Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

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

** **

**Forthe quarterly period ended September 30, 2009**

 

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

 

**Forthe transition period from                    to                     **

 

**CommissionFile Number 000-51112**

 

**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

(Exact Name of SmallBusiness Issuer as Specified in Its Charter)

 

| **GEORGIA**                                                     | ** ** | **20-2118147**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of

Incorporation or Organization) |       | (I.R.S. Employer

Identification No.) |

 

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

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

(Address of PrincipalExecutive Offices)

 

**(478)476-2170**

(Issuer’sTelephone Number, Including Area Code)

 

**NotApplicable**

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes  o   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of “largeaccelerated filer,” “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 |

 

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

 

 

 

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**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date: Common Stock, no par value, 4,211,780 sharesoutstanding at November 10, 2009

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

 

INDEX

 
| ** **                                                                                                     | ** **                                                                                                                                               | **PAGE** |
|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                           |                                                                                                                                                     |     |
| PART I:                                                                                                   | FINANCIAL INFORMATION                                                                                                                                    |     |   |
| ITEM 1.                                                                                                        | FINANCIAL STATEMENTS                                                                                                                                     |     |   |
|                                                                                                           |                                                                                                                                                     |     |
| The following consolidated financial statements are  provided for Atlantic Southern Financial Group, Inc. |                                                                                                                                                     |     |
|                                                                                                           |                                                                                                                                                     |     |
|                                                                                                           | Consolidated  Balance Sheets — September 30,  2009 (unaudited) and December 31,  2008 (audited).                                          |     | 2 |
|                                                                                                           |                                                                                                                                                     |     |   |
|                                                                                                           | Consolidated Statements of Operations (unaudited) —  For the Three Months And Nine Months Ended September 30, 2009 and 2008.                   |     | 3 |
|                                                                                                           |                                                                                                                                                     |     |   |
|                                                                                                           | Consolidated Statements of Comprehensive Income (Loss)  (unaudited) — For the Three Months and Nine Months Ended September 30,  2009 and 2008. |     | 4 |
|                                                                                                           |                                                                                                                                                     |     |   |
|                                                                                                           | Consolidated Statements of Cash Flows (unaudited) —  For the Nine Months Ended September 30, 2009 and 2008.                                    |     | 5 |
|                                                                                                           |                                                                                                                                                     |     |   |
|                                                                                                           | Notes to Consolidated Financial Statements (unaudited)                                                                                                   |     | 7 |
|                                                                                                           |                                                                                                                                                     |     |   |
| ITEM 2.                                                                                                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                              |     | 17 |
|                                                                                                           |                                                                                                                                                     |     |   |
| ITEM 3.                                                                                                        | Quantitative  and Qualitative Disclosures About Market Risk                                                                                              |     | 33 |
|                                                                                                           |                                                                                                                                                     |     |   |
| ITEM 4T.                                                                                                       | Controls and Procedures                                                                                                                                  |     | 34 |
|                                                                                                           |                                                                                                                                                     |     |   |
| PART II:                                                                                                  | OTHER INFORMATION                                                                                                                                        |     | 35 |

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Balance Sheets**

**September 30, 2009****(Unaudited) and****December 31, 2008****(Audited)**

 
| ** **                                                                                                                                                                                 | ** ** | **As of**              | ** **    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|
| ** **                                                                                                                                                                                 | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
| ** **                                                                                                                                                                                 | ** ** | **2009**               | ** **    | **2008** | ** ** |
| **Assets**                                                                                                                                                                                 |       |                   |          |   |   |
| Cash and due from banks                                                                                                                                                                    |       | $                      | 8,330,095     |   | $ | 14,010,580 |   |
| Interest-bearing deposits in other banks                                                                                                                                                   |       | 62,357,577             |          | 1,119,556 |   |
| Total cash and cash equivalents                                                                                                                                                            |       | 70,687,672             |          | 15,130,136 |   |
| Securities available for sale, at fair value                                                                                                                                               |       | 180,169,835            |          | 100,619,437 |   |
| Federal Home Loan Bank stock, restricted, at cost                                                                                                                                          |       | 4,316,800              |          | 3,670,200 |   |
| Loans held for sale                                                                                                                                                                        |       | 1,571,940              |          | 1,291,352 |   |
| Loans, net of unearned income                                                                                                                                                              |       | 760,499,549            |          | 792,883,664 |   |
| Less - allowance for loan losses                                                                                                                                                           |       | (14,602,754            | )             | (11,671,534 | ) |
| Loans, net                                                                                                                                                                                 |       | 745,896,795            |          | 781,212,130 |   |
| Bank premises and equipment, net                                                                                                                                                           |       | 31,322,862             |          | 31,049,394 |   |
| Accrued interest receivable                                                                                                                                                                |       | 5,363,330              |          | 6,342,138 |   |
| Cash surrender value of life insurance                                                                                                                                                     |       | 12,866,768             |          | 12,465,228 |   |
| Goodwill and other intangible assets, net of  amortization                                                                                                                                 |       | 2,639,429              |          | 22,444,667 |   |
| Other real estate owned                                                                                                                                                                    |       | 15,775,214             |          | 10,196,165 |   |
| Other assets                                                                                                                                                                               |       | 13,066,115             |          | 7,320,743 |   |
| **Total Assets**                                                                                                                                                                           |       | $                      | 1,083,676,760 |   | $ | 991,741,590 |   |
|                                                                                                                                                                                       |       |                   |          |   |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                                             | ** ** | ** **             | ** **    | ** ** | ** ** |
| Deposits:                                                                                                                                                                                  |       |                   |          |   |   |
| Non-interest bearing                                                                                                                                                                       |       | $                      | 54,608,848    |   | $ | 48,482,128 |   |
| Money market and NOW accounts                                                                                                                                                              |       | 154,820,863            |          | 141,224,574 |   |
| Savings                                                                                                                                                                                    |       | 9,268,996              |          | 7,972,230 |   |
| Time deposits                                                                                                                                                                              |       | 738,461,369            |          | 638,772,511 |   |
| Total deposits                                                                                                                                                                             |       | 957,160,076            |          | 836,451,443 |   |
| Federal Home Loan Bank advances                                                                                                                                                            |       | 50,300,000             |          | 47,500,000 |   |
| Subordinated debentures                                                                                                                                                                    |       | 1,400,000              |          | 1,400,000 |   |
| Junior subordinated debentures                                                                                                                                                             |       | 10,310,000             |          | 10,310,000 |   |
| Accrued interest payable                                                                                                                                                                   |       | 5,149,813              |          | 5,487,499 |   |
| Accrued expenses and other liabilities                                                                                                                                                     |       | 1,827,457              |          | 1,630,080 |   |
| Total liabilities                                                                                                                                                                          |       | 1,026,147,346          |          | 902,779,022 |   |
| Commitments                                                                                                                                                                                |       |                   |          |   |   |
| Shareholders’ Equity:                                                                                                                                                                 |       |                   |          |   |   |
| Preferred stock, authorized 2,000,000 shares,  outstanding -0- shares                                                                                                                      |       | —                 |          | — |   |
| Common stock, no par value, authorized 10,000,000  shares, 4,211,780 issued and outstanding in 2009, $5 par value, authorized  10,000,000 shares, 4,211,780 issued and outstanding in 2008 |       | 74,624,881             |          | 21,058,900 |   |
| Paid-in capital surplus                                                                                                                                                                    |       | —                 |          | 53,546,955 |   |
| Retained earnings (accumulated deficit)                                                                                                                                                    |       | (17,738,955            | )             | 13,588,966 |   |
| Accumulated other comprehensive income                                                                                                                                                     |       | 643,488                |          | 767,747 |   |
| Total shareholders’ equity                                                                                                                                                            |       | 57,529,414             |          | 88,962,568 |   |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                                                       |       | $                      | 1,083,676,760 |   | $ | 991,741,590 |   |

 

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

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Operations**

**Forthe Three Months and Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

** **
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                      | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Interest and Dividend Income:**                                               |       |                   |       |                   |       |   |   |   |   |
| Interest and fees on loans                                                      |       | $                      | 10,424,193 |                   | $          | 12,591,813 |   | $ | 32,555,605 |   | $ | 38,457,367 |   |
| Interest on securities:                                                         |       |                   |       |                   |       |   |   |   |   |
| Taxable income                                                                  |       | 614,751                |       | 824,416                |       | 2,400,476 |   | 2,167,990 |   |
| Non-taxable income                                                              |       | 146,952                |       | 227,177                |       | 470,204 |   | 652,614 |   |
| Income on federal funds sold                                                    |       | —                 |       | 35,594                 |       | — |   | 148,977 |   |
| Other interest and dividend income                                              |       | 68,928                 |       | 48,652                 |       | 77,409 |   | 204,398 |   |
| Total interest and dividend income                                              |       | 11,254,824             |       | 13,727,652             |       | 35,503,694 |   | 41,631,346 |   |
| **Interest Expense:**                                                           |       |                   |       |                   |       |   |   |   |   |
| Deposits                                                                        |       | 6,704,732              |       | 7,310,723              |       | 20,052,429 |   | 21,889,215 |   |
| Junior subordinated debentures                                                  |       | 69,176                 |       | 125,961                |       | 255,423 |   | 428,351 |   |
| Federal funds purchased                                                         |       | 112                    |       | 8,037                  |       | 209 |   | 52,797 |   |
| FHLB borrowings and other interest expense                                      |       | 448,987                |       | 261,671                |       | 1,272,319 |   | 996,515 |   |
| Total interest expense                                                          |       | 7,223,007              |       | 7,706,392              |       | 21,580,380 |   | 23,366,878 |   |
|                                                                            |       |                   |       |                   |       |   |   |   |   |
| Net interest income                                                             |       | 4,031,817              |       | 6,021,260              |       | 13,923,314 |   | 18,264,468 |   |
| **Provision for loan losses**                                                   |       | 11,352,000             |       | 907,000                |       | 17,420,000 |   | 2,255,000 |   |
| Net interest income (expense) after provision for  loan losses                  |       | (7,320,183             | )          | 5,114,260              |       | (3,496,686 | ) | 16,009,468 |   |
| **Noninterest Income:**                                                         |       |                   |       |                   |       |   |   |   |   |
| Service charges on deposit accounts                                             |       | 464,250                |       | 455,318                |       | 1,303,925 |   | 1,312,536 |   |
| Other service charges, commissions and fees                                     |       | 135,817                |       | 128,818                |       | 373,944 |   | 357,549 |   |
| Gain (loss) on sales, calls and impairment write-down  of investment securities |       | 15,342                 |       | (1,160,895             | )          | 1,331,160 |   | (1,120,650 | ) |
| Mortgage origination income                                                     |       | 249,162                |       | 210,794                |       | 642,749 |   | 640,826 |   |
| Other income                                                                    |       | 267,493                |       | 245,851                |       | 823,569 |   | 923,082 |   |
| Total noninterest income                                                        |       | 1,132,064              |       | (120,114               | )          | 4,475,347 |   | 2,113,343 |   |
| **Noninterest Expense:**                                                        |       |                   |       |                   |       |   |   |   |   |
| Salaries and employee benefits                                                  |       | 2,423,366              |       | 3,027,999              |       | 7,838,818 |   | 8,715,614 |   |
| Occupancy expense                                                               |       | 463,275                |       | 482,284                |       | 1,355,029 |   | 1,393,955 |   |
| Equipment rental and depreciation of equipment                                  |       | 333,301                |       | 318,108                |       | 964,804 |   | 862,418 |   |
| Loss on sale of other assets                                                    |       | 464,847                |       | 23,951                 |       | 1,988,532 |   | 37,436 |   |
| Goodwill impairment                                                             |       | —                 |       | —                 |       | 19,533,501 |   | — |   |
| Other expenses                                                                  |       | 2,810,101              |       | 1,889,478              |       | 7,363,428 |   | 5,252,736 |   |
| Total noninterest expense                                                       |       | 6,494,890              |       | 5,741,820              |       | 39,044,112 |   | 16,262,159 |   |
|                                                                            |       |                   |       |                   |       |   |   |   |   |
| **Earnings (Loss) Before Income  Taxes**                                        |       | (12,683,009            | )          | (747,674               | )          | (38,065,451 | ) | 1,860,652 |   |
| Income tax benefit (expense)                                                    |       | 4,395,044              |       | 400,799                |       | 6,737,530 |   | (309,535 | ) |
| **Net Earnings (Loss)**                                                         |       | $                      | (8,287,965 | )                      | $          | (346,875 | ) | $ | (31,327,921 | ) | $ | 1,551,117 |   |
| **Net Earnings (Loss) per share:**                                              |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                           |       | $                      | (1.97      | )                      | $          | (0.08 | ) | $ | (7.44 | ) | $ | 0.37 |   |
| Diluted                                                                         |       | $                      | (1.97      | )                      | $          | (0.08 | ) | $ | (7.44 | ) | $ | 0.35 |   |
| **Dividends declared per share:**                                               |       | $                      | —     |                   | $          | 0.03 |   | $ | — |   | $ | 0.09 |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Comprehensive Income(Loss)**

