *** | *** *** | *** *** | *** ***                       | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| * *                                           | * *     | * *     | * *     | * *                           | * *     | * *                                                               | * *     | * * | * * | * * | * * | * * | * * |
| Total Risk-Based  Capital To Risk Weighted Assets: |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 87,583,000   |                               | 10.47        | %                                                                      | $            | 66,921,108 | >  | 8.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 86,181,000   |         | 10.33                              | %            | 66,742,304                                                             | >    | 8.0 | % | $ | 83,427,880 | >  | 10.0 | % |
|                                               |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Tier I Capital  To Risk Weighted Assets:           |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 75,709,000   |                               | 9.05         | %                                                                      | $            | 33,462,541 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 74,332,000   |         | 8.91                               | %            | 33,370,146                                                             | >    | 4.0 | % | $ | 50,055,219 | >  | 6.0 | % |
|                                               |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Tier I Capital  To Average Assets                  |         |         |         |                               |         |                                                                   |         |   |   |   |   |   |   |
| Consolidated                                       |         | $            | 75,709,000   |                               | 7.84         | %                                                                      | $            | 38,627,041 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                               |         | 74,332,000   |         | 7.71                               | %            | 38,563,943                                                             | >    | 4.0 | % | $ | 48,204,929 | >  | 5.0 | % |

 

We had outstandingjunior subordinated debentures commonly referred to as Trust PreferredSecurities totaling $10.3 million at March 31, 2009 and December 31,2008.  The Trust Preferred Securitiesqualify as a Tier I capital under risk-based capital guidelines provided thattotal Trust Preferred Securities do not exceed certain quantitativelimits.  At March 31, 2009 and December 31,2008, all of the Trust Preferred Securities qualify as a Tier I capital.

 

We had outstandingsubordinated debentures totaling $1.4 million at March 31, 2009 and December 31,2008.  The subordinated debenturesqualify as a Tier II capital under risk-based capital guidelines provided forthat.  At March 31, 2009 and December 31,2008, all of the subordinated debentures qualify as a Tier II capital.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

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

**For the Three Months Ended March 31, 2009**

** **

Pursuant to Item 305(e) ofRegulation S-K, no disclosure under this item is required.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Item 4T. Controls and Procedures**

**For the Three Months Ended March 31, 2009**

** **

The Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, supervised and participated in an evaluation of the effectivenessof its disclosure controls and procedures (as defined in federal securitiesrules) 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 andforms.  The Company’s disclosure controlsand procedures are designed to ensure that the information required to bedisclosed in reports that are filed or submitted by the Company pursuant to theSecurities Exchange Act, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

#### **During the first quarter of 2009, there were no significantchanges in the Company’s internal control over financial reporting or, to theCompany’s knowledge, in other factors that could significantly affect thoseinternal controls subsequent to the date the Company carried out its evaluationthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.  However, the design of any system of controlsand procedures is based in part upon certain assumptions about the likelihoodof future events.  There can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.**

 

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** **

**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Part II. Other Information**

**For the Three Months Ended March 31, 2009**

#### ** **

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

#### ** **

Item1. Legal Proceedings

 

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

 

Item1A. Risk Factors

 

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2008, which couldmaterially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-Kare not the only risks we face. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operation results.

 

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item3. Defaults Upon Senior Securities

 

NotApplicable

 

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

 

None

 

Item5. Other Information

 

None

 

Item6. Exhibits

 

(a)                                  Exhibits:

 

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

 

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

 

32            Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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** **

**SIGNATURES**

** **

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

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

** **

** **
| /s/ Mark A. Stevens                   |   |
|---------------------------------------|--------|
|                                  |   |
| Mark A. Stevens                       |   |
| President and Chief Executive Officer |   |
|                                  |   |
|                                  |   |
| Date: May 1, 2009                |   |

 

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