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EX-10.1 - EX-10.1 - Atlantic Southern Financial Group, Inc.a09-30954_1ex10d1.htm
EX-31.1 - EX-31.1 - Atlantic Southern Financial Group, Inc.a09-30954_1ex31d1.htm
EX-10.2 - EX-10.2 - Atlantic Southern Financial Group, Inc.a09-30954_1ex10d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2009

 

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

 

For the transition period from                    to                     

 

Commission File Number 000-51112

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

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

 

GEORGIA

 

20-2118147

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1701 Bass Road
Macon, Georgia 31210

(Address of Principal Executive Offices)

 

(478) 476-2170

(Issuer’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

 

 



Table of Contents

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

 

INDEX

 

 

 

PAGE

 

 

 

PART I:

FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

The following consolidated financial statements are provided for Atlantic Southern Financial Group, Inc.

 

 

 

 

 

 

Consolidated Balance Sheets — 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

 



Table of Contents

 

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 to Consolidated Financial Statements (Unaudited).

 

2



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Operations

For the 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).

 

3



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Comprehensive Income (Loss)

For the 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).

 

4



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Cash Flows

For the 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).

 

5



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Consolidated Statements of Cash Flows

For the 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).

 

6



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)   Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles.  The interim financial statements furnished reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

(2)   Subsequent Events

 

The Company performed an evaluation of subsequent events through November 10, 2009, the date upon which the Company’s quarterly report on Form 10-Q was filed with the Securities and Exchange Commission.  No subsequent events were identified that would have required a change to the financial statements or disclosure in the notes to the financial statements.

 

(3)   Management’s Plan of Action for Cease and Desist Order

 

On September 11, 2009, Atlantic Southern Bank (the “Bank”), the wholly-owned subsidiary bank of Atlantic Southern Financial Group, Inc., entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Consent Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “GDBF”), whereby the Bank consented to the issuance of an Order to Cease and Desist (the “Order”).  Under the terms of the Order, the Bank cannot declare dividends without the prior written approval of the FDIC and the GDBF. Other material provisions of the order require the Bank to: (i) strengthen its board of directors’ oversight of management and operations of the Bank, (ii) establish a committee consisting of at least four members, three of which must be independent, to oversee the Bank’s compliance with the Order, (iii) maintain specified capital and liquidity ratios, (iv)  improve the Bank’s lending and collection policies and procedures, particularly with respect to the origination and monitoring of commercial real estate and acquisition, development and construction loans, (v) eliminate from its books, by charge off or collection, all assets classified as “loss” and 50% of all assets classified as doubtful, (vi) perform risk segmentation analysis with respect to concentrations of credit, (vii) receive a brokered deposit waiver from the FDIC prior to accepting, rolling over or renewing any brokered deposits and submit a written plan for eliminating its reliance on brokered deposits, (viii) adopt and implement a policy limiting the use of loan interest reserves, (ix) formulate and fully implement a written plan and comprehensive budget for all categories of income and expense, and (x) prepare and submit progress reports to the FDIC and the GDBF. The FDIC order will remain in effect until modified or terminated by the FDIC and the GDBF.

 

The Bank expects to continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions.  The Bank’s deposits will remain insured by the FDIC to the maximum limits allowed by law.  The FDIC and GDBF did not impose or recommend any monetary penalties.

 

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

 

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

 

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

 

7



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(iii)                             The Bank has developed a capital plan, which includes expense reductions to improve earnings, restructuring the balance sheet to reduce non-performing assets, seeking new capital and limiting loan growth.  The Bank is currently updating the plan and will continue to revise the plan quarterly.  The Bank has also reviewed its written liquidity, contingency funding, and funds management policies and has made appropriate revisions.  Both the revised capital plan and the revised liquidity policy have been submitted to the supervisory authorities for review.  The Bank’s Total Risk Based Capital ratio was 9.34% and the Tier 1 Leverage Ratio was 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 lending policies to provide additional guidance and control over the lending functions.

 

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

 

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

 

(vii)                          The Bank submitted to the supervisory authorities a written plan for eliminating its reliance on brokered deposits and will not accept, roll over or renew any brokered deposits unless a waiver has been received from the FDIC.  The Bank has significantly reduced its exposure to brokered deposits.  Since June 30, 2008, the Bank reduced brokered 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 limiting the use of interest reserves.

 

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

 

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

 

(4)   Net Earnings (Loss) per Share

 

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

 

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

 

8



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated 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 in the balance sheet according to management’s intent.  All investments as of September 30, 2009 and December 31, 2008 are classified as available for sale.  The following table reflects the amortized cost 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 pledged securities 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

 

 

9



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

The amortized cost and estimated fair value of debt securities available for sale at September 30, 2009, by contractual maturity, is shown below.  Expected maturities for mortgage-backed securities may differ from contractual maturities because in certain cases borrowers can prepay obligations without prepayment penalties.  Therefore, these securities are 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 independent pricing service as of the approximate dates indicated.  The differences between the amortized cost and 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 only in the event of dispositions prior to maturity.

