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

†          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

† 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;

† 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.

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.

                                          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.

                                                     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

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         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.

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 as salvage on uncollectible loans. At the time of foreclosure, an appraisal is obtained on the real estate. The amount charged to other real estate will be the lower of appraised value or recorded investment in the loan satisfied. The recorded investment is the unpaid balance of the loan, increased by accrued and uncollected interest, unamortized premium,

finance charges, and loan acquisition costs, if any, and decreased by previous direct write down and unamortized discount. Any excess of the recorded investment in the loan satisfied over the appraised value of the property must be charged to allowance for loan losses.

Goodwill

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

Since year-end, however, the Company's stock price continues to trade below its per-share book value which management believes reflects uncertainty about the economic cycle. The current economic environment has also resulted in lower earnings with higher credit costs. Higher credit costs are reflected in the income statement as well as valuation adjustments to the loan balances, through increases to the level of the allowance for loan losses. With these factors in place, management believed that goodwill should be re-assessed for impairment. The Company engaged the same business valuation firm to update their year-end valuation analysis, which included a discounted cash flow analysis. The conclusion from the updated impairment analysis was that impairment was present and a $19.5 million charge to earnings was taken 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 non-cash goodwill impairment charge had no effect on the Company's regulatory capital ratios or cash flows of the Company.

Deposits

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

Total time 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 increase core deposits and reduce reliance on brokered deposits. The weighted average rates paid for retail time deposits for the three and 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 brokered deposits at September 30, 2009 decreased approximately $58.5 million, or 7.9% of total time deposits, from December 31, 2008, resulting mainly from our ability to replace brokered deposits with retail deposits during the three quarters of 2009. The weighted average rates 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 the three and nine months ended September 30, 2008.

Results of Operations

General

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