Atlantic Bancgroup (ATBC) 10-K 2008 FY Annual report

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number  001-15061

ATLANTIC BANCGROUP, INC.

(Exact name of registrant as specified in its charter)

Florida	59-3543956
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1315 South Third Street, Jacksonville Beach, Florida	32250
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (904) 247-9494

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, par value $0.01 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

YES £   NO S

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

YES £   NO S

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 S   NO £

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

£

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  £	Accelerated filer  £
Non-accelerated filer  £	Smaller reporting company  S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES £   NO S

The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2008:  $15,249,825.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

The number of shares outstanding of the registrant’s common stock as of February 27, 2009:  1,247,516.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, are incorporated into Part III, Items 9 through 14 of this Annual Report on Form 10-K.

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
	Forward-Looking Statements	1
	PART I
Item 1.	Business	3
	General	3
	Competition	4
	Lending Activities	5
	Deposit Activities	6
	Investment Activities	6
	Correspondent Banking	7
	Interest and Usury	7
	Supervision and Regulation	7
	Future Legislative Developments	12
	Common Stock	12
	Preferred Stock	12
	Indemnification of Directors and Officers	12
	Employees	13
	Website Availability of Reports Filed with the Securities and Exchange Commission	13
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and  Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Overview	17
	Comparison of Years Ended December 31, 2008 and 2007	18
	Comparison of Years Ended December 31, 2007 and 2006	20
	Loan Portfolio	24
	Classification of Assets and Nonaccrual or Impaired Loans	26
	Allowance for Loan Losses	28
	Securities	28
	Deposits	30
	Short-Term and Long-Term Debt	32
	Liquidity	33
	Off-Balance Sheet Arrangements and Contractual Obligations	34
	Capital Resources	34
	Related Party Transactions	36
	Interest Rate Sensitivity	36
	Recent Accounting Pronouncements Impacting Future Periods	37
	Impact of Inflation	37

		Page
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
Item 9A.	Controls and Procedures	68
Item 9B.	Other Information	69
	PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	69
	Compliance with Section 16(a) of the Exchange Act	69
	Code of Ethics	69
	Financial Expert	69
	Corporate Governance	69
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13.	Certain Relationships and Related Transactions, and Director Independence	70
Item 14.	Principal Accounting Fees and Services	70
	PART IV
Item 15.	Exhibits	70
SIGNATURES		72
EXHIBIT INDEX		73

FORWARD-LOOKING STATEMENTS

Atlantic BancGroup, Inc., and our wholly-owned banking subsidiary, Oceanside Bank, may from time to time make written or oral statements, including statements contained in this report that may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements.  These statements should be considered subject to various risks and uncertainties.  Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors.  Such factors are described below and include, without limitation:

· Losses in our loan portfolio are greater than estimated or expected;

· Unanticipated deterioration in the financial condition of borrowers may result in significant increases in loan losses and provisions for those losses.

· If real estate values in our target markets continue to decline, our loan portfolio could become impaired and losses from loan defaults may exceed our allowance for loan and lease losses established for that purpose.

· Economic conditions affecting real estate values and transactions in Atlantic’s market and/or general economic conditions, either nationally or regionally, that are less favorable or take longer to recover than expected;

· An inability to raise additional capital on terms and conditions that are satisfactory;

· The impact of current economic conditions and the impact of our results of operations on our ability to borrow additional funds to meet our liquidity needs;

· Changes in the interest rate environment which expand or reduce margins or adversely affect critical estimates as applied and projected returns on investments and fair values of assets;

· Deposit attrition, customer loss or revenue loss in the ordinary course of business;

· Increased competition with other financial institutions may affect our results of operations and liquidity.

· If our securities portfolio fails to perform, our securities may lose value.

· Changes in the legislative and regulatory environment may increase the cost of operations or limit our growth.

· Our common stock is not an insured bank deposit and is subject to market risk.

· Although publicly traded, our common stock has substantially less liquidity than the average trading market for a stock quoted on the NASDAQ Capital Market, and our stock price can be volatile.

· The inability of Atlantic to realize elements of its strategic and operating plans for 2009 and beyond;

· Natural disasters in Atlantic’s primary market areas result in prolonged business disruption or materially impair the value of collateral securing loans;

· Management’s assumptions and estimates underlying critical accounting policies prove to be inadequate or materially incorrect or are not borne out by subsequent events;

· The impact of recent and future federal and state regulatory changes;

· Current or future litigation, regulatory investigations, proceedings or inquiries;

· Strategies to manage interest rate risk may yield results other than those anticipated;

· A significant rate of inflation (deflation);

· Unanticipated litigation or claims;

· Changes in the securities markets;

· Acts of terrorism or war; and

· Details of the recently enacted Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009 and various announced and unannounced programs implemented by the U.S. Treasury Department and bank regulators to address capital and liquidity concerns in the banking system, are still being finalized and may have a significant effect on the financial services industry and Atlantic.

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Many of such factors are beyond our ability to control or predict.  Readers should not place undue reliance on any such forward-looking statements, which speak only as to the date made.  Readers are advised that the factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.  We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Atlantic,” “Holding Company,” or “Oceanside” as used herein refer collectively to Atlantic BancGroup, Inc. and our subsidiary Oceanside Bank, which we sometimes refer to as “Oceanside,” “our bank subsidiary,” or “our bank.”  References herein to the fiscal years 2006, 2007, and 2008 mean our fiscal years ended December 31, 2006, 2007, and 2008, respectively.

[Remainder of page left intentionally blank.]

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PART I

ITEM 1. BUSINESS.

General

Atlantic BancGroup, Inc.  On October 23, 1998, Atlantic BancGroup, Inc. (“Atlantic” or “Holding Company”) was incorporated in the State of Florida.  On April 3, 1999, the shareholders of Oceanside Bank (“Oceanside” or “Bank”) approved the Agreement and Plan of Reorganization (“Reorganization”) whereby Oceanside became a wholly-owned subsidiary of the Holding Company.  The Reorganization was completed on May 5, 1999. The Holding Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and now owns all of the voting shares of Oceanside.  Our corporate offices are located at 1315 South Third Street, Jacksonville Beach, Florida.  Atlantic presently has no significant operations other than the operations of Oceanside.

Oceanside Bank. Oceanside opened July 21, 1997, and operates as a Florida state-chartered community bank within our assessment area.  Oceanside provides general commercial banking services to businesses and individuals.  The principal business of Oceanside is to receive demand and time deposits from the public and to make loans and other investments.  Oceanside operates from a main office located at 1315 South Third Street, Jacksonville Beach, Florida, and three branch offices that are located at 560 Atlantic Boulevard, Neptune Beach, Florida; 13799 Beach Boulevard, Jacksonville, Florida; and 1790 Kernan Boulevard South, Jacksonville, Florida.  In 2008, Oceanside formed and began operating a subsidiary, S. Pt. Properties, Inc., for the sole purpose of managing a single real estate property acquired through foreclosure.

As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation, and the State of Florida Department of Financial Services.  Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest.  Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand, the availability of funds, and our ability to collect outstanding loans.  We face strong competition in attracting deposits (our primary source for funding loans) and significant challenges with realizing the full value of our loan portfolio.

Oceanside has defined its assessment area based on various factors, including its size, banking offices, geographic boundaries, lending expertise, management, and competition.  Duval County and three census tracts in the Ponte Vedra area of St. Johns County have been designated as the institution's assessment area.  Oceanside draws most of our customer deposits and conducts a significant portion of our lending transactions from and within our assessment area, which includes the “Beaches and West Beaches area” of Jacksonville, Florida.  Duval and St. Johns Counties enjoy an abundant and educated work force, an attractive business environment, favorable cost-of-living comparisons to other metropolitan areas in the United States, and a good relationship between the private and public sectors.

In general, commercial real estate in the assessment area consists of small shopping centers and office buildings.  The type of residential real estate within our assessment area varies, with a number of condominiums, townhouses, and single-family housing developments dispersed throughout the area.  New residential growth consists primarily of working professionals with families.

We believe that our assessment area has been desirable market in which to operate an independent, locally-owned bank.  Furthermore, since we have a large base of local shareholders and communicate frequently with our shareholders, additional opportunities exist for marketing that might not be found with other financial institutions in our assessment area.  Our broad base of shareholders from the Beaches and surrounding areas of Jacksonville, and the historically favorable economic environment of our assessment area, should provide us with the opportunity to gain market share.

As a locally-owned and operated institution, we emphasize providing prompt, efficient, and personalized service to individuals, small and medium-sized businesses, professionals and other local organizations.  Generally, customers have one account officer to serve all of their banking needs and have ready access to senior management when necessary.  In addition, our Board of Directors is responsible for maintaining a visible profile for, and providing business to, Oceanside within our local community.

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Our principal strategy is to:

· expand our commercial and small business customer base within our assessment area,

· make loans secured principally by commercial and residential real estate within our assessment area, as well as throughout Duval County and the surrounding counties, and

· expand our consumer loan base within our assessment area.

Our belief is that the most profitable deposit relationships are characterized by high deposit balances, low frequency of transactions, and low distribution requirements.  Being a community bank with local management, we are well-positioned to establish these relationships with smaller commercial customers and households.

Our sources of funds for loans and other investments include demand, time, savings, and other deposits, amortization and repayment of loans, sales to other lenders or institutions of loans or participations in loans, and other borrowings.  Our principal sources of income are interest and fees collected on loans, and to a lesser extent, interest and dividends collected on other investments. Our principal expenses are interest paid on savings and other deposits, interest paid on other borrowings, employee compensation, office expenses, and other overhead and operational expenses.  We offer several deposit accounts, including demand deposit accounts, negotiable order of withdrawal accounts (“NOW” accounts), money market accounts, savings accounts, certificates of deposit, and various retirement accounts.  During 2006, 2007, and 2008, we also obtained funds from customer repurchase agreements that have been classified as other borrowings and brokered deposits that have been classified as other time deposits.

We have automated teller machines (the “ATMs”) located at each of our offices, and we are a member of an electronic banking network so that our customers may use the ATMs of other financial institutions.  We also operate drive-in tellers and 24-hour depositories at each of our offices.  As part of the strategy to offer innovative services to our customers, we provide on-line banking (“Internet Banking”), Dial-a-Bank (“Telephone Banking”), remote deposit capture, ACH origination, and lock-box cash management.

Our efforts are focused on filling the void created by the increasing number of locally-owned community banks that have been acquired by large regional holding companies, negatively impacting the personal nature of the delivery, quality, and availability of banking services in our assessment area and surrounding areas.

Competition

The banking industry, in general, and our market, in particular, is characterized by significant competition for both deposits and lending opportunities.  In our market area, we compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and various other nonbank competitors.  Competition for deposits may have the effect of increasing the rates of interest we will pay on deposits, which would increase our cost of money and possibly reduce our net earnings.  Competition for loans may have the effect of lowering the rate of interest we will receive on our loans, which would lower our return on invested assets and possibly reduce our net earnings.  Many of our competitors have been in existence for a significantly longer period of time than us, are larger and have greater financial and other resources and lending limits than us, and may offer certain services that we do not provide at this time.  However, we feel the market is rich with opportunity to provide tailor-made custom banking products and services that cannot be provided by the large institutions that offer many banking products and services on an impersonal basis.  As larger financial institutions have in recent years acquired community banks, we are able to cater to those customers looking for more personalized service.

Our profitability depends upon our ability to compete in this market area.  At the present time, we are unable to predict to what degree competition may adversely affect our financial condition and operating results.

Our response to this highly competitive environment dictates that we:

· review and act upon loan requests quickly with a locally-based loan committee,

· maintain flexible, but prudent lending policies,

· personalize service with emphasis on establishing long-term banking relationships with our customers, and

· maintain a strong ratio of employees to customers to enhance the level of service.

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Lending Activities

We offer a wide range of loans to individuals and small businesses and other organizations that are located, or conduct a substantial portion of their business, in our assessment area.  At December 31, 2008, our consolidated total loans were $207.1 million, or 77.3%, of our total consolidated assets.  The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations.  We have no foreign loans or loans for highly-leveraged transactions.

Our loan portfolio is concentrated in three major areas: real estate loans, commercial loans, and consumer and other loans.  A majority of our loans are made on a secured basis.  As of December 31, 2008, approximately 92% of our total loan portfolio consisted of loans secured by mortgages on real estate.  Of the total loans secured by mortgages on real estate, approximately 47% are secured by nonfarm nonresidential properties (commercial real estate) and 21% are construction, land development, and other land loans, secured by real estate.  The remaining 32% are secured by 1-4 family and multifamily residential properties.

Our real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of, refinance of, or investment in, real estate and for the construction of 1-4 family residential units or the development of single-family residential building lots.  These real estate loans may be made at fixed or variable interest rates.  We generally do not make fixed-rate commercial real estate loans for terms exceeding three to five years.  Loans in excess of three to five years are generally adjustable rate loans.  Residential real estate loans ordinarily are repayable in monthly installments, based on up to a 30-year amortization schedule, with variable interest rates.

During 2008, 2007, and 2006, we brokered loans totaling $11.6 million, $7.6 million and $11.0 million, respectively, which were closed by the correspondent mortgage lenders.  We recorded brokering fees of $17,000, $69,000, and $119,000 in 2008, 2007, and 2006, respectively.  Our ability to solicit, process, and broker residential mortgage loans is highly dependent on the general economy and interest rate environment, the health of the residential real estate market, and competition from other local and national mortgage bankers and brokers.

Our commercial loans include loans to individuals and small-to-medium-sized businesses located primarily in Duval and St. Johns Counties for working capital, equipment purchases, and various other business purposes.  A majority of commercial loans are secured by real estate, equipment, or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable or fixed rates of interest.  Commercial lines of credit are typically granted on a one-year basis, with loan covenants.  Other commercial loans with terms or amortization schedules of longer than one year will normally be made at interest rates that vary with the prime lending rate and will become payable in full in three to five years.  Commercial loans not secured by real estate amounted to approximately 6% of our total loan portfolio as of December 31, 2008.

Our consumer loans and other loans consist primarily of loans to individuals for various consumer purposes, but include some business-purpose loans which are payable on an installment basis.  The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers; however, consumer loans may also be made on an unsecured basis.  Consumer loans are made at fixed and variable interest rates, and are often based on an amortization schedule of up to five years.  Consumer and other loans represent approximately 2% of our total loan portfolio at December 31, 2008.

Loan originations are derived from a number of sources.  Loan originations can be attributed to direct solicitation by our loan officers, referrals from existing customers and borrowers, advertising, walk-in customers, and, in some instances, referrals from brokers.

Certain credit risks are inherent in making loans.  These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.  In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility.  We attempt to minimize loan losses through various means.  In particular, on larger loans, we generally rely on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral.  In addition, shorter loan terms are utilized in order to reduce the risk of a decline in the value of such collateral.

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Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature.  Over the latter part of 2007 and in 2008, real estate prices in our markets have declined rapidly, and if real estate prices continue to decline, the value of the real estate collateral securing our loans will decline.  Such a reduction in the value of our collateral could increase the number of non-performing loans and adversely affect our financial performance.

If the strength of the local economy in which we conduct operations continues to decline, this could result in, among other things, a further deterioration of credit quality and availability of credit, which impacts our loan portfolio and allowance for loan and lease losses.  The vast majority of our loan portfolio is secured by real estate or other commercial assets in our market.  Certain markets in Florida have been particularly adversely affected by declines in real estate value, declines in home sale volumes, and declines in new home building.  These declines continue to adversely affect the general economy in our markets.  These factors could result in higher delinquencies and greater charge-offs in future periods, which would adversely affect our financial condition and results of operations.

The risk of delinquent loans is inherent in banking; therefore, we may experience greater levels of delinquencies than anticipated, and as a result, our earnings and overall financial condition could be affected.  We cannot precisely estimate economic conditions or be assured that our monitoring procedures and policies will reduce lending risks and that our Allowance for Loan Loss (the “Allowance”) will be adequate.  Loan losses in excess of what we predict may result, causing Oceanside to fall in a capital category prompting regulatory action.  In addition, future provisions for loan losses could have an adverse effect on our profitability.  A loan loss will reduce the Allowance, and a reduction to the Allowance will be restored by a recovery of the loss.  If not recovered, a loan loss will result in an increase to our expense provision for loan losses, thereby reducing earnings, which could have an adverse effect on the market value of our common stock.

Deposit Activities

Deposits are our major source of funds for loans and other investment activities.  At December 31, 2008, our regular savings, demand, NOW, and money market deposit accounts comprised approximately 39% of our consolidated total deposits.  Approximately 39% of our consolidated deposits at December 31, 2008, were certificates of deposit (or time deposits) of less than $100,000.  Time deposits of $100,000 and over made up approximately 22% of our consolidated total deposits at December 31, 2008.  Generally, our goal is to maintain the rates paid on our deposits at a competitive level.  Brokered deposits of $26.3 million, or approximately 11%, of consolidated total deposits at December 31, 2008, are included in time deposits of $100,000 or less.

Investment Activities

We are permitted to invest a portion of our assets in U.S. Government agency, state, county, and municipal obligations, certificates of deposit, collateralized mortgage obligations (“CMOs”), and federal funds sold.  Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.

Our total investment portfolio may be invested in U.S. Treasury and general obligations of its agencies and state, county, and municipal obligations because such securities generally represent a minimal investment risk.  Occasionally, we purchase certificates of deposits of national and state banks.  These investments may exceed $250,000 in any one institution (the current limit of FDIC insurance for deposit accounts).  CMOs are secured with Federal National Mortgage Association (“FNMA”) and General National Mortgage Association (“GNMA”) mortgage-backed securities and generally have a shorter life than the stated maturity.  Federal funds sold is the excess cash we have available over and above daily cash needs.  We invest this money on an overnight basis with approved correspondent banks.

We monitor changes in financial markets that may affect our portfolio investments.  We also monitor our daily cash position to ensure that all available funds earn interest at the earliest possible date.

A portion of our investment account is designated as primary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss.  These investments usually consist of U.S. Treasury obligations, U.S. government agencies, and federal funds.  The remainder of our investment account (or secondary reserves) may be placed in investment securities of different types and longer maturities.  The maturities of our securities are staggered whenever possible so as to produce a steady cash flow in the event we need cash, or economic conditions change to a more favorable rate environment.

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Correspondent Banking

Correspondent banking involves one bank providing services to another bank that cannot provide those services for itself from an economic, regulatory, or practical standpoint.  We purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations, and sales of loans to, or participation with, correspondent banks.  We have ongoing banking relationships with several correspondent banks.  We also sell loan participations to correspondent banks with respect to loans that would exceed our lending limit.

Interest and Usury

Like other commercial banks, we are subject to state and federal statutes that affect the interest rates that may be charged on loans.  These laws do not, under present market conditions, deter us from continuing the process of originating loans.

Supervision and Regulation

Both the Holding Company and Oceanside are subject to comprehensive regulation, examination, and supervision by the Federal Reserve, the Florida Department of Financial Services (“Department”) and the Federal Deposit Insurance Corporation (“FDIC”) and are subject to other laws and regulations applicable to bank holding companies and banks. Such regulations include limitations on loans to any single borrower and to our directors, officers, and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; disclosure of the costs and terms of such credit; and restrictions as to permissible investments.  The Holding Company is examined periodically by the Federal Reserve, and the Bank is regularly examined by the Department and the FDIC.  Both the Bank and the Holding Company submit periodic reports regarding their financial condition and other matters to their respective regulators.  These agencies have a broad range of powers to enforce regulations under their respective jurisdictions, and to take discretionary actions determined to be for the protection of the safety and soundness of the Holding Company and Oceanside.

The following is a brief summary of certain statutes, rules, and regulations affecting us and our subsidiary bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below, and is not intended to be an exhaustive description of the statutes or regulations applicable to our business and subsidiary bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.

Bank Holding Company Regulation.  Atlantic is a bank holding company, registered with the Federal Reserve under the BHC Act.  As such, Atlantic is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve.  The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company, (ii) acquiring all or substantially all of the assets of a bank, or (iii) merging or consolidating with any other bank holding company.

The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be to substantially lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served.  The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience, and needs of the community to be served.  Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties’ performance under the Community Reinvestment Act (“CRA”).

Except as authorized by the Gramm-Leach-Bliley Act of 1999, the BHC Act generally prohibits a bank holding company from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce

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benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.  For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies.  Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.

Under federal law, federally insured banks are subject, with some exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower.  In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.

Gramm-Leach-Bliley Act.  Enacted in 1999, the Gramm-Leach-Bliley Act reforms and modernizes certain areas of financial services regulation.  The law permits the creation of financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation.  The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies.  The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary.  The law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies.  At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies.  The law also sets up a process for coordination between the Federal Reserve Board and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries.

