U.
S. SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB





T
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





for
the fiscal year ended December 31, 2007





£
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





Commission
File Number  001-15061





ATLANTIC
BANCGROUP, INC.


(Name of
small business issuer in its charter)





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





1315
      South Third Street, Jacksonville Beach, Florida
            32250(Address
      of principal executive offices)
            (Zip
      Code)





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





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





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





Common
Stock, par value $0.01 per share


(Title of
Class)





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





Check
whether the issuer has (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  YES T   NO
£





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





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


YES £   NO
T





The
issuer’s revenues for its most recent fiscal year were $18,487,000.





The
aggregate market value of the common stock of the issuer held by non-affiliates
of the issuer (1,016,955 shares) at February 29, 2008, was approximately $15.9
million based on the initial bid quoted price of $15.65 per share as quoted on
the NASDAQ Capital Market.





As of
February 29, 2008, there were issued and outstanding 1,247,516 shares of the
issuer’s common stock.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 24, 2008, are incorporated into Part III, Items 9 through 13 of
this Annual Report on Form 10-KSB.













ATLANTIC BANCGROUP,INC. AND SUBSIDIARY





TABLE
OF CONTENTS





PagePART
      IForward-Looking Statements
            1Item
      1.
            Description of Business
            2General
            2Competition
            3Lending Activities
            4Deposit Activities
            5Investment Activities
            5Correspondent Banking
            5Interest and Usury
            6Supervision and Regulation
            6Future Legislative Developments
            10Common Stock
            10Preferred Stock
            11Indemnification of Directors and
    Officers
            11Employees
            11Website Availability of Reports Filed with the Securities
      and Exchange Commission
            11Item
      2.
            Description of Properties
            12Item
      3.
            Legal Proceedings
            12Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            12PART
      IIItem
      5.
            Market for Common Equity and Related Stockholder
      Matters
            13Item
      6.
            Management’s Discussion and
Analysis
            13Selected Financial Data
            14Overview
            15Comparison of Years Ended December 31, 2007 and
      2006
            16Comparison of Years Ended December 31, 2006 and
      2005
            18Loan Portfolio
            22Classification of Assets and Nonaccrual or Impaired
      Loans
            24Allowance for Loan Losses
            25Securities
            26Deposits
            27Short-Term and Long-Term Debt
            29Liquidity
            30Off-Balance Sheet Arrangements and Contractual
      Obligations
            31Capital Resources
            31Related Party Transactions
            33Interest Rate Sensitivity
            33Recent Accounting Pronouncements Impacting Future
      Periods
            34Impact of Inflation
            34Quantitative and Qualitative Disclosures About Market
      Risk
            35










PageItem
      7.
            Financial Statements
            36Item
      8.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            61Item
      8A(T).
            Controls and Procedures
            61Item
      8B.
            Other Information
            62PART
      IIIItem
      9.
            Directors, Executive Officers, Promoters, Control Persons,
      and Corporate Governance;Compliance
      with Section 16(a) of the Exchange Act
            62Compliance with Section 16(a) of the Exchange
      Act
            62Code of Ethics
            62Financial Expert
            62Audit Committee Charter
            62Item
      10.
            Executive Compensation
            63Item
      11.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            63Item
      12.
            Certain Relationships and Related Transactions, and
      Director Independence
            63Item
      13.
            Exhibits
            63Item
      14.
            Principal Accountant Fees and Services
            64SIGNATURES
            65EXHIBIT INDEX
            66




Table of Contents


PART
I
 
 
 FORWARD-LOOKING STATEMENTS
 
 Atlantic
BancGroup, Inc., and our wholly-owned banking subsidiary, Oceanside Bank, may
from time to time make written or oral statements, including statements
contained in this report that may constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange
Act”).  The words “expect,” “anticipate,” “intend,” “consider,”
“plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are
intended to identify such forward-looking statements, but other statements may
constitute forward-looking statements.  These statements should be
considered subject to various risks and uncertainties.  Such
forward-looking statements are made based upon management’s belief as well as
assumptions made by, and information currently available to, management pursuant
to “safe harbor” provisions of the Private Securities Litigation Reform Act of
1995.  Our actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of
factors.  Such factors are described below and include, without
limitation:
 
 ·
              Unanticipated deterioration in
      the financial condition of borrowers may result in significant increases
      in loan losses and provisions for those
  losses.
 ·
              If real estate values in our
      target markets continue to decline, our loan portfolio could become
      impaired and losses from loan defaults may exceed our allowance for loan
      and lease losses established for that
  purpose.
 ·
              Weakness in the economy and in
      the real estate market within our geographic footprint may adversely
      affect us.
 ·
              Increased competition with
      other financial institutions may affect our results of operations and
      liquidity.
 ·
              Rapid fluctuations or
      unanticipated changes in interest rates may affect our
      profitability.
 ·
              If our mortgage-backed
      securities portfolio fails to perform, our securities may lose
      value.
 ·
              Changes in the legislative and
      regulatory environment may increase the cost of operations or limit our
      growth.
 ·
              Our common stock is not an
      insured bank deposit and is subject to market
  risk.
 ·
              Although publicly traded, our
      common stock has substantially less liquidity than the average trading
      market for a stock quoted on the NASDAQ Capital Market, and our stock
      price can be volatile.
 
 Many of such factors are beyond our
ability to control or predict.  Readers should not place undue
reliance on any such forward-looking statements, which speak only as to the date
made.  Readers are advised that the factors listed above could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements.  We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
 
 Unless
this Form 10-KSB indicates otherwise or the context otherwise requires, the
terms “we,” “our,” “us,” “Atlantic,” “Holding Company,” or “Oceanside” as used
herein refer collectively to Atlantic BancGroup, Inc. and our subsidiary
Oceanside Bank, which we sometimes refer to as “Oceanside,” “our bank
subsidiary,” or “our bank.”  References herein to the fiscal years
2005, 2006, and 2007 mean our fiscal years ended December 31, 2005, 2006, and
2007, respectively.
  - 1
-
 Table of Contents
  ITEM
      1.
              DESCRIPTION OF
BUSINESS.
 
 General
 
 Atlantic BancGroup,
Inc.On October 23, 1998, Atlantic BancGroup, Inc. (“Atlantic”
or “Holding Company”) was incorporated in the State of Florida.  On
April 3, 1999, the shareholders of Oceanside Bank (“Oceanside” or “Bank”)
approved the Agreement and Plan of Reorganization (“Reorganization”) whereby
Oceanside became a wholly-owned subsidiary of the Holding
Company.  The Reorganization was completed on May 5, 1999. The Holding
Company is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended (the “BHC Act”), and now owns all of the voting shares of
Oceanside.  Our corporate offices are located at 1315 South Third
Street, Jacksonville Beach, Florida.
 
 Atlantic
presently has no significant operations other than the operations of
Oceanside.  Oceanside, which is our primary source of income, is a
state-chartered commercial bank.  Oceanside does not have trust powers
and, accordingly, no trust services are provided.
 
 As is the
case with banking institutions generally, our operations are materially and
significantly influenced by general economic conditions and by related monetary
and fiscal policies of financial institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation, and the State of
Florida Department of Financial Services.  Deposit flows and costs of
funds are influenced by interest rates on competing investments and general
market rates of interest.  Lending activities are affected by the
demand for financing of real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting local demand and availability of funds.  We face
strong competition in attracting deposits (our primary source for funding loans)
and in originating loans.
 
 Oceanside Bank.Oceanside
opened July 21, 1997, and operates as a community bank within our assessment
area.  Oceanside provides general commercial banking services to
businesses and individuals.  The principal business of Oceanside is to
receive demand and time deposits from the public and to make loans and other
investments.  Oceanside operates from a main office located at 1315
South Third Street, Jacksonville Beach, Florida, and three branch offices that
are located at 560 Atlantic Boulevard, Neptune Beach, Florida; 13799 Beach
Boulevard, Jacksonville, Florida; and 1790 Kernan Boulevard South, Jacksonville,
Florida.
 
 Oceanside
has defined its assessment area based on various factors, including its size,
banking offices, geographic boundaries, lending expertise, management, and
competition.  Duval County and three census tracts in the Ponte Vedra
area of St. Johns County have been designated as the institution's assessment
area.  Oceanside draws most of our customer deposits and conducts a
significant portion of our lending transactions from and within our assessment
area, which includes the “Beaches and West Beaches area” of Jacksonville,
Florida.  Duval and St. Johns Counties enjoy an abundant and educated
work force, an attractive business environment, favorable cost-of-living
comparisons to other metropolitan areas in the United States, and a good
relationship between the private and public sectors.
 
 In
general, commercial real estate in the assessment area consists of small
shopping centers and office buildings.  The type of residential real
estate within our assessment area varies, with a number of condominiums,
townhouses, and single-family housing developments dispersed throughout the
area.  New residential growth consists primarily of working
professionals with families.
 
 We
believe that our assessment area is a desirable market in which to operate an
independent, locally-owned bank.  Furthermore, since we have a large
base of local shareholders and communicate frequently with our shareholders,
additional opportunities exist for marketing that might not be found with other
financial institutions in our assessment area.  Our broad base of
shareholders from the Beaches and surrounding areas of Jacksonville, and the
favorable economic environment of our assessment area, should provide us with
the opportunity to gain market share.
 
 As a
locally-owned and operated institution, we emphasize providing prompt,
efficient, and personalized service to individuals, small and medium-sized
businesses, professionals and other local organizations.  Generally,
customers have one account officer to serve all of their banking needs and have
ready access to senior management when necessary.  In addition, our
Board of Directors is responsible for maintaining a visible profile for, and
providing business to, Oceanside within our local community.
 
 - 2
-
 Table of Contents
  Our principal strategy is
to:
  ·
              Expand
      our commercial and small business customer base within our assessment
      area,
 ·
              Make
      real estate mortgage loans within our assessment area, as well as
      throughout Duval County and the surrounding counties,
  and
 ·
              Expand
      our consumer loan base within our assessment
  area.
 
 Our
belief is that the most profitable deposit relationships are characterized by
high deposit balances, low frequency of transactions, and low distribution
requirements.  Being a community bank with local management, we are
well-positioned to establish these relationships with smaller commercial
customers and households.
 
 Our
sources of funds for loans and other investments include demand, time, savings,
and other deposits, amortization and repayment of loans, sales to other lenders
or institutions of loans or participations in loans, and other
borrowings.  Our principal sources of income are interest and fees
collected on loans, and to a lesser extent, interest and dividends collected on
other investments. Our principal expenses are interest paid on savings and other
deposits, interest paid on other borrowings, employee compensation, office
expenses, and other overhead and operational expenses.  We offer
several deposit accounts, including demand deposit accounts, negotiable order of
withdrawal accounts (“NOW” accounts), money market accounts, savings accounts,
certificates of deposit, and various retirement accounts.  During
2005, 2006, and 2007, we also obtained funds from customer repurchase agreements
that have been classified as other borrowings and brokered deposits that have
been classified as other time deposits.
 
 We have
automated teller machines (the “ATMs”) located at each of our offices, and we
are a member of an electronic banking network so that our customers may use the
ATMs of other financial institutions.  We also operate drive-in
tellers and 24-hour depositories at each of our offices.  As part of
the strategy to offer innovative services to our customers, we offer on-line
banking (“Internet Banking”) and Dial-a-Bank (“Telephone Banking”).
 
 Our
efforts are focused on filling the void created by the increasing number of
locally-owned community banks that have been acquired by large regional holding
companies, negatively impacting the personal nature of the delivery, quality,
and availability of banking services in our assessment area and surrounding
areas.
 
 Competition
 
 The
banking industry, in general, and our market, in particular, is characterized by
significant competition for both deposits and lending
opportunities.  In our market area, we compete with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking firms, and various
other nonbank competitors.  Competition for deposits may have the
effect of increasing the rates of interest we will pay on deposits, which would
increase our cost of money and possibly reduce our net
earnings.  Competition for loans may have the effect of lowering the
rate of interest we will receive on our loans, which would lower our return on
invested assets and possibly reduce our net earnings.  Many of our
competitors have been in existence for a significantly longer period of time
than us, are larger and have greater financial and other resources and lending
limits than us, and may offer certain services that we do not provide at this
time.  However, we feel the market is rich with opportunity to provide
tailor-made custom banking products and services that cannot be provided by the
large institutions that offer many banking products and services on an
impersonal basis.  As larger financial institutions have in recent
years acquired community banks, we are able to cater to those customers looking
for more personalized service.
 
 Our
profitability depends upon our ability to compete in this market
area.  At the present time, we are unable to predict to what degree
competition may adversely affect our financial condition and operating
results.
 
 Our
response to this highly competitive environment dictates that we:
 
 ·
              review
      and act upon loan requests quickly with a locally-based loan
      committee,
 ·
              maintain
      flexible, but prudent lending
policies,
 ·
              personalize
      service with emphasis on establishing long-term banking relationships with
      our customers, and
 ·
              maintain
      a strong ratio of employees to customers to enhance the level of
      service.
  - 3
-
 Table of Contents
  Lending Activities
 
 We offer
a wide range of loans to individuals and small businesses and other
organizations that are located, or conduct a substantial portion of their
business, in our assessment area.  At December 31, 2007, our
consolidated total loans were $204.1 million, or 78.1%, of our total
consolidated assets.  The interest rates charged on loans vary with
the degree of risk, maturity, and amount of the loan, and are further subject to
competitive pressures, money market rates, availability of funds, and government
regulations.  We have no foreign loans or loans for highly-leveraged
transactions.
 
 Our loan
portfolio is concentrated in three major areas: real estate loans, commercial
loans, and consumer and other loans.  A majority of our loans are made
on a secured basis.  As of December 31, 2007, approximately 92% of our
total loan portfolio consisted of loans secured by mortgages on real
estate.  Of the total loans secured by mortgages on real estate,
approximately 46% are secured by nonfarm nonresidential properties (commercial
real estate) and 28% are construction, land development, and other land loans,
secured by real estate.  The remaining 26% are secured by 1-4 family
and multifamily residential properties.
 
 Our real
estate loans are secured by mortgages and consist primarily of loans to
individuals and businesses for the purchase, improvement of, refinance of, or
investment in, real estate and for the construction of 1-4 family residential
units or the development of single-family residential building
lots.  These real estate loans may be made at fixed or variable
interest rates.  We generally do not make fixed-rate commercial real
estate loans for terms exceeding three to five years.  Loans in excess
of three to five years are generally adjustable rate
loans.  Residential real estate loans ordinarily are repayable in
monthly installments, based on up to a 30-year amortization schedule, with
variable interest rates.
 