**Forthe Three Months and Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net earnings (loss)                                                            |       | $                                         | (8,287,965 | )                                        | $          | (346,875 | ) | $ | (31,327,921 | ) | $ | 1,551,117 |   |
| Other comprehensive income (loss):                                             |       |                                      |       |                                     |       |   |   |   |   |
| Unrealized holding gain (losses) on investment securities  available for sale  |       | 1,349,409                                 |       | (463,367                                 | )          | 1,200,506 |   | (1,462,738 | ) |
| Reclassification adjustment for (gains) losses  realized in net earnings       |       | (15,342                                   | )          | 1,160,895                                |       | (1,388,778 | ) | 1,120,650 |   |
| Total other comprehensive income (loss), before tax                            |       | 1,334,067                                 |       | 697,528                                  |       | (188,272 | ) | (342,088 | ) |
| Income taxes related to other comprehensive  (income) loss:                    |       |                                      |       |                                     |       |   |   |   |   |
| Unrealized holding (gains) losses on investment securities  available for sale |       | (458,799                                  | )          | 157,545                                  |       | (408,172 | ) | 497,331 |   |
| Reclassification adjustment for gains (losses)  realized in net earnings       |       | 5,216                                     |       | (394,704                                 | )          | 472,185 |   | (381,020 | ) |
| Total income taxes related to other comprehensive  (income) loss               |       | (453,583                                  | )          | (237,159                                 | )          | 64,013 |   | 116,311 |   |
| Total other comprehensive income (loss), net of tax                            |       | 880,484                                   |       | 460,369                                  |       | (124,259 | ) | (225,777 | ) |
| Total comprehensive income (loss)                                              |       | $                                         | (7,407,481 | )                                        | $          | 113,494 |   | $ | (31,452,180 | ) | $ | 1,325,340 |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**Consolidated Statements of Cash Flows**

**Forthe Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **Nine Months Ended September 30,** | ** **  |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                                  | ** ** | **2009**                                 | ** **  | **2008** | ** ** |
| **Cash Flows from Operating  Activities:**                                                  |       |                                     |        |   |   |
| Net earnings (loss)                                                                         |       | $                                        | (31,327,921 | ) | $ | 1,551,117 |   |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities: |       |                                     |        |   |   |
| Provision for loan losses                                                                   |       | 17,420,000                               |        | 2,255,000 |   |
| Depreciation                                                                                |       | 1,219,143                                |        | 1,072,085 |   |
| Stock based compensation                                                                    |       | 19,026                                   |        | 41,202 |   |
| Goodwill impairment charge                                                                  |       | 19,533,501                               |        | — |   |
| Amortization and (accretion), net                                                           |       | 536,481                                  |        | 233,401 |   |
| Loss on sales and impairment of other assets                                                |       | 2,370,298                                |        | 119,505 |   |
| (Gain) loss on sales, calls and impairment write-down  of investment securities             |       | (1,331,160                               | )           | 1,120,650 |   |
| Earnings on cash surrender value of life insurance                                          |       | (401,540                                 | )           | (388,449 | ) |
| Change in:                                                                                  |       |                                     |        |   |   |
| Loans held for sale                                                                         |       | (280,588                                 | )           | (13,488 | ) |
| Accrued income and other assets                                                             |       | (5,012,220                               | )           | (1,188,802 | ) |
| Accrued expenses and other liabilities                                                      |       | (76,297                                  | )           | 801,407 |   |
| Net cash provided by operating activities                                                   |       | 2,668,723                                |        | 5,603,628 |   |
| **Cash Flows from Investing  Activities:**                                                  |       |                                     |        |   |   |
| Net change in loans to customers                                                            |       | 5,215,629                                |        | (101,892,953 | ) |
| Purchase of available for sale securities                                                   |       | (201,094,582                             | )           | (51,214,050 | ) |
| Proceeds from sales, calls, maturities and paydowns  of available for sale securities       |       | 122,479,947                              |        | 22,778,346 |   |
| Purchase of other investments                                                               |       | (880,600                                 | )           | (686,200 | ) |
| Proceeds from sale of other investments                                                     |       | 484,000                                  |        | 684,000 |   |
| Purchase of cash surrender value of life insurance                                          |       | —                                   |        | (7,500,000 | ) |
| Property and equipment expenditures                                                         |       | (1,492,611                               | )           | (2,578,378 | ) |
| Cash paid for improvements of other real estate                                             |       | (25,048                                  | )           | (117,259 | ) |
| Proceeds from sales of assets                                                               |       | 4,693,445                                |        | 578,351 |   |
| Net cash used in investing activities                                                       |       | (70,619,820                              | )           | (139,948,143 | ) |
| **Cash Flows from Financing  Activities:**                                                  |       |                                     |        |   |   |
| Net change in deposits                                                                      |       | 120,708,633                              |        | 141,219,268 |   |
| Net increase in federal funds purchased                                                     |       | —                                   |        | 191,000 |   |
| Advances on FHLB borrowings                                                                 |       | 31,000,000                               |        | 20,200,000 |   |
| Payments on FHLB borrowings                                                                 |       | (28,200,000                              | )           | (30,200,000 | ) |
| Proceeds from subordinated debentures                                                       |       | —                                   |        | 950,000 |   |
| Dividends paid                                                                              |       | —                                   |        | (373,661 | ) |
| Net cash provided by financing activities                                                   |       | 123,508,633                              |        | 131,986,607 |   |
| **Net Increase (Decrease) in Cash  and Cash Equivalents**                                   |       | 55,557,536                               |        | (2,357,908 | ) |
| **Cash and Cash Equivalents,  Beginning of Year**                                           |       | 15,130,136                               |        | 19,924,178 |   |
| **Cash and Cash Equivalents, End of Quarter**                                               |       | $                                        | 70,687,672  |   | $ | 17,566,270 |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

 

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**ATLANTIC SOUTHERN FINANCIAL GROUP, INC.**

**ConsolidatedStatements of Cash Flows**

**Forthe Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

 

**Supplemental Disclosure of Cash Flow Information**

 

**Noncash transactions:**

 
| ** **                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Changes in unrealized gain/loss on investments, net  of tax effect |       | $                                        | (124,259   | ) | $ | (225,777 | ) |
| Transfer of loans to other real estate and other  assets           |       | $                                        | 16,758,579 |   | $ | 1,676,776 |   |
| Transfer of other real estate to loans                             |       | $                                        | 4,078,873  |   | $ | — |   |

 

*See Accompanying Notes to Consolidated Financial Statements(Unaudited).*

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

# ** **

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-Q and therefore do not includeall information and footnotes necessary for a fair presentation of financialposition, results of operations, and changes in financial position inconformity with generally accepted accounting principles.  The interim 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)   Subsequent Events***

# ** **

The Company performed an evaluationof subsequent events through November 10, 2009, the date upon which the Company’squarterly report on Form 10-Q was filed with the Securities and ExchangeCommission.  No subsequent events wereidentified that would have required a change to the financial statements ordisclosure in the notes to the financial statements.

 

# ***(3)   Management’s Plan of Actionfor Cease and Desist Order***

# ** **

On September 11,2009, Atlantic Southern Bank (the “Bank”), the wholly-owned subsidiary bank ofAtlantic Southern Financial Group, Inc., entered into a Stipulation andConsent to the Issuance of an Order to Cease and Desist (the “Consent Agreement”)with the Federal Deposit Insurance Corporation (the “FDIC”) and the GeorgiaDepartment of Banking and Finance (the “GDBF”), whereby the Bank consented tothe issuance of an Order to Cease and Desist (the “Order”).  Under the terms of the Order, the Bank cannotdeclare dividends without the prior written approval of the FDIC and the GDBF.Other material provisions of the order require the Bank to: (i) strengthenits board of directors’ oversight of management and operations of the Bank, (ii) establisha committee consisting of at least four members, three of which must beindependent, to oversee the Bank’s compliance with the Order, (iii) maintainspecified capital and liquidity ratios, (iv)  improve the Bank’s lendingand collection policies and procedures, particularly with respect to theorigination and monitoring of commercial real estate and acquisition,development and construction loans, (v) eliminate from its books, bycharge off or collection, all assets classified as “loss” and 50% of all assetsclassified as doubtful, (vi) perform risk segmentation analysis withrespect to concentrations of credit, (vii) receive a brokered depositwaiver from the FDIC prior to accepting, rolling over or renewing any brokereddeposits and submit a written plan for eliminating its reliance on brokereddeposits, (viii) adopt and implement a policy limiting the use of loaninterest reserves, (ix) formulate and fully implement a written plan andcomprehensive budget for all categories of income and expense, and (x) prepareand submit progress reports to the FDIC and the GDBF. The FDIC order willremain in effect until modified or terminated by the FDIC and the GDBF.

 

TheBank expects to continue to serve its customers in all areas including makingloans, establishing lines of credit, accepting deposits and processing bankingtransactions.  The Bank’s deposits willremain insured by the FDIC to the maximum limits allowed by law.  The FDIC and GDBF did not impose or recommendany monetary penalties.

 

The followingis an update as to the actions taken by the Bank in response to the Order.  As of the date of this report, the Bank hasmade the following progress in complying with the above stated provisions:

 

(i)                                    Since the Order and throughout 2009, theboard of director’s participation in the affairs of the Bank has increasedthrough greater communication with management, an analysis of managementreports to the board, as well as increased committee activities.

 

(ii)                                 The Bank has formed an oversightcommittee for the purpose of monitoring the Bank’s overall compliance with theOrder and this committee has been meeting bi-weekly and reporting to the fullboard of the Bank at each regularly scheduled board meeting.  Although not specifically required by theOrder, the board engaged an independent management consulting firm to conductan assessment of Bank management.

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

(iii)                             The Bank has developed a capital plan,which includes expense reductions to improve earnings, restructuring thebalance sheet to reduce non-performing assets, seeking new capital and limitingloan growth.  The Bank is currentlyupdating the plan and will continue to revise the plan quarterly.  The Bank has also reviewed its writtenliquidity, contingency funding, and funds management policies and has madeappropriate revisions.  Both the revisedcapital plan and the revised liquidity policy have been submitted to thesupervisory authorities for review.  TheBank’s Total Risk Based Capital ratio was 9.34% and the Tier 1 Leverage Ratiowas 5.69% at September 30, 2009. The Bank’s liquidity ratio at September 30, 2009 was 25.94%.

 

(iv)                             The Bank has reviewed and revised lendingpolicies to provide additional guidance and control over the lending functions.

 

(v)                                The Bank has eliminated from its booksall assets or portions of assets classified as “Loss” and 50% of all assets orportions of assets classified as “Doubtful”.

 

(vi)                             The Bank has performed a risksegmentation analysis with respect to concentrations of credit and isdeveloping a plan to reduce the concentrations of credit.  Upon completion, we will submit the plan tothe supervisory authorities.

 

(vii)                          The Bank submitted to the supervisoryauthorities a written plan for eliminating its reliance on brokered depositsand will not accept, roll over or renew any brokered deposits unless a waiverhas been received from the FDIC.  TheBank has significantly reduced its exposure to brokered deposits.  Since June 30, 2008, the Bank reducedbrokered deposits by 19.3%, or $78 million, while increasing core deposits by$199 million during the same period.

 

(viii)                       The Bank has adopted a policy limitingthe use of interest reserves.

 

(ix)                               A three-year profit plan has beendeveloped and is currently under review by the oversight committee.

 

(x)                                  The Bank has submitted the requiredprogress report to the appropriate supervisory authorities.

 

# ***(4)   Net Earnings (Loss) perShare***

 

Basic earnings (loss) per share arebased on the weighted average number of common shares outstanding during theperiod while the effects of potential shares outstanding during the period areincluded in diluted earnings per share.  Options andwarrants were not included in the diluted (loss) per share computations for thethree and nine months ended September 30, 2009 and for the three monthsended September 30, 2008 as they were all antidilutive.