 

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual 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 for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

10



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

At September 30, 2009, nineteen debt securities had unrealized losses with aggregate 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 federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future if classified as available for sale and it is more likely than not that the Company will not be required to sell these investments before recovery of their amortized cost basis, no declines are deemed to be other than temporary.

 

The following table summarizes securities sales activity for the three month and nine 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

)

 

During the second quarter of 2009, the Company recognized an impairment loss of $57,618 on an equity investment in Silverton Bank, a financial institution that failed during the quarter.  The impairment loss represents the full amount of the Company’s investment in Silverton.

 

During the second quarter of 2009, the Bank restructured approximately $36 million in U.S. agency and mortgage backed securities to capture gains on securities prepaying at high speeds, to offset the FDIC special assessment and to shorten the average maturity of the portfolio.

 

During the third quarter of 2009, the Bank recognized approximately $16 thousand from the calls of $5.0 million 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 subdivisions securities.

 

11



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(6)  Allowance for Loan Losses

 

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

 

As of September 30, 2009 and December 31, 2008, the Company’s other real estate consisted of the 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 being actively marketed for sale and management is continuously monitoring these properties in order to minimize any losses.

 

12



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated 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 estate properties.  These properties were being held as collateral against several non-accrual loans at September 30, 2009.  Management is currently evaluating any additional losses on these properties.

 

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

 

(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 Company updated its goodwill impairment assessment based upon the current economic environment.  The current economic environment factors have resulted in lower earnings with higher credit costs being reflected in the statement of operations as well as valuation adjustments to the loan balances through increases in the level of the allowance for loan losses.  As a result of the updated assessment, goodwill was found to be impaired and was written down to its estimated fair value.  The impairment charge of $19.5 million was recognized as an expense in the second quarter consolidated statement of operations.

 

(9)  Shareholders’ Equity

 

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

 

(10) Fair Value Measurements and Disclosures

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

The table below presents the recorded amount of assets 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 changed its investment bond accountants.  Therefore, the level of measurement techniques to evaluate some of the securities available-for-sale changed to include all in the Level

 

13



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

2 category since they are using different pricing sources 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, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below.

 

 

 

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

 

$

 

 

The carrying amount and estimated fair values of the Company’s assets and liabilities which are required to be either disclosed or recorded at fair value at 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 value estimates are made at a specific point in time, based on relevant market information and information about the financial statement elements.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like the mortgage banking operation, brokerage network and premises and equipment.

 

14



Table of Contents

 

ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(11) Accounting Standards Updates

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 — Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards Codification TM (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

 

Following this Statement, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB does not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Statement 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Upon becoming effective, all of the content of the Codification carries the same level of authority, effectively superseding Statement 162. In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, this Statement replaces Statement 162 to indicate this change to the GAAP hierarchy. The adoption of the Codification and ASU 2009-01 did not have any effect on the Company’s consolidated financial condition or results of operations.

 

In June 2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU 2009-02”), Omnibus Update — Amendments to Various Topics for Technical Corrections. The adoption of ASU 2009-02 did not have a material effect on the Company’s consolidated financial condition or results of operations.

 

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

 

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

 

1.)           A valuation technique that uses:

 

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

 

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

 

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

 

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ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

The amendments in ASU 2009-5 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is effective for the first reporting period beginning after issuance. The adoption of ASU 2009-5 will not have a material effect on the Company’s consolidated financial condition or results of operations.

 

In September 2009, the FASB issued Accounting Standards Update No. 2009-07 (“ASU 2009-07”), Accounting for Various Topics. ASU 2009-07 represents technical corrections to various topics containing SEC guidance based on external comments received. The adoption of this guidance did not have a material effect on the Company’s consolidated financial condition or results of operations.

 

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (“ASU 2009-12”), Fair Value Measurements and Disclosures (Topic 820), Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share. This ASU also requires disclosures by major category of investment about the attributes of investments within the scope of the amendments in this Update. The amendments in this Update are effective for interim and annual periods after December 15, 2009. The adoption of this guidance will not have a material effect on the Company’s consolidated financial condition or results of operations.

 

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ATLANTIC SOUTHERN FINANCIAL GROUP, INC.

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

For Each of the Three Months and Nine Months in the Period Ended

September 30, 2009 and 2008

 

The following discussion of financial condition as of September 30, 2009 compared to December 31, 2008, and the results of operations for the three 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 and accompanying footnotes appearing in this report.