 We also
solicit, accept applications for, and negotiate terms and conditions for
fixed-rate and other residential mortgage loans on behalf of our customers that
we broker to third-party correspondent mortgage lenders.  During 2007,
2006, and 2005, we brokered loans totaling $7.6 million, $11.0 million and $12.7
million, respectively, which were closed by the correspondent mortgage
lenders.  We recorded brokering fees of $69,000, $119,000, and
$114,000 in 2007, 2006, and 2005, respectively.  Our ability to
solicit, process, and broker residential mortgage loans is highly dependent on
the general economy and interest rate environment, the health of the residential
real estate market, and competition from other local and national mortgage
bankers and brokers.
 
 Our
commercial loans include loans to individuals and small-to-medium-sized
businesses located primarily in Duval and St. Johns Counties for working
capital, equipment purchases, and various other business purposes.  A
majority of commercial loans are secured by real estate, equipment, or similar
assets, but these loans may also be made on an unsecured basis. Commercial loans
may be made at variable or fixed rates of interest.  Commercial lines
of credit are typically granted on a one-year basis, with loan
covenants.  Other commercial loans with terms or amortization
schedules of longer than one year will normally be made at interest rates that
vary with the prime lending rate and will become payable in full in three to
five years.  Commercial loans not secured by real estate amounted to
approximately 6% of our total loan portfolio as of December 31,
2007.
 
 Our
consumer loans and other loans consist primarily of loans to individuals for
various consumer purposes, but include some business-purpose loans which are
payable on an installment basis.  The majority of these loans are for
terms of less than five years and are secured by liens on various personal
assets of the borrowers; however, consumer loans may also be made on an
unsecured basis.  Consumer loans are made at fixed and variable
interest rates, and are often based on an amortization schedule of up to five
years.  Consumer and other loans represent approximately 2% of our
total loan portfolio at December 31, 2007.
 
 Loan
originations are derived from a number of sources.  Loan originations
can be attributed to direct solicitation by our loan officers, referrals from
existing customers and borrowers, advertising, walk-in customers, and, in some
instances, referrals from brokers.
 
 Certain
credit risks are inherent in making loans.  These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers.  In particular, longer
maturities increase the risk that economic conditions will change and adversely
affect collectibility.  We attempt to minimize loan losses through
various means.  In particular, on larger loans, we generally rely on
the cash flow of a debtor as the source of repayment and secondarily on the
value of the underlying collateral.  In addition, shorter loan terms
are utilized in order to reduce the risk of a decline in the value of such
collateral.
  - 4
-
 Table of Contents
  Real
estate values and real estate markets are generally affected by, among other
things, changes in national, regional or local economic conditions; fluctuations
in interest rates and the availability of loans to potential purchasers; changes
in the tax laws and other governmental statutes, regulations and policies; and
acts of nature.  Over the latter part of 2007, real estate prices in
our markets have declined and if real estate prices continue to decline, the
value of the real estate collateral securing our loans could be
reduced.  Such a reduction in the value of our collateral could
increase the number of non-performing loans and adversely affect our financial
performance.
 
 If the
strength of the local economy in which we conduct operations declines, or
continues to decline, this could result in, among other things, a deterioration
of credit quality or a reduced demand for credit, including a resultant effect
on our loan portfolio and allowance for loan and lease losses.  The
vast majority of our loan portfolio is secured by real estate or other
commercial assets in our market.  Certain markets in Florida have been
particularly adversely affected by declines in real estate value, declines in
home sale volumes, and declines in new home building.  These declines
may also adversely affect the general economy in our markets.  These
factors could result in higher delinquencies and greater charge-offs in future
periods, which would adversely affect our financial condition and results of
operations.
 
 Deposit Activities
 
 Deposits
are our major source of funds for loans and other investment
activities.  At December 31, 2007, our regular savings, demand, NOW,
and money market deposit accounts comprised approximately 33% of our
consolidated total deposits.  Approximately 41% of our consolidated
deposits at December 31, 2007, were certificates of deposit (or time deposits)
of less than $100,000.  Time deposits of $100,000 and over made up
approximately 26% of our consolidated total deposits at December 31,
2007.  Generally, our goal is to maintain the rates paid on our
deposits at a competitive level.  Brokered deposits of $17.9 million,
or approximately 8%, of consolidated total deposits at December 31, 2007, are
included in time deposits of $100,000 or less.
 
 Investment Activities
 
 We are
permitted to invest a portion of our assets in U.S. Government agency, state,
county, and municipal obligations, certificates of deposit, collateralized
mortgage obligations (“CMOs”), and federal funds sold.  Our
investments are managed in relation to loan demand and deposit growth, and are
generally used to provide for the investment of excess funds at minimal risks
while providing liquidity to fund increases in loan demand or to offset
fluctuations in deposits.
 
 Our total
investment portfolio may be invested in U.S. Treasury and general obligations of
its agencies and state, county, and municipal obligations because such
securities generally represent a minimal investment
risk.  Occasionally, we purchase certificates of deposits of national
and state banks.  These investments may exceed $100,000 in any one
institution (the current limit of FDIC insurance for deposit
accounts).  CMOs are secured with Federal National Mortgage
Association (“FNMA”) and General National Mortgage Association (“GNMA”)
mortgage-backed securities and generally have a shorter life than the stated
maturity.  Federal funds sold is the excess cash we have available
over and above daily cash needs.  We invest this money on an overnight
basis with approved correspondent banks.
 
 We
monitor changes in financial markets that may affect our portfolio
investments.  We also monitor our daily cash position to ensure that
all available funds earn interest at the earliest possible date.
 
 A portion
of our investment account is designated as primary reserves and invested in
liquid securities that can be readily converted to cash with minimum risk of
market loss.  These investments usually consist of U.S. Treasury
obligations, U.S. government agencies, and federal funds.  The
remainder of our investment account (or secondary reserves) may be placed in
investment securities of different types and longer maturities.  The
maturities of our securities are staggered whenever possible so as to produce a
steady cash flow in the event we need cash, or economic conditions change to a
more favorable rate environment.
 
 Correspondent Banking
 
 Correspondent
banking involves one bank providing services to another bank that cannot provide
those services for itself from an economic, regulatory, or practical
standpoint.  We purchase correspondent services offered by larger
banks, including check collections, purchase of federal funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations, and sales of loans to, or participation with,
correspondent banks.  We have ongoing banking relationships with
several correspondent banks.  We also sell loan participations to
correspondent banks with respect to loans that would exceed our lending
limit.
  - 5
-
 Table of Contents
  Interest and Usury
 
 Like
other commercial banks, we are subject to state and federal statutes that affect
the interest rates that may be charged on loans.  These laws do not,
under present market conditions, deter us from continuing the process of
originating loans.
 
 Supervision and Regulation
 
 Both the
Holding Company and Oceanside are subject to comprehensive regulation,
examination, and supervision by the Federal Reserve, the Florida Department of
Financial Services (“Department”) and the Federal Deposit Insurance Corporation
(“FDIC”) and are subject to other laws and regulations applicable to bank
holding companies and banks. Such regulations include limitations on loans to
any single borrower and to our directors, officers, and employees; restrictions
on the opening and closing of branch offices; the maintenance of required
capital and liquidity ratios; the granting of credit under equal and fair
conditions; disclosure of the costs and terms of such credit; and restrictions
as to permissible investments.  The Holding Company is examined
periodically by the Federal Reserve, and the Bank is regularly examined by the
Department and the FDIC.  Both the Bank and the Holding Company submit
periodic reports regarding their financial condition and other matters to their
respective regulators.  These agencies have a broad range of powers to
enforce regulations under their respective jurisdictions, and to take
discretionary actions determined to be for the protection of the safety and
soundness of the Holding Company and Oceanside, including the issuance of cease
and desist orders and the removal of directors and officers.
 
 The
following is a brief summary of certain statutes, rules, and regulations
affecting us and our subsidiary bank. This summary is qualified in its entirety
by reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations applicable to our business and subsidiary bank. Supervision,
regulation, and examination of banks by regulatory agencies are intended
primarily for the protection of depositors, rather than
shareholders.
 
 Bank Holding Company
Regulation.  Atlantic is a bank holding company, registered
with the Federal Reserve under the BHC Act.  As such, Atlantic is
subject to the supervision, examination and reporting requirements of the BHC
Act and the regulations of the Federal Reserve.  The BHC Act requires
that a bank holding company obtain the prior approval of the Federal Reserve
before (i) acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any bank or bank holding company, (ii) acquiring all or
substantially all of the assets of a bank, or (iii) merging or consolidating
with any other bank holding company.
 
 The BHC
Act further provides that the Federal Reserve may not approve any transaction
that would result in a monopoly or would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any
section of the United States, or the effect of which may be to substantially
lessen competition or to tend to create a monopoly in any section of the
country, or that in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served.  The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience, and needs of the community to
be served.  Consideration of financial resources generally focuses on
capital adequacy and consideration of convenience and needs issues includes the
parties’ performance under the Community Reinvestment Act (“CRA”).
 
 Except as
authorized by the Gramm-Leach-Bliley Act of 1999, the BHC Act generally
prohibits a bank holding company from engaging in activities other than banking,
or managing or controlling banks or other permissible subsidiaries, and from
acquiring or retaining direct or indirect control of any company engaged in any
activities other than those activities determined by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.  In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices.  For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and certain insurance underwriting
activities have all been determined by regulations of the Federal Reserve to be
permissible activities of bank holding companies.  Despite prior
approval, the Federal Reserve has the power to order a holding company or its
subsidiaries to terminate any activity or terminate its ownership or control of
any subsidiary, when it has reasonable cause to believe that continuation of
such activity or such ownership or
  - 6
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 Table of Contents
  control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
 
 Under
federal law, federally insured banks are subject, with some exceptions, to
certain restrictions on any extension of credit to their parent holding
companies or other affiliates, on investment in the stock or other securities of
affiliates, and on the taking of such stock or securities as collateral from any
borrower.  In addition, banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the providing
of any property or service.
 
 Gramm-Leach-Bliley
Act.  Enacted in 1999, the Gramm-Leach-Bliley Act reforms and
modernizes certain areas of financial services regulation.  The law
permits the creation of financial services holding companies that can offer a
full range of financial products under a regulatory structure based on the
principle of functional regulation.  The legislation eliminates the
legal barriers to affiliations among banks and securities firms, insurance
companies, and other financial services companies.  The law also
provides financial organizations with the opportunity to structure these new
financial affiliations through a holding company structure or a financial
subsidiary.  The law reserves the role of the Federal Reserve Board as
the supervisor for bank holding companies.  At the same time, the law
also provides a system of functional regulation which is designed to utilize the
various existing federal and state regulatory bodies.  The law also
sets up a process for coordination between the Federal Reserve Board and the
Secretary of the Treasury regarding the approval of new financial activities for
both bank holding companies and national bank financial
subsidiaries.
 
 The law
also includes a minimum federal standard of financial
privacy.  Financial institutions are required to have written privacy
policies that must be disclosed to customers. The disclosure of a financial
institution’s privacy policy must take place at the time a customer relationship
is established and not less than annually during the continuation of the
relationship. The act also provides for the functional regulation of bank
securities activities.  The law repeals the exemption that banks were
afforded from the definition of “broker,” and replaces it with a set of limited
exemptions that allow the continuation of some historical activities performed
by banks.  In addition, the act amends the securities laws to include
banks within the general definition of dealer. Regarding new bank products, the
law provides a procedure for handling products sold by banks that have
securities elements.  In the area of CRA activities, the law generally
requires that financial institutions address the credit needs of low-to-moderate
income individuals and neighborhoods in the communities in which they
operate.  Bank regulators are required to take the CRA ratings of a
bank or of the bank subsidiaries of a holding company into account when acting
upon certain branch and bank merger and acquisition applications filed by the
institution.  Under the law, financial holding companies and banks
that desire to engage in new financial activities are required to have
satisfactory or better CRA ratings when they commence the new
activity.
 
 FDIC and Other Banking
Regulations.  Our deposit accounts are insured by the Bank
Insurance Fund (“BIF”) of the FDIC up to a maximum of $100,000 per insured
depositor.  Beginning April 1, 2006, the FDIC began insuring
retirement accounts up to $250,000.  The FDIC issues regulations,
conducts periodic examinations, requires the filing of reports, and generally
supervises the operations of its insured banks.  The approval of the
FDIC is required prior to a merger or consolidation or the establishment or
relocation of an office facility.  This supervision and regulation is
intended primarily for protection of depositors and not
stockholders.
 
 The
Federal Reserve and bank regulatory agencies require bank holding companies and
financial institutions to maintain capital at adequate levels based on a
percentage of assets and off-balance sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Under the risk-based standard, capital is classified
into two tiers.  Tier 1 capital consists of common shareholders’
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets.  Tier 2 capital consists of the
general allowance for loan losses except for certain limitations.  An
institution’s qualifying capital base for purposes of its risk-based capital
ratio consists of the sum of its Tier 1 and Tier 2 capital.  The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based
capital.  At December 31, 2007, Oceanside’s Tier 1 and total
risk-based capital ratios were 9.33% and 10.26%, respectively.  Under
current regulations, bank holding companies with consolidated assets under $500
million are not required to calculate and report risk-based capital
ratios.
 
 Bank
holding companies and banks are also required to maintain capital at a minimum
level based on average total assets, which is known as the leverage
ratio.  The minimum requirement for the leverage ratio is 3%; however,
all but the highest rated institutions are required to maintain ratios 100 to
200 basis points above the minimum.  At December 31, 2007, Oceanside’s
leverage ratio was 8.53 %, which was 3.53% in excess of its required 5.00%. The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
contains “prompt corrective action” provisions pursuant to which banks are to be
classified into one of five categories based upon capital
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  adequacy,
ranging from “well-capitalized” to “critically undercapitalized” and which
require (subject to certain exceptions) the appropriate federal banking agency
to take prompt corrective action with respect to an institution that becomes
“significantly undercapitalized” or “critically undercapitalized.”
 