 

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

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Net earnings (loss)                                                         |       | $                      | (8,287,965 | )                      | $          | (346,875 | ) | $ | (31,327,921 | ) | $ | 1,551,117 |   |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Weighted average common  shares outstanding                                 |       | 4,211,780              |       | 4,151,780              |       | 4,211,780 |   | 4,151,780 |   |
| Shares issued from assumed  exercise of common stock equivalents            |       | —                 |       | —                 |       | — |   | 227,819 |   |
| Weighted average number of  common and common equivalent shares outstanding |       | 4,211,780              |       | 4,151,780              |       | 4,211,780 |   | 4,379,599 |   |
| Earnings (loss) per share:                                                  |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                       |       | $                      | (1.97      | )                      | $          | (0.08 | ) | $ | (7.44 | ) | $ | 0.37 |   |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Diluted                                                                     |       | $                      | (1.97      | )                      | $          | (0.08 | ) | $ | (7.44 | ) | $ | 0.35 |   |

 

***(5)  ******Investment Securities***

 

Debt and equity securities have been classified inthe balance sheet according to management’s intent.  All investments as of September 30, 2009and December 31, 2008 are classified as available for sale.  The following table reflects the amortizedcost and estimated fair values of the investments:

 
| ** **                                 | ** ** | **Amortized** | ** **  | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated**  | ** ** |
|--------------------------------------------|------------|---------------|-------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                 | ** ** | **Cost**      | ** **  | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **September 30, 2009**                |       |          |        |           |       |           |       |           |       |
| Non-mortgage backed debt  securities of :  |       |          |        |           |       |           |       |           |       |
| U.S. Treasury obligations                  |       | $             | 100,163,158 |           | $          | 43,013         |       | $              | (675       | ) | $ | 100,205,496 |   |
| U.S. government sponsored  enterprises     |       | 37,318,791    |        | 471,536        |       | (12,050        | )          | 37,778,277     |       |
| State and political  subdivisions          |       | 15,429,117    |        | 266,257        |       | (456,632       | )          | 15,238,742     |       |
| Other investments                          |       | 250,000       |        | 11,560         |       | —         |       | 261,560        |       |
| Total non-mortgage backed  debt securities |       | 153,161,066   |        | 792,366        |       | (469,357       | )          | 153,484,075    |       |
| Mortgage backed securities                 |       | 25,949,062    |        | 702,546        |       | (50,870        | )          | 26,600,738     |       |
| Equity securities                          |       | 84,725        |        | 5,097          |       | (4,800         | )          | 85,022         |       |
| Total                                      |       | $             | 179,194,853 |           | $          | 1,500,009      |       | $              | (525,027   | ) | $ | 180,169,835 |   |
| **December 31,  2008**                |       |          |        |           |       |           |       |           |       |
| Non-mortgage backed debt  securities of :  |       |          |        |           |       |           |       |           |       |
| U.S. Treasury obligations                  |       | $             | 249,892     |           | $          | 1,701          |       | $              | —     |   | $ | 251,593 |   |
| U.S. government sponsored  enterprises     |       | 17,051,518    |        | 709,477        |       | —         |       | 17,760,995     |       |
| State and political  subdivisions          |       | 21,241,661    |        | 119,635        |       | (1,063,228     | )          | 20,298,068     |       |
| Other investments                          |       | 250,000       |        | —         |       | —         |       | 250,000        |       |
| Total non-mortgage backed  debt securities |       | 38,793,071    |        | 830,813        |       | (1,063,228     | )          | 38,560,656     |       |
| Mortgage backed securities                 |       | 60,578,388    |        | 1,470,122      |       | (12,465        | )          | 62,036,045     |       |
| Equity securities                          |       | 84,725        |        | —         |       | (61,989        | )          | 22,736         |       |
| Total                                      |       | $             | 99,456,184  |           | $          | 2,300,935      |       | $              | (1,137,682 | ) | $ | 100,619,437 |   |

 

The amortized cost and fair values of pledgedsecurities for public deposits were as follows:

 
| ** **     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Amortized cost |       | $                      | 5,839,067  |                  | $          | 12,098,353 |   |
| Fair value     |       | $                      | 5,644,967  |                  | $          | 12,106,428 |   |

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

The amortized cost and estimated fair value of debtsecurities available for sale at September 30, 2009, by contractual maturity,is shown below.  Expected maturities formortgage-backed securities may differ from contractual maturities because incertain cases borrowers can prepay obligations without prepaymentpenalties.  Therefore, these securitiesare not included in the following maturity summary.

 
| ** **                                 | ** ** | ** **         | ** **  | **Estimated**  | ** ** |
|--------------------------------------------|------------|--------------------|-------------|----------------|------------|
| ** **                                 | ** ** | **Amortized Cost** | ** **  | **Fair Value** | ** ** |
| Non-mortgage backed debt  securities:      |       |               |        |           |       |
| Due in one year or less                    |       | $                  | 101,162,232 |           | $          | 101,210,806 |   |
| Due after one year through  five years     |       | 27,678,402         |        | 27,882,131     |       |
| Due after five years  through ten years    |       | 11,652,303         |        | 11,847,718     |       |
| Due after ten years                        |       | 12,668,129         |        | 12,543,420     |       |
| Total non-mortgage backed  debt securities |       | $                  | 153,161,066 |           | $          | 153,484,075 |   |

 

The fair value is established by an independentpricing service as of the approximate dates indicated.  The differences between the amortized costand fair value reflect current interest rates and represent the potential loss(or gain) had the portfolio been liquidated on that date.  Security losses (or gains) are realized onlyin the event of dispositions prior to maturity.

 

Information pertaining to securities with grossunrealized losses, aggregated by investment category and length of time thatindividual securities have been in a continuous unrealized loss position,follows:

 
| ** **                                 | ** ** | **September 30, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Less Than Twelve Months** | ** ** | **More Than Twelve Months** | ** ** |
| ** **                                 | ** ** | **Unrealized**              | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **Securities  Available for Sale**         | ** ** | **Losses**                  | ** ** | **Fair Value** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Non-mortgage backed debt  securities of:   |       |                        |       |   |   |   |   |   |   |
| U.S. Treasury obligations                  |       | $                           | (675       | ) | $ | 2,991,900 |   | $ | — |   | $ | — |   |
| U.S. government sponsored  enterprises     |       | (12,050                     | )          | 2,487,950 |   | — |   | — |   |
| State and political  subdivisions          |       | (16,619                     | )          | 1,496,265 |   | (440,013 | ) | 4,051,759 |   |
| Total non-mortgage backed  debt securities |       | (29,344                     | )          | 6,976,115 |   | (440,013 | ) | 4,051,759 |   |
| Mortgage backed securities                 |       | (50,870                     | )          | 2,470,308 |   | — |   | — |   |
| Equity securities                          |       | —                      |       | — |   | (4,800 | ) | 70,000 |   |
| Total                                      |       | $                           | (80,214    | ) | $ | 9,446,423 |   | $ | (444,813 | ) | $ | 4,121,759 |   |
|                                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **December 31, 2008**  | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Less Than Twelve Months** | ** ** | **More Than Twelve Months** | ** ** |
| ** **                                 | ** ** | **Unrealized**              | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **Securities  Available for Sale**         | ** ** | **Losses**                  | ** ** | **Fair Value** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Non-mortgage backed debt  securities of:   |       |                        |       |   |   |   |   |   |   |
| U.S. government sponsored  enterprises     |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   |
| State and political  subdivisions          |       | (1,038,539                  | )          | 12,911,929 |   | (24,689 | ) | 390,310 |   |
| Total non-mortgage backed  debt securities |       | (1,038,539                  | )          | 12,911,929 |   | (24,689 | ) | 390,310 |   |
| Mortgage backed securities                 |       | (12,465                     | )          | 2,644,664 |   | — |   | — |   |
| Equity securities                          |       | (61,989                     | )          | 22,736 |   | — |   | — |   |
| Total                                      |       | $                           | (1,112,993 | ) | $ | 15,579,329 |   | $ | (24,689 | ) | $ | 390,310 |   |

 

Management evaluates securities forother-than-temporary impairment at least on a quarterly basis, and morefrequently when economic or market concerns warrant such evaluation.Consideration is given to (1) the length of time and the extent to whichthe fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

AtSeptember 30, 2009, nineteen debt securities had unrealized losses withaggregate depreciation of 0.29% from the Company’s amortized cost basis.  In analyzing an issuer’s financial condition,management considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades by bond rating agencies haveoccurred, and industry analysts’ reports. As management has the ability andintent to hold debt securities until maturity, or for the foreseeable future ifclassified as available for sale and it is more likely than not that theCompany will not be required to sell these investments before recovery of theiramortized cost basis, no declines are deemed to be other than temporary.

 

Thefollowing table summarizes securities sales activity for the three month andnine month periods ended September 30, 2009 and 2008:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proceeds from sales               |       | $                      | —     |                   | $          | 6,628,958 |   | $ | 51,611,819 |   | $ | 6,628,958 |   |
| Proceeds from calls               |       | 5,040,000              |       | 440,000                |       | 5,220,000 |   | 8,255,000 |   |
| Proceeds from maturities          |       | 27,340,247             |       | 3,750,000              |       | 56,080,247 |   | 4,750,000 |   |
| Total                             |       | $                      | 32,380,247 |                   | $          | 10,818,958 |   | $ | 112,912,066 |   | $ | 19,633,958 |   |
|                              |       |                   |       |                   |       |   |   |   |   |
| Gross gains                       |       | $                      | 16,119     |                   | $          | 26,030 |   | $ | 1,400,252 |   | $ | 66,275 |   |
| Gross losses                      |       | (777                   | )          | (21,641                | )          | (11,474 | ) | (21,641 | ) |
| Impairment losses                 |       | —                 |       | (1,165,284             | )          | (57,618 | ) | (1,165,284 | ) |
|                              |       |                   |       |                   |       |   |   |   |   |
| Net gains (losses) of  securities |       | $                      | 15,342     |                   | $          | (1,160,895 | ) | $ | 1,331,160 |   | $ | (1,120,650 | ) |
|                              |       |                   |       |                   |       |   |   |   |   |
| Income tax expense  (benefit)     |       | $                      | 5,216      |                   | $          | (394,704 | ) | $ | 472,185 |   | $ | (381,020 | ) |

 

Duringthe second quarter of 2009, the Company recognized an impairment loss of$57,618 on an equity investment in Silverton Bank, a financial institution thatfailed during the quarter.  Theimpairment loss represents the full amount of the Company’s investment inSilverton.

 

Duringthe second quarter of 2009, the Bank restructured approximately $36 million inU.S. agency and mortgage backed securities to capture gains on securitiesprepaying at high speeds, to offset the FDIC special assessment and to shortenthe average maturity of the portfolio.

 

During the third quarter of 2009, the Bank recognizedapproximately $16 thousand from the calls of $5.0 million in U.S governmentsponsored enterprises securities.  Otherproceeds are from the maturities of $1.8 million in U.S. government sponsoredenterprises, $25.0 million in U.S. Treasury obligations and $605 thousand instate and political subdivisions securities.

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***(6)  Allowance for LoanLosses***

 

Activity in the allowance for loan losses for the nine months ended September 30,2009 and for the year ended December 31, 2008 is as follows:

 
| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Beginning Balance                           |       | $                      | 11,671,534 |                  | $          | 8,878,795 |   |
| Add:                                        |       |                   |       |                  |       |
| Provision for possible loan  losses         |       | 17,420,000             |       | 7,443,000             |       |
| Subtotal                                    |       | 29,091,534             |       | 16,321,795            |       |
| Less:                                       |       |                   |       |                  |       |
| Loans charged off                           |       | 14,708,798             |       | 4,843,627             |       |
| Recoveries on loans  previously charged off |       | (220,018               | )          | (193,366              | )          |
| Net loans charged off                       |       | 14,488,780             |       | 4,650,261             |       |
| Balance, end of period                      |       | $                      | 14,602,754 |                  | $          | 11,671,534 |   |

 

***(7)  Nonperforming Assets***

 

### **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:**

 
| ** **                       | ** ** | **September 30.** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Accruing loans 90 days past  due |       | $                      | —     |                  | $          | — |   |
| Non-accrual loans                |       | 69,900,631             |       | 21,103,468            |       |
| Repossessed assets               |       | 40,500                 |       | 34,783                |       |
| Other real estate                |       | 15,775,214             |       | 10,196,165            |       |
| Total non-performing assets      |       | $                      | 85,716,345 |                  | $          | 31,334,416 |   |

 

Nonperformingassets increased $54.4 million, or 173.6%, from December 31, 2008 to September 30,2009.  This increase is largely due toseveral large relationships that are secured by commercial and residential realestate construction and land development real estate being placed onnon-accrual during the three quarters of 2009. All non-accrual loans are adequately collateralized based on management’sjudgment and supported by recent collateral appraisals.  Other real estate increased $5.6 million fromDecember 31, 2008 to September 30, 2009.  This increase is largely due to the additionof $16.8 million in foreclosed properties being offset by the sale of $8.8million in foreclosed properties resulting in $2.0 million loss on theseproperties.  During the third quarter of2009, the Company added approximately $12.1 million in 29 other real estateproperties.

 

As of September 30,2009 and December 31, 2008, the Company’s other real estate consisted ofthe following:

 
| ** **                                           | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| 1-4 Family residential  properties                   |       | 21                                |       | $                                | 3,203,001  |   | 8 |   | $ | 3,574,090 |   |
| Nonfarm nonresidential  properties                   |       | 9                                 |       | 6,085,070                        |       | 5 |   | 520,101 |   |
| Multifamily residential  properties                  |       | 1                                 |       | 31,675                           |       | — |   | — |   |
| Construction &  land development properties |       | 23                                |       | 6,455,468                        |       | 15 |   | 6,101,974 |   |
| Total                                                |       | 54                                |       | $                                | 15,775,214 |   | 28 |   | $ | 10,196,165 |   |

 

Allproperties are being actively marketed for sale and management is continuouslymonitoring these properties in order to minimize any losses.

 

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**ATLANTIC SOUTHERNFINANCIAL GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

On November 3,2009, the Bank foreclosed on approximately $7.4 million in various commercial,construction and land development and 1-4 family residential real estateproperties.  These properties were beingheld as collateral against several non-accrual loans at September 30,2009.  Management is currently evaluatingany additional losses on these properties.

