** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 
| **(Mark One)** |
|----------------|
|           |
| **x**          | ** ** | **ANNUAL REPORT UNDER SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT O F 1934.** |
|           |   |   |
| ** **     |   |   | **For The  Fiscal Year Ended: December 31, 2007.** |
|           |   |   |
| **o**          | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT O  F 1934.** |

 

| ** ** | **For the Transition Period from                      to                   ** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                              |
|       | **Commission  file number****333-127242**                                                                                                                                                                                                                         |

 

| **Atlantic Bancshares, Inc.**             |
|------------------------------------------------|
| (Name of small business issuer in its charter) |

 

| **South Carolina**                       |   | **20-3047433**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of          |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)           |   |                                 |
|                                     |   |                                 |
| **1 Sherington Drive,  Suite J**    |   |                                 |
| **Bluffton, South Carolina**             |   | **29910**                            |
| (Address of principal executive offices) |   | (Zip Code)                           |

 

Issuer’s telephonenumber:  **(843)815-7111**

 

Securities registered under Section 12(b) of the ExchangeAct:  **None**

 

Securities registered under Section 12(g) of the ExchangeAct:  **None**

 

Check whether the issuer is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act.  o

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forpast 90 days.  Yes x  No o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

State issuer’s revenues for itsmost recent fiscal year. $ 4,691,499

 

The estimated aggregate market value of the common stock held bynon-affiliates (shareholders holding less than 5% of an outstanding class ofstock, excluding directors and executive officers) of the company on March 1,2008 was $8,680,064. ** **There is not an active trading market for the common stock.  We have used the last trade for the yearended December 31, 2007 of $9.70 as an estimate of the market value of ashare of our common stock for purposes of calculating our public float.

 

As of March 20, 2008, the company had 1,251,577 shares of commonstock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

TransitionalSmall Business Disclosure Format (Check one): Yes o  No x

 

 

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**Part I**

 

**Item 1.  Description of Business**

 

ThisReport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and the SecuritiesExchange Act of 1934.  Forward-lookingstatements may relate to our financial condition, results of operation, plans,objectives, or future performance.  Thesestatements are based on many assumptions and estimates and are not guaranteesof future performance.  Our actualresults may differ materially from those anticipated in any forward-lookingstatements, as they will depend on many factors about which we are unsure,including many factors which are beyond our control.  The words “may,”  “would,” “could,” “will,” “expect,” “anticipate,”“believe,” “intend,” “plan,” and “estimate,” as well as similar expressions,are meant to identify such forward-looking statements.  Potential risks and uncertainties include,but are not limited to, those described below under “Risk Factors” and thefollowing:

 
| · | significant  increases in competitive pressure in the banking and financial services  industries;                                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | changes  in the interest rate environment which could reduce anticipated or actual  margins;                                                                                                                            |
| · | changes  in political conditions or the legislative or regulatory environment;                                                                                                                                          |
| · | general economic conditions, either nationally or  regionally and especially in our primary service area, becoming less  favorable than expected, resulting in, among other things, a deterioration in  credit quality; |
| · | changes  occurring in business conditions and inflation;                                                                                                                                                                |
| · | changes  in technology;                                                                                                                                                                                                 |
| · | changes  in monetary and tax policies;                                                                                                                                                                                  |
| · | the  level of allowance for loan loss;                                                                                                                                                                                  |
| · | the  rate of delinquencies and amounts of charge-offs;                                                                                                                                                                  |
| · | the  rates of loan growth;                                                                                                                                                                                              |
| · | adverse  changes in asset quality and resulting credit risk-related losses and  expenses;                                                                                                                               |
| · | loss  of consumer confidence and economic disruptions resulting from terrorist  activities;                                                                                                                             |
| · | changes  in the securities markets; and                                                                                                                                                                                 |
| · | other risks  and uncertainties detailed from time to time in our filings with the  Securities and Exchange Commission (“SEC”).                                                                                |

 

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  In light of these risks,uncertainties, and assumptions, the forward-looking events discussed in thisreport might not occur.

 

**General**

 

AtlanticBancshares, Inc. was incorporated in South Carolina in June 2005 forpurposes of operating as a bank holding company.  Our wholly-owned subsidiary, AtlanticCommunity Bank, commenced business on January 26, 2006, and is primarilyengaged in the business of accepting savings, demand, and time deposits andproviding mortgage, consumer and commercial loans to the general public.

 

**RiskFactors**

 

***We are a new bank that has incurred losses to date,and there is a risk we may never become profitable.***

 

Our bank is a de novo bank that began operations in January 2006.  As is typical with most new banks, we incurredsubstantial start-up expenses and are still operating with an accumulateddeficit.  In order for us to becomeprofitable, we will need to attract a larger number of customers to deposit andborrow money.  Our future profitabilityis also dependent on numerous other factors including the continued success ofthe economy of the community and favorable government regulation.  While the economy in this area has beenstrong in recent years, an economic downturn in the area would hurt ourbusiness.  We are also a highly regulatedinstitution.  Our ability to grow andachieve profitability may be adversely affected by state and federalregulations that limit a bank’s right to make loans and purchasesecurities.  Although we expect to becomeprofitable in our third year of operation, there is a risk that a deteriorationof the local economy or adverse government regulation could affect ourplans.  If this happens, we may neverbecome profitable and you will lose part or all of your investment.

 

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***Our decisions regardingcredit risk and reserves for loan losses may materially and adversely affectour business.***

 

Making loans and otherextensions of credit is an essential element of our business.  Although we seek to mitigate risks inherentin lending by adhering to specific underwriting practices, our loans and otherextensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

·                  theduration of the credit;

·                  creditrisks of a particular customer;

·                  changesin economic and industry conditions; and

·                  inthe case of a collateralized loan, risks resulting from uncertainties about thefuture value of the collateral.

 

Weattempt to maintain an appropriate allowance for loan losses to provide forpotential losses in our loan portfolio. We periodically determine the amount of the allowance based onconsideration of several factors, including:

 

·                  anongoing review of the quality, mix, and size of our overall loan portfolio;

·                  ourhistorical loan loss experience;

·                  evaluationof economic conditions;

·                  regularreviews of loan delinquencies and loan portfolio quality; and

·                  theamount and quality of collateral, including guarantees, securing the loans.

 

There is no precise method of predicting credit losses; therefore, weface the risk that charge-offs in future periods will exceed our allowance forloan losses and that additional increases in the allowance for loan losses willbe required.  Additions to the allowancefor loan losses would result in a decrease of our net income, and possibly ourcapital.

 

While we generally underwrite the loans in our portfolio in accordancewith our own internal underwriting guidelines and regulatory supervisoryguidelines, in certain circumstances we have made loans which exceed either ourinternal underwriting guidelines, supervisory guidelines, or both.  As of December 31, 2007, approximately$12.8 million of our loans, or 128% of our company’s capital, had loan-to-valueratios that exceeded regulatory supervisory guidelines, of which nine loanstotaling approximately $1.9 million had loan-to-value ratios of 100% ormore.  At December 31, 2007,approximately $10 million of our commercial loans, or 99.7% of our company’scapital, exceeded the supervisory loan to value ratio.  The number of loans in our portfolio withloan-to-value ratios in excess of supervisory guidelines, our internalguidelines, or both could increase the risk of delinquencies and defaults inour portfolio.

 

***We may havehigher loan losses than we have allowed for in our allowance for loan losses.***

 

Our loan losses could exceed our allowance for loan losses.  Reliance on our historic allowance for loanlosses may not be adequate.  Approximately51% of our loan portfolio is composed of construction, commercial mortgage andcommercial loans.  Repayment of suchloans is generally considered more subject to market risk than residentialmortgage loans.  Industry experienceshows that a portion of loans will become delinquent and a portion of loanswill require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may beexperienced as a result of various factors beyond our control, including amongother things, changes in market conditions affecting the value of loancollateral and problems affecting the credit of our borrowers.

 

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***Lack of seasoning of ourloan portfolio may increase the risk of credit defaults in the future.***

 

Due to our short operatinghistory, the loans in our loan portfolio and our lending relationships are ofrelatively recent origin.  In general,loans do not begin to show signs of credit deterioration or default until theyhave been outstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition.

 

***A significant portion of our loan portfolio is secured by real estate,and events that negatively impact the real estate market could hurt ourbusiness.***

 

Asignificant portion of our loan portfolio is secured by real estate.  As of December 31, 2007, approximately92% of our loans had real estate as a primary or secondary component ofcollateral.  The real estate collateralin each case provides an alternate source of repayment in the event of defaultby the borrower and may deteriorate in value during the time the credit isextended.  A weakening of the real estatemarket in our primary market area could result in an increase in the number ofborrowers who default on their loans and a reduction in the value of thecollateral securing their loans, which in turn could have an adverse effect onour profitability and asset quality.  Ifwe are required to liquidate the collateral securing a loan to satisfy the debtduring a period of reduced real estate values, our earnings and capital couldbe adversely affected.  Acts of nature,including hurricanes, tornados, earthquakes, fires and floods, which may causeuninsured damage and other loss of value to real estate that secures theseloans, may also negatively impact our financial condition.

 

***We have a high concentration ofconstruction and development loans in our loan portfolio which carry a higherdegree of risk than long-term financing of existing properties.***

 

As of December 31,2007, total construction and development loans amounted to approximately$5.9 million, or 9%, of our total loan portfolio.  Included in the $5.9 million wasapproximately $2 million outstanding under construction loan facilities,or 33.6% of our construction and development loan portfolio, that were made tocommercial construction developers. Construction and development loans generally carry a higher degree ofrisk than long-term financing of existing properties because repayment dependson the ultimate completion of the project or home and usually on the sale ofthe property or permanent financing. Specific risks include:

 

·                  cost overruns;

 

·                  mismanagedconstruction;

 

·                  inferior orimproper construction techniques;

 

·                  economic changes ordownturns during construction;

 

·                  rising interestrates that may prevent sale of the property; and

 

·                  failure to sellcompleted projects or units in a timely manner.

 

Theoccurrence of any of the preceding risks could result in the deterioration ofone or more of these loans which could significantly increase our percentage ofnon-performing assets.  An increase innon-performing loans may result in a loss of earnings from these loans, anincrease in the related provision for loan losses, and an increase in charge-offs,all of which could have a material adverse effect on our financial conditionand results of operations.

 

***An economic downturn, especiallyone affecting Beaufort and Jasper Counties******and thesurrounding communities, could reduce our customer base, our level of deposits,and demand for financial products such as loans.***

 

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Oursuccess will significantly depend upon the growth in population, income levels,deposits, and housing starts in our primary service area.  If the primary service area in which weoperate does not grow or if prevailing economic conditions locally ornationally are unfavorable, our business may not succeed.  An economic downturn would likely contributeto the deterioration of the quality of our loan portfolio and reduce our levelof deposits, which in turn would hurt our business.  If an economic downturn occurs in the economyas a whole, or in our primary market, borrowers may be less likely to repaytheir loans as scheduled.  Moreover, thevalue of real estate or other collateral that may secure our loans could beadversely affected.  Unlike many largerinstitutions, we are not able to spread the risks of unfavorable local economicconditions across a large number of diversified economies.  Aneconomic downturn, including a decline in the local real estate market, could,therefore, result in losses that materially and adversely affect our business.

 

***Our small- to medium-sized business targetmarkets may have fewer financial resources to weather a downturn in theeconomy.***

 

We target the banking andfinancial services needs of small- and medium-sized businesses.  These businesses generally have fewerfinancial resources in terms of capital borrowing capacity than largerentities.  If general economic conditionsnegatively impact these businesses in the markets in which we operate, ourbusiness, financial condition, and results of operation may be adverselyaffected.

 

***We are dependent on Robert Trask and our businesswould suffer if something were to happen to him or if he were to leave.***

 

Our growth and development will largely be theresult of the contributions of our president, Robert Trask.  The performance of community banks, likeAtlantic Community Bank, is often dependent upon the ability of executiveofficers to promote the bank in the local market area.  Mr. Trask has extensive andlong-standing ties within our primary service areas and will provide us with animportant medium through which to market our products and services.  If we lose the services of Mr. Trask, hewould be difficult to replace and our business and development could bematerially and adversely affected.  Wehave an employment agreement with Mr. Trask and have $1,000,000 ofinsurance on his life payable to the bank.

 

***We face strong competition for customers, whichcould prevent us from obtaining customers and may cause us to pay higherinterest rates to attract customers****.*

 

Thebanking business is highly competitive, and we experience competition in ourmarket from many other financial institutions. We compete with commercial banks, credit unions, savings and loanassociations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds, and other mutualfunds, as well as other super-regional, national, and international financialinstitutions that operate offices in our primary market areas andelsewhere.  We compete with theseinstitutions both in attracting deposits and in making loans.  In addition, we have to attract our clientbase from other existing financial institutions and from new residents.  Many of our competitors are well-established,larger financial institutions.  Theseinstitutions offer some services, such as extensive and established branchnetworks, that we do not currently provide. Also, a number of community banks are entering our primary servicearea.  They include de novo banks andbranches of established banking operations, both headquartered in-market aswell as out-of-market.  As is the casewith other financial service providers, they are attracted to our primaryservice area’s demographic trends and growing deposit base.  There is a risk that we will not be able tocompete successfully with other financial institutions in our market, and thatwe may have to pay higher interest rates to attract deposits, resulting inreduced profitability.  In addition,competitors that are not depository institutions are generally not subject tothe extensive regulations that apply to us.

 

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***We are subject to extensive regulation that could limit or restrict ouractivities.  This regulation is******forprotection of the bank’s depositors and not for the investors.***

 

We operate in a highlyregulated industry and are subject to examination, supervision, andcomprehensive regulation by various regulatory agencies.  Our compliance with these regulations iscostly and restricts certain of our activities, including payment of dividends,mergers and acquisitions, investments, loans and interest rates charged,interest rates paid on deposits, and locations of offices.  We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth.

 

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business andprofitability.  Because governmentregulation greatly affects the business and financial results of all commercialbanks and bank holding companies, our cost of compliance could adversely affectour ability to operate profitably.

 

Althoughwe are subject to extensive and comprehensive regulation by various bankingregulatory agencies such as the FDIC and the South Carolina Board of FinancialInstitution, the purpose of these banking regulatory agencies is to protect andinsure the interests and deposits of our bank’s depositors.  These agencies do not consider preserving ormaximizing the investment made by the company’s investors when regulating thebank’s activities.

 

***We will face risks with respect to futureexpansion and acquisitions or mergers.***

 

Although we do not have anycurrent plans to do so, we may seek to acquire other financial institutions orparts of those institutions.  We may alsoexpand into new markets or lines of business or offer new products orservices.  These activities would involvea number of risks, including:

 

·                  takingadditional time and creating expense associated with identifying and evaluatingpotential acquisitions and merger partners;

·                  usinginaccurate estimates and judgments to evaluate credit, operations, management,and market risks with respect to the target institution or assets;

·                  dilutingour existing shareholders in an acquisition;

·                  takingadditional time and creating expense associated with evaluating new markets forexpansion, hiring experienced local management, and opening new offices, asthere may be a substantial time lag between these activities before we generatesufficient assets and deposits to support the costs of the expansion;

·                  takinga significant amount of time negotiating a transaction or working on expansionplans, resulting in management’s attention being diverted from the operation ofour existing business;

·                  takingtime and creating expense integrating the operations and personnel of thecombined businesses;

·                  creatingan adverse short-term effect on our results of operations; and

·                  losingkey employees and customers as a result of an acquisition that is poorlyreceived.

 

Wehave never acquired another institution before, so we lack experience inhandling any of these risks.  There isalso a risk that any expansion effort will not be successful.

 

***The costs of being an SEC registered company are proportionately higherfor small companies such as Atlantic Bancshares because of the requirementsimposed by the Sarbanes-Oxley Act.***

 

The Sarbanes-Oxley Act of 2002 and the related rules andregulations promulgated by the SEC have increased the scope, complexity, andcost of corporate governance, reporting, and disclosure practices.  These regulations are applicable to ourcompany.  We have experienced, and expectto continue to experience, increasing compliance costs, including costs relatedto internal controls, as a result of the Sarbanes-Oxley Act.  These necessary costs are proportionatelyhigher for a company of our size and will affect our profitability more thanthat of some of our larger competitors.

 

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***Changes in prevailinginterest rates may reduce our profitability.***

 

Our results ofoperations depend in large part upon the level of our net interest income,which is the difference between interest income from interest-earning assets,such as loans and mortgage-backed securities, and interest expense oninterest-bearing liabilities, such as deposits and other borrowings.  Depending on the terms and maturities of ourassets and liabilities, a significant change in interest rates could have amaterial adverse effect on our profitability. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, maturities, andpricing of our assets and liabilities, our efforts may not be effective and ourfinancial condition and results of operations could suffer.

 

***Our pace of growth may require us to raise additional capital in thefuture, and that capital may not be available when it is needed.***

 

We are required by our regulators to maintain adequate levels ofcapital to support our operations.  Tosupport continued growth, we may need to raise additional capital in thefuture.  Our ability to raise additionalcapital, if needed, will depend in part on conditions in the capital markets atthat time, which are beyond our control. We cannot make assurances as to our ability to raise additional capital,if needed, on terms acceptable to us.  Ifwe cannot raise additional capital when needed, our ability to expand our operationsthrough internal growth and acquisitions could be materially affected.  In addition, if we decide to raise additionalcapital, your interest could be diluted.

 

***We do not expect a liquid market for our common stock to develop forseveral years, if at all.***

 

Althoughour common stock is quoted on the OTC Bulletin Board under the symbol “ATBA”,there is currently no established market for our common stock, and trading andquotations of our common stock have been limited and sporadic.  We do not expect a liquid market for ourcommon stock to develop for several years, if at all.

 

**Marketing Focus**

 

Historically, the banks in Beaufort County were localbranches of large regional banks. Recently there has been, and there may continue to be, an influx of communitybanks within our primary service area. The mix of incoming banks includes de novo banks and establishedoperations, both headquartered in-market as well as out-of-market.  Size continues to provide the larger bankscertain advantages in competing for business from large corporations, includinghigher lending limits and the ability to offer services in other areas of SouthCarolina and in Beaufort County.

 

We have created a niche in the community banking marketin our primary service area via our staffing, advertising and approach toservice. Generally, we do not attempt to compete for the banking relationshipsof large corporations, but concentrate our efforts on small to medium-sizedbusinesses, entrepreneurs and professional concerns.  The bank advertises to emphasize the company’sbrand image, local ownership, community bank nature, and ability to providemore personalized service than its competition.

 

**Locationand Service Area**

 

Our main office is currently located at 1 Sherington Drive, Suite J(Sheridan Park), Bluffton, South Carolina 29910.  Thelocation was formerly subleased through Regional Bankshares, Inc. until January 24,2006 when we entered into a new lease with Carolina Partners, LLC. The facilityis 2,190 square feet and is leased until 2010 with a three-year option torenew.  We also lease a facility for ouroperations department at 70 Pennington Drive, Suite 21 (Sheridan Park),Bluffton, South Carolina 29910.  Thisfacility is approximately 1⁄4 mile south of the Sheridan Park branch location andis in the same commercial subdivision. This operations department facility has approximately 2,000 square feetof office space and houses between seven and 10 employees.  We anticipate leasing the location housingour operations department through June 2008.

 

Wehave entered into a lease agreement for a facility that will consolidate andhouse our main office and our operations department.  The facility is located in the same SheridanPark commercial subdivision as the main office and operations department arecurrently located.  The new location isleased until December 2023 and provides two five-year renewal terms.  Planned renovations to the new space and themove to consolidate the main branch and the 

 

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operationsdepartment are planned to be completed during the second quarter 2008.  We plan to sublease the existing main officefor the remainder of the current lease during 2009.

 

Ourloan production office located at 1 Corpus Christi Place, Suite 108,Hilton Head Island, South Carolina 29928 was converted into a full servicebranch in October 2007.  The 1,837square feet facility housing this branch is leased from MB Partners, LLC, a separatecompany whose ownership, in part, includes the eight directors of AtlanticBancshares, Inc.

 

Currentplans project opening an additional branch office within five years.  As is the case with any and all branchingefforts, we would need to receive approval from appropriate regulatory bodies.     In 2006, MB Partners, LLC purchased anapproximately one and a half acre commercial parcel in Jasper County.  This commercial parcel is located at thecorner of Meade Road and Argent Boulevard. We may enter into a purchase, lease and/or build-to-suit agreement relatingto this parcel and the development of a branch facility on this parcel.  In the event that we determine to moveforward with a branch on this parcel, we would, again, need to receive, priorto consummation, approval from appropriate regulatory bodies.

 

Ourprimary service area consists of southern Beaufort County and a portion ofJasper County.  Our office is located inBluffton.** **Ourgeographical market area includes southern Beaufort County and a portion ofJasper County.  The area is generallydefined by the Broad River and Interstate 95 to the North, the State of Georgiato the South, the Atlantic Ocean and Broad River to the East, and Interstate 95to the West.  Additional communitiesfalling within our market area include Hilton Head Island, Palmetto Bluff,Pritchardville, Sun City, Okatie, Hardeeville and Ridgeland.

 

Ourprimary service area’s economic strength comes from the industries of tourism,real estate development, education, government and services.  The commercial sector of the economy isoriented towards real estate development. According to Claritas, Inc., a marketing research firm, 2006’saverage household income in our primary service area was $89,196 compared to$65,849 for the United States as a whole. Within the primary service area, the average household income isprojected to increase by 10.3% between 2006 and 2011.  We believe that the community will continueto experience rapid growth in the commercial sectors offering services toresidents and visitors.  We anticipatethat growth in residential and commercial activity in the primary service areaand surrounding areas will increase the demand for depository and lendingservices within our market and believe that the conditions are favorable forthe growth of our company.

 

We believe our primary service area will sustaincontinued growth.  According to Claritas, Inc.,the population growth for our primary service area from 2000 to 2006 wasapproximately 18.6%.  They are projectinga growth of 12.7% between 2006 and 2011 compared to the projected nationalaverage of 4.8%.  The number ofhouseholds in our primary service area is projected to increase by 13.5%between 2006 and 2011 compared to the projected national average of 5%.  As a result, we anticipate the area’sexpanding population and expected growth in total households will enlarge thebank’s potential customer base.

 

**Lending Activities**

 

*General*.  Weoffer a range of lending services, including real estate, commercial, andequity-line and consumer loans to individuals, small- to medium-sizedbusinesses, and professional concerns that are located in or conduct asubstantial portion of their business in the bank’s market area.  We compete for these loans with competitorswho are well established in our service area and have greater resources andlending limits and also de novo banking organizations new to our market.  As a result, we have charged, from time totime, lower interest rates to attract borrowers and may continue to do so.

 

Thewell established banks in our service area will make proportionately more loansto medium-to-large-sized businesses than we do. Many of the bank’s commercial loans are made to small-to-medium-sizedbusinesses which are less able to withstand competitive, economic, andfinancial conditions than larger borrowers.

 

*Loan Approval and Review.*  The bank’s loan approvalpolicies provide for various levels of officer lending authority.  When the amount of aggregate loans to asingle borrower exceeds that individual officer’s lending authority, the loan requestis considered and approved by an officer with a higher lending limit or theboard of directors’ loan committee.  Thebank does not make any loans to any director of the bank unless the loan isapproved 

 

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by the board of directors of the bank and ismade on terms not more favorable to the person than would be available to aperson not affiliated with the bank.  Thebank currently intends to adhere to Federal National Mortgage Association andFederal Home Loan Mortgage Corporation guidelines in its mortgage loan reviewprocess, but may choose to alter this policy in the future.  The bank sells residential mortgage loansthat it originates on the secondary market.

 

*Loan Distribution.*  Thedistribution of our loans as of December 31, 2007 is as follows:

 

| Real Estate-Mortgage                                             |   | 65     | %      |
|------------------------------------------------------------------|--------|--------|--------|
| Real Estate-Construction, land development  and other land loans |   | 27     | %      |
| Commercial and industrial                                        |   | 7      | %      |
| Consumer loans                                                   |   | 1      | %      |
|                                                             |   |   |   |
| Total                                                            |   | 100    | %      |

 

Our deposit and loandistribution going forward depend on our customers’ requirements and otherfactors and will likely vary over time. Please see our “Management’s Discussion and Analysis – Earning Assets”for further information on our loan portfolio.

 

*Allowance for Loan Losses.*  We maintain an allowance forloan losses, which we establish through a provision for loan losses chargedagainst income.  We charge loans againstthis allowance when we believe that the collectability of the principal isunlikely.  The allowance is an estimatedamount that we believe will be adequate to absorb losses inherent in the loanportfolio based on evaluations of its collectability.  At December 31, 2007, our allowance forloan losses equals approximately 1.03% of the average outstanding balance ofour loans.  Over time, we periodicallydetermine the amount of the allowance based on our consideration of severalfactors, including:

 

·                  an ongoing review of the quality, mix, andsize of our overall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  specific problem loans and commitments thatmay affect the borrower’s ability to pay;

·                  regular reviews of loan delinquencies andloan portfolio quality by our internal auditors and our bank regulators; and

·                  the amount and quality of collateral,including guarantees, securing the loans.

 

*Lending Limits.*  The bank’s lending activities are subject toa variety of lending limits imposed by federal law.  In general, the bank is subject to a legallimit on loans to a single borrower equal to 15% of the bank’s capital andunimpaired surplus.  Different limits mayapply based on the type of loan or the nature of the borrower, including theborrower’s relationship to the bank. These limits will increase or decrease as the bank’s capital increasesor decreases.  Unless the bank is able tosell participations in its loans to other financial institutions, the bank isnot be able to meet all of the lending needs of loan customers requiringaggregate extensions of credit above these limits.

 

*Credit Risk*.  The principal credit risk associated witheach category of loans is the creditworthiness of the borrower.  Borrower creditworthiness is affected bygeneral economic conditions and the strength of the manufacturing, services,and retail market segments.  Generaleconomic factors affecting a borrower’s ability to repay include interest,inflation, employment rates, and the strength of local and national economy, aswell as other factors affecting a borrower’s customers, suppliers, andemployees.

 

*Real Estate Loans*.  Loans secured by first orsecond mortgages on real estate make up the most significant portion of the bank’sloan portfolio — approximately 92% as of December 31, 2007.  These loans generally fall into one of twocategories: commercial real estate loans or construction and developmentloans.  We also make residential realestate loans secured by first or second mortgages on real estate.  Each of these categories is discussed in moredetail below, including their specific risks. Interest rates for all categories may be fixed or adjustable, typicallyfixed for shorter-term loans.  The bankgenerally charges an origination fee for each loan.

 

Real estateloans are subject to the same general risks as other loans.  Real estate loans are also sensitive tofluctuations in the value of the real estate securing the loan.  On first and second mortgage loans we typicallydo not 

 

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advance more than regulatory limits.  We require a valid mortgage lien on all realproperty loans along with a title lien policy which insures the validity andpriority of the lien.  We also requireborrowers to obtain hazard insurance policies and flood insurance, ifapplicable.  Additionally, certain typesof real estate loans have specific risk characteristics that vary according tothe collateral type securing the loan and the terms and repayment sources forthe loan.

 

Wehave the ability to originate some real estate loans for sale into thesecondary market.  We can limit ourinterest rate and credit risk on these loans by locking the interest rate foreach loan with the secondary investor and receiving the investor’s underwritingapproval prior to originating the loan.

 

·                  *Commercial Real Estate Loans*. Commercial real estate loans generally have terms of five years or less,although payments may be structured on a longer amortization basis.  Inherent in commercial real estate loans’credit risk is the risk that the primary source of repayment, the operatingcommercial real estate company, will be insufficient to service the debt.  If a real estate loan is in default, we alsorun the risk that the value of a commercial real estate loan’s secured realestate will decrease, and thereby be insufficient to satisfy the loan.  To mitigate these risks, we evaluate eachborrower on an individual basis and attempt to determine its business risks andcredit profile.  We attempt to reducecredit risk in the commercial real estate portfolio by emphasizing loans onowner-occupied office and retail buildings where the loan-to-value ratio isestablished by independent appraisals. We typically review the personal financial statements of the principal ownersand require their personal guarantees. These reviews often reveal secondary sources of payment and liquidity tosupport a loan request.

 

·                  *Construction and Development RealEstate Loans. *We offer adjustable and fixed rateresidential and commercial construction loans to builders and developers and toconsumers who wish to build their own home. The term of construction and development loans generally is limited to18 months, although payments may be structured on a longer amortizationbasis.  Most loans will mature andrequire payment in full upon the sale of the property.  Construction and development loans generallycarry a higher degree of risk than long term financing of existingproperties.  Repayment usually depends onthe ultimate completion of the project within cost estimates and on the sale ofthe property.  Specific risks include:

 

·                  cost overruns;

·                  mismanaged construction;

·                  inferior or improper construction techniques;

·                  economic changes or downturns duringconstruction;

·                  a downturn in the real estate market;

·                  rising interest rates which may prevent saleof the property; and

·                  failure to sell completed projects in atimely manner.

 

Weattempt to reduce risk by obtaining personal guarantees where possible, and bykeeping the loan-to-value ratio of the completed project below specifiedpercentages.  We also reduce risk byselling participations in larger loans to other institutions when possible.

 

·                  *Residential Real Estate Loans*. These loans generally have longer terms, up to 30 years.  We offer fixed and adjustable rate mortgages,and we sell most or all of the residential real estate loans that we generatein the secondary market soon after we originate them.  At this time, we do not intend to retainservicing rights for these loans. Inherent in residential real estate loans’ credit risk is the risk thatthe primary source of repayment, the residential borrower, will be insufficientto service the debt.  If a real estateloan is in default, we also run the risk that the value of a residential realestate loan’s secured real estate will decrease, and thereby be insufficient tosatisfy the loan.  To mitigate theserisks, we evaluate each borrower on an individual basis and attempt todetermine its credit profile.  By sellingthese loans in the secondary market, we believe we significantly reduce ourexposure to credit risk because the loans will be underwritten through a thirdparty agent without any recourse against the bank.

 

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*Commercial Loans*.  Thebank makes loans for commercial purposes in various lines of businesses.  We focus our efforts on commercial loans of$1,000,000 or less.  Equipment loans aretypically made for a term of five years or less at fixed or variable rates,with the loan fully amortized over the term and secured by the financedequipment.  Working capital loanstypically have terms not exceeding one year and are usually secured by accountsreceivable, inventory, or personal guarantees of the principals of thebusiness.  For loans secured by accountsreceivable or inventory, principal will typically be repaid as the assetssecuring the loan are converted into cash, and in other cases principal willtypically be due at maturity.  We issuetrade letters of credit, standby letters of credit, and foreign exchangedirectly and, in some cases, through a correspondent bank as agent for thebank.  Commercial loans primarily haverisk that the primary source of repayment, the borrowing business, will beinsufficient to service the debt.  Oftenthis occurs as the result of changes in local economic conditions or in theindustry in which the borrower operates which impact cash flow or collateralvalue.

 

Wehave access to small business loans utilizing government enhancements such asthe Small Business Administration’s 7(a) program and SBA’s 504 and “LowDoc”programs.  Typically, these loans arepartially guaranteed by the government which may help to reduce the bank’srisk.  Government guarantees of SBA loanswill not exceed 80% of the loan value, and will generally be less.