 The FDIC
has issued regulations to implement the “prompt corrective action” provisions of
FDICIA. In general, the regulations define the five capital categories as
follows:
 
 ·
              an
      institution is “well-capitalized” if it has a total risk-based capital
      ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
      greater, has a leverage ratio of 5% or greater and is not subject to any
      written capital order or directive to meet and maintain a specific capital
      level for any capital measures;
 ·
              an
      institution is “adequately capitalized” if it has a total risk-based
      capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of
      4% or greater, and has a leverage ratio of 4% or
  greater;
 ·
              an
      institution is “undercapitalized” if it has a total risk-based capital
      ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less
      than 4% or has a leverage ratio that is less than
  4%;
 ·
              an
      institution is “significantly undercapitalized” if it has a total
      risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
      ratio that is less than 3% or a leverage ratio that is less than 3%;
      and
 ·
              an
      institution is “critically undercapitalized” if its “tangible equity” is
      equal to or less than 2% of its total
assets.
 
 After an
opportunity for a hearing, the FDIC has the authority to downgrade an
institution from “well-capitalized” to “adequately capitalized” or to subject an
“adequately capitalized” or “undercapitalized” institution to the supervisory
actions applicable to the next lower category for supervisory
concerns.
 
 The
“prompt corrective action” provisions of FDICIA also provide that, in general,
no institution may make a capital distribution if it would cause the institution
to become “undercapitalized.”  Capital distributions include cash (but
not stock) dividends, stock purchases, redemptions, and other distributions of
capital to the owners of an institution.
 
 FDICIA
also contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
 
 As of
December 31, 2007, Oceanside met the capital requirements of a
“well-capitalized” institution.
 
 Maximum Legal Interest
Rates.  Like the laws of many states, Florida law contains
provisions on interest rates that may be charged by banks and other lenders on
certain types of loans. Numerous exceptions exist to the general interest
limitations imposed by Florida law.  The relative importance of these
interest limitation laws to the financial operations of Oceanside will vary from
time to time, depending on a number of factors, including conditions in the
money markets, the costs and availability of funds, and prevailing interest
rates.
 
 Bank
Branching.  Banks in Florida are permitted to branch
state-wide.  Such branch banking, however, is subject to prior
approval by the Department and the FDIC.  Any such approval would take
into consideration several factors, including the bank’s level of capital, the
prospects and economics of the proposed branch office, and other conditions
deemed relevant by the Department and the FDIC for purposes of determining
whether approval should be granted to open a branch office.
 
 The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, provides
for nationwide interstate banking and branching. Under the law, interstate
acquisitions of banks or bank holding companies in any state by bank holding
companies in any other state are permissible. Interstate branching and
consolidation of existing bank subsidiaries in different states is
permissible.  Florida has a law that allows out-of-state bank holding
companies (located in states that allow Florida bank holding companies to
acquire banks and bank holding companies in that state) to acquire Florida banks
and Florida bank holding companies.  The law essentially provides for
out-of-state entry by acquisition only (and not by interstate branching) and
requires the acquired Florida bank to have been in existence for at least three
years.
 
 Dividend
Restrictions.  In addition to dividend restrictions placed on
Oceanside by the FDIC based on Oceanside’s minimum capital requirements, the
Florida Financial Institutions
Codeprohibits the declaration of dividends in certain
circumstances.  Section 658.37, Florida Statutes, prohibits
the declaration of any dividend until a bank has charged off bad debts,
depreciation, and other worthless assets, and has made provision for
reasonably-anticipated future losses on loans and other assets. Such a dividend
is limited to the aggregate of the net profits of the dividend period combined
with a bank’s retained net profits of the preceding two years.  A bank
may declare a dividend from
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  retained
net profits accruing prior to the preceding two years with the approval of the
Department. However, a bank will be required, prior to the declaration of a
dividend on its common stock, to carry 20% of its net profits for such preceding
period as is covered by the dividend to its surplus fund, until the surplus fund
equals at least the amount of the bank’s common and preferred stock then issued
and outstanding.  In no event may a bank declare a dividend at any
time in which its net income from the current year, combined with the retained
net income from the preceding two years is a loss or which would cause the
capital accounts of the bank to fall below the minimum amount required by law,
regulation, order, or any written agreement with the Department or the
FDIC.  We currently do not intend to pay a cash
dividend.  Instead, we are using our earnings to support our
growth.
 
 Change of
Control.  Federal law restricts the amount of voting stock of a
bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank or bank holding company by tender offer or
similar means than another type of corporation.  Consequently,
shareholders of Atlantic may be less likely to benefit from the rapid increases
in stock prices that may result from tender offers or similar efforts to acquire
control of other companies.  Federal law also imposes restrictions on
acquisitions of stock in a bank holding company and a state
bank.  Under the federal Change in Bank Control Act and the
regulations thereunder, a person or group must give advance notice to the
Federal Reserve before acquiring control of any bank holding company and the
FDIC before acquiring control of any state bank (such as
Oceanside).  Upon receipt of such notice, the FDIC may approve or
disapprove the acquisition.  The Change in Bank Control Act creates a
rebuttable presumption of control if a member or group acquires 10% or more of a
bank holding company’s or state bank’s voting stock, and if one or more other
control factors set forth in the Act are present.
 
 Enforcement
Powers.  Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and
orders.  Among other things, the agencies may require that
institutions cease and desist from certain activities, may preclude persons from
participating in the affairs of insured depository institutions, may suspend or
remove deposit insurance, and may impose civil money penalties against
institution-affiliated parties for certain violations.
 
 Effect of Governmental
Policies.  Our business and earnings are affected by the
policies of various regulatory authorities of the United States, especially the
Federal Reserve.  The Federal Reserve, among other things, regulates
the supply of credit and deals with general economic conditions within the
United States.  The instruments of monetary policy employed by the
Federal Reserve for those purposes influence in various ways the overall level
of investments, loans, other extensions of credit, and deposits, and the
interest rates paid on liabilities and received on assets.
 
 Corporate
Governance.  The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley
Act” or “SOX”), which became law on July 30, 2002, added new legal requirements
for public companies affecting corporate governance, accounting and corporate
reporting.  Some of the principal provisions of the Act
include:
 
 ·
              the creation of an independent
      accounting oversight board to oversee the audit of public companies and
      auditors who perform such
audits;
 ·
              auditor independence provisions
      which restrict non-audit services that independent accountants may provide
      to their audit clients;
 ·
              additional corporate governance
      and responsibility measures which (a) require the chief executive officer
      and chief financial officer to certify financial statements and internal
      controls and to forfeit salary and bonuses in certain situations, and (b)
      protect whistleblowers and
informants;
 ·
              expansion of the authority and
      responsibilities of the company’s audit, nominating and compensation
      committees;
 ·
              mandatory disclosure by analysts
      of potential conflicts of interest;
and
 ·
              enhanced penalties for fraud and
      other violations.
 
 USA Patriot
Act.  As part of the USA Patriot Act, signed into law on
October 26, 2001, Congress adopted the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001 (the “Act”).  The Act
authorizes the Secretary of the Treasury, in consultation with the heads of
other government agencies, to adopt special measures applicable to financial
institutions such as banks, bank holding companies, broker-dealers and insurance
companies.  Among its other provisions, the Act requires each
financial institution: (i) to establish an anti-money laundering program; (ii)
to establish due diligence policies, procedures and controls that are reasonably
designed to detect and report instances of money laundering in United States
private banking accounts and correspondent accounts maintained for non-United
States persons or their representatives; and (iii) to avoid
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  establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign shell bank that does not have a physical
presence in any country.  In addition, the Act expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120
hours.
 
 Treasury
regulations implementing the due diligence requirements were issued in
2002.  These regulations required minimum standards to verify customer
identity, encouraged cooperation among financial institutions, federal banking
agencies, and law enforcement authorities regarding possible money laundering or
terrorist activities, prohibited the anonymous use of “concentration accounts,”
and required all covered financial institutions to have in place an anti-money
laundering compliance program.
 
 The Act
also amended the Bank Holding Company Act and the Bank Merger Act to require the
federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts.  In the past three years, both state and federal
banking regulators have significantly increased enforcement of the Act and other
anti-money laundering laws and regulations, including levying civil money
penalties and seeking cease and desist orders.
 
 Check 21.On October 28, 2003,
President Bush signed into law the Check Clearing for the 21st Century Act, also
known as Check 21.  This law gives “substitute checks,” such as a digital
image of a check and copies made from that image, the same legal standing as the
original paper check.  Some of the major provisions include:
 
 ·
              allowing check truncation without
      making it mandatory;
 ·
              demanding that every financial
      institution communicate to accountholders in writing a description of its
      substitute check processing program and their rights under the
      law;
 ·
              legalizing substitutions for and
      replacements of paper checks without agreement from
      consumers;
 ·
              retaining in place the previously
      mandated electronic collection and return of checks between financial
      institutions only when individual agreements are in
      place;
 ·
              requiring that when
      accountholders request verification, financial institutions produce the
      original check (or a copy that accurately represents the original) and
      demonstrate that the account debit was accurate and valid;
      and
 ·
              requiring recrediting of funds to
      an individual’s account on the next business day after a consumer proves
      that the financial institution has
erred.
 
 This new
legislation will likely continue to affect bank capital spending as many
financial institutions assess whether technological or operational changes are
necessary to stay competitive and take advantage of the new opportunities
presented by Check 21.
 
 Future Legislative Developments
 
 Various
legislative acts, including proposals to modify the bank regulatory system,
expand the powers of banking institutions and financial holding companies and
limit the investments that a depository institution may make with insured funds,
are from time to time introduced in Congress and the Florida
legislature.  Such legislation may change banking statutes and the
environment in which we and our banking subsidiary operate in substantial and
unpredictable ways.  We cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon our financial condition or results of operations or
that of our banking subsidiary.
 
 Common Stock
 
 We have
10,000,000 shares of our $0.01 par value common stock authorized.  As
of February 29, 2008, there were 1,247,516 shares
outstanding.  Holders of our common stock are entitled to one vote for
each share held of record on all matters to be voted on by
stockholders.  Upon liquidation, dissolution, or winding-up, holders
of our common stock are entitled to receive pro rata all assets remaining
legally available for distribution to shareholders.  The holders of
common stock have no right to cumulate their votes in the election of
directors.  The common stock has no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares.  All of the outstanding shares
of common stock are fully paid and non-assessable.
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 Table of Contents
  Preferred Stock
 
 In
addition to the 10,000,000 shares of authorized common stock, our Articles of
Incorporation authorize up to 2,000,000 shares of preferred
stock.  The Board of Directors is further authorized to establish
designations, powers, preferences, rights, and other terms for preferred stock
by resolution.  No shares of preferred stock have been
issued.
 
 Indemnification of Directorsand Officers
 
 Our
Bylaws afford indemnification rights to our officers and directors to the
fullest extent permitted or required by the Florida Business Corporation
Act.
 
 Under
Section 607.0850 of the Florida Business Corporation Act, officers and directors
of a Florida corporation may be entitled to indemnification by the corporation
against liability incurred in connection with any threatened, pending, or
completed action, suit, or other type of proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal; provided,
however, that such officer or director acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful.  Such
indemnification includes obligations to pay a judgment, settlement, penalty,
fine, and expenses actually and reasonably incurred with respect to a
proceeding.  In addition, Florida law provides that officers and
directors shall be indemnified by a Florida corporation against expenses
actually and reasonably incurred by such officer or director, to the extent that
such officer or director has been successful on the merits or otherwise in
defense of any proceeding (as defined in Section 607.0850) or in defense of any
claim, issue, or matter therein.
 
 In
addition, Section 607.0831 of the Florida Business Corporation Act provides that
a director is not personally liable for monetary damages to a corporation or any
other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless such director breached or
failed to perform such duties as a director and such breach or failure to
perform constitutes:
 
 ·
              a
      violation of the criminal law, unless the director had reasonable cause to
      believe the conduct was lawful or had no reasonable cause to believe the
      conduct was unlawful;
 ·
              a
      transaction from which the director derived an improper personal benefit,
      either directly or indirectly;
 ·
              a
      circumstance involving a director’s liability for unlawful distributions
      under the Florida Business Corporation
Act;
 ·
              in
      proceedings by or in the right of the corporation to procure a judgment or
      by or in the right of a shareholder, conscious disregard for the best
      interest of the corporation, or willful misconduct;
  or
 ·
              in
      a proceeding by or in the right of someone other than the corporation or a
      shareholder, recklessness or an act or omission which was committed in bad
      faith or with malicious purpose or in a manner exhibiting wanton and
      willful disregard of human rights, safety, or
  property.
 
 Employees
 
 At
December 31, 2007, we had approximately 50 full-time employees and 6 part-time
employees for a full-time employee equivalent of 53.  No significant
changes in the number of our full-time employees are currently
anticipated.  Because we believe that one of the primary deficiencies
of large regional banks is the constant turnover of personnel and therefore the
lack of continuing personal relationships with local customers, our goal is to
maintain a competently trained staff of local bankers who have settled in the
community on a permanent basis.  To maintain a skilled and
knowledgeable staff, we allocate funds for continuing on-the-job and educational
training, and employees are encouraged to enroll in various banking courses and
other seminars to improve their overall knowledge of the banking
business.
 
 The
employees are not represented by a collective bargaining unit.  We
consider relations with employees to be good.
 
 Website Availabilityof Reports Filed with the Securities and
Exchange Commission
 
 We
maintain an Internet website located at www.oceansidebank.com on which, among
other things, we make available, free of charge, various reports that we file
with, or furnish to, the SEC, including our Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and amendments to
those reports. These reports are made available as soon as reasonably
practicable after these reports are filed with, or furnished to, the
SEC.
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 Table of Contents
  ITEM
      2.
              DESCRIPTION OF
PROPERTIES.
 
 On
October 29, 1996, Oceanside purchased from an unaffiliated entity the two-story,
3,100 square-foot building at 1315 South Third Street, Jacksonville Beach,
Florida, as our main office (“Main Office”).  The Main Office includes
three inside teller stations, four drive-up teller windows, an automated teller
machine, and on-site parking.  The Main Office is a former Barnett
Bank branch office.  Oceanside purchased the real property for
$850,000 and used a portion of the proceeds of the initial offering of
Atlantic’s common stock to add 2,200 square feet to the
facility.  Oceanside originally acquired the Main Office with funds
drawn on a line of credit with Columbus Bank and Trust Company, which was repaid
out of the proceeds of Atlantic’s initial offering.  Improvements
totaling approximately $481,000, net of disposals, have been made through
December 31, 2007.
 