 

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 through or in lieu of foreclosure. At the time of foreclosure, an appraisal is obtained on the realestate.  The amount charged to other realestate will be the estimated fair value less costs to sell.  The recorded investment is the unpaid balanceof the loan, increased by accrued and uncollected interest, unamortizedpremium, finance charges, and loan acquisition costs, if any, and decreased byprevious 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.

 

***(8)  ******Goodwill***

 

A summary of the changes in goodwill as of September 30,2009 and December 31, 2008 is presented below.

 
| ** **        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Beginning Balance |       | $                      | 19,533,501 |                  | $          | 19,533,501 |   |
| Impairment        |       | (19,533,501            | )          | —                |       |
| Ending Balance    |       | $                      | —     |                  | $          | 19,533,501 |   |

 

During the second quarter of 2009, the Companyupdated its goodwill impairment assessment based upon the current economicenvironment.  The current economicenvironment factors have resulted in lower earnings with higher credit costsbeing reflected in the statement of operations as well as valuation adjustmentsto the loan balances through increases in the level of the allowance for loanlosses.  As a result of the updatedassessment, goodwill was found to be impaired and was written down to itsestimated fair value.  The impairmentcharge of $19.5 million was recognized as an expense in the second quarterconsolidated statement of operations.

 

***(9)  ******Shareholders’Equity***

 

On May 27, 2009, the Company amended itsArticles of Incorporation to eliminate par value per share with respect to itscommon stock from the previous $5.00 par value per share of its commonstock.  Therefore, the paid-in capitalsurplus for the Company as of that date was included with the Company’s commonstock.

 

***(10) ******FairValue Measurements and Disclosures***

 

Assets and Liabilities Recorded at Fair Value on aRecurring Basis

 

The table below presents the recorded amount ofassets and liabilities measured at fair value on a recurring basis.

 
| ** **                      | ** ** | **As  of September 30,** | ** **  |
|---------------------------------|------------|-------------------------------|-------------|
| ** **                      | ** ** | **2009**                      | ** **  |
| ** **                      | ** ** | **Total**                     | ** **  | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                      |       |                          |        |   |   |   |   |   |   |
| Securities  available-for-sale  |       | $                             | 180,169,835 |   | $ | — |   | $ | 180,169,835 |   | $ | — |   |
| **Total  assets at fair value** |       | $                             | 180,169,835 |   | $ | — |   | $ | 180,169,835 |   | $ | — |   |

 

During the first quarter of 2009, the Company changedits investment bond accountants. Therefore, the level of measurement techniques to evaluate some of thesecurities available-for-sale changed to include all in the Level 

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

2 category since they are using different pricingsources and different matrixes for the securities available-for-sale.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

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

 
| ** **                      | ** ** | **As  of September 30,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2009**                      | ** ** |
| ** **                      | ** ** | **Total**                     | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                            |       |                          |       |   |   |   |   |   |   |
| Loans                           |       | $                             | 79,668,971 |   | $ | — |   | $ | 79,668,971 |   | $ | — |   |
| Loans held for sale             |       | 1,571,940                     |       |   |   | 1,571,940 |   |   |   |
| Other real estate owned         |       | 15,775,214                    |       | — |   | 15,775,214 |   | — |   |
|                            |       |                          |       |   |   |   |   |   |   |
| **Total  assets at fair value** |       | $                             | 97,016,125 |   | $ | — |   | $ | 97,016,125 |   | $ | — |   |

 

Thecarrying amount and estimated fair values of the Company’s assets andliabilities which are required to be either disclosed or recorded at fair valueat September 30, 2009 and December 31, 2008 are as follows:

 
| ** **                              | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Carrying**                | ** ** | **Estimated**              | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                              | ** ** | **Amount**                  | ** ** | **Fair Value**             | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| **Assets:**                             |       |                        |       |                       |       |   |   |   |   |
| Cash and cash equivalents               |       | $                           | 70,687,672 |                       | $          | 70,687,672 |   | $ | 15,130,136 |   | $ | 15,130,136 |   |
| Securities available for  sale          |       | 180,169,835                 |       | 180,169,835                |       | 100,619,437 |   | 100,619,437 |   |
| Federal Home Loan Bank  Stock           |       | 4,316,800                   |       | 4,316,800                  |       | 3,670,200 |   | 3,670,200 |   |
| Loans held for sale                     |       | 1,571,940                   |       | 1,571,940                  |       | 1,291,352 |   | 1,291,352 |   |
| Loans, net                              |       | 745,896,795                 |       | 747,117,534                |       | 781,212,130 |   | 783,884,588 |   |
| Other real estate owned                 |       | 15,775,214                  |       | 15,775,214                 |       | 10,196,165 |   | 10,196,165 |   |
| Cash surrender value of  life insurance |       | 12,866,768                  |       | 12,866,768                 |       | 12,465,228 |   | 12,465,228 |   |
| **Liabilities:**                        |       |                        |       |                       |       |   |   |   |   |
| Deposits                                |       | 957,160,076                 |       | 963,849,714                |       | 836,451,443 |   | 838,965,232 |   |
| FHLB borrowings                         |       | 50,300,000                  |       | 51,268,959                 |       | 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 valueestimates are made at a specific point in time, based on relevant marketinformation and information 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- andoff-balance sheet financial instruments without attempting to estimate thevalue of anticipated future business and the fair value of assets andliabilities that are not required to be recorded or disclosed at fair valuelike the mortgage banking operation, brokerage network and premises andequipment.

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***(11) AccountingStandards Updates***

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update No. 2009-01 (“ASU 2009-01”), *Topic 105 — Generally Accepted Accounting Principlesamendments based on Statement of Financial Accounting Standards No. 168 —The FASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*. ASU 2009-01 amends the FASB AccountingStandards Codification for the issuance of FASB Statement No. 168 (“SFAS168”), *The FASB Accounting StandardsCodification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*. ASU 2009-1 includes SFAS 168 in itsentirety, including the accounting standards update instructions contained inAppendix B of the Statement. The FASB Accounting Standards Codification TM (“Codification”) became the source ofauthoritative U.S. generally accepted accounting principles (“GAAP”) recognizedby the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. On the effective date of this Statement, the Codification willsupersede all then-existing non-SEC accounting and reporting standards. Allother non-grandfathered non-SEC accounting literature not included in theCodification will become non-authoritative. This Statement is effective forfinancial statements issued for interim and annual periods ending after September 15,2009.

 

Followingthis Statement, the FASB will not issue new standards in the form ofStatements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.Instead, it will issue Accounting Standards Updates. The FASB does not considerAccounting Standards Updates as authoritative in their own right. AccountingStandards Updates serve only to update the Codification, provide backgroundinformation about the guidance, and provide the bases for conclusions on thechange(s) in the Codification. FASB Statement No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*, which became effective on November 13, 2008,identified the sources of accounting principles and the framework for selectingthe principles used in preparing the financial statements of nongovernmentalentities that are presented in conformity with GAAP. Statement 162 arrangedthese sources of GAAP in a hierarchy for users to apply accordingly. Uponbecoming effective, all of the content of the Codification carries the samelevel of authority, effectively superseding Statement 162. In other words, theGAAP hierarchy has been modified to include only two levels of GAAP:authoritative and non-authoritative. As a result, this Statement replacesStatement 162 to indicate this change to the GAAP hierarchy. The adoption ofthe Codification and ASU 2009-01 did not have any effect on the Company’sconsolidated financial condition or results of operations.

 

InJune 2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU2009-02”), *Omnibus Update — Amendments toVarious Topics for Technical Corrections*. The adoption of ASU2009-02 did not have a material effect on the Company’s consolidated financialcondition or results of operations.

 

InAugust 2009, the FASB issued Accounting Standards Update No. 2009-03(“ASU 2009-03”), *SEC Update — Amendments toVarious Topics Containing SEC Staff Accounting Bulletins*. ASU2009-03 represents technical corrections to various topics containing SEC StaffAccounting Bulletins to update cross-references to Codification text. ASU2009-03 did not have a material effect on the Company’s consolidated financialcondition or results of operations.

 

InAugust 2009, the FASB issued Accounting Standards Update No. 2009-05(“ASU 2009-05”), *Fair Value Measurements andDisclosures (Topic 820) — Measuring Liabilities at Fair Value*. ASU2009-05 applies to all entities that measure liabilities at fair value withinthe scope of ASC Topic 820. ASU 2009-05 provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following techniques:

 

1.)           A valuation technique thatuses:

 

a.               The quoted price of the identical liabilitywhen traded as an asset.

 

b.              Quoted prices for similar liabilities or similarliabilities when traded as assets.

 

2.)           Another valuation techniquethat is consistent with the principles of ASC Topic 820. Two examples would bean income approach, such as a technique that is based on the amount at themeasurement date that the reporting entity would pay to transfer the identicalliability or would receive to enter into the identical liability.

 

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**ATLANTIC SOUTHERN FINANCIALGROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Theamendments in ASU 2009-5 also clarify that when estimating the fair value of aliability, a reporting entity is not required to include a separate input oradjustment to other inputs relating to the existence of a restriction thatprevents the transfer of the liability. It also clarifies that both a quotedprice in an active market for the identical liability at the measurement dateand the quoted price for the identical liability when traded as an asset in anactive market when no adjustments to the quoted price of the asset are requiredare Level 1 fair value measurements. The guidance provided in ASU 2009-5 iseffective for the first reporting period beginning after issuance. The adoptionof ASU 2009-5 will not have a material effect on the Company’s consolidatedfinancial condition or results of operations.

 

InSeptember 2009, the FASB issued Accounting Standards Update No. 2009-07(“ASU 2009-07”), *Accounting for VariousTopics*. ASU 2009-07 represents technical corrections to varioustopics containing SEC guidance based on external comments received. Theadoption of this guidance did not have a material effect on the Company’sconsolidated financial condition or results of operations.

 

InSeptember 2009, the FASB issued Accounting Standards Update No. 2009-12(“ASU 2009-12”), *Fair Value Measurements andDisclosures (Topic 820), Investments in Certain Entities that Calculate NetAsset Value per Share (or Its Equivalent).* ASU 2009-12 providesamendments to Subtopic 820-10, *Fair ValueMeasurements and Disclosures — Overall,* for the fair valuemeasurement of investments in certain entities that calculate net asset valueper share. This ASU also requires disclosures by major category of investmentabout the attributes of investments within the scope of the amendments in thisUpdate. The amendments in this Update are effective for interim and annualperiods after December 15, 2009. The adoption of this guidance will nothave a material effect on the Company’s consolidated financial condition orresults 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 and Nine Months inthe Period Ended**

**September 30, 2009 and 2008**

 

Thefollowing discussion of financial condition as of September 30, 2009 compared to December 31, 2008, and the results of operations for thethree months and nine months ended September 30,2009 compared to the three months and nine months ended September 30,2008 should be read in conjunction with the condensed financial statements andaccompanying footnotes appearing in this report.

 

##### ***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:

 

·                  thechallenges, costs and complications associated with the continued developmentof our branches;

·                  thepotential that loan charge-offs may exceed the allowance for loan losses orthat such allowance will be increased as a result of factors beyond ourcontrol;

·                  ourdependence on senior management;

·                  competitionfrom existing financial institutions operating in our market areas as well asthe entry into such areas of new competitors with greater resources, broaderbranch networks and more comprehensive services;

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

·                  theeffect of any mergers, acquisitions or other transactions to which we or oursubsidiary may from time to time be a party, including, without limitation, ourability to successfully integrate any businesses that we acquire;

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

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

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

·                  thestrength of the United States economy in general and the strength of the localeconomies in which we conduct operations may be different than expectedresulting in, among other things, a deterioration in credit quality or areduced demand for credit, including the resultant effect on our loan portfolioand allowance for loan losses;

·                  fluctuationsin consumer spending and saving habits;

·                  thedemand for our products and services;

·                  technologicalchanges;

·                  thechallenges and uncertainties in the implementation of our expansion anddevelopment strategies;

·                  theability to increase market share;

·                  theadequacy of expense projections and estimates of impairment loss;

·                  theimpact of changes in accounting policies by the Securities and ExchangeCommission, as well as the Public Company Accounting Oversight Board, theFinancial Accounting Standards Board and others that set accounting standards;

·                  unanticipatedregulatory or judicial proceedings;

·                  thepotential negative effects of future legislation affecting financialinstitutions (including, without limitation, laws concerning taxes, banking,securities, and insurance);

·                  theeffects of, and changes in, trade, monetary and fiscal policies and laws,including interest rate policies of the Board of Governors of the FederalReserve System;

·                  thetimely development and acceptance of products and services, including productsand services offered through alternative delivery channels such as theInternet;

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

·                  thepossibility that we will be unable to comply with the conditions imposed uponus in the Order to Cease and Desist, which could result in the imposition offurther restrictions on our operations or penalties;

 

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·                  otherfactors described in this report and in other reports we have filed with theSecurities and 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 September 30,2009, were approximately $1.1 billion, which represented an increase ofapproximately $91.9 million, or 9.27%, from December 31, 2008.  Net earnings (loss) decreased $32.9 million,or 2119.70%, for the nine months ended September 30, 2009 to a loss of$31.3 million, or $7.44 per diluted share, compared to earnings of $1.6million, or $0.35 per diluted share, for the nine months ended September 30,2008.**

 

During the second quarterof 2009, the Company recognized a $19.5 million goodwill impairment charge toearnings.  The Company completed itsannual goodwill impairment assessment during the fourth quarter of 2008.  At the time of the annual assessment, therewas no impairment of goodwill.  Sinceyear-end, the Company has continuously updated its goodwill impairment assessmentand found an impairment of goodwill during the second quarter of 2009.  Because goodwill is an intangible asset thatcannot be sold separately or otherwise disposed of, it is not recognized indetermining capital adequacy for regulatory purposes.  Therefore, the goodwill impairment charge hadno effect on the Company’s regulatory capital ratios.

