Atlantic Bancgroup (ATBC) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

þ         QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

¨   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to .

Commission File Number 001-15061

ATLANTIC BANCGROUP, INC.

(Exact Name of small business issuer as specified in its charter)

Florida	59-3543956
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1315 S. Third Street

Jacksonville Beach, Florida  32250

(Address of Principal Executive Offices)

(904) 247-9494

(Issuer’s telephone number)

Check whether the registrant: (1) filed all reports required by Section 13 or 15 (d) of the Exchange Act 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 [X]    NO [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES [   ]    NO [   ]

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

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[X]

(Do not check if a smaller reporting company)

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

YES [   ]    NO [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, par value $0.01 per share	1,247,516
(Class)	Outstanding at July 31, 2009

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 2009

INDEX

			PAGE
			NUMBER
PART I - FINANCIAL INFORMATION
	Item 1 - Financial Statements
		Condensed Consolidated Statements of Financial Condition as of June 30, 2009 (Unaudited) and December 31, 2008	3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)	4
		Condensed Consolidated Statement of Stockholders' Equity (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 4 - Controls and Procedures		30
PART II - OTHER INFORMATION			31
	Item 1 - Legal Proceedings
	Item 4 - Submission of Matters to a Vote of Security Holders
	Item 6 - Exhibits
SIGNATURES			33

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
	June 30, 2009			December 31,
	(Unaudited)			2008
ASSETS
Cash and due from banks	$	51,314		$	17,077
Federal funds sold		-			100
Total cash and cash equivalents		51,314			17,177
Investment securities, available-for-sale		15,913			14,870
Investment securities, held-to-maturity (market value of $14,459 in 2009 and
$14,898 in 2008)		15,320			15,536
Restricted stock, at cost		1,151			955
Loans, net		203,772			203,030
Bank premises and equipment		3,486			3,583
Other real estate owned		2,290			3,421
Accrued interest receivable		988			1,051
Deferred income taxes		2,214			2,003
Investment in unconsolidated subsidiary		93			93
Cash surrender value of bank-owned life insurance		4,993			4,886
Other assets		1,271			1,368
TOTAL	$	302,805		$	267,973
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	36,503		$	43,017
Interest-bearing		232,038			196,827
Total deposits		268,541			239,844
Long-term borrowings		15,393			9,393
Accrued interest payable		244			321
Other liabilities		1,830			1,483
Total liabilities		286,008			251,041
Commitments and contingencies		-			-
Stockholders' equity:
Common stock		12			12
Additional paid-in capital		11,788			11,788
Retained earnings		5,130			5,133
Accumulated other comprehensive loss:
Net unrealized holding losses on securities, available-for-sale		(133	)		(1	)
Total stockholders' equity		16,797			16,932
TOTAL	$	302,805		$	267,973
Book value per common share	$	13.46		$	13.57
Common shares outstanding		1,247,516			1,247,516

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Interest and fees on loans	$	3,098		$	3,328		$	6,252		$	6,958
Investment income on investment securities		137			257			312			545
Tax-exempt interest income on investment securities		168			169			336			339
Interest on federal funds sold		-			12			1			20
Total interest income		3,403			3,766			6,901			7,862
Interest on deposits		1,566			1,953			3,182			4,126
Short-term borrowings		-			60			-			179
Long-term borrowings		143			73			261			145
Total interest expense		1,709			2,086			3,443			4,450
Net interest income before provision for loan losses		1,694			1,680			3,458			3,412
Provision for loan losses		133			661			367			885
Net interest income after provision for loan losses		1,561			1,019			3,091			2,527
Noninterest income:
Fees and service charges		147			158			326			322
Income from bank-owned life insurance		58			56			115			109
Gain on sale of investment securities		11			-			56			-
Loss on sale of other real estate owned and
repossessed assets		(12	)		-			(73	)		-
Loss on writedown of restricted stock		-			-			(179	)		-
Other income		70			67			84			126
Total noninterest income		274			281			329			557
Noninterest expenses:
Salaries and employee benefits		710			783			1,445			1,578
Expenses of bank premises and fixed assets		259			269			515			542
Data processing, software, and communications		144			135			314			292
Legal, auditing, and consulting		112			118			240			236
Pension		88			81			171			151
Other real estate owned		17			45			144			137
FDIC assessments		230			-			297			44
Advertising and marketing		28			40			62			64
Directors' fees		-			26			-			52
Other operating expenses		340			270			543			483
Total noninterest expenses		1,928			1,767			3,731			3,579
Loss before benefit for income taxes		(93	)		(467	)		(311	)		(495	)
Benefit for income taxes		(158	)		(265	)		(308	)		(340	)
Net income (loss)		65			(202	)		(3	)		(155	)
Other comprehensive loss, net of income taxes (benefits):
Unrealized holding losses arising during period		(104	)		(358	)		(132	)		(7	)
Comprehensive loss	$	(39	)	$	(560	)	$	(135	)	$	(162	)
Earnings (losses) per common share
Basic	$	0.05		$	(0.16	)	$	-		$	(0.12	)
Diluted	$	0.05		$	(0.16	)	$	-		$	(0.12	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars In Thousands)
										Net
										Unrealized
										Holding
										Losses on
					Additional					Securities,			Total
	Common Stock				Paid-in		Retained			Available-			Stockholders'
	Shares		Amount		Capital		Earnings			for-Sale			Equity
Balance, December 31, 2008		1,247,516	$	12	$	11,788	$	5,133		$	(1	)	$	16,932
Comprehensive income (loss):
Net loss for the quarter		-		-		-		(68	)		-
Net change in unrealized
holding losses on securities,
available-for-sale		-		-		-		-			(28	)
Total comprehensive loss		-		-		-		-			-			(96	)
Balance, March 31, 2009		1,247,516		12		11,788		5,065			(29	)		16,836
Comprehensive income (loss):
Net income for the quarter		-		-		-		65			-
Net change in unrealized
holding losses on securities,
available-for-sale		-		-		-		-			(104	)
Total comprehensive loss		-		-		-		-			-			(39	)
Balance, June 30, 2009		1,247,516	$	12	$	11,788	$	5,130		$	(133	)	$	16,797

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Cash flows from operating activities:
Net income (loss)	$	65		$	(202	)	$	(3	)	$	(155	)
Provision for loan losses		133			661			367			885
Depreciation and amortization		63			80			126			157
Net premium amortization and discount accretion		78			(7	)		92			(15	)
Gain on sale of investment securities		(11	)		-			(56	)		-
Loss on sale of other real estate owned and
repossessed assets		12			-			73			-
Loss on writedown of restricted stock		-			-			179			-
Other, net		(51	)		(2,783	)		(414	)		(4,842	)
Net cash provided (used) by operating activities		289			(2,251	)		364			(3,970	)
Cash flows from investing activities:
Net (increase) decrease in:
Investment securities		(5,473	)		3,509			(12,564	)		5,427
Loans		(155	)		(2,793	)		(1,109	)		(552	)
Proceeds from sale of investment securities		7,621			-			11,432			-
Proceeds from sale of other real estate owned		-			770			1,346			1,390
Purchases of bank premises and equipment, net		(12	)		(15	)		(29	)		(52	)
Net cash provided (used) by investing activities		1,981			1,471			(924	)		6,213
Cash flows from financing activities:
Net increase (decrease) in deposits		27,159			(3,567	)		28,697			1,671
Net increase (decrease) in other borrowings		(2,000	)		4,730			6,000			992
Net cash provided by financing activities		25,159			1,163			34,697			2,663
Net increase in cash and cash equivalents		27,429			383			34,137			4,906
Cash and cash equivalents at beginning of period		23,885			9,179			17,177			4,656
Cash and cash equivalents at end of period	$	51,314		$	9,562		$	51,314		$	9,562
CONDENSED SUPPLEMENTAL DISCLOSURES
Non-cash transaction - loans transferred to
other real estate owned, net of write-downs	$	-		$	350		$	276		$	5,539