 On June
3, 1998, Oceanside purchased from SouthTrust Bank, N.A., a 1,968 square-foot
building and real estate located at 560 Atlantic Boulevard, Neptune Beach,
Florida.  This facility was formerly a branch office of SouthTrust
Bank, N.A.  Oceanside purchased this building for $427,000 and,
subsequently spent $93,000 on renovations and upgrades, net of
disposals.  This facility includes two offices, three inside teller
windows, general lobby space, three drive-up teller windows, an ATM, and on-site
parking.  There is no outstanding mortgage loan on this
property.
 
 On
September 27, 2000, Oceanside executed a lease for our third banking location,
which opened in the third quarter of 2001. This branch is located at 13799 Beach
Boulevard, Jacksonville, Florida.  The lease, which commenced upon
execution, covers approximately 9,000 square feet. In addition to the branch,
other operations of Atlantic and Oceanside were relocated to this
facility.  Rent commenced in May 2002, which was one year from the
date of completion of the landlord’s work, and expires ten years thereafter,
with two five-year renewal options.  No rent was paid in the first
year after completion of the landlord’s work.  Oceanside acquired an
additional 2,200 square feet of rental space during 2004 adjacent to the
operations area for its loan operations department.  Scheduled annual
rent payments for 2008 through 2011 for the branch and loan operations
are:  2008 - $234,000; 2009 - $241,000; 2010 - $248,000; and 2011 -
$84,000.  Building improvements totaled $949,000, net of
disposals.
 
 On August
22, 2002, Oceanside executed a lease for our newest branch location, which
opened December 15, 2003. This branch is located at the intersection of Kernan
and Atlantic Boulevards, at 1790 Kernan Boulevard South, Jacksonville,
Florida.  The land lease covers approximately 42,000 square
feet.  The Bank constructed the branch building totaling approximately
3,200 square feet at a cost of approximately $1,388,000.  Rent
commenced in September 2003.  The lease is for twenty years with two
ten-year renewal options.  Scheduled annual rent payments
are:  2008 - $78,000; 2009-2012 - $84,000; 2013 - $87,000; 2014-2017 -
$94,000; 2018 - $100,000; 2019-2022 - $103,000; and 2023 - $69,000.
 
 We
believe all of our facilities are in good condition and
well-maintained.
   ITEM
      3.
              LEGAL PROCEEDINGS.
 
 We are
periodically parties to or otherwise involved in legal proceedings arising in
the normal course of business, such as claims to enforce liens, claims involving
the making and servicing of real property loans, and other issues incident to
our operations.
 
 We do not
believe that there are any pending or threatened proceedings against us, which,
if determined adversely, would have a material effect on our consolidated
financial position.
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS.
 
 No
matters were submitted to a vote of Atlantic’s security holders during the
fourth quarter of the year ended December 31, 2007.
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 Table of Contents
  PART
II
 
 
 ITEM
      5.
              MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS.
 
 Prior to
October 28, 1999, the shares of Atlantic common stock were not actively traded,
and such trading activity, as it occurred, took place in privately negotiated
transactions.  On October 28, 1999, Atlantic’s common stock was
approved for quotation on the Over-the-Counter Bulletin Board, and on August 29,
2003, Atlantic common stock commenced its listing on the NASDAQ Capital Market
under the symbol “ATBC.”  During 2007, 2006, and 2005, the reported
periodic high and low quotes during each quarter follow:
 
 2007
              
              
              2006
              
              
              20054th Qtr
              
              
              3rd Qtr
              
              
              2nd Qtr
              
              
              1st Qtr
              
              
              4th Qtr
              
              
              3rd Qtr
              
              
              2nd Qtr
              
              
              1st Qtr
              
              
              4th Qtr
              
              
              3rd Qtr
              
              
              2nd Qtr
              
              
              1st QtrHigh
              
              $
              36.00
              
              
              $
              40.00
              
              
              $
              43.73
              
              
              $
              39.46
              
              
              $
              35.49
              
              
              $
              41.00
              
              
              $
              29.95
              
              
              $
              30.00
              
              
              $
              29.05
              
              
              $
              25.95
              
              
              $
              25.57
              
              
              $
              28.00Low
              
              $
              16.42
              
              
              $
              32.00
              
              
              $
              36.15
              
              
              $
              33.35
              
              
              $
              31.24
              
              
              $
              27.31
              
              
              $
              26.29
              
              
              $
              24.78
              
              
              $
              25.55
              
              
              $
              24.00
              
              
              $
              23.25
              
              
              $
              24.50
 
 Please
note that the information above represents offers made to buy our stock and may
not represent actual transactions or sales.  The source of data used
to prepare the above chart was taken from historical prices provided by
Commodity Systems, Inc.
 
 At
December 31, 2007, there were 587 shareholders of record with shares held by
individuals and in nominee names.
 
 At
February 29, 2008, the initial bid quoted price for the common stock of Atlantic
was $15.65.  We have never paid a cash dividend on our common
stock.  We anticipate that for the foreseeable future, earnings will
be retained for business development and growth.  Accordingly, we do
not anticipate paying cash dividends on our common stock in the foreseeable
future.  The payment of future dividends will be at the sole
discretion of the Board of Directors and will depend on, among other things,
future earnings, capital requirements, and our general financial and business
condition.
 
 Furthermore,
the ability to pay dividends to our stockholders depends primarily on dividends
received from our banking subsidiary, Oceanside.  Oceanside’s ability
to pay dividends is limited by federal and state banking regulations based upon
Oceanside’s profitability and other factors.  At December 31, 2007,
retained earnings of Oceanside totaling approximately $621,000 were available to
pay dividends to the Holding Company in order to maintain Oceanside’s current
regulatory capital classification.
 
 
 ITEM 6.
              MANAGEMENT’S DISCUSSION AND
  ANALYSIS.
 
 Management’s
discussion and analysis is included to provide the shareholders with an expanded
narrative of our results of operations, changes in financial condition,
liquidity, and capital adequacy.  This narrative should be reviewed in
conjunction with the audited consolidated financial statements and notes
included in this report.  Since our primary asset is our wholly-owned
subsidiary, Oceanside Bank, most of the discussion and analysis relates to
Oceanside.
  - 13
-
 Table of Contents
  SELECTED FINANCIAL DATA(dollars and shares in thousands,
except per share data)
 
 At
      or for thePeriod Ended
    December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Statements
      of Operations Data:Total
      interest income
              
              $
              17,368
              
              
              $
              15,502
              
              
              $
              11,259
              
              
              $
              8,241
              
              
              $
              6,837Total
      interest expense
              
              
              9,591
              
              
              
              7,584
              
              
              
              4,358
              
              
              
              2,278
              
              
              
              1,790Net
      interest income before provision for loan losses
              
              
              7,777
              
              
              
              7,918
              
              
              
              6,901
              
              
              
              5,963
              
              
              
              5,047Provision
      for loan losses
              
              
              629
              
              
              
              194
              
              
              
              334
              
              
              
              362
              
              
              
              319Net
      interest income after provision for loan losses
              
              
              7,148
              
              
              
              7,724
              
              
              
              6,567
              
              
              
              5,601
              
              
              
              4,728Noninterest
      income
              
              
              1,119
              
              
              
              1,078
              
              
              
              839
              
              
              
              923
              
              
              
              880Noninterest
      expense
              
              
              6,413
              
              
              
              5,981
              
              
              
              5,283
              
              
              
              4,889
              
              
              
              4,158Income
      tax provision
              
              
              448
              
              
              
              903
              
              
              
              645
              
              
              
              469
              
              
              
              463Net
      income
              
              
              1,406
              
              
              
              1,918
              
              
              
              1,478
              
              
              
              1,166
              
              
              
              987Selected
      End of Period Balances:Total
      assets
              
              $
              261,406
              
              
              $
              243,497
              
              
              $
              213,880
              
              
              $
              184,317
              
              
              $
              145,717Interest-earning
      assets
              
              
              245,373
              
              
              
              228,686
              
              
              
              196,931
              
              
              
              166,829
              
              
              
              124,675Securities
      and stock, at cost
              
              
              41,300
              
              
              
              39,837
              
              
              
              38,290
              
              
              
              29,419
              
              
              
              23,308Loans,
      net of deferred fees
              
              
              204,060
              
              
              
              177,708
              
              
              
              152,803
              
              
              
              129,801
              
              
              
              99,482Allowance
      for loan losses
              
              
              2,169
              
              
              
              1,599
              
              
              
              1,552
              
              
              
              1,296
              
              
              
              1,220Deposit
      accounts
              
              
              217,491
              
              
              
              192,704
              
              
              
              168,480
              
              
              
              146,352
              
              
              
              113,378Other
      borrowings
              
              
              23,581
              
              
              
              32,314
              
              
              
              29,138
              
              
              
              23,004
              
              
              
              18,800Stockholders’
      equity
              
              
              18,856
              
              
              
              17,251
              
              
              
              15,232
              
              
              
              14,033
              
              
              
              12,920Selected
      Average Balances for the Period:Total
      assets
              
              $
              247,674
              
              
              $
              225,591
              
              
              $
              193,249
              
              
              $
              159,951
              
              
              $
              126,806Interest-earning
      assets
              
              
              233,339
              
              
              
              211,081
              
              
              
              179,001
              
              
              
              147,353
              
              
              
              115,741Securities
      and interest-earning deposits
              
              
              41,696
              
              
              
              37,278
              
              
              
              34,202
              
              
              
              27,064
              
              
              
              21,915Loans,
      net
              
              
              187,544
              
              
              
              167,883
              
              
              
              141,587
              
              
              
              114,236
              
              
              
              88,922Interest-bearing
      deposit accounts
              
              
              175,922
              
              
              
              150,762
              
              
              
              123,694
              
              
              
              104,174
              
              
              
              77,477Other
      borrowings
              
              
              22,888
              
              
              
              24,186
              
              
              
              22,450
              
              
              
              14,608
              
              
              
              13,959Stockholders’
      equity
              
              
              18,086
              
              
              
              16,042
              
              
              
              14,596
              
              
              
              13,445
              
              
              
              12,653Share
      Data:Earnings
      per shareBasic
              
              $
              1.13
              
              
              $
              1.54
              
              
              $
              1.18
              
              
              $
              0.93
              
              
              $
              0.79Fully
      diluted
              
              $
              1.13
              
              
              $
              1.54
              
              
              $
              1.18
              
              
              $
              0.93
              
              
              $
              0.79Book
      value per share (period end)
              
              $
              15.11
              
              
              $
              13.83
              
              
              $
              12.21
              
              
              $
              11.25
              
              
              $
              10.36Common
      shares outstanding (period end)
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248Weighted
      average shares outstandingBasic
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248Fully
      diluted
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248
              
              
              
              1,248Performance
      Ratios:Return
      on average assets
              
              
              0.57
              %
              
              
              0.85
              %
              
              
              0.76
              %
              
              
              0.73
              %
              
              
              0.78
              %Return
      on average equity
              
              
              7.77
              
              
              
              11.96
              
              
              
              10.13
              
              
              
              8.67
              
              
              
              7.80Interest-rate
      spread during the period
              
              
              2.78
              
              
              
              3.10
              
              
              
              3.40
              
              
              
              3.76
              
              
              
              4.05Net
      interest margin
              
              
              3.49
              
              
              
              3.84
              
              
              
              3.95
              
              
              
              4.13
              
              
              
              4.46Noninterest
      expenses to average assets
              
              
              2.59
              
              
              
              2.65
              
              
              
              2.73
              
              
              
              3.06
              
              
              
              3.28Asset
      Quality Ratios:Allowance
      for loan losses to period end loans
              
              
              1.06
              %
              
              
              0.90
              %
              
              
              1.02
              %
              
              
              1.00
              %
              
              
              1.23
              %Net
      charge-offs to average loans
              
              
              0.03
              
              
              
              0.09
              
              
              
              0.06
              
              
              
              0.25
              
              
              
              0.08Nonperforming
      assets to period end loans
              
              
              3.13
              
              
              
              0.03
              
              
              
              0.13
              
              
              
              0.07
              
              
              
              0.04Nonperforming
      assets to period end total assets
              
              
              2.44
              
              
              
              0.02
              
              
              
              0.09
              
              
              
              0.05
              
              
              
              0.03Capital
      and Liquidity Ratios:Average
      equity to average assets (Consolidated)
              
              
              7.30
              %
              
              
              7.11
              %
              
              
              7.55
              %
              
              
              8.41
              %
              
              
              9.98
              %Leverage
      (4.00% required minimum) (Oceanside)
              
              
              8.53
              
              
              
              8.75
              
              
              
              8.93
              
              
              
              8.02
              
              
              
              8.12Risk-based
      capital (Oceanside):Tier
      1
              
              
              9.33
              
              
              
              10.16
              
              
              
              10.62
              
              
              
              9.55
              
              
              
              9.42Total
              
              
              10.26
              
              
              
              10.95
              
              
              
              11.52
              
              
              
              10.43
              
              
              
              10.46Average
      loans to average deposits (Consolidated)
              
              
              91.37
              
              
              
              91.27
              
              
              
              91.18
              
              
              
              87.10
              
              
              
              89.22Full-time
      Employee Equivalents (End of Period)
              
              
              53
              
              
              
              51
              
              
              
              50
              
              
              
              48
              
              
              
              47
  - 14
-
 Table of Contents
  OVERVIEW
 
 How We Earn Income.  As stated
elsewhere herein, our results of operations are primarily dependent upon the
results of operations of Oceanside.  Oceanside conducts commercial
banking business consisting of attracting deposits from the general public and
applying those funds to the origination of commercial, consumer, and real estate
loans (including commercial loans collateralized by real
estate).  Profitability depends primarily on net interest income,
which is the difference between interest income generated from interest-earning
assets (i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed
funds).  Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and is dependent upon
Oceanside’s interest-rate spread, which is the difference between the average
yield earned on our interest-earning assets and the average rate paid on our
interest-bearing liabilities.  When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.  The factors that influence
net interest income include changes in interest rates and changes in the volume
and mix of assets and liability balances.  The interest rate spread is
impacted by interest rates, deposit flows, and loan
demand.  Additionally, and to a lesser extent, Oceanside’s
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for loan losses, and the effective tax
rate.  Noninterest income consists primarily of service fees on
deposit accounts and mortgage banking operations. Noninterest expense consists
of compensation and employee benefits, occupancy and equipment expenses, data
processing costs, and other operating expenses.
 