 

On May 27, 2009, theCompany amended its Articles of Incorporation to eliminate par value per sharewith respect to its common stock from the previous $5.00 par value per share ofits common stock.  Therefore, the paid-incapital surplus for the Company as of that date was included with the Company’scommon stock.

 

During the second quarterof 2009, the Company created a Special Assets Division to address problemcredits and to assist in the collection efforts from problem loans and charged-offloans.  Senior Vice President RandyGriffin will manage this department of three people and will report directly toEdward P. Loomis, President and Chief Executive Officer of the Bank.

 

On July 31, 2009,the Board of Directors promoted Edward P. Loomis, Jr. to the role ofPresident and Chief Executive Officer of Atlantic Southern Bank.  Mark Stevens will continue as President andChief Executive Officer of the holding company, Atlantic Southern FinancialGroup, Inc.

 

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**Financial Condition**

 

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

 
| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **   | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------------|------------|--------------|------------|
| ** **                             | ** ** | **2009**               | ** ** | **2008**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                            |       |                   |       |                  |       |              |       |         |       |
| Total cash and cash equivalents        |       | $                      | 70,687,672 |                  | $          | 15,130,136        |       | $            | 55,557,536 |   | 367.20 | % |
| Securities available for sale          |       | 180,169,835            |       | 100,619,437           |       | 79,550,398        |       | 79.06        | %          |
| Loans, net of unearned income          |       | 760,499,549            |       | 792,883,664           |       | (32,384,115       | )          | -4.08        | %          |
| Cash surrender value of life insurance |       | 12,866,768             |       | 12,465,228            |       | 401,540           |       | 3.22         | %          |
| Goodwill and other intangible assets   |       | 2,639,429              |       | 22,444,667            |       | (19,805,238       | )          | -88.24       | %          |
| Total assets                           |       | 1,083,676,760          |       | 991,741,590           |       | 91,935,170        |       | 9.27         | %          |
| **Liabilities:**                       |       |                   |       |                  |       |              |       |         |       |
| Deposits                               |       | 957,160,076            |       | 836,451,443           |       | 120,708,633       |       | 14.43        | %          |
| FHLB advances                          |       | 50,300,000             |       | 47,500,000            |       | 2,800,000         |       | 5.89         | %          |
| Subordinated debentures                |       | 1,400,000              |       | 1,400,000             |       | —            |       | —       |       |
| Junior subordinated debentures         |       | 10,310,000             |       | 10,310,000            |       | —            |       | —       |       |
| Accrued expenses and other liabilities |       | 1,827,457              |       | 1,630,080             |       | 197,377           |       | 12.11        | %          |
|                                   |       |                   |       |                  |       |              |       |         |       |
| Loan to Deposit Ratio                  |       | 79.45                  | %          | 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 brokered and core deposits, are our principalsource of funds for loans and investing in securities.  Local retail time deposits at September 30,2009, increased approximately $158.2 million since December 31, 2008 dueto managements’ aggressive efforts to increase core deposits and reduce theBank’s reliance on brokered deposits. The Company was able to decrease brokered deposits since December 31,2008 by approximately $58.5 million at September 30, 2009 primarily due toits ability to replace them with retail deposits.  Other core deposits (non-interest bearing,interest bearing and saving accounts) increased approximately $21.0 million at September 30,2009 compared to December 31, 2008.

 

Due to our strong loandemand in the past, we chose to obtain a portion of our deposits from outsideof our 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 brokered time deposits represented 34.05% of our deposits as of September 30,2009 when compared to 46.2% of our deposits as of December 31, 2008.  Pursuant to the Order, the Bank is prohibitedfrom accepting, rolling over, or renewing any brokered deposits without firstreceiving a brokered deposit waiver from the FDIC.

 

In the past, the Bank hasrelied heavily on brokered deposits.  Asa result of the Order, this source of funding is limited and management has institutedan aggressive retail deposit marketing campaign to replace a portion of thebrokered CDs as they mature.

 

**Investment Securities**

 

Securitiesin our portfolio totaled $180.2 million at September 30, 2009, compared to$100.6 million at December 31, 2008. The most significant increase in the securities portfolio has resultedfrom the purchase of $150.1 million in U.S. Treasury securities and $38.4 millionof U.S Government Sponsored Enterprises securities, which were offset by thesale of $5.1 million in state, county and municipal bonds, the maturity of$50.2 million in U.S. Treasury securities and the sales and/or paydowns of$47.8 million in mortgage-backed securities. At September 30, 2009, the securities portfolio had unrealized netgains of approximately $975 thousand.

 

The following table shows the carrying valueof the investment securities at September 30, 2009 and December 31,2008.

 

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| ** **                             | ** ** | **September 30,**     | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                             | ** ** | **(Amounts in Thousands)** | ** ** |
| Securities available for sale:         |       |                       |       |                  |       |
| U. S. Government Sponsored Enterprises |       | $                          | 37,778     |                  | $          | 17,761 |   |
| U. S. Treasury Securities              |       | 100,205                    |       | 251                   |       |
| State, County and Municipal            |       | 15,239                     |       | 20,298                |       |
| Mortgage-backed Securities             |       | 26,601                     |       | 62,036                |       |
| Other Investments                      |       | 347                        |       | 273                   |       |
| Total                                  |       | $                          | 180,170    |                  | $          | 100,619 |   |

### ** **

The following tablesummarizes securities sales activity for the three month and nine month periodsended September 30, 2009 and 2008:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                       | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proceeds from sales              |       | $                      | —     |                   | $          | 6,628,958 |   | $ | 51,611,819 |   | $ | 6,628,958 |   |
| Proceeds from calls              |       | 5,040,000              |       | 440,000                |       | 5,220,000 |   | 8,255,000 |   |
| Proceeds from maturities         |       | 27,340,247             |       | 3,750,000              |       | 56,080,247 |   | 4,750,000 |   |
| Total                            |       | $                      | 32,380,247 |                   | $          | 10,818,958 |   | $ | 112,912,066 |   | $ | 19,633,958 |   |
|                             |       |                   |       |                   |       |   |   |   |   |
| Gross gains                      |       | $                      | 16,119     |                   | $          | 26,030 |   | $ | 1,400,252 |   | $ | 66,275 |   |
| Gross losses                     |       | (777                   | )          | (21,641                | )          | (11,474 | ) | (21,641 | ) |
| Impairment losses                |       | —                 |       | (1,165,284             | )          | (57,618 | ) | (1,165,284 | ) |
|                             |       |                   |       |                   |       |   |   |   |   |
| Net gains (losses) of securities |       | $                      | 15,342     |                   | $          | (1,160,895 | ) | $ | 1,331,160 |   | $ | (1,120,650 | ) |
|                             |       |                   |       |                   |       |   |   |   |   |
| Income tax expense (benefit)     |       | $                      | 5,216      |                   | $          | (394,704 | ) | $ | 472,185 |   | $ | (381,020 | ) |

 

During the second quarter of2009, the Company recognized an impairment loss of $57,618 on an equityinvestment in Silverton Bank, a financial institution that failed during thequarter.  The impairment loss representsthe full amount of the Company’s investment in Silverton.

 

During the second quarter of2009, the Bank restructured approximately $36 million in U.S. agency andmortgage backed securities to capture gains on securities prepaying at highspeeds, to offset FDIC special assessment and to shorten the average maturityof the portfolio.

 

During the third quarter of2009, the Bank recognized approximately $16 thousand from the calls of $5.0million in U.S government sponsored enterprises securities.  Other proceeds are from the maturities of$1.8 million in U.S. government sponsored enterprises, $25.0 million in U.S.Treasury obligations and $605 thousand in state and political subdivisionssecurities.

 

### **Loans**

### ** **

Totalloans, net of unearned income, decreased approximately $32.4 million, or 4.08%,at September 30, 2009, from December 31, 2008 as management has madean effort to limit loan growth in order to preserve capital for theCompany.  Management is limiting creditavailability especially for acquisitions, development and construction loansand pursuing collection efforts aggressively. The following table presents a summary of the loan portfolio bycategory.

 

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| ** **                                        | ** ** | **September 30,**     | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                                        | ** ** | **(Amounts in Thousands)** | ** ** |
|                                              |       |                       |       |                  |       |
| Commercial                                        |       | $                          | 57,476     |                  | $          | 70,187 |   |
| Real estate - commercial                          |       | 317,230                    |       | 310,459               |       |
| Real estate - construction                        |       | 285,356                    |       | 314,405               |       |
| Real estate - mortgage                            |       | 92,357                     |       | 89,102                |       |
| Obligations of political subdivisions in the U.S. |       | 324                        |       | 347                   |       |
| Consumer                                          |       | 8,072                      |       | 8,905                 |       |
| Total Loans                                       |       | 760,815                    |       | 793,405               |       |
| Less:                                             |       |                       |       |                  |       |
| Unearned loan fees                                |       | (315                       | )          | (521                  | )          |
| Allowance for loan losses                         |       | (14,603                    | )          | (11,672               | )          |
| Loans, net                                        |       | $                          | 745,897    |                  | $          | 781,212 |   |

### ** **

### **Asset Quality**

### ** **

### **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.  Management has an establishedwarning and early detection system regarding the loans and a comprehensiveanalysis of the allowance for loan losses.**

 

Thefollowing table presents a summary of changes in the allowance for loan lossesfor the three and nine-month periods ended September 30, 2009 and 2008.

 

**Analysisof Changes in Allowance for Loan Losses**

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | **(Amounts in Thousands)**                | ** ** |
|                                               |       |                                      |       |                                     |       |   |   |   |   |
| Balance  beginning of period                       |       | $                                         | 14,911     |                                     | $          | 9,734 |   | $ | 11,672 |   | $ | 8,879 |   |
| Loans  charged-off                                 |       | (11,798                                   | )          | (349                                     | )          | (14,709 | ) | (934 | ) |
| Recoveries                                         |       | 138                                       |       | 20                                       |       | 220 |   | 112 |   |
| Net  charge-offs                                   |       | (11,660                                   | )          | (329                                     | )          | (14,489 | ) | (822 | ) |
| Provision  for loan losses                         |       | 11,352                                    |       | 907                                      |       | 17,420 |   | 2,255 |   |
| Balance  end of period                             |       | $                                         | 14,603     |                                     | $          | 10,312 |   | $ | 14,603 |   | $ | 10,312 |   |
|                                               |       |                                      |       |                                     |       |   |   |   |   |
| Total  Loans:                                      |       |                                      |       |                                     |       |   |   |   |   |
| At  period end                                     |       | $                                         | 760,500    |                                     | $          | 794,377 |   | $ | 760,500 |   | $ | 794,377 |   |
| Average                                            |       | 782,622                                   |       | 804,406                                  |       | 789,869 |   | 755,685 |   |
|                                               |       |                                      |       |                                     |       |   |   |   |   |
| As a  percentage of average loans (annualized):    |       |                                      |       |                                     |       |   |   |   |   |
| Net  charge-offs                                   |       | 5.91                                      | %          | 0.16                                     | %          | 2.45 | % | 0.15 | % |
| Provision  for loan losses                         |       | 5.80                                      | %          | 0.45                                     | %          | 2.95 | % | 0.40 | % |
| Allowance  as a percentage of period end loans     |       | 1.92                                      | %          | 1.30                                     | %          | 1.92 | % | 1.30 | % |
| Allowance  as a percentage of non-performing loans |       | 20.89                                     | %          | 118.27                                   | %          | 20.89 | % | 118.27 | % |

 

### **Management believes that the allowance for loanlosses at September 30, 2009 is adequate to absorb losses inherent in theloan portfolio.  This assessment involvesuncertainty and judgment; therefore, the adequacy of the allowance**

 

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### **for loan losses cannot be determined with precisionand may be subject to change in future periods. Significant increases to the provision for loan losses may be necessaryif material adverse changes in general economic conditions occur or theperformance of our loan portfolio deteriorates. In addition, bank regulatory authorities, as part of their periodicexamination of the Bank, may require adjustments to the provision for loanlosses in future periods if, in their opinion, the results of their reviewwarrant such additions.  Because of thesefactors, it is reasonably possible that the estimated losses on loans maychange materially in the near term. However, the amount of the change cannot be estimated.**

### ** **

### **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:**

 
| ** **                      | ** ** | **September 30.** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Accruing loans 90 days past due |       | $                      | —     |                  | $          | — |   |
| Non-accrual loans               |       | 69,900,631             |       | 21,103,468            |       |
| Repossessed assets              |       | 40,500                 |       | 34,783                |       |
| Other real estate               |       | 15,775,214             |       | 10,196,165            |       |
| Total non-performing assets     |       | $                      | 85,716,345 |                  | $          | 31,334,416 |   |

 

Nonperforming assetsincreased $54.4 million, or 173.6%, from December 31, 2008 to September 30,2009.  This increase is largely due toseveral large relationships that are secured by commercial and residential realestate construction and land development real estate being placed onnon-accrual during the three quarters of 2009. All non-accrual loans are adequately collateralized based on management’sjudgment and supported by recent collateral appraisals.  Other real estate increased $5.6 million fromDecember 31, 2008 to September 30, 2009.  This increase is largely due to the additionof $16.8 million in foreclosed properties being offset by the sale of $8.8million in foreclosed properties resulting in $2.0 million loss on theseproperties.  During the third quarter of2009, the Company added approximately $12.1 million in 29 other real estateproperties.