The law also includes a minimum federal standard of financial privacy.  Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution’s privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities.  The law repeals the exemption that banks were afforded from the definition of “broker,” and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks.  In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements.  In the area of CRA activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate.  Bank regulators are required to take the CRA ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution.  Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better CRA ratings when they commence the new activity.

FDIC and Other Banking Regulations.  Our deposit accounts are insured by the Bank Insurance Fund (“BIF”) of the FDIC up to a maximum of $100,000 per insured depositor.  On October 3, 2008, the deposit insurance was increased to $250,000 per insured depositor until December 31, 2009.  In addition, Oceanside is participating in the FDIC’s Transaction Account Guarantee Program (“TAGP”).  Under that program, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account through December 31, 2009. Coverage under the TAGP is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.  The FDIC issues regulations, conducts periodic examinations, requires the filing of reports, and generally supervises the operations of its insured banks.  The approval of the FDIC is required prior to a merger or consolidation or the establishment or relocation of an office facility.  This supervision and regulation is intended primarily for protection of depositors and not stockholders.

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers.  Tier 1 capital

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consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets.  Tier 2 capital consists of the general allowance for loan losses except for certain limitations.  An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.  At December 31, 2008, Oceanside’s Tier 1 and total risk-based capital ratios were 8.99% and 10.25%, respectively.  Under current regulations, bank holding companies with consolidated assets under $500 million are not required to calculate and report risk-based capital ratios.

Bank holding companies and banks are also required to maintain capital at a minimum level based on average total assets, which is known as the leverage ratio.  The minimum requirement for the leverage ratio is 3%; however, all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum.  At December 31, 2008, Oceanside’s leverage ratio was 7.25 %, which was 2.25% in excess of its required 5.00%.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well-capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution that becomes “significantly undercapitalized” or “critically undercapitalized.”

The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:

· an institution is “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures;

· an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater;

· an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%;

· an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and

· an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.

After an opportunity for a hearing, the FDIC has the authority to downgrade an institution from “well-capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category for supervisory concerns.

The “prompt corrective action” provisions of FDICIA also provide that, in general, no institution may make a capital distribution if it would cause the institution to become “undercapitalized.”  Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.

FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.

As of December 31, 2008, Oceanside met the capital requirements of a “well-capitalized” institution.

Maximum Legal Interest Rates.  Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law.  The relative importance of these interest limitation laws to the financial operations of Oceanside will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates.

Bank Branching.  Banks in Florida are permitted to branch state-wide.  Such branch banking, however, is subject to prior approval by the Department and the FDIC.  Any such approval would take into consideration several factors, including the bank’s level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the Department and the FDIC for purposes of determining whether approval should be granted to open a branch office.

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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible.  Florida has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies.  The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years.

Dividend Restrictions.  In addition to dividend restrictions placed on Oceanside by the FDIC based on Oceanside’s minimum capital requirements, the Florida Financial Institutions Code prohibits the declaration of dividends in certain circumstances.  Section 658.37, Florida Statutes, prohibits the declaration of any dividend until a bank has charged off bad debts, depreciation, and other worthless assets, and has made provision for reasonably-anticipated future losses on loans and other assets. Such a dividend is limited to the aggregate of the net profits of the dividend period combined with a bank’s retained net profits of the preceding two years.  A bank may declare a dividend from retained net profits accruing prior to the preceding two years with the approval of the Department. However, a bank will be required, prior to the declaration of a dividend on its common stock, to carry 20% of its net profits for such preceding period as is covered by the dividend to its surplus fund, until the surplus fund equals at least the amount of the bank’s common and preferred stock then issued and outstanding.  In no event may a bank declare a dividend at any time in which its net income from the current year, combined with the retained net income from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law, regulation, order, or any written agreement with the Department or the FDIC.  We currently do not intend to pay a cash dividend.  Instead, we will use our earnings to increase our capital.

Change of Control.  Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank or bank holding company by tender offer or similar means than another type of corporation.  Consequently, shareholders of Atlantic may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies.  Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank.  Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company and the FDIC before acquiring control of any state bank (such as Oceanside).  Upon receipt of such notice, the FDIC may approve or disapprove the acquisition.  The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires 10% or more of a bank holding company’s or state bank’s voting stock, and if one or more other control factors set forth in the Act are present.

Enforcement Powers.  Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders.  Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.

Emergency Economic Stabilization Act of 2008.  In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law.  The EESA temporarily revises the federal deposit insurance laws by increasing the basic deposit insurance coverage from $100,000 to $250,000 per depositor.  This revision is currently effective through December 31, 2009.  The EESA also authorized the United States Department of the Treasury to implement programs to provide financial assistance and/or support to financial institutions.  We have not participated in any such programs.

Temporary Liquidity Guarantee Program.  In order to promote financial stability in the economy, the FDIC adopted the Temporary Liquidity Guarantee Program (“TLGP”) on October 13, 2008.  Participation in the program is voluntary. However, once participation is elected, it can not be revoked.  We have chosen to participate in the Transaction Account Guarantee Program component of the TLGP.  Under the Transaction Account Guarantee Program, the FDIC will fully insure funds held in noninterest-bearing transaction accounts.  Noninterest-bearing transaction accounts are ones that do not accrue or pay interest and for which the institution does not require an advance notice of withdrawal.  Also covered are interest on lawyers’ trust accounts and negotiable order of withdrawal (NOW) accounts with interest rates lower than 50 basis points.  These revisions are only effective through December 31, 2009.

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Effect of Governmental Policies.  Our business and earnings are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve.  The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States.  The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets.

Corporate Governance.  The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act” or “SOX”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.  Some of the principal provisions of the Act include:

· the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;

· auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;

· additional corporate governance and responsibility measures which (a) require the chief executive officer and chief financial officer to certify financial statements and internal controls and to forfeit salary and bonuses in certain situations, and (b) protect whistleblowers and informants;

· expansion of the authority and responsibilities of the company’s audit, nominating and compensation committees;

· mandatory disclosure by analysts of potential conflicts of interest; and

· enhanced penalties for fraud and other violations.

Community Reinvestment Act.  The Community Reinvestment Act of 1977 requires federal banking regulators to evaluate the record of financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. To the best knowledge of management, Oceanside is meeting its obligations under this act.

Loans to Insiders.  The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers, and principal shareholder of banks.  Under Section 22(h) of the Federal Reserve Act, any loan to a director, executive officer or principal shareholder of a bank, or to entities controlled by any of the foregoing, may not exceed, together with all outstanding loans to such persons or entities controlled by such person, the bank’s loan to one borrower limit.  Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100 million, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus.  Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company, and to entities controlled by such persons, unless such loans are approved in advance by a majority of the Board of Directors of the bank with any “interested” director not participating in the voting.  Our loan amount, which includes all other outstanding loans to such persons, as to which such prior board of director approval is required, must be the greater of $25,000 or 5% of capital and surplus (up to $500,000).  Section 22(h) requires that loans to directors, executive officers, and principal shareholders be made in terms and underwriting standards substantially the same as offered in comparable transactions to other persons.

USA Patriot Act.  As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”).  The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies.  Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country.  In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

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Treasury regulations implementing the due diligence requirements were issued in 2002.  These regulations required minimum standards to verify customer identity, encouraged cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibited the anonymous use of “concentration accounts,” and required all covered financial institutions to have in place an anti-money laundering compliance program.

The Act also amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.  In the past few years, both state and federal banking regulators have significantly increased enforcement of the Act and other anti-money laundering laws and regulations, including levying civil money penalties and seeking cease and desist orders.

Other Regulation.  Oceanside is subject to a variety of other regulations. State and federal laws restrict interest rates on loans, potentially affecting our income. The Truth in Lending Act and the Home Mortgage Disclosure Act impose information requirements on us in making loans. The Equal Credit Opportunity Act prohibits discrimination in lending on the basis of race, creed, or other prohibited factors. The Fair Credit Reporting Act governs the use and release of information to credit reporting agencies. The Truth in Savings Act requires disclosure of yields and costs of deposits and deposit accounts. Other acts govern confidentiality of consumer financial records, automatic deposits and withdrawals, check settlement, endorsement and presentment, and reporting of cash transactions as required by the Internal Revenue Service.

Future Legislative Developments

Various legislative acts, including proposals to modify the bank regulatory system, expand the powers of banking institutions and financial holding companies and limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and the Florida legislature.  Such legislation may change banking statutes and the environment in which we and our banking subsidiary operate in substantial and unpredictable ways.  We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our banking subsidiary.

Common Stock

We have 10,000,000 shares of our $0.01 par value common stock authorized.  As of February 27, 2009, there were 1,247,516 shares outstanding.  Holders of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders.  Upon liquidation, dissolution, or winding-up, holders of our common stock are entitled to receive pro rata all assets remaining legally available for distribution to shareholders.  The holders of common stock have no right to cumulate their votes in the election of directors.  The common stock has no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares.  All of the outstanding shares of common stock are fully paid and non-assessable.

Preferred Stock

In addition to the 10,000,000 shares of authorized common stock, our Articles of Incorporation authorize up to 2,000,000 shares of preferred stock.  The Board of Directors is further authorized to establish designations, powers, preferences, rights, and other terms for preferred stock by resolution.  No shares of preferred stock have been issued.

Indemnification of Directors and Officers

Our Bylaws afford indemnification rights to our officers and directors to the fullest extent permitted or required by the Florida Business Corporation Act.

Under Section 607.0850 of the Florida Business Corporation Act, officers and directors of a Florida corporation may be entitled to indemnification by the corporation against liability incurred in connection with any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal; provided, however, that such officer or director acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to

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any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful.  Such indemnification includes obligations to pay a judgment, settlement, penalty, fine, and expenses actually and reasonably incurred with respect to a proceeding.  In addition, Florida law provides that officers and directors shall be indemnified by a Florida corporation against expenses actually and reasonably incurred by such officer or director, to the extent that such officer or director has been successful on the merits or otherwise in defense of any proceeding (as defined in Section 607.0850) or in defense of any claim, issue, or matter therein.

In addition, Section 607.0831 of the Florida Business Corporation Act provides that a director is not personally liable for monetary damages to a corporation or any other person for any statement, vote, decision, or failure to act, regarding corporate management or policy, by a director, unless such director breached or failed to perform such duties as a director and such breach or failure to perform constitutes:

· a violation of the criminal law, unless the director had reasonable cause to believe the conduct was lawful or had no reasonable cause to believe the conduct was unlawful;

· a transaction from which the director derived an improper personal benefit, either directly or indirectly;

· a circumstance involving a director’s liability for unlawful distributions under the Florida Business Corporation Act;

· in proceedings by or in the right of the corporation to procure a judgment or by or in the right of a shareholder, conscious disregard for the best interest of the corporation, or willful misconduct; or

· in a proceeding by or in the right of someone other than the corporation or a shareholder, recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

Employees

At December 31, 2008, we had approximately 47 full-time employees and 4 part-time employees for a full-time employee equivalent of 49.  No significant changes in the number of our full-time employees are currently anticipated.  Because we believe that one of the primary deficiencies of large regional banks is the constant turnover of personnel and therefore the lack of continuing personal relationships with local customers, our goal is to maintain a competently trained staff of local bankers who have settled in the community on a permanent basis.  To maintain a skilled and knowledgeable staff, we allocate funds for continuing on-the-job and educational training, and employees are encouraged to enroll in various banking courses and other seminars to improve their overall knowledge of the banking business.

The employees are not represented by a collective bargaining unit.  We consider relations with employees to be good.

Website Availability of Reports Filed with the Securities and Exchange Commission

We maintain an Internet website located at www.oceansidebank.com on which, among other things, we make available, free of charge, various reports that we file with, or furnish to, the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports. These reports are made available as soon as reasonably practicable after these reports are filed with, or furnished to, the SEC.

ITEM 1A. RISK FACTORS.

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

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ITEM 2. PROPERTIES.

On October 29, 1996, Oceanside purchased from an unaffiliated entity the two-story, 3,100 square-foot building at 1315 South Third Street, Jacksonville Beach, Florida, as our main office (“Main Office”).  The Main Office includes three inside teller stations, four drive-up teller windows, an automated teller machine, and on-site parking.  The Main Office is a former Barnett Bank branch office.  Oceanside purchased the real property for $850,000 and used a portion of the proceeds of the initial offering of Atlantic’s common stock to add 2,200 square feet to the facility.  Oceanside originally acquired the Main Office with funds drawn on a line of credit with Columbus Bank and Trust Company, which was repaid out of the proceeds of Atlantic’s initial offering.  Improvements totaling approximately $483,000, net of disposals, have been made through December 31, 2008.

On June 3, 1998, Oceanside purchased from SouthTrust Bank, N.A., a 1,968 square-foot building and real estate located at 560 Atlantic Boulevard, Neptune Beach, Florida.  This facility was formerly a branch office of SouthTrust Bank, N.A.  Oceanside purchased this building for $427,000 and, subsequently spent $93,000 on renovations and upgrades, net of disposals.  This facility includes two offices, three inside teller windows, general lobby space, three drive-up teller windows, an ATM, and on-site parking.  There is no outstanding mortgage loan on this property.

On September 27, 2000, Oceanside executed a lease for our third banking location, which opened in the third quarter of 2001. This branch is located at 13799 Beach Boulevard, Jacksonville, Florida.  The lease, which commenced upon execution, covers approximately 9,000 square feet. In addition to the branch, other operations of Atlantic and Oceanside were relocated to this facility.  Rent commenced in May 2002, which was one year from the date of completion of the landlord’s work, and expires ten years thereafter, with two five-year renewal options.  No rent was paid in the first year after completion of the landlord’s work.  Oceanside acquired an additional 2,200 square feet of rental space during 2004 adjacent to the operations area for its loan operations department.  Scheduled annual rent payments for 2009 through 2011 for the branch and loan operations are:  2009 - $241,000; 2010 - $248,000; and 2011 - $84,000.  Building improvements totaled $951,000, net of disposals.

On August 22, 2002, Oceanside executed a lease for our newest branch location, which opened December 15, 2003. This branch is located at the intersection of Kernan and Atlantic Boulevards, at 1790 Kernan Boulevard South, Jacksonville, Florida.  The land lease covers approximately 42,000 square feet.  The Bank constructed the branch building totaling approximately 3,200 square feet at a cost of approximately $1,388,000.  Rent commenced in September 2003.  The lease is for twenty years with two ten-year renewal options.  Scheduled annual rent payments are:  2009-2012 - $84,000; 2013 - $88,000; 2014-2017 - $94,000; 2018 - $100,000; 2019-2022 - $103,000; and 2023 - $68,000.

We believe all of our facilities are in good condition and well-maintained.

ITEM 3. LEGAL PROCEEDINGS.

We are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our operations.

We do not believe that there are any pending or threatened proceedings against us, which, if determined adversely, would have a material effect on our consolidated financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of Atlantic’s security holders during the fourth quarter of the year ended December 31, 2008.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Prior to October 28, 1999, the shares of Atlantic common stock were not actively traded, and such trading activity, as it occurred, took place in privately negotiated transactions.  On October 28, 1999, Atlantic’s common stock was approved for quotation on the Over-the-Counter Bulletin Board, and on August 29, 2003, Atlantic common stock commenced its listing on the NASDAQ Capital Market under the symbol “ATBC.”  During 2008 and 2007 the reported periodic high and low quotes during each quarter follow:

	2008								2007
	4th Qtr		3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr		1st Qtr
High	$	10.00	$	13.75	$	16.44	$	17.80	$	36.00	$	40.00	$	43.73	$	39.46
Low	$	5.75	$	5.09	$	12.57	$	14.29	$	16.42	$	32.00	$	36.15	$	33.35

Please note that the information above represents offers made to buy our stock and may not represent actual transactions or sales.  The source of data used to prepare the above chart was taken from historical prices provided by Commodity Systems, Inc.

At December 31, 2008, there were 573 shareholders of record with shares held by individuals and in nominee names.

At February 27, 2009, the initial bid quoted price for the common stock of Atlantic was $5.42.  We have never paid a cash dividend on our common stock.  We anticipate that for the foreseeable future, any earnings will be retained for capital.  Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future.  The payment of future dividends will be at the sole discretion of the Board of Directors and will depend on, among other things, future earnings, capital requirements, and our general financial and business condition.

Furthermore, the ability to pay dividends to our stockholders depends primarily on dividends received from our banking subsidiary, Oceanside.  Oceanside’s ability to pay dividends is limited by federal and state banking regulations based upon Oceanside’s profitability and other factors.  At December 31, 2008, retained earnings of Oceanside totaling approximately $532,000 were available to pay dividends to the Holding Company in order to maintain Oceanside’s current regulatory capital classification.

[Remainder of page left intentionally blank.]

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ITEM 6.  SELECTED FINANCIAL DATA (dollars and shares in thousands, except per share data)

	At or for the
	Period Ended December 31,
	2008			2007			2006			2005			2004
Statements of Operations Data:
Total interest income	$	15,335		$	17,368		$	15,502		$	11,259		$	8,241
Total interest expense		8,390			9,591			7,584			4,358			2,278
Net interest income before provision for loan losses		6,945			7,777			7,918			6,901			5,963
Provision for loan losses		4,424			629			194			334			362
Net interest income after provision for loan losses		2,521			7,148			7,724			6,567			5,601
Noninterest income		1,509			1,119			1,078			839			923
Noninterest expense		7,649			6,413			5,981			5,283			4,889
Income tax provision (benefit)		(1,692	)		448			903			645			469
Net income (loss)		(1,927	)		1,406			1,918			1,478			1,166
Selected End of Period Balances:
Total assets	$	267,973		$	261,406		$	243,497		$	213,880		$	184,317
Interest-earning assets		237,689			245,373			228,686			196,931			166,829
Investment securities		30,406			41,300			39,837			38,290			29,419
Loans, net of deferred fees		207,029			204,060			177,708			152,803			129,801
Allowance for loan losses		3,999			2,169			1,599			1,552			1,296
Deposit accounts		239,844			217,491			192,704			168,480			146,352
Other borrowings		9,393			23,581			32,314			29,138			23,004
Stockholders’ equity		16,932			18,856			17,251			15,232			14,033
Selected Average Balances for the Period:
Total assets	$	260,025		$	247,674		$	225,591		$	193,249		$	159,951
Interest-earning assets		242,648			233,339			211,081			179,001			147,353
Securities and interest-earning deposits		36,995			41,696			37,278			34,202			27,064
Loans, net		203,675			187,544			167,883			141,587			114,236
Interest-bearing deposit accounts		191,691			175,922			150,762			123,694			104,174
Other borrowings		21,046			22,888			24,186			22,450			14,608
Stockholders’ equity		18,574			18,086			16,042			14,596			13,445
Share Data:
Earnings (loss) per share
Basic	$	(1.54	)	$	1.13		$	1.54		$	1.18		$	0.93
Fully diluted	$	(1.54	)	$	1.13		$	1.54		$	1.18		$	0.93
Book value per share (period end)	$	13.57		$	15.11		$	13.83		$	12.21		$	11.25
Common shares outstanding (period end)		1,248			1,248			1,248			1,248			1,248
Weighted average shares outstanding
Basic		1,248			1,248			1,248			1,248			1,248
Fully diluted		1,248			1,248			1,248			1,248			1,248
Performance Ratios:
Return on average assets		-0.74	%		0.57	%		0.85	%		0.76	%		0.73	%
Return on average equity		-10.37			7.77			11.96			10.13			8.67
Interest-rate spread during the period		2.55			2.78			3.10			3.40			3.76
Net interest margin		3.03			3.49			3.84			3.95			4.13
Noninterest expenses to average assets		2.94			2.59			2.65			2.73			3.06
Asset Quality Ratios:
Allowance for loan losses to period end loans		1.93	%		1.06	%		0.90	%		1.02	%		1.00	%
Net charge-offs to average loans		1.27			0.03			0.09			0.06			0.25
Nonperforming assets to period end loans		5.13			3.13			0.04			0.13			0.07
Nonperforming assets to period end total assets		3.96			2.45			0.03			0.09			0.05
Capital and Liquidity Ratios:
Average equity to average assets (Consolidated)		7.14	%		7.30	%		7.11	%		7.55	%		8.41	%
Leverage (Oceanside)		7.25			8.53			8.75			8.93			8.02
Risk-based capital (Oceanside):
Tier 1		8.99			9.33			10.16			10.62			9.55
Total		10.25			10.26			10.95			11.52			10.43
Average loans to average deposits (Consolidated)		92.92			91.37			91.27			91.18			87.10
Full-time Employee Equivalents (End of Period)		49			53			51			50			48

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s discussion and analysis is included to provide the shareholders with an expanded narrative of our results of operations, changes in financial condition, liquidity, and capital adequacy.  This narrative should be reviewed in conjunction with the audited consolidated financial statements and notes included in this report.  Since our primary asset is our wholly-owned subsidiary, Oceanside Bank, most of the discussion and analysis relates to Oceanside.