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

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 operation of Oceanside, and it operates in only one reportable industry segment, banking.  Collectively, the entities are referred to as “Atlantic.”  References to Atlantic, Oceanside, and the Subsidiary throughout these condensed consolidated financial statements are made using the first-person notations of “we,” “our,” and “us.”  In 2008, Oceanside formed and began operating a subsidiary, S. Pt. Properties, Inc. (the “Subsidiary”), for the sole purpose of managing a single real estate property acquired through foreclosure.

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

Our condensed consolidated financial statements for the three and six months ended June 30, 2009 and 2008, have not been audited and do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.  In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair presentation.  Our results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year.  The accounting policies followed by us are set forth in the consolidated financial statements for the year ended December 31, 2008, and are incorporated herein by reference.

Oceanside, through four banking offices, provides a wide range of banking services to individual and corporate customers primarily in East Duval and Northeast St. Johns counties of Florida.  We are subject to regulations of certain federal and state regulatory agencies and, accordingly, we are examined by those agencies.  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.

Regulatory Oversight.  As described in Form 10-K for the year ended December 31, 2008, Oceanside Bank has undergone an FDIC regulatory examination and expects to commit to increasing capital and reducing its classified assets consistent with trends in the current regulatory environment.  As noted herein, federal and state regulatory examinations may result in enforcement actions (including informal Memoranda of Understanding to formal agreements or Cease and Desist Orders) that include recognition of additional losses, stricter capital and liquidity thresholds, and other restrictions.  At this time, management cannot predict the form or outcome of any FDIC enforcement actions.

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.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

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

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 Atlantic’s depressed stock price are significant barriers to obtaining non-dilutive capital.

Liquidity.  Atlantic actively manages liquidity.  Cash and cash equivalents at June 30, 2009, totaled $51.3 million.  In addition to cash and cash equivalents and un-pledged investment securities, Atlantic has the following sources of available liquidity at June 30, 2009:  lines of credit to purchase federal funds ($10.0 million) and Federal Home Loan Bank of Atlanta ($8.6 million).  Other funding sources include brokered deposits, which currently represent 8.6% of total deposits.  Subject to prior approval, additional sources of liquidity include Federal Reserve discount window ($3.1 million) and FDIC Temporary Liquidity Guarantee Program ($4.8 million).  Based on current and expected liquidity needs and sources, management expects Atlantic to be able to meet its obligations.

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, valuation of other real estate owned (or 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.

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 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 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.

Atlantic has recorded a deferred tax asset to recognize the future income tax benefit of operating losses incurred for tax year 2008.  Management believes that the tax benefits on the net operating loss carry forwards will be utilized when Atlantic returns to profitability.  The net operating losses can be carried forward for up to 20 years and do not begin to expire until 2028.

Management considered the cumulative losses in 2008 and the anticipated net operating loss for 2009 when determining whether or not to perform a valuation allowance on the deferred tax asset.  The economic conditions and Atlantic’s level of non-performing assets were taken into consideration as well.

However, management believed that the negative evidence was outweighed by certain positive evidence.  Atlantic has a prior history of earnings outside of the recent losses and believes that changes have been made to allow Atlantic to return to an earnings position, including reductions in payroll and other operating costs.  Based on the above analysis, management believes it is more likely than not that Atlantic would realize the deferred tax asset through future operating income.

Reclassifications - Certain amounts in the prior periods have been reclassified to conform to the presentation for the current period.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

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 could have a significant impact on Atlantic’s accounting should it enter into any business combinations closing after January 1, 2009.

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 became effective for Atlantic on January 1, 2009.  The adoption of this statement did not 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.

On May 28, 2009, SFAS No. 165, Subsequent Events was issued.  SFAS 165 should not result in significant changes in the subsequent events that an entity reports.  Rather, SFAS 165 introduces the concept of financial statements being available to be issued.  Financial statements are considered available to be issued when they are complete in a form and format that complies with generally accepted accounting principles and all approvals necessary for issuance have been obtained.

The objective of SFAS 165 is to establish general standards for the accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth:

1. The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements.

2. The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.

3. The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009, with prospective application.  The adoption of this statement did not have a significant impact on Atlantic’s financial statements.

On April 9, 2009, the Financial Accounting Standards Board (“FASB”) announced the issuance of three final FASB Staff Positions (“FSPs”).  These FSPs are intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

1. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

2. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

3. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

The FSPs are effective for interim and annual reporting periods ending after June 15, 2009.  The adoption of these FSPs did not have a significant impact on Atlantic’s financial statements.

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.

Subsquent Events - Atlantic’s date for evaluating the existence of subsequent events that would affect the financial statement for the quarter ended June 30, 2009, was August 14, 2009, which was the date the financial statements were issued.

NOTE 2 - COMPUTATION OF PER SHARE EARNINGS (LOSSES)

Basic earnings (losses) per share (“EPS”) amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the three and six months ended June 30, 2009 and 2008.  Diluted EPS is computed by dividing net income (loss) by the weighted average number of shares and all dilutive potential shares outstanding during the period.  We have no dilutive potential shares outstanding for 2009 or 2008.  The following information was used in the computation of EPS on both a basic and diluted basis for the three and six months ended June 30, 2009 and 2008 (dollars and number of shares in thousands):

	Three Months Ended June 30,
	2009			2008
Basic and diluted EPS computation:
Numerator - Net income (loss)	$	65		$	(202	)
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Basic and diluted earnings (losses) per share	$	0.05		$	(0.16	)
	Six Months Ended June 30,
	2009			2008
Basic and diluted EPS computation:
Numerator - Net loss	$	(3	)	$	(155	)
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Basic and diluted losses per share	$	-		$	(0.12	)

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 3 - INVESTMENT SECURITIES

The amortized cost and estimated fair value of instruments in debt and equity securities are as follows (dollars in thousands):

	June 30, 2009									December 31, 2008
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-sale
U.S. Government-sponsored
agency securities	$	171	$	4	$	-		$	175	$	2,700	$	5	$	(6	)	$	2,699
Mortgage-backed securities		15,956		21		(239	)		15,738		12,171		40		(40	)		12,171
		16,127		25		(239	)		15,913		14,871		45		(46	)		14,870
Held-to-maturity
State, county and
municipal bonds		15,320		101		(962	)		14,459		15,536		133		(771	)		14,898
Total investment securities	$	31,447	$	126	$	(1,201	)	$	30,372	$	30,407	$	178	$	(817	)	$	29,768

Information pertaining to securities with gross unrealized losses at June 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

	Less Than Twelve Months					Over Twelve Months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
Available-for-Sale
U.S. Government-sponsored agency	$	-		$	-	$	-		$	-	$	-		$	-
Mortgage-backed securities		(239	)		15,257		-			-		(239	)		15,257
	$	(239	)	$	15,257	$	-		$	-	$	(239	)	$	15,257
Held-to-Maturity
State, county, and municipal bonds	$	(40	)	$	2,581	$	(922	)	$	8,531	$	(962	)	$	11,112

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.  At June 30, 2009 and December 31, 2008, Atlantic did not have any investment securities deemed other-than-temporarily-impaired debt securities.