 

**Banking Services**

 

We offer a full range ofdeposit services that are typically available in most banks and savings andloan associations, including checking accounts, NOW accounts, commercialaccounts, savings accounts, and other time deposits of various types, rangingfrom daily money market accounts to longer-term certificates of deposit.  The transaction accounts and timecertificates are tailored to our principal market area at rates competitive tothose offered in the Beaufort and Jasper County area.  In addition, we offer certain retirementaccount services, including IRAs.  Wesolicit these accounts from individuals, businesses, and other organizations.

 

**Other Banking Services**

 

Weoffer cashier’s checks, banking by mail, direct deposit of payroll and socialsecurity checks, United States Savings Bonds, and travelers checks.  We are associated with the Honor, Star,Presto, and Cirrus ATM networks that may be used by the bank’s customersthroughout the country.  We believe that by being associated with a sharednetwork of ATMs, we are better able to serve our customers and will be able toattract customers who are accustomed to the convenience of using ATMs. ****We also offer a debit card and credit card servicesthrough a correspondent bank as an agent for the bank.  We offer on-line banking, lines of credit,and telephone banking.  And, we providedeposit courier service for customers who fall within our primary service area.We do not expect the bank to exercise trust powers during its initial years ofoperation.

 

Weoffer products and services via the traditional means of brick and mortar,phone banking, ATM network and Internet banking.

 

**Competition**

 

The banking business ishighly competitive.  We compete as afinancial intermediary with other commercial banks, community banks, savingsbanks, credit unions, finance companies, and money market mutual fundsoperating in the Bluffton area and surrounding communities.  Some of these competitors have been inbusiness for a long time and have already established their customer base andname recognition.  Many are larger thanwe are and have greater financial and personnel resources than we currentlyhave.  Some are large super-regional andregional banks, like Wachovia Bank, Bank of America, and SunTrust Bank, andothers are more established community banks, like CoastalStates Bank, LibertySavings Bank FSB, First Federal S&L of Charleston, Beach First NationalBank, Tidelands Bank, Bank Meridian, Ameris Bank, Woodlands Bank, First SouthBank, and Lowcountry National Bank.  Manyof these institutions offer services, including extensive and establishedbranch networks and trust services that we either do not expect to provide orwill not provide for some time.  Due tothis competition, we may pay higher rates of interest to attract deposits fromtime to time.  In addition, competitorsthat are not depository institutions are generally not subject to the extensiveregulations that apply to our bank.  Mostof these institutions have substantially greater resources and lending limitsthan we have.  Nevertheless, we believethat our management team, our focus on

 

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relationship banking, our successful brandingadvertising campaign, and the economic and demographic dynamics of our servicearea have allowed us to gain a meaningful share of the area’s deposits in arelatively short period of time.

 

**Employees**

 

Asof March 20, 2008, we had 22 full-time employees and one part-timeemployee.

 

**SUPERVISION AND REGULATION**

 

Both Atlantic Bancshares, Inc., and AtlanticCommunity Bank are subject to extensive state and federal banking regulationsthat impose restrictions on and provide for general regulatory oversight oftheir operations.  These laws generallyare intended to protect depositors and not shareholders.  The following summary is qualified by reference to thestatutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect onour business and prospects.  Ouroperations may be affected by legislative changes and the policies of variousregulatory authorities.  We cannotpredict the effect that fiscal or monetary policies, economic control, or newfederal or state legislation may have on our business and earnings in thefuture.

 

Thefollowing discussion is not intended to be a complete list of all theactivities regulated by the banking laws or of the impact of such laws andregulations on our operations.  It isintended only to briefly summarize some material provisions.

 

**Atlantic Bancshares, Inc.**

 

Weown 100% of the outstanding capital stock of the bank, and therefore we areconsidered to be a bank holding company under the federal Bank Holding CompanyAct of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examinationand reporting requirements of the Board of Governors of the Federal Reserve(the “Federal Reserve”) under the Bank Holding Company Act and its regulationspromulgated thereunder.  As a bank holdingcompany located in South Carolina, the South Carolina Board of FinancialInstitutions also regulates and monitors all significant aspects of ouroperations.

 

***PermittedActivities.***Under the Bank Holding Company Act, a bank holdingcompany is generally permitted to engage in, or acquire direct or indirectcontrol of more than 5% of the voting shares of any company engaged in, thefollowing activities:

 

·                  banking or managing or controlling banks;

 

·                  furnishing services to or performing servicesfor our subsidiaries; and

 

·                  anyactivity that the Federal Reserve determines to be so closely related tobanking as to be a proper incident to the business of banking.

 

Activities that the Federal Reserve has found to be soclosely related to banking as to be a proper incident to the business ofbanking include:

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering or servicingloans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depository institution,such as a savings association;

 

·                  trust company functions;

 

·                  financial and investment advisory activities;

 

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·                  conducting discount securities brokerageactivities;

 

·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  providing specified management consulting andcounseling activities;

 

·                  performing selected data processing servicesand support services;

 

·                  acting as agent or broker in selling creditlife insurance and other types of insurance in connection with credittransactions; and

 

·                  performing selected insuranceunderwriting activities.

 

As a bank holding company we also can elect to be treated as a “financialholding company,” which would allow us engage in a broader array ofactivities.  In sum, a financial holdingcompany can engage in activities that are financial in nature or incidental orcomplementary to financial activities, including insurance underwriting, salesand brokerage activities, providing financial and investment advisory services,underwriting services and limited merchant banking activities.  We have not sought financial holding companystatus, but may elect such status in the future as our business matures.  If we were to elect in writing for financialholding company status, each insured depository institution we control wouldhave to be well capitalized, well managed and have at least a satisfactory ratingunder the CRA (discussed below).

 

The Federal Reserve has the authority to order a bank holding companyor its subsidiaries to terminate any of these activities or to terminate itsownership or control of any subsidiary when it has reasonable cause to believethat the bank holding company’s continued ownership, activity or controlconstitutes a serious risk to the financial safety, soundness or stability ofit or any of its bank subsidiaries.

 

***Change inControl****. *In addition, andsubject to certain exceptions, the Bank Holding Company Act and the Change inBank Control Act, together with regulations promulgated there under, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Moreover, theSouth Carolina Board of Financial Institutions also must approve an acquisitionof a South Carolina bank holding company. Control is conclusively presumed to exist if an individual or companyacquires 25% or more of any class of voting securities of a bank holdingcompany.  Control is rebuttably presumedto exist if a person acquires 10% or more, but less than 25%, of any class ofvoting securities and either:

 

·                  the company has registered securities under Section 12of the Securities Exchange Act of 1934; or

 

·                  no other person owns a greater percentage ofthat class of voting securities immediately after the transaction.

 

Ourcommon stock is not registered under Section 12 of the Securities ExchangeAct of 1934.  If we have more than 500shareholders of record on December 31 of any year, we will be required toregister our common stock under Section 12 of the Securities Exchange Actduring the first 120 days of the following year.  Any shareholder of 10% or more, but less than25% of any class of our voting securities would be required to either file as acontrolling shareholder of the company or rebut the presumption of control inaccordance with Federal Reserve regulations**.**  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

***Source of Strength****.*  Inaccordance with Federal Reserve Board policy, we are expected to act as asource of financial strength to the bank and to commit resources to support thebank in circumstances in which we might not otherwise do so.  If the bank were to become “undercapitalized”(see below “Atlantic Community Bank – Prompt Corrective Action”), we would berequired to provide a guarantee of the bank’s plan to return to capitaladequacy.  Additionally, under the BankHolding Company Act, the Federal Reserve Board may require a bank holdingcompany to terminate any activity or relinquish control of a nonbank subsidiary,other than a nonbank subsidiary of a bank, upon the Federal Reserve Board’sdetermination that such activity or control constitutes a serious risk to thefinancial soundness or stability of any depository institution subsidiary ofthe bank holding company.  Further,federal bank

 

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regulatoryauthorities have additional discretion to require a bank holding company todivest itself of any bank or nonbank subsidiaries if the agency determines thatdivestiture may aid the depository institution’s financial condition.  Further, any loans by a bank holding companyto a subsidiary bank are subordinate in right of payment to deposits andcertain other indebtedness of the subsidiary bank.  In the event of a bank holding company’sbankruptcy, any commitment by the bank holding company to a federal bankregulatory agency to maintain the capital of a subsidiary bank at a certainlevel would be assumed by the bankruptcy trustee and entitled to prioritypayment.

 

***Capital Requirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the bank and are described below under “AtlanticCommunity Bank - Capital Regulations.” Subject to our capital requirements and certain other restrictions, weare able to borrow money to make a capital contribution to the bank, and theseloans may be repaid from dividends paid from the bank to the company.  Our ability to pay dividends depends on thebank’s ability to pay dividends to us, which is subject to regulatoryrestrictions as described below in “Atlantic Community Bank– Dividends.”  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

***South Carolina State Regulation.***  As aSouth Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe South Carolina Board prior to acquiring the capital stock of a nationalbank, but we must notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

**AtlanticCommunity Bank**

 

The bank operates as a state bank incorporated underthe laws of the State of South Carolina and is subject to examination by theSouth Carolina Board of Financial Institutions.

 

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The South Carolina Board of Financial Institutionsand the FDIC regulate or monitor virtually all areas of the bank’s operations,including:

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable on loans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry on safelending and deposit gathering practices.

 

The South Carolina Board of Financial Institutionsrequires the bank to maintain specified capital ratios and imposes limitationson the bank’s aggregate investment in real estate, bank premises, and furnitureand fixtures.  The South Carolina Boardof Financial Institutions also requires the bank to prepare quarterly reportson the bank’s financial condition in compliance with its minimum standards andprocedures.

 

All insured institutions must undergo regular onsite examinations by their appropriate banking agency.  The cost of examinations of insureddepository institutions and any affiliates may be assessed by the appropriateagency against each institution or affiliate as it deems necessary orappropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and their state supervisor when applicable. The FDIC has developed a method for insured depository institutions toprovide supplemental disclosure of the estimated fair market value of assetsand liabilities, to the extent feasible and practicable, in any balance sheet,financial statement, report of condition or any other report of any insureddepository institution.  The FDICImprovement Act also requires the federal banking regulatory agencies toprescribe, by regulation, standards for all insured depository institutions anddepository institution holding companies relating, among other things, to thefollowing:

 

·                  internal controls;

 

·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

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·                  interest rate risk exposure; and

 

·                  asset quality.

 

***PromptCorrective Action. ***As an insured depository institution, thebank is required to comply with the capital requirements promulgated under theFederal Deposit Insurance Act and the regulations thereunder, which set forth****five capital categories, each with specific regulatoryconsequences.  Under these regulations,the categories are:

 

Ÿ                                          Well Capitalized — The institution exceedsthe required minimum level for each relevant capital measure.  A well capitalized institution is one (i) havinga total capital ratio of 10% or greater, (ii) having a tier 1 capitalratio of 6% or greater, (iii) having a leverage capital ratio of 5% orgreater and (iv) that is not subject to any order or written directive tomeet and maintain a specific capital level for any capital measure.

 

Ÿ                                          Adequately Capitalized — The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) havinga total capital ratio of 8% or greater, (ii) having a tier 1 capital ratioof 4% or greater and (iii) having a leverage capital ratio of 4% orgreater or a leverage capital ratio of 3% or greater if the institution israted composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

 

Ÿ                                          Undercapitalized — The institution fails tomeet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) havinga total capital ratio of less than 8% or (ii) having a tier 1 capitalratio of less than 4% or (iii) having a leverage capital ratio of lessthan 4%, or if the institution is rated a composite 1 under the CAMELS ratingsystem, a leverage capital ratio of less than 3%.

 

Ÿ                                          Significantly Undercapitalized — Theinstitution is significantly below the required minimum level for any relevantcapital measure.  A significantlyundercapitalized institution is one (i) having a total capital ratio ofless than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) havinga leverage capital ratio of less than 3%.

 

Ÿ                                          Critically Undercapitalized — The institutionfails to meet a critical capital level set by the appropriate federal bankingagency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

If the FDIC determines, after notice and an opportunity for hearing,that the bank is in an unsafe or unsound condition, the regulator is authorizedto reclassify the bank to the next lower capital category (other thancritically undercapitalized) and require the submission of a plan to correctthe unsafe or unsound condition.

 

If the bank is not well capitalized, it cannot accept brokered depositswithout prior FDIC approval and, if approval is granted, cannot offer aneffective yield in excess of 75 basis points on interests paid on deposits ofcomparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The bank also would become subject to increased regulatory oversight,and is increasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the

 

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agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution, that is in substance a distribution of capital to the owners of theinstitution if following such a distribution the institution would beundercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

Asof December 31, 2007, the bank was deemed to be “well capitalized.”

 

***Standards for Safety and Soundness. ***The Federal Deposit Insurance Act (“FDIA”) also requires the federalbanking regulatory agencies to prescribe, by regulation or guideline, operationaland managerial standards for all insured depository institutions relating to: (i) internalcontrols, information systems, and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth.  Theagencies also must prescribe standards for asset quality, earnings, and stockvaluation, as well as standards for compensation, fees, and benefits.  The federal banking agencies have adoptedregulations and Interagency Guidelines Prescribing Standards for Safety andSoundness to implement these required standards.  These guidelines set forth the safety andsoundness standards that the federal banking agencies use to identify andaddress problems at insured depository institutions before capital becomesimpaired.  Under the regulations, if theFDIC determines that the bank fails to meet any standards prescribed by theguidelines, the agency may require the bank to submit to the agency anacceptable plan to achieve compliance with the standard, as required by theFDIC.  The final regulations establishdeadlines for the submission and review of such safety and soundness complianceplans.

 

***Deposit Insurance and Assessments. ***Deposits at the bank are insured by the Deposit Insurance Fund (the “DIF”)as administered by the FDIC, up to the applicable limits established by law –generally $100,000 per accountholder and $250,000 for certain retirementaccountholders.  In November 2006,the FDIC adopted final regulations that set the deposit insurance assessmentrates that took effect in 2007.  The FDICuses a risk-based assessment system that assigns insured depositoryinstitutions to one of four risk categories based on three primary sources ofinformation – supervisory risk ratings for all institutions, financial ratiosfor most institutions, including the company, and long-term debt issuer ratingsfor large institutions that have such ratings. The new premium rate structure imposes a minimum assessment of from fiveto seven cents for every $100 of domestic deposits in institutions that areassigned to the lowest risk category. This category is expected to encompass substantially all insuredinstitutions, including the bank.  A onetime assessment credit is available to offset up to 100% of the 2007 assessment.  Any remaining credit can be used to offset upto 90% of subsequent annual assessments through 2010.  For institutions assigned to higher riskcategories, the premium that took effect in 2007 ranges from 10 cents to 43cents per $100 of deposits.

 

The FDIC also collects a deposit-based assessment frominsured financial institutions on behalf of The Financing Corporation (“FICO”).  The funds from these assessments are used toservice debt issued by FICO in its capacity as a financial vehicle for theFederal Savings and Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2006 ranged from 1.32cents to 1.24 cents per $100 of assessable deposits.  For the first quarter of 2007, the FICOassessment rate was 1.22 cents per $100 of assessable deposits.

 

***Transactions with Affiliates and Insiders.***  Thecompany is a legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitationsrestrict the bank from lending or otherwise supplying funds to the company orits non-bank subsidiaries.  The companyand the bank are subject to Section 23A and 23B of the Federal Reserve Actand Federal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the bank’s capital and surplus and, as to all affiliatescombined, to 20% of the bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateral requirements.  The bank is forbidden to purchase low qualityassets from an affiliate.

 

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Section 23Bof the Federal Reserve Act, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.

 

RegulationW generally excludes all non-bank and non-savings association subsidiaries ofbanks from treatment as affiliates, except to the extent that the FederalReserve Board decides to treat these subsidiaries as affiliates.  The regulation also limits the amount ofloans that can be purchased by a bank from an affiliate to not more than 100%of the bank’s capital and surplus.

 

Thebank is also subject to certain restrictions on extensions of credit toexecutive officers, directors, certain principal shareholders, and theirrelated interests.  Such extensions ofcredit (i) must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties and (ii) must not involve more than thenormal risk of repayment or present other unfavorable features.

 

***Branching****.*  Under current South Carolina law, we may openbranch offices throughout South Carolina with the prior approval of the SouthCarolina Board of Financial Institutions.  In addition, with prior regulatory approval,the bank will be able to acquire existing banking operations in SouthCarolina.  Furthermore, federallegislation has been passed that permits interstate branching by banks ifallowed by state law, and interstate merging by banks.  However, South Carolina law, with limitedexceptions, currently permits branching across state lines only throughinterstate mergers.

 

***Anti-Tying Restrictions***.  Underamendments to the Bank Holding Company Act and Federal Reserve regulations, abank is prohibited from engaging in certain tying or reciprocity arrangementswith its customers.  In general, a bankmay not extend credit, lease, sell property, or furnish any services or fix orvary the consideration for these on the condition that (i) the customerobtain or provide some additional credit, property, or services from or to thebank, the bank holding company or subsidiaries thereof or (ii) thecustomer may not obtain some other credit, property, or services from acompetitor, except to the extent reasonable conditions are imposed to assurethe soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balanceproducts and may otherwise offer more favorable terms if a customer obtains twoor more traditional bank products; and certain foreign transactions are exemptfrom the general rule.  A bank holdingcompany or any bank affiliate also is subject to anti-tying requirements inconnection with electronic benefit transfer services.

 

***Community Reinvestment Act****.*  TheCommunity Reinvestment Act (“CRA”) requires that, in connection withexaminations of financial institutions within their respective jurisdictions, afinancial institution’s primary regulator, which is the FDIC for the bank,shall evaluate the record of each financial institution in meeting the creditneeds of its local community, including low and moderate incomeneighborhoods.  These factors are alsoconsidered in evaluating mergers, acquisitions, and applications to open abranch or facility.  Failure toadequately meet these criteria could impose additional requirements andlimitations on our bank.  Additionally,we must publicly disclose the terms of various Community ReinvestmentAct-related agreements.  The FDICconducted our first CRA examination in January 2008.

 

***Finance Subsidiaries.***  Underthe Gramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposedby their respective banking regulators, national and state-chartered banks arepermitted to form “financial subsidiaries” that may conduct financial orincidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposes several safeguards andrestrictions on financial subsidiaries, including that the parent bank’s equityinvestment in the financial subsidiary be deducted from the bank’s assets andtangible equity for purposes of calculating the bank’s capital adequacy.  In addition, the GLBA imposes newrestrictions on transactions between a bank and its financial subsidiariessimilar to restrictions applicable to transactions between banks and non-bankaffiliates.

 

***Consumer Protection Regulations.*** Activities of the bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the bank are subject to state usury laws and federal lawsconcerning interest rates.  The bank’sloan operations are also subject to federal laws applicable to credittransactions, such as the:

 

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·                  The federal Truth-In-Lending Act, governingdisclosures of credit terms to consumer borrowers;

 

·                  The Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits obligation to help meet the housing needs of the community it serves;

 

·                  The Equal Credit Opportunity Act, prohibitingdiscrimination on the basis of race, creed or other prohibited factors inextending credit;

 

·                  The Fair Credit Reporting Act of 1978, asamended by the Fair and Accurate Credit Transactions Act, governing the use andprovision of information to credit reporting agencies, certain identity theftprotections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act, governing themanner in which consumer debts may be collected by collection agencies; and

 

·                  The Rules and regulations of the variousfederal agencies charged with the responsibility of implementing these federallaws.

 

The deposit operations of the bank also are subjectto:

 

·                  theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and

 

·                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

***Enforcement Powers.***  Thebank and its “institution-affiliated parties,” including its management,employees, agents, independent contractors, and consultants such as attorneysand accountants and others who participate in the conduct of the financialinstitution’s affairs, are subject to potential civil and criminal penaltiesfor violations of law, regulations or written orders of a government agency.These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to 20 years.  In addition, regulators are provided withgreater flexibility to commence enforcement actions against institutions andinstitution-affiliated parties.  Possibleenforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issuecease-and-desist orders were expanded. Such orders may, among other things, require affirmative action tocorrect any harm resulting from a violation or practice, including restitution,reimbursement, indemnifications or guarantees against loss.  A financial institution may also be orderedto restrict its growth, dispose of certain assets, rescind agreements orcontracts, or take other actions as determined by the ordering agency to beappropriate.

 

***Anti-Money Laundering.***  Financialinstitutions must maintain anti-money laundering programs that includeestablished internal policies, procedures, and controls; a designatedcompliance officer; an ongoing employee training program; and testing of theprogram by an independent audit function. The company and the bank are alsoprohibited from entering into specified financial transactions and accountrelationships and must meet enhanced standards for due diligence and “knowingyour customer” in their dealings with foreign financial institutions andforeign customers.  Financialinstitutions must take reasonable steps to conduct enhanced scrutiny of accountrelationships to guard against money laundering and to report any suspicioustransactions, and recent laws provide law enforcement authorities withincreased access to financial information maintained by banks.  Anti-money laundering obligations have beensubstantially strengthened as a result of the USA Patriot Act, enacted in 2001and renewed in 2006.  Bank regulatorsroutinely examine institutions for compliance with these obligations and arerequired to consider compliance in connection with the regulatory review ofapplications.  The regulatory authoritieshave been active in

 

19

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imposing“cease and desist” orders and money penalty sanctions against institutionsfound to be violating these obligations.

 

## ***USA PATRIOT Act.***** The USA PATRIOT Act becameeffective on October 26, 2001, amended, in part, the Bank Secrecy Act, andprovides, in part, for the facilitation of information sharing amonggovernmental entities and financial institutions for the purpose of combatingterrorism and money laundering by enhancing anti-money laundering and financialtransparency laws, as well as enhanced information collection tools andenforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bank accountsor correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions forcompliance with these obligations and are required to consider compliance inconnection with the regulatory review of applications.

## ** **

Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”)can send our banking regulatory agencies lists of the names of personssuspected of involvement in terrorist activities.  The bank can be requested to search itsrecords for any relationships or transactions with persons on those lists.  If the bank finds any relationships ortransactions, it must file a suspicious activity report and contact the FBI.

 

The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of theUnited States, as defined by various Executive Orders and Acts ofCongress.  OFAC has sent, and will send,our banking regulatory agencies lists of names of persons and organizationssuspected of aiding, harboring or engaging in terrorist acts.  If the bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checkshigh-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

***Privacy andCredit Reporting*****. **Financialinstitutions are required to disclose their policies for collecting andprotecting confidential information. Customers generally may prevent financial institutions from sharingnonpublic personal financial information with nonaffiliated third partiesexcept under narrow circumstances, such as the processing of transactionsrequested by the consumer or when the financial institution is jointlysponsoring a product or service with a nonaffiliated third party.  Additionally, financial institutions generallymay not disclose consumer account numbers to any nonaffiliated third party foruse in telemarketing, direct mail marketing or other marketing toconsumers.  It is the bank’s policy notto disclose any personal information unless required by law.

 

Likeother lending institutions, the bank utilizes credit bureau data in itsunderwriting activities.  Use of suchdata is regulated under the Federal Credit Reporting Act on a uniform,nationwide basis, including credit reporting, prescreening, sharing of informationbetween affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)authorizes states to enact identity theft laws that are not inconsistent withthe conduct required by the provisions of the FACT Act.

 

***Payment ofDividends.*** A South Carolina state bank may not pay dividends fromits capital.  All dividends must be paidout of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  Thebank is authorized to pay cash dividends up to 100% of net income in anycalendar year without obtaining the prior approval of the South Carolina Boardof Financial Institutions, provided that the bank received a composite ratingof one or two at the last federal or state regulatory examination.  The bank must obtain approval from the SouthCarolina Board of Financial Institutions prior to the payment of any other cashdividends.  In addition, under the FDIC Improvement Act, the bank may not paya dividend if, after paying the dividend, the bank would be undercapitalized.

 

20

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***Check 21.***  TheCheck Clearing for the 21st Century Act gives “substitute checks,” such as adigital image of a check and copies made from that image, the same legalstanding as the original paper check. Some of the major provisions include:

 

·                                          allowing check truncation without making itmandatory;

 

·                                          demanding that every financial institutioncommunicate to accountholders in writing a description of its substitute checkprocessing program and their rights under the law;

 

·                                          legalizing substitutions for and replacementsof paper checks without agreement from consumers;

 

·                                          retaining in place the previously mandatedelectronic collection and return of checks between financial institutions onlywhen individual agreements are in place;

 

·                                          requiring that when accountholders requestverification, financial institutions produce the original check (or a copy thataccurately represents the original) and demonstrate that the account debit wasaccurate and valid; and

 

·                                          requiring the re-crediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

***Effect of Governmental Monetary Policies*****.**  Ourearnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve Board’s monetary policieshave had, and are likely to continue to have, an important impact on theoperating results of commercial banks through its power to implement nationalmonetary policy in order, among other things, to curb inflation or combat arecession.  The monetary policies of theFederal Reserve Board have major effects upon the levels of bank loans,investments and deposits through its open market operations in United Statesgovernment securities and through its regulation of the discount rate onborrowings of member banks and the reserve requirements against member bankdeposits.  It is not possible to predictthe nature or impact of future changes in monetary and fiscal policies.

 

***Proposed Legislation and Regulatory Action*****.**  Newregulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitiverelationships of the nation’s financial institutions.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

 

**Item2.  Description of Property.**

 

We are located at 1 Sherington Drive, Suite J (Sheridan Park),Bluffton, South Carolina 29910.  The location was formerlysubleased through Regional Bankshares, Inc. until January 24, 2006when we entered into a new lease with Carolina Partners, LLC.  The facility is 2,190 square feet and isleased until 2010 with a thee-year option to renew.    Sheridan Park is an established commercialsubdivision fronting Highway 278 and includes the South Carolina Division ofMotor Vehicles, restaurants, retail stores, wholesalers, and professionaloffice space.  The commercial buildingthat contains our leased space also borders on and provides signage on Highway278.  Signage is also provided directlyover the main public entrance.

 

Wealso lease a facility for our operations department at 70 Pennington Drive, Suite 21(Sheridan Park), Bluffton, South Carolina 29910.  This facility isapproximately 1⁄4 mile south of the Sheridan Park branch location and is in thesame commercial subdivision.  Thisoperations department facility has approximately 2,000 square feet of office spaceand houses between seven and 10 employees. We anticipate leasing this temporary location through June 2008.

 

Wehave entered into a lease agreement for a facility that will consolidate andhouse our main office and our operations department.  The facility is located in the same SheridanPark commercial subdivision as the main office and operations department arecurrently located.  The new location isleased until December 2023 and provides two five-year renewal terms.  Planned renovations to the new space and themove to consolidate the main branch and the 

 

21

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operations department are planned to becompleted during the second quarter 2008. We may sublease the existing main office for the remainder of thecurrent lease during 2009.

 

OnJanuary 1, 2006 we opened a loan production office on the south end ofHilton Head Island.  This location wasconverted into a full service branch in October 2007.  We leased a facility at 1 Corpus ChristiPlace, Suite 108, Hilton Head Island, South Carolina 29928 that has atotal of 1,837 square feet for a period of one year with a one-year option torenew.  The organizers of the company, along with other non-organizers, haveformed a separate company, MB Partners, LLC, which purchased thislocation that we lease.  We entered intoa new lease agreement beginning August 1, 2006 for a minimum of tenyears.  The lease provides for twoten-year renewal options.

 

Seethe discussion under “Location and Service Area” in Item 1 above for additionalinformation regarding our properties and certain potential future properties.

 

**Item 3.  Legal Proceedings****.**

 

We are not a party to, norare any of our properties subject to, any material legal proceedings.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders****.**

 

Nomatter was submitted to a vote of security holders during the fourth quarter ofthe fiscal year covered by this report.

 

**Part II.**

 

**Item5.  Market for Common Equity and RelatedStockholder Matters****.**

 

Althoughour common stock is quoted on the OTC Bulletin Board under the symbol “ATBA,”there is currently no established public trading market in our common stock,and trading and quotations of our common stock have been limited andsporadic.  Based on the limited trading ofour stock on the OTC Bulletin Board and information available to us from alimited number of sellers and purchasers of common stock who have engaged inprivately negotiated transactions of which we are aware, we believe there wereseveral stock trades in 2007 with prices per share ranging from $8.00 to$11.50.  Because there has not been anestablished market for our common stock, we may not be aware of all prices atwhich our common stock has been traded. We have not determined whether the trades of which we are aware were theresult of arm’s-length negotiations between the parties.

 

Asof March 20, 2008, there were 1,251,577 shares of common stock outstandingheld by approximately 387 shareholders of record.  All of our currently issued and outstandingcommon stock was issued in our initial public offering which was completed on March 1,2006.  The price per share in our initialpublic offering was $10.00.

 

Wehave not declared or paid any cash dividends on our common stock since ourinception.  For the foreseeable future,we do not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen ourcapital base.  Our ability to paydividends depends on the ability of our subsidiary, Atlantic Community Bank, topay dividends to us.  As a South Carolinastate bank, our bank may only pay dividends out of its net profits, afterdeducting expenses, including losses and bad debts.  In addition, our bank is prohibited fromdeclaring a dividend on its shares of common stock until its surplus equals itsstated capital.

 

Additional information regarding our equity compensationplans is set forth in Item 11 below.

 

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**Item 6.  Management’s Discussionand Analysis or Plan of Operation**

 

**Selected Financial Data**

 

The following selected financial data for the periodended December 31, 2007 and 2006 is derived from the financial statementsand other data of Atlantic Bancshares, Inc. (the Company).  The selected financial data should be read inconjunction with the financial statements of the Company, including theaccompanying notes, included elsewhere herein.

 
| **(Dollars in thousands)**               | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income Statement Data:**                         |       |       |       |       |       |
| Interest income                                    |       | $          | 4,691      |       | $          | 2,178 |   |
| Interest expense                                   |       | 2,335      |       | 981        |       |
|                                               |       |       |       |       |       |
| Net interest income                                |       | 2,356      |       | 1,197      |       |
| Provision for loan losses                          |       | 291        |       | 390        |       |
|                                               |       |       |       |       |       |
| Net interest income after provision for  loan loss |       | 2,065      |       | 807        |       |
|                                               |       |       |       |       |       |
| Noninterest income                                 |       | 306        |       | 198        |       |
| Noninterest expense                                |       | 3,201      |       | 3,426      |       |
|                                               |       |       |       |       |       |
| Loss before income taxes                           |       | (830       | )          | (2,421     | )          |
|                                               |       |       |       |       |       |
| Income taxes                                       |       | (261       | )          | (823       | )          |
|                                               |       |       |       |       |       |
| Net loss                                           | ** ** | **$**      | **(569**   | **)**      | **$**      | **(1,598** | **)** |
|                                               |       |       |       |       |       |
| **Balance Sheet Data:**                            |       |       |       |       |       |
| Assets                                             |       | $          | 82,633     |       | $          | 51,922 |   |
| Earning assets                                     |       | 79,763     |       | 49,084     |       |
| Securities (1)                                     |       | 13,917     |       | 3,654      |       |
| Loans, net (2)                                     |       | 65,764     |       | 38,819     |       |
| Allowance for loan losses                          |       | 677        |       | 389        |       |
| Deposits                                           |       | 63,469     |       | 41,211     |       |
| Advances from Federal Home Loan Bank               |       | 5,000      |       | —     |       |
| Shareholders’ equity                          |       | 9,982      |       | 10,443     |       |
| * *                                           | * *   | * *   | * *   | * *   | * *   |
| **Per share data:**                                | * *   | * *   | * *   | * *   | * *   |
| Earnings (losses) per share                        |       | $          | (.45       | )          | $          | (1.36 | ) |
| Book value (period end)                            |       | 7.98       |       | 8.34       |       |

 

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| (1) | All  securities are available for sale and are stated at fair value. Nonmarketable  securities totaling $318,400 and $93,200 are included for 2007 and 2006,  respectively. These securities are recorded at cost. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Loans  are stated at gross amounts before allowance for loan losses.                                                                                                                                               |

 

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**Forward Looking Statements**

 

Thisreport contains “forward-looking statements” within the meaning of thesecurities laws.  All statements that arenot historical facts are “forward-looking statements.”  You can identify these forward-lookingstatements through our use of words such as “may,” “will,” “expect,” “anticipate,”“believe,” “intend,” “estimate,” “project,” “continue,” or other similarwords.  Forward-looking statementsinclude, but are not limited to, statements regarding our future businessprospects, revenues, working capital, liquidity, capital needs, interest costs,income, business operations and proposed services.