Overview

How We Earn Income.  As stated elsewhere herein, our results of operations are primarily dependent upon the results of operations of Oceanside.  Oceanside conducts commercial banking business consisting of attracting deposits from the general public and applying those funds to the origination of commercial, consumer, and real estate loans (including commercial loans collateralized by real estate).  Profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds).  Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and is dependent upon Oceanside’s interest-rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities.  When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.  The factors that influence net interest income include changes in interest rates and changes in the volume and mix of assets and liability balances.  The interest rate spread is impacted by interest rates, deposit flows, and loan demand.  Additionally, and to a lesser extent, Oceanside’s profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective tax rate.  Noninterest income consists primarily of service fees on deposit accounts and mortgage banking operations. Noninterest expense consists of compensation and employee benefits, occupancy and equipment expenses, data processing costs, and other operating expenses.

Critical Accounting Policies and Use of Significant Estimates.  Our consolidated financial statements include the accounts of the Holding Company and the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies conform with accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements.  The majority of these accounting policies do not require our management to make difficult, subjective, or complex judgments.  However, we believe the allowance for loan losses and the valuations of foreclosed assets are critical estimates.

Allowance for Loan Losses.  The allowance for loan losses is a valuation allowance for probable or incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed (that is, a confirmed loss exists).  Subsequent recoveries, if any, are credited to the allowance.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful (impaired).  The general component covers non-classified loans and is based on historical loss experience adjusted for current trends.

Loans are individually evaluated for impairment, if significant.  A loan is impaired when full payment under the loan terms is not expected.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral and accrual of interest is discontinued.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. There is no precise method of predicting specific loan losses or amounts that ultimately may be charged-off.  Also, this evaluation is inherently subjective as it requires estimates

- 17 - -

that are susceptible to significant revision as more information becomes available.  The determination that a loan may be uncollectible, in whole or in part, is a matter of judgment.  Similarly, the adequacy of the allowance for loan losses can be determined only on a judgmental basis, after full review, including, consideration of economic conditions and their effect on particular industries and specific borrowers; a review of borrowers' financial data, together with industry data, their competitive situation, the borrowers' management capabilities and other factors; a continuing evaluation of the loan portfolio, including monitoring any loans that are identified as being of less than acceptable quality; a detailed analysis, on a quarterly basis, of all impaired loans; and an evaluation of the underlying collateral for secured lending.

We maintain a formalized loan review process supported by a credit analysis and control system. We intend to maintain the allowance for loan losses at a level sufficient to absorb estimated uncollectible loans and, expect to make periodic additions to the allowance for loan losses, when warranted.

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and valuation of foreclosed assets.

The determination of the adequacy of the allowance for loan losses is based on estimates that may be affected by significant changes in the economic environment and market conditions.  In connection with the determination of the estimated losses on loans and to support the carrying value of foreclosed assets, we obtain independent appraisals for significant collateral.

Our loans are generally secured by specific items of collateral including real property, consumer assets, and business assets.  Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts is dependent on local, state, and national economic conditions that may affect the value of the underlying collateral or the income of the debtor.

While we use available information to recognize losses on loans, further reductions in the carrying amounts of loans or foreclosed assets may be necessary based on changes in economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and the carrying value of foreclosed assets.  Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.

Interest Rate Risk.  Our asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows.  Management monitors the effect of such risks by considering the mismatch of the maturities of our assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates.  We have considered the effect of significant increases and decreases in interest rates and believe such changes, if they occurred, would be manageable and would not affect our ability to hold assets as planned.  However, we are exposed to significant market risk in the event of significant and prolonged interest rate changes.

Regulatory Environment.  We are subject to regulations of certain federal and state agencies and, accordingly, are periodically examined by those regulatory authorities.  As a consequence of the extensive regulation of commercial banking activities, our business is particularly susceptible to being affected by federal and state legislation and regulations.

COMPARISON OF YEARS ENDED DECEMBER 31, 2008 AND 2007

Highlights.  As of December 31, 2008, we had grown to approximately $268.0 million in total assets, with $207.1 million in total loans, $239.8 million in deposits, and $16.9 million in stockholders’ equity.

The net loss in 2008 was $1,927,000 versus net income of $1,406,000 in 2007.  The primary reasons for the change of $3,333,000 in 2008 over 2007 were as follows:

· Interest and fees on loans totaled $13,637,000 in 2008 compared with $15,255,000 in 2007, a decrease of $1,618,000, or 10.6%.  Other interest income also declined $415,000 in 2008 over 2007, or 19.6%.

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· Our income from average interest-earning assets decreased 11.7%.

· Our total interest expense decreased $1,201,000, or 12.5%.

· Net interest income declined by $832,000 in 2008 from 2007.

· Noninterest income grew $390,000, or 34.9% in 2008 over 2007.

· Noninterest expenses grew $1,236,000, or 19.3%.

Interest Income.  Interest income was $15,335,000 and $17,368,000 in 2008 and 2007, respectively.  The decrease of $2.0 million resulted from a decrease in the yield on interest-earning assets in 2008, which was partially offset by growth in our most significant interest-earning asset, loans, which grew 8.6% from average levels in 2007 to 2008.  Average loans accounted for 83.9% of our average interest-earning assets in 2008 versus 80.4% in 2007.  Our overall yield on interest-earning assets of 6.49% was down from the 2007 level of 7.60% due to a lower interest rate environment throughout 2008.  Our overall yield on interest-earning assets in 2008 would have been 7 basis points higher, or 6.56%, if not for approximately $176,000 in income earned but not collected on nonaccrual loans.

Interest Expense.  Interest expense was $8,390,000 and $9,591,000 in 2008 and 2007, respectively.  As a result of the lower interest rate environment during 2008 which was partially offset by our growth in average interest-bearing liabilities of $13.9 million, or 7.0%, during this period, interest expense decreased 12.5%.  Our cost of funds dropped to 3.94% in 2008 compared with 4.82% in 2007.  Substantially all of the decrease in interest expense was attributable to a decrease in rates, which was partially offset by an increase in average certificates of deposit of $17.3 million, or 13.4%.

Net Interest Income.  Net interest income (before provision for loan losses) was $6,945,000 and $7,777,000 for 2008 and 2007, respectively, a decrease of 10.7% from 2007 to 2008.  The average balances, interest income and expense, and the average rates earned and paid for assets and liabilities are found in the tables that follow.

Our net interest margin was lower (3.03% in 2008 compared with 3.49% in 2007), which reflects the smaller decrease in our cost of funds (88 basis points) versus the decrease in our yield on interest-earning assets (111 basis points).  The decrease in net interest income of $832,000 was impacted by the declining rate environment, while the net interest margin was most impacted by the increase in certificates of deposit of 13.4%.  Certificates of deposit account for 76.5% of all interest-bearing deposits in 2008 as compared with 73.5% in 2007.

Provision for Loan Losses.  A provision for loan losses of $4,424,000 was recorded in 2008, reflecting our assessment of the needed level of the allowance for loan losses.  This assessment is based on management’s evaluation of probable loan losses and considers the overall quality of the loan portfolio.  The increase in the provision for loan losses in 2008 versus the 2007 level of $629,000 was due to unfavorable trends in most measures of loan portfolio quality, including the growth in impaired and nonaccrual loans and other nonperforming assets, which increased $4.2 million in 2008, or 65.9%.  Other real estate owned of $3.4 million at December 31, 2008, accounted for 81.1% of the increase.  Included in other real estate owned is a condominium development at Jacksonville Beach with 9 units remaining at December 31, 2008.  Of the original 14 units acquired in foreclosure in the first quarter of 2008, 5 units sold in the remainder of 2008, leaving a carrying value of $2.0 million at December 31, 2008.  In the first quarter of 2009, 2 additional units have sold for net proceeds in excess of the individual carrying value of the units sold.  Net charge-offs in 2008 were $2,594,000 as compared with $59,000 in 2007, an increase of $2,535,000.

Noninterest Income.  Noninterest income increased $390,000, or 34.9%, to $1,509,000 in 2008 from $1,119,000 in 2007 primarily as a result of gains on the sale of securities of $346,000 in the fourth quarter of 2008.

Noninterest Expenses.  Total noninterest expenses increased to $7,649,000 in 2008 compared to $6,413,000 for 2007, an increase of $1,236,000, or 19.3%.  The more significant increases during 2008 over 2007 follow:

· Expenses related to other real estate owned totaled $807,000 in 2008 versus $-0- in 2007, as a result of losses and ongoing expenses on properties that Oceanside obtained title in 2008.

· Professional, legal, and audit fees were $459,000 in 2008 versus $264,000 in 2007, an increase of $195,000, or 73.9%, as a result of increased costs of corporate governance and regulatory compliance matters.

· Pension expense totaled $294,000 in 2008, an increase of 63.3% from 2007.  This increase of $114,000 was more than offset by the net increase in the cash surrender value of the life insurance policies, which totaled $206,000.

· Regulatory assessments increased by $60,000, or 35.5%, from 2007 to 2008 due to increased cost of maintaining the FDIC insurance fund.

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Provision for Income Taxes.  The income tax benefit was $1,692,000 for 2008, an effective rate of 46.8%.  This compares with an effective rate of 24.2% for 2007.  The effective tax rates in 2008 and 2007 differ from the federal and state statutory rates principally due to nontaxable investment income.  The growth of tax-exempt income in 2008 over 2007 of 13.1%, compared with the overall decline in taxable interest, which contributed to the swing in the effective tax rate.

COMPARISON OF YEARS ENDED DECEMBER 31, 2007 AND 2006

Highlights.  As of December 31, 2007, we had grown to approximately $261.4 million in total assets, $204.1 million in total loans, $217.5 million in deposits, and $18.9 million in stockholders’ equity.

Net income in 2007 was $1,406,000 versus $1,918,000 in 2006, a decrease of $512,000, or 26.7%.  The primary reasons for the change in net income in 2007 over 2006 were as follows:

· Interest and fees on loans totaled $15,255,000 in 2007 compared with $13,592,000 in 2006, an increase of $1,663,000, or 12.2%.

· Our income from average interest-earning assets grew 12.0%.

· Our total interest expense rose $2,007,000, or 26.5%.

· The increase in net interest expense exceeded the increase in interest income by $141,000, causing net interest income to decrease by 1.8%.

· Noninterest expenses grew $432,000, or 7.2%.

Interest Income.  Interest income was $17,368,000 and $15,502,000 in 2007 and 2006, respectively.  The increase of 12.0% was attributable to growth in our most significant interest-earning asset, loans, which grew 11.7% from average levels in 2006 to 2007.  Average loans accounted for 80.4% of our average interest-earning assets in 2007 versus 79.5% in 2006.  Our overall yield on interest-earning assets of 7.60% was relatively unchanged from the 2006 level of 7.44% due to a more stable interest rate environment throughout most of 2007.  Our overall yield on interest-earning assets in 2007 would have been 9 basis points higher, or 7.69%, if not for the increase in nonaccrual loans and approximately $216,000 in income earned but not collected on nonaccrual loans.

Interest Expense.  Interest expense was $9,591,000 and $7,584,000 in 2007 and 2006, respectively.  As a result of the increasing competition for deposits and other funding sources, and our growth in average interest-bearing liabilities of $23.9 million, or 13.6%, during this period, interest expense increased 26.5%.  Our cost of funds rose to 4.82% in 2007 compared with 4.34% in 2006.  Substantially all of the increase in interest expense was attributable to an increase in rates and volume of certificates of deposit.  Interest expense from average certificates of deposit increased 36.8% as compared with the total interest expense of all other average deposits of 31.5%.  Average certificates of deposit increased $25.8 million versus a decline in all average other interest bearing deposits of $668,000.

Net Interest Income.  Net interest income (before provision for loan losses) was $7,777,000 and $7,918,000 for 2007 and 2006, respectively, a decrease of 1.8% from 2006 to 2007, which was due to the increase in our cost of funds primarily caused by intense competition for funding.  The average balances, interest income and expense, and the average rates earned and paid for assets and liabilities are found in the tables that follow.

During 2007 and 2006, the average yield (on a tax-equivalent basis) on interest-earning assets was 7.60% and 7.44%, respectively, while the average cost of funds was 4.82% in 2007 and 4.34% in 2006.  Our net interest margin was lower (3.49% in 2007 compared with 3.84% in 2006), which reflects the faster growth in interest-bearing liabilities (13.6%) over interest-earning assets (10.5%) and cost of funds (48 basis points) versus yield on interest-earning assets (16 basis points).  The increase in interest income was due primarily to the increased volume of average loans and securities, while the increases to interest expense was a combination of increased cost of funds and changes in our volume of interest-bearing liabilities.

Provision for Loan Losses.  A provision for loan losses of $629,000 was recorded in 2007, reflecting our assessment of the needed level of the allowance for loan losses.  This assessment is based on management’s evaluation of probable loan losses and considers the overall quality of the loan portfolio.  The increase in the provision for loan losses in 2007 versus the 2006 level of $435,000 was due to unfavorable trends in most measures of loan portfolio quality, including the growth in impaired and nonaccrual loans and other nonperforming assets.  Net charge-offs in 2007 were $59,000 as compared with $147,000 in 2006, a decrease of $88,000.

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Noninterest Income.  Noninterest income increased $41,000, or 3.8%, to $1,119,000 in 2007 from $1,078,000 in 2006.  A summary of the more significant changes for 2007 compared with 2006 follows:

· Fees and service charges on deposit accounts grew by $36,000. or 6.0%, which reflects increases in fees implemented in late-2006.

· Mortgage banking fees decreased from $119,000 to $69,000, or 42.0%, reflecting the depressed residential real estate market.

· Income from bank-owned life insurance increased from $106,000 to $152,000, or 43.4%, reflecting earnings on additional bank-owned life insurance purchased of $2.0 million during 2007.

Noninterest Expenses.  Total noninterest expenses increased to $6,413,000 in 2007 compared to $5,981,000 for 2006, an increase of $432,000, or 7.2%.  The more significant increases during 2007 over 2006 follow:

· Salaries and employee benefits grew $101,000, or 3.4%, reflecting increases in salaries, bonuses, retirement plan contributions, and insurance costs.

· Processing and settlement fees increased by $185,000, or 29.6%, due to our growth in account activity and, price increases, which were partially offset by higher fees and service charges on deposit accounts.  Also, changes in capturing branch data for processing increased $58,000 in 2007 over 2006, which allowed us to achieve certain efficiencies and cost reductions in other operating expenses.

· The cost of regulatory assessments rose 156.1% from $66,000 to $169,000, due to FDIC deposit insurance fees of $119,000 in 2007 versus $21,000 in 2006.  The increase was due in part to the new assessment calculation implemented by the FDIC in 2007.

Provision for Income Taxes.  The income tax provision was $448,000 for 2007, an effective rate of 24.2%.  This compares with an effective rate of 32.0% for 2006.  The effective tax rates in 2007 and 2006 differ from the federal and state statutory rates principally due to nontaxable investment income.  The growth of tax-exempt income in 2007 over 2006 of 82.3% greatly exceeded the growth in overall interest income of 12.0%, contributing to the decline in the effective tax rate.

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Rate/Volume Analysis (dollars in thousands):

	Years Ended December 31,
	2008								2007								2006
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/ Rate
Interest-earning assets:
Loans (1)	$	203,675		$	13,637		6.70	%	$	187,544		$	15,255		8.13	%	$	167,883		$	13,592		8.10	%
Securities and deposits (2)		36,995			1,663		5.59			41,696			1,886		5.38			37,278			1,605		4.83
Other interest-earning assets (3)		1,978			35		1.77			4,099			227		5.54			5,920			305		5.15
Total interest-earning assets (2)		242,648			15,335		6.49	%		233,339			17,368		7.60	%		211,081			15,502		7.44	%
Noninterest-earning assets		17,381								14,335								14,510
Total assets	$	260,029							$	247,674							$	225,591
Interest-bearing liabilities:
Demand deposits	$	42,108			996		2.37	%	$	42,858			1,683		3.93	%	$	41,983			1,452		3.46	%
Savings		2,988			33		1.10			3,751			56		1.49			5,294			68		1.28
Certificates of deposit		146,595			6,741		4.60			129,313			6,726		5.20			103,485			4,915		4.75
Other borrowings		21,046			620		2.95			22,888			1,126		4.92			24,186			1,149		4.75
Total interest-bearing liabilities		212,737			8,390		3.94	%		198,810			9,591		4.82	%		174,948			7,584		4.34	%
Noninterest-bearing liabilities		28,718								30,778								34,601
Stockholders’ equity		18,574								18,086								16,042
Total liabilities and stockholders’ equity	$	260,029							$	247,674							$	225,591
Net interest income (before provision for loan losses)				$	6,945							$	7,777							$	7,918
Interest-rate spread (4)							2.55	%							2.78	%							3.10	%
Net interest margin (2) (5)							3.03	%							3.49	%							3.84	%
Ratio of average interest-earning assets to average interest-bearing liabilities		114.06	%							117.37	%							120.65	%

(1) Average loan balances include nonaccrual loans, which averaged (in thousands) $5,130, $5,853, and $79 in 2008, 2007, and 2006, respectively.  Average loans are net of deferred fees.  Loan fees (in thousands) were $416, $536, and $600 in 2008, 2007, and 2006, respectively.  Loan yields have been reported in total since a substantial portion of loans are secured by real estate.

(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6%.  Includes interest-earning deposits.

(3) Includes federal funds sold.

(4) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net interest margin is net interest income divided by average interest-earning assets.

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Rate/Volume Analysis (dollars in thousands):

	Year Ended December 31,
	2008 vs. 2007
	Increase (Decrease) Due to
	Rate			Volume			Rate/ Volume			Total
Interest-earning assets:
Loans (1)	$	(2,698	)	$	1,312		$	(232	)	$	(1,618	)
Securities and other deposits		(12	)		(213	)		2			(223	)
Other interest-earning assets (2)		(154	)		(117	)		79			(192	)
Total interest-earning assets		(2,864	)		982			(151	)		(2,033	)
Interest-bearing liabilities:
Demand deposits		(669	)		(29	)		11			(687	)
Savings		(15	)		(11	)		3			(23	)
Certificates of deposit		(780	)		899			(104	)		15
Other borrowings		(452	)		(91	)		37			(506	)
Total interest-bearing liabilities		(1,916	)		768			(53	)		(1,201	)
Net interest income	$	(948	)	$	214		$	(98	)	$	(832	)
	Year Ended December 31,
	2007 vs. 2006
	Increase (Decrease) Due to
	Rate			Volume			Rate/ Volume			Total
Interest-earning assets:
Loans (1)	$	64		$	1,592		$	7		$	1,663
Securities and other deposits		81			190			10			281
Other interest-earning assets (2)		23			(94	)		(7	)		(78	)
Total interest-earning assets		168			1,688			10			1,866
Interest-bearing liabilities:
Demand deposits		197			30			4			231
Savings		11			(20	)		(3	)		(12	)
Certificates of deposit		468			1,227			117			1,812
Other borrowings		41			(62	)		(3	)		(24	)
Total interest-bearing liabilities		717			1,175			115			2,007
Net interest income	$	(549	)	$	513		$	(105	)	$	(141	)

(1) Average loan balances include nonaccrual loans.

(2) Includes federal funds sold.