 

Advisory Note Regarding Forward-Looking Statements

 

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

 

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

 

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

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

·                  our dependence on senior management;

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

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

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

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

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

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

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

·                  fluctuations in consumer spending and saving habits;

·                  the demand for our products and services;

·                  technological changes;

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

·                  the ability to increase market share;

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

·                  the impact of changes in accounting policies by the Securities and Exchange Commission, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and others that set accounting standards;

·                  unanticipated regulatory or judicial proceedings;

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

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

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

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

·                  the possibility that we will be unable to comply with the conditions imposed upon us in the Order to Cease and Desist, which could result in the imposition of further restrictions on our operations or penalties;

 

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

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

 

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

 

Executive Summary and Recent Developments

 

The Company’s total assets at September 30, 2009, were approximately $1.1 billion, which represented an increase of approximately $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 $1.6 million, or $0.35 per diluted share, for the nine months ended September 30, 2008.

 

During the second quarter of 2009, the Company recognized a $19.5 million goodwill impairment charge to earnings.  The Company completed its annual goodwill impairment assessment during the fourth quarter of 2008.  At the time of the annual assessment, there was no impairment of goodwill.  Since year-end, the Company has continuously updated its goodwill impairment assessment and found an impairment of goodwill during the second quarter of 2009.  Because goodwill is an intangible asset that cannot be sold separately or otherwise disposed of, it is not recognized in determining capital adequacy for regulatory purposes.  Therefore, the goodwill impairment charge had no effect on the Company’s regulatory capital ratios.

 

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

 

During the second quarter of 2009, the Company created a Special Assets Division to address problem credits and to assist in the collection efforts from problem loans and charged-off loans.  Senior Vice President Randy Griffin will manage this department of three people and will report directly to Edward 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 of President and Chief Executive Officer of Atlantic Southern Bank.  Mark Stevens will continue as President and Chief Executive Officer of the holding company, Atlantic Southern Financial Group, Inc.

 

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Financial Condition

 

The composition of assets and 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 significant change in the composition of assets was the increase in cash and due from banks due to the growth of deposits of the Company.  The most significant change in the composition of liabilities was the increase in deposits, especially time deposits.  Time deposits, including brokered and core deposits, are our principal source 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 due to managements’ aggressive efforts to increase core deposits and reduce the Bank’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 to its 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 loan demand in the past, we chose to obtain a portion of our deposits from outside of our market.  The deposits obtained outside of our market area generally have lower rates than rates being offered for certificates of deposits in our local market.  We have also utilized out-of-market deposits in certain instances to obtain longer term deposits than are 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 prohibited from accepting, rolling over, or renewing any brokered deposits without first receiving a brokered deposit waiver from the FDIC.

 

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

 

Investment Securities

 

Securities in 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 resulted from the purchase of $150.1 million in U.S. Treasury securities and $38.4 million of U.S Government Sponsored Enterprises securities, which were offset by the sale 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 net gains of approximately $975 thousand.

 

The following table shows the carrying value of 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 table summarizes securities sales activity for the three month and nine 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

)

 

During the second quarter of 2009, the Company recognized an impairment loss of $57,618 on an equity investment in Silverton Bank, a financial institution that failed during the quarter.  The impairment loss represents the full amount of the Company’s investment in Silverton.

 

During the second quarter of 2009, the Bank restructured approximately $36 million in U.S. agency and mortgage backed securities to capture gains on securities prepaying at high speeds, to offset FDIC special assessment and to shorten the average maturity of the portfolio.

 

During the third quarter of 2009, the Bank recognized approximately $16 thousand from the calls of $5.0 million 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 subdivisions securities.

 

Loans

 

Total loans, net of unearned income, decreased approximately $32.4 million, or 4.08%, at September 30, 2009, from December 31, 2008 as management has made an effort to limit loan growth in order to preserve capital for the Company.  Management is limiting credit availability especially for acquisitions, development and construction loans and pursuing collection efforts aggressively.  The following table presents a summary of the loan portfolio by category.

 

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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 primary importance.  Management has a credit administration and loan review process, which monitors, controls and measures our credit risk, standardized credit analyses and our comprehensive credit policy.  Management has an established warning and early detection system regarding the loans and a comprehensive analysis of the allowance for loan losses.

 

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

 

Analysis of 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 loan losses at September 30, 2009 is adequate to absorb losses inherent in the loan portfolio.  This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance

 

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for loan losses cannot be determined with precision and may be subject to change in future periods.  Significant increases to the provision for loan losses may be necessary if material adverse changes in general economic conditions occur or the performance of our loan portfolio deteriorates.  In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.  Because of these factors, it is reasonably possible that the estimated losses on loans may change 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 estate owned. 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 assets increased $54.4 million, or 173.6%, from December 31, 2008 to September 30, 2009.  This increase is largely due to several large relationships that are secured by commercial and residential real estate construction and land development real estate being placed on non-accrual during the three quarters of 2009.  All non-accrual loans are adequately collateralized based on management’s judgment and supported by recent collateral appraisals.  Other real estate increased $5.6 million from December 31, 2008 to September 30, 2009.  This increase is largely due to the addition of $16.8 million in foreclosed properties being offset by the sale of $8.8 million in foreclosed properties resulting in $2.0 million loss on these properties.  During the third quarter of 2009, the Company added approximately $12.1 million in 29 other real estate properties.

 

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