The unrealized losses on investment securities were caused by interest rate changes.  Temporary net decreases in fair value of securities available-for-sale at June 30, 2009, are regarded as an adjustment to stockholders' equity.  The estimated fair value of investment securities is determined on the basis of market quotations.  The following is a summary of the effects on the Condensed Consolidated Statement of Stockholders’ Equity at June 30, 2009 and December 31, 2008 (dollars in thousands):

	June 30,			December 31,
	2009			2008
Unrealized losses on investment securities available-for-sale	$	(213	)	$	(1	)
Deferred tax benefit on unrealized losses		80			-
Balance	$	(133	)	$	(1	)

- 11 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 3 - INVESTMENT SECURITIES (Continued)

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 three and six months ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,
	2009			2008
Unrealized holding losses on investment securities arising during period	$	(156	)	$	(575	)
Less: reclassification adjustment for gains included in net income (loss)		(11	)		-
Other comprehensive loss, before income tax benefits		(167	)		(575	)
Income tax benefit related to items of other comprehensive income		63			217
Other comprehensive loss, net of income tax benefits	$	(104	)	$	(358	)
	Six Months Ended June 30,
	2009			2008
Unrealized holding losses on investment securities arising during period	$	(157	)	$	(11	)
Less: reclassification adjustment for gains included in net income (loss)		(56	)		-
Other comprehensive loss, before income tax benefits		(213	)		(11	)
Income tax benefit related to items of other comprehensive income		81			4
Other comprehensive loss, net of income tax benefits	$	(132	)	$	(7	)

Gross gains and losses on sales of investment securities for the three and six months ended June 30, 2009, totaled $11,000 and $56,000, respectively.  There were no sales of investment securities during the same periods of 2008.

At June 30, 2009, held-to-maturity investment securities with an amortized cost of $863,000 and fair value of $872,000 were pledged to secure deposits of public funds from the State of Florida and treasury tax and loan deposits with the Federal Reserve.  At June 30, 2009, held-to-maturity investment securities with an amortized cost of $4.2 million and a fair value of $3.8 million were pledged for other borrowings.

There were no securities of a single issuer, which are non-governmental or non-government sponsored, that exceeded 10% of stockholders’ equity at June 30, 2009 or 2008.

The cost and estimated fair value of debt and equity securities at June 30, 2009, 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).

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	113	$	115	$	-	$	-
Due after one through five years		238		245		271		290
Due after five through fifteen years		219		233		4,300		4,241
Due after fifteen years		15,557		15,320		10,749		9,928
	$	16,127	$	15,913	$	15,320	$	14,459

- 12 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 4 - LOANS

Loans consisted of (dollars in thousands):

	June 30,			December 31,
	2009			2008
Real estate loans:
Construction, land development, and other land	$	33,106		$	39,135
1-4 family residential		59,947			57,814
Multifamily residential		4,813			4,481
Commercial		95,002			88,762
		192,868			190,192
Commercial loans		12,089			13,314
Consumer and other loans		2,990			3,548
Total loan portfolio		207,947			207,054
Less, deferred fees		(20	)		(25	)
Less, allowance for loan losses		(4,155	)		(3,999	)
Loans, net	$	203,772		$	203,030

A summary of the activity in Other Real Estate Owned for June 30, 2009 and 2008 follows (dollars in thousands):

	For the Three			For the Six			For the Twelve
	Months Ended			Months Ended			Months Ended
	June 30, 2009			June 30, 2009			December 31, 2008
Balance, beginning of period	$	2,338		$	3,421		$	-
Transfers to OREO		-			324			6,034
Disposals		-			(1,407	)		(2,298	)
Writedowns		(48	)		(48	)		(315	)
Balance, end of period	$	2,290		$	2,290		$	3,421

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Our Board of Directors monitors the loan portfolio quarterly in order to enable it to evaluate the adequacy of the allowance for loan losses.  We maintain the allowance for loan losses at a level that we believe to be sufficient to absorb probable losses inherent in the loan portfolio.  Activity in the allowance for loan losses follows (dollars in thousands):

	For the Three			For the Six			For the Twelve
	Months Ended			Months Ended			Months Ended
	June 30, 2009			June 30, 2009			December 31, 2008
Balance, beginning of period	$	4,062		$	3,999		$	2,169
Provisions charged to operating expenses		133			367			4,424
Loans charged-off		(44	)		(215	)		(2,615	)
Recoveries		4			4			21
Balance, end of period	$	4,155		$	4,155		$	3,999

We had twelve loans totaling $9,225,000 at June 30, 2009, categorized as nonaccrual, and nine loans totaling $5,459,000 categorized as nonaccrual at December 31, 2008.  We had specific allowances for losses on nonaccrual loans of $664,000 and $385,000 at June 30, 2009 and December 31, 2008, respectively.

We had loans past due 90 days or more and still accruing interest totaling $-0- and $1,656,000 at June 30, 2009 and December 31, 2008, respectively.  Loans over 90 days past due that are well secured and in process of collection remain on accrual status in accordance with regulatory guidelines.

NOTE 6 - LONG-TERM BORROWINGS

A summary of long-term borrowings follows (dollars in thousands):

	June 30,		December 31,
	2009		2008
FHLB of Atlanta advances	$	12,300	$	6,300
Junior subordinated debentures		3,093		3,093
Total long-term borrowings	$	15,393	$	9,393

- 13 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 6 - LONG-TERM BORROWINGS (Continued)

A summary of the FHLB of Atlanta advances follows (dollars in thousands):

					June 30,		December 31,
	Maturity Date	Interest Rate			2009		2008
Convertible fixed rate debt	11/17/2010		4.45	%	$	2,300	$	2,300
Fixed rate advances	12/20/2010		1.91	%		2,000		4,000
Fixed rate advance	01/09/2012		2.30	%		8,000		-
					$	12,300	$	6,300

NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

We are a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers.  These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.  Our exposure to credit loss is represented by the contractual amount of these commitments.  We follow the same credit policies in making commitments as we do for on-balance sheet instruments.  Financial instruments at June 30, 2009, consisted of commitments to extend credit approximating $10.9 million and standby letters of credit of $1.7 million.

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 us, is based on our credit evaluation of the customer.