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Weighted Average Yield or Rate:

	For the Years Ended December 31,
	2008			2007			2006
Interest-earning assets:
Loans, net		6.70	%		8.13	%		8.10	%
Investment securities		5.59			5.38			4.83
Other interest-earning assets		1.77			5.54			5.15
All interest-earning assets		6.49			7.60			7.44
Interest-bearing liabilities:
NOW deposits		0.70			1.31			1.09
Money market deposits		2.77			4.22			3.84
Savings		1.10			1.49			1.28
Certificates of deposit		4.60			5.20			4.75
Other borrowings		2.95			4.92			4.75
All interest-bearing liabilities		3.94			4.82			4.34
Interest-rate spread		2.55			2.78			3.10
Net interest margin		3.03			3.49			3.84

Change in Mix of Interest-Earning Assets and Interest-Bearing Deposits and Other Borrowings (dollars in thousands):

	At December 31,
	2008					2007					2006
	Average Balance		Percentto Total			Average Balance		Percent to Total			Average Balance		Percent to Total
Interest-earning assets:
Loans, net	$	203,675		83.9	%	$	187,544		80.4	%	$	167,883		79.5	%
Investment securities		36,995		15.3	%		41,696		17.9	%		37,278		17.7	%
Other		1,978		0.8	%		4,099		1.7	%		5,920		2.8	%
Total interest-earning assets	$	242,648		100.0	%	$	233,339		100.0	%	$	211,081		100.0	%
Interest-bearing deposits:
Demand deposits	$	42,108		17.5	%	$	42,858		18.8	%	$	41,983		20.2	%
Savings		2,988		1.2	%		3,751		1.7	%		5,294		2.6	%
Certificates of deposit		146,595		61.0	%		129,313		56.7	%		103,485		49.7	%
Total interest-bearing deposits		191,691		79.7	%		175,922		77.2	%		150,762		72.5	%
Noninterest-bearing deposits		27,504		11.5	%		29,335		12.9	%		33,177		15.9	%
Total deposits		219,195		91.2	%		205,257		90.1	%		183,939		88.4	%
Other borrowings		21,046		8.8	%		22,888		9.9	%		24,186		11.6	%
Total deposits and other borrowings	$	240,241		100.0	%	$	228,145		100.0	%	$	208,125		100.0	%

LOAN PORTFOLIO

Average loans receivable were $203,675,000 for the year 2008 as compared to $187,544,000 for 2007, an increase of 8.6%.  The year-to-year average increase in 2007 over 2006 was 11.7%.  Management believes the growth in loans was directly attributable to the growth in our branch network, community acceptance, and the reputations of our lending team despite a significant downturn in economic conditions in our market area during 2008.  The following provides an analysis of our loan distribution at the end of 2004 - 2008.  Loans that are secured by real estate include residential and nonresidential mortgages and home equity loans to individuals.

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Loan Portfolio (dollars in thousands):

	At December 31,
	2008			%			2007			%			2006			%			2005			%			2004			%
Real estate
Construction, land development, and other land	$	39,135			19	%	$	53,197			25	%	$	51,598			29	%	$	37,905			25	%	$	27,246			21	%
1-4 family residential		57,814			28	%		45,708			23	%		38,018			22	%		31,997			21	%		19,283			15	%
Multifamily residential		4,481			2	%		1,784			1	%		2,489			1	%		3,051			2	%		2,513			2	%
Commercial		88,762			43	%		86,785			42	%		68,588			39	%		62,612			41	%		60,869			47	%
Total real estate		190,192			92	%		187,474			91	%		160,693			91	%		135,565			89	%		109,911			85	%
Commercial		13,314			6	%		11,485			6	%		11,214			6	%		11,901			8	%		13,817			11	%
Consumer and other loans		3,548			2	%		5,138			3	%		5,828			3	%		5,400			3	%		6,147			4	%
Total loans		207,054			100	%		204,097			100	%		177,735			100	%		152,866			100	%		129,875			100	%
Less:
Less, deferred fees		(25	)					(37	)					(27	)					(63	)					(74	)
Less, allowance for loan losses		(3,999	)					(2,169	)					(1,599	)											(1,296	)
																				(1,552	)
	$	203,030					$	201,891					$	176,109					$	151,251					$	128,505

The following tables show the maturity data for loans receivable.

Contractual Loan Maturities at December 31, 2008 (dollars in thousands):

	1 Year or Less		1 Through 5 Years		After 5 Years		Total
Real estate
Construction, land development, and other land	$	27,907	$	11,017	$	211	$	39,135
1-4 family residential		37,050		12,971		7,793		57,814
Multifamily residential		3,985		496		-		4,481
Commercial		15,402		65,436		7,924		88,762
		84,344		89,920		15,928		190,192
Commercial		8,847		4,058		409		13,314
Consumer and other loans		903		2,263		382		3,548
Total loan portfolio	$	94,094	$	96,241	$	16,719	$	207,054
Loans with maturities over one year:
Fixed rate							$	33,298
Variable rate								79,662
Total maturities greater than one year							$	112,960

Loan Maturities or Next Repricing Date at December 31, 2008, excluding nonaccrual loans (dollars in thousands):

Three months or less	$	72,617
Over three months through twelve months		15,999
Over one year through three years		64,319
Over three through five years		31,922
Over five years		16,719
	$	201,576

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Loans Originated and Repaid (dollars in thousands):

	Years Ended December 31,
	2008			2007			2006			2005			2004
Originations:
Real estate loans
Construction, land development, and other land	$	8,052		$	19,007		$	39,551		$	33,561		$	16,911
1-4 family residential		14,563			13,262			15,744			12,518			8,689
Multifamily residential		-			-			-			-			2,304
Commercial		2,946			18,632			17,548			13,180			16,776
		25,561			50,901			72,843			59,259			44,680
Commercial		2,971			2,678			4,452			4,364			11,360
Consumer and other loans		835			2,047			2,807			2,263			3,390
Total		29,367			55,626			80,102			65,886			59,430
Principal reductions		(26,410	)		(29,264	)		(55,233	)		(42,895	)		(29,114	)
Increase in total loans	$	2,957		$	26,362		$	24,869		$	22,991		$	30,316

CLASSIFICATION OF ASSETS AND NONACCRUAL OR IMPAIRED LOANS

Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding.  Management’s policy is to discontinue the accrual of interest income and classify a loan as nonaccrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized, or when in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation.  Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent payments received are applied to the outstanding principal balance.  Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection.  Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain.

Real estate acquired as a result of foreclosure, or by deed in lieu of foreclosure, is classified as other real estate owned.  Other real estate owned is recorded at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at the time the loan is transferred to other real estate owned.  Further allowances for losses in other real estate owned are recorded at the time management believes additional deterioration in value has occurred.  Gains or losses on the sale of other real estate owned are recognized in the period closed.  However, gains on the sale of units in a real estate development project may be deferred until management is reasonably certain that its investment in the remaining units will not result in losses.  In 2008, Oceanside sold 5 units of a condominium development project with net proceeds exceeding the current carrying value of those units by approximately $90,000.  No gain was recorded on the sale of these units during 2008.  During 2008, Oceanside reduced its carrying value on this project and other real estate owned with a charge to earnings of $315,000, which has been included in noninterest expenses.

Management has adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”), which considers a loan to be impaired if it is probable that all amounts due under the contractual terms of the loan agreement will not be collected.  If a loan is considered impaired, its value generally should be measured based on the present value of expected cash flows discounted at the loan’s effective interest rate.  As a practical expedient, however, the loan’s value may be based on:

· the loan’s market price; or

· the discounted fair value of the loan’s collateral, less estimated costs to sell, if the collateral is expected to be the sole source of repayment.

If the value of the loan is less than the recorded investment in the loan, a loss should be recognized by recording a valuation allowance and a corresponding increase to the provision for loan losses.

Situations may occur where:

· we receive physical possession of a debtor’s assets regardless of whether formal foreclosure proceedings have been initiated or completed; or

· the debtor has effectively surrendered control of the underlying collateral in contemplation of foreclosure.

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These situations are referred to as “in-substance foreclosures.”  SFAS No. 114 recognizes the practical problems of accounting for the operation of an asset the creditor does not possess, and states that a loan for which foreclosure is probable should continue to be accounted for as a loan.

At December 31, 2008, 2007, and 2006, loans past due for 30 days or more (but less than 89 days) totaled $3,340,000, $280,000, and $197,000, respectively.  At December 31, 2008, one loan of $1,656,000 was past due more than 90 days, but was not considered to be impaired and interest was still being accrued on this loan.  At December 31, 2008, there was a total of $5,459,000 of impaired and nonaccrual loans.

Management maintains a list of monitored loans risk-rated substandard or lower (referred to as “classified loans”). At December 31, 2008, management had fifty classified loans totaling approximately $28.5 million, as compared with twenty-eight classified loans totaling $8.0 million at December 31, 2007, and fifteen classified loans totaling $4.5 million at December 31, 2006.  At December 31, 2008, ten loan relationships comprise 78% of the total classified loans.

Many of the loans risk-rated substandard are currently performing with no expectation that we will suffer any loss; however, we monitor these loans because many of them are collateral-dependent and the current status of the borrower’s liquidity and cash flow have not been confirmed.  Because some of these loans exhibit well-defined credit weaknesses, we may incur losses if the underlying collateral declines in value beyond our expectations or the borrower’s financial condition deteriorates and payments are not made as agreed.

Nonperforming Assets (dollars in thousands)

	At December 31,
	2008		2007		2006		2005		2004
Nonperforming loans
Nonaccrual (and impaired) loans	$	5,459	$	6,222	$	53	$	202	$	90
Loans past due 90 days still accruing		1,656		164		-		-		-
Total nonperforming loans	$	7,115	$	6,386	$	53	$	202	$	90
Other nonperforming assets
Other real estate owned	$	3,421	$	-	$	-	$	-	$	-
Repossessed assets		75		9		13		-		-
	$	3,496	$	9	$	13	$	-	$	-
Total nonperforming assets	$	10,611	$	6,395	$	66	$	202	$	90

Highly leveraged transactions generally include loans and commitments made in connection with recapitalizations, acquisitions, and leveraged buyouts, and result in the borrower’s debt-to-total assets ratio exceeding 75%.  At December 31, 2008, 2007, 2006, 2005, and 2004, there were no loans qualified as highly leveraged transactions.

Loans restructured and in compliance with modified terms are commonly referred to as “troubled debt restructurings.”  A restructuring of debt constitutes a Troubled Debt Restructuring (“TDR”) if a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor it would not otherwise consider. A summary of loans we classified TDR at December 31 follows (dollars in thousands):

	2008		2007		2006		2005		2004
Loans restructured and in compliance with modified terms	$	3,566	$	4,491	$	-	$	-	$	-
Loans restructured and past due 30-89 days		53		-		-		-		-
Loans restructured and in nonaccrual status		4,386		782		-		-		-
	$	8,005	$	5,273	$	-	$	-	$	-

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ALLOWANCE FOR LOAN LOSSES

The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management.  These evaluations consider several factors including but not limited to, current economic conditions, loan portfolio composition, prior credit loss experience, trends in portfolio volume, and management’s estimation of future potential losses.  Management believes that the allowance for loan losses is adequate. The following is an analysis of the allowance for loan losses for 2004 - 2008.

Allowance for Loan Losses (dollars in thousands):

	Years Ended December 31,
	2008			2007			2006			2005			2004
Balance, at beginning of period	$	2,169		$	1,599		$	1,552		$	1,296		$	1,220
Provision for loan losses		4,424			629			194			334			362
Loans charged off
Real estate		(1,979	)		-			-			(36	)		-
Commercial		(501	)		(49	)		(169	)		-			-
Consumer and other loans		(135	)		(26	)		(12	)		(50	)		(294	)
		(2,615	)		(75	)		(181	)		(86	)		(294	)
Recoveries
Real estate		-			-			-			1			-
Commercial		19			11			31			-			-
Consumer and other loans		2			5			3			7			8
		21			16			34			8			8
Net charge-offs		(2,594	)		(59	)		(147	)		(78	)		(286	)
Balance, at end of period	$	3,999		$	2,169		$	1,599		$	1,552		$	1,296
Net charge-offs to average loans		1.27	%		0.03	%		0.09	%		0.06	%		0.25	%

The specific allocations of the allowance for loan losses are based on management’s evaluation of the risks inherent in the specific portfolios for the dates indicated.  Amounts in a particular category may be used to absorb losses if another category allocation proves to be inadequate.

Allocation of Allowance for Loan Losses (dollars in thousands):

	At December 31,
	2008					2007					2006					2005					2004
	Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans
Real estate loans	$	1,254		92	%	$	511		92	%	$	15		91	%	$	134		89	%	$	234		85	%
Commercial loans		435		6			205		6			120		6			219		8			77		11
Consumer and other loans		28		2			12		2			23		3			37		3			39		4
Unallocated		2,282		-			1,441		-			1,441		-			1,162		-			946		-
	$	3,999		100	%	$	2,169		100	%	$	1,599		100	%	$	1,552		100	%	$	1,296		100	%

SECURITIES

Financial institutions classify their investment securities as either “held-to-maturity” or “available-for-sale.” Securities classified as held-to-maturity are carried at amortized or accreted cost and include those securities that a bank has the intent and ability to hold to maturity.  Securities classified as available-for-sale, which are those securities that a bank intends to hold for an indefinite amount of time, but not necessarily to maturity, are carried at fair value with the unrealized holding gains or losses, net of taxes, reported as a component of the stockholders’ equity on a bank’s balance sheet.  The following tables set forth the carrying amount of securities at the dates indicated.

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Carrying Value of Investment Securities (dollars in thousands):

	At December 31,
	2008		2007		2006
Securities available-for-sale:
U. S. Government-sponsored agency	$	2,699	$	3,019	$	1,007
Mortgage-backed securities		12,171		22,519		28,798
		14,870		25,538		29,805
Securities held-to-maturity:
Tax-exempt state, county, and municipal bonds		15,536		15,762		10,032
Balance, end of year	$	30,406	$	41,300	$	39,837

Investment Securities at Amortized Cost (dollars in thousands):

	At December 31,
	2008		2007		2006
Securities available-for-sale:
U. S. Government-sponsored agency	$	2,700	$	2,983	$	1,000
Mortgage-backed securities		12,171		22,691		29,259
		14,871		25,674		30,259
Securities held-to-maturity:
Tax-exempt state, county, and municipal bonds		15,536		15,762		10,032
Balance, end of year	$	30,407	$	41,436	$	40,291

The following tables set forth the maturities (excluding principal paydowns on mortgage-backed securities) and the weighted average yields of securities by contractual maturities at December 31, 2008, 2007, and 2006.

Analysis of Investment Securities Available-for-Sale (dollars in thousands and average yield on a tax-equivalent basis):

	Due in one					Due in Five					Due in Five					Due in Ten
	year or less					to Five Years					to Ten Years					Years or More					Total
			Average					Average					Average					Average					Average
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At December 31, 2008:
U.S. Government-sponsored agency	$	-		-	%	$	-		-	%	$	2,123		4.01	%	$	576		4.26	%	$	2,699		4.06	%
Mortgage-backed securities		639		3.77	%		1,075		3.79	%		973		4.93	%		9,484		4.37	%		12,171		4.33	%
	$	639		3.77	%	$	1,075		3.79	%	$	3,096		4.93	%	$	10,060		4.37	%	$	14,870		4.42	%
At December 31, 2007:
U.S. Government-sponsored agency	$	-		-	%	$	-		-	%	$	-		-	%	$	3,019		5.64	%	$	3,019		5.64	%
Mortgage-backed securities		2,803		4.08	%		2,356		3.85	%		10,594		4.53	%		6,766		4.90	%		22,519		4.52	%
	$	2,803		4.08	%	$	2,356		3.85	%	$	10,594		4.53	%	$	9,785		4.90	%	$	25,538		4.56	%
At December 31, 2006:
U.S. Government-sponsored agency	$	-		-	%	$	-		-	%	$	-		-	%	$	1,007		6.00	%	$	1,007		6.00	%
Mortgage-backed securities		293		5.26	%		6,280		3.91	%		12,125		4.61	%		10,100		4.56	%		28,798		4.45	%
	$	293		5.26	%	$	6,280		3.91	%	$	12,125		4.61	%	$	11,107		4.69	%	$	29,805		4.50	%

Analysis of Investment Securities Held-to-Maturity (dollars in thousands and average yield on a tax-equivalent basis):

	Due in one					Due in One					Due in Five					Due in Ten
	year or less					to Five Years					to Ten Years					Years or More					Total
			Average					Average					Average					Average					Average
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At December 31, 2008:
Tax-exempt state, county, and municipal bonds	$	-		-	%	$	-		-	%	$	1,010		4.86	%	$	14,526		4.27	%	$	15,536		4.31	%
At December 31, 2007:
Tax-exempt state, county, and municipal bonds	$	-		-	%	$	-		-	%	$	1,057		4.77	%	$	14,705		3.97	%	$	15,762		4.02	%
At December 31, 2006:
Tax-exempt state, county, and municipal bonds	$	-		-	%	$	-		-	%	$	625		4.70	%	$	9,407		4.38	%	$	10,032		4.40	%

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At December 31, the weighted average life in years was as follows:

	2008		2007		2006
Securities available-for-sale:
U. S. Government-sponsored agency		2.6		14.0		14.7
Mortgage-backed securities		21.0		9.5		9.3
Total		17.7		14.1		10.1
Securities held-to-maturity:
Tax-exempt state, county, and municipal bonds		18.4		17.6		16.1

DEPOSITS

Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our assessment area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more), and retirement savings plans.

Maturity terms, service charges, and withdrawal penalties are established by management on a periodic basis. The determination of rates and terms is predicated on loan funding and liquidity requirements, rates paid by competitors, growth goals, and federal regulations.

The FDIC regulations limit the ability of certain insured depository institutions to accept, renew, or rollover deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institutions’ normal market area.  Under these regulations, “well-capitalized” depository institutions may accept, renew, or rollover deposits at such rates without restriction, “adequately capitalized” depository institutions may accept, renew or rollover deposits at such rates with a waiver from the FDIC (subject to certain restrictions on payments and rates), and “undercapitalized” depository institutions may not accept, renew or rollover deposits at such rates. The regulations contemplate that the definitions of “well-capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of applicable law.  See “Description of Business/Supervision and Regulation.”  As of December 31, 2008, Oceanside met the definition of a “well-capitalized” depository institution.

Our primary source of funds is deposit accounts that include both interest- and noninterest-bearing demand, savings, and time deposits under $100,000 (referred to as “core deposits”).  At December 31, 2008, 2007, and 2006, these core deposits accounted for approximately 78%, 73%, and 76%, respectively, of all deposits.  At December 31, 2008, time deposits under $100,000 accounted for approximately 50% of these core deposits as compared with money market deposits at 15% and noninterest-bearing demand deposits at 23%.  This compares with 2007 levels of 55%, 23%, and 17%, respectively, and with 2006 levels of 44%, 28%, and 22%, respectively.  At December 31, 2008, 2007, and 2006, jumbo certificates of deposit (time deposits $100,000 and greater) represented approximately 22%, 27%, and 24%, respectively, of total deposits.  At December 31, 2008, 2007, and 2006, time deposits outstanding in an individual amount of $100,000 or more totaled $51,771,000, $57,785,000, and $46,103,000, respectively.

Interest-bearing demand accounts, consisting of NOW and money market accounts, averaged $42,108,000 for the year ended 2008, $42,858,000 for the year ended 2007, and $41,983,000 for the year ended 2006, or approximately 19%, 21%, and 23% of average total deposits in 2008, 2007, and 2006, respectively.

- 30 - -

Distribution of Deposit Accounts by Type (dollars in thousands):

	At December 31,
	2008						2007						2006
	% of			% of			% of
	Amount			Deposits			Amount			Deposits			Amount		Deposits
Demand deposits	$	43,017			17.9	%	$	27,278			12.5	%	$	32,006		16.6	%
NOW deposits		20,208			8.4			4,440			2.1			3,970		2.1
Money market deposits		27,981			11.7			36,835			16.9			40,349		20.9
Savings deposits		2,892			1.2			2,800			1.3			5,347		2.8
Subtotal		94,098			39.2			71,353			32.8			81,672		42.4
Certificates of deposit:
1.00% - 1.99%		-			0.0			-			0.0			-		0.0
2.00% - 2.99%		6,250			2.6			-			0.0			90		0.1
3.00% - 3.99%		69,932			29.2			950			0.4			3,741		1.9
4.00% - 4.99%		42,947			17.9			40,953			18.8			40,915		21.2
5.00% - 5.99%		26,669			11.1			104,275			48.0			66,286		34.4
Less fees on brokered deposits		(52	)		0.0			(40	)		0.0			-		0.0
Total certificates of deposit (1)		145,746			60.8			146,138			67.2			111,032		57.6
Total deposits	$	239,844			100.0	%	$	217,491			100.0	%	$	192,704		100.0	%

(1) Includes retirement accounts (in thousands) totaling $4,047, $5,281, and $3,954, in 2008, 2007, and 2006, respectively, all of which were in the form of certificates of deposit.