 

Theseforward-looking statements are based on current expectations, estimates andprojections about our industry, management’s beliefs, and assumptions made bymanagement.  Such information includes,without limitation, discussions as to estimates, expectations, beliefs, plans,strategies, and objectives concerning our future financial and operatingperformance.  These statements are notguarantees of future performance and are subject to risks, uncertainties andassumptions that are difficult to predict, particularly in light of the factthat we are a new company with no operating history. Therefore, actual resultsmay differ materially from those expressed or forecasted in suchforward-looking statements.  The risksand uncertainties include, but are not limited to:

 

·                  ourgrowth and our ability to maintain growth;

 

·                  governmentalmonetary and fiscal policies, as well as legislative and regulatory changes;

 

·                  theeffect of interest rate changes on our level and composition of deposits, loandemand and the value of our loan collateral and securities;

 

·                  theeffects of competition from other financial institutions operating in ourmarket area and elsewhere, including institutions operating locally,regionally, nationally and internationally, together with competitors thatoffer banking products and services by mail, telephone and computer and/or theInternet;

 

·                  failure of assumptions underlying theestablishment of our allowance for loan losses, including the value ofcollateral securing loans;

 

·                  lossof consumer confidence and economic disruptions resulting from terroristactivities; and

 

·                  otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission, including, without limitation, thosedescribed under the caption “Risk Factors” in Item 1 of our Form 10-KSBfiled for the year ended December 31, 2007.

 

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  In light of these risks,uncertainties, and assumptions, the forward-looking events discussed in thisreport might not occur.

 

**Introduction**

 

Thefollowing discussion describes our results of operations for 2007 compared to2006 and also analyzes our financial condition as of December 31, 2007 and2006.  Like most community banks, wederive most of our income from interest we receive on our loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

 

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Wehave included a number of tables to assist in our description of thesemeasures.  For example, the “AverageBalances” table shows the average balance in 2007 and 2006 of each category ofour assets and liabilities, as well as the yield we earned or the rate we paidwith respect to each category.  A reviewof these tables shows that our loans typically provide higher interest yieldsthan do other types of interest earning assets, which is why we intend tochannel a substantial percentage of our earning assets into our loanportfolio.  We also track the sensitivityof our various categories of assets and liabilities to changes in interestrates, and we have included an “Interest Sensitivity Analysis Table” to helpexplain this.  Finally, we have includeda number of tables that provide detail about our investment securities, ourloans, and our deposits.

 

Naturally,there are risks inherent in all loans, so we maintain an allowance for loanlosses to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the “Provision and Allowance for Loan Loss”section, we have included a detailed discussion of this process, as well asseveral tables describing our allowance for loan losses and the allocation ofthis allowance among our various categories of loans.

 

Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our customers.  We describe the various components of thisnoninterest income, as well as our noninterest expense, in the “NoninterestIncome and Expense” section.

 

Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the accompanying financial statements.  We encourage you to read this discussion andanalysis in conjunction with the financial statements and the related notes andthe other information included in this report.

 

# **Basis of Presentation**

 

The following discussion should be read in conjunction with thepreceding “Selected Financial Data” and the Company’s Financial Statements andthe Notes thereto and the other information included elsewhere in this AnnualReport.  The financial informationprovided below has been rounded in order to simplify its presentation.  However, the ratios and percentages providedbelow are calculated using the detailed financial information contained in theFinancial Statements, the Notes thereto and the other financial data includedelsewhere in this Annual Report.

 

# **General**

 

Atlantic Bancshares, Inc. is a bank holding company headquarteredin Bluffton, South Carolina.  Oursubsidiary, Atlantic Community Bank, opened for business on January 26,2006.  The principal business activity ofthe Bank is to provide banking services to domestic markets, principally in theBeaufort county region of South Carolina. Our deposits are insured by the Federal Deposit Insurance Corporation.

 

Wecompleted an initial public offering of our common stock on March 1, 2006****in which we sold a total of 1,251,577 shares of commonstock at $10 per share.  Proceeds of thestock issuance, net of offering costs totaling $533,648, were used to payorganizational costs and provide the initial capital for the bank.

 

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**Resultsof Operations**

 

#### ***Year ended December 31, 2007, compared with year ended December 31,2006***

 

Net interest income increased $1,158,869, or 96.78%, to $2,356,320, in2007 from $1,197,451 in 2006.  Theincrease in net interest income was due primarily to an increase in averageearning assets, which increased $28,598,505, or 86.87%, mainly due to continuedgrowth in the loan portfolio during our second year of operations.   The primary component of interest income wasinterest on loans, including fees, of $4,247,639 for the year ended December 31,2007.

 

Our net interest spread and net interestmargin were 2.77% and 3.83%, respectively, in 2007 compared to 1.92% and 3.64%,respectively, in 2006.  The increase innet interest spread was primarily the result of loan growth and transfer ofinterest-earning assets into loans from federal funds sold in 2006.  The average balance of federal funds solddecreased $12,649,365, or 92.94%, from $13,610,436 in 2006.  In December 2006, the significantbalance in federal funds sold was mainly attributable to excess funds from theinitial stock offering.  Theaverage balance in the loan portfolio increased $35,790,235, or 203.26%, to$53,397,968 in 2007, from $17,607,733 in 2006. Yields on average earning assets increased from 6.62% in 2006 to 7.63%in 2007.  Yields on average interest-bearingliabilities were 4.86% for 2007 and 4.70% in 2006.

 

The provision for loan losses was $291,584 in 2007 compared to $390,174in 2006.  We seek to maintain theallowance for loan losses at a level management believes to be sufficient tocover known and inherent losses in the loan portfolio.

 

Noninterest income increased $109,093 or55.26%, to $306,513 in 2007 from $197,420 in 2006.  The largest component of noninterest incomewas residential mortgage origination fees, which increased $23,108, or 16.62%,to $162,165 for the year ended December 31, 2007.   As a result of increased deposit accountvolume, service charges on deposit accounts increased by $49,340 or 202.69% to$73,683 for the year ended December 31, 2007, when compared to 2006.

 

Total noninterest expense decreased $224,552,or 6.55%, to $3,201,118 in 2007 from $3,425,670 in 2006.   Noninterest expenses included $740,680 inpre-opening expenses in 2006. Excluding $740,680 from 2006 noninterest expense, total noninterestexpense in 2007 increased $516,128, or 19.22%, over 2006.  Salaries and employee benefits increased$341,430, or 25.43%, to $1,684,220 for the year ended December 31, 2007from $1,342,790, excluding $389,374 related to pre-opening salaries andemployee benefit expenses for the year ended December 31, 2006.   This increase is mainly attributable to thehiring of additional staff to meet needs associated with our growth in oursecond full year of operations and to normal pay increases.  Our efficiency ratio was 120.2% in 2007compared to 245.6% in 2006.  Theefficiency ratio is defined as noninterest expense divided by the sum of netinterest income and noninterest income, net of gains and losses on sales ofassets.

 

Net loss was $568,846 in 2007 compared to a net loss of $1,598,113 in2006.  The decline in net loss reflectsour continued growth, as average earning assets increased from $32,921,801 forthe year ended December 31, 2006 to $61,520,306 for the year ended December 31,2007.  Return on average assets during2007 was (.89)% compared to (4.39)% during 2006.  Net loss is after the recognition of anincome tax benefit of $261,023 and $822,860 for the years 2007 and 2006,respectively. The income tax benefit was based on an effective tax rate of 34%.

 

**NetInterest Income**

 

***General****.*  Foran established financial institution, the largest component of net income isits net interest income, which is the difference between the income earned onassets and interest paid on deposits and borrowings used to support suchassets.  Net interest income isdetermined by the yields earned on our interest-earning assets and the ratespaid on its interest-bearing liabilities, the relative amounts ofinterest-earning assets and interest-bearing liabilities, and the degree ofmismatch and the maturity and repricing characteristics of its interest-earningassets and interest-bearing liabilities. This net interest income divided by average interest-earning assetsrepresents our net interest margin.

 

26

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***Average Balances, Income and Expenses and Rates****.*  Thefollowing tables set forth, for the period indicated, certain informationrelated to our average balance sheet and our average yields on assets andaverage costs of liabilities.  Suchyields are derived by dividing income or expense by the average balance of thecorresponding assets or liabilities and are then annualized.  Average balances have been derived from thedaily balances throughout the period indicated.

 
| ** **                                      | ** ** | **December 31, 2007** |       | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(Dollars in thousands)**            | ** ** | **Average  Balance**       | ** ** | **Income/  Expense**       | ** ** | **Yield/  Rate** |   | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets:**                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Earning assets:                                 |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans (1)                                       |       | $                          | 53,398     |                       | $          | 4,247 |   | 7.95 | % | $ | 17,608 |   | $ | 1,422 |   | 8.07 | % |
| Securities,  taxable                            |       | 7,031                      |       | 383                        |       | 5.46 | % | 1,304 |   | 71 |   | 5.42 | % |
| Nonmarketable  equity securities                |       | 114                        |       | 7                          |       | 5.96 | % | 3 |   | — |   | — |   |
| Federal funds  sold                             |       | 961                        |       | 53                         |       | 5.48 | % | 13,610 |   | 668 |   | 4.91 | % |
| Time deposits  with otherbanks                  |       | 16                         |       | 1                          |       | 4.61 | % | 397 |   | 17 |   | 4.41 | % |
|                                            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  earning-assets                           |       | $                          | 61,520     |                       | $          | 4,691 |   | 7.63 | % | $ | 32,922 |   | $ | 2,178 |   | 6.62 | % |
|                                            |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                        |       | 844                        |       |                       |       |   |   | 2,670 |   |   |   |   |   |
| Premises and  equipment                         |       | 406                        |       |                       |       |   |   | 345 |   |   |   |   |   |
| Other assets                                    |       | 1,330                      |       |                       |       |   |   | 621 |   |   |   |   |   |
| Allowance for  loan losses                      |       | (526                       | )          |                       |       |   |   | (161 | ) |   |   |   |   |
|                                            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** |   | ** ** |   |   |   |   |   |
| Total Assets                                    | ** ** | **$**                      | **63,574** | ** **                 | ** ** | ** ** | ** ** |   | **$** | **36,397** |   |   |   |   |   |
|                                            |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **Liabilities:**                                | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                  |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest-bearing  transaction accounts          |       | $                          | 2,037      |                       | $          | 23 |   | 1.15 | % | $ | 1,130 |   | $ | 15 |   | 1.33 | % |
| Savings and  money market accounts              |       | 17,523                     |       | 806                        |       | 4.60 | % | 12,606 |   | 593 |   | 4.71 | % |
| Time deposits                                   |       | 27,382                     |       | 1,456                      |       | 5.32 | % | 7,117 |   | 372 |   | 5.22 | % |
| Federal Home  Loan Bank advances                |       | 452                        |       | 16                         |       | 3.48 | % | — |   | — |   | — |   |
| Federal funds  purchased                        |       | 665                        |       | 34                         |       | 5.15 | % | 20 |   | 1 |   | 4.01 | % |
|                                            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  interest-bearing deposits                |       | $                          | 48,059     |                       | $          | 2,335 |   | 4.86 | % | $ | 20,873 |   | $ | 981 |   | 4.70 | % |
|                                            |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 5,432                      |       |                       |       |   |   | 3,952 |   |   |   |   |   |
| Accrued interest  and other liabilities         |       | 331                        |       |                       |       |   |   | 730 |   |   |   |   |   |
| Shareholders’  equity                      |       | 9,752                      |       |                       |       |   |   | 10,842 |   |   |   |   |   |
|                                            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** |   | ** ** |   |   |   |   |   |
| Total liabilites  and Shareholders’ equity | ** ** | **$**                      | **63,574** | ** **                 | ** ** | ** ** | ** ** |   | **$** | **36,397** |   |   |   |   |   |
|                                            |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net interest  spread                            |       |                       |       |                       | ** ** | **2.77** | **%** |   | ** ** | ** ** | ** ** | **1.92** | **%** |
| Net interest  income                            |       |                       | ** ** | **$**                      | **2,356**  | ** ** | ** ** |   |   | ** ** | **$** | **1,197** | ** ** | ** ** | ** ** |
| Net interest  margin (2)                        |       |                       |       |                       | ** ** | **3.83** | **%** |   | ** ** | ** ** | ** ** | **3.64** | **%** |

 

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(1)  There were three loanstotaling $528,387 in nonaccrual status as of December 31, 2007.  There were no loans in nonaccrual status asof December 31, 2006.  The effect offees collected on loans totaling $102,029 increased the annualized yield onloans by .19% from 7.76%.  The effect onthe annualized yield on earning assets was an increase of .17% from 7.46%.  The effect on net interest spread and netinterest margin was an increase of .17% and .17% from 2.60% and 3.66%,respectively.  The net interest spread isthe difference between the yield we earn on our interest-earning assets and therate we pay on our interest-bearing liabilities.

 

(2)  Net interestincome divided by average earning assets.

 

27

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***Analysis of Changes in Net Interest Income. ***** **Net interest incomecan also be analyzed in terms of the impact of changing rates and changingvolume.  The following table reflects theextent to which changes in interest rates and changes in the volume of earningassets and interest-bearing liabilities have affected our interest income andinterest expense during the periods indicated. Information on changes in each category attributable to (i) changesdue to volume (change in volume multiplied by prior period rate), (ii) changesdue to rates (changes in rates multiplied by prior period volume) and (iii) changesin rate/volume (change in rate multiplied by the change in volume) is providedas follows:

 
| ** **                                  | ** ** | **2007 compared to 2006** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| **(Dollars in thousands)**        | ** ** | **Volume****(1)**                        | ** ** | **Rate (1)** | ** ** | **Volume/Rate (2)** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income:                            |       |                                     |       |   |   |   |   |   |   |
| Loans, incuding  fees                       |       | $                                        | 2,890      |   | $ | (21 | ) | $ | (43 | ) | $ | 2,826 |   |
| Securities,  available for sale, taxable    |       | 310                                      |       | 1 |   | 2 |   | 313 |   |
| Nonmarketable  equity securities            |       | —                                   |       | — |   | 7 |   | 7 |   |
| Federal funds  sold                         |       | (621                                     | )          | 78 |   | (73 | ) | (616 | ) |
| Interest bearing  deposits with other banks |       | (17                                      | )          | 1 |   | (1 | ) | (17 | ) |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Total interest  income                      |       | 2,562                                    |       | 59 |   | (108 | ) | 2,513 |   |
| ** **                                  | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction  accounts                       |       | 12                                       |       | (2 | ) | (2 | ) | 8 |   |
| Savings and  money market accounts          |       | 231                                      |       | (14 | ) | (5 | ) | 212 |   |
| Time deposits                               |       | 1,058                                    |       | 7 |   | 19 |   | 1,084 |   |
| Federal Home  Loan Bank advances            |       | —                                   |       | — |   | 16 |   | 16 |   |
| Federal funds  purchased                    |       | 26                                       |       | — |   | 8 |   | 34 |   |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Total interest expense                      |       | 1,327                                    |       | (9 | ) | 36 |   | 1,354 |   |
|                                        |       |                                     |       |   |   |   |   |   |   |
| **Net interest income**                     | ** ** | **$**                                    | **1,235**  | ** ** | **$** | **68** | ** ** | **$** | **(144** | **)** | **$** | **1,159** | ** ** |

 

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(1)   Volume-rate changes have been allocated to eachcategory based on a consistent basis between rate and volume.

(2)  Changes to both rate and volume, (in iiiabove), which cannot be segregated, have been allocated proportionately.

 

***Interest Sensitivity****.*  Wemonitor and manage the pricing and maturity of our assets and liabilities inorder to diminish the potential adverse impact that changes in interest ratescould have on its net interest income. The principal monitoring technique employed by us is the measurement ofour interest sensitivity “gap”, which is the positive or negative dollardifference between assets and liabilities that are subject to interest raterepricing within a given period of time. Interest rate sensitivity can be managed by repricing assets orliabilities, selling securities available for sale, replacing an asset orliability at maturity, or adjusting the interest rate during the life of anasset or liability.  Managing the amountof assets and liabilities repricing in this same time interval helps to hedgethe risk and minimize the impact on net interest income of rising or fallinginterest rates.

 

28

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The following table sets forth our interestrate sensitivity at December 31, 2007:

 

**Interest Sensitivity Analysis**

 
| **(Dollars in thousands)**             | ** ** | **Within  Three  Months** | ** ** | **After Three  Through  Twelve  Months** | ** ** | **One  Through  Five Years** | ** ** | **Greater  Than  Five Years  or Non-  sensitive** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | ** **                | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| **Assets**                                       |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Earning Assets:                                  |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Loans                                            |       | $                         | 31,243     |                                          | $          | 16,486                            |       | $                                                           | 15,547     |       | $          | 2,488 |   | $ | 65,764 |   |
| Investment securities                            |       | —                    |       | —                                        |       | 1001                              |       | 12,598                                                      |       | 13,599     |       |
| Nonmarketable equity securities                  |       | —                    |       | —                                        |       | —                            |       | 318                                                         |       | 318        |       |
| Interest bearing deposits with other banks       |       | 82                        |       | —                                        |       | —                            |       | —                                                      |       | 82         |       |
| Total earning assets                             |       | 31,325                    |       | 16,486                                        |       | 16,548                            |       | 15,404                                                      |       | 79,763     |       |
|                                             |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| **Liabilities**                                  |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Interest-bearing liabilities:                    |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Demand deposits                                  |       | 2,536                     |       | —                                        |       | —                            |       | —                                                      |       | 2,536      |       |
| Savings and money market deposits                |       | 17,713                    |       | —                                        |       | —                            |       | —                                                      |       | 17,713     |       |
| Time deposits                                    |       | 11,098                    |       | 23,490                                        |       | 2,680                             |       | —                                                      |       | 37,268     |       |
| Federal funds purchased                          |       | 3,838                     |       | —                                        |       | —                            |       | —                                                      |       | 3,838      |       |
| Federal Home Loan Bank advance                   |       | —                    |       | —                                        |       | —                            |       | 5,000                                                       |       | 5,000      |       |
| Total interest-bearing liabilities               |       | 35,185                    |       | 23,490                                        |       | 2,680                             |       | 5,000                                                       |       | 66,355     |       |
|                                             |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Period gap                                       | ** ** | **$**                     | **(3,860** | **)**                                         | **$**      | **(7,004**                        | **)**      | **$**                                                       | **13,868** | ** ** | **$**      | **10,404** | ** ** | **$** | **13,408** | ** ** |
| Cumulative gap                                   | ** ** | **$**                     | **(3,860** | **)**                                         | **$**      | **(10,864**                       | **)**      | **$**                                                       | **3,004**  | ** ** | **$**      | **13,408** | ** ** | **$** | **13,408** | ** ** |
|                                             |       |                      |       |                                          |       |                              |       |                                                        |       |       |       |
| Ratio of cumulative gap to total earning  assets |       | (4.84                     | )%         | (13.62                                        | )%         | 3.77                              | %          | 16.81                                                       | %          | 16.81      | %          |

 

The above table reflects the balances of interest-earning assets andinterest-bearing liabilities at the earlier of their repricing or maturitydates.  Overnight federal funds arereflected at the earliest pricing interval due to the immediately availablenature of the instruments.  Debtsecurities are reflected at each instrument’s ultimate maturity date.  Scheduled payment amounts of fixed rateamortizing loans are reflected at each scheduled payment date.  Scheduled payment amounts of variable rateamortizing loans are reflected at each scheduled payment date until the loanmay be repriced contractually; the unamortized balance is reflected at thatpoint.  Interest-bearing liabilities withno contractual maturity, such as savings deposits and interest-bearingtransaction accounts, are reflected in the earliest repricing period due tocontractual arrangements which give us the opportunity to vary the rates paidon those deposits within a thirty-day or shorter period.  Fixed rate time deposits, principallycertificates of deposit, are reflected at their contractual maturity date.  The Federal Home Loan Bank advance isreflected at its contractual maturity date.

 

We generally would benefit from increasing marketrates of interest when we have an asset-sensitive gap position and generallywould benefit from decreasing market rates of interest when we areliability-sensitive.  We are cumulativelyliability sensitive through the first twelve months and cumulatively assetsensitive beyond one year.  However, ourgap analysis is not a precise indicator of its interest sensitivityposition.  The analysis presents only astatic view of the timing of maturities and repricing opportunities, withouttaking into consideration that changes in interest rates do not affect allassets and liabilities equally.  Netinterest income may be impacted by other significant factors in a giveninterest rate environment, including changes in the volume and mix of earningassets and interest-bearing liabilities.

 

29

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**Provision and Allowancefor Loan Losses**

 

***General****.*  Wehave developed policies and procedures for evaluating the overall quality ofits credit portfolio and the timely identification of potential problemcredits.  On a quarterly basis, our Boardof Directors reviews and approves the appropriate level for our allowance forloan losses based upon management’s recommendations, the results of theinternal monitoring and reporting system, and an analysis of economicconditions in our market.  The provisionfor loan losses reflects the amount deemed appropriate by management to establishan adequate reserve to meet probable loan losses incurred in the loanportfolio.

 

Additions to the allowance for loan losses, which are expensed as theprovision for loan losses on our income statement, are made periodically tomaintain the allowance at an appropriate level based on management’s analysisof the risk inherent in the loan portfolio. Loan losses and recoveries are charged or credited directly to theallowance.  The amount of the provisionis a function of the level of loans outstanding, the level of nonperformingloans, the amount of loan losses actually charged against the reserve during agiven period, and current and anticipated economic conditions.

 

Our allowance for loan losses is based upon judgments and assumptionsabout risk elements in the portfolio, future economic conditions, and otherfactors affecting borrowers.  The processincludes identification and analysis of loss potential in various portfoliosegments utilizing a credit risk grading process and specific reviews andevaluations of significant problem credits. Our determination of the allowance for loan losses is based onevaluations of the collectability of loans, including consideration of factorssuch as the balance of impaired loans, the quality, mix, and size of ouroverall loan portfolio, economic conditions that may affect the borrower’sability to repay, the amount and quality of collateral securing the loans, ourhistorical loan loss experience, and a review of specific problem loans.  We also consider subjective issues such aschanges in the lending policies and procedures, changes in the local/nationaleconomy, changes in volume or type of credits, changes in volume/severity ofproblem loans, quality of loan review and board of director oversight,concentrations of credit, and peer group comparisons.  The adequacy of the allowance for loan lossesand the effectiveness of our monitoring and analysis system are also reviewedperiodically by the banking regulators.

 

Due to our limited operating history, to date the provision for loanlosses has been made primarily as a result of our assessment of general loanloss risk compared to banks of similar size and maturity.  Due to our short operating history, the loansin our loan portfolio and our lending relationships are of very recentorigin.  In general, loans do not beginto show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process known as seasoning.  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher than current levels.

 

Based on present information and an ongoing evaluation, we consider theallowance for loan losses to be adequate to meet presently known and inherentrisks in the loan portfolio.  Ourjudgment about the adequacy of the allowance is based upon a number ofassumptions about future events which we believe to be reasonable but which mayor may not be accurate.  Thus, there canbe no assurance that charge-offs in future periods will not exceed theallowance for loan losses or that additional increases in the allowance forloan losses will not be required.  We donot allocate the allowance for loan losses to specific categories of loans butevaluates the adequacy on an overall portfolio basis utilizing a risk gradingsystem.

 

30

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The followingtable sets forth certain information with respect to our allowance for loanlosses and the composition of charge-offs and recoveries for the years ended December 31,2007 and 2006.

 

**Allowance for Loan Losses**

 
| **(Dollars in thousands)**                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                        |       |       |       |       |       |
| Total loans outstanding at end of period                    | ** ** | **$**      | **65,764** | ** ** | **$**      | **38,819** | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average loans outstanding                                   | ** ** | **$**      | **53,398** | ** ** | **$**      | **17,608** | ** ** |
|                                                        |       |       |       |       |       |
| Balance of allowance for loan losses at beginning of period |       | $          | 389        |       | —     |   |
|                                                        |       |       |       |       |       |
| Net loan losses                                             |       | (3         | )          | (1         | )          |
| Provision for loan losses                                   |       | 291        |       | 390        |       |
| Balance of allowance for loan losses at end of year         | ** ** | **$**      | **677**    | ** ** | **$**      | **389** | ** ** |
|                                                        |       |       |       |       |       |
| Allowance for loan losses to period end loans               |       | 1.03       | %          | 1.00       | %          |

 

**Nonperforming Assets**

 

***Nonperforming Assets****.* There were three loans totaling $528,387 which werenonperforming assets at December 31, 2007. There were no nonperforming assets as of December 31, 2006.  There were no loans past due 90 days or moreand still accruing interest at December 31, 2007 or 2006.

 

Our policy withrespect to nonperforming assets is as follows. Accrual of interest will be discontinued on a loan when we believe,after considering economic and business conditions and collection efforts thatthe borrower’s financial condition is such that the collection of interest isdoubtful.  A delinquent loan willgenerally be placed in nonaccrual status when it becomes 90 days or more pastdue.  When a loan is placed in nonaccrualstatus, all interest which has been accrued on the loan but remains unpaid willbe reversed and deducted from current earnings as a reduction of reportedinterest income.  No additional interestwill be accrued on the loan balance until the collection of both principal andinterest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be anactual write-down or charge-off of the principal balance of the loan whichwould necessitate additional charges to earnings.

 

***Potential Problem Loans****.* At December 31, 2007, loans totaling $2,267,869 as compared to$777,690 for the prior year, were criticized and $528,387 were classified orimpaired by our internal review mechanisms. At December 31, 2006, there were no impaired loans.  The results of this internal review processare considered in determining our assessment of the adequacy of the allowancefor loan losses.  Included in theallowance for loan losses at December 31, 2007 was $162,775 related toimpaired loans.  There was no specificreserve for impaired loans for the year ended December 31, 2006.

 

# **Noninterest Income and Expense**

# ** **

***Noninterest Income****.*  The largestcomponent of noninterest income was residential mortgage origination fees forthe year ended December 31, 2007 which totaled $162,165 as compared to$139,057 in 2006.  Service chargeson deposit accounts totaled $73,683 for the year ended December 31, 2007and $24,343 for the year ended December 31, 2006.  The increase in service charges on depositaccounts is due to an increase in the volume of deposits in 2007.

 

31

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The followingtable sets forth the principal components of noninterest income for the yearsended December 31, 2007 and 2006.

 
| **(Dollars in thousands)** | ** ** | **2007** | ** ** | **2006**   | ** ** |
|--------------------------------------|------------|----------|------------|------------|------------|
|                                 |       |     |       |       |       |
| Mortgage origination fees            |       | $        | 162        |       | $          | 139 |   |
| Service charge on deposit accounts   |       | 74       |       | 25         |       |
| Other                                |       | 70       |       | 34         |       |
|                                 |       |     |       |       |       |
| Total noninterest income             | ** ** | **$**    | **306**    | ** ** | **$**      | **198** | ** ** |

 

***Noninterest Expense****. *Pre-openingexpenses associated with our formation of the bank comprised $740,680 of totalnoninterest expenses for the year ended December 31, 2006. * *Salaries andemployee benefits comprised the largest component of noninterest expense eachyear, totaling $1,684,220 and $1,342,790 (excluding $389,374 related topre-opening transfers) for the years ended December 31, 2007 and 2006,respectively.  Salaries and employeebenefits increased $341,730 in 2007 from 2006 mainly as a result of the hiringof new employees to assist with our growth and of pay raises for existingemployees.  Professional fees totaled$197,192 and $175,939 (excluding $104,623 related to pre-opening transfers) forthe years ended December 31, 2007 and 2006, respectively. Increasedprofessional fees expense of $21,253 in 2007 from 2006 reflects costsassociated with Sarbanes-Oxley Act compliance in 2007.  We continued to promote our “a” brand, whichcontributed to marketing expenses totaling $258,153 and $322,099 (excluding$47,820 related to pre-opening transfers) for the years ended December 31,2007 and 2006, respectively.  As a resultof this advertising commitment, we believe we have successfully achieved arecognizable brand for the bank in our local competitive market in a relativelyshort time.

 

The followingtable sets forth the primary components of noninterest expense for the yearsended December 31, 2007 and 2006.

 
| **(Dollars in thousands)**     | ** ** | **2007** | ** ** | **2006**   | ** ** | **Pre-opening** | ** ** | **Net 2006** | ** ** |
|------------------------------------------|------------|----------|------------|------------|------------|-----------------|------------|-------------------|------------|
|                                     |       |     |       |       |       |            |       |              |       |
| Salaries and employee benefits           |       | $        | 1,684      |       | $          | 1,732           |       | $                 | 389        |   | $ | 1,343 |   |
| Net occupancy expense                    |       | 185      |       | 264        |       | 85              |       | 179               |       |
| Insurance                                |       | 22       |       | 23         |       | 9               |       | 14                |       |
| Application and license fees             |       | 1        |       | 10         |       | —          |       | 10                |       |
| Advertising and marketing expense        |       | 258      |       | 370        |       | 48              |       | 322               |       |
| Office supplies, stationary and printing |       | 63       |       | 83         |       | 14              |       | 69                |       |
| Data processing                          |       | 265      |       | 245        |       | —          |       | 245               |       |
| Professional fees                        |       | 197      |       | 281        |       | 105             |       | 176               |       |
| Furniture and equipment expense          |       | 201      |       | 140        |       | 21              |       | 119               |       |
| Telephone                                |       | 71       |       | 85         |       | 15              |       | 70                |       |
| Postage                                  |       | 13       |       | 15         |       | —          |       | 15                |       |
| Other                                    |       | 241      |       | 178        |       | 55              |       | 123               |       |
|                                     |       |     |       |       |       |            |       |              |       |
| Total noninterest expense                | ** ** | **$**    | **3,201**  | ** ** | **$**      | **3,426**       | ** ** | **$**             | **741**    | ** ** | **$** | **2,685** | ** ** |

 

32

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**Earning Assets**

 

***Loans****. *Loans arethe largest category of earning assets and typically provide higher yields thanthe other types of earning assets. Associated with the higher loan yields are the inherent credit andliquidity risks which we attempt to control and counterbalance.  Loans averaged $53,397,968 and $17,607,733 in2007 and 2006, respectively.  At December 31,2007 and 2006, total loans were $65,764,459 and $38,819,635, respectively.