 

As of September 30,2009 and December 31, 2008, the Company’s other real estate consisted ofthe following:

 
| ** **                                          | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| 1-4 Family residential properties                   |       | 21                                |       | $                                | 3,203,001  |   | 8 |   | $ | 3,574,090 |   |
| Nonfarm nonresidential properties                   |       | 9                                 |       | 6,085,070                        |       | 5 |   | 520,101 |   |
| Multifamily residential properties                  |       | 1                                 |       | 31,675                           |       | — |   | — |   |
| Construction & land development properties |       | 23                                |       | 6,455,468                        |       | 15 |   | 6,101,974 |   |
| Total                                               |       | 54                                |       | $                                | 15,775,214 |   | 28 |   | $ | 10,196,165 |   |

 

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

 

On November 3, 2009,the Bank foreclosed on approximately $7.4 million in various commercial,construction and land development and 1-4 family residential real estateproperties.  These properties were beingheld as collateral against several non-accrual loans at September 30,2009.  Management is currently evaluatingany additional losses on these properties.

 

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, 

 

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financecharges, and loan acquisition costs, if any, and decreased by previous directwrite down and unamortized discount.  Anyexcess of the recorded investment in the loan satisfied over the appraisedvalue of the property must be charged to allowance for loan losses.

 

**Goodwill**

 

TheCompany reviews its goodwill for impairment annually, or more frequently ifcircumstances indicate that goodwill has been impaired.  The Company completed its annual goodwillimpairment assessment as of December 31, 2008.  In completing the annual assessment, theCompany engaged an independent business valuation firm to assist with thevaluation.  The Company’s year-endgoodwill impairment assessment indicated that there was no goodwill impairment.

 

Sinceyear-end, however, the Company’s stock price continues to trade below itsper-share book value which management believes reflects uncertainty about theeconomic cycle.  The current economicenvironment has also resulted in lower earnings with higher credit costs.  Higher credit costs are reflected in theincome statement as well as valuation adjustments to the loan balances, throughincreases to the level of the allowance for loan losses.  With these factors in place, managementbelieved that goodwill should be re-assessed for impairment.  The Company engaged the same businessvaluation firm to update their year-end valuation analysis, which included adiscounted cash flow analysis.  Theconclusion from the updated impairment analysis was that impairment was presentand a $19.5 million charge to earnings was taken during the second quarter of2009.

 

Becausegoodwill is an intangible asset that cannot be sold separately or otherwisedisposed of, it is not recognized in determining capital adequacy forregulatory purposes.  Therefore, thenon-cash goodwill impairment charge had no effect on the Company’s regulatorycapital ratios or cash flows of the Company.

 

**Deposits**

 

Totaldeposits at September 30, 2009 were $957.2 million, an increase of $120.7million, or 14.4%, from December 31, 2008. Total interest bearing demand and savings accounts of $164.1 millionincreased $14.9 million, or 10.0%, resulting mainly from our branching effortsand our emphasis on increasing core deposits.

 

Totaltime deposits as of September 30, 2009 were $738.5 million, an increase of$99.7 million, or 15.6%, from December 31, 2008.  Total retail time deposits at September 30,2009 increased approximately $158.2 million, or 21.4% of total time deposits,from December 31, 2008 due to managements’ aggressive efforts to increasecore deposits and reduce reliance on brokered deposits. The weighted average rates paid for retail time deposits for the threeand nine months ended September 30, 2009 were 3.00% and 3.27%,respectively, compared to 4.07% and 4.55% for the three and nine months ended September 30,2008, respectively.  Total brokereddeposits at September 30, 2009 decreased approximately $58.5 million, or7.9% of total time deposits, from December 31, 2008, resulting mainly fromour ability to replace brokered deposits with retail deposits during the threequarters of 2009.  The weighted averagerates paid for brokered deposits for the three and nine months ended September 30,2009 were 3.41% and 3.59%, respectively, compared to 3.96% and 4.33% for thethree and nine months ended September 30, 2008.

 

### **Results of 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.

 

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# **Thefollowing table shows the significant components of net earnings (loss):**

 
| ** **                            | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest and Dividend Income          |       | $                      | 35,503,694 |       | $          | 41,631,346        |       | $ | (6,127,652 | ) | -14.72 | % |
| Interest Expense                      |       | 21,580,380             |       | 23,366,878 |       | (1,786,498        | )          | -7.65 | % |
| Net Interest Income                   |       | 13,923,314             |       | 18,264,468 |       | (4,341,154        | )          | -23.77 | % |
| Provision for Loan Losses             |       | 17,420,000             |       | 2,255,000  |       | 15,165,000        |       | 672.51 | % |
| Net Earnings (Loss)                   |       | (31,327,921            | )          | 1,551,117  |       | (32,879,038       | )          | -2119.70 | % |
| Net Earnings (Loss) Per Diluted Share |       | $                      | (7.44      | )          | $          | 0.35              |       | (7.79 | ) | -2225.71 | % |
|                                       |            |                        |            |            |            |                   |            |  |  |  |  |  |

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                   | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                   | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest and Dividend Income |       | $                      | 11,254,824 |       | $          | 13,727,652        |       | $ | (2,472,828 | ) | -18.01 | % |
| Interest Expense             |       | 7,223,007              |       | 7,706,392  |       | (483,385          | )          | -6.27 | % |
| Net Interest Income          |       | 4,031,817              |       | 6,021,260  |       | (1,989,443        | )          | -33.04 | % |
| Provision for Loan Losses    |       | 11,352,000             |       | 907,000    |       | 10,445,000        |       | 1151.60 | % |
| Net Loss                     |       | (8,287,965             | )          | (346,875   | )          | (7,941,090        | )          | -2289.32 | % |
| Net Loss Per Diluted Share   |       | $                      | (1.97      | )          | $          | (0.08             | )          | (1.89 | ) | -2362.50 | % |
|                              |            |                        |            |            |            |                   |            |  |  |  |  |  |

 

# **Net Interest 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 $4.3 million, or 23.8%, for the nine months ended September 30,2009 compared to the nine months ended September 30, 2008.  Net interest income decreased $2.0 million,or 33.0%, for the third quarter of 2009 compared to the same period in 2008.

 

Total interest anddividend income for the three and nine months ended September 30, 2009decreased $2.5 million, or 18.0%, and $6.1 million, or 14.7%, respectively,when compared to the three and nine months ended September 30, 2008.  This decrease is primarily due to the effectof the Federal Reserve decreasing the federal funds rate, which affects amajority of the interest rates for our loans and due to the reversal ofinterest income from loans going on non-accrual status.  Interest income was reduced by $540 thousandand $1.5 million, respectively, for the three and nine months ended September 30,2009.  The average loan and loan held forsale portfolio for the three months ended September 30, 2009 decreasedapproximately $21.8 million, or 2.7%, when compared to average loan and loanheld for sale portfolios for the three months ended September 30,2008.  The average loan and loan held forsale portfolio for the nine months ended September 30, 2009 increasedapproximately $34.2 million, or 4.5%, when compared to average loan and loanheld for sale portfolios for the nine months ended September 30,2008.  The average yield on loans,however, decreased during the three and nine months ended September 30,2009 to 5.29% and 5.51%, respectively, compared to an average yield of 6.21%and 6.81% for the three and nine months ended September 30, 2008,respectively.

 

Total interest expensefor the three and nine months ended September 30, 2009 decreased $483thousand, or 6.3%, and $1.8 million, or 7.7%, respectively, when compared tothe three and nine months ended September 30, 2008.  Two factors impact interest expense: averagebalances of deposit and borrowing portfolios and average rates paid oneach.  Average deposit balances increasedapproximately $141.9 million and $147.5 million when comparing the three andnine months ended September 30, 2009 to the three and nine months ended September 30,2008.  The average rate paid on thedeposit portfolios for the three and nine months ended September 30, 2009decreased to 2.87% and 3.09%, respectively, from 3.67% and 4.03% when comparedto the three and nine months ended 

 

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September 30, 2008,respectively.  Average borrowing balancesincreased approximately $20.3 million and $12.9 million when comparing thethree and nine months ended September 30, 2009 to the three and ninemonths ended September 30, 2008, respectively.  Average interest rates paid on borrowingswere 3.27% and 3.24% for the three and nine months ended September 30,2009, respectively, compared to 3.68% and 3.93% for the three and nine monthsended September 30, 2008, respectively.

 

The banking industry usestwo key ratios to measure relative profitability of net interest income, whichare net interest spread and net interest margin.  The interest rate spread measures thedifference between the average yield on earning assets and the average ratepaid on interest-bearing liabilities. The interest rate spread eliminates the impact of non-interest-bearingfunding sources and gives a direct perspective on the effect of market interestrate movements.  The net interest marginis an indication of the profitability of our investments, and is defined as netinterest revenue as a percentage of total average earning assets which includesthe positive impact of funding a portion of earning assets with customers’non-interest-bearing deposits and with stockholders’ equity.

 

For the three monthsended September 30, 2009 and 2008, our tax equivalent net interest spreadwas 1.39% and 2.41%, respectively, while the tax equivalent net interest marginwas 1.56% and 2.70%, respectively.  Forthe nine months ended September 30, 2009 and 2008, our tax equivalent netinterest spread was 1.86% and 2.60%, respectively, while the tax equivalent netinterest margin was 1.97% and 2.94%, respectively.  The decreases in net interest spread and netinterest margin from the three and nine months ended September 30, 2008 tothe three and nine months ended September 30, 2009, were due to ourpromotion of higher short-term yields on retail time deposits, which reducedour dependence on  brokered timedeposits, purchase of investment securities and the reduction of the short-termrates by the Federal Reserve, starting in the second quarter of 2007 andcontinuing through the fourth quarter of 2008, and its effect on the Company’sslightly 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 September 30, 2009 and 2008.

 