Average Deposits and Average Rates (dollars in thousands):

	At December 31,
	2008					2007					2006
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
Demand, money market and NOW deposits	$	69,612		1.43	%	$	72,193		2.33	%	$	75,160		1.93	%
Savings deposits		2,988		1.10			3,751		1.49			5,294		1.28
Certificates of deposit		146,595		4.60			129,313		5.20			103,485		4.75
Total deposits	$	219,195		3.54	%	$	205,257		4.12	%	$	183,939		3.50	%

Time Deposits of $100,000 or more with remaining maturities of (dollars in thousands):

	December 31,
	2008		2007		2006
Due in three months or less	$	21,648	$	20,720	$	12,474
Over three through twelve months		21,122		22,686		16,878
Over twelve months through three years		8,501		11,561		10,565
Over three years		500		2,818		6,186
	$	51,771	$	57,785	$	46,103

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Certificates of Deposits by Rate and Maturity Date (dollars in thousands):

	Year Ending December 31,
	2009			2010			2011		2012			2013	+	Total
At December 31, 2008:
1.00% - 1.99%	$	-		$	-		$	-	$	-	$	-		$	-
2.00% - 2.99%		6,036			213			1		-		-			6,250
3.00% - 3.99%		51,461			17,772			476		-		223			69,932
4.00% - 4.99%		34,078			7,765			761		57		286			42,947
5.00% - 5.99%		16,316			6,192			3,749		412		-			26,669
Less fees on brokered deposits		(52	)		-			-		-		-			(52	)
Total certificates of deposit	$	107,839		$	31,942		$	4,987	$	469	$	509		$	145,746
	Year Ending December 31,
	2008			2009			2010		2011			2012	+	Total
At December 31, 2007:
1.00% - 1.99%	$	-		$	-		$	-	$	-	$	-		$	-
2.00% - 2.99%		-			-			-		-		-			-
3.00% - 3.99%		446			504			-		-		-			950
4.00% - 4.99%		30,952			8,762			1,172		11		56			40,953
5.00% - 5.99%		77,138			15,690			6,662		4,377		408			104,275
Less fees on brokered deposits		(23	)		(17	)		-		-		-			(40	)
Total certificates of deposit	$	108,513		$	24,939		$	7,834	$	4,388	$	464		$	146,138
	Year Ending December 31,
	2007			2008			2009		2010			2011	+	Total
At December 31, 2006:
1.00% - 1.99%	$	-		$	-		$	-	$	-	$	-		$	-
2.00% - 2.99%		58			32			-		-		-			90
3.00% - 3.99%		2,707			523			505		6		-			3,741
4.00% - 4.99%		30,814			7,365			1,752		968		16			40,915
5.00% - 5.99%		33,802			14,545			7,721		4,502		5,716			66,286
Total certificates of deposit	$	67,381		$	22,465		$	9,978	$	5,476	$	5,732		$	111,032

SHORT-TERM AND LONG-TERM DEBT

Other Borrowings (dollars in thousands):

	December 31,
	2008		2007		2006
Customer repurchase agreements	$	-	$	13,816	$	26,921
Federal funds purchased		-		4,372		-
FHLB of Atlanta advances		6,300		2,300		2,300
Junior subordinated debentures		3,093		3,093		3,093
	$	9,393	$	23,581	$	32,314

Customer Repurchase Agreements.  Oceanside has sold securities under an agreement to repurchase with during 2008, which effectively collateralizes overnight borrowings.  At December 31, 2008, no borrowings were outstanding and no securities were sold under agreements to repurchase.

FHLB of Atlanta Advances.  Oceanside has obtained advances from FHLB totaling $6,300,000 collateralized by Oceanside’s FHLB capital stock in the amount of $751,000 and a blanket lien on eligible qualifying real estate mortgage loans totaling approximately $41.4 million.  The advances mature in 2010, and have fixed interest rates ranging from 1.91% to 4.54%.  Atlantic has $18.4 million lendable collateral value for future FHLB advances.

Junior Subordinated Debentures.  On September 15, 2005, Atlantic issued $3,093,000 of fixed-rate junior subordinated debentures (the “debt securities”) to Atlantic BancGroup Statutory Trust I, a statutory trust created under the laws of the State of Delaware.  These debt securities are subordinated to effectively all borrowings of Atlantic and are due and payable in thirty years.

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Other Short-term Borrowings.  Oceanside purchases federal funds for liquidity needs during the year.  At December 31, 2008, 2007, and 2006, federal fund purchases were $-0-, $4,372,000, and $-0-, respectively.

Selected Data for Other Borrowings (dollars in thousands):

	2008			2007			2006
Interest rate at end of period
Customer repurchase agreements (federal funds rate less 25 basis points)		-	%		4.000	%		5.250	%
FHLB of Atlanta advances (fixed rate convertible debt)		4.540	%		4.540	%		4.540	%
FHLB of Atlanta advances (fixed rate fixed debt)		1.990	%		-	%		-	%
Junior subordinated debentures (fixed rate for five years)		5.886	%		5.886	%		5.886	%
Other short-term borrowings (federal funds purchased)		-	%		4.600	%		-	%
Average balances during the period
Customer repurchase agreements	$	10,960		$	15,054		$	18,098
FHLB of Atlanta advances	$	4,545		$	2,300		$	2,300
Junior subordinated debentures	$	3,093		$	3,093		$	3,093
Other short-term borrowings (federal funds purchased)	$	2,445		$	2,441		$	695
Weighted average interest rate
Customer repurchase agreements		1.88	%		4.81	%		4.59	%
FHLB of Atlanta advances		3.30	%		4.45	%		4.52	%
Junior subordinated debentures		5.89	%		5.89	%		5.89	%
Other short-term borrowings (federal funds purchased)		3.27	%		4.64	%		3.96	%
Short-term borrowings (customer repurchase agreements and federal funds purchased)
Balance at end of period	$	-		$	18,188		$	26,921
Weighted average interest rate at end of period		-	%		4.00	%		5.25	%
Maximum amount outstanding at month end during the period	$	22,159		$	26,184		$	29,310
Average amount outstanding during the period	$	13,405		$	17,495		$	18,793
Weighted average interest rate during the period		2.13	%		4.78	%		4.58	%

Interest Expense for Other Borrowings (dollars in thousands):

	December 31,
	2008		2007		2006
Customer repurchase agreements	$	206	$	724	$	830
FHLB of Atlanta advances		149		104		104
Junior subordinated debentures		185		185		184
Other short-term borrowings (federal funds purchased)		80		113		31
	$	620	$	1,126	$	1,149

LIQUIDITY

Our principal source of funds comes from Oceanside’s operations, including net increases in deposits, principal and interest payments on loans, and proceeds from sales and maturities of investment securities.  We use our capital resources principally to fund existing and continuing loan commitments, purchase investment securities, and meet other contractual obligations.

Liquidity management involves meeting the funds flow requirements of customers who may either be depositors wanting to withdraw funds, or borrowers needing assurance that sufficient funds will be available to meet their credit needs.  Liquid assets consist of vault cash, securities, and principal paydowns of other interest-earning assets.  Our principal sources of asset liquidity are federal funds sold and the securities portfolio, including principal paydowns from mortgage-backed securities.  In 2008, 2007, and 2006, principal paydowns from mortgage-backed securities totaled $7,163,000, $6,601,000, and $7,389,000, respectively.

Other sources of funds are principal paydowns and maturities in the loan portfolio.  The contractual loan maturity table herein illustrates the maturities of loans receivable at December 31, 2008.

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We also have sources of liability liquidity that include core deposits as previously discussed and access to borrowed funds including overnight federal funds, lines of credit with the FHLB and Federal Reserve, and customer repurchase agreements.  At December 31, 2008, we had approximately $42.8 million available from these sources.  As mentioned elsewhere, increased competition for all funding sources has reduced our liquidity.

At December 31, 2008, 2007, and 2006, our liquidity ratio of liquid assets to transaction deposit accounts was 20.5%, 10.9%, and 23.6%, respectively.  Management believes that our liquidity is sufficient to meet our anticipated needs, and we also have the ability to supplement our liquidity by pursuing additional brokered deposits as have other community banks.  At December 31, 2008, brokered deposits totaled $26,343,000, which represented 11.0% of total deposits.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Contractual Commitments (dollars in thousands)

	December 31,
	2008		2007		2006
Commitments to originate loans
Residential real estate	$	4,983	$	8,796	$	10,550
Commercial real estate, construction, and land development secured by real estate		2,186		12,099		15,691
Other unused commitments		3,311		7,462		5,221
Total commitments to originate loans		10,480		28,357		31,462
Financial standby letters of credit		1,701		2,084		1,712
Total contractual commitments	$	12,181	$	30,441	$	33,174

Contractual Obligations (dollars in thousands)

	1 Year		Years 2		Years 4		After
	or Less		and 3		and 5		5 Years		Total
Deposits without a stated maturity	$	94,098	$	-	$	-	$	-	$	94,098
Certificates of deposit and other time deposits		107,841		36,928		977		-		145,746
Federal Home Loan Bank advances		-		6,300		-		-		6,300
Junior subordinated debentures		-		-		-		3,093		3,093
Operating leases		325		500		172		956		1,953
Total contractual obligations	$	202,264	$	43,728	$	1,149	$	4,049	$	251,190

Management believes that we have adequate resources to fund all our commitments and contractual obligations.  If so desired, we can adjust the rates and terms on certificates of deposit and other deposit accounts to attract deposits and fund additional commitments.  Other alternative funding sources include additional FHLB and Federal Reserve borrowings and brokered deposits, if necessary.

CAPITAL RESOURCES

We place a significant emphasis on maintaining a strong capital base.  The capital resources consist of two major components of regulatory capital, stockholders’ equity and the allowance for loan losses.  Current capital guidelines issued by federal regulatory authorities require a company to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to a company’s on- and off-balance sheet items.

Risk-based capital guidelines re-define the components of capital, categorize assets into risk classes, and include certain off-balance sheet items in the calculation of capital requirements.  The components of risk-based capital are segregated as Tier 1 and total risk-based capital.  Tier 1 capital is composed of total stockholders’ equity reduced by goodwill and other intangible assets. Total risk-based capital includes Tier 1 capital plus the allowance for loan losses and any qualifying debt obligations.  Regulators also have adopted minimum requirements of 4% of Tier 1 capital and 8% of risk-adjusted assets in total capital.

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We are also subject to leverage capital requirements.  This requirement compares capital (using the definition of Tier 1 capital) to balance sheet assets and is intended to supplement the risk-based capital ratio in measuring capital adequacy.  The guidelines set a minimum leverage ratio of 3% for depository institutions that are highly rated in terms of safety and soundness, and which are not experiencing or anticipating any significant growth.  Other depository institutions are expected to maintain capital levels of at least 1% or 2% above the minimum.  Our actual capital amounts, capital ratios, and leverage ratios at December 31, 2008, 2007, and 2006 (Bank Only), are reflected in the table below.

Capital Ratios (dollars in thousands):

	Bank Only
	At December 31,
	2008			2007			2006
Tier 1 capital
Stockholder’s equity	$	19,899		$	21,831		$	20,278
Plus, qualifying trust preferred securities		-			-			-
Plus, unrealized losses on AFS securities		1			84			283
Less disallowed deferred taxes for risk-based capital only		(845	)		-			-
Less intangible assets		-			-			-
		19,055			21,915			20,561
Tier 2 capital
Allowable portion of allowance for loan losses and off-balance sheet commitments		2,665			2,200			1,599
Total risk-based capital	$	21,720		$	24,115		$	22,160
Total risk-weighted assets	$	211,883		$	234,940		$	202,463
Tier 1 risk-based capital ratio		8.99	%		9.33	%		10.16	%
Total risk-based capital ratio		10.25	%		10.26	%		10.95	%
Average total assets for leverage capital purposes	$	262,982		$	257,067		$	234,906
Tier 1 leverage ratio		7.25	%		8.53	%		8.75	%

Trust Preferred Securities.  On September 15, 2005, Atlantic entered into a transaction commonly referred to as trust preferred securities.  Subject to percentage limitations, the proceeds from the issuance of trust preferred securities are considered Tier 1 capital for regulatory purposes, which totaled $3.0 million (net of Atlantic’s investment in the unconsolidated subsidiary).  However, as a result of the issuance of FIN 46 and FIN 46R, the trust subsidiary is not consolidated in these financial statements, and therefore the proceeds received by Atlantic from the trust subsidiary is reported as junior subordinated debentures.  In 2005, the Federal Reserve Board ruled that, notwithstanding the deconsolidation of such trusts, junior subordinated debentures, such as those issued by Atlantic, may continue to constitute up to 25% of a bank holding company's Tier 1 capital, subject to certain new limitations, which will not become effective until March 31, 2009, and which, in any event, are not expected to affect the treatment of Atlantic's junior subordinated debentures as Tier 1 capital for regulatory purposes.

Capital Analysis:

	For the Year Ended December 31,
	2008			2007			2006
Average equity as a percentage of average assets		7.14	%		7.30	%		7.11	%
Equity to total assets at end of year		6.32			7.21			7.08
Return on average equity		-10.37			7.77			11.96
Return on average assets		-0.74			0.57			0.85
Noninterest expenses to average assets		2.94			2.59			2.65

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Stockholders’ equity is adjusted for the effect of unrealized appreciation or depreciation, net of tax, on securities classified as available-for-sale.  Stockholders’ equity decreased $1,924,000 in 2008 and increased $1,605,000 and $2,019,000 in 2007 and 2006, respectively, as follows (dollars in thousands):

	2008			2007			2006
Net income (loss)	$	(1,927	)	$	1,406		$	1,918
Change in unrealized gains (losses) on available-for-sale securities		83			199			101
Implementation of EITF 06-4 for indexed retirement plan		(80	)		-			-
	$	(1,924	)	$	1,605		$	2,019
Return on average equity		-10.37	%		7.77	%		11.96	%

The decrease in return on average equity in 2008 and 2007 is the result of the net loss in 2008 and lower earnings for 2007 due to higher cost of funds resulting from increased competition for deposits and the increased allowances for loan losses to reflect higher nonperforming loans and lower collateral values particularly in the real estate market in which we operate.

RELATED PARTY TRANSACTIONS

We have entered into transactions with our directors, executive officers, significant stockholders, and their affiliates (insiders).  Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.  The following table summarizes the significant end of period insider transactions (dollars in millions):

	2008		2007		2006
Loans	$	6.6	$	6.2	$	2.0
Unfunded loan commitments	$	0.6	$	1.9	$	1.6
Deposits and customer repurchase agreements	$	10.1	$	24.2	$	37.6

INTEREST RATE SENSITIVITY

Our operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, mature, or reprice in specified periods.

The principal objective of asset/liability management activities is to provide consistently higher levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating our funding needs.  We utilize an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present.  The traditional maturity “gap” analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is reviewed regularly by management.  A positive gap occurs when the amount of interest-sensitive assets exceeds interest-sensitive liabilities.  This position would contribute positively to net income in a rising interest rate environment.  Conversely, if the balance sheet has more liabilities repricing than assets, the balance sheet is liability sensitive or negatively gapped.  We continue to monitor sensitivity in order to avoid overexposure to changing interest rates.

Our operations do not subject us to foreign currency exchange or commodity price risk. Also, we do not use interest rate swaps, caps, or other hedging transactions. Our overall sensitivity to interest rate risk is low due to our non-complex balance sheet.  We have implemented several strategies to manage interest rate risk that include originating residential mortgages for third-party lenders, increasing the volume of variable rate commercial loans, requiring interest rate calls on commercial loans, and maintaining a short repricing maturity for a significant portion of our investment portfolio.

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The following table provides information about our financial instruments that are sensitive to changes in interest rates.  For securities, loans, and deposits, the table presents principal cash flows and related weighted average interest rates by maturity dates or repricing frequency. We have no market risk sensitive instruments entered into for trading purposes.

Interest Rate Sensitivity at December 31, 2008 (dollars in thousands):

	Under			3 to 12			Over
	3 Months			Months			1 - 5 Years			5 Years			Total
Federal funds sold	$	100		$	-		$	-		$	-		$	100
Interest-bearing deposits in other banks		154			-			-			-			154
Loans(1)		72,618			15,999			96,239			16,720			201,576
Securities(2)		-			639			1,075			28,692			30,406
Total rate-sensitive assets	$	72,872		$	16,638		$	97,314		$	45,412		$	232,236
Money market and NOW accounts(2)	$	27,981		$	-		$	-		$	20,208		$	48,189
Savings accounts (2)		-			-			-			2,892			2,892
Certificates of deposit (2)		44,021			63,818			37,907			-			145,746
Total rate-sensitive liabilities	$	72,002		$	63,818		$	37,907		$	23,100		$	196,827
Gap (repricing differences)	$	870		$	(47,180	)	$	59,407		$	22,312		$	35,409
Cumulative Gap	$	870		$	(46,310	)	$	13,097		$	35,409
Cumulative Gap/total assets		0.32	%		-17.28	%		4.89	%		13.21	%
Total assets													$	267,973

(1) In preparing the table above, adjustable-rate loans were included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the loans mature.  Fixed-rate loans were scheduled according to their contractual maturities.  Nonaccrual loans of $5,459 (net of $6 of deferred fees), or $5,453, were excluded (dollars in thousands).

(2) Excludes noninterest-bearing deposit accounts.  Money market deposits were regarded as maturing immediately, and other core deposits were assumed to mature in the “Over 5 Years” category.  All other time deposits were scheduled through the maturity or repricing dates.  Investments were scheduled through their contractual, repricing, or expected principal payment dates.  Certain mortgage-backed investments with varying maturities of three years or less were included in the “1-5 Years” category.

RECENT ACCOUNTING PRONOUNCEMENTS IMPACTING FUTURE PERIODS

There are currently no pronouncements issued or that are scheduled for implementation during 2009 that are expected to have any significant impact on our accounting policies.  For a discussion of recent accounting pronouncements, see the accompanying Notes to Consolidated Financial Statements shown in Item 8.

IMPACT OF INFLATION

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurements of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.  Unlike most industrial companies, substantially all of the assets and liabilities of Atlantic are monetary in nature.  As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.  As discussed previously, management seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Oceanside’s earnings are dependent, to a large degree, on its net interest income, which is the difference between interest income earned on all interest-earning assets, primarily loans and securities, and interest paid on all interest-bearing liabilities, primarily deposits.  Market risk is the risk of loss from adverse changes in market prices and interest rates.  Oceanside’s market risk arises primarily from inherent interest rate risk in its lending, investing, and deposit gathering activities.  Oceanside seeks to reduce its exposure to market risk through actively monitoring and managing its interest rate risk.  Management relies upon static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest-earning assets and interest-bearing liabilities which quantifies, to a large extent, the degree of market risk inherent in Oceanside’s balance sheet.  Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific interest-earning assets and interest-bearing liabilities to changes in those prevailing rates.  Simulation analysis consists of evaluating the impact on net interest income given changes from 200 basis points below the current prevailing rates to 200 basis points above the current prevailing rates.  Management makes certain assumptions as to the effect varying levels of interest rates have on certain interest-earning assets and interest-bearing liabilities, which consider both historical experience and consensus estimates of outside sources.

With respect to the primary interest-earning assets, loans and securities, certain features of individual types of loans and specific securities introduce uncertainty as to their expected performance at varying levels of interest rates.  In some cases, prepayment options exist whereby the borrower may elect to repay the obligation at any time prior to maturity.  These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing interest rates.  Management believes that assumptions used in its simulation analysis about the performance of financial instruments with such prepayment options are appropriate.  However, the actual performance of these financial instruments may differ from management’s estimates due to several factors, including the diversity and financial sophistication of the customer base, the general level of prevailing interest rates and the relationship to their historical levels, and general economic conditions.  The difference between those assumptions and actual results, if significant, could cause the actual results to differ from those indicated by the simulation analysis.

Deposits are the primary funding source for interest-earning assets and the associated market risk is considered by management in its simulation analysis.  Generally, it is anticipated that deposits will be sufficient to support funding requirements.  However, the rates paid for deposits at varying levels of prevailing interest rates have a significant impact on net interest income.

The following table illustrates the results of the latest simulation analysis used by Oceanside to determine the extent to which market risk would affect net interest margin for the next twelve and twenty-four months if prevailing interest rates increased or decreased the specified amounts from current prevailing rates.  As noted above, this model uses estimates and assumptions in both balance sheet growth and asset and liability account rate reactions to changes in prevailing interest rates.  Because of the inherent risk of using these estimates and assumptions in the simulation model used to derive this market risk information, the actual results of the future impact of market risk on Oceanside’s net interest margin may differ from that found in the table.

Change in Prevailing Interest Rates

	Next 12 months			Next 24 months
+   200 basis points		(0.13	%)		(0.33	%)
Prevailing rates		-			-
-   200 basis points		(0.20	%)		(0.32	%)

We do not engage in trading or hedging activities and do not invest in interest-rate derivatives or enter into interest rate swaps.  We actively monitor and manage our interest rate risk exposure.  The primary objective in managing interest-rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure.  We rely primarily on the asset-liability structure to control interest rate risk.  However, a sudden and substantial change in interest rates could adversely impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Atlantic BancGroup, Inc.

  and Subsidiaries

Jacksonville Beach, Florida

We have audited the consolidated balance sheets of Atlantic BancGroup, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic BancGroup, Inc. and Subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 (page 50) to the consolidated financial statements, effective January 1, 2008, the Corporation adopted Emerging Issues Task Force No. 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split – Dollar Life Insurance Arrangements”.