 

The followingtable sets forth the composition of the loan portfolio by category at December 31,2007 and 2006 and highlights our general emphasis on real-estate lending.

 

**Compositionof Loan Portfolio**

 
| ** **                                          | ** ** | **2007**   | ** ** | **2006**      | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------|------------|
| **December 31,**                               | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(Dollars in thousands)**                | ** ** | **Amount** | ** ** | **Total**     | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Commerical and industrial                           |       | $          | 4,562      |          | 6.92       | % | $ | 3,577 |   | 9.19 | % |
| Real estate:                                        |       |       |       |          |       |   |   |   |   |
| Mortgage                                            |       | 42,690     |       | 64.81         | %          | 22,333 |   | 57.35 | % |
| Construction, land development and other land loans |       | 18,028     |       | 27.37         | %          | 12,740 |   | 32.72 | % |
| Consumer                                            |       | 592        |       | .90           | %          | 288 |   | .74 | % |
| Total loans                                         | ** ** | **$**      | **65,872** | ** **    | **100.00** | **%** | **$** | **38,938** | ** ** | **100.00** | **%** |
|                                                |       |       |       |          |       |   |   |   |   |
| Allowance for loan losses                           |       | 677        |       |          |       | 389 |   |   |   |
| Deferred loan origination fees                      |       | 108        |       |          |       | 119 |   |   |   |
|                                                |       |       |       |          |       |   |   |   |   |
| Net loans                                           | ** ** | **$**      | **65,087** | ** **    | ** ** |   | **$** | **38,430** |   |   |   |
|                                                     |            |            |            |               |            |  |  |  |  |  |  |  |  |

 

The largestcomponent of loans in our loan portfolio is real estate mortgage loans.  At December 31, 2007, real estatemortgage loans totaled $42,690,242, or 64.81% of our total loan portfolio,compared to $22,333,490, or 57.35%, in 2006.

 

In the context ofthis discussion, a “real estate mortgage loan” is defined as any loan, otherthan a loan for construction, land development and other land, secured by realestate, regardless of the purpose of the loan. It is common practice for financial institutions in our market area toobtain a security interest in real estate whenever possible, in addition to anyother available collateral. This collateral is taken to reinforce thelikelihood of the ultimate repayment of the loan and tends to increase themagnitude of the real estate loan portfolio component.

 

Residentialmortgage loans totaled $21,886,078 at December 31, 2007, compared to$15,688,108 in 2006.  Residential realestate loans consist of first and second mortgages on single or multi-familyresidential dwellings.  Nonresidentialmortgage loans, which include commercial loans and other loans secured bymulti-family properties and farmland, totaled $20,804,164 at December 31,2007 and $6,645,382 in 2006.  Commercialreal estate loans are generally viewed as having more risk of default thanresidential real estate loans.  They arealso typically larger than residential real estate loans and consumer loans anddepend on cash flows from the owner’s business or the property to service thedebt.  Cash flows may be affectedsignificantly by general economic conditions (including rising interest rates)and a downturn in the local economy or in occupancy rates in the local economywhere the property is located could increase the likelihood of default.  Because our loan portfolio contains a numberof commercial real estate loans with relatively large balances, thedeterioration of one or a few of these loans could cause a significant increasein our level of non-performing loans.  Anincrease in non-performing loans could result in a loss of earnings from theseloans, an increase in the related provision for loan losses and an increase incharge-offs, all of which could have a material adverse effect on our financialcondition and results of operations.

 

33

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Construction, landdevelopment and other land loans totaled $18,027,664 at December 31, 2007and $12,739,992 in 2006.  The demand forthis type of loan has been strong due to the amount of new development in ourmarket area.

 

Commercial andindustrial loans totaled $4,561,846 at December 31, 2007 and $3,576,762 in2006 and comprised 6.92% and 9.19%, respectively, of our total portfolio.

 

Our loan portfolioalso includes consumer loans.  At December 31,2007, consumer loans totaled $592,378, compared to $288,391 in 2006, andrepresented .90% and .74%, respectively, of the total loan portfolio on suchdates.

 

Our loan portfolioreflects the diversity of our market. Our home office is located in Bluffton, South Carolina.  We expanded our existing loan productionoffice on Hilton Head Island, South Carolina, into a full-service branch in October 2007.  We expect growth to continue in our regionover the next few years.  We believe thediversity of the economy in our market creates opportunities for various typesof lending.  We do not engage in foreignlending.

 

The repayment ofloans in the loan portfolio as they mature is also a source of liquidity forus.  The following table sets forth ourloans maturing within specified intervals at December 31, 2007.

 

**LoanMaturity Schedule and Sensitivity to Changes in Interest Rates**

 
| ** **                                                 | ** ** | ** **        | ** ** | **Over One**   | ** ** | ** **          | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| **December 31, 2007**                            | ** ** | **One Year** | ** ** | **Year  Through**   | ** ** | **Over**            | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                       | ** ** | **or Less**  | ** ** | **Five Years** | ** ** | **Five years** | ** ** | **Total**  | ** ** |
| ** **                                                 | ** ** | ** **        | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
| Commerical and industrial                                  |       | $                 | 1,678      |                | $          | 2,275               |       | $          | 609        |   | $ | 4,562 |   |
| Real estate-mortgage                                       |       | 9,089             |       | 23,949              |       | 9,652               |       | 42,690     |       |
| Real estate-construction, land development and  other land |       | 5,636             |       | 12,000              |       | 392                 |       | 18,028     |       |
| Consumer and other                                         |       | 284               |       | 269                 |       | 39                  |       | 592        |       |
| ** **                                                 | ** ** | **$**             | **16,687** | ** **          | **$**      | **38,493**          | ** ** | **$**      | **10,692** | ** ** | **$** | **65,872** | ** ** |
|                                                       |       |              |       |                |       |                |       |       |       |
| Loans maturing after one year with:                        |       |              |       |                |       |                |       |       |       |
| Fixed interest rates                                       |       |              |       |                |       |                |       | $          | 38,674     |   |
| Floating interest rates                                    |       |              |       |                |       |                |       | 10,511     |       |
| ** **                                                 | ** ** | ** **        | ** ** | ** **          | ** ** | ** **          | ** ** | **$**      | **49,185** | ** ** |

 

The informationpresented in the above table is based on the contractual maturities of the individualloans, including loans which may be subject to renewal at their contractualmaturity.  Renewal of such loans issubject to review and credit approval as well as modification of terms upontheir maturity.  Consequently, we believethis treatment presents fairly the maturity and repricing structure of the loanportfolio shown in the above table.

 

**Investments**

 

***Investment Securities****.* The investment securities portfolio is also acomponent of our total earning assets.  Total securities averaged $7,031,172 in 2007and $1,304,183 in 2006.  At December 31,2007, the total securities portfolio was $13,599,116 and $3,560,807 in2006.  All securities were designated asavailable for sale and were recorded at market value.

 

34

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The followingtable sets forth the scheduled maturities and average yields of securitiesavailable for sale at December 31, 2007.

 

**InvestmentSecurities Maturity Distribution and Yields**

 
| **December 31, 2007**       | ** ** | **One Year  or Less** | ** ** | **Over One Year  Through  Five Years** | ** ** | **Over Five Years  Through  Ten years** | ** **  | **Over  Ten Years** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|-------------|--------------------------|------------|------------|------------|
| **(Dollars in thousands)**  | ** ** | **Amount**                      | ** ** | **Yield**                                             | ** ** | **Amount**                                             | ** **  | **Yield**                | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                            | ** ** | ** **                      | ** ** | ** **                                            | ** ** | ** **                                             | ** **  | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Government-sponsored enterprises |       | —                          |       | —                                                |       | $                                                      |  1,001 |                     | 5.31       | %          | 2,599      |   | 6.15 | % |   |   |   |   | $ |  3,600 |   | 5.91 | % |
| Mortgage-backed securities            |       | —                          |       | —                                                |       | —                                                 |        | —                   |       | 9,999      |       | 5.33 | % | — |   | — |   | $ | 9,999 |   | 5.33 | % |
| Total                                 | ** ** | —                          | ** ** | —                                                | ** ** | **$**                                                  | **1,001**   | ** **               | **5.31**   | **%**      | **$**      | **12,598** | ** ** | **5.50** | **%** | — | ** ** | — | ** ** | **$** | **13,599** | ** ** | **5.48** | **%** |
|                                       |            |                                 |            |                                                       |            |                                                        |             |                          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Nonmarketable equity securities totaled $318,400 and $93,200 and had ayield of 5.96% and 0.00% at December 31, 2007 and 2006, respectively.

 

Other attributesof the securities portfolio, including yields and maturities, are discussedabove in “—Net Interest Income— Interest Sensitivity.”

 

***Short-Term Investments****.* Short-term investments, which consist primarily offederal funds sold, averaged $977,470 in 2007 and $14,007,332 in 2006.  At December 31, 2007, we had no federalfunds sold.  At December 31, 2006,short-term investment in federal funds sold totaled $6,611,000.  Federal funds are generally invested in anearning capacity on an overnight basis. The significant balance in short-term investments at the end of December 2006was partially attributable to the investment in federal funds sold as a resultof excess funds from the stock offering.

 

# **Deposits and Other Interest-Bearing Liabilities**

# ** **

***Deposits****.* Average total deposits totaled $52,374,427 during2007 and $24,805,978 during 2006.  At December 31,2007, total deposits were $63,469,102 and $41,211,144 in 2006.  Average interest-bearing liabilities totaled$48,058,601 in 2007 and $20,873,007 in 2006.

 

The followingtable sets forth our deposits by category as of December 31, 2007 and2006.

 

**Deposits**

 
| ** **                           | ** ** | **2007**   | ** ** | **2006**      | ** ** |
|--------------------------------------|------------|------------|------------|---------------|------------|
| **December 31,**                | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(Dollars in thousands)** | ** ** | **Amount** | ** ** | **Deposits**  | ** ** | **Amount** | ** ** | **Deposits** | ** ** |
| Demand deposit accounts              |       | $          | 5,952      |          | 9.38       | % | $ | 4,974 |   | 12.07 | % |
| NOW accounts                         |       | 2,536      |       | 4.00          | %          | 4,379 |   | 10.63 | % |
| Savings and money market accounts    |       | 17,713     |       | 27.91         | %          | 14,736 |   | 35.76 | % |
| Time deposits of $100 or over        |       | 9,956      |       | 15.68         | %          | 9,727 |   | 23.60 | % |
| Other time deposits                  |       | 27,312     |       | 43.03         | %          | 7,395 |   | 17.94 | % |
| Total deposits                       | ** ** | **$**      | **63,469** | ** **    | **100.00** | **%** | **$** | **41,211** | ** ** | **100.00** | **%** |

 

35

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Core deposits,which exclude certificates of deposit of $100,000 or more, provide a relativelystable funding source for our loan portfolio and other earning assets.  Our core deposits were $53,512,720 at December 31,2007 and $31,483,699 in 2006.

 

Deposits, andparticularly core deposits, have been a primary source of funding and haveenabled us to meet successfully both our short-term and long-term liquidityneeds.  Competition for core deposits isintense in our market and we expect the deposit competition to increase in thenear future.  Our loan-to-deposit ratiowas 103.62% and 94.20% at December 31, 2007 and 2006, respectively.

 

The maturitydistribution of our time deposits over $100,000 at December 31, 2007, isset forth in the following table:

 

**Maturitiesof Certificates of Deposit of $100,000 or More**

 
| **(Dollars in thousands)**                                  | ** ** | **Within  Three  Months** | ** ** | **After Three  Through  Twelve  Months** | ** ** | **One  Through  Five Years** | ** ** | **Greater  Than  Five Years** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | ** **                | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Certificates of deposit of $100 or more | ** ** | $                         | 1,993      |                                          | $          | 6,111                             |       | $                                  | 1,852      |       | $          | — |   | $ | 9,956 |   |
|                                                                       |            |                           |            |                                               |            |                                   |            |                                    |            |            |            |  |  |  |  |  |

 

Of our timedeposits over $100,000, 20.02% had scheduled maturities within three months,61.38% had maturities after three through twelve months and 18.60% hadmaturities of one year to five years. Large certificate of deposit customers may be extremely sensitive tointerest rate levels, making these deposits less reliable sources of fundingfor liquidity planning purposes than core deposits.

 

***OtherBorrowings.***Thefollowing table summarizes our borrowings for the year ended December 31,2007.  There were no borrowings at theend of December 31, 2006.  Theseborrowings consist of one advance from the Federal Home Loan Bank and federalfunds purchased.  The advance from theFederal Home Loan Bank is discussed in the footnotes to the financialstatements and is secured by a portion of our investment portfolio and ourinvestment in Federal Home Loan Bank stock. Federal funds are short-term borrowings from other financialinstitutions that mature daily.  Of thefederal funds purchased at December 31, 2007, $2,800,000 is secured by aportion of our investment portfolio.  Theremaining balance of federal funds purchased at December 31, 2007 isunsecured.

 
| **(Dollars in thousands)**                                   | ** ** | **Maximum  Outstanding  at any  Month End** | ** **  | **Average  Balance** | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Balance  December 31,** | ** ** | **Interest  Rate at  December 31,** | ** **  |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|-------------|----------------------|------------|---------------------------------------|------------|--------------------------------|------------|-----------------------------------------------|-------------|
| ** **                                                             | ** ** | ** **                                            | ** **  | ** **           | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                                    | ** **  |
| Advances from the Federal Home Loan Bank |       | $                                                     |  5,000 |                 | $          |  452                             |       | 3.48                           | %          | $                                             |  5,000 |   | 3.48 | % |
| Federal funds purchased                                      |       | 3,838                                                 |        | 665                  |       | 5.15                                  | %          | 3,838                          |       | 4.29                                          | %           |
|                                                                        |            |                                                       |             |                      |            |                                       |            |                                |            |                                               |             |  |  |  |

 

36

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**Capital**

 

The FederalReserve and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on apercentage of assets and off balance sheet exposures, adjusted for risk weightsranging from 0% to 100%.

 

The FederalReserve guidelines contain an exemption from the capital requirements for “smallbank holding companies,” which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have a materialamount of debt or equity securities outstanding registered with the SEC.  Although we file periodic reports with theSEC, we believe that because our stock is not registered under Section 12of the Securities Exchange Act and is not listed on any exchange or otherwiseactively traded, the Federal Reserve Board will interpret its new guidelines tomean that we qualify as a small bank holding company.  Nevertheless, our bank remains subject tothese capital requirements.

 

Failure to meetminimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea material effect on the bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the bank must meet specificcapital guidelines that involve quantitative measures of the bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the bankto maintain minimum ratios of Tier 1 and total capital as a percentage ofassets and off-balance-sheet exposures, adjusted for risk weights ranging from0% to 100%.  Tier 1 capital of the bankconsists of common shareholders’ equity, excluding the unrealized gain or losson securities available-for-sale, minus certain intangible assets.  The bank’s Tier 2 capital consists of theallowance for loan losses subject to certain limitations.  Total capital for purposes of computing thecapital ratios consists of the sum of Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4%for Tier 1 capital and 8% for total risk-based capital.

 

The bank is alsorequired to maintain capital at a minimum level based on quarterly averageassets, which is known as the leverage ratio.  Only the strongest banks are allowed tomaintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios1% to 2% above the minimum.

 

The bank exceededthe regulatory capital requirements at December 31 as set forth in the followingtable.

 

**Analysisof Capital and Capital Ratios**

 
| **December 31,****(Dollars in thousands)**           | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Tier 1 capital                                                      |       | $         | 8,495      |       | $          | 9,133 |   |
| Tier 2 capital                                                      |       | 677       |       | 389        |       |
| Total qualifying capital                                            | ** ** | **$**     | **9,172**  | ** ** | **$**      | **9,522** | ** ** |
|                                                                |       |      |       |       |       |
| Risk-adjusted total assets (including  off-balance-sheet-exposures) | ** ** | **$**     | **62,589** | ** ** | **$**      | **37,915** | ** ** |
|                                                                |       |      |       |       |       |
| Tier 1 risk-based capital ratio                                     | ** ** | **13.57** | **%**      | **25.11**  | **%**      |
| Total risk-based capital ratio                                      | ** ** | **14.65** | **%**      | **24.09**  | **%**      |
| Tier 1 leverage ratio                                               | ** ** | **11.26** | **%**      | **20.40**  | **%**      |

 

37

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**Off-Balance Sheet Risk**

 

Through our operations, we have made contractualcommitments to extend credit in the ordinary course of our business activities.These commitments are legally binding agreements to lend money to our customersat predetermined interest rates for a specified period of time.  At December 31, 2007, we had issuedcommitments to extend credit of $12,891,632 through various types of lendingarrangements.  There were also $205,073outstanding commercial letters of credit at December 31, 2007.

 

The following table sets forth the length of timeuntil maturity for unused commitments to extend credit and standby letters ofcredit at December 31, 2007.

 
| **(Dollars in thousands)**                    | ** ** | **Within  Three  Months** | ** **  | **After Three  Through  Twelve  Months** | ** ** | **One  Through  Five Years** | ** ** | **Greater  Than  Five Years** | ** **  | **Total**  | ** ** |
|---------------------------------------------------------|------------|---------------------------|-------------|-----------------------------------------------|------------|-----------------------------------|------------|------------------------------------|-------------|------------|------------|
| ** **                                              | ** ** | ** **                | ** **  | ** **                                    | ** ** | ** **                        | ** ** | ** **                         | ** **  | ** ** | ** ** |
| Unused commitments to extend credit |       | $                         |  1,476 |                                          | $          |  3,668                       |       | $                                  |  3,653 |       | $          |  4,300 |   | $ |  13,097 |   |
|                                                         |            |                           |             |                                               |            |                                   |            |                                    |             |            |            |  |  |  |  |  |

 

We evaluate each customer’s credit worthiness on acase-by-case basis.  The amount ofcollateral obtained, if deemed necessary by us upon extension of credit, isbased on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory,property, plant and equipment, commercial and residential real estate.

 

**CriticalAccounting Policies**

 

We have adopted various accounting policies whichgovern the application of accounting principles generally accepted in theUnited States in the preparation of our financial statements.  Our significant accounting policies are describedin the footnotes to the consolidated financial statements at December 31,2007 as included in Item 7 of this annual report on Form 10-KSB.  Certain accounting policies involvesignificant judgments and assumptions which have a material impact on thecarrying value of certain assets and liabilities.  These accounting policies are considered tobe critical accounting policies.  Thejudgments and assumptions used are based on historical experience and otherfactors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions, actual results could differ from these judgments and estimateswhich could have a material impact on the carrying values of assets and liabilitiesand results of operations.

 

We believe the allowancefor loan losses is a critical accounting policy that requires the mostsignificant judgments and estimates used in preparation of the consolidatedfinancial statements.  Refer to theportion of the discussion above that addresses the allowance for loan lossesfor a description of our processes and methodology for determining ourallowance for loan losses.

 

**Liquidity Management and Capital Resources**

 

Liquiditymanagement involves monitoring our sources and uses of funds in order to meetour day-to-day cash flow requirements while maximizing profits.  Liquidity represents the ability of us toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Without proper liquidity management, we wouldnot be able to perform the primary function of a financial intermediary andwould, therefore, not be able to meet the needs of the communities it serves.

 

38

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Liquidity managementis made more complex because different balance sheet components are subject tovarying degrees of management control. For example, the timing of maturities of the investment portfolio isvery predictable and subject to a high degree of control at the time investmentdecisions are made.  However, net depositinflows and outflows are far less predictable and are not subject to nearly thesame degree of control.  We also have theability to obtain funds from various financial institutions should the needarise.

 

**Impact of Inflation**

 

Unlike mostindustrial companies, the assets and liabilities of financial institutions suchas the bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the bank’sperformance than do the effects of changes in the general rate of inflation andchange in prices.  In addition, interestrates do not necessarily move in the same direction or in the same magnitude asthe prices of goods and services.  Asdiscussed previously, management seeks to manage the relationships betweeninterest sensitive assets and liabilities in order to protect against wideinterest rate fluctuations, including those resulting from inflation.

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Return  on average assets               |       | (.89     | )%         | (4.39    | )%         |
| Return  on average equity               |       | (5.83    | )%         | (14.74   | )%         |
| Average  equity to average assets ratio |       | 15.34    | %          | 29.79    | %          |

 

39

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**Item 7 –Financial Statements**

 

**ATLANTICBANCSHARES, INC.**

 

ConsolidatedFinancial Statements

 

#### **and**

#### ** **

#### **Report ofIndependent Registered Public Accounting Firm**

#### ** **

#### **December 31,2007 and 2006**

#### ** **

F-1

----

 

**ATLANTIC BANCSHARES, INC.**

** **

#### **Table of Contents**

| ** **                                                                                | **Page No.** |
|-------------------------------------------------------------------------------------------|-------------------|
| ** **                                                                                | ** **        |
| Report of  Independent Registered Public Accounting Firm                                  | F-3               |
| Consolidated  Balance Sheets                                                              | F-4               |
| Consolidated  Statements of Operations                                                    | F-5               |
| Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Income | F-6               |
| Consolidated  Statements of Cash Flows                                                    | F-7               |
| Notes  to Consolidated Financial Statements                                               | F-8-F-27          |
| Corporate  Data                                                                           | 40                |

 

F-2

----

 

Elliott Davis

1901 Main Street, Suite 1650

PO Box 2227

Columbia, South Carolina 29202-2227

 

## **INDEPENDENT ACCOUNTANTS’ REPORT**

## ** **

The Board of Directors

Atlantic Bancshares, Inc.

Bluffton, South Carolina

 

We have audited the accompanying consolidated balance sheets ofAtlantic Bancshares, Inc. as of December 31, 2007 and 2006, and therelated consolidated statements of operations, changes in shareholders’ equityand comprehensive income, and cash flows for the years then ended.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

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

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Atlantic Bancshares, Inc.,at December 31, 2007 and 2006, and the results of their operations andcash flows for the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

We were not engaged to examine management’s assertion about theeffectiveness of Atlantic Bancshares, Inc.’s internal control overfinancial reporting as of December 31, 2007 included in the accompanyingManagement’s Report on Internal Control over Financial Reporting and,accordingly, we do not express an opinion thereon.

 

 
| /s/ Elliott Davis, LLC   |   |
|--------------------------|--------|
|                     |   |
| Elliott Davis, LLC       |   |
| Columbia, South Carolina |   |
| March 19, 2008      |   |

 

F-3

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** **

**ATLANTIC BANCSHARES, INC.**

** **

**Consolidated Balance Sheets**

** **
| ** **                                                                                         | ** ** | **December 31,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                                         | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Assets:**                                                                                        | ** ** | ** **            | ** **     | ** ** | ** ** |
| Cash and cash equivalents:                                                                         |       |                  |           |   |   |
| Cash and due from banks                                                                            |       | $                     | 1,630,198      |   | $ | 1,621,399 |   |
| Federal funds sold                                                                                 |       | —                |           | 6,611,000 |   |
| Total cash and cash equivalents                                                                    |       | 1,630,198             |           | 8,232,399 |   |
|                                                                                               |       |                  |           |   |   |
| Securities available for sale                                                                      |       | 13,599,116            |           | 3,560,807 |   |
| Nonmarketable equity securities                                                                    |       | 318,400               |           | 93,200 |   |
|                                                                                               |       |                  |           |   |   |
| Loans receivable                                                                                   |       | 65,764,459            |           | 38,819,635 |   |
| Less allowance for loan losses                                                                     |       | (677,850              | )              | (389,340 | ) |
| Loans, net                                                                                         |       | 65,086,609            |           | 38,430,295 |   |
|                                                                                               |       |                  |           |   |   |
| Accrued interest receivable                                                                        |       | 369,775               |           | 231,559 |   |
| Premises, furniture and  equipment, net                                                            |       | 397,451               |           | 445,877 |   |
| Deferred tax asset                                                                                 |       | 1,073,313             |           | 817,814 |   |
| Other assets                                                                                       |       | 157,878               |           | 110,094 |   |
| Total assets                                                                                       | ** ** | **$**                 | **82,632,740** | ** ** | **$** | **51,922,045** | ** ** |
| ** **                                                                                         | ** ** | ** **            | ** **     | ** ** | ** ** |
| **Liabilities:**                                                                                   |       |                  |           |   |   |
| Deposits:                                                                                          |       |                  |           |   |   |
| Noninterest bearing transaction  accounts                                                          |       | $                     | 5,951,955      |   | $ | 4,974,343 |   |
| Interest-bearing transaction  accounts                                                             |       | 2,536,183             |           | 4,379,043 |   |
| Savings and money market                                                                           |       | 17,712,595            |           | 14,735,478 |   |
| Time deposits $100,000 and over                                                                    |       | 9,956,382             |           | 9,727,445 |   |
| Other time deposits                                                                                |       | 27,311,987            |           | 7,394,835 |   |
| Total deposits                                                                                     |       | 63,469,102            |           | 41,211,144 |   |
|                                                                                               |       |                  |           |   |   |
| Advances from Federal Home Loan  Bank                                                              |       | 5,000,000             |           | — |   |
| Federal funds purchased                                                                            |       | 3,838,200             |           | — |   |
| Accrued interest payable                                                                           |       | 196,852               |           | 145,657 |   |
| Other liabilities                                                                                  |       | 146,328               |           | 122,272 |   |
| Total liabilities                                                                                  |       | 72,650,482            |           | 41,479,073 |   |
| ** **                                                                                         | ** ** | ** **            | ** **     | ** ** | ** ** |
| Commitments and contingencies                                                                      |       |                  |           |   |   |
|                                                                                               |       |                  |           |   |   |
| **Shareholders’ equity:**                                                                     |       |                  |           |   |   |
| Preferred stock, no par value;  10,000,000 shares authorized; no shares issued and outstanding     |       | —                |           | — |   |
| Common stock, no par value;  10,000,000 shares authorized; 1,251,577 shares issued and outstanding |       | 11,982,122            |           | 11,982,122 |   |
| Capital surplus                                                                                    |       | 159,781               |           | 62,373 |   |
| Accumulated other comprehensive  income                                                            |       | 20,518                |           | 9,794 |   |
| Deficit                                                                                            |       | (2,180,163            | )              | (1,611,317 | ) |
| Total shareholders’ equity                                                                    |       | 9,982,258             |           | 10,442,972 |   |
| Total liabilities and  shareholders’ equity                                                   | ** ** | **$**                 | **82,632,740** | ** ** | **$** | **51,922,045** | ** ** |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-4

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** **

**ATLANTIC BANCSHARES, INC.**

** **

**Consolidated Statements of Operations**

**For the years ended December 31, 2007 and 2006**

*** ***
| ** **                                               | ** ** | **2007**   | ** **   | **2006**   | ** ** |
|----------------------------------------------------------|------------|------------|--------------|------------|------------|
| ** **                                               | ** ** | ** ** | ** **   | ** ** | ** ** |
| **Interest income:**                                     | ** ** | ** ** | ** **   | ** ** | ** ** |
| Loans, including fees                                    |       | $          | 4,247,639    |       | $          | 1,421,776 |   |
| Securities, available for sale,  taxable                 |       | 383,615    |         | 70,690     |       |
| Nonmarketable equity securities                          |       | 6,778      |         | —     |       |
| Federal funds sold                                       |       | 52,711     |         | 668,325    |       |
| Interest bearing deposits with  other banks              |       | 756        |         | 17,492     |       |
| Total                                                    |       | 4,691,499  |         | 2,178,283  |       |
| ** **                                               | ** ** | ** ** | ** **   | ** ** | ** ** |
| **Interest expense:**                                    | ** ** | ** ** | ** **   | ** ** | ** ** |
| Time deposits $100,000 and over                          |       | 496,289    |         | 201,827    |       |
| Other deposits                                           |       | 1,788,674  |         | 778,226    |       |
| Other borrowings                                         |       | 50,216     |         | 779        |       |
| Total                                                    |       | 2,335,179  |         | 980,832    |       |
|                                                     |       |       |         |       |       |
| **Net interest income**                                  |       | 2,356,320  |         | 1,197,451  |       |
|                                                     |       |       |         |       |       |
| Provision for loan losses                                |       | 291,584    |         | 390,174    |       |
| **Net interest income after  provision for loan losses** |       | 2,064,736  |         | 807,277    |       |
|                                                     |       |       |         |       |       |
| **Noninterest income:**                                  |       |       |         |       |       |
| Service fees on deposit accounts                         |       | 73,683     |         | 24,343     |       |
| Residential mortgage origination  fees                   |       | 162,165    |         | 139,057    |       |
| Other income                                             |       | 70,665     |         | 34,020     |       |
| Total noninterest income                                 |       | 306,513    |         | 197,420    |       |
| ** **                                               | ** ** | ** ** | ** **   | ** ** | ** ** |
| **Noninterest expenses:**                                | ** ** | ** ** | ** **   | ** ** | ** ** |
| Salaries and employee benefits                           |       | 1,684,220  |         | 1,732,164  |       |
| Net occupancy                                            |       | 184,712    |         | 263,599    |       |
| Professional fees                                        |       | 197,192    |         | 280,562    |       |
| Marketing                                                |       | 258,153    |         | 369,919    |       |
| Furniture and equipment                                  |       | 201,437    |         | 140,131    |       |
| Data processing and related costs                        |       | 264,644    |         | 245,413    |       |
| Other operating                                          |       | 410,760    |         | 393,882    |       |
| Total noninterest expenses                               |       | 3,201,118  |         | 3,425,670  |       |
|                                                     |       |       |         |       |       |
| **Loss before income tax  benefit**                      |       | (829,869   | )            | (2,420,973 | )          |
|                                                     |       |       |         |       |       |
| Income tax benefit                                       |       | (261,023   | )            | (822,860   | )          |
|                                                     |       |       |         |       |       |
| **Net loss**                                             | ** ** | **$**      | **(568,846** | **)**      | **$**      | **(1,598,113** | **)** |
| ** **                                               | ** ** | ** ** | ** **   | ** ** | ** ** |
| Basic loss per share                                     | ** ** | **$**      | **(.45**     | **)**      | **$**      | **(1.36** | **)** |
|                                                     |       |       |         |       |       |
| Diluted loss per share                                   | ** ** | **$**      | **(.45**     | **)**      | **$**      | **(1.36** | **)** |
|                                                     |       |       |         |       |       |
| Average shares outstanding                               |       | 1,251,577  |         | 1,174,734  |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-5