NOTE 8 - REGULATORY CAPITAL

Oceanside is required to maintain certain minimum regulatory capital requirements.  The following is a summary at June 30, 2009, of the regulatory capital requirements and actual capital on a percentage basis for Oceanside:

				Regulatory Requirement
				For Capital			For Well-
	Actual			Adequacy			Capitalized
Total capital ratio to risk-weighted assets		10.47	%		8.00	%		10.00	%
Tier 1 capital ratio to risk-weighted assets		9.21	%		4.00	%		6.00	%
Tier 1 capital to average assets		6.71	%		4.00	%		5.00	%

As previously mentioned in Note 1,Oceanside has undergone 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 informal Memoranda of Understanding to formal agreements or Cease and Desist Orders.  Imposition of such an action could preclude Oceanside from being considered well-capitalized and restrict or prohibit certain activities by Atlantic or Oceanside.  If Oceanside is

- 14 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 8 - REGULATORY CAPITAL (Continued)

deemed a less than well-capitalized institution, the banking regulators will require Atlantic and Oceanside to submit a plan for restoring Oceanside to an acceptable capital category and restrict the use of brokered deposits.

NOTE 9 - FAIR VALUE MEASUREMENTS

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.

The table below presents the Atlantic’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets (dollars in thousands):
Investment securities, available-for-sale
U.S. Government-sponsored
agency securities	$	-	$	175	$	-	$	175
Mortgage-backed securities		-		15,738		-		15,738
Total assets at fair value	$	-	$	15,913	$	-	$	15,913

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 subdivisions.

- 15 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 9 - FAIR VALUE MEASUREMENTS (Continued)

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 June 30, 2009.

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets (dollars in thousands):
Impaired loans, net of direct write-off and
specific valuation allowances of $664	$	-	$	-	$	8,561	$	8,561
Foreclosed assets		-		-		2,290		2,290
Total assets at fair value	$	-	$	-	$	10,851	$	10,851

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 repossession) 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.

The following is a summary of activity of assets and liabilities measured at fair value under SFAS 157 on a nonrecurring basis (dollars in thousands):

	Impaired
	Loans		OREO			Total
Balance, December 31, 2008	$	5,074	$	3,496		$	8,570
Gains for the year		-		54			54
Losses for the year		-		(127	)		(127	)
Net transfers in/out Level 3		3,487		(1,133	)		2,354
Balance, end of period	$	8,561	$	2,290		$	10,851

NOTE 10 - FAIR VALUE DISCLOSURES

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.

- 16 -

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009

NOTE 10 - FAIR VALUE DISCLOSURES (Continued)

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.

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 June 30, 2009, follow (dollars in thousands):

	Carrying		Fair
	Amount		Value
Financial Assets
Cash and due from banks and federal funds sold	$	51,314	$	51,314
Investment securities and accrued interest receivable		31,455		30,594
Restricted stock		1,151		1,151
Loans and accrued interest receivable		204,538		203,621
Total assets valued	$	288,458	$	286,680
Financial Liabilities
Deposits and accrued interest payable	$	268,749	$	267,487
Other borrowings and accrued interest payable		15,429		15,429
Total liabilities valued	$	284,178	$	282,916
Off-Balance Sheet Commitments	$	12,544	$	12,544

As mentioned in Note 1, Atlantic has adopted FSP FAS 107 and APB 28-1, effective with the quarter ended June 30, 2009.  This FSP amended SFAS 157 to require additional disclosures, including a discussion of changes in valuation techniques and related inputs for interim and annual periods.  There have been no changes since December 31, 2008, in the valuation techniques and related inputs noted herein.

- 17 -

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Commercial Banking Operations.  Atlantic, through its wholly-owned subsidiary, Oceanside, conducts commercial banking business consisting of attracting deposits and applying those funds to the origination of commercial, consumer, and real estate loans (including commercial loans collateralized by real estate) and purchases of investments.  Our profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (principally loans, investments, and federal funds sold), less the interest expense incurred on interest-bearing liabilities (customer deposits and borrowed funds).  Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate earned and paid on these balances.  Net interest income is dependent upon Oceanside’s interest-rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities.  When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.  The interest rate spread is impacted by interest rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective income tax rate. Noninterest income consists primarily of service fees on deposit accounts and mortgage banking fees. Noninterest expense consists of compensation and employee benefits, occupancy and equipment expenses, deposit insurance premiums paid to the FDIC, and other operating expenses.

Our corporate offices are located at 1315 South Third Street, Jacksonville Beach, Florida.  This location is also our main banking office for Oceanside, which opened July 21, 1997, as a state-chartered banking organization.  We also operate branch offices located at 560 Atlantic Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, and 1790 Kernan Boulevard South, Jacksonville, Florida.

Forward-looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties including changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as to the date made.  We advise readers that the factors listed above, as well as others, 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, which 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.

Future Accounting Requirements

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.

Impact of Inflation

The consolidated 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 our assets and liabilities 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 in 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, we seek to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

- 18 -

Critical Accounting Policies

Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles (“GAAP”), and they conform to general practices within the banking industry.  We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations.  We have identified our policy covering the allowance for loan losses as being particularly sensitive in terms of judgments and the extent to which significant estimates are used.  For more information on this critical accounting policy, please refer to our 2008 Annual Report on Form 10-K.

Results of Operations

We reported consolidated net income of $65,000 for the three months ended June 30, 2009, after four consecutive quarters of losses stemming from the depressed real estate market and the effects of local, state, and national economic trends.  We achieved these results despite absorbing increased FDIC insurance premium assessments of $230,000 during the quarter ended June 30, 2009, with $130,000 as a special FDIC assessment.

Other noteworthy improvements since the end of 2008 included reductions in foreclosed assets from $3.5 million at December 31, 2008, to $2.3 million at June 30, 2009, a decrease of 34%.  Total nonperforming, classified, and foreclosed assets decreased $2.8 million, or 8.8%, to $29.2 million as compared with $32.0 million at December 31, 2008.  During this period, we raised our allowance for loan and lease losses from 1.93% to 2.0% of total loans outstanding, and total risk-based capital from 10.25% to 10.47%.  Our total exposure to construction, land development, and other land loans declined from $39.1 million to $33.1 million, a decrease of 15%.

Our net loss for the six months ended June 30, 2009, was $3,000, as compared with a net loss of $155,000 in the same period of 2008.  An overview of the more significant matters affecting our results of operations follows:

· Average loans for the six months ended June 30, 2009, were higher than the same period of 2008 by $7.4 million, or 3.7%.  Average interest bearing deposits increased $17.5 million, or 9.1%, and average non-interest bearing deposits increased $7.9 million, or 29.3%.  While we experienced year-to-year loan growth from the first half of 2008 to the first half of 2009, we do not expect this trend to continue throughout 2009.  Loan growth from December 31, 2008 to June 30, 2009, totaled 0.4%.

· Net interest income (before provision for loan losses) increased $46,000, or 1.3%, for the six months ended June 30, 2009, over the same period in 2008.  This increase is due primarily to yields on interest earning assets decreasing at a slower pace than yields on deposits and other borrowings, resulting in improved net interest margins.  Net interest margin was 2.89%, but would have exceeded 300 basis points for the first half of 2009; however, we improved our liquidity by obtaining core deposits that have been temporarily invested in an interest-bearing account with the Federal Reserve with an effective yield of less than 0.2%.

· Our results for 2009 included additional reserves set aside to offset loan charge-offs and recent real estate foreclosures with the allowance for loan and lease losses rising to 2.0% of total loans outstanding at June 30, 2009.  However, due to the reduction of net charge-offs, we were able to lower our provision for loan losses for the first six months of 2009 to $367,000 from $885,000 in the same period of 2008, a reduction of 58.5%.