**Average Consolidated Balance Sheet and Net InterestMargin Analysis**

 
| ** **                                          | ** ** | **For the Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(Dollar amounts in thousands)**                  | ** ** |
| ** **                                          | ** ** | **Average**                                        | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                          | ** ** | **Balance**                                        | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                      |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned income (4) (5) (6) |       | $                                                  | 782,622    |   | $ | 10,424 |   | 5.29 | % | $ | 804,406 |   | $ | 12,592 |   | 6.21 | % |
| Federal funds sold                                  |       | 0                                                  |       | 0 |   | 0.00 | % | 6,774 |   | 36 |   | 2.08 | % |
| Investment securities - taxable (7)                 |       | 144,475                                            |       | 615 |   | 1.69 | % | 63,684 |   | 824 |   | 5.13 | % |
| Investment securities - tax-exempt (6) (7)     |       | 14,342                                             |       | 147 |   | 6.16 | % | 22,998 |   | 227 |   | 5.93 | % |
| Other interest and dividend income                  |       | 106,522                                            |       | 69 |   | 0.26 | % | 5,351 |   | 49 |   | 3.63 | % |
| Total Earning Assets                                |       | 1,047,961                                          |       | 11,255 |   | 4.29 | % | 903,213 |   | 13,728 |   | 6.08 | % |
|                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning assets                         |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                           |       | (15,049                                            | )          |   |   |   |   | (9,985 | ) |   |   |   |   |
| Cash and due from banks                             |       | 12,855                                             |       |   |   |   |   | 10,149 |   |   |   |   |   |
| Premises and equipment                              |       | 31,481                                             |       |   |   |   |   | 29,086 |   |   |   |   |   |
| Accrued interest receivable                         |       | 5,436                                              |       |   |   |   |   | 6,805 |   |   |   |   |   |
| Other assets                                        |       | 31,793                                             |       |   |   |   |   | 41,842 |   |   |   |   |   |
| Total Assets                                        |       | $                                                  | 1,114,477  |   |   |   |   |   | $ | 981,110 |   |   |   |   |   |
|                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities                        |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand                             |       | $                                                  | 165,538    |   | $ | 655 |   | 1.57 | % | $ | 122,957 |   | $ | 646 |   | 2.08 | % |
| Savings                                             |       | 9,456                                              |       | 11 |   | 0.46 | % | 8,294 |   | 12 |   | 0.57 | % |
| Time deposits                                       |       | 751,271                                            |       | 6,039 |   | 3.19 | % | 659,375 |   | 6,653 |   | 4.00 | % |
| Total interest bearing deposits                     |       | 926,265                                            |       | 6,705 |   | 2.87 | % | 790,626 |   | 7,311 |   | 3.67 | % |
| Federal Home Loan Bank advances                     |       | 51,139                                             |       | 406 |   | 3.15 | % | 30,952 |   | 262 |   | 3.36 | % |
| Other borrowings                                    |       | 1,483                                              |       | 43 |   | 11.50 | % | 1,408 |   | 8 |   | 2.25 | % |
| Junior subordinated debentures                      |       | 10,310                                             |       | 69 |   | 2.66 | % | 10,310 |   | 126 |   | 4.85 | % |
| Total borrowed funds                                |       | 62,932                                             |       | 518 |   | 3.27 | % | 42,670 |   | 396 |   | 3.68 | % |
| Total interest-bearing liabilities                  |       | 989,197                                            |       | 7,223 |   | 2.90 | % | 833,296 |   | 7,707 |   | 3.67 | % |
|                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing deposits                       |       | 56,016                                             |       |   |   |   |   | 49,770 |   |   |   |   |   |
| Other liabilities                                   |       | 5,382                                              |       |   |   |   |   | 7,871 |   |   |   |   |   |
| Shareholders’ equity                           |       | 63,882                                             |       |   |   |   |   | 90,173 |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity     |       | $                                                  | 1,114,477  |   |   |   |   |   | $ | 981,110 |   |   |   |   |   |
| Net interest revenue (1)                            |       |                                               |       | $ | 4,032 |   |   |   |   |   | $ | 6,021 |   |   |   |
| Net interest spread (2)                             |       |                                               |       |   |   | 1.39 | % |   |   |   |   | 2.41 | % |
| Net interest margin (3) (6)                         |       |                                               |       |   |   | 1.56 | % |   |   |   |   | 2.70 | % |

 

----

(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 - $276; 2008 - $432

(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 table showsthe relationship between interest revenue and interest expense and the averagebalances of interest-earning assets and interest-earning liabilities for thenine months ended September 30, 2009 and 2008.

 

**Average Consolidated Balance Sheet and Net InterestMargin Analysis**

 
| ** **                                          | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(Dollar amounts in thousands)**                 | ** ** |
| ** **                                          | ** ** | **Average**                                       | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                          | ** ** | **Balance**                                       | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning Assets                                      |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned income (4) (5) (6) |       | $                                                 | 789,869    |   | $ | 32,556 |   | 5.51 | % | $ | 755,685 |   | $ | 38,457 |   | 6.81 | % |
| Federal funds sold                                  |       | 0                                                 |       | 0 |   | 0.00 | % | 7,986 |   | 149 |   | 2.49 | % |
| Investment securities - taxable (7)                 |       | 112,795                                           |       | 2,400 |   | 2.84 | % | 56,663 |   | 2,168 |   | 5.12 | % |
| Investment securities - tax-exempt (6) (7)     |       | 15,406                                            |       | 470 |   | 6.18 | % | 21,969 |   | 653 |   | 6.02 | % |
| Other interest and dividend income                  |       | 45,340                                            |       | 77 |   | 0.23 | % | 5,254 |   | 204 |   | 5.19 | % |
| Total Earning Assets                                |       | 963,410                                           |       | 35,503 |   | 4.96 | % | 847,557 |   | 41,631 |   | 6.62 | % |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning assets                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                           |       | (12,952                                           | )          |   |   |   |   | (9,465 | ) |   |   |   |   |
| Cash and due from banks                             |       | 38,620                                            |       |   |   |   |   | 9,506 |   |   |   |   |   |
| Premises and equipment                              |       | 31,613                                            |       |   |   |   |   | 28,537 |   |   |   |   |   |
| Accrued interest receivable                         |       | 5,903                                             |       |   |   |   |   | 6,992 |   |   |   |   |   |
| Other assets                                        |       | 47,146                                            |       |   |   |   |   | 40,414 |   |   |   |   |   |
| Total Assets                                        |       | $                                                 | 1,073,740  |   |   |   |   |   | $ | 923,541 |   |   |   |   |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand                             |       | $                                                 | 153,345    |   | $ | 1,859 |   | 1.62 | % | $ | 115,746 |   | $ | 1,852 |   | 2.14 | % |
| Savings                                             |       | 8,741                                             |       | 26 |   | 0.40 | % | 8,080 |   | 34 |   | 0.56 | % |
| Time deposits                                       |       | 706,897                                           |       | 18,167 |   | 3.44 | % | 602,788 |   | 20,003 |   | 4.44 | % |
| Total interest bearing deposits                     |       | 868,983                                           |       | 20,052 |   | 3.09 | % | 726,614 |   | 21,889 |   | 4.03 | % |
| Federal Home Loan Bank advances                     |       | 51,392                                            |       | 1,145 |   | 2.98 | % | 37,282 |   | 997 |   | 3.58 | % |
| Other borrowings                                    |       | 1,442                                             |       | 128 |   | 11.87 | % | 2,661 |   | 53 |   | 2.66 | % |
| Junior subordinated debentures                      |       | 10,310                                            |       | 255 |   | 3.31 | % | 10,310 |   | 428 |   | 5.46 | % |
| Total borrowed funds                                |       | 63,144                                            |       | 1,528 |   | 3.24 | % | 50,253 |   | 1,478 |   | 3.93 | % |
| Total interest-bearing liabilities                  |       | 932,127                                           |       | 21,580 |   | 3.10 | % | 776,867 |   | 23,367 |   | 4.02 | % |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing deposits                       |       | 53,606                                            |       |   |   |   |   | 48,471 |   |   |   |   |   |
| Other liabilities                                   |       | 6,949                                             |       |   |   |   |   | 7,908 |   |   |   |   |   |
| Shareholders’ equity                           |       | 81,058                                            |       |   |   |   |   | 90,295 |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity     |       | $                                                 | 1,073,740  |   |   |   |   |   | $ | 923,541 |   |   |   |   |   |
| Net interest revenue (1)                            |       |                                              |       | $ | 13,923 |   |   |   |   |   | $ | 18,264 |   |   |   |
| Net interest spread (2)                             |       |                                              |       |   |   | 1.86 | % |   |   |   |   | 2.60 | % |
| Net interest margin (3) (6)                         |       |                                              |       |   |   | 1.97 | % |   |   |   |   | 2.94 | % |

 

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(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 the averageinterest-bearing liabilities from the yield from the average earning assets.

(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 - $969; 2008 - $1,363

(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 and nine monthsended September 30, 2009 compared to September 30, 2008.

 

**Change in Interest Revenue andExpense on a Taxable Equivalent Basis**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2009 Compared to 2008**                  | ** ** | **2009 Compared to 2008**                | ** ** |
| ** **                                    | ** ** | **Changes due to (a)**                     | ** ** | **Changes due to (a)**                   | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | **Yield/**                               | ** ** | **Net** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Volume**                                 | ** ** | **Rate**                                 | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **(Amounts in thousands)**                 | ** ** |
| Interest earned on:                           |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans                                         |       | $                                          | (1,177     | )                                        | $          | (991 | ) | $ | (2,168 | ) | $ | 130 |   | $ | (6,031 | ) | $ | (5,901 | ) |
| Investment securities:                        |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Taxable investment  securities                |       | 5                                          |       | (214                                     | )          | (209 | ) | 603 |   | (371 | ) | 232 |   |
| Tax-exempt investment  securities             |       | (96                                        | )          | 16                                       |       | (80 | ) | (218 | ) | 35 |   | (183 | ) |
| Interest earning deposits  and fed funds sold |       | 70                                         |       | (86                                      | )          | (16 | ) | 89 |   | (365 | ) | (276 | ) |
| Total interest income                         |       | (1,198                                     | )          | (1,275                                   | )          | (2,473 | ) | 604 |   | (6,732 | ) | (6,128 | ) |
|                                          |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest paid on:                             |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Deposits:                                     |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest bearing demand  deposits             |       | 193                                        |       | (184                                     | )          | 9 |   | 521 |   | (514 | ) | 7 |   |
| Savings                                       |       | 2                                          |       | (3                                       | )          | (1 | ) | 3 |   | (11 | ) | (8 | ) |
| Time deposits                                 |       | 810                                        |       | (1,424                                   | )          | (614 | ) | 3,276 |   | (5,112 | ) | (1,836 | ) |
| Other borrowings and FHLB  advances           |       | 156                                        |       | 23                                       |       | 179 |   | 303 |   | (80 | ) | 223 |   |
| Junior subordinated  debentures               |       | —                                     |       | (57                                      | )          | (57 | ) | — |   | (173 | ) | (173 | ) |
| Total interest expense                        |       | 1,161                                      |       | (1,645                                   | )          | (484 | ) | 4,103 |   | (5,890 | ) | (1,787 | ) |
|                                          |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Decrease in net interest  revenue             |       | $                                          | (2,359     | )                                        | $          | 370 |   | $ | (1,989 | ) | $ | (3,499 | ) | $ | (842 | ) | $ | (4,341 | ) |

 

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(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 nine months ended September 30, 2009 was $17.4 millioncompared to $2.3 million for the same period of 2008.  The provision for loan losses for the thirdquarter of 2009 was $11.4 million compared to $907 thousand for the same periodof 2008.  The increase in the provisionfor loan losses is directly related to the increase in nonperforming assetsduring the second and third quarters of 2009. Net charge-offs as an annualized percentage of average outstanding loansfor the nine months ended September 30, 2009 were 2.45%, as compared with0.15% for the same period of 2008.  Netcharge-offs as an annualized percentage of average outstanding loans for thethird quarter of 2009 were 5.91%, as compared to 0.16% for the same period of2008.  Net loan charge-offs increasedsignificantly during the three months and nine months ended September 30,2009, as compared to the three months and nine months ended September 30,2008, due mainly to the Company writing down $14.7 million for several impairedloans during the three quarters 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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# **Non-interestIncome**

 

Composition of othernoninterest income is as follows:

 
| ** **                                                                      | ** ** | **Nine Months  Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                                                      | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on deposit  accounts                                            |       | $                      | 1,303,925  |       | $          | 1,312,536         |       | $ | (8,611 | ) | -0.66 | % |
| Other service charges,  commissions and fees                                    |       | 373,944                |       | 357,549    |       | 16,395            |       | 4.59 | % |
| Gain (loss) on sales, calls  and impairment write-down of investment securities |       | 1,331,160              |       | (1,120,650 | )          | 2,451,810         |       | 218.78 | % |
| Mortgage origination income                                                     |       | 642,749                |       | 640,826    |       | 1,923             |       | 0.30 | % |
| Other income                                                                    |       | 823,569                |       | 923,082    |       | (99,513           | )          | -10.78 | % |
| Total noninterest income                                                        |       | $                      | 4,475,347  |       | $          | 2,113,343         |       | $ | 2,362,004 |   | 111.77 | % |

 
| ** **                                                                      | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **September 30,**  | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                                                      | ** ** | **2009**                | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service charges on deposit  accounts                                            |       | $                       | 464,250    |       | $          | 455,318           |       | $ | 8,932 |   | 1.96 | % |
| Other service charges,  commissions and fees                                    |       | 135,817                 |       | 128,818    |       | 6,999             |       | 5.43 | % |
| Gain (loss) on sales, calls  and impairment write-down of investment securities |       | 15,342                  |       | (1,160,895 | )          | 1,176,237         |       | 101.32 | % |
| Mortgage origination income                                                     |       | 249,162                 |       | 210,794    |       | 38,368            |       | 18.20 | % |
| Other income                                                                    |       | 267,493                 |       | 245,851    |       | 21,642            |       | 8.80 | % |
| Total noninterest income                                                        |       | $                       | 1,132,064  |       | $          | (120,114          | )          | $ | 1,252,178 |   | 1042.49 | % |

 

Non-interestincome for the three and nine months ended September 30, 2009 increased$1.3 million, or 1,042.5%, and $2.4 million, or 111.8%, respectively, whencompared to the three and nine months ended September 30, 2008.  The increase is primarily due to the gains onthe sales of several mortgage-backed securities during the second quarter of2009.  Also, during the third quarter of2008, the Company took an other than temporary impairment loss of $1,165,284 onthe Company’s investments in the Freddie Mac series F preferred stock and theFannie Mae series R preferred stock.  Thedecrease in other income for the nine months ended September 30, 2009,compared to the same period in 2008 is due to the Bank recognizing $171thousand from the fair value adjustments to an interest rate swap during thesecond quarter of 2008 and to the decrease in commission fees from our wealthmanagement department.