/s/ MAULDIN & JENKINS, LLC

Albany, Georgia

March 23, 2009

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2008			2007
	(Dollars in Thousands, Except Per Share Data)
ASSETS
Cash and due from banks	$	17,077		$	4,656
Federal funds sold		100			-
Total cash and cash equivalents		17,177			4,656
Investment securities, available-for-sale		14,870			25,538
Investment securities, held-to-maturity (market value of $14,898 in 2008 and $15,522 in 2007)		15,536			15,762
Restricted stock		955			746
Loans, net		203,030			201,891
Bank premises and equipment		3,583			3,784
Other real estate owned		3,421			-
Accrued interest receivable		1,051			1,538
Deferred income taxes		2,003			996
Investment in unconsolidated subsidiary		93			93
Cash surrender value of bank-owned life insurance		4,886			4,680
Other assets		1,368			1,722
Total assets	$	267,973		$	261,406
LIABILITIES
Deposits:
Noninterest-bearing	$	43,017		$	27,278
Interest-bearing		196,827			190,213
Total deposits		239,844			217,491
Other borrowings:
Short-term borrowings, customer repurchase agreements		-			18,188
Long-term debt		9,393			5,393
Total other borrowings		9,393			23,581
Accrued interest payable		321			384
Other liabilities		1,483			1,094
Total liabilities		251,041			242,550
Commitments and contingencies		-			-
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 2,000,000 shares, none issued and outstanding		-			-
Common stock, $0.01 par value, authorized 10,000,000 shares, issued and outstanding 1,247,516 shares in 2008 and 2007		12			12
Additional paid-in capital		11,788			11,788
Retained earnings		5,133			7,140
Accumulated other comprehensive loss:
Net unrealized holding losses on securities		(1	)		(84	)
Total stockholders’ equity		16,932			18,856
Total liabilities and stockholders’ equity	$	267,973		$	261,406
Book value per common share	$	13.57		$	15.11
Common shares outstanding		1,247,516			1,247,516

See accompanying notes to consolidated financial statements.

- 40 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Year ended December 31,
	2008			2007
	(Dollars in Thousands, Except Per Share Data)
INTEREST INCOME
Interest and fees on loans	$	13,637		$	15,255
Taxable interest income on investment securities and interest bearing deposits in banks		989			1,290
Tax-exempt interest income on investment securities		674			596
Interest on federal funds sold		35			227
Total interest income		15,335			17,368
INTEREST EXPENSE
Interest on deposits		7,770			8,465
Short-term borrowings		286			837
Long-term borrowings		334			289
Total interest expense		8,390			9,591
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		6,945			7,777
PROVISION FOR LOAN LOSSES		4,424			629
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,521			7,148
NONINTEREST INCOME
Fees and service charges on deposit accounts		688			635
Other fee income for banking services		162			200
Mortgage banking fees		17			69
Income from bank-owned life insurance		221			152
Dividends on restricted stock		32			34
Dividends on trust-preferred securities		5			5
Gain on sale of investment securities		346			-
Gain on sale of other real estate owned		4			-
Other income		34			24
Total noninterest income		1,509			1,119
NONINTEREST EXPENSES
Salaries and employee benefits		3,128			3,063
Expenses of bank premises and fixed assets		1,092			1,096
Other operating expenses		3,429			2,254
Total noninterest expenses		7,649			6,413
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		(3,619	)		1,854
PROVISION (BENEFIT) FOR INCOME TAXES		(1,692	)		448
NET INCOME (LOSS)		(1,927	)		1,406
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains on securities arising during period, net of income tax expense of $51 in 2008 and $119 in 2007 (See Note 2)		83			199
COMPREHENSIVE INCOME (LOSS)	$	(1,844	)	$	1,605
AVERAGE COMMON SHARES OUTSTANDING
Basic and fully diluted		1,247,516			1,247,516
EARNINGS (LOSSES) PER SHARE
Basic and fully diluted	$	(1.54	)	$	1.13

See accompanying notes to consolidated financial statements.

- 41 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock				Accumulated Paid-in		Retained			Additional Other Comprehensive			Total Stockholders’
	Shares		Amount		Capital		Earnings			Loss			Equity
	(Dollars in Thousands)
Balance, December 31, 2006		1,247,516	$	12	$	11,788	$	5,734		$	(283	)	$	17,251
Comprehensive income:
Net income		-		-		-		1,406
Change in net unrealized holding gains on securities		-		-		-		-			199
Total comprehensive income		-		-		-		-			-			1,605
Balance, December 31, 2007		1,247,516		12		11,788		7,140			(84	)		18,856
Cumulative effect adjustment recorded as of January 1, 2008, for implementation of EITF 06-4 (See Notes 1 and 9)		-		-		-		(80	)		-			(80	)
Comprehensive income (loss):
Net loss		-		-		-		(1,927	)
Change in net unrealized holding gains on securities		-		-		-		-			83
Total comprehensive loss		-		-		-		-			-			(1,844	)
Balance, December 31, 2008		1,247,516	$	12	$	11,788	$	5,133		$	(1	)	$	16,932

See accompanying notes to consolidated financial statements.

- 42 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2008			2007
	(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(1,927	)	$	1,406
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		4,424			629
Provision for off-balance sheet commitments		-			31
Depreciation and amortization		313			321
Net premium amortization and discount accretion		(24	)		(28	)
Gain on sale of investment securities		(346	)		-
Gain on sale of other real estate owned		(4	)		-
Deferred income taxes		(1,007	)		(295	)
Policy income from bank-owned life insurance		(206	)		(137	)
Pension expense from indexed retirement plan		295			181
Write-down of other real estate owned		315			-
(Increase) decrease in accrued interest receivable and other assets		526			(1,559	)
Increase (decrease) in accrued interest payable and other liabilities		(99	)		38
Net cash provided by operating activities		2,260			587
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases		(9,346	)		(1,982	)
Proceeds from sales		12,751			-
Calls and maturities		610			-
Principal repayments on mortgage-backed investment securities		7,163			6,601
Securities held-to-maturity:
Purchases		-			(5,736	)
Calls		220			-
Purchases of restricted stock		(209	)		(11	)
Increase in loans		(11,282	)		(26,411	)
Proceeds from sale of other real estate owned		2,302			(2,000	)
Purchases of bank premises and equipment		(113	)		(145	)
Net cash provided by (used in) investing activities		2,096			(29,684	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits:
Noninterest-bearing		15,739			(4,728	)
Interest-bearing		6,614			29,515
Proceeds from other borrowings, net of repayments		(14,188	)		(8,733	)
Net cash provided by financing activities		8,165			16,054
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		12,521			(13,043	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,656			17,699
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	17,177		$	4,656
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash received during the year for interest and dividends	$	15,859		$	17,053
Cash paid during the year for interest	$	8,453		$	9,486
Cash paid during the year for income taxes	$	46		$	1,139
NONCASH TRANSACTIONS
Loans transferred to foreclosed real estate during the year	$	5,719		$	-
Increase in cash surrender value of bank-owned life insurance	$	220		$	152
Increase in deferred compensation arrangements	$	295		$	181
Net change in unrealized holding gains on securities available-for-sale, net of income taxes	$	83		$	199

See accompanying notes to consolidated financial statements.

- 43 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

General - - Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company registered with the Federal Reserve and owns 100% of the outstanding stock of Oceanside Bank (“Oceanside”).  Oceanside is a Florida state-chartered commercial bank, which opened July 21, 1997.  Oceanside’s deposits are insured by the Federal Deposit Insurance Corporation.  The Holding Company’s primary business activities are the operations of Oceanside, and it operates in only one reportable industry segment:  banking.  Collectively, the entities are referred to as “Atlantic.”  In 2008, Oceanside formed and began operating a subsidiary, S. Pt. Properties, Inc., for the sole purpose of managing a single real estate property acquired through foreclosure.

Regulatory Oversight, Capital Adequacy, Liquidity, and Management’s Plans - The consolidated financial statements contemplate the realization of assets and the discharge of liabilities in the normal course of business.  Due to Atlantic’s 2008 financial results and the substantial uncertainty throughout the U.S. banking industry, the following matters should be considered:

Regulatory Oversight.  As described in Note 15 Regulatory Capital Matters, Oceanside Bank is currently undergoing an FDIC regulatory examination and the final results are unknown.  As noted herein, federal and state regulatory examinations may result in enforcement actions that include recognition of additional losses, stricter capital and liquidity thresholds, and other restrictions.  At this time, management cannot predict the outcome of the current FDIC examination.

Capital Adequacy.  During 2008, the FDIC issued guidance to institutions with significant concentrations of commercial real estate (“CRE”) loans, particularly construction and development (“C&D”) loans.  The FDIC strongly recommended that, as market conditions warrant, institutions with CRE concentrations (particularly in C&D lending) increase capital to provide ample protection from unexpected losses if market conditions deteriorate further.  Other recommendations for managing CRE concentrations included:

·   Ensure that loan loss allowances are appropriately strong.

·   Manage C&D and CRE loan portfolios closely.

·   Manage interest reserve and loan extension accommodations, reflecting the borrower's condition accurately in loan ratings and documented reviews.

·   Maintain updated financial and analytical information.

·   Bolster the loan workout infrastructure.

In light of the current economic environment, management is pursuing a number of sources for raising additional capital.  However, current market conditions for banking institutions, the overall uncertainty in financial markets, and the Atlantic’s depressed stock price are significant barriers to obtaining non-dilutive capital.

Liquidity.  Atlantic actively manages liquidity.  Cash and cash equivalents at December 31, 2008, were $17.2 million.  In addition to cash and cash equivalents and un-pledged investment securities, Atlantic has the following sources of available liquidity at December 31, 2008: lines of credit to purchase federal funds ($19.5 million), Federal Reserve discount window ($3.1 million), FDIC Temporary Liquidity Guarantee Program ($4.8 million), and Federal Home Loan Bank of Atlanta ($18.4 million).  Other funding sources include brokered deposits, which currently represent less than 11% of total deposits.  Based on current and expected liquidity needs and sources, management expects Atlantic to be able to meet obligations.

Competition - - Oceanside, through four banking offices, provides a variety of banking services to individuals and businesses located primarily in East Duval and Northeast St. Johns counties of Florida.  Atlantic funds its loans primarily by offering time, savings and money market, and demand deposit accounts to both commercial enterprises and individuals.  Atlantic competes with other banking and financial institutions in its primary markets including Internet-based institutions.  Commercial banks, savings banks, savings and loan associations, mortgage bankers and brokers, credit unions, and money market funds actively compete for deposits and loans.  Such institutions, as well as consumer finance, mutual funds, insurance companies, and brokerage and investment banking firms, may be considered competitors of Atlantic with respect to one or more of the services it renders.

- 44 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Holding Company and its wholly-owned subsidiary, Oceanside.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies of Atlantic conform with U.S. generally accepted accounting principles and to general practices within the banking industry.

Regulatory Environment - Atlantic is subject to regulations of certain federal and state agencies and, accordingly, it is periodically examined by those regulatory authorities.  As a consequence of the extensive regulation of commercial banking activities, Atlantic's business is particularly susceptible to being affected by federal legislation and regulations.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets, and the realization of deferred tax assets.

The determination of the adequacy of the allowance for loan losses and the valuation of foreclosed assets is based on estimates that may be affected by significant changes in the economic environment and market conditions.  In connection with the determination of the estimated losses on loans and the valuation of foreclosed assets, management obtains independent appraisals for significant collateral.

Atlantic’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets.  Although Atlantic has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local, state, and national economic conditions that may affect the value of the underlying collateral or the income of the debtor.

While management uses available information to recognize losses on loans and to value foreclosed assets, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and the carrying value of foreclosed assets.  Such agencies may require Atlantic to recognize additional losses based on their judgments about information available to them at the time of their examination.

Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing, nature, and amount of future income earned by certain subsidiaries and the implementation of various plans to maximize realization of deferred tax assets.  Management believes that the Company will generate sufficient operating earnings to realize the deferred tax benefits.

Cash and Cash Equivalents - For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks and federal funds sold, all of which mature within ninety days.  At December 31, 2008 and 2007, cash and due from banks includes $154,000 and $13,000, respectively, of interest-bearing deposits in the Federal Home Loan Bank.

Oceanside is required by law or regulation to maintain cash reserves on hand or with the Federal Reserve Bank of Atlanta.  The minimum reserve balances were approximately $1,664,000 and $1,765,000 at December 31, 2008 and 2007, respectively.

- 45 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

Investment Securities - Debt securities are classified as held-to-maturity when Atlantic has the positive intent and ability to hold the securities to maturity.  Securities held-to-maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

Debt securities not classified as held-to-maturity are classified as available-for-sale.  Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss).  Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income (loss).  Gains and losses on sales of securities are determined by the specific-identification method.

Equity securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in noninterest income.  During 2008 and 2007, Atlantic did not engage in trading securities.

Declines in the fair value of individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value.  The related write-downs are included in earnings as realized losses.  As of December 31, 2008, no securities were determined to have other than a temporary decline in fair value below cost.

Atlantic does not purchase, sell, or utilize off-balance sheet derivative financial instruments or derivative commodity instruments for hedging purposes.

Securities Purchased Under Agreements to Resell And Securities Sold Under Agreements to Repurchase - Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest.  Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party.  The fair value of collateral either received from or provided to a third party is continually monitored, and additional collateral is obtained or requested to be returned as appropriate.

Restricted Stock - At December 31, 2008 and 2007, Oceanside owned Federal Home Loan Bank stock, carried at cost, totaling $751,000 and $542,000, respectively.  The stock is considered restricted, and the amount is required to be maintained based on a percentage of Oceanside’s total assets.  Oceanside also maintained stock, carried at cost, as a condition of its correspondent banking relationship with two banks totaling $204,000 at both December 31, 2008 and 2007.

Loans Held-for-Sale - Residential loans held-for-sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements.  Gains and losses resulting from sales of residential mortgage loans are recognized when Atlantic funds the loan and has a commitment from the purchaser.  Atlantic had no significant loans held-for-sale as of December 31, 2008 or 2007.  Loans originated for sale in 2008 and 2007 totaled $11.6 million and $7.6 million, respectively.  The income from mortgage banking operations totaled $17,000 and $69,000 for 2008 and 2007, respectively.

Oceanside originates loans with a guaranty from the Small Business Administration (“SBA”).  Oceanside does not classify SBA loans (or the SBA-guaranteed portion) as held-for-sale, as the intent is to generally hold SBA loans to maturity in Oceanside’s held-for-investment portfolio.  There were no sales of SBA loans in 2008 or 2007.  Typically, if an SBA loan is sold, no loan servicing is retained by Oceanside.

- 46 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

Loans Held-for-Investment - Loans originated with the intent and ability to hold for the foreseeable future or until maturity or payoff are categorized as loans held-for-investment.  These loans are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or capitalized costs.  Loan origination fees are capitalized and certain direct origination costs are deferred.  Both are recognized as an adjustment of the yield of the related loan over the estimated life of the loan.

The accrual of interest on loans is discontinued at the time the loan is ninety days delinquent unless the loan is well collateralized and in process of collection.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses and Impaired Loans - The allowance for loan losses is established as probable losses are estimated through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that Atlantic will be unable to collect the scheduled payments of principal or interest when due.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Interest Rate Risk - Atlantic’s asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows.  Atlantic monitors the effect of such risks by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates.  Atlantic’s management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of Atlantic to hold its assets as planned.  However, Atlantic is exposed to significant market risk in the event of significant and prolonged interest rate changes.

Facilities - - Facilities are stated at cost, less accumulated depreciation and amortization.  Charges to income for depreciation and amortization are computed on the straight-line method over the estimated useful lives of assets.  When properties are sold or otherwise disposed of, the gain or loss resulting from the disposition is credited or charged to income.  Expenditures for maintenance and repairs are charged against income, and renewals and betterments are capitalized.

- 47 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

Long-Lived Assets - Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.  When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset.  Certain long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Foreclosed Assets (Including Other Real Estate Owned) - Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of foreclosure establishing a new cost basis.  After foreclosure, valuations are periodically performed by management and the foreclosed asset is carried at the lower of carrying amount or fair value less cost to sell.  Subsequent changes in value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the foreclosed assets at the time of the transfer.  Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.  At December 31, 2008 and 2007, foreclosed assets including repossessed vehicles and other assets totaled $75,000 and $9,000, respectively, and other real estate owned of $3,421,000 and $-0-, respectively.

Off-Balance Sheet Instruments - In the ordinary course of business, Atlantic has entered into off-balance sheet financial instruments consisting of commitments to extend credit, which may include standby letters of credit.  Such financial instruments are recorded in the consolidated financial statements when they become payable.

Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from Atlantic, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) Atlantic does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Employee Benefits - Costs associated with the savings incentive plan (see Note 8) are charged to salaries and employee benefits expense when accrued.  The accounting for income and costs associated with the Indexed Retirement Plans is more fully described at Note 8.

Income Taxes - Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statement purposes and those reported for income tax purposes.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are provided against assets that are not likely to be realized.

Comprehensive Income - Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”), establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements.  SFAS 130 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity.  In accordance with the provisions of the SFAS 130, Atlantic has included in the accompanying consolidated financial statements comprehensive income resulting from such activities.  Comprehensive income (loss) consists of the net income (loss) and net unrealized gains (losses) on investment securities available-for-sale.

These amounts are reported net of the income tax benefit (expense) less any related allowance for realization.  Also, accumulated other comprehensive income (loss) is included as a separate disclosure within the Consolidated Statements of Stockholders’ Equity in the accompanying consolidated financial statements.

- 48 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

Computation of Per Share Earnings - Basic earnings (losses) per share (“EPS”) amounts are computed by dividing net earnings (losses) by the weighted average number of common shares outstanding for the years ended December 31, 2008 and 2007.  Diluted EPS are computed by dividing net earnings (losses) by the weighted average number of shares and all dilutive potential shares outstanding during the period.  Atlantic has no dilutive potential shares outstanding for 2008 or 2007.  The following information was used in the computation of EPS on both a basic and diluted basis for the years ended December 31, 2008 and 2007 (dollars in thousands except per share data):

	For the Years Ended December 31,
	2008			2007
Basic EPS computation:
Numerator - Net income (loss)	$	(1,927	)	$	1,406
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Basic EPS	$	(1.54	)	$	1.13
Diluted EPS computation:
Numerator - Net income (loss)	$	(1,927	)	$	1,406
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Diluted EPS	$	(1.54	)	$	1.13

Advertising and Business Development - Atlantic expenses advertising and business development costs as incurred. Advertising and business development costs for 2008 and 2007 as included in other operating expenses were $145,000 and $125,000, respectively.

Reclassification of Accounts - Atlantic’s management periodically revises its classification of certain items within the consolidated financial statements in order to provide a more meaningful presentation of Atlantic’s financial position, results of operations, and cash flows.  In those cases where the revisions in presentation have been adopted in the 2008 consolidated financial statements, the corresponding 2007 balances have also been reclassified to enhance comparability between periods.

Recent Accounting Pronouncements - SFAS No 141, “Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses.  SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to  recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt.  This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.  SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141.  Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting.  Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting, and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.”  SFAS 141R is expected to have a significant impact on Atlantic’s accounting should it enter into any business combinations closing on or after January 1, 2009.

SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157, with the exception of certain provisions, became effective for Atlantic on January 1, 2008 (see Note 14).

- 49 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.”  SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date.  The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.  SFAS 159 became effective for Atlantic on January 1, 2008.  The adoption of this statement did not have a significant impact on Atlantic’s financial statements.

SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.”  SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.  Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.  SFAS 160 is effective for Atlantic on January 1, 2009, and is not expected to have a significant impact on Atlantic’s financial statements.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  The hierarchical guidance provided by SFAS 162 did not have a significant impact on Atlantic’s financial statements.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.”  Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest, and penalties. The adoption of Interpretation 48 on January 1, 2007, did not significantly impact Atlantic’s financial statements.

FSP No. 48-1 “Definition of Settlement in FASB Interpretation No. 48.” FSP 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  FSP 48-1 was effective retroactively to January 1, 2007, and did not significantly impact Atlantic’s financial statements.