· Total noninterest income declined $228,000, or 40.9%, in the first half of 2009 over the same period of 2008.  During the first quarter of 2009, Oceanside Bank reported a write-down of $179,000 on its investment in a correspondent bank, Silverton Bank, National Association.  Silverton Bank was closed by federal regulators on May 1, 2009.  For the six months ended June 30, 2009, we also recorded net losses on the sale of foreclosed assets totaling $73,000, which was partially offset by $56,000 in gains on sale of investment securities.  No gains or losses were reported during the same period of 2008.

Financial Condition

The following table shows selected ratios for the periods ended or at the dates indicated (annualized for the three and six months ended June 30, 2009):

	Three months			Six Months			Year Ended
	Ended			Ended			December 31,
	June 30, 2009			June 30, 2009			2008
Return on average assets		0.09	%		-	%		-0.74	%
Return on average equity		1.54	%		-0.04	%		-10.37	%
Interest-rate spread		2.32	%		2.52	%		2.55	%
Net interest margin		2.69	%		2.89	%		3.03	%
Noninterest expenses to average assets		2.67	%		2.69	%		2.94	%

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Liquidity and Capital Resources

Liquidity Management.  Liquidity management involves monitoring the sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits.  Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management is made more complicated because different statements of financial condition components are subject to varying degrees of management control.  For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made.  However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets that are readily marketable, which can be pledged, or which will mature in the near future.  Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area.  In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase.

We expect to meet our liquidity needs with:

· Available cash, including both interest and noninterest-bearing balances, and federal funds sold, which totaled $51.3 million at June 30, 2009;

· The repayment of loans, which include loans with a remaining maturity of one year or less (excluding those in nonaccrual status) totaling $44.0 million;

· Proceeds of unpledged securities available-for-sale and principal repayments from mortgage-backed securities;

· Retention of and growth in deposits; and,

· If necessary, borrowing against approved lines of credit and other alternative funding strategies.

Short-Term Investments.  Short-term investments, which consist of federal funds sold and interest-bearing deposits, were $41.5 million at June 30, 2009, as compared to $254,000 at December 31, 2008.  We regularly review our liquidity position and have implemented internal policies that establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the statement of financial condition and funding from non-core sources.  To further enhance our liquidity, we have developed alternative funding strategies that have been approved by our Board of Directors.  Alternate funding strategies include (dollars in thousands):

Lines of credit to purchase federal funds	$	10,000
Federal Reserve discount window (1)		3,131
FDIC Temporary Liquidity Guarantee Program (1)		4,841
Federal Home Loan Bank of Atlanta		8,598
	$	26,570
(1)  Subject to prior approval

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, 2013.  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.

Deposits and Other Sources of Funds.  In addition to deposits, the sources of funds available for lending and other business purposes include loan repayments, loan sales, securities sold under agreements to repurchase, and advances under approved borrowings from the Federal Home Loan Bank of Atlanta.  Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money

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market conditions.  Borrowings may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.

Core Deposits.  Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets.  We had core deposits totaling $219.5 million at June 30, 2009, and $188.1 million at December 31, 2008, an increase of 16.7%.  We anticipate that a stable base of deposits will be our primary source of funding to meet both short-term and long-term liquidity needs in the future.

Customers with large certificates of deposit tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.  Some financial institutions acquire funds in part through large certificates of deposit obtained through brokers.  These brokered deposits have been historically expensive and unreliable as long-term funding sources.  More recently, the brokered funds have become less expensive than local deposits.  Brokered certificates of deposit issued by us totaled $23.2 million at June 30, 2009, and $26.3 million at December 31, 2008, a decrease of 12.0%.

We use our resources principally to fund existing and continuing loan commitments and to purchase investment securities.  At June 30, 2009, we had commitments to extend credit totaling $10.9 million, and had issued, but unused, standby letters of credit of $1.7 million for the same period.  In addition, scheduled maturities of certificates of deposit during the twelve months following June 30, 2009, total $110.0 million.  We believe that adequate resources exist to fund all our anticipated commitments, and, if so desired, that we can adjust the rates and terms on certificates of deposit and other deposit accounts to retain deposits in a changing interest rate environment.

Capital.  We are subject to various regulatory capital requirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  FDIC’s Prompt Corrective Action regulations are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations).

As of the most recent reporting period for the quarter ended June 30, 2009, Oceanside’s ratios exceeded the minimum levels for the well-capitalized category.  An institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables.  At June 30, 2009, Oceanside’s actual capital amounts and percentages are presented in the following table (dollars in thousands):

	Actual					Minimum(1)					Well-Capitalized(2)
	Amount		%			Amount		%			Amount		%
Total capital to risk-weighted assets	$	22,005		10.47	%	$	16,818		8.00	%	$	21,023		10.00	%
Tier 1 capital to risk-weighted assets	$	19,358		9.21	%	$	8,409		4.00	%	$	12,614		6.00	%
Tier 1 capital to average assets	$	19,358		6.71	%	$	11,542		4.00	%	$	14,428		5.00	%

(1)      The minimum required for adequately capitalized purposes.

(2)      To be "well-capitalized" under the FDIC's Prompt Corrective Action regulations for banks.

Notes 1 and 8 to Condensed Consolidated Financial Statements discuss events that may affect Oceanside’s required level of capital to maintain in the future.

Asset Quality

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans.  Our judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that we believe to be reasonable, but which may or may not be valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

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Asset Classification.  Commercial banks are required to review and, when appropriate, classify their assets on a regular basis.  The State of Florida and the FDIC have the authority to identify problem assets and, if appropriate, require them to be classified or require a harsher classification than management has assessed.  There are three classifications for problem (or classified) assets: substandard, doubtful, and loss.  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss.  An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an asset or portion thereof is classified as loss, the insured institution establishes a specific reserve for the full amount of the portion of the asset classified as loss.  All or a portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

Assets that do not warrant classification in the aforementioned categories, but possess weaknesses, are classified by us as special mention and monitored.  We also monitor other loans based on a variety of factors and internally designate these loans as watch list loans.

Management monitors our loan portfolio throughout the month for classification changes.  Each quarter, we perform a detailed internal review to determine an appropriate level of reserves to set aside for probable losses in our loan portfolio.  We supplement our internal reviews with semiannual external loan review performed by an independent public accounting firm.  The regulatory agencies also have the authority to require additional levels of reserves if they deem necessary despite management’s best efforts to establish an appropriate level of reserves consistent with generally accepted accounting principles.  Sometimes our collective assessments from internal and loan reviews may differ from the regulatory assessment.