----

** **

**ATLANTIC BANCSHARES, INC.**

** **

**Consolidated Statements of Changes in Shareholders’ Equity andComprehensive Income**

**For the years ended December 31, 2007 and 2006**

 
| ** **                                                                | ** ** | **Common stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  other  comprehensive** | ** ** | ** ** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **income** | ** ** | **Deficit**                           | ** ** | **(deficit)** | ** ** |
| ** **                                                                | ** ** | ** **            | ** ** | ** **              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **December 31, 2005**                                                |       | 10                    |       | $                       | 100        |                                  | —     |       | —     |                                  | $          | (13,204 | ) | $ | (13,104 | ) |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Proceeds from issuance of common stock, net of offering costs of $533,648 |       | 1,251,567             |       | 11,982,022              |       | —                                |       | —     |       | —                                |       | 11,982,022 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Net loss                                                                  |       | —                |       | —                  |       | —                                |       | —     |       | (1,598,113                            | )          | (1,598,113 | ) |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Other comprehensive income, net of tax of  $5,046                         |       | —                |       | —                  |       | —                                |       | 9,794      |       | —                                |       | 9,794 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Total comprehensive loss                                                  |       | —                |       | —                  |       | —                                |       | —     |       | —                                |       | (1,588,319 | ) |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Stock based compensation                                                  |       | —                |       | —                  |       | 62,373                                |       | —     |       | —                                |       | 62,373 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| **December 31, 2006**                                                |       | 1,251,577             |       | 11,982,122              |       | 62,373                                |       | 9,794      |       | (1,611,317                            | )          | 10,442,972 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Net loss                                                                  |       |                  |       |                    |       |                                  |       |       |       | (568,846                              | )          | (568,846 | ) |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Other comprehensive income, net of tax of  $5,524                         |       | —                |       | —                  |       | —                                |       | 10,724     |       | —                                |       | 10,724 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Total comprehensive loss                                                  |       | —                |       | —                  |       | —                                |       | —     |       | —                                |       | (558,122 | ) |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| Stock based compensation                                                  |       | —                |       | —                  |       | 97,408                                |       | —     |       | —                                |       | 97,408 |   |
|                                                                      |       |                  |       |                    |       |                                  |       |       |       |                                  |       |   |   |
| **December 31, 2007**                                                |       | 1,251,577             |       | $                       | 11,982,122 |                                  | $          | 159,781    |       | $                                     | 20,518     |   | $ | (2,180,163 | ) | $ | 9,982,258 |   |
|                                                                           |            |                       |            |                         |            |                                       |            |            |            |                                       |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-6

----

** **

**ATLANTIC BANCSHARES, INC.**

** **

**Consolidated Statements of Cash Flows**

**For the years ended December 31, 2007 and 2006**

** **
| ** **                                                                                   | ** ** | **For the years ended ** | ** **    |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|---------------|
| ** **                                                                                   | ** ** | **December 31,**                        | ** **    |
| ** **                                                                                   | ** ** | **2007**                                     | ** **    | **2006** | ** ** |
| **Cash flows from operating  activities**                                                    |       |                                         |          |   |   |
| Net loss                                                                                     |       | $                                            | (568,846      | ) | $ | (1,598,113 | ) |
| Adjustments to reconcile net loss  to net cash used in operating activities:                 |       |                                         |          |   |   |
| Provision for loan losses                                                                    |       | 291,584                                      |          | 390,174 |   |
| Depreciation and amortization  expense                                                       |       | 170,977                                      |          | 159,848 |   |
| Discount (accretion) on  securities available for sale                                       |       | (35,670                                      | )             | 1,649 |   |
| Stock-based compensation expense                                                             |       | 97,408                                       |          | 62,373 |   |
| Deferred income tax benefit                                                                  |       | (261,024                                     | )             | (822,860 | ) |
| Increase in interest receivable                                                              |       | (138,216                                     | )             | (231,559 | ) |
| Increase in interest payable                                                                 |       | 51,195                                       |          | 140,626 |   |
| (Increase) decrease in other  assets                                                         |       | (47,784                                      | )             | 764,309 |   |
| (Decrease) increase in other  liabilities                                                    |       | 24,056                                       |          | (65,215 | ) |
|                                                                                         |       |                                         |          |   |   |
| Net cash used in operating  activities                                                       |       | (416,320                                     | )             | (1,198,768 | ) |
|                                                                                         |       |                                         |          |   |   |
| **Cash flows from investing  activities Investing activities**                               |       |                                         |          |   |   |
| Net increase in loans receivable,  net                                                       |       | (26,947,898                                  | )             | (38,820,469 | ) |
| Purchase of premises, furniture  and equipment                                               |       | (122,552                                     | )             | (605,725 | ) |
| Purchase of securities available  for sale                                                   |       | (10,539,784                                  | )             | (3,655,950 | ) |
| Repayments of securities  available for sale                                                 |       | 553,395                                      |          | 108,334 |   |
| Purchase of nonmarketable equity  securities                                                 |       | (225,200                                     | )             | (93,200 | ) |
| Reimbursement from Bank for  premises, furniture and equipment                               |       | —                                       |          | 311,572 |   |
|                                                                                         |       |                                         |          |   |   |
| Net cash used in investing  activities                                                       |       | (37,282,039                                  | )             | (42,755,438 | ) |
|                                                                                         |       |                                         |          |   |   |
| **Cash flows from financing  activities Investing activities Financing activities**          | ** ** | ** **                                   | ** **    | ** ** | ** ** |
| Net increase in demand deposits,  interest-bearing transaction accounts and savings accounts |       | 2,111,869                                    |          | 24,088,864 |   |
| Net increase in certificates of  deposit and other time deposits                             |       | 20,146,089                                   |          | 17,122,280 |   |
| Net decrease in stock  subscription deposits                                                 |       | —                                       |          | (7,162,150 | ) |
| Net decrease in note payable                                                                 |       | —                                       |          | (1,046,988 | ) |
| Net increase in federal funds  purchased                                                     |       | 3,838,200                                    |          | — |   |
| Net increase in FHLB advances                                                                |       | 5,000,000                                    | ** **    | **—** | ** ** |
| Proceeds from sale of common  stock, net of stock issuance costs                             |       | —                                       |          | 11,982,022 |   |
|                                                                                         |       |                                         |          |   |   |
| Net cash provided by financing  activities                                                   |       | 31,096,158                                   |          | 44,984,028 |   |
|                                                                                         |       |                                         |          |   |   |
| Net (decrease) increase in cash  and cash equivalents                                        |       | (6,602,201                                   | )             | 1,029,822 |   |
|                                                                                         |       |                                         |          |   |   |
| **Cash and cash equivalents at  beginning of the period**                                    |       | 8,232,399                                    |          | 7,202,577 |   |
|                                                                                         |       |                                         |          |   |   |
| **Cash and cash equivalents at  end of the period**                                          | ** ** | **$**                                        | **1,630,198** | ** ** | **$** | **8,232,399** | ** ** |
|                                                                                         |       |                                         |          |   |   |
| **Supplemental information Cash  paid for**                                                  |       |                                         |          |   |   |
| Interest                                                                                     |       | $                                            | 2,283,984     |   | $ | 840,206 |   |
| Income taxes                                                                                 |       | $                                            | —        |   | $ | — |   |

 

The accompanying notes are an integral part of theconsolidated financial statements

 

F-7

----

** **

**ATLANTIC BANCSHARES, INC**.

 

**Notes to Consolidated Financial Statements**

** **

### **NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

### ** **

**Organization** - Atlantic Bancshares, Inc. (theCompany) was incorporated to serve as a bank holding company for itssubsidiary, Atlantic Community Bank (the Bank). Atlantic Community Bank commenced business on January 26,2006.  The principal business activity ofthe Bank is to provide banking services to domestic markets, principally in theBeaufort County region of South Carolina. The Bank is a state-chartered commercial bank, and its deposits areinsured by the Federal Deposit Insurance Corporation.  The consolidated financial statements includethe accounts of the parent company and its wholly-owned subsidiary afterelimination of all significant intercompany balances and transactions.

 

**Management’s Estimates** - The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and thereported amounts of income and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Materialestimates that are particularly susceptible to significant change relate to thedetermination of the allowance for losses on loans, including valuationallowances for impaired loans, the valuation of real estate acquired inconnection with foreclosures or in satisfaction of loans, and income tax assetsand liabilities.  In connection with thedetermination of the allowances for losses on loans and foreclosed real estate,management obtains independent appraisals for significant properties.  Management must also make estimates indetermining the estimated useful lives and methods for depreciating premisesand equipment.

 

Whilemanagement uses available information to recognize losses on loans andforeclosed real estate, future additions to the allowances may be necessarybased on changes in local economic conditions. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company’s allowances for losses onloans and foreclosed real estate.  Suchagencies may require the Company to recognize additions to the allowances basedon their judgments about information available to them at the time of theirexamination.  Because of these factors,it is reasonably possible that the allowances for losses on loans andforeclosed real estate may change materially in the near term.

 

**Concentrations of Credit Risk** - Financial instruments, which potentiallysubject the Company to concentrations of credit risk, consist principally ofloans receivable, investment securities, federal funds sold and amounts duefrom banks.

 

TheCompany makes loans to individuals and small businesses for various personaland commercial purposes primarily in the Beaufort County region of SouthCarolina.  The Company’s loan portfoliois not concentrated in loans to any single borrower or a relatively smallnumber of borrowers.  The Company has aconcentration of construction, land and land development loans****which totaled $18,027,664 at December 31, 2007,representing 181% of total equity and 28% of net loans receivable**. **Within this loancategory, the collateral, purpose and structure of the loans varysubstantially.  Historically, economicgrowth and a low interest rate environment have created opportunities for landacquisition and development activities in the Company’s market area.  During fiscal 2007, adverse changes in suchfactors slowed the absorption of developing projects and moderated marketvalues of land and developed lots. Management continues to monitor this concentration of credit risk atthis time and has considered this concentration in its evaluation of theallowance for loan losses.  As of December 31,2007, the Company identified one impaired loan related to thisconcentration.  Included in the allowancefor loan losses at December 31, 2007 was approximately $19,000 related tothis impaired loan.  The Companyexperienced no significant losses related to this identified risk during theyears ended December 31, 2007 and 2006.** **Management is not aware of anyother concentrations of loans to classes of borrowers or industries that wouldbe similarly affected by these economic conditions.

 

Inaddition to monitoring potential concentrations of loans to particularborrowers or groups of borrowers, industries and geographic regions, managementmonitors exposure to credit risk from concentrations of lending products andpractices such as loans that subject borrowers to substantial payment increases(e.g. principal deferral periods, loans

 

F-8

----

** **

NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

** **

withinitial interest-only periods, etc), and loans with high loan-to-valueratios.  Management has determined thatthere is no concentration of credit risk associated with its lending policiesor practices.  Additionally, there areindustry practices that could subject the Company to increased credit riskshould economic conditions change over the course of a loan’s life. Forexample, the Company makes variable rate loans and fixed rate principal-amortizingloans with maturities prior to the loan being fully paid (i.e. balloon paymentloans).  These loans are underwritten andmonitored to manage the associated risks. Therefore, management believes that these particular practices do notsubject the Company to unusual credit risk.

 

TheCompany’s investment portfolio consists principally of obligations of theUnited States, its agencies or its corporations.  In the opinion of management, there is noconcentration of credit risk in its investment portfolio.  The Company places its deposits with correspondentaccounts and sells its federal funds to high quality institutions. Managementbelieves credit risk associated with correspondent accounts is not significant.

 

**Securities Available-for-Sale******- Securities available-for-sale are carriedat amortized cost and adjusted to estimated market value by recognizing theaggregate unrealized gains or losses in a valuation account.  Aggregate market valuation adjustments arerecorded in shareholders’ equity net of deferred income taxes.  Reductions in market value considered bymanagement to be other than temporary are reported as a realized loss and areduction in the cost basis of the security. The adjusted cost basis ofinvestments available-for-sale is determined by specific identification and isused in computing the gain or loss upon sale. Interest income is recognized when earned.

 

**NonmarketableEquity Securities******- Nonmarketable equitysecurities consist of the cost of the Company’s investment in the stock ofFederal Home Loan Bank.  This stock hasno quoted market value and no ready market for it exists**. **The Company has determined it isnot practicable to estimate the fair value of these investments and,accordingly, uses cost as fair value. Investment****in the Federal Home Loan Bank isa condition of borrowing from the Federal Home Loan Bank, and the stock ispledged to collateralize such borrowings. At December 31, 2007 and 2006, the Company’s investment in FederalHome Loan Bank stock was $318,400 and $93,200, respectively**. **Dividends are recognized whenearned.  These nonmarketable equitysecurities were not evaluated for impairment.

 

**Loans Receivable** - Loans are stated at their unpaid principal balance adjusted forunamortized premiums and unearned discounts and deferred loan fees andcosts.  Interest income is computed usingthe simple interest method and is recorded in the period earned.

 

Whenserious doubt exists as to the collectability of a loan or when a loan becomescontractually 90 days past due as to principal or interest, recognition of****interest income is generally discontinued unless theestimated net realizable value of collateral exceeds the unpaid principalbalance and accrued interest.  Whenrecognition of****interest income is****discontinued, interest****earned but notcollected since the last payment received****is reversed.

 

Loansare charged off when the amount of loss is reasonably quantifiable and the lossis likely to occur.  Interest paymentsreceived after a loan is placed in nonaccrual are applied as a principalreduction until such time as the loan is returned to accrual status.  Generally, loans are returned to accrualstatus when the loan is brought current and the ultimate collectability ofprincipal and interest is no longer in doubt. The amount of unrecognized interest income on nonaccrual loans at December 31,2007 is $ 27,759.  No interest income onnonaccrual loans was unrecognized for the year ending December 31, 2006.

 

TheCompany follows SFAS No. 114 “Accounting by Creditors for Impairment of aLoan,” for determining impairment on certain loans.  SFAS No. 114 requires that nonhomogenousimpaired loans and certain restructured loans be measured at the present valueof expected future cash flows discounted at the loan’s effective interest rate,at the loan’s observable market price or at the fair value of the collateral ifthe loan is collateral dependent.  Aspecific reserve, if deemed necessary, is set up for each impaired loan.  Accrual of interest income on impaired loansis suspended when, in management’s judgment, doubt exists as to thecollectability of principal and interest. Loans are not considered impaired if a minimal payment delay occurs andall amounts due, including accrued interest at the contractual interest ratefor the period of delay, are expected to be collected.  If amounts are received on impaired orrestructured loans for which the accrual of interest has been discontinued, adetermination is made as to whether payments received should be recorded as areduction of the principal balance or as interest income depending on

 

F-9

----

** **

NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

** **

management’sjudgment as to the collectability of principal. The loan is returned to accrual status when, in management’s judgment,the borrower has demonstrated the ability to make periodic interest andprincipal payments on a timely basis.

 

Loanorigination and commitment fees and certain direct loan origination costs(principally salaries and employee benefits) are deferred and amortized toincome over the contractual life of the related loans or commitments, adjustedfor prepayments, using a method approximating a level yield.

 

**Allowancefor Loan Losses** -The provision for loan losses charged to operating expenses reflects the amountdeemed appropriate by management to establish an adequate reserve to meet theprobable loan losses incurred in the current loan portfolio.  Management’s judgment is based on periodicand regular evaluation of individual loans, the overall risk characteristics ofthe various portfolio segments, and prevailing economic conditions.  Loans that are determined to be uncollectibleare charged against the allowance. Provisions for loan losses and recoveries on loans previously chargedoff are added to the allowance.

 

Whilemanagement uses the best information available to make evaluations, futureadjustments may be necessary if economic conditions differ substantially fromthe assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by variousregulatory authorities and may be subject to adjustment upon examination.

 

**Premises, Furniture and Equipment** - Premises, furniture and equipment arestated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method,based on the estimated useful lives for furniture and equipment of 3 to 10years and software of 1 year.  Leaseholdimprovements are amortized over the lesser of the asset’s useful life or thelife of the lease.  The cost of assetssold or otherwise disposed of and the related allowance for depreciation areeliminated from the accounts and the resulting gains or losses are reflected inthe income statement when incurred. Maintenance and repairs are charged to current expense. The costs ofmajor renewals and improvements are capitalized.

 

**Income Taxes** - Income taxes are the sum of amounts currently payable to taxingauthorities and the net changes in income taxes payable or refundable in futureyears.  Income taxes deferred to futureyears are determined utilizing a liability approach.  This method gives consideration to the futuretax consequences associated with differences between financial accounting andtax bases of certain assets and liabilities which are principally the allowancefor loan losses, depreciable premises and equipment, and the net operating losscarryforward.

 

In2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting forUncertainty in Income Taxes - an Interpretation of SFAS No. 109.”FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.” FIN 48 also prescribes a recognitionthreshold and measurement of a tax position taken or expected to be taken in anenterprise’s tax return. FIN 48 is effective for fiscal years beginningafter December 15, 2006. Accordingly, the Company****adoptedFIN 48 effective January 1, 2007. The adoption of FIN 48 did nothave any impact on the Company’s consolidated financial position.

 

**AdvertisingExpense** -Advertising and public relations costs are generally expensed as incurred andare included in marketing expense in the accompanying consolidated statementsof operations.  External costs incurredin producing media advertising are expensed the first time the advertisingtakes place.  External costs relating todirect mailing costs are expensed****in the periodin which the direct mailings are sent.

 

F-10

----

### ** **

NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

### **Pre-opening expenses** - The activities associated with organizing theBank were conducted in the name of the Company during the developmental stageperiod (October 1, 2004 to December 31, 2005).  The Company transferred certainorganizational expenses to the Bank.

### ** **

Asummary of expenses that were transferred included:

 
| Salaries and benefits    |       | $       | 389,374     |       |
|--------------------------|------------|---------|-------------|------------|
| Professional fees        |       | 104,623 |        |
| Advertising              |       | 47,820  |        |
| Depreciation             |       | 21,310  |        |
| Insurance                |       | 8,718   |        |
| Office supplies          |       | 14,289  |        |
| Rent                     |       | 82,067  |        |
| Telephone                |       | 15,233  |        |
| Travel and entertainment |       | 24,139  |        |
| Utilities                |       | 2,576   |        |
| Other                    |       | 30,531  |        |
| ** **               | ** ** | **$**   | **740,680** | ** ** |

 

Asof December 31, 2005, the Company recorded $615,729 as a receivable fromthe Bank for expenses associated with the forming of the Bank.  The Bank reimbursed and recorded theseexpenses in the statement of operations for the year ended December 31,2006.

 

**Loss Per Share** - Basic loss per share is computed by dividing the net loss by theweighted-average number of common shares outstanding during the period.  Dilutive loss per share is computed bydividing net loss by the weighted average number of common shares and potentialcommon shares outstanding.  Potentialcommon share equivalents consist of****stock optionsand warrants determined using the treasury stock method and the average marketprice of the common stock.  At December 31,2007 and 2006, there were no dilutive stock options or warrants.

 

**Stock-BasedCompensation** -The Company accounts for options and warrants under the fair value recognitionprovisions of Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), Accounting for Stock-BasedCompensation.  Compensation expense isrecognized in the consolidated statement of operations.

 

In calculating thecompensation expense for stock options, the fair value of options granted isestimated as of the date granted using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2007:dividend yield of 0 percent; expected volatility of 15 percent based onforecasted future volatility because there is no historical data****available; risk-free interest rates that range from 4.66%to 4.94%****based on a risk free rate of returncorresponding to the estimated life of the option; and expected life of 7.50years using the “simplified method” described in SAB Topic 14.D because thereis no historical data available. For purposes of this calculation, compensationexpense is recognized on a straight-line basis over the vesting period.

 

In calculating thecompensation expense for stock options, the fair value of options granted isestimated as of the date granted using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2006:dividend yield of 0 percent; expected volatility of 10 percent****based on forecasted future volatility because there is nohistorical data available; risk-free interest rates that range from 4.40% to5.12% based on a risk free rate of return corresponding to the estimated lifeof the option; and expected life of 7.50 years using the “simplified method”described in SAB Topic 14.D because there is no historical data available. Forpurposes of this calculation, compensation expense is recognized on a straight-linebasis over the vesting period.

 

The Company’s stockoption plan, which is stockholder approved, provides for stock options to begranted primarily to directors, officers and key employees.  Options granted under the stock option planmay be incentive stock options or non-incentive stock options.  Share option awards are generally grantedwith an exercise price equal to, or in excess of, the market price of theCompany’s shares at the date of grant. Options vest ratably over a five-year period and

 

F-11

----

** **

NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

** **

expire after ten yearsfrom the date of grant.  Share optionsawards provide for accelerated vesting if there is a change in control, as definedin the stock option plan.  The remainingshares of stock reserved under the option plan at December 31, 2007amounted to approximately 180,502 shares.

 

The Company intends toissue authorized but previously unissued shares to satisfy option exercises.

 

In calculating thecompensation expense for stock warrants, the fair value of warrants granted isestimated as of the date granted using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2006: dividendyield of 0 percent; expected volatility of 10 percent; risk-free interest rateof 4.73%; and expected life of 7.50 years. For purposes of this calculation,compensation expense is recognized on a straight-line basis over the vestingperiod.

 

**Comprehensive Income** - SFAS No 130, “Reporting Comprehensive Income” established standardsfor the reporting and presentation of comprehensive income and its componentsin a full set of financial statements. Comprehensive income consists of net income (loss) and net unrealizedgains (losses) on securities and is presented in the consolidated statements ofshareholders’ equity and comprehensive income.

 

**Statement of Cash Flows** - For purposes of reporting cash flows inthe financial statements, the Company considers certain highly liquid debtinstruments purchased with a maturity of three months or less to be cashequivalents.  Cash equivalents includeamounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.

 

**Off-Balance-Sheet Financial Instruments** - In the ordinary course of business, theCompany enters into off-balance-sheet financial instruments consisting ofcommitments to extend credit and letters of credit.  These financial instruments are recorded inthe financial statements when they become payable by the customer.

 

**Recent Accounting Pronouncements** - The following is a summary of recentauthoritative pronouncements:

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedthe Statement of Financial Accounting Standards (“SFAS”) No. 157, “FairValue Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  This standard eliminates inconsistenciesfound in various prior pronouncements but does not require any new fair valuemeasurements.  SFAS 157 is effective forthe Company on January 1, 2008 and will not impact the Company’saccounting measurements but it is expected to result in additional disclosures.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an amendment of FASBStatement No. 115” (“SFAS 159”). This statement permits, but does notrequire, entities to measure many financial instruments at fair value.  The objective is to provide entities with anopportunity to mitigate volatility in reported earnings caused by measuring relatedassets and liabilities differently without having to apply complex hedgeaccounting provisions.  Entities electingthis option will apply it when the entity first recognizes an eligibleinstrument and will report unrealized gains and losses on such instruments incurrent earnings.  This statement 1)applies to all entities, 2) specifies certain election dates, 3) can be appliedon an instrument-by-instrument basis with some exceptions, 4) is irrevocableand 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitlyexcluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturitysecurities at the effective date are eligible for the fair value option at thatdate.  If the fair value option iselected for those securities at the effective date, cumulative unrealized gainsand losses at that date shall be included in the cumulative-effect adjustmentand thereafter, such securities will be accounted for as tradingsecurities.  SFAS 159 is effective forthe Company on January 1, 2008.  TheCompany is currently analyzing the fair value option that is permitted, but notrequired, under SFAS 159.

 

InNovember 2007, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 109, “Written Loan Commitments Recorded at FairValue Through Earnings” (“SAB 109”).  SAB109 expresses the current view of the SEC staff that the expected net futurecash flows related to the associated servicing of the loan should be includedin the measurement of all written loan commitments that are accounted for atfair value through

 

F-12

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** **

NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

** **

earnings.  SEC registrants are expected to apply thisguidance on a prospective basis to derivative loan commitments issued ormodified in the first quarter of 2008 and thereafter.  The Company is currently analyzing the impactof this guidance, which relates to the Company’s mortgage loans held for sale.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  FAS 141(R) iseffective for acquisitions by the Company taking place on or after January 1,2009.  Early adoption is prohibited.Accordingly, a calendar year-end company is required to record and disclosebusiness combinations following existing accounting guidance until January 1,2009.  The Company will assess the impactof SFAS 141(R) if and when a future acquisition occurs.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an amendment of ARB No. 51”(“SFAS 160”). SFAS 160 establishes new accounting and reporting standards forthe noncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  Before this statement,limited guidance existed for reporting noncontrolling interests (minorityinterest).  As a result, diversity inpractice exists. In some cases minority interest is reported as a liability andin others it is reported in the mezzanine section between liabilities andequity.  Specifically, SFAS 160 requiresthe recognition of a noncontrolling interest (minority interest) as equity inthe consolidated financials statements and separate from the parent’sequity.  The amount of net incomeattributable to the noncontrolling interest will be included in consolidatednet income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation are equity transactions if theparent retains its controlling financial interest. In addition, this statementrequires that a parent recognize gain or loss in net income when a subsidiaryis deconsolidated.  Such gain or losswill be measured using the fair value of the noncontrolling equity investmenton the deconsolidation date.  SFAS 160also includes expanded disclosure requirements regarding the interests of theparent and its noncontrolling interests. SFAS 160 is effective for the Companyon January 1, 2009.  Earlieradoption is prohibited.  The Company iscurrently evaluating the impact, if any, the adoption of SFAS 160 will have onits consolidated financial statements.

 

Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Risksand Uncertainties**- In the normal course of its business, the Company encounters two significanttypes of risks: economic and regulatory. There are three main components of economic risk:  interest rate risk, credit risk and marketrisk.  The Company is subject to interestrate risk to the degree that its interest-bearing liabilities mature or repriceat different speeds, or on different bases, than its interest-earningassets.  Credit risk is the risk ofdefault on the Company’s loan portfolio that results from borrower’s inabilityor unwillingness to make contractually required payments.  Market risk reflects changes in the value ofcollateral underlying loans receivable and the valuation of real estate held bythe Company.

 

TheCompany is subject to the regulations of various governmental agencies.  These regulations can and do changesignificantly from period to period.  TheCompany also undergoes periodic examinations by the regulatory agencies, whichmay subject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions from the regulators’judgments based on information available to them at the time of theirexamination.

 

**Reclassifications** - Certain captions and amounts in the 2006financial statements were reclassified to conform with the 2007 presentation.

 

F-13

----

 

**NOTE 2 – CASH AND DUE FROM BANKS**

 

At December 31,2007, the Company is not required to maintain cash balances with itscorrespondent banks to cover cash letter transactions.

 

**NOTE 3 – INVESTMENT SECURITIES**

 

The amortized costs and fair value of investment securities available forsale are as follows for the years ended December 31:

 
| ** **                        | ** ** | **December 31, 2007** | ** **     |
|-----------------------------------|------------|----------------------------|----------------|
| ** **                        | ** ** | **Amortized**              | ** **     | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                        | ** ** | **Cost**                   | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Government-sponsored  enterprises |       | $                          | 3,537,088      |   | $ | 63,332 |   | $ | — |   | $ | 3,600,420 |   |
| Mortgage-backed  securities       |       | 10,030,940                 |           | 14,378 |   | (46,622 | ) | 9,998,696 |   |
| Total investment securities       | ** ** | **$**                      | **13,568,028** | ** ** | **$** | **77,710** | ** ** | **$** | **(46,622** | **)** | **$** | **13,599,116** | ** ** |

 
| ** **                        | ** ** | **December 31, 2006** | ** **    |
|-----------------------------------|------------|----------------------------|---------------|
| ** **                        | ** ** | **Amortized**              | ** **    | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                        | ** ** | **Cost**                   | ** **    | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Government-sponsored  enterprises |       | $                          | 1,963,751     |   | $ | 11,249 |   | $ | (550 | ) | $ | 1,974,450 |   |
| Mortgage-backed  securities       |       | 1,582,216                  |          | 6,542 |   | (2,401 | ) | 1,586,357 |   |
| Total investment securities       | ** ** | **$**                      | **3,545,967** | ** ** | **$** | **17,791** | ** ** | **$** | **(2,951** | **)** | **$** | **3,560,807** | ** ** |

 

The amortized costs and fair values of investment securities available forsale at December 31, 2007 and 2006, by contractual maturity, are shownbelow.  Mortgage-backed securities areincluded in the maturity schedule below. The maturities related to these mortgage-backed securities have beenallocated based on their scheduled repayment terms.**  **Expected maturities may differfrom contractual maturities because issuers have the right to prepay theobligations with or without call or prepayment penalties.

 
| ** **                        | ** ** | **2007**      | ** **     | **2006**   | ** ** |
|-----------------------------------|------------|---------------|----------------|------------|------------|
| ** **                        | ** ** | **Amortized** | ** **     | **Fair**   | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                        | ** ** | **Cost**      | ** **     | **Value**  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Due  within one year              |       | $             | —         |       | $          | — |   | $ | — |   | $ | — |   |
| Due  after one through five years |       | 990,690       |           | 1,001,500  |       | 986,422 |   | 989,950 |   |
| Due  after five through ten years |       | 1,989,425     |           | 2,020,662  |       | 1,612,972 |   | 1,624,343 |   |
| Due  after ten years              |       | 10,587,913    |           | 10,576,954 |       | 946,573 |   | 946,514 |   |
| Total investment securities       | ** ** | **$**         | **13,568,028** | ** ** | **$**      | **13,599,116** | ** ** | **$** | **3,545,967** | ** ** | **$** | **3,560,807** | ** ** |

 

The Company sold no investment securities in 2007 or 2006.  Accordingly, no gains or losses wererecorded.  At December 31, 2007 and2006, approximately $8,696,853 and $3,087,533, respectively, of securities waspledged as collateral for lines of credit and advances with correspondentbanks.

 

The followingtable shows gross unrealized losses and fair value, aggregated by investmentcategory, and length of time that individual securities have been in acontinuous unrealized loss position, at December 31:

 
| ** **                        | ** ** | **December 31, 2007** | ** **    |
|-----------------------------------|------------|----------------------------|---------------|
| ** **                        | ** ** | **Less than 12 months**    | ** **    | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **Fair Value**             | ** **    | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government-sponsored  enterprises |       | $                          | —        |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage-backed securities        |       | 4,715,487                  |          | (38,576 | ) | 420,402 |   | (8,046 | ) | 5,135,889 |   | (46,622 | ) |
|                              | ** ** | **$**                      | **4,715,487** | ** ** | **$** | **(38,576** | **)** | **$** | **420,402** | ** ** | **$** | **(8,046** | **)** | **$** | **5,135,889** | ** ** | **$** | **(46,622** | **)** |

 

F-14

----

 

**NOTE 3 – INVESTMENT SECURITIES(continued)**

 
| ** **                        | ** ** | **December 31, 2006** | ** **  |
|-----------------------------------|------------|----------------------------|-------------|
| ** **                        | ** ** | **Less than 12 months**    | ** **  | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **Fair Value**             | ** **  | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Government-sponsored  enterprises |       | $                          | 499,450     |   | $ | (550 | ) | $ | — |   | $ | — |   | $ | 499,450 |   | $ | (550 | ) |
| Mortgage-backed securities        |       | 473,274                    |        | (2,401 | ) | — |   | — |   | 473,274 |   | (2,401 | ) |
|                              | ** ** | **$**                      | **972,724** | ** ** | **$** | **(2,951** | **)** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **972,724** | ** ** | **$** | **(2,951** | **)** |

 

The unrealized losses oninvestments were attributable to increases in interest rates, rather thancredit quality.  At December 31,2007, unrealized losses are comprised of five securities that have hadcontinuous losses of less than 12 months totaling $38,576 and one security thathas had a continuous loss of 12 months or more totaling $8,046.   At December 31, 2006, unrealized lossesare comprised of two securities that have had continuous losses of less than 12months totaling $2,951.  None of theCompany’s securities were considered impaired at December 31, 2007.  The Company has the intent and ability tohold these investments until a recovery of fair value, which may be atmaturity.