 Critical Accounting Policies and Use
of Significant Estimates.  Our consolidated financial
statements include the accounts of the Holding Company and the
Bank.  All significant intercompany accounts and transactions have
been eliminated in consolidation.  The accounting and reporting
policies conform with accounting principles generally accepted in the United
States of America and to general practices within the banking
industry.  Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial
Statements.  The majority of these accounting policies do not
require our management to make difficult, subjective, or complex
judgments.  However, we believe the allowance for loan losses is a
critical estimate.
 
 Allowance for Loan
Losses.  The allowance for loan losses is a valuation allowance
for probable or incurred credit losses.  Loan losses are charged
against the allowance when management believes the uncollectibility of a loan
balance is confirmed.  Subsequent recoveries, if any, are credited to
the allowance.
 
 Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be
charged-off.
 
 The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful (impaired).  The
general component covers non-classified loans and is based on historical loss
experience adjusted for current factors.
 
 A loan is
impaired when full payment under the loan terms is not
expected.  Commercial loans and commercial real estate loans are
individually evaluated for impairment.  If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral and accrual of interest is discontinued.  Large groups of
smaller balance, homogeneous loans, such as consumer and residential real estate
loans, are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
 
 The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. There is
no precise method of predicting specific loan losses or amounts that ultimately
may be charged-off.  Also, this evaluation is inherently subjective as
it requires estimates that are susceptible to significant revision as more
information becomes available.  The determination that a loan may be
uncollectible, in whole or in part, is a matter of
judgment.  Similarly, the adequacy of the allowance for loan losses
can be determined only on a judgmental basis, after full review, including,
consideration of economic conditions and their effect on particular industries
and specific borrowers; a review of borrowers' financial data, together with
industry data, their competitive situation, the borrowers' management
capabilities and other factors; a continuing evaluation of the loan portfolio,
including monitoring any loans that are identified as being of less than
acceptable quality; a detailed analysis, on a quarterly basis, of all impaired
loans; and an evaluation of the underlying collateral for secured
lending.
  - 15
-
 Table of Contents
  We
maintain a formalized loan review process supported by a credit analysis and
control system. We intend to maintain the allowance for loan losses at a level
sufficient to absorb estimated uncollectible loans and, expect to make periodic
additions to the allowance for loan losses.
 
 Use of
Estimates.  The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and valuation of foreclosed assets.
 
 The
determination of the adequacy of the allowance for loan losses is based on
estimates that may be affected by significant changes in the economic
environment and market conditions.  In connection with the
determination of the estimated losses on loans and to support the carrying value
of foreclosed assets, we obtain independent appraisals for significant
collateral.
 
 Our loans
are generally secured by specific items of collateral including real property,
consumer assets, and business assets.  Although we have a diversified
loan portfolio, a substantial portion of our debtors’ ability to honor their
contracts is dependent on local, state, and national economic conditions that
may affect the value of the underlying collateral or the income of the
debtor.
 
 While we
use available information to recognize losses on loans, further reductions in
the carrying amounts of loans or foreclosed assets may be necessary based on
changes in economic conditions.  In addition, regulatory agencies, as
an integral part of their examination process, periodically review the estimated
losses on loans and the carrying value of foreclosed assets.  Such
agencies may require us to recognize additional losses based on their judgments
about information available to them at the time of their
examination.
 
 Interest Rate
Risk.  Our asset base is exposed to risk including the risk
resulting from changes in interest rates and changes in the timing of cash
flows.  Management monitors the effect of such risks by considering
the mismatch of the maturities of our assets and liabilities in the current
interest rate environment and the sensitivity of assets and liabilities to
changes in interest rates.  We have considered the effect of
significant increases and decreases in interest rates and believe such changes,
if they occurred, would be manageable and would not affect our ability to hold
assets as planned.  However, we are exposed to significant market risk
in the event of significant and prolonged interest rate changes.
 
 Regulatory
Environment.  We are subject to regulations of certain federal
and state agencies and, accordingly, are periodically examined by those
regulatory authorities.  As a consequence of the extensive regulation
of commercial banking activities, our business is particularly susceptible to
being affected by federal and state legislation and regulations.
 
 COMPARISON OF YEARSENDED DECEMBER 31, 2007 AND
2006
 
 Highlights.  As of
December 31, 2007, we had grown to approximately $261.4 million in total assets,
$204.1 million in total loans, $217.5 million in deposits, and $18.9 million in
stockholders’ equity.
 
 Net
income in 2007 was $1,406,000 versus $1,918,000 in 2006, a decrease of $512,000,
or 26.7%.  The primary reasons for the change in net income in 2007
over 2006 were as follows:
 
 ·
              Interest
      and fees on loans totaled $15,255,000 in 2007 compared with $13,592,000 in
      2006, an increase of $1,663,000, or
12.2%.
 ·
              Our
      income from average interest-earning assets grew 12.0% as a result of
      increases in average interest-earning assets of 10.5%, and improved yields
      that increased from 7.44% to 7.60%.
 ·
              Our
      total interest expense rose $2,007,000, or 26.5%, as our cost of funding
      increased in 2007 from 4.34% to 4.82%.  Our average 2007
      interest-bearing deposits and other borrowings continued to grow at a pace
      of 13.6% over 2006.
 ·
              The
      increase in net interest expense exceeded the increase in interest income
      by $141,000, causing net interest income to decrease by
    1.8%.
 ·
              Noninterest
      expenses grew $432,000, or 7.2%, reflecting increased expenses related to
      personnel costs, processing and settlement fees, and regulatory
      assessments.
  - 16
-
 Table of Contents
  Interest
Income.  Interest income was $17,368,000 and $15,502,000 in
2007 and 2006, respectively.  The increase of 12.0% was attributable
to growth in our most significant interest-earning asset, loans, which grew
11.7% from average levels in 2006 to 2007.  Average loans accounted
for 80.4% of our average interest-earning assets in 2007 versus 79.5% in
2006.  Our overall yield on interest-earning assets of 7.60% was
relatively unchanged from the 2006 level of 7.44% due to a more stable interest
rate environment throughout most of 2007.  Our overall yield on
interest-earning assets in 2007 would have been 9 basis points higher, or 7.69%,
if not for the increase in nonaccrual loans and approximately $216,000 in income
earned but not collected on nonaccrual loans.
 
 Interest
Expense.  Interest expense was $9,591,000 and $7,584,000 in
2007 and 2006, respectively.  As a result of the increasing
competition for deposits and other funding sources, and our growth in average
interest-bearing liabilities of $23.9 million, or 13.6%, during this period,
interest expense increased 26.5%.  Our cost of funds rose to 4.82% in
2007 compared with 4.34% in 2006.  Substantially all of the increase
in interest expense was attributable to an increase in rates and volume of
certificates of deposit.  Interest expense from average certificates
of deposit increased 36.8% as compared with the total interest expense of all
other average deposits of 31.5%.  Average certificates of deposit
increased $25.8 million versus a decline in all average other interest bearing
deposits of $668,000.
 
 Net Interest
Income.  Net interest income (before provision for loan losses)
was $7,777,000 and $7,918,000 for 2007 and 2006, respectively, a decrease of
1.8% from 2006 to 2007, which was due to the increase in our cost of funds
primarily caused by intense competition for funding.  The average
balances, interest income and expense, and the average rates earned and paid for
assets and liabilities are found in the tables that follow.
 
 During
2007 and 2006, the average yield (on a tax-equivalent basis) on interest-earning
assets was 7.60% and 7.44%, respectively, while the average cost of funds was
4.82% in 2007 and 4.34% in 2006.  Our net interest margin was lower
(3.49% in 2007 compared with 3.84% in 2006), which reflects the faster growth in
interest-bearing liabilities (13.6%) over interest-earning assets (10.5%) and
cost of funds (48 basis points) versus yield on interest-earning assets (16
basis points).  The increase in interest income was due primarily to
the increased volume of average loans and securities, while the increases to
interest expense was a combination of increased cost of funds and changes in our
volume of interest-bearing liabilities.
 
 Provision for Loan
Losses.  A provision for loan losses of $629,000 was recorded
in 2007, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The increase in the provision for loan losses in 2007
versus the 2006 level of $435,000 was due to unfavorable trends in most measures
of loan portfolio quality, including the growth in impaired and nonaccrual loans
and other nonperforming assets.  Net charge-offs in 2007 were $59,000
as compared with $147,000 in 2006, a decrease of $88,000.
 
 Noninterest
Income.  Noninterest income increased $41,000, or 3.8%, to
$1,119,000 in 2007 from $1,078,000 in 2006.  A
summary of the more significant changes for 2007 compared with 2006
follows:
 
 ·
              Fees
      and service charges on deposit accounts grew by $36,000. or 6.0%, which
      reflects increases in fees implemented in
  late-2006.
 ·
              Mortgage
      banking fees decreased from $119,000 to $69,000, or 42.0%, reflecting the
      depressed residential real estate
market.
 ·
              Income
      from bank-owned life insurance increased from $106,000 to $152,000, or
      43.4%, reflecting earnings on additional bank-owned life insurance
      purchased of $2.0 million during
2007.
 
 Noninterest
Expenses.  Total noninterest expenses increased to $6,413,000
in 2007 compared to $5,981,000 for 2006, an increase of $432,000, or
7.2%.  The more significant increases during 2007 over 2006
follow:
 
 ·
              Salaries
      and employee benefits grew $101,000, or 3.4%, reflecting increases in
      salaries, bonuses, retirement plan contributions, and insurance
      costs.
 ·
              Processing
      and settlement fees increased by $185,000, or 29.6%, due to our growth in
      account activity and, price increases, which were partially offset by
      higher fees and service charges on deposit accounts.  Also,
      changes in capturing branch data for processing increased $58,000 in 2007
      over 2006, which allowed us to achieve certain efficiencies and cost
      reductions in other operating
expenses.
 ·
              The
      cost of regulatory assessments rose 156.1% from $66,000 to $169,000, due
      to FDIC deposit insurance fees of $119,000 in 2007 versus $21,000 in
      2006.  The increase was due in part to the new assessment
      calculation implemented by the FDIC in
2007.
  - 17
-
 Table of Contents
  Provision for Income
Taxes.  The income tax provision was $448,000 for 2007, an
effective rate of 24.2%.  This compares with an effective rate of
32.0% for 2006.  The effective tax rates in 2007 and 2006 differ from
the federal and state statutory rates principally due to nontaxable investment
income.  The growth of tax-exempt income in 2007 over 2006 of 82.3%
greatly exceeded the growth in overall interest income of 12.0%, contributing to
the decline in the effective tax rate.
 
 
 COMPARISON OF YEARSENDED DECEMBER 31, 2006 AND
2005
 
 Highlights.  As of
December 31, 2006, we had grown to approximately $243.5 million in total assets,
$177.7 million in total loans, $192.7 million in deposits, and $17.3 million in
stockholders’ equity.
 
 Net
income in 2006 was $1,918,000 versus $1,478,000 in 2005, an increase of
$440,000, or 29.8%.  The primary reasons for the change in net income
in 2006 over 2005 were as follows:
 
 ·
              Interest
      and fees on loans totaled $13,592,000 in 2006 compared with $9,870,000 in
      2005, an increase of $3,722,000, or
37.7%.
 ·
              Our
      income from average interest-earning assets grew 37.7% as a result of
      increases in average interest-earning assets of 17.9%, and improved yields
      that increased from 6.38% to 7.44%.
 ·
              Our
      total interest expense rose 74.0% as our cost of funding increased in 2006
      from 2.98% to 4.34%.  Our average 2006 interest-bearing deposits
      and other borrowings continued to grow at a pace of 19.7% over
      2005.
 ·
              Partially
      offsetting the positive gain in net interest income (before provision for
      loan losses) of $1,017,000, noninterest expenses grew $698,000, or 13.2%,
      reflecting increased expenses related to our expansion of the loan
      operations area, support of the branching network, and related personnel
      costs.
 
 Interest
Income.  Interest income was $15,502,000 and $11,259,000 in
2006 and 2005, respectively.  The increase of 37.7% was attributable
to growth in our most significant interest-earning asset, loans, which grew
18.6% from average levels in 2005 to 2006.  Average loans accounted
for 79.5% of our average interest-earning assets in 2006 versus 79.1% in
2005.  Our overall yield on interest-earning assets of 7.44% also
benefited from the rising interest rate environment in 2006.
 
 Interest
Expense.  Interest expense was $7,584,000 and $4,358,000 in
2006 and 2005, respectively.  As a result of the increasing interest
rate environment and our growth in average interest-bearing liabilities of $28.8
million, or 19.7%, during this period, interest expense increased
74.0%.  Our cost of funds rose to 4.34% in 2006 compared with 2.98% in
2005.  Interest expense from certificates of deposit outpaced overall
interest expense from deposits (83.7% compared with 78.7%, respectively) as the
growth in certificates of deposit more than offset declines in other
deposits.  Customer repurchase agreements and the junior subordinated
debentures issued in 2006 contributed to the growth, with the average cost of
funds for other borrowings at 4.75% in 2006 and 3.37% in 2005.
 
 Net Interest
Income.  Net interest income (before provision for loan losses)
was $7,918,000 and $6,901,000 for 2006 and 2005, respectively, an increase of
14.7% from 2005 to 2006, which was due to the increase in average
interest-earning assets of 17.9%, partially offset by increases in our cost of
funds and the growth in interest-bearing liabilities.  The average
balances, interest income and expense, and the average rates earned and paid for
assets and liabilities are found in the tables that follow.
 
 During
2006 and 2005, the average yield (on a tax-equivalent basis) on interest-earning
assets was 7.44% and 6.38%, respectively, while the average cost of funds was
4.34% in 2006 and 2.98% in 2005.  Our net interest margin was lower
(3.84% in 2006 compared with 3.95% in 2005), which reflects the faster growth in
interest-bearing deposits (19.7%) over interest-earning assets (17.9%) and cost
of funds (136 basis points) versus yield on interest-earning assets (106 basis
points).  The increase in loan yields from 6.97% to 8.10% was more
than offset by the increase in volume of certificates of deposit and increases
in our cost of funds, which contributed to the declines in interest-rate spread
and net interest margin.
 