Allowance for Loan Losses.  The allowance for loan losses is established through a provision for loan losses charged against income.  Loans are charged against the allowance when we believe that the collectibility of principal is unlikely.  The provision is an estimated amount that we believe will be adequate to absorb probable losses inherent in the loan portfolio based on evaluations of its collectibility.  The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and commitments, and current anticipated economic conditions that may affect the borrower's ability to pay.  While we use the best information available to recognize losses on loans, future additions to the provision may be necessary based on changes in economic conditions.  A summary of balances in the allowance for loan losses and key ratios follows (dollars in thousands):

	For the Six			For the Twelve
	Months Ended			Months Ended
	June 30, 2009			December 31, 2008
End of period loans (net of deferred fees)	$	207,927		$	207,029
End of period allowance for loan losses	$	4,155		$	3,999
% of allowance for loan losses to total loans		2.00	%		1.93	%
Average loans for the period	$	207,619		$	203,675
Net charge-offs as a percentage of average loans
for the period (annualized for 2009)		0.20	%		1.27	%
Nonperforming assets:
Nonaccrual loans	$	9,225		$	5,459
Loans past due 90 days or more and still accruing		-			1,656
Foreclosed real estate		2,290			3,421
Other repossessed assets		-			75
	$	11,515		$	10,611
Nonaccrual loans to period end loans		4.44	%		2.64	%
Nonperforming assets to period end total assets		3.80	%		3.96	%

At June 30, 2009, we had 41 loans totaling approximately $23.5 million classified as substandard and 4 loans totaling approximately $3.4 million classified as doubtful.  We had no loans classified as loss at June 30, 2009.  At June 30, 2009, management had provided specific reserves totaling $1.9 million for loans risk-rated substandard or lower.

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Our internally-classified loans declined $1.6 million to $26.9 million from December 31, 2008, levels of $28.5 million.  We also reported a net decline in total nonperforming assets of $2.8 million, or 8.8%, which included a reduction in other real estate owned and foreclosed assets of $1.2 million, or 34.5%, due principally to sales of other real estate.

Included in our total classified loans of $26.9 million, we internally monitor classified loans of $17.7 million that we believe continue to meet the regulatory definition of performing loans.  As mentioned earlier, we have classified these loans because one or more defined credit weaknesses currently exist.  While we may experience losses, many of these loans are believed to be well-secured.  Of the 45 loans classified substandard or worse, 27 loans were determined to have no collateral exposure with an allocated reserve based on our historical loss rates adjusted for recent trends in accordance with regulatory guidance and generally accepted accounting principles.

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 follows (dollars in thousands):

	June 30,		December 31,
	2009		2008
Loans restructured and in compliance with modified terms	$	5,232	$	3,566
Loans restructured and past due 30-89 days		-		53
Loans restructured and in nonaccrual status		1,123		4,386
	$	6,355	$	8,005

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.  We monitor 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 our assets as planned.  However, we would be exposed to significant market risk in the event of significant and prolonged interest rate changes.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates.  Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities.  We have little or no risk related to trading accounts, commodities or foreign exchange.

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 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.  There have been no significant changes in our market risk exposure since December 31, 2008.

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Average Balances, Income and Expenses, and Rates

The following table depicts, for the periods indicated, certain information related to our average statements of financial condition and our average yields on assets and average costs of liabilities.  Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities.  Average balances have generally been derived from daily averages (dollars in thousands):

	For the Three Months Ended June 30,
	2009								2008
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Rate			Balance			Dividends		Rate
Interest-earning assets:
Loans	$	207,954		$	3,098		5.98	%	$	198,878		$	3,328		6.73	%
Investment securities and
interest-bearing deposits (1)		60,052			305		2.71	%		38,161			426		5.56	%
Other interest-earning assets		-			-		0.00	%		2,159			12		2.24	%
Total interest-earning assets (1)		268,006			3,403		5.24	%		239,198			3,766		6.50	%
Noninterest-earning assets		21,239								17,491
Total assets	$	289,245							$	256,689
Interest-bearing liabilities:
Demand, money market
and NOW deposits	$	76,494			348		1.82	%	$	40,078			233		2.34	%
Savings		2,844			7		0.99	%		3,144			8		1.02	%
Certificates of deposit		139,870			1,211		3.47	%		147,833			1,712		4.66	%
Other borrowings		15,701			143		3.65	%		18,484			133		2.89	%
Total interest-bearing liabilities		234,909			1,709		2.92	%		209,539			2,086		4.00	%
Noninterest-bearing liabilities		37,450								28,177
Stockholders’ equity		16,886								18,973
Total liabilities and
stockholders’ equity	$	289,245							$	256,689
Net interest income before
provision for loan losses				$	1,694							$	1,680
Interest-rate spread							2.32	%							2.50	%
Net interest margin (1)							2.69	%							3.00	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		114.09	%							114.15	%

Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6% for purposes of computing the average yield/rate.

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	For the Six Months Ended June 30,
	2009								2008
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Rate			Balance			Dividends		Rate
Interest-earning assets:
Loans	$	207,619		$	6,252		6.07	%	$	200,264		$	6,958		6.99	%
Investment securities and
interest-bearing deposits (1)		46,997			648		3.65	%		39,478			884		5.54	%
Other interest-earning assets		1,108			1		0.18	%		1,542			20		2.61	%
Total interest-earning assets (1)		255,724			6,901		5.60	%		241,284			7,862		6.72	%
Noninterest-earning assets		23,658								16,943
Total assets	$	279,382							$	258,227
Interest-bearing liabilities:
Demand, money market
and NOW deposits	$	65,257			558		1.72	%	$	40,483			536		2.66	%
Savings		2,893			14		0.98	%		3,041			18		1.19	%
Certificates of deposit		141,168			2,610		3.73	%		148,260			3,572		4.85	%
Other borrowings		16,277			261		3.23	%		19,189			324		3.40	%
Total interest-bearing liabilities		225,595			3,443		3.08	%		210,973			4,450		4.24	%
Noninterest-bearing liabilities		36,903								28,247
Stockholders’ equity		16,884								19,007
Total liabilities and
stockholders’ equity	$	279,382							$	258,227
Net interest income before
provision for loan losses				$	3,458							$	3,412
Interest-rate spread							2.52	%							2.48	%
Net interest margin (1)							2.89	%							3.01	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		113.36	%							114.37	%

(1) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6% for purposes of computing the average yield/rate.

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Analysis of Changes in Net Interest Income

The following table sets forth, on a taxable equivalent basis, the effect which varying levels of interest-earning assets and interest-bearing liabilities and the applicable interest rates had on changes in net interest income for the three months periods ended June 30, 2009, compared to the same period in 2008.  For purposes of this table, changes which are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis (dollars in thousands):

	Three Months Ended June 30,
	2009 vs. 2008
	Increase (Decrease) Due to
							Rate/
	Rate			Volume			Volume			Total
Interest-earning assets:
Loans	$	(372	)	$	152		$	(10	)	$	(230	)
Investment securities and interest-bearing deposits		(271	)		303			(153	)		(121	)
Other interest-earning assets		(12	)		(12	)		12			(12	)
Total interest-earning assets		(655	)		443			(151	)		(363	)
Interest-bearing liabilities:
Demand, money market and NOW deposits		(52	)		212			(45	)		115
Savings		-			(1	)		-			(1	)
Certificates of deposit		(439	)		(93	)		31			(501	)
Other borrowings		35			(20	)		(5	)		10
Total interest-bearing liabilities		(456	)		98			(19	)		(377	)
Net interest income	$	(199	)	$	345		$	(132	)	$	14
	Six Months Ended June 30,
	2009 vs. 2008
	Increase (Decrease) Due to
							Rate/
	Rate			Volume			Volume			Total
Interest-earning assets:
Loans	$	(916	)	$	256		$	(46	)	$	(706	)
Investment securities and interest-bearing deposits		(371	)		207			(72	)		(236	)
Other interest-earning assets		(19	)		(6	)		6			(19	)
Total interest-earning assets		(1,306	)		457			(112	)		(961	)
Interest-bearing liabilities:
Demand, money market and NOW deposits		(189	)		328			(117	)		22
Savings		(3	)		(1	)		-			(4	)
Certificates of deposit		(826	)		(171	)		35			(962	)
Other borrowings		(16	)		(49	)		2			(63	)
Total interest-bearing liabilities		(1,034	)		107			(80	)		(1,007	)
Net interest income	$	(272	)	$	350		$	(32	)	$	46