Emerging Issues Task Force (EITF) Issue No. 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.”  EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods.  Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee.  Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

on the future cost of insurance to be incurred during the employee’s retirement.  If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, “Employer’s Accounting for Post-retirement Benefits Other Than Pensions.”  Atlantic adopted EITF 06-4 on January 1, 2008, as a change in accounting principle through a cumulative-effect adjustment to retained earnings totaling $80,979.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies.  Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Atlantic’s consolidated financial statements.

NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair value of instruments in debt and equity securities at December 31, 2008 and 2007, follow (dollars in thousands):

	December 31, 2008									December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. Government- sponsored agency	$	2,700	$	5	$	(6	)	$	2,699	$	2,983	$	36	$	-		$	3,019
Mortgage-backed securities		12,171		40		(40	)		12,171		22,691		46		(218	)		22,519
		14,871		45		(46	)		14,870		25,674		82		(218	)		25,538
Held-to-maturity
State, county and municipal bonds		15,536		133		(771	)		14,898		15,762		131		(371	)		15,522
Total investment securities	$	30,407	$	178	$	(817	)	$	29,768	$	41,436	$	213	$	(589	)	$	41,060

Information pertaining to securities with gross unrealized losses at December 31, 2008 and 2007, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than Twelve Months					Over Twelve Months					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
December 31, 2008:
Available-for-Sale
U.S. Government-sponsored agency	$	(6	)	$	927	$	-		$	88	$	(6	)	$	1,015
Mortgage-backed securities		(40	)		10,881		-			-		(40	)		10,881
	$	(46	)	$	11,808	$	-		$	88	$	(46	)	$	11,896
Held-to-Maturity
State, county, and municipal bonds	$	(393	)	$	6,590	$	(378	)	$	3,868	$	(771	)	$	10,458
December 31, 2007:
Available-for-Sale
Mortgage-backed securities	$	(28	)	$	6,063	$	(190	)	$	12,746	$	(218	)	$	18,809
Held-to-Maturity
State, county, and municipal bonds	$	(313	)	$	8,987	$	(58	)	$	2,758	$	(371	)	$	11,745

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 2 - INVESTMENT SECURITIES (Continued)

Management evaluates securities for other-than-temporary impairment at least on a monthly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of Atlantic to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The unrealized losses on investment securities were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because Atlantic has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.  The estimated fair value of securities is determined on the basis of market quotations.

The following is a summary of the effects on the Consolidated Statements of Stockholders’ Equity at December 31, 2008 and 2007 (dollars in thousands):

	2008			2007
Gross unrealized losses on investment securities available-for-sale	$	(1	)	$	(136	)
Deferred tax benefit on unrealized losses		-			52
Balance, December 31	$	(1	)	$	(84	)

The following presents the net change in unrealized gains or losses on investment securities available-for-sale that are shown as a component of stockholders’ equity and comprehensive income (loss) for the years ended December 31, 2008 and 2007 (dollars in thousands):

	2008			2007
Unrealized holding gains on investment securities arising during period	$	480		$	318
Less: reclassification adjustment for gains included in net income (loss)		(346	)		-
Other comprehensive income, before tax		134			318
Income tax expense related to items of other comprehensive income		(51	)		(119	)
Other comprehensive income, net of tax	$	83		$	199

Gross gains and losses on sales of investment securities in 2008 totaled $346,000 and $-0-, respectively.  There were no sales of investment securities in 2007.

At December 31, 2008, securities with a carrying value of $864,000 and fair value of $889,000 were pledged to secure deposits of public funds from the state of Florida and treasury tax and loan deposits with the Federal Reserve.  Securities were pledged as collateral for Federal Reserve Borrowings and to secure public funds from the State of Florida, Federal Reserve discount window, and treasury tax and loan deposits in 2008 and 2007.  The amortized cost of these securities was $5,023,000 and $868,000, respectively, and the fair values of these pledged securities were $4,711,000 and $911,000, respectively, as of December 31, 2008 and 2007.

There were no securities of a single issuer (which were non-governmental or non-government sponsored) that exceeded 10% of stockholders’ equity at December 31, 2008 or 2007.

The cost and estimated fair value of debt and equity securities at December 31, 2008 and 2007, by contractual maturities, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 2 - INVESTMENT SECURITIES (Continued)

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
December 31, 2008:
Due in one year or less	$	639	$	639	$	-	$	-
Due after one through five years		1,074		1,075		-		-
Due after five through ten years		3,067		3,096		1,010		1,044
Due after ten years		10,091		10,060		14,526		13,854
	$	14,871	$	14,870	$	15,536	$	14,898
December 31, 2007:
Due in one year or less	$	2,816	$	2,803	$	-	$	-
Due after one through five years		2,408		2,356		-		-
Due after five through ten years		10,657		10,594		1,057		1,091
Due after ten years		9,793		9,785		14,705		14,431
	$	25,674	$	25,538	$	15,762	$	15,522

NOTE 3 - LOANS

The loan portfolio at December 31, 2008 and 2007, is composed of the following (dollars in thousands):

	2008			2007
Real estate loans
Construction, land development, and other land	$	39,135		$	53,197
1-4 family residential		57,814			45,708
Multifamily residential		4,481			1,784
Commercial		88,762			86,785
Total real estate loans		190,192			187,474
Commercial loans		13,314			11,485
Consumer and other loans		3,548			5,138
Total loan portfolio		207,054			204,097
Less, deferred fees and other		(25	)		(37	)
Less, allowance for loan losses		(3,999	)		(2,169	)
Loans, net	$	203,030		$	201,891

At December 31, 2008 and 2007, fixed-rate loans (excluding nonaccrual loans) with maturities (or repricing) over one year totaled approximately $33.3 million and $29.3 million, respectively.

The following is a summary of the transactions in the allowance for loan losses (dollars in thousands):

	2008			2007
Balance, beginning of period	$	2,169		$	1,599
Provisions charged to operating expenses		4,424			629
Loans charged-off		(2,615	)		(75	)
Recoveries		21			16
Balance, end of period	$	3,999		$	2,169

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 3 - LOANS (Continued)

The following is a summary of information pertaining to impaired and nonaccrual loans (dollars in thousands):

	December 31,
	2008		2007
Impaired loans with a valuation allowance (net of direct write-off of $1,110 in 2008 and $-0- in 2007)	$	4,205	$	2,698
Impaired loans without a valuation allowance		1,254		3,524
Total impaired loans	$	5,459	$	6,222
Valuation allowance related to impaired loans	$	385	$	562
Total nonaccrual loans	$	5,459	$	6,222
Total loans past due ninety days or more and still accruing	$	1,656	$	164

No additional funds are committed to be advanced in connection with impaired loans.

	2008		2007
Average impaired and nonaccrual loans during the year	$	5,130	$	5,853

During 2008 and 2007, interest income recorded on nonaccrual loans totaled $4,000 and $231,000, respectively, and interest earned but not recorded on nonaccrual loans in 2008 and 2007 was $176,000 and $216,000, respectively.

Loans past due 90 or more days and still accruing interest totaled $1,656,000 at December 31, 2008, and $164,000 at December 31, 2007.

NOTE 4 - FACILITIES

Facilities.  A summary follows (dollars in thousands):

	Cost		Accumulated Depreciation and Amortization		Net Book Value		Estimated Useful Lives
December 31, 2008:
Land and land improvements	$	750	$	-	$	750
Bank building and improvements		3,443		875		2,568	5 - 40 years
Furniture, fixtures, and equipment		2,248		1,983		265	3 - 10 years
	$	6,441	$	2,858	$	3,583
December 31, 2007:
Land and land improvements	$	750	$	-	$	750
Bank building and improvements		3,438		757		2,681	5 - 40 years
Furniture, fixtures, and equipment		2,171		1,818		353	3 - 10 years
	$	6,359	$	2,575	$	3,784

Depreciation and amortization of facilities totaled $313,000 and $321,000 in 2008 and 2007, respectively.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 4 - FACILITIES (Continued)

Operating Leases.  Atlantic leases property for a branch location and its operations center at 13799 Beach Boulevard, Jacksonville, Florida, under a noncancelable operating lease dated September 27, 2000, that expires in 2011, subject to two five-year renewal options.  On August 22, 2002, Atlantic entered into a 20-year noncancelable operating lease agreement for a new branch at the corner of Kernan Boulevard South and Atlantic Boulevard, Jacksonville, Florida.  Lease payments commenced in September 2003, and the branch opened December 15, 2003.

All other operating leases, consisting principally of computer and other equipment, are not material.

Total branch rent expense for 2008 and 2007 was $392,000 and $385,000, respectively.  The future annual rental payments for the branch leases are due as follows (dollars in thousands):

Years Ending December 31,	Amount
2009	$	325
2010		332
2011		168
2012		84
2013		88
Thereafter		956
	$	1,953

NOTE 5 - TIME DEPOSITS

Time deposits at December 31, 2008 and 2007, totaled $145,746,000 and $146,138,000, respectively.  The scheduled maturities of time deposits were as follows (dollars in thousands):

	December 31, 2008				December 31, 2007
	Time, $100,000 And Over		Other Time Deposits		Time, $100,000 And Over		Other Time Deposits
Three months or less	$	21,648	$	22,373	$	20,720	$	22,707
Over three through twelve months		21,122		42,696		22,686		42,398
Over twelve months through three years		8,501		28,428		11,561		21,212
Over three years		500		478		2,818		2,036
	$	51,771	$	93,975	$	57,785	$	88,353

Time deposits of less than $100,000 with a remaining maturity of one year or less totaled $65,069,000 at December 31, 2008.  Time deposits of $100,000 or more with a remaining maturity of one year or less totaled $42,770,000 at December 31, 2008.

Interest expense on certificates of deposit of $100,000 or more totaled $2,378,000 and $2,858,000 for 2008 and 2007, respectively.  Interest expense on other time deposits totaled $4,371,000 and $3,878,000 for 2008 and 2007, respectively.  Early withdrawal penalties on certificates of deposit totaled $8,000 and $10,000 for 2008 and 2007, respectively, and have been netted against interest expense.

At December 31, 2008, Oceanside had $26,343,000 of brokered deposits, which are reflected in other time deposits.  Interest expense on brokered deposits totaled $1,174,000 for 2008.  At December 31, 2007, Oceanside had $17,926,000 of brokered deposits which are reflected in other time deposits.  Interest expense on brokered deposits totaled $203,000 for 2007.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 6 - OTHER BORROWINGS

Short-Term Debt, Customer Repurchase Agreements.  Atlantic has sold securities under agreements to repurchase during 2008, which effectively collateralize overnight borrowings.  As of December 31, 2008, no borrowings were outstanding and no securities were sold under agreements to repurchase.  The average balance of customer repurchase agreements for 2008 and 2007 were $10,960,000 and $15,054,000, respectively, at a weighted average interest rate of 1.88% and 4.81%, respectively.  Interest of $206,000 and $724,000 was recorded in 2008 and 2007, respectively.

Other Short-term Borrowings.  Atlantic purchases federal funds for liquidity needs during the year.  At December 31, 2008 and 2007, federal funds purchased were $-0- and $4,372,000, respectively.  The average federal funds purchased during 2008 and 2007, were $2,445,000 and $2,441,000, respectively, at a weighted average interest rate of 3.27% and 4.64%, respectively.  Interest of $80,000 and $113,000 was recorded in 2008 and 2007, respectively.

Long-Term Debt.  A summary of long-term debt follows (dollars in thousands):

	December 31,
	2008		2007
FHLB of Atlanta advances
Convertible debt	$	2,300	$	2,300
Fixed debt		4,000		-
		6,300		2,300
Junior subordinated debentures		3,093		3,093
	$	9,393	$	5,393

FHLB of Atlanta Advances.  At December 31, 2008 and 2007, Atlantic had obtained advances from FHLB of $6,300,000 and $2,300,000, respectively.  At December 31, 2008 and 2007, the advances were collateralized by Atlantic’s FHLB capital stock in the amount of $751,000 and $542,000, respectively, and a blanket lien on eligible wholly-owned residential (1-4 units) loans, commercial first mortgage loans, and home equity loans with a carrying value of $41.4 million and $5.7 million, respectively.  A summary follows (dollars in thousands):

					Balance of Advances at December 31,				Interest Expense
	Date	Interest Rate			2008		2007		2008		2007
Convertible fixed rate debt	11/17/2010		4.45	%	$	2,300	$	2,300	$	104	$	104
Fixed rate advances	12/20/2010		1.91%-2.07	%		4,000		-		45		-
					$	6,300	$	2,300	$	149	$	104

The weighted average rate for FHLB advances was 3.27% in 2008 and 4.54% in 2007.  At December 31, 2008, the FHLB had determined that of the $41.4 million of pledged collateral, $24.7 million was the lendable collateral value. The amount of advances available to Atlantic under this credit facility at December 31, 2008, totaled $18.4 million.

Junior Subordinated Debentures.  On September 15, 2005, Atlantic participated in a pooled offering of trust preferred securities.  Atlantic formed Atlantic BancGroup Statutory Trust I (the "Trust"), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities.  The Trust used the proceeds from the issuance of $3,000,000 in trust preferred securities to acquire fixed/floating rate junior subordinated deferrable interest debentures of Atlantic in the amount of $3,093,000.  The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate of 5.886% equal to the interest rate on the debt securities, both payable quarterly for five years.  Beginning September 15, 2010, the quarterly rates vary based on the three month LIBOR plus 150 basis points.  The debt securities and the trust preferred securities each have 30-year lives.  The trust preferred securities and the debt securities are callable by Atlantic or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 6 - OTHER BORROWINGS (Continued)

by the Federal Reserve Board, if then required.  Atlantic has treated the trust preferred securities as Tier 1 capital up to the maximum amount allowed, and the remainder, if any, as Tier 2 capital for federal regulatory purposes.  There are no required principal payments on the junior subordinated debentures over the next five years.  Interest expense on the junior subordinated debentures totaled $185,000 in both 2008 and 2007.

Under new accounting guidance, FASB Interpretation Nos. 46 and 46R, the Trust is not consolidated with Atlantic.  Accordingly, Atlantic does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the junior subordinated debentures issued by Atlantic and held by the Trust.

At December 31, 2008 and 2007, Atlantic’s investment in the statutory trust of $93,000 has been included in Other Assets in the Consolidated Balance Sheets as an investment in an unconsolidated subsidiary.

NOTE 7 - INCOME TAXES

The provision (benefit) for income taxes on income is summarized as follows (dollars in thousands):

	Year Ended December 31,
	2008			2007
Current:
Federal	$	(585	)	$	635
State		(100	)		108
		(685	)		743
Deferred:
Federal		(860	)		(252	)
State		(147	)		(43	)
		(1,007	)		(295	)
Total income tax provision (benefit)	$	(1,692	)	$	448

A reconciliation of the income tax provision (benefit) computed at the federal statutory rate of 34% and the income tax provision (benefit) shown on the Consolidated Statements of Operations and Comprehensive Income, follows (dollars in thousands):

	2008						2007
				% of						% of
	Amount			Pretax			Amount			Pretax
Tax computed at statutory rate	$	(1,230	)		34.0	%	$	631			34.0	%
Increase (decrease) resulting from:
State income taxes		(88	)		2.4			131			7.0
Indexed retirement plan		(78	)		2.2			(51	)		(2.7	)
Nontaxable interest income, net		(217	)		6.0			(185	)		(9.9	)
Other		(79	)		2.2			(78	)		(4.2	)
Income tax provision (benefit)	$	(1,692	)		46.8	%	$	448			24.2	%

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 7 - INCOME TAXES (Continued)

The components of the net deferred income tax assets are as follows (dollars in thousands):

	December 31,
	2008			2007
Deferred tax asset:
Federal	$	1,815		$	1,030
State		311			176
		2,126			1,206
Deferred tax liability:
Federal		(105	)		(179	)
State		(18	)		(31	)
		(123	)		(210	)
Net deferred tax asset	$	2,003		$	996

The tax effects of each type of significant item that gave rise to deferred taxes are (dollars in thousands):

	December 31,
	2008			2007
Allowance for loan losses	$	1,250		$	761
Indexed retirement plans		514			359
Net unrealized holding losses on securities		-			51
Other real estate owned write-downs		181			-
State income tax net operating loss carryforward		88			-
Nonaccrual interest		66			-
Depreciation		(123	)		(210	)
Other, net		27			35
Net deferred tax asset	$	2,003		$	996

Income tax expense of $51,000 and $119,000 for 2008 and 2007, respectively, have been netted in the caption “Unrealized holding gains (losses) on securities arising during period” found in the Consolidated Statements of Operations and Comprehensive Income (Loss).

During 2008, Atlantic reported net operating losses for income tax purposes of $2,097,000 for Federal and $1,610,000 for State.  The Federal net operating loss can be carried back to 2006 and 2007, fully recovered as an income tax refund, and has been included in other assets on the Consolidated Balance Sheets.  The State net operating loss can only be carried forward and has been included in deferred tax assets at December 31, 2008.

NOTE 8 - EMPLOYEE BENEFITS AND INDEXED RETIREMENT PLANS

SIMPLE Plan.  Atlantic sponsors a savings incentive plan (“SIMPLE Plan”) that covers substantially all employees.  Atlantic matches each participant’s contribution, subject to a maximum of 3% of the participant's salary.  The SIMPLE Plan is a prototype plan and has been approved by the Internal Revenue Service.  The amount included in salaries and employee benefits as pension expense totaled $64,000 and $65,000 for 2008 and 2007, respectively.

Indexed Retirement Plans.  Atlantic has adopted an Indexed Retirement Plan (“IRP”) for Atlantic’s seven directors (including one director emeritus) and four of its current and former officers.  The purpose of the IRP is to retain qualified directors and members of management by offering a retirement benefit.  Benefits under the IRP began vesting over a five-year period, with service beginning in 1997.  Upon his resignation from Atlantic, a former officer and director was 60% vested in the IRP.  All of the directors are vested and the three current officers will be fully vested in December 2009.  At December 31, 2008, these three officers were vested at 86% - 88%.

- 58 - -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 8 - EMPLOYEE BENEFITS AND INDEXED RETIREMENT PLANS (Continued)

Atlantic has purchased a pool of life insurance policies totaling $4,050,000 with funds that had previously been invested in overnight federal funds sold.  The policies have cash surrender values that can progressively grow, based on a fluctuating index of life insurance securities, resulting in an earnings stream to Atlantic.  At December 31, 2008 and 2007, the cash surrender values of these life insurance policies totaled $4,886,000 and $4,680,000, respectively.  For 2008, the average yield on these life insurance policies was estimated at 4.45% (or a taxable equivalent yield of 7.12%).

Under the IRP, as amended, eight of the current participants will begin receiving benefit payments for fifteen years following retirement.  In addition, the beneficiaries of these eight participants will each receive 90% of the death benefits gains, payable upon the respective participant’s death, with the remaining 10% plus the policy cash value payable to Atlantic.  The remaining three participants will receive benefit payments over a twenty-year period following retirement.  Following a participant’s death, any unpaid benefits will continue to the beneficiary (or beneficiaries) over the remaining term.

A summary of the activity for the IRP follows (dollars in thousands):

	December 31,
	2008			2007
Policy income included in other income	$	220		$	152
IRP expense included in other operating expenses		(294	)		(181	)
Life insurance expense included in other operating expenses		(14	)		(17	)
Deferred income tax benefit		110			67
Net after income tax benefit	$	22		$	21

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Credit-Related Financial Instruments.  Atlantic is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.  Atlantic’s exposure to credit loss is represented by the contractual amount of these commitments.  Atlantic follows the same credit policies in making commitments as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if it is deemed necessary by Atlantic, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines-of-credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.  These lines-of-credit may not be fully collateralized but generally contain a specified maturity date.  Certain conditions may exist that would prevent the customer from drawing upon the total amount to which Atlantic is committed.

Commercial and standby letters-of-credit are conditional commitments issued by Atlantic to guarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issued to support public and private borrowing arrangements.  All letters of credit issued and outstanding at December 31, 2008, totaling $1,701,000, have expiration dates within one year.  The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers.  Atlantic generally holds collateral supporting those commitments if deemed necessary.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)

At December 31, 2008 and 2007, the following financial instruments were outstanding whose contract amounts represent credit risk for Atlantic (dollars in thousands):

	2008		2007
Commitments to extend credit (including unused lines of credit):
Revolving, open-end lines secured by 1-4 family residential properties (home equity lines)	$	4,983	$	8,796
Commercial real estate, construction, and land development secured by real estate		2,186		12,099
Other		3,311		7,462
		10,480		28,357
Standby letters of credit		1,701		2,084
	$	12,181	$	30,441

Derivative Loan Commitments.  At December 31, 2008, Atlantic did not have any material amounts of commitments to originate residential mortgage loans that will be sold to investors at a specified time in the future.