 Provision for Loan
Losses.  A provision for loan losses of $194,000 was recorded
in 2006, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The decrease in the provision for loan losses in 2006 of
$140,000 was due to continuing favorable trends in most measures of loan
portfolio quality.  Net charge-offs in 2006 were $147,000 as compared
with $78,000 in 2005, an increase of $69,000.
  - 18
-
 Table of Contents
  Noninterest
Income.  Noninterest income increased $239,000, or 28.5%, to
$1,078,000 in 2006 from $839,000 in 2005.  A
summary of the more significant changes for 2006 compared with 2005
follows:
 
 ·
              Fees
      and service charges on deposit accounts grew by 20.3%, which reflects
      recent increases in fees implemented in 2006 and increases in the number
      of demand accounts of 2.6%.
 ·
              Other
      fee income for banking services increased $99,000, or 99.0% in 2006 versus
      2005, reflecting increased usage and fees from wire transfers, ATMs, and
      other banking services.
 ·
              Mortgage
      banking fees increased moderately from $114,000 to $119,000, or
      4.4%.
 
 Noninterest
Expenses.  Total noninterest expenses increased to $5,981,000
in 2006 compared to $5,283,000 for 2005. This increase of $698,000, or 13.2%,
reflects higher expenses due to growth in our operations.  The more
significant increases during 2006 over 2005 follow:
 
 ·
              Salaries
      and employee benefits grew $352,000, or 13.5%, reflecting the increase in
      the average number of full-time equivalent employees of approximately 4.1%
      and increases in salaries, bonuses, retirement plan contributions, and
      insurance costs.
 ·
              Expenses
      of bank premises and fixed assets increased $124,000, or 12.1%, in 2006
      versus 2005, reflecting increased maintenance, utilities, insurance, and
      property taxes resulting, in part, from the new loan operations office
      added at the Beach Boulevard branch in late-2005, increased property
      values, and higher utility rates.
 ·
              While
      processing and settlement fees; postage, freight, and courier costs;
      director fees; advertising and business development; and other
      miscellaneous costs rose at double-digit rates, other operating expenses
      grew at a relatively modest overall pace in 2006 over 2005, considering
      the overall growth of banking
operations.
 
 Provision for Income
Taxes.  The income tax provision was $903,000 for 2006, an
effective rate of 32.0%.  This compares with an effective rate of
30.4% for 2005.  The effective tax rates in 2006 and 2005 differ from
the federal and state statutory rates principally due to nontaxable investment
income.  While tax-exempt income increased 18.5% in 2006 over 2005,
this growth did not keep pace with the growth in overall interest income,
contributing to the rise in the effective tax rate.
 
 
 
 [Remainder
of page left blank.]
  - 19
-
 Table of Contents
  Rate/Volume
Analysis (dollars in thousands):
 
 Years
      Ended December 31,2007
              
              
              
              
              
              
              
              
              2006
              
              
              
              
              
              
              
              
              2005Average
              
              
              
              
              
              
              
              
              Average
              
              
              
              
              
              
              
              
              AverageAverage
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              Rate
              
              
              Balance
              
              
              Interest
              
              
              RateInterest-earning
      assets:Loans
      (1)
              
              $
              187,544
              
              
              $
              15,255
              
              
              
              8.13
              %
              
              $
              167,883
              
              
              $
              13,592
              
              
              
              8.10
              %
              
              $
              141,587
              
              
              $
              9,870
              
              
              
              6.97
              %Securities
      and deposits (2)
              
              
              41,696
              
              
              
              1,886
              
              
              
              5.38
              
              
              
              37,278
              
              
              
              1,605
              
              
              
              4.83
              
              
              
              34,202
              
              
              
              1,295
              
              
              
              4.28Other
      interest-earning assets (3)
              
              
              4,099
              
              
              
              227
              
              
              
              5.54
              
              
              
              5,920
              
              
              
              305
              
              
              
              5.15
              
              
              
              3,212
              
              
              
              94
              
              
              
              2.93Total
      interest-earning assets (2)
              
              
              233,339
              
              
              
              17,368
              
              
              
              7.60
              %
              
              
              211,081
              
              
              
              15,502
              
              
              
              7.44
              %
              
              
              179,001
              
              
              
              11,259
              
              
              
              6.38
              %Noninterest-earning
      assets
              
              
              14,335
              
              
              
              
              
              
              
              
              
              
              
              14,510
              
              
              
              
              
              
              
              
              
              
              
              14,248Total
      assets
              
              $
              247,674
              
              
              
              
              
              
              
              
              
              
              $
              225,591
              
              
              
              
              
              
              
              
              
              
              $
              193,249Interest-bearing
      liabilities:Demand
      deposits
              
              $
              42,858
              
              
              
              1,683
              
              
              
              3.93
              %
              
              $
              41,983
              
              
              
              1,452
              
              
              
              3.46
              %
              
              $
              42,319
              
              
              
              879
              
              
              
              2.08
              %Savings
              
              
              3,751
              
              
              
              56
              
              
              
              1.49
              
              
              
              5,294
              
              
              
              68
              
              
              
              1.28
              
              
              
              6,231
              
              
              
              47
              
              
              
              0.75Certificates
      of deposit
              
              
              129,313
              
              
              
              6,726
              
              
              
              5.20
              
              
              
              103,485
              
              
              
              4,915
              
              
              
              4.75
              
              
              
              75,144
              
              
              
              2,675
              
              
              
              3.56Other
      borrowings
              
              
              22,888
              
              
              
              1,126
              
              
              
              4.92
              
              
              
              24,186
              
              
              
              1,149
              
              
              
              4.75
              
              
              
              22,450
              
              
              
              757
              
              
              
              3.37Total
      interest-bearing liabilities
              
              
              198,810
              
              
              
              9,591
              
              
              
              4.82
              %
              
              
              174,948
              
              
              
              7,584
              
              
              
              4.34
              %
              
              
              146,144
              
              
              
              4,358
              
              
              
              2.98
              %Noninterest-bearing
      liabilities
              
              
              30,778
              
              
              
              
              
              
              
              
              
              
              
              34,601
              
              
              
              
              
              
              
              
              
              
              
              32,509Stockholders’
      equity
              
              
              18,086
              
              
              
              
              
              
              
              
              
              
              
              16,042
              
              
              
              
              
              
              
              
              
              
              
              14,596Total
      liabilities and stockholders’ equity
              
              $
              247,674
              
              
              
              
              
              
              
              
              
              
              $
              225,591
              
              
              
              
              
              
              
              
              
              
              $
              193,249Net
      interest income (before provision for loan losses)
              
              
              
              
              
              $
              7,777
              
              
              
              
              
              
              
              
              
              
              $
              7,918
              
              
              
              
              
              
              
              
              
              
              $
              6,901Interest-rate
      spread (4)
              
              
              
              
              
              
              
              
              
              
              2.78
              %
              
              
              
              
              
              
              
              
              
              
              3.10
              %
              
              
              
              
              
              
              
              
              
              
              3.40
              %Net
      interest margin(2)
      (5)
              
              
              
              
              
              
              
              
              
              
              3.49
              %
              
              
              
              
              
              
              
              
              
              
              3.84
              %
              
              
              
              
              
              
              
              
              
              
              3.95
              %Ratio
      of average interest-earning assets to average
    interest-bearing
              
              
              117.37
              %
              
              
              
              
              
              
              
              
              
              
              120.65
              %
              
              
              
              
              
              
              
              
              
              
              122.48
              %
  (1)
                  Average
      loan balances include nonaccrual loans, which averaged (in thousands)
      $5,853, $79, and $195 in 2007, 2006, and 2005,
      respectively.  Average loans are net of deferred
      fees.  Loan fees (in thousands) were $536, $600, and $664 in
      2007, 2006, and 2005, respectively.  Loan yields have been
      reported in total since a substantial portion of loans are secured by real
      estate.
 (2)
                  Tax-exempt
      income has been adjusted to a tax-equivalent basis using an incremental
      rate of 37.6%.  Includes interest-earning
    deposits.
 (3)
                  Includes
      federal funds sold.
 (4)
                  Interest-rate
      spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest-bearing
      liabilities.
 (5)
                  Net
      interest margin is net interest income divided by average interest-earning
      assets.
  - 20
-
 Table of Contents




Rate/Volume
Analysis (dollars in thousands):





Year
      Ended December 31,2007
      vs. 2006Increase (Decrease) Due toRate/Rate
            
            
            Volume
            
            
            Volume
            
            
            TotalInterest-earning
      assets:Loans
      (1)
            
            $
            64
            
            
            $
            1,592
            
            
            $
            7
            
            
            $
            1,663Securities
      and other deposits
            
            
            81
            
            
            
            190
            
            
            
            10
            
            
            
            281Other
      interest-earning assets (2)
            
            
            23
            
            
            
            (94
            )
            
            
            (7
            )
            
            
            (78
            )Total
      interest-earning assets
            
            
            168
            
            
            
            1,688
            
            
            
            10
            
            
            
            1,866Interest-bearing
      liabilities:Demand
      deposits
            
            
            197
            
            
            
            30
            
            
            
            4
            
            
            
            231Savings
            
            
            11
            
            
            
            (20
            )
            
            
            (3
            )
            
            
            (12
            )Certificates
      of deposit
            
            
            468
            
            
            
            1,227
            
            
            
            117
            
            
            
            1,812Other
      borrowings
            
            
            41
            
            
            
            (62
            )
            
            
            (3
            )
            
            
            (24
            )Total
      interest-bearing liabilities
            
            
            717
            
            
            
            1,175
            
            
            
            115
            
            
            
            2,007Net
      interest income
            
            $
            (549
            )
            
            $
            513
            
            
            $
            (105
            )
            
            $
            (141
            )Year
      Ended December 31,2006
      vs. 2005Increase (Decrease) Due toRate/Rate
            
            
            Volume
            
            
            Volume
            
            
            TotalInterest-earning
      assets:Loans
      (1)
            
            $
            1,593
            
            
            $
            1,833
            
            
            $
            296
            
            
            $
            3,722Securities
      and other deposits
            
            
            178
            
            
            
            116
            
            
            
            16
            
            
            
            310Other
      interest-earning assets (2)
            
            
            71
            
            
            
            79
            
            
            
            61
            
            
            
            211Total
      interest-earning assets
            
            
            1,842
            
            
            
            2,028
            
            
            
            373
            
            
            
            4,243Interest-bearing
      liabilities:Demand
      deposits
            
            
            585
            
            
            
            (7
            )
            
            
            (5
            )
            
            
            573Savings
            
            
            33
            
            
            
            (7
            )
            
            
            (5
            )
            
            
            21Certificates
      of deposit
            
            
            894
            
            
            
            1,009
            
            
            
            337
            
            
            
            2,240Other
      borrowings
            
            
            310
            
            
            
            59
            
            
            
            23
            
            
            
            392Total
      interest-bearing liabilities
            
            
            1,822
            
            
            
            1,054
            
            
            
            350
            
            
            
            3,226Net
      interest income
            
            $
            20
            
            
            $
            974
            
            
            $
            23
            
            
            $
            1,017







(1)
            Average
      loan balances include nonaccrual
loans.


(2)
            Includes
      federal funds sold.





- 21
-
 Table of Contents





Weighted
Average Yield or Rate:





For the Year Ended
      December 31,2007
            
            
            2006
            
            
            2005Interest-earning
      assets:Loans,
      net
            
            
            8.13
            %
            
            
            8.10
            %
            
            
            6.97
            %Investment
      securities
            
            
            5.38
            
            
            
            4.83
            
            
            
            4.28Other
      interest-earning assets
            
            
            5.54
            
            
            
            5.15
            
            
            
            2.93All
      interest-earning assets
            
            
            7.60
            
            
            
            7.44
            
            
            
            6.38Interest-bearing
      liabilities:NOW
      deposits
            
            
            1.31
            
            
            
            1.09
            
            
            
            0.53Money
      market deposits
            
            
            4.22
            
            
            
            3.84
            
            
            
            2.41Savings
            
            
            1.49
            
            
            
            1.28
            
            
            
            0.75Certificates
      of deposit
            
            
            5.20
            
            
            
            4.75
            
            
            
            3.56Other
      borrowings
            
            
            4.92
            
            
            
            4.75
            
            
            
            3.37All
      interest-bearing liabilities
            
            
            4.82
            
            
            
            4.34
            
            
            
            2.98Interest-rate
      spread
            
            
            2.78
            
            
            
            3.10
            
            
            
            3.40Net
      interest margin
            
            
            3.49
            
            
            
            3.84
            
            
            
            3.95








Change
in Mix of Deposits and Other Borrowings (dollars in thousands):





At December 31,2007
            
            
            2006
            
            
            2005Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            PercentAverage
            
            
            to
            
            
            Average
            
            
            to
            
            
            Average
            
            
            toBalance
            
            
            Total
            
            
            Balance
            
            
            Total
            
            
            Balance
            
            
            TotalInterest-earning
      assets:Loans,
      net
            
            $
            187,544
            
            
            
            80.4
            %
            
            $
            167,883
            
            
            
            79.5
            %
            
            $
            141,587
            
            
            
            79.1
            %Investment
      securities
            
            
            41,696
            
            
            
            17.9
            %
            
            
            37,278
            
            
            
            17.7
            %
            
            
            34,202
            
            
            
            19.1
            %Other
            
            
            4,099
            
            
            
            1.7
            %
            
            
            5,920
            
            
            
            2.8
            %
            
            
            3,212
            
            
            
            1.8
            %Total
      interest-earning assets
            
            $
            233,339
            
            
            
            100.0
            %
            
            $
            211,081
            
            
            
            100.0
            %
            
            $
            179,001
            
            
            
            100.0
            %Interest-bearing
      deposits:Demand
      deposits
            
            $
            42,858
            
            
            
            18.8
            %
            
            $
            41,983
            
            
            
            20.2
            %
            
            $
            42,319
            
            
            
            23.8
            %Savings
            
            
            3,751
            
            
            
            1.7
            %
            
            
            5,294
            
            
            
            2.6
            %
            
            
            6,231
            
            
            
            3.5
            %Certificates
      of deposit
            
            
            129,313
            
            
            
            56.7
            %
            
            
            103,485
            
            
            
            49.7
            %
            
            
            75,144
            
            
            
            42.3
            %Total
      interest-bearing deposits
            
            
            175,922
            
            
            
            77.2
            %
            
            
            150,762
            
            
            
            72.5
            %
            
            
            123,694
            
            
            
            69.6
            %Noninterest-bearing
      deposits
            
            
            29,335
            
            
            
            12.9
            %
            
            
            33,177
            
            
            
            15.9
            %
            
            
            31,583
            
            
            
            17.8
            %Total
      deposits
            
            
            205,257
            
            
            
            90.1
            %
            
            
            183,939
            
            
            
            88.4
            %
            
            
            155,277
            
            
            
            87.4
            %Other
      borrowings
            
            
            22,888
            
            
            
            9.9
            %
            
            
            24,186
            
            
            
            11.6
            %
            
            
            22,450
            
            
            
            12.6
            %Total
      deposits and other borrowings
            
            $
            228,145
            
            
            
            100.0
            %
            
            $
            208,125
            
            
            
            100.0
            %
            
            $
            177,727
            
            
            
            100.0
            %








LOAN PORTFOLIO





Average
loans receivable were $187,544,000 for the year 2007 as compared to $167,883,000
for 2006, an increase of 11.7%.  The year-to-year average increase in
2006 over 2005 was 18.6%.  Management believes the growth in loans was
directly attributable to the growth in our branch network, community acceptance,
and the reputations of our lending team despite a downturn in economic
conditions in our market area during 2007.  The following provides an
analysis of our loan distribution at the end of 2003 - 2007.  Loans
that are secured by real estate include residential and nonresidential
mortgages, and home equity loans to individuals.