Comparison of Three Months Ended June 30, 2009 and 2008

Interest Income and Expense

Interest Income.  Interest income was $3,403,000 and $3,766,000 for the three months ended June 30, 2009 and 2008, respectively, a decline of $363,000, or 9.6%.  A decrease in yields on average interest-earning assets of 126 basis points was not offset by the increase in average earning assets of $28.8 million, or 12.0%.  Substantially all of the increase was due to higher levels of interest-bearing deposits in the Federal Reserve that averaged $26.7 million, which yielded less than 0.2%.  Average loans grew $9.1 million over 2008, or 4.6%.  However, the declining interest rate environment and the effect of increased nonaccrual loans, restructured loans, and other real estate owned contributed to lower yields on average loans of 5.98% versus 6.73%, a decline of 75 basis points.  Average loans, as a percentage of average interest-earning assets, decreased to 77.6% in the second quarter of 2009 as compared with 83.1% in 2008.

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We saw a shift in the percentage of average investment securities and deposits to total interest-earning assets to 22.4% in 2009 from 16.0% in 2008.

Interest Expense.  Interest expense was $1,709,000 and $2,086,000 for the three months ended June 30, 2009 and 2008, respectively.  Our average cost of funds for interest-bearing liabilities decreased to 2.92% in 2009 compared with 4.00% over the same period in 2008, an overall decline of 108 basis points.  A shift in the mix of our interest-bearing deposits, along with decreases in the overall interest rates in our market area, contributed to the decrease in our cost of funds.  Certificates of deposit, with an average cost of funds of 3.47% in 2009 and 4.66% in 2008, represented 59.5% of our total interest-bearing liabilities in 2009 as compared with 70.6% in 2008.  The decline in average certificates of deposit and other interest-bearing liabilities were more than offset by increases in our interest-bearing demand deposits, with an average cost of funds of 1.82% in 2009 and 2.34% in 2008, representing 32.6% of our total interest-bearing liabilities in 2009 as compared with 19.3% in 2008.

With the recent changes in FDIC-insured levels for certain deposits, we have seen a shift from customer repurchase agreements (short-term other borrowings) into interest-bearing demand deposits.  For the second quarter of 2009, we had no short-term other borrowings versus $13.0 million in the same period of 2008.

Net Interest Income before Provision for Loan Losses.  Net interest income before provision for loan losses was $1,694,000 and $1,680,000 for the three months ended June 30, 2009 and 2008, respectively.  The net interest margin for the second quarter of 2009 was 2.69% versus 3.00% in 2008.  While we experienced an overall decline of 31 basis points, we would have yielded in excess of 3.00% had the additional core deposits obtained in the second quarter been invested in higher yielding assets rather than deposits with the Federal Reserve.  We temporarily invested these funds in the Federal Reserve to improve our overall liquidity position.

Provision for Loan Losses

We recorded provisions for loan losses totaling $133,000 and $661,000 for the three months ended June 30, 2009 and 2008, respectively, which management considered appropriate after its assessment of the overall quality of the loan portfolio.  During 2009, we increased our reserves in advance of recognizing charge-offs, with our reserve reaching 2.00% at June 30, 2009.

Noninterest Income and Expenses

Noninterest Income.  Total noninterest income decreased by $7,000, or 2.5% for the three months ended June 30, 2009, to $274,000 compared with $281,000 for the same period in 2008.  During the second quarter of 2009, gains on securities of $11,000 were offset by net losses of $12,000 on repossessed assets.

Noninterest Expenses.  Management has taken steps to reduce noninterest expenses in areas in which it can without significantly affecting the safety and soundness of our banking operations.  Salaries and employee benefits decreased $73,000, or 9.3%, in the second quarter of 2009 over 2008.  Expenses of bank premises and fixed assets decreased $10,000, or 3.7%.  Other components of noninterest expenses increased $244,000, or 34.1%.  The more significant increases were:

· Higher data processing, software, and communications expense of $9,000;

· Increases in pension expense of $7,000;

· Increases in regulatory assessments of $230,000 of which $130,000 was a special FDIC insurance premium assessment; and

· Increases in other operating expenses of $70,000, with the bulk of the increase coming from loan collection costs.

These increases were partially offset by the following decreases:

· Legal, auditing, and consulting fees decreased by $6,000;

· Other real estate owned expenses decreased by $28,000;

· Advertising and marketing expenses declined by $12,000; and

· Directors’ fees that were $26,000 in 2008 have been eliminated in 2009.

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In addition to the special assessment of $130,000 in the second quarter of 2009, FDIC insurance premium assessment rates increased during 2009 due to an interim rule approved by the FDIC in December 2008, which raised assessment rates uniformly by 7 basis points annually.  Additionally, assessment rates have increased due to the establishment of the Temporary Liquidity Guarantee Program (TLGP), which temporarily guarantees qualifying senior debt issued by participating FDIC-insured institutions and certain holding companies, as well as qualifying transaction account deposits.  We anticipate the FDIC assessments may increase throughout 2009.

Benefit for Income Taxes.  The effective tax rates differ from the federal and state statutory rates of 37.6% principally due to nontaxable investment income.  Tax-exempt income was $168,000 for the second quarter of 2009 as compared with $169,000 in 2008.

An income tax summary follows (dollars in thousands):

	Three Months Ended June 30,
	2009			2008
Book loss before income tax benefit	$	(93	)	$	(467	)
Nontaxable interest income, net		(168	)		(169	)
Realization of net operating losses and other, net		(159	)		(68	)
Taxable loss		(420	)		(704	)
Tax rate		37.6	%		37.6	%
Benefit for income taxes	$	(158	)	$	(265	)
Effective rate		169.9	%		56.7	%

Comparison of Six Months Ended June 30, 2009 and 2008

Interest Income and Expense

Interest Income.  Interest income was $6,901,000 and $7,862,000 for the six months ended June 30, 2009 and 2008, respectively, a decline of $961,000, or 12.2%.  A decrease in yields on average interest-earning assets of 112 basis points was not offset by the increase in average earning assets of $14.4 million, or 6.0%.  Substantially all of the increase was due to higher levels of interest-bearing deposits in the Federal Reserve that averaged $15.7 million, which yielded less than 0.2%.  Average loans grew by $7.4 million over 2008, or 3.7%.  However, the declining interest rate environment and the effect of increased nonaccrual loans, restructured loans, and other real estate owned contributed to lower yields on average loans of 6.07% versus 6.99%, a decline of 92 basis points.  Average loans, as a percentage of average interest-earning assets, decreased to 81.1% in the first half of 2009 as compared with 83.1% in 2008.