Collateral Requirements.  To reduce credit risk related to the use of credit-related financial instruments, Atlantic might deem it necessary to obtain collateral.  The amount and nature of the collateral obtained is based on Atlantic’s credit evaluation of the customer.  Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate.  Access to the collateral is generally achieved by either (i) maintaining possession of the collateral, (ii) placing a recorded lien in the appropriate jurisdiction, or (iii) other means such as an assignment.

If the counterparty does not have the right and ability to redeem the collateral or Atlantic is permitted to sell or repledge the collateral on short notice, Atlantic records the collateral on its consolidated balance sheet at fair value with a corresponding obligation to return it.

Exposure to Transactions with Correspondent Banks and Related Limitations on Interbank Liabilities.  In the ordinary course of business, Oceanside may incur a loss if a correspondent bank defaults upon an obligation, which may include overnight federal funds, loan participations, and other interbank transactions.  Management monitors its risks with these correspondents and places certain limitations upon the exposure.

Litigation.  Atlantic may periodically be a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to Atlantic’s operations.  Management, after consultation with legal counsel, does not believe that there are any pending or threatened proceedings against Atlantic which, if determined adversely, would have a material effect on Atlantic’s consolidated financial position.

Change of Control Agreements.  Atlantic has entered into agreements with its three executive officers that would provide certain benefits in the event of a change of control (as defined in the agreement) and, within three years of the change in control, the executive officer is terminated (without cause) or resigns.  The change of control benefits include cash payments equal to 2.99 times the executive officer’s base annual compensation (as defined in the agreement) and continuation of health benefits for six months.

Other.  At December 31, 2008 and 2007, Oceanside had $19.5 million of lines of credit from other banks for the purchase of overnight federal funds.  At December 31, 2008 and 2007, Atlantic had outstanding purchases in overnight federal funds of $-0- and $4.4 million, respectively, leaving $19.5 million and $15.1 million, respectively, available under these lines.  Additionally, Oceanside has an available line of credit with the Federal Home Loan Bank, for which approximately $18.4 million and $9.7 million, respectively, was available at December 31, 2008 and 2007.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)

At December 31, 2008, securities with an amortized cost of $4.2 million and fair value of $3.8 were pledged to secure available advances of $3.1 million at the Federal Reserve Discount Window.  At December 31, 2008, Oceanside also had approximately $4.8 million available under the FDIC’s Temporary Liquidity Guarantee Program.

NOTE 10 - CONCENTRATIONS OF CREDIT

Substantially all of Atlantic's loans, commitments, and standby letters of credit have been granted to customers in northeast Florida, including Duval and St. Johns counties.  Atlantic’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets.  Although Atlantic has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local, state, and national economic conditions, which can be affected by a number of events domestically and internationally.

The concentrations of credit by type of loan are set forth in Note 3.  The distribution of commitments to extend credit approximates the distribution of loans outstanding.  Standby letters of credit were granted primarily to commercial borrowers.  Atlantic, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of its legal lending limit.  As a state-chartered bank, Oceanside’s 15% legal lending limit was approximately $3.6 million at December 31, 2008 ($6.0 million for loans qualifying for the 25% limit).  Atlantic does not have any significant concentrations in any one industry or customer.

NOTE 11 - RELATED PARTIES

Atlantic has entered into transactions with its directors, executive officers, significant stockholders, and their affiliates (insiders).  Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

A summary of activity for 2008 and 2007 for such loans follows (dollars in thousands):

	2008			2007
Beginning of year balance	$	6,164		$	1,998
Additions		1,040			5,622
Reductions		(634	)		(1,456	)
End of year balance	$	6,570		$	6,164

Unfunded commitments to the same parties totaled $579,000 and $1,865,000 at December 31, 2008 and 2007, respectively.  At December 31, 2008 and 2007, deposits and customer repurchase agreements with insiders totaled approximately $10.1 million and $24.2 million, respectively.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 12 - STOCKHOLDERS' EQUITY

Preferred Stock.  In addition to the 10,000,000 shares of authorized common stock, Atlantic’s articles of incorporation authorize up to 2,000,000 shares of preferred stock.  The Board of Directors is further authorized to establish designations, powers, preferences, rights, and other terms for preferred stock by resolution.  No shares of preferred stock have been issued.

Dividends.  The ability of Atlantic to pay dividends to stockholders depends primarily on dividends received by Atlantic from its subsidiary, Oceanside.  Oceanside’s ability to pay dividends is limited by federal and state banking regulations based upon Oceanside’s profitability and other factors.  State banking statutes further require (i) prior approval, (ii) that at least 20% of the prior year’s earnings be transferred to additional paid-in capital (surplus) annually until surplus equals or exceeds Oceanside’s common stock, and (iii) that certain minimum capital levels are maintained.  At December 31, 2008 and 2007, retained earnings of approximately $532,000 and $621,000, respectively, were available to pay cash dividends to the holding company only (Atlantic) in order to maintain Oceanside’s current regulatory capital classification.  Atlantic’s dividend policy is to retain accumulated earnings to support its growth and maintain its capital levels.

NOTE 13 - OTHER OPERATING EXPENSES

Other operating expenses follow (dollars in thousands):

	2008		2007
Processing and settlement fees	$	773	$	646
OREO expenses		492		-
Professional, legal, and audit fees		459		264
Write-down of other real estate owned		315		-
Pension expense		295		181
Stationery, printing, and supplies		107		132
Postage, freight, and courier		80		100
Director fees		78		122
Telephone		134		88
Advertising and business development		145		125
Regulatory assessments		229		169
Insurance (excluding group insurance)		46		43
Dues and subscriptions		27		39
Other miscellaneous expenses		249		345
	$	3,429	$	2,254

NOTE 14 - FAIR VALUE

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due from Banks and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities - For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 14 - FAIR VALUE (Continued)

Restricted Stock - Fair value of Atlantic’s investment in Federal Home Loan Bank and correspondent banks’ stock is its cost.

Loans Receivable - For loans subject to repricing and loans intended for sale within six months, fair value is estimated at the carrying amount plus accrued interest.  The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposit Liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of long-term fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Other Borrowings - For short-term debt, including accounts and demand notes payable, the carrying amount is a reasonable estimate of fair value.  The fair value of customer repurchase agreements is the amount payable on demand at the reporting date.  For long-term debt, the fair value is estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance Sheet Instruments - - Fair values for off-balance sheet lending commitments are based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Other - Accrued interest receivable on investment securities and loans and accrued interest payable on deposits and other borrowings are included in investment securities, loans, deposits, and other borrowings, accordingly.  The carrying amount is a reasonable estimate of fair value.

The estimated fair values of Atlantic's financial instruments at December 31, 2008 and 2007, follow (dollars in thousands):

	Carrying		Fair
	Amount		Value
December 31, 2008:
Financial Assets
Cash and due from banks and federal funds sold	$	17,177	$	17,177
Investment securities and accrued interest receivable		30,615		29,977
Restricted stock		955		955
Loans and accrued interest receivable		203,872		205,897
Total assets valued	$	252,619	$	254,006
Financial Liabilities
Deposits and accrued interest payable	$	240,134	$	261,720
Other borrowings and accrued interest payable		9,424		9,424
Total liabilities valued	$	249,558	$	271,144
Off-Balance Sheet Commitments	$	12,181	$	12,181

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 14 - FAIR VALUE (Continued)

	Carrying		Fair
	Amount		Value
December 31, 2007:
Financial Assets
Cash and due from banks and federal funds sold	$	4,656	$	4,656
Investment securities and accrued interest receivable		41,599		41,359
Restricted stock		746		746
Loans and accrued interest receivable		203,130		203,191
Total assets valued	$	250,131	$	249,952
Financial Liabilities
Deposits and accrued interest payable	$	217,850	$	215,392
Other borrowings and accrued interest payable		23,608		23,393
Total liabilities valued	$	241,458	$	238,785
Off-Balance Sheet Commitments	$	30,441	$	30,441

While these estimates of fair value are based on management’s judgment of the most appropriate factors, there is no assurance that, were Atlantic to have disposed of such items at December 31, 2008, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2008, should not necessarily be considered to apply at subsequent dates.

On January 1, 2008, Atlantic adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS 157 emphasizes that fair value is market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where more than one level of input exists for assets or liabilities, the lowest level of input that is significant to the fair value measurement in its entirety will be used in determining the fair value hierarchy.  Atlantic’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 14 - FAIR VALUE (Continued)

The table below presents Atlantic’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets (dollars in thousands):
Investment securities, available-for-sale	$	-	$	14,870	$	-	$	14,870
Total assets at fair value	$	-	$	14,870	$	-	$	14,870

Securities available-for-sale – The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange.  Level 2 securities include mortgage-backed securities, other pass-through securities and collateralized mortgage obligations of government sponsored entities (GSE’s) and private issuers and obligations of states and political subdivision.

Certain other assets are measured at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.  For assets measured at fair value on a nonrecurring basis, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets at December 31, 2008.

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets (dollars in thousands):
Impaired loans, net of direct write-off and specific valuation allowances	$	-	$	-	$	5,074	$	5,074
Foreclosed assets		-		-		3,496		3,496
Total assets at fair value	$	-	$	-	$	8,570	$	8,570

Loans – Nonrecurring fair value adjustments to loans reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan.  Since the market for impaired loans is not active, loans subjected to nonrecurring fair value adjustments based on the loan’s observable market price are generally classified as Level 2. Loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral may be classified as Level 2 or Level 3 depending on the type of asset and the inputs to the valuation.  When appraisals are used to determine impairment and these appraisals are based on a market approach incorporating a dollar-per-square-foot multiple, the related loans are classified as Level 2.  If the appraisals require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows to measure fair value, the related loans subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurement.

Foreclosed assets – These assets are reported at the lower of the loan carrying amount at foreclosure (or repossessions) or fair value written down by estimated cost to sale. Fair value is based on third party appraisals for other real estate owned and other independent sources for repossessed assets, considering the assumptions in the valuation, and are considered Level 2 or Level 3 inputs.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 15 - REGULATORY CAPITAL MATTERS

The Federal Reserve Board and other bank regulatory agencies have adopted risk-based capital guidelines for all banks and for bank holding companies whose consolidated assets are over $500 million.  The main objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of banking organizations and to take into account the different risks among banking organizations' assets, liabilities, and off-balance sheet items.  Bank regulatory agencies have supplemented the risk-based capital standard with a leverage ratio for Tier 1 capital to total reported assets.

Failure to meet the capital adequacy guidelines and the framework for prompt corrective actions could initiate actions by the regulatory agencies, which could have a material effect on the consolidated financial statements.

As of December 31, 2008, the most recent notification from the FDIC, Oceanside was categorized as well-capitalized under the regulatory framework for prompt corrective action.  To remain categorized as well-capitalized, it will have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below.  There are no conditions or events, since the most recent notification, that management believes have changed the prompt corrective action category.

						For Capital							To Be Well-Capitalized Under Prompt Corrective Action
	Actual					Adequacy Purposes							Provisions
	Amount		Ratio			> Amount		> Ratio			> Amount		> Ratio
	(dollars in thousands)
As of December 31, 2008:
Total capital to risk-weighted assets	$	21,720		10.25	%	$	16,951		8.00	%	$	21,188		10.00	%
Tier 1 capital to risk-weighted assets	$	19,055		8.99	%	$	8,475		4.00	%	$	12,713		6.00	%
Tier 1 capital to average assets	$	19,055		7.25	%	$	10,519		4.00	%	$	13,149		5.00	%
As of December 31, 2007:
Total capital to risk-weighted assets	$	24,115		10.26	%	$	18,795		8.00	%	$	23,494		10.00	%
Tier 1 capital to risk-weighted assets	$	21,915		9.33	%	$	9,398		4.00	%	$	14,096		6.00	%
Tier 1 capital to average assets	$	21,915		8.53	%	$	10,283		4.00	%	$	12,853		5.00	%

As previously mentioned in Note 1, Regulatory Oversight, Capital Adequacy, Liquidity, and Management’s Plans, Oceanside is undergoing an FDIC examination.  Given the current banking environment (which includes concerns over CRE concentrations, liquidity, loan losses, and capital), regulatory agencies are addressing these issues with enforcement actions ranging from a written agreement (either informal or formal) that would preclude Oceanside from being considered well-capitalized to the restriction or prohibition of certain activities by Atlantic or Oceanside.  If Oceanside was deemed an undercapitalized institution, the banking regulators would likely require Atlantic and Oceanside to submit a plan for restoring Oceanside to an acceptable capital category.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION

Presented below are condensed financial statements for Atlantic BancGroup, Inc. (parent only):

Condensed Balance Sheets as of December 31:	2008			2007
	(Dollars In Thousands)
Assets
Cash and cash equivalents	$	13		$	8
Investment in and advances to subsidiary bank		19,899			21,831
Other assets		178			156
Total	$	20,090		$	21,995
Liabilities and Stockholders' Equity
Liabilities	$	3,158		$	3,139
Stockholders' equity		16,932			18,856
Total	$	20,090		$	21,995
Condensed Statements of Operations and Stockholders' Equity
Years Ended December 31:	2008			2007
	(Dollars In Thousands)
Equity in net income (loss) of subsidiary bank	$	(1,685	)	$	1,597
Other income		5			5
Interest expense		(185	)		(185	)
Other expenses (net of income tax benefit)		(62	)		(11	)
Net income (loss)		(1,927	)		1,406
Stockholders' Equity:
Beginning of  year		18,856			17,251
Net change in unrealized holding gains (losses) on securities in subsidiary bank		83			199
Cumulative effect adjustment - Implementation of EITF 06-4		(80	)		-
End of year	$	16,932		$	18,856
Condensed Statements of Cash Flows
Years Ended December 31:	2008			2007
	(Dollars In Thousands)
Operating Activities
Net income (loss)	$	(1,927	)	$	1, 406
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed earnings (losses) of subsidiary bank		1,685			(1,597	)
Other		247			190
Net Cash Provided By (Used In) Operating Activities		5			(1	)
Increase (Decrease) in Cash and Cash Equivalents		5			(1	)
Cash and Cash Equivalents:
Beginning of year		8			9
End of year	$	13		$	8

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Background of Internal Controls and Internal Audits.  Oceanside is the sole financial subsidiary of Atlantic.  Oceanside has in place extensive policies and operating procedures for loans, operations, accounting, and compliance.  All audits, whether internal or external are reported directly to the joint Audit Committee of Oceanside and Atlantic, and the minutes of the Audit Committee meetings are subsequently reported to the Boards of Directors of Oceanside and Atlantic.

The joint Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared by the internal auditor for planning purposes.  This audit calendar is submitted to the Boards of Oceanside and Atlantic for approval.  Annually, Atlantic engages an external Certified Public Accounting firm to perform an independent audit conducted in accordance with generally accepted auditing standards.

Periodically, Oceanside and Atlantic undergo regulatory examinations that include tests of the policies and operating procedures for loans, operations, accounting, and compliance.  The results of these examinations are presented by the regulators to the Boards of Oceanside and Atlantic.

Evaluation of Disclosure Controls and Procedures.Atlantic maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Atlantic files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, the Chief Executive Officer and Chief Financial Officer of Atlantic concluded that, subject to the limitations noted below, Atlantic’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by Atlantic in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting. The management of Atlantic is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report.  The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Such internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management assessed the effectiveness of Atlantic’s internal control over financial reporting as of December 31, 2008.  In making this assessment, Atlantic used the criteria set forth in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies (2006) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and Sarbanes-Oxley Section 404 – A Guide for Small Business, published by the U.S. Securities and Exchange Commission.

Based upon management’s evaluation under the framework in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies (2006) and Sarbanes-Oxley Section 404 – A Guide for Small Business, management concluded that Atlantic’s internal control over financial reporting was effective as of December 31, 2008.  The results of management’s assessment has been reviewed with the Audit Committee.

This annual report does not include an attestation report of Atlantic’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by Atlantic's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Atlantic to provide only management’s report in this annual report.

- 68 - -

Changes in Internal Controls.  Atlantic has made no significant changes in its internal controls over financial reporting during the quarter ended December 31, 2008, which have materially affected or are reasonably likely to materially affect their internal control over financial reporting.

Limitations on the Effectiveness of Controls.  Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls and internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Atlantic have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B. OTHER INFORMATION.

There is no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2008 that was not reported.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information contained under the section captioned “Proposal I.  Election of Directors” beginning on page 6 of Atlantic’s definitive Proxy Statement is incorporated herein by reference.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information contained under the section captioned “Section 16(a) Beneficial Ownership Compliance” on page 13 of Atlantic’s definitive Proxy Statement is incorporated herein by reference.

CODE OF ETHICS

In 2003, Atlantic adopted a Code of Ethics policy that applies to its principal executive and financial officers (Incorporated by reference to Exhibit 14 to Atlantic’s Form 10-KSB for year ended December 31, 2003).

FINANCIAL EXPERT

Atlantic has at least one audit committee financial expert.  The information contained in the section captioned “Report of the Audit Committee” on page 4 in Atlantic’s definitive Proxy Statement is incorporated herein by reference.

CORPORATE GOVERNANCE

The information contained under the sections captions “Director Independence,” “Committees of the Board of Directors,” and “Report of the Audit Committee,” beginning on page 3 of Atlantic’s definitive Proxy Statement is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION.

The information contained in the sections captioned “Summary Compensation Table” under “Executive Compensation” at page 9, “2009 Director Compensation Table” at page 10, “Benefits,” at page 11 and “Employment Contracts” at page 11 in the definitive Proxy Statement, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information contained in the section captioned “Beneficial Stock Ownership of Directors and Executive Officers” at page 9 in the definitive Proxy Statement, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information contained in the section captioned “Certain Relationships and Related Transactions” at page 11 in the definitive Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information contained in the section captioned “Proposal II.  Ratification of the Appointment of the Independent Auditor for the Fiscal Year Ending December 31, 2009,” at page 11 in the definitive Proxy Statement is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS.

The following exhibits are filed with or incorporated by reference into this report (see legend below).

Legend

(a)  Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31, 1999

(b)  Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31, 2000

(c)  Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31, 2002

(d)  Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31, 2003

(e)  Incorporated by reference on Atlantic’s Form 10-QSB for quarter ended September 30, 2006

Exhibit No. Description of Exhibit

3.1 Articles of Incorporation (a)

3.2 Bylaws (a)

4.1 Specimen Stock Certificate (a)

10.1Software License Agreement dated as of October 6, 1997, between Oceanside and File Solutions, Inc. (a)

10.2 File Solutions Software Maintenance Agreement dated as of July 15, 1997, between Oceanside and SPARAK Financial Systems, Inc. (a)

10.3 Remote Data Processing Agreement dated as of March 3, 1997, between Oceanside and Bankers Data Services, Inc. (a)

10.4 Lease dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside. (b)

10.5 Lease dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and Oceanside. (c)

10.6 Change in Control Agreement for Barry W. Chandler. (e)

10.7 Change in Control Agreement for David L. Young. (e)

10.8 Change in Control Agreement for Grady R. Kearsey. (e)

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11 The computation of per share earnings is shown in the consolidated financial statements of Atlantic BancGroup, Inc. and Subsidiaries for December 31, 2008 and 2007, contained in Item 8, on Page 49 of the Notes to Consolidated Financial Statements

14 Code of Ethics for Senior Officers Policy. (d)

21.1 Subsidiaries of the Registrant

31.1 Certifications of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

31.2 Certifications of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

32.1 Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2 Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville Beach, State of Florida, on the twenty-third day of March, 2009.

ATLANTIC BANCGROUP, INC.

/s/     Barry W. Chandler

Barry W. Chandler

Principal Executive Officer

/s/     David L. Young

David L. Young

Principal Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the twenty-third day of March, 2009:

Signature	Title
/s/     Donald F. Glisson, Jr.	Chairman of the Board
Donald F. Glisson, Jr.
/s/     Barry W. Chandler	President, Chief Executive Officer, and Director
Barry W. Chandler
/s/     David L. Young	Executive Vice President, Chief Financial Officer,
David L. Young	and Corporate Secretary
/s/     Frank J. Cervone	Director
Frank J. Cervone
/s/      Robin H. Scheiderman	Director
Robin H. Scheiderman
/s/     G. Keith Watson	Director
G. Keith Watson
/s/     Conrad L. Williams	Director
Conrad L. Williams
/s/     Dennis M. Wolfson	Director
Dennis M. Wolfson

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

Form 10-K

For Fiscal Year Ended December 31, 2008

EXHIBIT INDEX

Exhibit No.	Exhibit
21.1	Subsidiaries of the Registrant
31.1	Certifications of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
31.2	Certifications of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1	Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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