- 22
-
 Table of Contents





Loan
Portfolio (dollars in thousands):





At December 31,2007
            
            
            %
            
            
            2006
            
            
            %
            
            
            2005
            
            
            %
            
            
            2004
            
            
            %
            
            
            2003
            
            
            %Real
      estateConstruction,
      land development,and other land
            
            $
            53,197
            
            
            
            25
            %
            
            $
            51,598
            
            
            
            29
            %
            
            $
            37,905
            
            
            
            25
            %
            
            $
            27,246
            
            
            
            21
            %
            
            $
            17,295
            
            
            
            17
            %1-4
      family residential
            
            
            45,708
            
            
            
            23
            %
            
            
            38,018
            
            
            
            22
            %
            
            
            31,997
            
            
            
            21
            %
            
            
            19,283
            
            
            
            15
            %
            
            
            17,335
            
            
            
            17
            %Multifamily
      residential
            
            
            1,784
            
            
            
            1
            %
            
            
            2,489
            
            
            
            1
            %
            
            
            3,051
            
            
            
            2
            %
            
            
            2,513
            
            
            
            2
            %
            
            
            2,003
            
            
            
            2
            %Commercial
            
            
            86,785
            
            
            
            42
            %
            
            
            68,588
            
            
            
            39
            %
            
            
            62,612
            
            
            
            41
            %
            
            
            60,869
            
            
            
            47
            %
            
            
            51,554
            
            
            
            52
            %Total
      real estate
            
            
            187,474
            
            
            
            91
            %
            
            
            160,693
            
            
            
            91
            %
            
            
            135,565
            
            
            
            89
            %
            
            
            109,911
            
            
            
            85
            %
            
            
            88,187
            
            
            
            88
            %Commercial
            
            
            11,485
            
            
            
            6
            %
            
            
            11,214
            
            
            
            6
            %
            
            
            11,901
            
            
            
            8
            %
            
            
            13,817
            
            
            
            11
            %
            
            
            4,750
            
            
            
            5
            %Consumer
      and other loans
            
            
            5,138
            
            
            
            3
            %
            
            
            5,828
            
            
            
            3
            %
            
            
            5,400
            
            
            
            3
            %
            
            
            6,147
            
            
            
            4
            %
            
            
            6,622
            
            
            
            7
            %Total
      loans
            
            
            204,097
            
            
            
            100
            %
            
            
            177,735
            
            
            
            100
            %
            
            
            152,866
            
            
            
            100
            %
            
            
            129,875
            
            
            
            100
            %
            
            
            99,559
            
            
            
            100
            %Less:Less,
      deferred fees
            
            
            (37
            )
            
            
            
            
            
            
            (27
            )
            
            
            
            
            
            
            (63
            )
            
            
            
            
            
            
            (74
            )
            
            
            
            
            
            
            (77
            )Less,
      allowance for loan losses
            
            
            (2,169
            )
            
            
            
            
            
            
            (1,599
            )
            
            
            
            
            
            
            (1,552
            )
            
            
            
            
            
            
            (1,296
            )
            
            
            
            
            
            
            (1,220
            )$
            201,891
            
            
            
            
            
            
            $
            176,109
            
            
            
            
            
            
            $
            151,251
            
            
            
            
            
            
            $
            128,505
            
            
            
            
            
            
            $
            98,262








The
following tables show the maturity data for loans receivable.





Contractual
Loan Maturities at December 31, 2007 (dollars in thousands):





1
      Year
            
            
            1
      Through
            
            
            Afteror Less
            
            
            5 Years
            
            
            5 Years
            
            
            TotalReal
      estateConstruction,
      land development,and other land
            
            $
            30,397
            
            
            $
            13,985
            
            
            $
            8,815
            
            
            $
            53,1971-4
      family residential
            
            
            10,593
            
            
            
            9,512
            
            
            
            25,603
            
            
            
            45,708Multifamily
      residential
            
            
            -
            
            
            
            -
            
            
            
            1,784
            
            
            
            1,784Commercial
            
            
            6,621
            
            
            
            6,120
            
            
            
            74,044
            
            
            
            86,78547,611
            
            
            
            29,617
            
            
            
            110,246
            
            
            
            187,474Commercial
            
            
            3,839
            
            
            
            5,144
            
            
            
            2,502
            
            
            
            11,485Consumer
      and other loans
            
            
            1,132
            
            
            
            3,202
            
            
            
            804
            
            
            
            5,138Total
      loan portfolio
            
            $
            52,582
            
            
            $
            37,963
            
            
            $
            113,552
            
            
            $
            204,097Loans
      with maturities over one year:Fixed
      rate
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            30,437Variable
      rate
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            121,078Total
      maturities greater than one year
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            151,515





Loan
Maturities or Next Repricing Date at December 31, 2007, excluding nonaccrual
loan (dollars in thousands):





Three
      months or less
            
            $
            78,018Over
      three months through twelve months
            
            
            25,775Over
      one year through three years
            
            
            48,076Over
      three through five years
            
            
            32,639Over
      five years
            
            
            13,330$
            197,838





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Loans
Originated and Repaid (dollars in thousands):





Years Ended
    December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Originations:Real
      estate loansConstruction,
      land development, and other land
            
            $
            19,007
            
            
            $
            39,551
            
            
            $
            33,561
            
            
            $
            16,911
            
            
            $
            10,6961-4
      family residential
            
            
            13,262
            
            
            
            15,744
            
            
            
            12,518
            
            
            
            8,689
            
            
            
            7,499Multifamily
      residential
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,304
            
            
            
            224Commercial
            
            
            18,632
            
            
            
            17,548
            
            
            
            13,180
            
            
            
            16,776
            
            
            
            12,35050,901
            
            
            
            72,843
            
            
            
            59,259
            
            
            
            44,680
            
            
            
            30,769Commercial
            
            
            2,678
            
            
            
            4,452
            
            
            
            4,364
            
            
            
            11,360
            
            
            
            7,981Consumer
      and other loans
            
            
            2,047
            
            
            
            2,807
            
            
            
            2,263
            
            
            
            3,390
            
            
            
            2,172Total
            
            
            55,626
            
            
            
            80,102
            
            
            
            65,886
            
            
            
            59,430
            
            
            
            40,922Principal
      reductions
            
            
            (29,264
            )
            
            
            (55,233
            )
            
            
            (42,895
            )
            
            
            (29,114
            )
            
            
            (20,567
            )Increase
      in total loans
            
            $
            26,362
            
            
            $
            24,869
            
            
            $
            22,991
            
            
            $
            30,316
            
            
            $
            20,355








CLASSIFICATION OF ASSETSAND NONACCRUAL OR IMPAIRED
LOANS





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





Real
estate acquired as a result of foreclosure, or by deed in lieu of foreclosure,
is classified as foreclosed assets.  Foreclosed assets are recorded at
the lower of cost or fair value less estimated selling costs, and the estimated
loss, if any, is charged to the allowance for loan losses at the time the real
estate is transferred to foreclosed assets.  Further allowances for
losses in foreclosed assets are recorded at the time management believes
additional deterioration in value has occurred.





Management
has adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan(“SFAS No. 114”), which considers a loan to be
impaired if it is probable that we will be unable to collect all amounts due
under the contractual terms of the loan agreement.  If a loan is
considered impaired, its value generally should be measured based on the present
value of expected cash flows discounted at the loan’s effective interest
rate.  As a practical expedient, however, the loan’s value may be
based on:





·
            the
      loan’s market price; or


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





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





Situations
may occur where:





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


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





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





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At
December 31, 2007, 2006, and 2005, loans past due for 30 days or more (but less
than 89 days) totaled $280,000, $197,000, and $193,000,
respectively.  At December 31, 2007, one loan of $164,000 was past due
more than 90 days, but was not considered to be impaired and interest was still
being accrued on this loan.  At December 31, 2007, there was a total
of $6,222,000 of impaired and nonaccrual loans.  $562,000 of such
loans were either specifically reserved for in the allowance for loan losses or
included a SBA-guaranteed portion of the loan.





Management
maintains a list of monitored loans risk-rated substandard or lower (referred to
as “classified loans”). At December 31, 2007, management had twenty-eight
classified loans totaling approximately $8.0 million, as compared with fifteen
classified loans totaling $4.5 million at December 31, 2006, and eighteen
classified loans totaling $1.4 million at December 31, 2005.





ALLOWANCE FOR LOANLOSSES





The
amount charged to operations and the related balance in the allowance for loan
losses is based upon periodic evaluations of the loan portfolio by
management.  These evaluations consider several factors including but
not limited to, current economic conditions, loan portfolio composition, prior
credit loss experience, trends in portfolio volume, and management’s estimation
of future potential losses.  Management believes that the allowance
for loan losses is adequate. The following is an analysis of the allowance for
loan losses for 2003 - 2007.





Allowance
for Loan Losses (dollars in thousands):





Years Ended
    December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance,
      at beginning of period
            
            $
            1,599
            
            
            $
            1,552
            
            
            $
            1,296
            
            
            $
            1,220
            
            
            $
            970Provision
      for loan losses
            
            
            629
            
            
            
            194
            
            
            
            334
            
            
            
            362
            
            
            
            319Loans
      charged offReal
      estate
            
            
            -
            
            
            
            -
            
            
            
            (36
            )
            
            
            -
            
            
            
            -Commercial
            
            
            (49
            )
            
            
            (169
            )
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            (26
            )
            
            
            (12
            )
            
            
            (50
            )
            
            
            (294
            )
            
            
            (73
            )(75
            )
            
            
            (181
            )
            
            
            (86
            )
            
            
            (294
            )
            
            
            (73
            )RecoveriesReal
      estate
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            -Commercial
            
            
            11
            
            
            
            31
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            5
            
            
            
            3
            
            
            
            7
            
            
            
            8
            
            
            
            416
            
            
            
            34
            
            
            
            8
            
            
            
            8
            
            
            
            4Net
      charge-offs
            
            
            (59
            )
            
            
            (147
            )
            
            
            (78
            )
            
            
            (286
            )
            
            
            (69
            )Balance,
      at end of period
            
            $
            2,169
            
            
            $
            1,599
            
            
            $
            1,552
            
            
            $
            1,296
            
            
            $
            1,220Net
      charge-offs to average loans
            
            
            0.03
            %
            
            
            0.09
            %
            
            
            0.06
            %
            
            
            0.25
            %
            
            
            0.08
            %





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





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





At December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003%
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      ofLoans
      to
            
            
            
            
            
            Loans
      to
            
            
            
            
            
            Loans
      to
            
            
            
            
            
            Loans
      to
            
            
            
            
            
            Loans
      toTotal
            
            
            
            
            
            Total
            
            
            
            
            
            Total
            
            
            
            
            
            Total
            
            
            
            
            
            TotalAmount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            LoansReal
      estate loans
            
            $
            511
            
            
            
            92
            %
            
            $
            15
            
            
            
            91
            %
            
            $
            134
            
            
            
            89
            %
            
            $
            234
            
            
            
            85
            %
            
            $
            43
            
            
            
            89
            %Commercial
      loans
            
            
            205
            
            
            
            6
            
            
            
            120
            
            
            
            6
            
            
            
            219
            
            
            
            8
            
            
            
            77
            
            
            
            11
            
            
            
            375
            
            
            
            5Consumer
      and other loans
            
            
            12
            
            
            
            2
            
            
            
            23
            
            
            
            3
            
            
            
            37
            
            
            
            3
            
            
            
            39
            
            
            
            4
            
            
            
            15
            
            
            
            6Unallocated
            
            
            1,441
            
            
            
            -
            
            
            
            1,441
            
            
            
            -
            
            
            
            1,162
            
            
            
            -
            
            
            
            946
            
            
            
            -
            
            
            
            787
            
            
            
            -$
            2,169
            
            
            
            100
            %
            
            $
            1,599
            
            
            
            100
            %
            
            $
            1,552
            
            
            
            100
            %
            
            $
            1,296
            
            
            
            100
            %
            
            $
            1,220
            
            
            
            100
            %





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 Table of Contents





Highly
leveraged transactions generally include loans and commitments made in
connection with recapitalizations, acquisitions, and leveraged buyouts, and
result in the borrower’s debt-to-total assets ratio exceeding 75%.  At
December 31, 2007, 2006, 2005, 2004, and 2003, there were no loans qualified as
highly leveraged transactions.  Loans restructured and in compliance
with modified terms are commonly referred to as “troubled debt
restructurings.”  At December 31, 2007, we had four loans classified
as restructured loans totaling $782,000, which we had $271,000 in specific
allocation in our allowance for loan losses.  At December 31, 2006,
2005, 2004, and 2003, we had no restructured loans.





SECURITIES





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





Carrying
Value of Investment Securities (dollars in thousands):





At December 31,2007
            
            
            2006
            
            
            2005Securities
      available-for-sale:U.
      S. Government-sponsored agency
            
            $
            3,019
            
            
            $
            1,007
            
            
            $
            -Mortgage-backed
      securities
            
            
            22,519
            
            
            
            28,798
            
            
            
            32,44025,538
            
            
            
            29,805
            
            
            
            32,440Securities
      held-to-maturity:Tax-exempt
      state, county, and municipal bonds
            
            
            15,762
            
            
            
            10,032
            
            
            
            5,850Balance,
      end of year
            
            $
            41,300
            
            
            $
            39,837
            
            
            $
            38,290








Investment
Securities at Amortized Cost (dollars in thousands):





At December 31,2007
            
            
            2006
            
            
            2005Securities
      available-for-sale:U.
      S. Government-sponsored agency
            
            $
            2,983
            
            
            $
            1,000
            
            
            $
            -Mortgage-backed
      securities
            
            
            22,691
            
            
            
            29,259
            
            
            
            33,05625,674
            
            
            
            30,259
            
            
            
            33,056Securities
      held-to-maturity:Tax-exempt
      state, county, and municipal bonds
            
            
            15,762
            
            
            
            10,032
            
            
            
            5,850Balance,
      end of year
            
            $
            41,436
            
            
            $
            40,291
            
            
            $
            38,906








The
following tables set forth the maturities (excluding principal paydowns on
mortgage-backed securities) and the weighted average yields of securities by
contractual maturities at December 31, 2007, 2006, and 2005.