 

**NOTE 4 – LOANS RECEIVABLE**

 

The composition ofnet loans by major loan categories is as follows for the years ended December 31:

 
| ** **                              | ** ** | **2007**   | ** **     | **2006**   | ** ** |
|-----------------------------------------|------------|------------|----------------|------------|------------|
| Real estate:                            |       |       |           |       |       |
| Mortgage                                |       | $          | 42,690,242     |       | $          | 22,333  490 |   |
| Construction, land and land development |       | 18,027,664 |           | 12,739,992 |       |
| Total real estate loans                 |       | 60,717,906 |           | 35,073,482 |       |
| Commercial and industrial               |       | 4,561,846  |           | 3,576,762  |       |
| Consumer and other                      |       | 592,378    |           | 288,391    |       |
| Deferred origination fees,  net         |       | (107,671   | )              | (119,000   | )          |
| Gross loans receivable                  |       | 65,764,459 |           | 38,819,635 |       |
| Less allowance for loan  losses         |       | (677,850   | )              | (389,340   | )          |
| Loans receivable, net                   | ** ** | **$**      | **65,086,609** | ** ** | **$**      | **38,430,295** | ** ** |

 

Nonaccrual loans, whichare all loans ninety days or more delinquent, totaled $528,387 at December 31,2007.  There were no nonaccrual loans at December 31,2006.  In the period ended December 31,2007, interest income which would have been recorded would have been $27,759,had nonaccruing loans been current in accordance with their originalterms.   No interest income would havebeen recorded for this reason for the period ended December 31, 2006. ** **Additionally, as of December 31,2007 and 2006, the Bank had no loans ninety days or more past due and stillaccruing interest.

 

At December 31,2007, the Bank had three loans that were impaired totaling $528,387.  At December 31, 2006, there were noimpaired loans**. **Allof these loans are secured by real estate. Included in the allowance for loanlosses at December 31, 2007 was $162,775 related to impaired loans.  There was no specific reserve for impairedloans in the allowance for loan losses at December 31, 2006.  The average recorded investment in impairedloans for the year ended December 31, 2007 was****$142,588.** **There was no averageinvestment for impaired loans for the year ended December 31, 2006.  The Bank recognized no interest income onimpaired loans during fiscal 2007 and 2006.

 

F-15

----

 

**NOTE 4 – LOANS RECEIVABLE(continued)**

 

Under current Federal Reserve regulations, the Bank is limited to theamount it may loan to the company.  Loansmade by the Bank may not exceed 10% and loans to all affiliates may not exceed20% of the bank’s capital, surplus and undivided profits, after adding back theallowance for loan losses. There were no loans outstanding between the Bank andthe Company at December 31, 2007 and 2006.

 

The composition of gross loans by rate type is as follows for the yearsended December 31:

 
| ** **                      | ** ** | **2007**   | ** **     | **2006**   | ** ** |
|---------------------------------|------------|------------|----------------|------------|------------|
|                            |       |       |           |       |       |
| Variable rate loans             |       | $          | 17,747,240     |       | $          | 10,630,191 |   |
| Fixed rate loans                |       | 48,124,890 |           | 28,308,444 |       |
| Deferred origination fees,  net |       | (107,671   | )              | (119,000   | )          |
|                            |       |       |           |       |       |
| Gross loans                     | ** ** | **$**      | **65,764,459** | ** ** | **$**      | **38,819,635** | ** ** |

 

The allowance for loanlosses is available to absorb future loan charge-offs.  The allowance is increased by provisionscharged to operating income and by recoveries of loans that were previouslywritten-off.  The allowance is decreasedby the aggregate loan balances, if any, that were deemed uncollectible duringthe year.

 

Transactions in theallowance for loan losses for the years ended December 31 are summarizedbelow:

 
| ** **                       | ** ** | **2007** | ** **  | **2006**   | ** ** |
|----------------------------------|------------|----------|-------------|------------|------------|
|                             |       |     |        |       |       |
| Balance, beginning of year       |       | $        | 389,340     |       | $          | — |   |
| Provision charged to  operations |       | 291,584  |        | 390,174    |       |
| Charge-offs                      |       | (5,230   | )           | (834       | )          |
| Recoveries                       |       | 2,156    |        | —     |       |
|                             |       |     |        |       |       |
| Balance, end of year             | ** ** | **$**    | **677,850** | ** ** | **$**      | **389,340** | ** ** |

 

**NOTE 5 - PREMISES, FURNITURE ANDEQUIPMENT**

 

Property andequipment are stated at cost less accumulated depreciation.  Components of property and equipment includedin the consolidated balance sheets are as follows at December 31:

 
| ** **                    | ** ** | **2007** | ** **  | **2006**   | ** ** |
|-------------------------------|------------|----------|-------------|------------|------------|
|                          |       |     |        |       |       |
| Leasehold improvements        |       | $        | 236,549     |       | $          | 154,125 |   |
| Furniture and equipment       |       | 491,727  |        | 451,600    |       |
| Accumulated depreciation      |       | (330,825 | )           | (159,848   | )          |
|                          |       |     |        |       |       |
| Total property and  equipment | ** ** | **$**    | **397,451** | ** ** | **$**      | **445,877** | ** ** |

 

Depreciationexpense for the years ended December 31, 2007 and 2006 was $170,977 and$159,848, respectively.

 

F-16

----

 

**NOTE 6 - DEPOSITS**

 

At December 31,2007 the scheduled maturities of certificates of deposit are as follows:

 
| 2008   |       | $         | 34,589,002     |       |
|--------|------------|-----------|----------------|------------|
| 2009   |       | 2,511,541 |           |
| 2010   |       | 167,826   |           |
|   | ** ** | **$**     | **37,268,369** | ** ** |

 

Included in the 2008 scheduled maturity is $19,159,985 of brokered CDswith a weighted average interest rate at December 31, 2007 of 5.16%.

 

**NOTE 7 - ADVANCES FROM FEDERALHOME LOAN BANK**

 

As of December 31,2007, the Bank had one advance from the Federal Home Loan Bank in the amount of$5,000,000. The advance has a fixed interest rate of 3.484% and matures on November 29,2017.  Interest is paid quarterly andprincipal is due at maturity.    Ascollateral, the Bank has pledged a portion of the investment portfolio.  The advance is subject to prepaymentpenalties and contains conversion options. At December 31, 2007, collateral pledged to the Federal Home LoanBank  would support additional borrowingsof $623,171.

 

**NOTE 8 -STOCK COMPENSATION PLAN**

 

Under the terms ofemployment agreements with the Company’s Chief Executive Officer (“CEO”), ChiefCredit Officer (“CCO”), Chief Operating Officer (“COO”) and the Company’s ChiefFinancial Officer (“CFO”), stock options were granted to each as part of theircompensation and benefits package.  Underthese agreements, the CEO was granted options to purchase common stock equal to2% of the shares sold in the offering or 25,031 options.  The CCO and the COO were granted options topurchase common stock equal to 1% of the shares sold in the offering or 12,516options to each.  The CFO was granted10,000 stock options.   These optionsvest over a five year period.  Theoptions have an exercise price of $10 per share and terminate ten years afterthe date of grant.

 

The Company has alsogranted a total of 25,750 stock options to its employees.  Of these, 18,000 were granted in 2006 and7,750 were granted in 2007.   Theseoptions vest over a five year period.  Years will be measured from the grant dates.   The options have an exercise price of $10 to$11 per share and terminate ten years after the date of grant.  The weighted average grant date fair valuewas $11 and $10 per share in 2007 and 2006, respectively.  No options have been exercised.  As of December 31, 2007 there was$162,558 of total unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the plan.  That cost is expected to be recognized over aweighted average period of 3.28 years. The total fair value of the shares vested during the years ended December 31,2007 and 2006 was $46,439 and $22,716, respectively.

 

A summary of the statusof the Company’s stock options as of December 31, and changes during theyear are presented below:

 
| ** **                        | ** ** | **2007**   | ** ** | **2006**                              | ** ** |
|-----------------------------------|------------|------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at  January 1,   |       | 69,563     |       | $                                     | 10.00      |   | — |   | $ | — |   |
| Granted                           |       | 7,750      |       | 11.00                                 |       | 78,063 |   | 10.00 |   |
| Exercised                         |       | —     |       | —                                |       | — |   | — |   |
| Forfeited                         |       | (7,500     | )          | 10.00                                 |       | (8,500 | ) | — |   |
| Expired                           | ** ** | **—** | ** ** | **—**                            | ** ** | — | ** ** | **—** | ** ** |
| Outstanding at  December 31, | ** ** | **69,813** | ** ** | **$**                                 | **10.11**  | ** ** | **69,563** | ** ** | **$** | **10.00** | ** ** |

 

F-17

----

 

**NOTE 8 -STOCK COMPENSATION PLAN (continued)**

 

At December 31,2007, 12,413 of these options were exercisable. No options were exercisable at December 31, 2006.

 

The followingtable summarizes information about the stock options outstanding under theCompany’s Plan at December 31, 2007:

* *
| ** **                       | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| Number of options                |       | 69,813          |       | 12,413          |       |
| Weighted average remaining  life |       | 8.70  years     |       | 8.58  years     |       |
| Weighted average exercise  price |       | $               | 10.11      |            | $          | 10.00 |   |
| High exercise price              |       | $               | 11.00      |            | $          | 10.00 |   |
| Low exercise price               |       | $               | 10.00      |            | $          | 10.00 |   |
| Aggregate intrinsic value        |       | $               | 0.00       |            | $          | 0.00 |   |

** **
| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| Nonvested at  January 1, 2007   |       | 69,563     |       | $                                             | 10.00      |   |
| Granted                              |       | 7,750      |       | $                                             | 11.00      |   |
| Vested                               |       | (12,413    | )          | $                                             | 10.00      |   |
| Forfeited                            |       | (7,500     | )          | $                                             | 10.00      |   |
| Nonvested at  December 31, 2007 | ** ** | **57,400** | ** ** | **$**                                         | **10.13**  | ** ** |

 

**NOTE 9 - STOCK WARRANTS**

 

The organizers of theBank received stock warrants giving them the right to purchase one share ofcommon stock for every share they purchased in the initial offering of theCompany’s common stock up to 10,000 shares at a price of $10 per share.   The warrants vest over a five yearperiod.   All unexercised organizerwarrants expire on the tenth anniversary of the opening date of the bank,subject to earlier termination in certain circumstances pursuant to individualstock warrant agreements.

 

A summary of the statusof Company’s stock warrants as of December 31, and changes during the yearis presented below:

* *
| ** **                        | ** ** | **2007**     | ** ** | **2006**                              | ** ** |
|-----------------------------------|------------|--------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at January 1,    |       | 80,000       |       | $                                     | 10.00      |   | — |   | $ | — |   |
| Granted                           |       | —       |       | —                                |       | 80,000 |   | 10.00 |   |
| Exercised                         |       | —       |       | —                                |       | — |   | — |   |
| Forfeited                         |       | —       |       | —                                |       | — |   | — |   |
| Outstanding at  December 31, | ** ** | **80,000**   | ** ** | **$**                                 | **10.00**  | ** ** | **80,000** | ** ** | **$** | **10.00** | ** ** |

 

At December 31,2007, 16,000 warrants were exercisable. No warrants were exercisable at December 31, 2006.

 

F-18

----

 

**NOTE 10 -INCOME TAXES**

 

Income tax expensefor the years ended December 31, is summarized as follows:

 
| ** **            | ** ** | **2007** | ** **  | **2006**   | ** ** |
|-----------------------|------------|----------|-------------|------------|------------|
| Current portion       |       |     |        |       |       |
| Federal               |       | $        | —      |       | $          | — |   |
| State                 |       | —   |        | —     |       |
| Total current         |       | —   |        | —     |       |
|                  |       |     |        |       |       |
| Deferred income taxes |       | 261,023  |        | 822,860    |       |
|                  |       |     |        |       |       |
| Income tax benefit    | ** ** | **$**    | **261,023** | ** ** | **$**      | **822,860** | ** ** |

 

The gross amountsof deferred tax assets and deferred tax liabilities are as follows:

 
| ** **                                        | ** ** | **2007**   | ** **    | **2006**   | ** ** |
|---------------------------------------------------|------------|------------|---------------|------------|------------|
| **Deferred tax assets:**                          | ** ** | ** ** | ** **    | ** ** | ** ** |
| Allowance for loan losses                         |       | $          | 164,507       |       | $          | 83,725 |   |
| Net operating loss  carryforward                  |       | 655,137    |          | 503,724    |       |
| Organizational and  start-up costs                |       | 215,308    |          | 231,879    |       |
| Accumulated depreciation                          |       | 31,248     |          | 24,765     |       |
| Other                                             |       | 49,491     |          | 23,154     |       |
| Total deferred tax assets                         |       | 1,115,691  |          | 867,247    |       |
|                                              |       |       |          |       |       |
| **Deferred tax liabilities:**                     | ** ** | ** ** | ** **    | ** ** | ** ** |
| Unrealized loss on  securities available for sale |       | 10,570     |          | 5,046      |       |
| Net capitalized loan costs  and fees              |       | 16,493     |          | 36,231     |       |
| Prepaid expenses                                  |       | 15,315     |          | 8,156      |       |
| Total deferred tax  liabilities                   |       | 42,378     |          | 49,433     |       |
|                                              |       |       |          |       |       |
| Net deferred tax asset                            | ** ** | **$**      | **1,073,313** | ** ** | **$**      | **817,814** | ** ** |

 

Deferred taxassets represent the future tax benefit of deductible differences and, if it ismore likely than not that a tax assets will not be realized, a valuationallowance is required to reduce the recorded deferred tax assets to netrealizable value.  As of December 31,2007, management has not recorded a valuation allowance.  Net deferred tax assets are recorded in otherassets on the Company’s consolidated balance sheet.

 

The Company has anet operating loss for income tax purposes of $1,916,041 as of December 31,2007. This net operating loss expires in the year 2026**.**

 

A reconciliationbetween the income tax expense and the amount computed by applying the Federalstatutory rate of 34% for 2007 to income before income taxes follows:

 
| ** **                                          | ** ** | **2007** | ** **   | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|--------------|----------|------------|
| Tax expense (benefit) at a  statutory rate          |       | $        | (282,155     | )        | $          | (823,131 | ) |
| State income tax, net of  federal income tax effect |       | —   |         | —   |       |
| Stock-based compensation                            |       | 33,118   |         | 21,207   |       |
| Other                                               |       | (11,986  | )            | (20,936  | )          |
| Income tax benefit                                  | ** ** | **$**    | **(261,023** | **)**    | **$**      | **(822,860** | **)** |

 

The Company has analyzedthe tax positions taken or expected to be taken in its tax returns andconcluded it has no liability related to uncertain tax positions in accordancewith FIN 48.

 

F-19

----

 

**NOTE 11 –BENEFIT PLAN**

 

During fiscal2007, the Company established a defined contribution plan coveringsubstantially all employees.  The Companycontributes a matching contribution of 100% of employee salary deferralcontributions up to 3% of salary, plus 50% of employee salary deferralcontributions from 3% to 5% of salary for the plan year.   Matching contribution expense was $39,363for fiscal 2007.

 

**NOTE 12 -LEASES**

 

The Company has enteredinto various lease agreements which are more fully described below.

 

The Companyentered into a lease agreement for a minimum term of thirty-six months whichended on October 15, 2007.  Thislease was amended on January 24, 2006. On March 27, 2007, this lease agreement was extended for anadditional three-year term, ending in October 14, 2010 with a monthlyrental amount of $4,928.  This leaseprovides for one additional three-year renewal term with monthly rental amounts$5,292.   This space currently serves asthe main branch location for the Bank.

 

The Companyentered into a lease agreement beginning September 1, 2005 for a minimumterm of one year, ending on August 31, 2006.   On May 24, 2006, this lease agreementwas extended for an additional one year term, ending on August 31,2007.  On April 20, 2007, this leaseagreement was extended for an additional six month term, ending on February 28,2008.   On January 1, 2008, thislease agreement was extended for an additional four month term, ending June 30,2008 with a monthly rental amount of $2,500. This space serves as the Operations Department for the Bank.

 

On January 1,2006, the Company opened a loan production office on Hilton Head Island, SouthCarolina.  This location was converted toa full-service branch on October 26, 2007. The leased facility was sold in August 2006 to a limited liabilitycorporation owned primarily by directors of the Company.  The Company entered into a new leaseagreement beginning August 1, 2006 for a minimum of ten years.   The lease agreement provides for two tenyear renewal terms.  Monthly rentalexpense for the first two years of the lease is $2,000.  At the end of the second year of the initialterm, and at the end of each subsequent two year period and of any renewal termof this lease, the base rent may be adjusted according to the provisions in thelease.

 

The Company hasassumed liability for a lease agreement for an automobile.  The lease terms call for monthly payments of$400.  On January 3, 2008, thislease was extended for an additional year with the same lease payment, termsand conditions contained in the original agreement.

 

The Bank enteredinto a lease agreement beginning January 1, 2008 for a minimum term offifteen years, ending on December 31, 2023.  The lease agreement provides for two fiveyear renewal terms.    Monthly rentalexpense for the first year of the lease is $9,572.  At the end of the first year of the initialterm, and at the end of each subsequent year, the base rent will be adjustedaccording to the provisions in the lease. This space will consolidate the existing main branch location and theOperations Department for the Bank.

 

Rental expense forthe year ending December 31, 2007 totaled $127,815.  Rental expense for the year ending December 31,2006 totaled $192,537, including rental expense for the period October 1,2004 (inception) to December 31, 2005 totaling $71,089 which wastransferred to the bank as organizational expenses.

 

Under theseassumptions, minimum future rental payments under non-cancelable operatingleases having remaining terms in excess of one year for each of the next fiveyears in the aggregate are:

 
| 2008 |   | $ | 201,856 |   |
|------|--------|---|---------|--------|
| 2009 |   | $ | 201,478 |   |
| 2010 |   | $ | 192,473 |   |
| 2011 |   | $ | 149,513 |   |
| 2012 |   | $ | 153,279 |   |

 

F-20

----

 

**NOTE 13** -**RELATED PARTYTRANSACTIONS**

 

Certainparties (principally certain directors and executive officers of the Company,their immediate families and business interests) were loan customers of and hadother transactions in the normal course of business with the Company.  Related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and do not involvemore than the normal risk of collectability. As of December 31, 2007, the Company had related party loanstotaling $2,694,127.  Advances madetotaled $2,628,123 and repayments totaled $717,664 during the year ended December 31,2007.   The Company had related partyloans totaling $783,668 as of December 31, 2006.  Advances made totaled $1,145,591 andrepayments totaled $361,923 during the year ended December 31, 2006.

 

Depositsby directors, including their affiliates and executive officers, at December 31,2007 and 2006 were $4,668,086 and $4,540,796, respectively.

 

One of the leasesdescribed in Note 12 is with a limited liability corporation that is ownedprimarily by the directors of the Company. The expense associated with this lease totaled $34,459 and $14,889 forthe years ended December 31, 2007 and 2006, respectively.

 

**NOTE 14 - COMMITMENTS AND CONTINGENCIES**

 

The Company issubject to claims and lawsuits which arise primarily in the ordinary course ofbusiness.  Management is not aware of anylegal proceedings which would have a material adverse effect on the financialposition or operating results of the Company.

 

**NOTE 15** -**LOSS PER SHARE**

 

Basic loss per share is computed by dividing netincome (loss) by the weighted-average number of common shares outstanding.  Diluted loss per share is computed bydividing net income (loss) by the weighted-average number of common sharesoutstanding and dilutive common share equivalents using the treasury stockmethod.  There were no dilutive commonshare equivalents outstanding during 2007 or 2006; therefore, basic loss pershare and diluted earnings per share were the same.

 
| ** **                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
| **Net loss per share – basic  computation:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss to common  shareholders                  |       | $          | (568,846   | )          | $          | (1,598,113 | ) |
| Average common shares  outstanding – basic   |       | 1,251,577  |       | 1,174,734  |       |
| Basic loss per share                              |       | $          | (.45       | )          | $          | (1.36 | ) |

 

**NOTE 16 - REGULATORY MATTERS**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directadverse material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum ratios of Tier 1 and total capital as a percentage ofassets and off-balance-sheet exposures, adjusted for risk weights ranging from0% to 100%.  Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities available-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance forloan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists ofthe sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for totalrisk-based capital.

 

F-21

----

 

**NOTE 16 - REGULATORY MATTERS (continued)**

 

The Bank is also requiredto maintain capital at a minimum level based on total average assets, which isknown as the leverage ratio.  Only thestrongest banks are allowed to maintain capital at the minimum requirement of3%.  All others are subject tomaintaining ratios 1% to 2% above the minimum.

 

As of December 31,2007 and 2006, the Bank exceeded its minimum regulatory capital ratios, as wellas the ratios to be considered “well-capitalized”.

 

Thefollowing table summarizes the capital amounts and ratios of the Bank and theregulatory minimum requirements at December 31, 2007 and 2006:

 
| ** **                                | ** ** | ** ** | ** ** | ** **  | ** ** | ** **            | ** ** | ** **            | ** ** | **To be well capitalized** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------|------------|-----------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** **  | ** ** | ** **            | ** ** | ** **            | ** ** | **under prompt**           | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **  | ** ** | **For capital**       | ** ** | **corrective**        | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **  | ** ** | **adequacy purposes** | ** ** | **action provisions** | ** ** |
| ** **                                | ** ** | **Actual** | ** ** | **Minimum** | ** ** | **Minimum**           | ** ** |
| **(Dollars in thousands)**      | ** ** | **Amount** | ** ** | **Ratio**   | ** ** | **Amount**            | ** ** | **Ratio**             | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| **As of December 31, 2007**          | ** ** | ** ** | ** ** | ** **  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Total Capital (to risk  weighted assets)  |       | $          | 9,172      |        | 14.65      | %                     | $          | 5,007                 |       | 8.0                        | %          | $ | 6,258 |   | 10.0 | % |
| Tier 1 Capital (to risk  weighted assets) |       | 8,495      |       | 13.57       | %          | 2,503                 |       | 4.0                   | %          | 3,755                      |       | 6.0 | % |
| Tier 1 Capital (to average  assets)       |       | 8,495      |       | 11.26       | %          | 3,017                 |       | 4.0                   | %          | 3,771                      |       | 5.0 | % |
| **As of December 31,2006**           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Total Capital (to risk  weighted assets)  |       | $          | 9,522      |        | 25.11      | %                     | $          | 3,033                 |       | 8.0                        | %          | $ | 3,792 |   | 10.0 | % |
| Tier 1 Capital (to risk  weighted assets) |       | 9,133      |       | 24.09       | %          | 1,517                 |       | 4.0                   | %          | 2,275                      |       | 6.0 | % |
| Tier 1 Capital (to average  assets)       |       | 9,133      |       | 20.40       | %          | 1,791                 |       | 4.0                   | %          | 2,238                      |       | 5.0 | % |

 

The Federal Reserveguidelines contain an exemption from the capital requirements for “small bankholding companies.”  On March 31,2006, the Federal Reserve changed the definition of a small bank holdingcompany to bank holding companies with less than $500 million in total assets(an increase from $150 million under the prior rule).  However, bank holding companies will notqualify under the new definition if they (i) are engaged in significantnonbanking activities either directly or indirectly through a subsidiary, (ii) conductsignificant off-balance sheet activities, including securitizations or managingor administering assets for third parties, or (iii) have a material amountof debt or equity securities (including trust preferred securities) outstandingthat are registered with the SEC. Although we have less than $500 million in assets, it is unclear at thispoint whether we otherwise meet the requirements for qualifying as a “smallbank holding company.”  According to theFederal Reserve Board, the revision of the criterion to exclude any bankholding company that has outstanding a material amount of SEC-registered debtor equity securities reflects the fact that SEC registrants typically exhibit adegree of complexity of operations and access to multiple funding sources thatwarrants excluding them from the new policy statement and subjecting them tothe capital guidelines.  In the adoptingrelease for the new rule, the Federal Reserve Board stated that whatconstitutes a “material” amount of SEC-registered debt or equity for aparticular bank holding company depends on the size, activities and conditionof the relevant bank holding company.  Inlieu of using fixed measurable parameters of materiality across allinstitutions, the rule provides the Federal Reserve with supervisoryflexibility in determining, on a case-by-case basis, the significance or materialityof activities or securities outstanding such that a bank holding company shouldbe excluded from the policy statement and subject to the capitalguidelines.  Prior to adoption of thisnew rule, our holding company was not subject to these capital guidelines, asit had less than $150 million in assets. Until the Federal Reserve provides further guidance on the new rules, itwill be unclear whether our holding company will be subject to the exemptionfrom the capital requirements for small bank holding companies.  Regardless, the****Bankis subject to, and complies with, these minimum capital requirements as set perbank regulatory agencies.

 

F-22

----

 

**NOTE 17- LINES OF CREDIT**

 

As of December 31,2007, the Company had lines of credit to purchase federal funds from unrelatedbanks totaling $7,400,000, consisting of a $2,800,000 line secured by$2,800,000 of investment securities, and $4,600,000 of unsecured lines. As of December 31,2007, $2,800,000 was outstanding on the secured line of credit, $1,038,200 wasoutstanding on unsecured lines of credit and $3,561,800 remained unused onlines of credit.  The lenders havereserved the right to withdraw the unsecured lines at their option.  These lines of credit are available onvarious structures for general corporate purposes.

 

###### **NOTE  18 -RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES**

###### ** **

The ability of theCompany to pay cash dividends to stockholders is dependent upon receiving cashin the form of dividends from its banking subsidiary.  However, certain restrictions exist regardingthe ability of the subsidiary to transfer funds in the form of cash dividendsto the Company.  State chartered banksare authorized to pay cash dividends up to 100% of net income in any calendaryear without obtaining the prior approval of the State Board of FinancialInstitutions or the Commissioner of Banking provided that the Bank received acomposite rating of one or two at the last examination conducted by the Stateor Federal regulatory authority. Otherwise, the Bank must file an income and expense report and obtainthe specific approval of the State Board.

 

Under Federal ReserveBoard regulations, the amount of loans or advances from the banking subsidiaryto the parent company is also restricted.

 

**NOTE 19 - FINANCIAL INSTRUMENTSWITH OFF-BALANCE SHEET RISK**

 

The Company is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments consist ofcommitments to extend credit and standby letters of credit.  Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee.  A commitmentinvolves, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the balance sheet.  The Company’s exposure to credit loss in theevent of nonperformance by the other party to the instrument is represented bythe contractual notional amount of the instrument.  Since certain commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The Company uses the same credit policies in making commitments toextend credit as it does for on-balance-sheet instruments.  Letters of credit are conditional commitmentsissued to guarantee a customer’s performance to a third party and haveessentially the same credit risk as other lending facilities.

 

Collateral held forcommitments to extend credit and letters of credit varies but may includeaccounts receivable, inventory, property, plant, equipment and income-producingcommercial properties.

 

The following tablesummarizes the Bank’s off-balance-sheet financial instruments whose contractamounts represent credit risk at December 31:

 
| ** **                    | ** ** | **2007** | ** **     | **2006**   | ** ** |
|-------------------------------|------------|----------|----------------|------------|------------|
| Commitments to extend  credit |       | $        | 12,891,632     |       | $          | 9,100,759 |   |
| Commercial letters of  credit |       | 205,073  |           | 121,336    |       |
| ** **                    | ** ** | **$**    | **13,096,705** | ** ** | **$**      | **9,222,095** | ** ** |

 

F-23

----

 

**NOTE 20 –FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The fair value of a financialinstrument is the amount at which the asset or obligation could be exchanged ina current transaction between willing parties, other than in a forced orliquidation sale.  Fair value estimatesare made at a specific point in time based on relevant market information andinformation about the financial instruments. Because no market value exists for a significant portion of thefinancial instruments, fair value estimates are based on judgments regardingfuture expected loss experience, current economic conditions, riskcharacteristics of various financial instruments, and other factors.

 

Thefollowing methods and assumptions were used to estimate the fair value ofsignificant financial instruments:

 

**Cashand Due from Banks** -The carrying amount is a reasonable estimate of fair value.

 

**FederalFunds Sold** - Federalfunds sold are for a term of one day, and the carrying amount approximates thefair value.

 

**InvestmentSecurities** - For securitiesavailable-for-sale, fair value equals the carrying amount which is the quotedmarket price.

 

**NonmarketableEquity Securities** –The carrying value of nonmarketable equity securities approximates the fairvalue since no ready market exists for the stocks.

 

# **Loans receivable** - For certain categoriesof loans, such as variable rate loans which are repriced frequently and have nosignificant change in credit risk, fair values are based on the carryingamounts.  The fair value of other typesof loans is estimated by discounting the future cash flows using the currentrates at which similar loans would be made to borrowers with similar creditratings and for the same remaining maturities.

# ** **

**Deposits** - The fair value of demand deposits,savings, and money market accounts is the amount payable on demand at thereporting date.  The fair values ofcertificates of deposit are estimated using a discounted cash flow calculationthat applies current interest rates to a schedule of aggregated expectedmaturities.

 

**Advances from Federal Home Loan Bank** - The fair value of fixed rate borrowingsare estimated using a discounted cash flow calculation that applies the Company’scurrent borrowing rate from the Federal Home Loan Bank.

 

**FederalFunds Purchased** -Federal funds purchased are for a term of one day, and the carrying amountapproximates the fair value.

 

**AccruedInterest Receivable and Payable** - The carrying value of these instruments is a reasonable estimate offair value.

 

**Off-Balance-SheetFinancial Instruments**- The carrying amount for loan commitments and standby letters of credit whichare off-balance-sheet financial instruments approximates the fair value sincethe obligations are typically based on current market rates.

 

TheCompany has used management’s best estimate of fair value based on the aboveassumptions.  Thus, the fair valuespresented may not be the amounts that could be realized in an immediate sale orsettlement of the instrument.  Inaddition, any income taxes or other expenses, which would be incurred in anactual sale or settlement, are not taken into consideration in the fair valuepresented.