 

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**Non-interest Expense**

 

Composition of othernoninterest expense is as follows:

 
| ** **                                     | ** ** | **Nine Months Ended   September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2009**                                   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Salaries and employee benefits                 |       | $                                          | 7,838,818  |       | $          | 8,715,614         |       | $ | (876,796 | ) | -10.06 | % |
| Occupancy expense                              |       | 1,355,029                                  |       | 1,393,955  |       | (38,926           | )          | -2.79 | % |
| Equipment rental and depreciation of equipment |       | 964,804                                    |       | 862,418    |       | 102,386           |       | 11.87 | % |
| Loss on sale of other assets                   |       | 1,988,532                                  |       | 37,436     |       | 1,951,096         |       | 5211.82 | % |
| Goodwill impairment                            |       | 19,533,501                                 |       | —     |       | 19,533,501        |       | 100.00 | % |
| FDIC and state assessments                     |       | 1,883,939                                  |       | 436,887    |       | 1,447,052         |       | 331.22 | % |
| Other real estate expense and writedowns       |       | 1,035,023                                  |       | 160,277    |       | 874,746           |       | 545.77 | % |
| Other expenses                                 |       | 4,444,466                                  |       | 4,655,572  |       | (211,106          | )          | -4.53 | % |
| Total noninterest expense                      |       | $                                          | 39,044,112 |       | $          | 16,262,159        |       | $ | 22,781,953 |   | 140.09 | % |

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2009**                                   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries and employee benefits                 |       | $                                          | 2,423,366  |       | $          | 3,027,999         |       | $ | (604,633 | ) | -19.97 | % |
| Occupancy expense                              |       | 463,275                                    |       | 482,284    |       | (19,009           | )          | -3.94 | % |
| Equipment rental and depreciation of equipment |       | 333,301                                    |       | 318,108    |       | 15,193            |       | 4.78 | % |
| Loss on sale of other assets                   |       | 464,847                                    |       | 23,951     |       | 440,896           |       | 1840.83 | % |
| Goodwill impairment                            |       | —                                     |       | —     |       | —            |       | — |   |
| FDIC and state assessments                     |       | 729,328                                    |       | 169,029    |       | 560,299           |       | 331.48 | % |
| Other real estate expense and writedowns       |       | 687,927                                    |       | 141,692    |       | 546,235           |       | 385.51 | % |
| Other expenses                                 |       | 1,392,846                                  |       | 1,578,757  |       | (185,911          | )          | -11.78 | % |
| Total noninterest expense                      |       | $                                          | 6,494,890  |       | $          | 5,741,820         |       | $ | 753,070 |   | 13.12 | % |

 

For the three and ninemonths ended September 30, 2009, total non-interest expense was $6.5million and $39.0 million, respectively. This includes a $19.5 million charge for goodwill impairment takenduring the second quarter of 2009. Excluding this non-recurring charge, total non-interest expense for thenine months ended September 30, 2009 was $19.5 million.  When compared to the same periods of 2008,excluding the goodwill impairment charge from the second quarter of 2009, totalnon-interest expense for the three and nine months increased $753 thousand, or13.1%, and $3.2 million, or 20.0%, respectively.  This increase is attributable to the loss onthe sales of other real estate properties with two particular property lossestotaling to $1.9 million from the second and third quarter of 2009, therecognition of other real estate expenses from several foreclosed propertiesacquired since the fourth quarter of 2008, the increase of $566 thousand inquarterly FDIC assessments, and the accrual of $527 thousand for the specialone-time FDIC assessment payable on September 30, 2009.  The decrease in salaries and employeebenefits pertains to a reduction in the accrual of bonuses, the utilization ofa bank officer one day per quarter furlough day, and a small reduction instaff.  The increases in equipment rentaland depreciation of equipment and other expenses are not attributable to anyone particular item, but represent increases related to physical facilityexpansion.  The decreases in occupancyexpense are attributable to the Company closing of the St. Simons Island branchon December 31, 2008.  Since thefourth quarter of 2008, the Company continues to take measures to decreasecontrollable noninterest expense.

 

**Income Tax Expense**

 

Income tax benefit forthe three and nine months ended September 30, 2009 was $4.4 million and$6.7 million, respectively, compared to the income tax benefit of $401 thousandand to the income tax expense of $310 thousand for the three and nine months endedSeptember 30, 2008, respectively. The effective tax rate for the three and nine 

 

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months ended September 30,2009 were 34.65% and 17.70%, respectively, compared to 53.61% and 16.64% forthe three and nine months ended September 30, 2008, respectively.  The effective tax rates were lower than thestatutory tax rates primarily due to the tax-free income from certaininvestment securities and loans that are exempt from income taxes, tax creditsreceived from affordable housing investments and the goodwill impairmentcharge.  The majority of the goodwillfrom the two acquisitions was treated as tax-free exchanges, which was notrecognized for tax reporting purposes and therefore no tax deduction wasallowed for the impairment charge. Likewise, no tax benefit for the goodwill was recognized in thefinancial statements relating to the $19.5 million charge.

 

**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 of,its 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 up to $16 million in federal fundsfrom other financial institutions. At September 30, 2009, the Company hadno federal funds purchased. The Company had a total available line of $55.1million, subject to available collateral, from the Federal Home Loan Bank. The Companyhas $50.3 million in FHLB advances on this line at September 30,2009.  The Company has a total availableline of $33.7 million, subject to available collateral, from the FederalReserve Bank (FRB).  The Company had noadvances on the FRB line at September 30, 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 September 30, 2009 and 2008 were 25.94% and 13.29%, respectively.

 

The Bank has reliedheavily on brokered deposits in the past. As a result of the Order, this source of funding is limited and requiresthe Bank to obtain a waiver from the FDIC prior to accepting, rolling over, orrenewing any brokered deposit. Management has instituted an aggressive retaildeposit marketing campaign to replace a portion of the brokered CDs as theymature.  The increase in liquid assets isdesigned to provide cash to payoff a portion of the brokered deposits as theymature.

 

**Capital Resources**

 

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 regulatory accounting practices.  Our capital amounts and classification arealso subject to qualitative judgments by the regulators about components, riskweightings 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 inthe regulations), and of Tier I capital (as defined in the regulations) toaverage assets 

 

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(as defined in theregulations).  Pursuant to the Order, weare in the process of developing a short-term and a long-term capital plan tomeet regulatory capital limits.  Pursuantto the Order, Tier 1 Capital must equal or exceed 8.00% of the Bank’s totalassets and the Bank’s Total Risk-based Capital must equal or exceed 10.00% ofthe Bank’s total risk-weighted assets, within 90 days of September 11, 2009, theeffective date of the Order.

 

As of September 30,2009, the Bank was categorized as adequately capitalized under the regulatoryframework for prompt corrective action. The Company’s and the Bank’s actual capital amounts and ratios as of September 30,2009 and December 31, 2008 are as follows:

 
| ** **                                        | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ***September 30,  2009***                    |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| * *                                          |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Total Risk-Based Capital To Risk Weighted Assets: |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Consolidated                                      |       | $          | 75,692,000 |                               | 9.47       | %                                                                      | $          | 63,942,555 | >  | 8.0 | % | N/A |   | N/A |   |
| Bank                                              |       | 74,603,000 |       | 9.34                               | %          | 63,899,786                                                             | >  | 8.0 | % | 79,874,732 | >  | 10.0 | % |
|                                              |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Tier I Capital To Risk Weighted Assets:           |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Consolidated                                      |       | $          | 64,247,000 |                               | 8.04       | %                                                                      | $          | 31,963,682 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                              |       | 63,163,000 |       | 7.91                               | %          | 31,940,834                                                             | >  | 4.0 | % | 47,911,252 | >  | 6.0 | % |
|                                              |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Tier I Capital To Average Assets                  |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Consolidated                                      |       | $          | 64,247,000 |                               | 5.78       | %                                                                      | $          | 44,461,592 | >  | 4.0 | % | N/A |   | N/A |   |
| Bank                                              |       | 63,163,000 |       | 5.69                               | %          | 44,402,812                                                             | >  | 4.0 | % | 55,503,515 | >  | 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 September 30, 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 quantitative limits.  At September 30, 2009 and December 31, 2008,all of the Trust Preferred Securities qualify as a Tier I capital.  We had outstanding subordinated debenturestotaling $1.4 million at September 30, 2009 and December 31,2008.  The subordinated debenturesqualify as a Tier II capital under risk-based capital guidelines.  At September 30, 2009 and December 31,2008, all of the subordinated debentures qualify as a Tier II capital.

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

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

**For the NineMonths Ended September 30, 2009**

 

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

 

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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Item 4T. Controls and Procedures**

**For the NineMonths Ended September 30, 2009**

 

The Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, supervised and participated in an evaluation of theeffectiveness of its disclosure controls and procedures (as defined in federalsecurities rules) as of the end of the period covered by this report.  Based on, and as of the date of, thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures wereeffective in accumulating and communicating information to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures of thatinformation under the Securities and Exchange Commission’s rules 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 of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

#### **During the third 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, theCompany’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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**ATLANTICSOUTHERN FINANCIAL GROUP, INC.**

**Part II Other Information**

**For the NineMonths Ended September 30, 2009**

 

PART II: OTHER INFORMATION:

 

Item1. Legal Proceedings

 

Pleaserefer to the material pending legal proceedings discussed in Part I, “Item3. Legal Proceedings” in our Annual Report on form 10-K for the year ended December 31,2008.  There have been no materialdevelopments in the matters discussed in our Annual Report and there are nofurther material legal proceedings to which the Company or the Bank is a party orof which their property is the subject.

 

Item1A. Risk Factors

 

There have been nomaterial changes from the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2008 and Part II, “Item 1A, Risk Factors” in our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009. You should carefully consider thefactors discussed below and in our Annual Report on Form 10-K, and ourQuarterly Report on Form 10-Q for the quarter ended June 30, 2009,which could materially affect our business, financial condition or futureresults. The risks described below and in our Annual Report on Form 10-Kand our Quarterly Report on Form 10-Q for the quarter ended June 30,2009 are not the only risks facing us. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 

***We are operating under a regulatory order with the FDIC andthe Georgia Department of Banking and Finance to address asset quality andrelated issues.***

 

We have entered into a Cease and Desist Order(the “Order”) with the FDIC and the Georgia Department of Banking and Finance (“GDBF”)to address asset quality and related issues. Under the Order, we are required, among other items, to reduceclassified assets, perform internal loan reviews on at least a quarterly basis,maintain an appropriate allowance for loan and lease losses and maintainprescribed capital ratios.  Additionally,the Bank may not accept, renew or roll over brokered deposits or pay cashdividends without prior regulatory approval. We are addressing these items, but there is no assurance that we will beable to comply fully with the Order.  Weexpect that our compliance with the Order will require the Bank to devotesignificant management attention and time on an ongoing basis to the issuesraised in the Order.  If we are unable tocomply, we could be subject to other regulatory sanctions.

 

***Current and future restrictions on the conduct of ourbusiness could adversely impact our ability to attract deposits.***

 

Because we are nolonger considered “well capitalized” by our banking regulators, we are, amongother restrictions, prohibited from paying rates in excess of 75 basis pointsabove the local market average on deposits of comparable maturity. Effective January 1,2010, financial institutions that are not well capitalized will be prohibitedfrom paying yields for deposits in excess of 75 basis points above a newnational average rate for deposits of comparable maturity, as calculated by theFDIC, except in very limited circumstances where the FDIC permits use of ahigher local market rate. This national rate may be lower than the prevailingrates in our local market, and we may be unable to secure the permission of theFDIC to use a local market rate. If restrictions on the rates we are able topay on deposit accounts negatively impacts our ability to compete for depositsin our market area, we may be unable to attract or maintain core deposits, andour liquidity and ability to support demand for loans could be adverselyaffected.

 

***Oversupply of assets and declining real estate values in our marketshas led, and may continue to lead, to a reduction of asset values resulting insignificant write downs that may negatively affect our capital.***

 

Many banks in our core markets are addressing capital and earningsissues by reducing significantly their asset bases. The resulting oversupply ofassets, coupled with declining real estate and asset values based on generaleconomic conditions, has resulted and may continue to result in steeplydiscounted market prices. Because these prices are then used as a reference inappraisals, the appraised values of the assets we hold, and therefore the valuewe must reflect in preparing our financial statements, is required to bewritten down to reflect these prices. This in turn reduces our asset andcapital levels. If this oversupply continues and market conditions deteriorate ordo not improve, our capital levels could decrease to a level that would materiallyimpair our financial condition.

 

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item3. Defaults Upon Senior Securities

 

NotApplicable

 

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

 

None

 

Item5. Other Information

 

None

 

Item6. Exhibits

 
| (a)    |   | Exhibits:                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| 10.1   |   | Stipulation and Consent  to the Issuance of an Order to Cease and Desist                                                                                      |
|   |   |                                                                                                                                                          |
| 10.2   |   | Order to Cease and  Desist                                                                                                                                    |
|   |   |                                                                                                                                                          |
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities  Exchange Act of 1934, as amended                                 |
|   |   |                                                                                                                                                          |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities  Exchange Act of 1934, as amended                                 |
|   |   |                                                                                                                                                          |
| 32     |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant 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: November 10, 2009           |   |

 

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