We saw a shift in the percentage of average investment securities and deposits to total interest-earning assets decrease to 18.4% in 2009 from 16.4% in 2008.

Interest Expense.  Interest expense was $3,443,000 and $4,450,000 for the six months ended June 30, 2009 and 2008, respectively.  Our average cost of funds for interest-bearing liabilities decreased to 3.08% in 2009 compared with 4.24% over the same period in 2008, an overall decline of 116 basis points.  A shift in the mix of our interest-bearing deposits, along with decreases in the overall interest rates in our market area, contributed to the decrease in our cost of funds.  Certificates of deposit, with an average cost of funds of 3.73% in 2009 and 4.85% in 2008, represented 62.3% of our total interest-bearing liabilities in 2009 as compared with 70.3% in 2008.  The decline in average certificates of deposit and other interest-bearing liabilities were more than offset by increases in our interest-bearing demand deposits, with an average cost of funds of 1.72% in 2009 and 2.66% in 2008, representing 28.9% of our total interest-bearing liabilities in 2009 as compared with 19.2% in 2008.

With the recent changes in FDIC-insured levels for certain deposits, we have seen a shift from customer repurchase agreements (short-term other borrowings) into interest-bearing demand deposits.  For 2009, we had no short-term other borrowings versus $11.8 million in 2008.

Net Interest Income before Provision for Loan Losses.  Net interest income before provision for loan losses was $3,458,000 and $3,412,000 for the three months ended June 30, 2009 and 2008, respectively.  The net interest margin for the first six months of 2009 was 2.89% versus 3.01% in 2008.  While we experienced an overall decline of 12 basis points, we would have yielded in excess of 3.00% had the additional core deposits obtained in the second quarter been invested in higher yielding assets rather than deposits with the Federal Reserve.  We temporarily invested these funds in the Federal Reserve to improve our overall liquidity position.

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Provision for Loan Losses

We recorded provisions for loan losses totaling $367,000 and $885,000 for the six months ended June 30, 2009 and 2008, respectively, which management considered appropriate after its assessment of the overall quality of the loan portfolio.  During 2009, we increased our reserves in advance of recognizing charge-offs, with our reserve reaching 2.00% at June 30, 2009.

Noninterest Income and Expenses

Noninterest Income.  Total noninterest income decreased by $228,000, or 40.9% for the six months ended June 30, 2009, to $329,000 compared with $557,000 for the same period in 2008.  During the first six months of 2009, gains on securities of $56,000 were offset by net losses of $61,000 on the sale of other real estate owned and $12,000 on repossessed assets.  Also, we reported a write-down of $179,000 of our investment in Silverton Bank following the bank closure by federal regulators on May 1, 2009.  We recorded this loss effective March 31, 2009.

Noninterest Expenses.  Management has taken steps to reduce noninterest expenses in areas in which it can without significantly affecting the safety and soundness of our banking operations.  Salaries and employee benefits decreased $133,000, or 8.4%, in the first half of 2009 over 2008.  Expenses of bank premises and fixed assets decreased $27,000, or 5.0%.  Other components of noninterest expenses increased $312,000, or 21.4%.  The more significant increases were:

· Higher data processing, software, and communications expense of $22,000;

· Increases in pension expense of $20,000; and

· Increases in regulatory assessments of $253,000 of which $130,000 was a special FDIC insurance premium assessment; and

· Increases in other operating expenses of $60,000, with the bulk of the increase coming from loan collection costs.

These increases were partially offset by directors’ fees that were $26,000 in 2008, which have been eliminated in 2009.

In addition to the special assessment of $130,000 in the second quarter of 2009, FDIC insurance premium assessment rates increased during 2009 due to an interim rule approved by the FDIC in December 2008, which raised assessment rates uniformly by 7 basis points annually.  Additionally, assessment rates have increased due to the establishment of the Temporary Liquidity Guarantee Program (TLGP), which temporarily guarantees qualifying senior debt issued by participating FDIC-insured institutions and certain holding companies, as well as qualifying transaction account deposits.  We anticipate the FDIC assessments may increase throughout 2009.

Benefit for Income Taxes.  The effective tax rates differ from the federal and state statutory rates of 37.6% principally due to nontaxable investment income.  Tax-exempt income was $336,000 for the first six months of 2009 as compared with $339,000 in 2008.

An income tax summary follows (dollars in thousands):

	Six Months Ended June 30,
	2009			2008
Book loss before income tax benefit	$	(311	)	$	(495	)
Nontaxable interest income, net		(336	)		(339	)
Realization of net operating losses and other, net		(172	)		(70	)
Taxable loss		(819	)		(904	)
Tax rate		37.6	%		37.6	%
Benefit for income taxes	$	(308	)	$	(340	)
Effective rate		99.0	%		68.7	%

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ITEM 4.  CONTROLS AND PROCEDURES

Background of Internal Controls and Internal Audits.  Oceanside is the sole financial subsidiary of Atlantic.  Oceanside has extensive policies and operating procedures in place 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 subsequently 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.

Atlantic engages an external certified public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) to annually perform an independent audit, conducted in accordance with generally accepted auditing standards adopted by the PCAOB.

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's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Atlantic's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”).  Based on that evaluation, such officers have concluded that, as of the Evaluation Date, Atlantic's disclosure controls and procedures are effective in bringing to their attention, on a timely basis, material information relating to Atlantic (including its consolidated subsidiary) required to be included in Atlantic's periodic filings under the Exchange Act.

Changes in Internal Controls.  Since the Evaluation Date, there have not been any significant changes in Atlantic's internal controls or in other factors that could significantly affect those controls.

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

PART II:                OTHER INFORMATION

Item 1. Legal Proceedings.

Periodically, we are 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.

An Annual Meeting of Shareholders was held on April 23, 2009.  At that meeting, a majority of the shareholders of record voted to elect a total of two Class III directors with terms to expire in 2012 (Proposal I); to ratify the Directors’ appointment of Mauldin, Jenkins, Certified Public Accountants, LLC, as the independent registered public accounting firm for Atlantic BancGroup, Inc., for the fiscal year ending December 31, 2009 (Proposal II); to approve the adjournment of the Annual Meeting to solicit additional proxies in the event that there were not sufficient votes to approve any one or more of the proposals at the 2009 Annual Meeting (Proposal III).

Proposal I

Class III Directors with Terms Expiring in 2012
Director	Votes For	Votes Against or Withheld	Votes Abstained
Dr. Conrad L. Williams	953,313	3,240	0
Dennis M. Wolfson	954,513	2,040	0

Proposal II

Votes For	Votes Against or Withheld	Votes Abstained
956,313	0	240

Proposal III

Votes For	Votes Against or Withheld	Votes Abstained
946,319	9,934	300

Item 6. Exhibits.

Exhibit No. Description of Exhibit

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)

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

10.1 Software 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)

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

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

In accordance with the requirements of the Securities Exchange Act of 1934, the issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Atlantic BancGroup, Inc.
Date:  August 14, 2009	/s/ Barry W. Chandler
	Barry W. Chandler
	President and Principal Executive Officer
Date:  August 14, 2009	/s/ David L. Young
	David L. Young
	Executive Vice President,
	Principal Financial Officer, and
	Corporate Secretary

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