 

F-24

----

 

**NOTE 20 –FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)**

 

The estimated fair values of the Company’s financial instruments at December 31,2007 and 2006 are as follows:

 
| ** **                                                          | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Carrying**                    | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Amount**                      | ** ** | **Value**                       | ** ** | **Amount** | ** ** | **Value** | ** ** |
| **Financial Assets:**                                               |       |                            |       |                            |       |   |   |   |   |
| Cash and due from banks                                             |       | $                               | 1,630,198  |                            | $          | 1,630,198 |   | $ | 1,621,399 |   | $ | 1,621,399 |   |
| Federal funds sold                                                  |       | —                          |       | —                          |       | 6,611,000 |   | 6,611,000 |   |
| Investment securities available for sale                            |       | 13,599,116                      |       | 13,599,116                      |       | 3,560,807 |   | 3,560.807 |   |
| Nonmarketable equity securities                                     |       | 318,400                         |       | 318,400                         |       | 93,200 |   | 93,200 |   |
| Loans receivable                                                    |       | 65,086,609                      |       | 65,874,000                      |       | 38,430,295 |   | 38,926,000 |   |
| Accrued interest receivable                                         |       | 369,775                         |       | 369,775                         |       | 231,559 |   | 231,559 |   |
|                                                                |       |                            |       |                            |       |   |   |   |   |
| **Financial Liabilities:**                                          |       |                            |       |                            |       |   |   |   |   |
| Demand deposits, interest-bearing transaction  and savings accounts |       | 26,200,733                      |       | 26,200,733                      |       | 24,088,864 |   | 24,088,864 |   |
| Time deposits                                                       |       | 37,268,369                      |       | 36,284,034                      |       | 17,122,280 |   | 17,122,280 |   |
| Advances from Federal Home Loan Bank                                |       | 5,000,000                       |       | 5,000,000                       |       | — |   | — |   |
| Federal funds purchased                                             |       | 3,838,200                       |       | 3,383,200                       |       | — |   | — |   |
| Accrued interest payable                                            |       | 196,852                         |       | 196,852                         |       | 145,657 |   | 145,657 |   |
|                                                                     |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                   | ** ** | **Notional** | ** ** | **Fair**  | ** ** | **Notional** | ** ** | **Fair**  | ** ** |
|------------------------------|------------|--------------|------------|-----------|------------|--------------|------------|-----------|------------|
| ** **                   | ** ** | **Amount**   | ** ** | **Value** | ** ** | **Amount**   | ** ** | **Value** | ** ** |
| Commitments to extend credit |       | $            | 12,891,632 |      | $          | —       |       | $         | 9,100,759  |   | $ | — |   |
| Standby letters of credit    |       | 205,073      |       | —    |       | 121,336      |       | —    |       |
|                              |            |              |            |           |            |              |            |           |            |  |  |  |  |

 

F-25

----

 

**NOTE 21 –PARENT COMPANY FINANCIAL INFORMATION**

 

Following is condensed financial information of Atlantic Bancshares, Inc.(parent company only):

 

**Condensed Balance Sheets**

**December 31, 2007 and 2006**

 
| ** **                                      | ** ** | **December 31,** | ** **    |
|-------------------------------------------------|------------|-----------------------|---------------|
| ** **                                      | ** ** | **2007**              | ** **    | **2006** | ** ** |
| **Assets:**                                     |       |                  |          |   |   |
| Cash and cash equivalents                       |       | $                     | 394,130       |   | $ | 439,220 |   |
| Deferred tax benefit                            |       | 54,989                |          | 42,440 |   |
| Other assets                                    |       | —                |          | — |   |
| Investment in subsidiary                        |       | 9,533,139             |          | 9,961,312 |   |
| Total assets                                    | ** ** | **$**                 | **9,982,258** | ** ** | **$** | **10,442,972** | ** ** |
|                                            |       |                  |          |   |   |
| **Liabilities and Shareholders’ Equity**   |       |                  |          |   |   |
| Total liabilities                               | ** ** | **—**            | ** **    | **—** | ** ** |
|                                            |       |                  |          |   |   |
| Shareholders’ equity                       |       | 9,982,258             |          | 10,442,972 |   |
| Total liabilities and shareholders’ equity | ** ** | **$**                 | **9,982,258** | ** ** | **$** | **10,442,972** | ** ** |

 

**Condensed Statements of Operations**

**For the years ended December 31, 2007 and 2006**

 
| ** **                                                                          | ** ** | **2007** | ** **   | **2006**   | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|--------------|------------|------------|
|                                                                                |       |     |         |       |       |
| Interest income                                                                     |       | $        | —       |       | $          | 25,450 |   |
|                                                                                |       |     |         |       |       |
| Salaries and benefits                                                               |       | 97,408   |         | 62,374     |       |
| Interest expense                                                                    |       | —   |         | 779        |       |
| Other expense                                                                       |       | 45,089   |         | 87,116     |       |
| Total expense                                                                       |       | 142,497  |         | 150,269    |       |
|                                                                                |       |     |         |       |       |
| Income (loss) before income taxes and  equity in undistributed losses of subsidiary |       | (142,497 | )            | (124,819   | )          |
|                                                                                |       |     |         |       |       |
| Income tax benefit                                                                  |       | (12,549  | )            | (42,440    | )          |
|                                                                                |       |     |         |       |       |
| Equity in undistributed net loss of  subsidiary                                     |       | (438,898 | )            | (1,515,734 | )          |
|                                                                                |       |     |         |       |       |
| Net loss                                                                            | ** ** | **$**    | **(568,846** | **)**      | **$**      | **(1,598,113** | **)** |

 

F-26

----

 

**Condensed Statements of Cash Flows**

**For the years ended December 31, 2007 and 2006**

 
| ** **                                                                  | ** ** | **2007**   | ** **  | **2006**    | ** ** |
|-----------------------------------------------------------------------------|------------|------------|-------------|-------------|------------|
| **Operating activities**                                                    |       |       |        |        |       |
| Net loss                                                                    |       | $          | (568,846    | )           | $          | (1,598,113 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities |       |       |        |        |       |
| Equity in undistributed net loss of  subsidiary                             |       | 438,897    |        | 1,515,734   |       |
| Stock based compensation expense                                            |       | 97,408     |        | 62,373      |       |
| (Increase) decrease in other assets                                         |       | (12,549    | )           | 831,963     |       |
| Decrease in accounts payable and accrued  expenses                          |       | —     |        | (192,518    | )          |
| Net cash used by operating activities                                       |       | (45,090    | )           | 619,439     |       |
|                                                                        |       |       |        |        |       |
| **Investing activities**                                                    | ** ** | ** ** | ** **  | ** **  | ** ** |
| Reimbursement from Bank for premises,  furniture and equipment              |       | —     |        | 311,572     |       |
| Investment in subsidiary                                                    |       | —     |        | (11,467,252 | )          |
| Net cash used in investing activities                                       |       | —     |        | (11,155,680 | )          |
| ** **                                                                  | ** ** | ** ** | ** **  | ** **  | ** ** |
| **Financing activities**                                                    | ** ** | ** ** | ** **  | ** **  | ** ** |
| Proceeds from sale of common stock, net                                     |       | —     |        | 11,982,022  |       |
| Net decrease in note payable                                                |       | —     |        | (1,046,988  | )          |
| Net decrease in stock subscription deposits                                 |       | —     |        | (7,162,150  | )          |
| Net cash provided by financing activities                                   |       | —     |        | 3,772,884   |       |
|                                                                        |       |       |        |        |       |
| Net increase (decrease) in cash and cash  equivalents                       |       | (45,090    | )           | (6,763,357  | )          |
|                                                                        |       |       |        |        |       |
| **Cash and cash equivalents, beginning of  year**                           |       | 439,220    |        | 7,202,577   |       |
|                                                                        |       |       |        |        |       |
| **Cash and cash equivalents, end of year**                                  | ** ** | **$**      | **394,130** | ** **  | **$**      | **439,220** | ** ** |

 

F-27

----

 

**CORPORATE DATA**

 

**ANNUAL MEETING:**

 

The Annual Meeting of Shareholders of Atlantic Bancshares, Inc.will be held on May 9, 2008 at 10:00 AM at the Community Center, OscarFrazier Park, 77 Shults Road, Bluffton, South Carolina 29910.

 
| **CORPORATE  OFFICE:**              | **CORPORATE  COUNSEL:**                           |
|-------------------------------------|---------------------------------------------------|
|                                |                                              |
| One  Sherington Drive, Suite J | Nelson  Mullins Riley & Scarborough, LLP |
| Bluffton,  South Carolina 29910     | Poinsett  Plaza, Suite 900                   |
| Phone:  843.815.7111                | 104  South Main Street                            |
| Fax:  843.815.7112                  | Greenville,  South Carolina 29601                 |
|                                |                                              |
| **INDEPENDENT  AUDITORS:**          | **STOCK  TRANSFER AGENT:**                        |
|                                |                                              |
| Elliott  Davis, LLC                 | First  Citizens Bank & Trust Company     |
| 1901  Main Street, Suite 1650  | Institutional  Trust Services Division            |
| Columbia,  South Carolina 29202     | 4300  Six Forks Road                              |
|                                | Raleigh,  North Carolina 27609                    |

 

**STOCKINFORMATION:**

 

Ourcommon stock is listed on the OTC Bulletin Board under the symbol “ATBA.”  As of March 20, 2008, there were 387shareholders of record.

 

Ourability to pay cash dividends is dependent upon receiving cash in the form ofdividends from Atlantic Community Bank. However, certain restrictions exist regarding the ability of the bank totransfer funds to us in the form of cash dividends.  All of the bank’s dividends to us are payableonly from the undivided profits of the bank.

 
| **LOCATIONS:**                            |   |                             |
|-------------------------------------------|--------|----------------------------------|
|                                      |   |                             |
| Sheridan  Park Branch                     |   | mailing:  (all locations)        |
| One  Sherington Drive, Suite J       |   | Post  Office Box 3077            |
| Bluffton,  South Carolina 29910           |   | Bluffton,  South Carolina 29910  |
| Phone:  843.815.7111                      |   |                             |
| Fax:  843.815.7112                        |   |                             |
|                                      |   |                             |
| Hilton  Head Island Branch                |   |                             |
| One  Corpus Christi Place, Suite 108 |   |                             |
| Hilton  Head Island, South Carolina 29928 |   |                             |
| Phone:  843.785.3400                      |   |                             |
| Fax:  843.785.3350                        |   |                             |
|                                      |   |                             |
| “a”  Online:                    |   | “a”  Telephone Banking |
| www.atlanticcommunitybank.com             |   | 877.ACB.2472                     |

 

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**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

**Item8A.  Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour chief executive officer and chief financial officer, of the effectivenessof our disclosure controls and procedures as defined in Exchange Act Rule 15d-15(e).  Based upon that evaluation, our chiefexecutive officer and chief financial officer have concluded that our currentdisclosure controls and procedures are effective as of December 31,2007.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2007 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**Management’s Report on Internal Controls Over FinancialReporting**

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in the Exchange Act Rules 15d-15(f).  A system of internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

 

Underthe supervision and with the participation of management, including theprincipal executive officer and the principal financial officer, our managementhas evaluated the effectiveness of our internal control over financialreporting as of December 31, 2007 based on the criteria established in areport entitled “Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission” and theinterpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, our management hasevaluated and concluded that our internal control over financial reporting waseffective as of December 31, 2007.

 

Weare continuously seeking to improve the efficiency and effectiveness of ouroperations and of our internal controls. This results in modifications to processes throughout the company.  However, there has been no change in ourinternal control over financial reporting that occurred during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

Thisannual report does not include an attestation report of the company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the company to provide only management’s report in this annual report.

 

**Item8B.  Other Information.**

 

None.

 

41

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**Part III.**

 

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act**

 

The following sets forth information regarding our executive officersand directors.  Our directors are electedto one year terms.  Our executiveofficers serve at the discretion of our board of directors.

 
| **Name**                            | ** ** | **Age**    | ** ** | **Year First  Elected or  Appointed** | ** ** | **Year Term  Expires** | ** ** | **Position(s) Held**          |
|-------------------------------------|------------|------------|------------|-------------------------------------------------|------------|-----------------------------|------------|------------------------------------|
| ** **                          | ** ** | ** ** | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                         |
| Gary  C. Davis                      |       | 43         |       | 2005                                            |       | 2008                        |       | Director                           |
| Frederick  Anthony Nimmer, III |       | 47         |       | 2005                                            |       | 2008                        |       | Director                           |
| Robyn  Josselson Shirley            |       | 41         |       | 2005                                            |       | 2008                        |       | Director                           |
| Mark  S. Simpson                    |       | 46         |       | 2005                                            |       | 2008                        |       | Director                           |
| Brian  J. Smith                     |       | 35         |       | 2005                                            |       | 2008                        |       | Chairman  of the Board, Director   |
| Robert  P. Trask                    |       | 45         |       | 2005                                            |       | 2008                        |       | Chief  Executive Officer, Director |
| Allen  B. Ward                      |       | 40         |       | 2005                                            |       | 2008                        |       | Director                           |
| Edgar  L. Woods                     |       | 47         |       | 2005                                            |       | 2008                        |       | Director                           |
| Michelle  M. Pennell                |       | 41         |       | 2006                                            |       |                        |       | Chief  Financial Officer, EVP      |
| Todd  D. Hoke                       |       | 36         |       | 2005                                            |       |                        |       | Chief  Credit Officer, EVP         |
| Karen  B. Sprague                   |       | 37         |       | 2005                                            |       |                        |       | Chief  Operations Officer, EVP     |

 

*Gary C. Davis*, 43,director, is broker-in-charge with Hilton Head Lakes residential community inHardeeville.  From October 2005 to October 2007,Mr. Davis was a real estate sales consultant with the Hampton Lakeresidential community in Bluffton.  Priorto that position, from November 2002 to September 2005, Mr. Daviswas broker-in-charge of Hampton Hall Realty, the real estate sales arm of theHampton Hall planned unit residential development located in Bluffton.  Mr. Davis also worked for 10 years withthe health care manufacturer Johnson & Johnson, the last three as adistrict sales manager for the southeastern United States.  Mr. Davis holds a South Carolina realestate brokers license.  He is a nativeof Ridgeland in Jasper County, South Carolina and has been living in Blufftonsince 1999.  Mr. Davis received hisbachelors degree in business administration from Presbyterian College.

 

*Frederick Anthony Nimmer, III*,47, director, is president of both Nimmer Turf + Tree Farm and Nimmer EquipmentRental Company a position he has held since 1987.  He also serves as vice president ofTurfmasters, Inc., which specializes in the installation of sod.  All of these businesses are based inRidgeland in Jasper County, South Carolina. Mr. Nimmer earned a bachelors degree in finance from ClemsonUniversity.  Mr. Nimmer formerlyserved on South Carolina Bank & Trust’s Jasper County Advisory Boardfrom January 1999 to October 2004. Mr. Nimmer is a native of Jasper County and has lived in Blufftonsince 2001.  He is also past president ofthe Jasper County Rotary Club.

 

*Robyn Josselson Shirley*,41, director, has been practice manager for the Southeastern Oral andMaxillofacial Surgery Center, Inc., Bluffton, South Carolina since1999.  She earned a bachelors degree insociology from Furman University.  Shealso holds bachelors and masters degrees in occupational therapy from theMedical University of South Carolina.  Mrs. Shirleyholds a South Carolina license in occupational therapy.  A native of Yemassee, South Carolina, she haslived in Bluffton since 2001 and formerly served on the board of directors ofHeroes on Horseback.

 

*Mark S. Simpson,* 46,director, is an attorney and member of the South Carolina Bar.  He has been in private practice with Jones,Patterson, Simpson & Newton, PA practicing in the fields of realestate and corporate law since 1987.  Mr. Simpsonearned undergraduate and law degrees from the University of SouthCarolina.  Mr. Simpson has lived onHilton Head Island since 1987. He has served as chair and is currently servingas a board member of the United Way of Beaufort County.

 

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*Brian J. Smith,*35,**served as chair of the organizing board and is the currentchair of our board of directors.   Anative of Estill, South Carolina, Dr. Smith earned a Bachelors of Sciencefrom Clemson University.  He then went onto earn his post-graduate degree form the Medical University of South Carolina’sCollege of Dental Medicine.  Uponcompletion of a General Practice residency program at Palmetto Richland HealthAlliance in Columbia, South Carolina, Dr. Smith opened his privatepractice.  He has been president andowner of Palmetto Dental Arts, PA since 1999.

 

*Robert P. Trask,*45,**has served as our president and chief executive officersince June 2005.  He also serves asone of our directors.  He is**a native of Beaufort and has lived in southern BeaufortCounty since 1989.  His 19 years ofcommercial bank experience are concentrated in the coastal communities ofCharleston, Beaufort, Hilton Head Island and Bluffton, South Carolina andSavannah, Georgia.  He earned a bachelorsdegree in financial management from Clemson University and a masters degree inbusiness administration from the University of South Carolina.  Mr. Trask is a trustee for both theCommunity Foundation of the Lowcountry, Inc.****andTechnical College of the Lowcountry Foundation, Inc.  Mr. Trask also serves as Group IDirector of the South Carolina Bankers Association’s Community BankersCouncil.  Most recently, Mr. Traskwas appointed as a fellow of the Liberty Fellowship Class of 2009.

 

*Allen B. Ward*, 40,director, has been president of the Bluffton-based engineering firm of WardEdwards Inc., which specializes in land surveying and multi-faceted engineeringservices, since 2000.  Ward Edwards, Inc.also has offices in Savannah and Beaufort. He holds professional engineer licenses from multiple states, includingSouth Carolina.  Mr. Ward earnedboth his bachelors degree in civil engineering and masters degree inenvironmental systems engineering from Clemson University.  Originally from Kingstree, South Carolina, hehas lived in Bluffton since 1998 and Beaufort County since 1992.  Mr. Ward currently serves as a member ofthe Board of Directors of the South Carolina Chamber of Commerce.

 

*Edgar L. Woods,* 47,**director, has been president and owner of Palmetto GrainBrokerage LLC, which specializes in cash grain brokerage, futures/optionstrading and farm management, since 1985. He is also president of Performance Ag, LLC, a licensed South Carolinagrain dealer/merchant, and is also a partner in the Agricultural ProductsExchange, a feed ingredients trading company with offices in New York, Iowa,and South Carolina.  He holds a Futures, Series 3license from the National Futures Association. Mr. Woods earned his bachelors degree in agricultural mechanizationand business from Clemson University.  Heis a native of Jasper County and has lived in Bluffton since 1990.   Mr. Woods serves as chairman of thePalmetto Agribusiness Council and is past president of both the South CarolinaGrain Dealers association and Southeastern Feed and Grain, a group of feed andgrain dealers from four southeastern states.

 

*Michelle M. Pennell*,41, is our chief financial officer and executive vice president.  Ms. Pennellhas been a resident of the low country area for over 16 years.  She earnedher bachelor of business administration degree in finance from James MadisonUniversity in Virginia, graduating magna cum laude.  She joined the bankin January 2006 and was promoted to her current position in May 2006. She served as the Vice President and Treasurer of Atlantic Savings Bank, awholly-owned subsidiary of Wachovia Corporation, on Hilton Head Island for overseven years, from 1991 to 1998.  In addition, she has substantialexperience in many levels of accounting and finance across thehotel/restaurant, retail and non-profit sectors.  Ms. Pennell hasparticipated in a variety of leadership positions in community organizationsover the years.  She is a graduate ofHilton Head Island/Bluffton Chamber of Commerce Leadership Program.

 

*Todd D. Hoke*is our Chief Credit Officer and Executive Vice President.  Mr. Hoke joined the bank in 2005 duringits formation phase.  From 2004 to 2005,he was the Vice President of Commercial Lending for the Hilton Head Islandbranch of Carolina First charged with managing a substantial commercial loanportfolio.  Prior to that, he was theAssistant Vice President for the Bluffton branch of BB&T.  Mr. Hoke began his employment withBB&T in 1999 and his responsibilities included establishing infrastructureand developing business for BB&T’s de novo Bluffton branch.  From 1996 to 1999, Mr. Hoke was employedby the Wachovia Corporation in Hilton Head Island starting as a commercialcredit analyst and was promoted to commercial lender.  He received his bachelor of science degree inbusiness administration from Bowling Green State University in Ohio.  He is also a graduate of the Risk ManagementAssociation’s Commercial Lending School. Mr. Hoke has been a resident of the low country area for 

 

43

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over 13 years.  He is active in the Bluffton/Okatie KiwanisClub and is a graduate of Hilton Head Island/Bluffton Chamber ofCommerce Leadership Program.

 

*Karen B. Sprague*is our Chief Operations Officer and Executive Vice President.  Ms. Sprague has been a resident of thelow country area since 1993.  Ms. Spraguejoined the bank in September 2005 during its formation phase.  Prior to that, she served as Branch Managerof the Hilton Head Island branch of First Federal from 2001 to 2005.  From 1993 to 2005, Ms. Sprague servedLiberty Savings Bank in various capacities ending as Assistant Vice Presidentand Sales Manager.  Ms. Spragueearned her bachelor of arts degree in sociology from The College of Wooster inOhio.  She is past President and currentmember of the Zonta Club of Hilton Head Island.   She currently serves on the Hilton HeadIsland/Bluffton Chamber of Commerce Junior Leadership Board of Trustees and theSouth Carolina Bankers Association Disaster Recovery Committee.  Ms. Sprague is also a graduate ofHilton Head Island/Bluffton Chamber of Commerce Leadership Program.

 

**Audit Committee**

 

Our auditcommittee has five members – Directors Gary C. Davis, Frederick Anthony Nimmer, III,Mark S. Simpson, Brian J. Smith, and Edgar L. Woods (chair).  None of the current members of the auditcommittee nor any other member of our board qualifies as an “audit committeefinancial expert” as defined under the rules of the SEC.  As a relatively small public company, it isdifficult to identify potential qualified candidates that are willing to serveon our board and otherwise meet our requirements for service.  At the present, we do not know if or when wewill appoint a new board member that qualifies as an audit committee financialexpert.  Although none of audit committeemembers qualify as “financial experts” as defined in the SEC rules, each of ourmembers has made valuable contributions to the company and its shareholders asmembers of the audit committee.  Theboard has determined that each member is fully qualified to monitor theperformance of management, the public disclosures by the company of itsfinancial condition and performance, our internal accounting operations, andour independent auditors.

 

Ourboard of directors has implemented a process for shareholders of the company tosend communications to the board.  Anyshareholder desiring to communicate with the board, or with specific individualdirectors, may so do by writing to the secretary of the company, at AtlanticBancshares, Inc., 1 Sherington Drive, Suite J, Bluffton, SouthCarolina 29910.  The secretary has beeninstructed by the board to promptly forward all such communications to theaddressees indicated thereon.

 

We do not have a class of securities registered under Section 12of the Securities Exchange Act of 1934. Therefore, our directors, executive officers, promoters and controlpersons are not required to comply with Section 16(a) of the ExchangeAct.

 

***Code of Ethics***

* *

Wehave adopted a Code of Ethics that applies to our principal executive officer,principal financial officer, principal accounting officer or controller, andpersons performing similar functions. The Code of Ethics is available withoutcharge to shareholders upon request. Shareholders should contact Mark S. Simpson, Secretary, at our mainoffice to obtain a copy.

 

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**Item10.  Executive Compensation**

 

**Summary Compensation Table**

 

Thefollowing table shows the compensation we paid to our chief executive officerand all other executive officers who earned over $100,000 for the years ended December 31,2007 and 2006 (collectively, the “named executive officers”).

 
| **Names and Principal Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Option  Awards** | ** ** | **All Other  Compensation****(1)** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|--------------------|------------|-----------------------------------------|------------|-----------|------------|
| Robert P.  Trask                                |       |     |       |       |       |      |       |               |       |                                    |       |      |       |
| President  and Chief Executive                  |       | 2007     |       | $          | 140,423    |      | $          | 10,000             |       | —                                  |       | $         | 27,695     |   | $ | 178,118 |   |
| Officer                                         |       | 2006     |       | $          | 129,057    |      | $          | 5,150              |       | $                                       | 13,968     |      | $          | 22,323 |   | $ | 170,498 |   |
|                                            |       |     |       |       |       |      |       |               |       |                                    |       |      |       |
| Michelle M.  Pennell                            |       | 2007     |       | $          | 106,366    |      | $          | 5,000              |       | —                                  |       | $         | 19,833     |   | $ | 131,199 |   |
| Chief Financial Officer                         |       | 2006     |       | $          | 81,438     |      | $          | 5,150              |       | $                                       | 3,600      |      | $          | 10,732 |   | $ | 100,920 |   |
|                                            |       |     |       |       |       |      |       |               |       |                                    |       |      |       |
| Todd D. Hoke                                    |       | 2007     |       | $          | 103,654    |      | $          | 5,000              |       | —                                  |       | $         | 13,318     |   | $ | 121,972 |   |
| Chief Credit Officer                            |       | 2006     |       | $          | 93,250     |      | $          | 5,150              |       | $                                       | 4,505      |      | $          | 9,917 |   | $ | 112,822 |   |
|                                            |       |     |       |       |       |      |       |               |       |                                    |       |      |       |
| Karen B.  Sprague                               |       | 2007     |       | $          | 93,654     |      | $          | 5,000              |       | —                                  |       | $         | 16,921     |   | $ | 115,575 |   |
| Chief Operating Officer                         |       | 2006     |       | $          | 85,096     |      | $          | 5,150              |       | $                                       | 4,505      |      | $          | 13,295 |   | $ | 108,846 |   |

 

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(1)          All Other Compensation includes premiums paid regarding group life,accidental death and dismemberment, disability, medical and dental insurance,auto allowance, employer match for 401k plan and dues.

(2)          2006 compensation earned by named executive officers reported in theSummary Compensation Table does not include compensation amounts for servicesthat were performed in 2005 that were transferred as pre-opening expenses tothe Bank in 2006.

 

**Employment Agreements**

 

*Robert P. Trask*.  In June 2005, we entered into an employment agreement with Mr. Trask, under which he agreed to serve as president and chief executive officer of Atlantic Bancshares and Atlantic Community Bank for a term of three years.  Mr. Trask’s employment with the company will automatically extend for additional terms of one year each unless the company delivers a notice of termination at least six months prior to the end of the term.  During this term, Mr. Trask is entitled to:

 

·                  Initial annual base salary of $117,000, which was increased to $135,000 on January 18, 2006 when the company broke escrow on its initial offering for the formation of the bank.  This salary may be increased annually by the board of directors;

·                  Optionsto purchase 25,032 shares of common stock for $10 per share.  The award agreement for the stock optionshall provide that one-fifth of the shares subject to the option will vest oneach of the first five anniversaries of the opening date of the bank (January 26,2006), but only if the executive remains employed by the company or one of itssubsidiaries on such date, and shall contain other customary terms andconditions;

·                  Termlife insurance policy providing for death benefits totaling $500,000 payable toMr. Trask’s spouse and heirs and $1,000,000 payable to the bank;

·                  Reasonable car allowance not to exceed $450 per month, plus insurance, taxes, and other related automobile expenses;

·                  Participate in our retirement, medical, welfare, and other benefit programs;

·                  Payment of initiation fees and reimbursement for club dues; and

 

45

 

·                  Reimbursement for travel and business expenses.

 

Pursuant to the terms of his employment agreement, Mr. Trask is prohibited from disclosing our trade secrets or confidential information.  If we terminate Mr. Trask’s employment without cause, he will be entitled to severance equal to 24 months of his then base salary.  In addition, following a change in control, if Mr. Trask terminates his employment for a good reason within a 90-day period beginning on the 30th day following a change in control or within a 90-day period beginning on the one year anniversary of the change in control:

 

·                  He will be entitled to severance equal to 36 months of his then base salary;

·                  The restrictions on any outstanding incentive awards (including restricted stock) granted to him under our long-term equity incentive program or any other incentive plan or arrangement shall lapse and such awards shall become 100% vested, all stock options and stock appreciation rights granted to Mr. Trask shall become immediately exercisable and shall become 100% vested, and all performance units granted to him shall become 100% vested;

·                  We will continue to pay his life insurance, disability, medical, dental, and hospitalization benefits for three years; and

·                  The restrictive covenants regarding competition and solicitation described below shall not apply.

 

During his employment and for a period of 12 months thereafter, Mr. Trask may not, subject to limited exceptions, (a) compete with us by forming, serving as an organizer, director, or officer of, or acquiring or maintaining an ownership interest in, a depository financial institution or holding company of a depository financial institution, if the depository institution or holding company has one or more offices or branches within our territory, (b) solicit our customers for a competing business, or (c) solicit our employees for a competing business.

 

In the event that our independent accountants acting as our auditors on the date of a change in control determine that the payments provided for in Mr. Trask’s employment agreement upon Mr. Trask’s termination for good reason within a 90-day period beginning on the 30th day following a change in control constitute “excess parachute payments” (as that term is used in Section 280G of the Internal Revenue Code of 1986 and any regulations thereunder), then such compensation will be reduced to an amount the value of which is $1.00 less than the maximum amount that could be paid to Mr. Trask without the compensation being treated as “excess parachute payments” under Section 280G.

 

In February 2008, we entered into a new employment agreement with Mr. Trask to serve as president and chief executive officer of Atlantic Bancshares and Atlantic Community Bank.  Unless it is terminated earlier, Mr. Trask’s employment agreement provides a three year term of employment which automatically extends for additional three year renewal terms unless written notice is given by either party 60 days prior to the termination date.  The initial base salary for Mr. Trask will be $135,000, which amount is subject to annual review by the board of directors and may be increased.  Mr. Trask will be eligible to receive bonuses if he meets the goals set forth annually for him by the board of directors.  Furthermore, Mr. Trask will be eligible for our long-term equity incentive program and for the grant of stock options, restricted stock and other similar awards.  Mr. Trask will be provided with membership fees and annual dues not to exceed $1,000 for an area country club and an automobile (including all related expenses) as well as a life insurance policy for the benefit of his spouse and heirs.  Mr. Trask is entitled to participation in our retirement, health, dental, welfare and other benefit plans and programs applicable to employees generally or to senior executives.

 

Mr. Trask’s employment agreement may be terminated for death, disability and with or without cause by us or by Mr. Trask.  If we terminate Mr. Trask without cause, we will make a lump sum payment to Mr. Trask in an amount equal to his then current monthly base salary multiplied by 24 plus any bonus earned or accrued through the date of termination.  Definitions of the term “cause” and “disability” are contained in Mr. Trask’s employment agreement.

 

Upon the occurrence of a change in control, and regardless of whether Mr. Trask remains employed by us or our successor following a change in control, Mr. Trask is entitled to a lump sum cash payment in an amount equal to his then current monthly base salary multiplied by 36 plus any bonus earned or accrued through the date of change in control.  In addition, for a period of 36 months following change in control, Mr. Trask will receive 

 

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payment of premiums for medical and dental insurance, disability insurance, and life insurance being provided to him prior to the change in control or to other similarly situated executives who continue their employment with us.  Also, any restrictions on any outstanding incentive awards (including restricted stock) granted to Mr. Trask under any incentive plan or arrangement will lapse and such incentive award or awards will immediately become 100% percent vested; all stock options and stock appreciation rights granted to Mr. Trask will become immediately exercisable and will become 100% vested; and any performance units granted to Mr. Trask will become 100% vested.  A detailed definition of the term “change in control” is contained in Mr. Trask’s employment agreement.

 

The parties intend that the severance payments and other compensation provided for in Mr. Trask’s employment agreement to be reasonable compensation for Mr. Trask’s service to us and shall not constitute “excess parachute payments” within the meaning of Section 280G of the Internal Revenue Code.  However, if our independent accountants determine that the payments provided in his employment agreement constitute “excess parachute payments,” then the compensation paid shall be increased, on a tax gross-up basis, so as to reimburse Mr. Trask for the tax payable by him on such “excess parachute payments.”

 

Mr. Trask’s employment agreement also contains provisions relating to non-solicitation of customers and personnel and non-competition during the term of employment and 12 months thereafter, as well as a provision relating to the protection of confidential information and trade secrets.  These non-solicitation and non-compete provisions do not apply following a change of control.

 

*Todd D. Hoke.*  In September 2005, we entered into an employment agreement with Mr. Hoke, under which he agreed to serve as chief credit officer of Atlantic Bancshares and Atlantic Community Bank for a term of three years.  Mr. Hoke’s employment with the company will automatically extend for additional terms of one year each unless the company delivers a notice of termination at least six months prior to the end of the term.  During this term, Mr. Hoke is entitled to:

 

·                  Initial annual base salary of $95,000, which was increased to $100,000 on August 1, 2006.  This salary may be increased annually by the board of directors;

·                  Optionsto purchase shares of common stock equal to 1% of shares sold duringcapitalization in accordance with the stock incentive plan approved by thecompany’s shareholders;

·                  Reasonable car allowance not to exceed $350 per month, plus insurance, taxes, and other related automobile expenses;

·                  Participate in our retirement, medical, welfare, and other benefit programs;

·                  Payment of initiation fees and reimbursement for club dues; and

·                  Reimbursement for travel and business expenses.

 

Pursuant to the terms of his employment agreement, Mr. Hoke is prohibited from disclosing our trade secrets or confidential information.  If we terminate Mr. Hoke’s employment without cause, he will be entitled to severance equal to 12 months of his then base salary.  In addition, following a change in control, if Mr. Hoke terminates his employment for a good reason within a 90-day period beginning on the 30th day following a change in control or within a 90-day period beginning on the one year anniversary of the change in control:

 

·                  He will be entitled to severance equal to 36 months of his then base salary;

·                  The restrictions on any outstanding incentive awards (including restricted stock) granted to him under our long-term equity incentive program or any other incentive plan or arrangement shall lapse and such awards shall become 100% vested, all stock options and stock appreciation rights granted to Mr. Hoke shall become immediately exercisable and shall become 100% vested, and all performance units granted to him shall become 100% vested;

·                  We will continue to pay his life insurance, disability, medical, dental, and hospitalization benefits for three years; and

·                  The restrictive covenants regarding competition and solicitation described below shall not apply.

 

Finally, during his employment and for a period of 12 months thereafter, Mr. Hoke may not, subject to limited exceptions, (a) compete with us by forming, serving as an organizer, director, or officer of, or acquiring or 

 

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maintaining an ownership interest in, a depository financial institution or holding company of a depository financial institution, if the depository institution or holding company has one or more offices or branches within our territory, (b) solicit our customers for a competing business, or (c) solicit our employees for a competing business.  The provisions in Mr. Hoke’s employment agreement regarding Section 280G payment limitations upon a change in control are identical to those described above for Mr. Trask’s June 2005 employment agreement.

 

In February 2008, we entered into a new employment agreement with Mr. Hoke to serve as executive vice president and chief credit officer of Atlantic Bancshares and Atlantic Community Bank.  The initial base salary for Mr. Hoke will be $105,000, which amount is subject to annual review by the board of directors and may be increased.  Mr. Hoke will be eligible to receive bonuses if he meets the goals set forth annually for him by the board of directors.  Furthermore, Mr. Hoke will be eligible for our long-term equity incentive program and for the grant of stock options, restricted stock and other similar awards.  We will pay membership fees and annual dues for various civic organizations subject to approval by our chief executive officer.  Mr. Hoke shall also have available an automobile allowance, dental and health insurance, disability insurance, retirement benefits and such other benefits or plans applicable to our employees generally or to our senior executives.  The provisions in Mr. Hoke’s employment agreement regarding the term and termination of employment, benefits payable upon change of control, and Section 280G gross-up payments as well as the confidentiality, non-solicitation and non-compete provisions are identical to those described above for Mr. Trask’s February 2008 employment agreement.

 

*MichelleM. Pennell. *In August 2006, we entered into anemployment agreement with Ms. Pennell, under which she agreed to serve aschief financial officer and executive vice president of Atlantic Bancshares andAtlantic Community Bank for a term of three years.  Ms. Pennell’s employment with thecompany will automatically extend for additional terms of one year unless thecompany delivers a notice of termination at least 60 days prior to the end ofthe term.  During this term, Ms. Pennellis entitled to:

 

·                  Initial annual salary of $100,000, which maybe increased periodically by the chief executive officer;

·                  Options to purchase 10,000 shares of commonstock in accordance with the stock incentive plan approved by the company’sshareholders;

·                  Car allowance of $350 per month;

·                  Participate in our retirement, medical,welfare, and other benefit programs;

·                  Payment of initiation fees and reimbursementfor club dues; and

·                  Reimbursement for travel and businessexpenses.

 

Pursuant to the terms of her employment agreement, Ms. Pennell is prohibited from disclosing our trade secrets or confidential information.  If we terminate Ms. Pennell’s employment without cause, she will be entitled to severance equal to three months of her then base salary.  In addition, following a change in control, if Ms. Pennell terminates her employment for a good reason within a 90-day period beginning on the 30th day following a change in control:

 

·                  She will be entitled to severance equal to 36 months of her then base salary;

·                  The restrictions on any outstanding incentive awards (including restricted stock) granted to her under our long-term equity incentive program or any other incentive plan or arrangement shall lapse and such awards shall become 100% vested, all stock options and stock appreciation rights granted to Ms. Pennell shall become immediately exercisable and shall become 100% vested, and all performance units granted to her shall become 100% vested;

·                  We will continue to pay her life insurance, disability, medical, dental, and hospitalization benefits for three years; and

·                  The restrictive covenants regarding competition and solicitation described below shall not apply.

 

The amounts described above to be paid to Ms. Pennell in connection with a termination following a change in control will be grossed up so as to account for any additional taxes that may be owed as a result of the lump sum payment rather than periodic payments over 36 months.  The provisions in Ms. Pennell’s employment agreement regarding Section 280G payment limitations upon a change in control are identical to those described above for Mr. Trask’s June 2005 employment agreement.

 

48

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During her employment and for a period of 12 months thereafter, Ms. Pennell may not, subject to limited exceptions, (a) compete with us by forming, serving as an organizer, director, or officer of, or acquiring or maintaining an ownership interest in, a depository financial institution or holding company of a depository financial institution, if the depository institution or holding company has one or more offices or branches within our territory, (b) solicit our customers for a competing business, or (c) solicit our employees for a competing business.

 

In February 2008, we entered into a new employmentagreement with Ms. Pennell to serve as executive vice president and chieffinancial officer ofAtlantic Bancshares and Atlantic Community Bank.  Theinitial base salary for Ms. Pennell will be $110,000, which amount issubject to annual review by the board of directors and may be increased.  The provisions in Ms. Pennell’semployment agreement regarding perquisites, term and termination of employment,benefits payable upon change of control, and Section 280G gross-uppayments as well as the confidentiality, non-solicitation and non-competeprovisions are identical to those described above for Mr. Hoke’s February 2008employment agreement.

 

*KarenB. Sprague. *In August 2006, we entered into anemployment agreement with Ms. Sprague, under which she agreed to serve aschief operating officer and executive vice president of Atlantic Bancshares andAtlantic Community Bank for a term of three years.  Ms. Sprague’s employment with thecompany will automatically extend for additional terms of one year unless thecompany delivers a notice of termination at least 60 days prior to the end ofthe term.  During this term, Ms. Spragueis entitled to:

 

·                  Initial annual salary of $90,000, which maybe increased periodically by the chief executive officer;

·                  Options to purchase shares of common stockequal to 1% of shares sold during capitalization in accordance with the stockincentive plan approved by the company’s shareholders;

·                  Car allowance of $350 per month;

·                  Participate in our retirement, medical,welfare, and other benefit programs;

·                  Payment of initiation fees and reimbursementfor club dues; and

·                  Reimbursement for travel and businessexpenses.

 

Pursuant to the terms of her employment agreement, Ms. Sprague is prohibited from disclosing our trade secrets or confidential information.  If we terminate Ms. Sprague’s employment without cause, she will be entitled to severance equal to three months of her then base salary.  In addition, following a change in control, if Ms. Sprague terminates her employment for a good reason within a 90-day period beginning on the 30th day following a change in control:

 

·                  She will be entitled to severance equal to 36 months of her then base salary;

·                  The restrictions on any outstanding incentive awards (including restricted stock) granted to her under our long-term equity incentive program or any other incentive plan or arrangement shall lapse and such awards shall become 100% vested, all stock options and stock appreciation rights granted to Ms. Sprague shall become immediately exercisable and shall become 100% vested, and all performance units granted to her shall become 100% vested;

·                  We will continue to pay her life insurance, disability, medical, dental, and hospitalization benefits for three years; and

·                  The restrictive covenants regarding competition and solicitation described below shall not apply.

 

The amounts described above to be paid to Ms. Sprague in connection with a termination following a change in control will be grossed up so as to account for any additional taxes that may be owed as a result of the lump sum payment rather than periodic payments over 36 months.  The provisions in Ms. Sprague’s employment agreement regarding Section 280G payment limitations upon a change in control are identical to those described above for Mr. Trask’s June 2005 employment agreement.

 

During her employment and for a period of 12 months thereafter, Ms. Sprague may not, subject to limited exceptions, (a) compete with us by forming, serving as an organizer, director, or officer of, or acquiring or maintaining an ownership interest in, a depository financial institution or holding company of a depository financial institution, if the depository institution or holding company has one or more offices or branches within our territory, (b) solicit our customers for a competing business, or (c) solicit our employees for a competing business.

 

49

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In February 2008, we entered into a new employmentagreement with Ms. Sprague to serve as executive vice president and chiefoperating officer ofAtlantic Bancshares and Atlantic Community Bank.  Theinitial base salary for Ms. Sprague will be $95,000, which amount is subjectto annual review by the board of directors and may be increased.  The provisions in Ms. Sprague’semployment agreement regarding perquisites, term and termination of employment,benefits payable upon change of control, and Section 280G gross-up paymentsas well as the confidentiality, non-solicitation and non-compete provisions areidentical to those described above for Mr. Hoke’s February 2008employment agreement.

 

###### **OutstandingEquity Awards at Fiscal Year-End**

 
| ** **                                    | ** ** | ** ** | ** ** | **Number of**         | ** ** | ** **               | ** ** | ** **             | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Securities  Underlying** | ** ** | ** **               | ** ** | ** **             | ** ** |
| ** **                                    | ** ** | ** ** | ** ** | **Unexercised  Options**   | ** ** | **Option Exercise** | ** ** | **Option  Expiration** | ** ** |
| **Name**                                      | ** ** | ** ** | ** ** | **Unexercisable**          | ** ** | **Price ($)**       | ** ** | **Date**               | ** ** |
| Robert P. Trask                               |       | Options    | ** ** | **25,032**                 |       | $                        | 10.00      |                   | 07/01/16   |   |
| President and Chief Executive Officer         |       | Warrants   | ** ** | **10,000**                 |       | $                        | 10.00      |                   | 01/26/16   |   |
|                                          |       |       | ** ** | ** **                 |       |                     |       |                   |       |
| Todd D. Hoke  Chief Credit Officer            |       | Options    | ** ** | **12,516**                 |       | $                        | 10.00      |                   | 07/01/16   |   |
|                                          |       |       |       |                       |       |                     |       |                   |       |
| Michelle M.  Pennell  Chief Financial Officer |       | Options    | ** ** | **10,000**                 |       | $                        | 10.00      |                   | 07/01/16   |   |
|                                          |       |       |       |                       |       |                     |       |                   |       |
| Karen B.  Sprague  Chief Operating Officer    |       | Options    | ** ** | **12,516**                 |       | $                        | 10.00      |                   | 07/01/16   |   |

 

----

(1)         The stock options and the warrants provide that one-fifth of theoptions or warrants, as applicable, will vest on each of the first fiveanniversaries of the opening date of the bank (January 26, 2006), but onlyif the executive remains employed by us.

 

Underthe terms of our 2006 stock incentive plan, upon a change of control of ourcompany after March 28, 2009 all options outstanding but not otherwiseexercisable will generally automatically accelerate and become exercisableimmediately before the effective date of the change of control.

 

Fora description of the employment agreements entered into between the company,the bank, and the named executive officers, please see the discussion aboveentitled “Employment Agreements.”

 

**Director Compensation**

 

Ourbylaws permit our directors to receive reasonable compensation as determined bya resolution of the board of directors. We did not pay any directors’ fees during the fiscal year ended December 31,2007.  We may, pursuant to our bylaws,begin to compensate our directors at some time in the future.  In connection with the formation of our bank,in 2006 each director was issuedwarrants for 10,000 shares.  The warrantsvest over a five-year period from the date of the opening date of the bank (January 26,2006), but only if the director continues to serve as a director.  Allunexercised organizer warrants expire on the tenth anniversary of the openingdate of the bank (January 26, 2016), subject to earlier termination incertain circumstances pursuant to individual stock warrant agreements.

 

**Item 11.  Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

The following table shows how much common stock inour company is owned by the directors, certain executive officers, and ownersof more than 5% of the outstanding common stock, as of March 1, 2008.  Unless otherwise indicated, the address ofeach beneficial owner is c/o Atlantic Bancshares, Inc., 1 SheringtonDrive, Suite J, Bluffton, South Carolina 29910.

 

50

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| **Name of Beneficial Owner**                 | ** ** | **Number of  Shares Owned (1)** | ** ** | **Right to Acquire (2)** | ** ** | **% of Beneficial  Ownership(3)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Gary C. Davis                                               |       | 10,000                                         |       | 4,000                                   |       | 1.1                                         | %          |
| Frederick Anthony Nimmer, III                          |       | 12,500                                         |       | 4,000                                   |       | 1.3                                         | %          |
| Robyn Josselson Shirley                                     |       | 12,500                                         |       | 4,000                                   |       | 1.3                                         | %          |
| Mark S. Simpson                                             |       | 12,600                                         |       | 4000                                    |       | 1.3                                         | %          |
| Brian J. Smith                                              |       | 12,500                                         |       | 4,000                                   |       | 1.3                                         | %          |
| Robert P. Trask                                             |       | 15,499                                         |       | 14,014                                  |       | 2.3                                         | %          |
| Allen B. Ward                                               |       | 10,000                                         |       | 4,000                                   |       | 1.1                                         | %          |
| Edgar L. Woods                                              |       | 20,000                                         |       | 4,000                                   |       | 1.9                                         | %          |
| Michelle M. Pennell                                         |       | —                                         |       | 4,000                                   |       |                                        | *          |
| Todd D. Hoke                                                |       | 10,000                                         |       | 5,008                                   |       | 1.2                                         | %          |
| Karen B. Sprague                                            |       | 5,594                                          |       | 5,008                                   |       |                                        | *          |
| First Clearing, LLC  PO Box 6570  Glen Allen, VA 23058-6570 |       | 235,532                                        |       | —                                  |       | 18.1                                        | %          |
|                                                        |       |                                           |       |                                    |       |                                        |       |
| All executive officers and directors(11 persons)            |       | 121,193                                        |       | 56,030                                  |       | 13.6                                        | %          |

 

----

*Indicatesless than 1% ownership.

 

(1)                                 Includes shares for which the named personhas sole voting and investment power, has shared voting and investment power,or holds in an IRA or other retirement plan program, and includes shares heldby a spouse, unless otherwise indicated in these footnotes.

(2)                                  Includes shares that may be acquired withinthe next 60 days of March 1, 2008 by exercising vested stock options orwarrants but does not include any unvested stock options or warrants.

(3)                                 For each individual, this percentage isdetermined by assuming the named person exercises all options and warrantswhich he or she has the right to acquire within 60 days, but that no otherpersons exercise any options or warrants. For the directors and executive officers as a group, this percentage isdetermined by assuming that each director and executive officer exercises alloptions or warrants which he or she has the right to acquire within 60 days,but that no other persons exercise any options. The calculations are based on 1,251,577 shares of common stockoutstanding on March 1, 2008.

 

51

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**Equity Compensation PlanInformation**

 

The following table sets forth the equitycompensation plan information at December 31, 2007.

 
| ** **                                                  | ** ** | ** **                                                                             | ** ** | ** **                                        | ** ** | **Number of securities  remaining available for**        | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Number of securities  to be issued  upon exercise of** | ** ** | **Weighted-average  exercise price of** | ** ** | **future issuance under  equity compensation  plan (c)** | ** ** |
| ** **                                                  | ** ** | **Outstanding options,**                                                          | ** ** | **outstanding options,**                     | ** ** | **(excluding securities**                                               | ** ** |
| **Plan Category**                                      | ** ** | **warrants and rights (a)**                                             | ** ** | **warrants and rights (b)**        | ** ** | **reflected in column (a))**                                  | ** ** |
| Equity compensation plans approved by  security holders     |       | 69,813                                                                                 |       | $                                                 | 10.11      |                                                                         | 180,502    |   |
|                                                        |       |                                                                                   |       |                                              |       |                                                                         |       |
| Equity compensation plans not approved by  security holders |       | 80,000                                                                                 |       | $                                                 | 10.00      |                                                                         | 0          |   |
|                                                        |       |                                                                                   |       |                                              |       |                                                                         |       |
| Total                                                       |       | 149,813                                                                                |       | $                                                 | 10.05      |                                                                         | 180,502    |   |

 

----

(1)          Each of our organizers received, for no additional consideration, awarrant to purchase one share of common stock for every share they purchased inthe initial offering of the company’s common stock up to 10,000 shares at aprice of $10 per share.  The warrants arerepresented by separate warrant agreements. The warrants vest over a five-year period.  All unexercised organizer warrants expire onthe tenth anniversary of the opening date of the bank, subject to earliertermination in certain circumstances pursuant to individual stock warrantagreements.

 

**Item 12.  Certain Relationships and RelatedTransactions, and Director Independence**

 

Weenter into banking and other transactions in the ordinary course of businesswith our directors and officers and their affiliates.  It is our policy that these transactions beon substantially the same terms (including price, or interest rates and collateral)as those prevailing at the time for comparable transactions with unrelatedparties.  We do not expect thesetransactions to involve more than the normal risk of collectability nor presentother unfavorable features to us.  Loansto individual directors and officers must also comply with our bank’s lendingpolicies and statutory lending limits, and directors with a personal interestin any loan application are excluded from the consideration of the loanapplication.  We intend for all of ourtransactions with our affiliates to be on terms no less favorable to us thancould be obtained from an unaffiliated third party and to be approved by amajority of disinterested directors.

 

OnJanuary 1, 2006 we opened a loan production office on the south end ofHilton Head Island. In October 2007, this location was converted into afull service branch.  We leased afacility at 1 Corpus Christi Place, Suite 108, Hilton Head Island, SouthCarolina that has a total of 1,837 square feet for a period of one year with aone-year option to renew.  In August 2006,the organizers of the company, along with other non-organizers, formed aseparate corporate entity which purchased this location that we lease.  The current lease is for a minimum of 10years and provides two 10-year renewal terms.

 

Ourboard of directors has determined that Mr. Davis, Mr. Nimmer, Ms. Shirley,Mr. Simpson, Dr. Smith, Mr. Ward and Mr. Woods are “independent”directors, based upon the independence criteria set forth in the corporategovernance listing standards of The NASDAQ Stock Market, the exchange that weselected in order to determine whether its directors and committee members meetthe independence criteria of a national securities exchange, as required byItem 407(a) of Regulation S-B.

 

Ourboard of directors has created an audit committee, a nominating committee and acompensation committee of the board.  Theboard of directors has determined that the members of each of these committeesare “independent” as contemplated in the listing standards of The NASDAQStock Market.

 

52

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**Item13.  Exhibits.**

 
| 3.1.   |   | Articles of Incorporation (incorporated by reference  to Exhibit 3.1 of the Company’s Form SB-2, File  No. 333-127242).                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 3.2.   |   | Amended and Restated Bylaws (incorporated by reference  to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed  January 26, 2007, File No. 333-127242).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 4.1.   |   | See Exhibits 3.1 and 3.2 for provisions in Atlantic  Bancshares, Inc.’s Articles of Incorporation and Amended and Restated  Bylaws defining the rights of holders of the common stock (incorporated by  reference to such exhibits as filed with the Company’s Form SB-2, File  No. 333-127242). |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 4.2.   |   | Form of certificate of common stock (incorporated  by reference to Exhibit 4.2 of the Company’s Form SB-2, File  No. 333-127242).                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.1   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Robert P. Trask dated  February 8, 2008 (incorporated by reference to Exhibit 10.2 of  the Company’s Current Report on Form 8-K filed February 11, 2008,  File No. 333-127242).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.2   |   | *Revised Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.3  of the Company’s Form 10-KSB for the period ended December 31,  2005).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Sublease  Agreement between Regional Bankshares, Inc. and Atlantic  Bancshares, Inc. dated June 1, 2005 (incorporated by reference to  Exhibit 10.7 of the Company’s Form SB-2, File No. 333-127242).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.4   |   | *Atlantic  Bancshares, Inc. 2006 Stock Incentive Plan and Form of Option Agreement  (incorporated  by reference to Exhibit 10.9 of the Company’s Form 10-KSB for the  period ended December 31, 2005).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.5   |   | Lease  Agreement between Carolina Partners, LLC and Atlantic Bancshares, Inc.  dated January 24, 2006 (incorporated by reference to  Exhibit 10.10 of the Company’s Form 10-KSB for the period ended December 31,  2005).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.6   |   | Commercial  Lease Agreement by and between MB Partners, LLC and Atlantic Community Bank,  dated August 9, 2006 (incorporated by reference to Exhibit 10.1 of  the Company’s Form 10-KSB filed August 10, 2006).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.7   |   | Lease  Agreement between Paradigm Holdings, LLC and Atlantic Community Bank dated  February 5, 2008 (incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed February 11, 2008, File  No. 333-127242).                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.8   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Todd D. Hoke dated  February 8, 2008 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on  Form 8-K filed February 11, 2008, File No. 333-127242).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.9   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Michelle M. Pennell  dated February 8, 2008 (incorporated by reference to Exhibit 10.4  of the Company’s Current  Report on Form 8-K filed February 11, 2008, File No. 333-127242).                                       |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.10  |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Karen B. Sprague dated  February 8, 2008 (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on  Form 8-K filed February 11, 2008, File No. 333-127242).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 21.1   |   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 23.1   |   | Consent  of Elliott Davis, LLC.                                                                                                                                                                                                                                                                                           |

 

53

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| 24.1.  |   | Power of Attorney (filed as part of the signature  page herewith). |
|--------|--------|-------------------------------------------------------------------------|
|   |   |                                                                    |
| 31.1   |   | Rule 15d-14(a) Certification  of the Chief Executive Officer. |
|   |   |                                                                    |
| 31.2   |   | Rule 15d-14(a) Certification  of the Chief Financial Officer. |
|   |   |                                                                    |
| 32     |   | Section 1350  Certifications.                                      |

 

----

*                                         Denotes management contract or compensatoryplan or arrangement required to be filed as an Exhibit to this Annual Reporton Form 10-KSB.

 

**Item 14.  Principal Accountant Fees and Services**

 

ElliottDavis LLC was our auditor during the fiscal years ended December 31, 2007and 2006.  The following table shows thefees that we paid for services performed in the fiscal years ended December 31,2007 and 2006:

 
| ** **     | ** ** | **Year Ended  December 31, 2007** | ** ** | **Year Ended  December 31, 2006** | ** ** |
|----------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
| Audit Fees     |       | $                                                | 37,200     |                                             | $          | 27,180 |   |
| Tax Fees       |       | 3,000                                            |       | 2,000                                            |       |
| All Other Fees |       | 375                                              |       | 575                                              |       |
| Total          | ** ** | **$**                                            | **40,575** | ** **                                       | **$**      | **29,755** | ** ** |

 

*Audit Fees.*This category consists of the audit of the Company’s annual consolidatedfinancial statements and for reviews of the condensed consolidated financialstatements included in the Company’s quarterly reports on Form 10-QSB.

 

*Tax Fees.*  This category includes the aggregate feesbilled for professional services rendered by the principal accountant for taxcompliance, tax advice, and tax planning.

 

*All Other Fees. *This category consists of fees billed toassist in payroll-related matters.

 

*Oversight of Accountants; Approval of Accounting Fees**.*Under the provisions of its charter, theaudit committee is responsible for the retention, compensation, and oversightof the work of the independent auditors. The charter provides that the audit committee must pre-approve the feespaid for the audit.  The policyspecifically prohibits certain non-audit services that are prohibited bysecurities laws from being provided by an independent auditor.  All of the accounting services and feesreflected in the table above were reviewed and approved by the audit committee,and none of the services were performed by individuals who were not employeesof the independent auditor.

 

**SupplementalInformation To Be Furnished With Reports Filed Pursuant to Section 15(d) ofthe Exchange Act by Non-Reporting Issuers**

 

Wewill furnish our proxy materials and audited financial statements to securityholders subsequent to the filing of the annual report on this Form 10-KSB,and will furnish copies of such materials to the SEC when they are sent tosecurity holders.

 

54

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** |                                   | **ATLANTIC BANCSHARES, INC.** |
|------------|----------------------------------------|-------------------------------|
|       |                                   |                          |   |
| Date:      |    March 27,  2008 |                          | By: | /s/  Robert P. Trask |
|       |                                   |                          | Robert  P. Trask |
|       |                                   |                          | President  and Chief Executive Officer |
|            |                                        |                               |  |  |

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signatureappears below constitutes and appoints Robert P. Trask, his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,for him and in his name, place and stead, in any and all capacities, to signany and all amendments to this Annual Report on Form 10-KSB, and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting untoattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that attorney-in-fact and agent, orhis substitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant in the capacities and on thedates indicated.

 
| **Signature**                           | ** ** | **Title**                            | ** ** | **Date**             |
|-----------------------------------------|------------|--------------------------------------|------------|----------------------|
|                                    |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
| /s/  Gary C. Davis                      |       | Director                             |       | March 27,  2008 |
| Gary  C. Davis                          |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
| /s/  Michelle M. Pennell                |       | Chief  Financial Officer and         |       | March 27,  2008 |
| Michelle  M. Pennell                    |       | Principal  Accounting Officer        |       |                 |
|                                    |       |                                 |       |                 |
| /s/  Frederick Anthony Nimmer, III |       | Director                             |       | March 27,  2008 |
| Frederick  Anthony Nimmer, III     |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
| /s/  Robyn Josselson Shirley            |       | Director                             |       | March 27,  2008 |
| Robyn  Josselson Shirley                |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
| /s/ Mark S. Simpson                     |       | Director                             |       | March 27,  2008 |
| Mark S. Simpson                         |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
|                                    |       | Chairman,  Director                  |       |                 |
| Brian  J. Smith                         |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
| /s/  Robert P. Trask                    |       | Chief  Executive Officer, President, |       | March 27,  2008 |
| Robert  P. Trask                        |       | and  Director                        |       |                 |
|                                    |       |                                 |       |                 |
| /s/ Allen B. Ward                       |       | Director                             |       | March 27,  2008 |
| Allen B. Ward                           |       |                                 |       |                 |
|                                    |       |                                 |       |                 |
|                                    |       | Vice  Chairman, Director             |       |                 |
| Edgar  L. Woods                         |       |                                 |       |                 |

 

55

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**Exhibit Index**

 
| 3.1.   |   | Articles of Incorporation (incorporated by reference  to Exhibit 3.1 of the Company’s Form SB-2, File  No. 333-127242).                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 3.2.   |   | Amended and Restated Bylaws (incorporated by reference  to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed  January 26, 2007, File No. 333-127242).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 4.1.   |   | See Exhibits 3.1 and 3.2 for provisions in Atlantic  Bancshares, Inc.’s Articles of Incorporation and Amended and Restated  Bylaws defining the rights of holders of the common stock (incorporated by  reference to such exhibits as filed with the Company’s Form SB-2, File  No. 333-127242). |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 4.2.   |   | Form of certificate of common stock (incorporated  by reference to Exhibit 4.2 of the Company’s Form SB-2, File  No. 333-127242).                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.1   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Robert P. Trask dated February 8,  2008  (incorporated by reference to Exhibit 10.2 of the Company’s Current  Report on Form 8-K filed February 11, 2008, File  No. 333-127242).                                          |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.2   |   | *Revised Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.3  of the Company’s Form 10-KSB for the period ended December 31,  2005).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Sublease  Agreement between Regional Bankshares, Inc. and Atlantic  Bancshares, Inc. dated June 1, 2005 (incorporated by reference to  Exhibit 10.7 of the Company’s Form SB-2, File No. 333-127242).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.4   |   | *Atlantic  Bancshares, Inc. 2006 Stock Incentive Plan and Form of Option  Agreement (incorporated by reference to Exhibit 10.9 of the Company’s  Form 10-KSB for the period ended December 31, 2005).                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.5   |   | Lease  Agreement between Carolina Partners, LLC and Atlantic Bancshares, Inc.  dated January 24, 2006 (incorporated by reference to  Exhibit 10.10 of the Company’s Form 10-KSB for the period ended December 31,  2005).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.6   |   | Commercial  Lease Agreement by and between MB Partners, LLC and Atlantic Community Bank,  dated August 9, 2006 (incorporated by reference to Exhibit 10.1 of the  Company’s Form 10-KSB filed August 10, 2006).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.7   |   | Lease  Agreement between Paradigm Holdings, LLC and Atlantic Community Bank dated  February 5, 2008 (incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed February 11, 2008, File  No. 333-127242).                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.8   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Todd D. Hoke dated  February 8, 2008 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on  Form 8-K filed February 11, 2008, File No. 333-127242).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.9   |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Michelle M. Pennell  dated February 8, 2008 (incorporated by reference to Exhibit 10.4  of the Company’s Current  Report on Form 8-K filed February 11, 2008, File  No. 333-127242).                                      |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.10  |   | *Employment  Agreement between Atlantic Bancshares, Inc. and Karen B. Sprague dated  February 8, 2008 (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on  Form 8-K filed February 11, 2008, File No. 333-127242).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 21.1   |   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 23.1   |   | Consent  of Elliott Davis, LLC.                                                                                                                                                                                                                                                                                           |

 

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| 24.1.  |   | Power of Attorney (filed as part of the signature  page herewith). |
|--------|--------|-------------------------------------------------------------------------|
|   |   |                                                                    |
| 31.1   |   | Rule 15d-14(a) Certification  of the Chief Executive Officer. |
|   |   |                                                                    |
| 31.2   |   | Rule 15d-14(a) Certification  of the Chief Financial Officer. |
|   |   |                                                                    |
| 32     |   | Section 1350  Certifications.                                      |

 

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*                                         Denotes management contract or compensatoryplan or arrangement required to be filed as an Exhibit to this Annual Reporton Form 10-KSB.

 

57

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