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





Due
      in one
            
            
            Due
      in One
            
            
            Due
      in Five
            
            
            Due
      in Tenyear or less
            
            
            to Five Years
            
            
            to Ten Years
            
            
            Years or More
            
            
            TotalAverage
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            AverageAmount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            YieldAt December 31,
      2007:U.S.
      Government-sponsored agency
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            3,019
            
            
            
            5.64
            %
            
            $
            3,019
            
            
            
            5.64
            %Mortgage-backed
      securities
            
            
            2,803
            
            
            
            4.08
            %
            
            
            2,356
            
            
            
            3.85
            %
            
            
            10,594
            
            
            
            4.53
            %
            
            
            6,766
            
            
            
            4.90
            %
            
            
            22,519
            
            
            
            4.52
            %$
            2,803
            
            
            
            4.08
            %
            
            $
            2,356
            
            
            
            3.85
            %
            
            $
            10,594
            
            
            
            4.53
            %
            
            $
            9,785
            
            
            
            4.90
            %
            
            $
            25,538
            
            
            
            4.56
            %At December 31,
      2006:U.S.
      Government-sponsored agency
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            1,007
            
            
            
            6.00
            %
            
            $
            1,007
            
            
            
            6.00
            %Mortgage-backed
      securities
            
            
            293
            
            
            
            5.26
            %
            
            
            6,280
            
            
            
            3.91
            %
            
            
            12,125
            
            
            
            4.61
            %
            
            
            10,100
            
            
            
            4.56
            %
            
            
            28,798
            
            
            
            4.45
            %$
            293
            
            
            
            5.26
            %
            
            $
            6,280
            
            
            
            3.91
            %
            
            $
            12,125
            
            
            
            4.61
            %
            
            $
            11,107
            
            
            
            4.69
            %
            
            $
            29,805
            
            
            
            4.50
            %At December 31,
      2005:Mortgage-backed
      securities
            
            $
            -
            
            
            
            -
            %
            
            $
            8,191
            
            
            
            3.25
            %
            
            $
            11,152
            
            
            
            4.61
            %
            
            $
            13,097
            
            
            
            4.04
            %
            
            $
            32,440
            
            
            
            4.04
            %





- 26
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Analysis
of Investment Securities Held-to-Maturity (dollars in thousands and average
yield on a tax-equivalent basis):





Due
      in one
            
            
            Due
      in One
            
            
            Due
      in Five
            
            
            Due
      in Tenyear or less
            
            
            to Five Years
            
            
            to Ten Years
            
            
            Years or More
            
            
            TotalAverage
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            AverageAmount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            YieldAt December 31,
      2007:Tax-exempt
      state, county, and municipal bonds
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            1,057
            
            
            
            4.77
            %
            
            $
            14,705
            
            
            
            3.97
            %
            
            $
            15,762
            
            
            
            4.02
            %At December 31,
      2006:Tax-exempt
      state, county, and municipal bonds
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            625
            
            
            
            4.70
            %
            
            $
            9,407
            
            
            
            4.38
            %
            
            $
            10,032
            
            
            
            4.40
            %At December 31,
      2005:Tax-exempt
      state, county, and municipal bonds
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            626
            
            
            
            4.73
            %
            
            $
            5,224
            
            
            
            4.72
            %
            
            $
            5,850
            
            
            
            4.72
            %








DEPOSITS





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





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





The FDIC
regulations limit the ability of certain insured depository institutions to
accept, renew, or rollover deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institutions’ normal market area.  Under these regulations,
“well-capitalized” depository institutions may accept, renew, or rollover
deposits at such rates without restriction, “adequately capitalized” depository
institutions may accept, renew or rollover deposits at such rates with a waiver
from the FDIC (subject to certain restrictions on payments and rates), and
“undercapitalized” depository institutions may not accept, renew or rollover
deposits at such rates. The regulations contemplate that the definitions of
“well-capitalized,” “adequately capitalized” and “undercapitalized” will be the
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of applicable law.  See“Description of
Business/Supervision and Regulation.”  As of December 31, 2007,
Oceanside met the definition of a “well-capitalized” depository
institution.





Our
primary source of funds is deposit accounts that include both interest- and
noninterest-bearing demand, savings, and time deposits under $100,000 (referred
to as “core deposits”).  At December 31, 2007, 2006, and 2005, these
core deposits accounted for approximately 73%, 76%, and 84%, respectively, of
all deposits.  At December 31, 2007, time deposits under $100,000
accounted for approximately 55% of these core deposits as compared with money
market deposits at 23% and noninterest-bearing demand deposits at
17%.  This compares with 2006 levels of 44%, 28%, and 22%,
respectively, and with 2005 levels of 40%, 27%, and 24%,
respectively.  At December 31, 2007, 2006, and 2005, jumbo
certificates of deposit (time deposits $100,000 and greater) represented
approximately 27%, 24%, and 16%, respectively, of total deposits.  At
December 31, 2007, 2006, and 2005, time deposits outstanding in an individual
amount of $100,000 or more totaled $57,785,000, $46,103,000, and $27,234,000,
respectively.





Interest-bearing
demand accounts, consisting of NOW and money market accounts, averaged
$42,858,000 for the year ended 2007, $41,983,000 for the year ended 2006, and
$42,319,000 for the year ended 2005, or approximately 21%, 23%, and 27% of
average total deposits in 2007, 2006, and 2005, respectively.





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





At December 31,2007
            
            
            2006
            
            
            2005%
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      ofAmount
            
            
            Deposits
            
            
            Amount
            
            
            Deposits
            
            
            Amount
            
            
            DepositsDemand
      deposits
            
            
            $
            27,278
            
            
            
            12.5
            %
            
            $
            32,006
            
            
            
            16.6
            %
            
            $
            33,682
            
            
            
            20.0
            %NOW
      deposits
            
            
            
            4,440
            
            
            
            2.1
            
            
            
            3,970
            
            
            
            2.1
            
            
            
            6,264
            
            
            
            3.7Money
      market deposits
            
            
            
            36,835
            
            
            
            16.9
            
            
            
            40,349
            
            
            
            20.9
            
            
            
            38,358
            
            
            
            22.8Savings
      deposits
            
            
            
            2,800
            
            
            
            1.3
            
            
            
            5,347
            
            
            
            2.8
            
            
            
            6,059
            
            
            
            3.6Subtotal
            
            
            
            71,353
            
            
            
            32.8
            
            
            
            81,672
            
            
            
            42.4
            
            
            
            84,363
            
            
            
            50.1Certificates
      of deposit:1.00%
      - 1.99%
            
            
            
            -
            
            
            
            0.0
            
            
            
            -
            
            
            
            0.0
            
            
            
            178
            
            
            
            0.12.00%
      - 2.99%
            
            
            
            -
            
            
            
            0.0
            
            
            
            90
            
            
            
            0.1
            
            
            
            11,561
            
            
            
            6.93.00%
      - 3.99%
            
            
            
            950
            
            
            
            0.4
            
            
            
            3,741
            
            
            
            1.9
            
            
            
            26,523
            
            
            
            15.74.00%
      - 4.99%
            
            
            
            40,953
            
            
            
            18.8
            
            
            
            40,915
            
            
            
            21.2
            
            
            
            34,282
            
            
            
            20.35.00%
      - 5.99%
            
            
            
            104,275
            
            
            
            48.0
            
            
            
            66,286
            
            
            
            34.4
            
            
            
            11,573
            
            
            
            6.9Less
      fees on brokered deposits
            
            
            
            (40
            )
            
            
            0.0
            
            
            
            -
            
            
            
            0.0
            
            
            
            -
            
            
            
            0.0Total
      certificates of deposit (1)
            
            
            
            146,138
            
            
            
            67.2
            
            
            
            111,032
            
            
            
            57.6
            
            
            
            84,117
            
            
            
            49.9Total
      deposits
            
            
            $
            217,491
            
            
            
            100.0
            %
            
            $
            192,704
            
            
            
            100.0
            %
            
            $
            168,480
            
            
            
            100.0
            %







(1)
            Includes
      retirement accounts (in thousands) totaling $5,281, $3,954, and $2,535, in
      2007, 2006, and 2005, respectively, all of which were in the form of
      certificates of deposit.








Average
Deposits and Average Rates (dollars in thousands):





At December 31,2007
            
            
            2006
            
            
            2005Average
            
            
            Average
            
            
            Average
            
            
            Average
            
            
            Average
            
            
            AverageBalance
            
            
            Rate
            
            
            Balance
            
            
            Rate
            
            
            Balance
            
            
            RateDemand,
      money market and NOW deposits
            
            $
            72,193
            
            
            
            2.33
            %
            
            $
            75,160
            
            
            
            1.93
            %
            
            $
            73,902
            
            
            
            1.19
            %Savings
      deposits
            
            
            3,751
            
            
            
            1.49
            
            
            
            5,294
            
            
            
            1.28
            
            
            
            6,231
            
            
            
            0.75Certificates
      of deposit
            
            
            129,313
            
            
            
            5.20
            
            
            
            103,485
            
            
            
            4.75
            
            
            
            75,144
            
            
            
            3.56Total
      deposits
            
            $
            205,257
            
            
            
            4.12
            %
            
            $
            183,939
            
            
            
            3.50
            %
            
            $
            155,277
            
            
            
            2.32
            %








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





December 31,2007
            
            
            2006
            
            
            2005Due
      in three months or less
            
            $
            20,720
            
            
            $
            12,474
            
            
            $
            7,929Over
      three through twelve months
            
            
            22,686
            
            
            
            16,878
            
            
            
            10,142Over
      twelve months through three years
            
            
            11,561
            
            
            
            10,565
            
            
            
            3,750Over
      three years
            
            
            2,818
            
            
            
            6,186
            
            
            
            5,413$
            57,785
            
            
            $
            46,103
            
            
            $
            27,234





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





Year Ending
    December 31,2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            
            2012+
            
            
            TotalAt
      December 31, 2007:1.00%
      - 1.99
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -2.00%
      - 2.99
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -3.00%
      - 3.99
            
            
            446
            
            
            
            504
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9504.00%
      - 4.99
            
            
            30,952
            
            
            
            8,762
            
            
            
            1,172
            
            
            
            11
            
            
            
            56
            
            
            
            40,9535.00%
      - 5.99
            
            
            77,138
            
            
            
            15,690
            
            
            
            6,662
            
            
            
            4,377
            
            
            
            408
            
            
            
            104,275Less
      fees on brokered deposits
            
            
            (23
            )
            
            
            (17
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (40
            )Total
      certificates of deposit
            
            $
            108,513
            
            
            $
            24,939
            
            
            $
            7,834
            
            
            $
            4,388
            
            
            $
            464
            
            
            $
            146,138Year Ending
    December 31,2007
            
            
            2008
            
            
            2009
            
            
            2010
            
            
            
            2011+
            
            
            TotalAt
      December 31, 2006:1.00%
      - 1.99
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -2.00%
      - 2.99
            
            
            58
            
            
            
            32
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            903.00%
      - 3.99
            
            
            2,707
            
            
            
            523
            
            
            
            505
            
            
            
            6
            
            
            
            -
            
            
            
            3,7414.00%
      - 4.99
            
            
            30,814
            
            
            
            7,365
            
            
            
            1,752
            
            
            
            968
            
            
            
            16
            
            
            
            40,9155.00%
      - 5.99
            
            
            33,802
            
            
            
            14,545
            
            
            
            7,721
            
            
            
            4,502
            
            
            
            5,716
            
            
            
            66,286Total
      certificates of deposit
            
            $
            67,381
            
            
            $
            22,465
            
            
            $
            9,978
            
            
            $
            5,476
            
            
            $
            5,732
            
            
            $
            111,032Year Ending
    December 31,2006
            
            
            2007
            
            
            2008
            
            
            2009
            
            
            
            2010+
            
            
            TotalAt
      December 31, 2005:1.00%
      - 1.99
            
            $
            178
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1782.00%
      - 2.99
            
            
            11,454
            
            
            
            57
            
            
            
            50
            
            
            
            -
            
            
            
            -
            
            
            
            11,5613.00%
      - 3.99
            
            
            22,158
            
            
            
            3,235
            
            
            
            544
            
            
            
            580
            
            
            
            6
            
            
            
            26,5234.00%
      - 4.99
            
            
            14,296
            
            
            
            9,141
            
            
            
            8,033
            
            
            
            1,850
            
            
            
            962
            
            
            
            34,2825.00%
      - 5.99
            
            
            1,425
            
            
            
            754
            
            
            
            819
            
            
            
            4,479
            
            
            
            4,096
            
            
            
            11,573Total
      certificates of deposit
            
            $
            49,511
            
            
            $
            13,187
            
            
            $
            9,446
            
            
            $
            6,909
            
            
            $
            5,064
            
            
            $
            84,117








SHORT-TERM AND LONG-TERMDEBT





Other
Borrowings (dollars in thousands):





December 31,2007
            
            
            2006
            
            
            2005Customer
      repurchase agreements
            
            $
            13,816
            
            
            $
            26,921
            
            
            $
            23,745Federal
      funds purchased
            
            
            4,372
            
            
            
            -
            
            
            
            -FHLB
      of Atlanta advances
            
            
            2,300
            
            
            
            2,300
            
            
            
            2,300Junior
      subordinated debentures
            
            
            3,093
            
            
            
            3,093
            
            
            
            3,093$
            23,581
            
            
            $
            32,314
            
            
            $
            29,138





Customer Repurchase
Agreements.  Oceanside has sold securities under an agreement
to repurchase with a par value of $16,174,000 and a fair value of $15,963,000,
which effectively collateralizes overnight borrowings totaling
$13,816,000.





FHLB of Atlanta
Advances.  Oceanside has obtained an advance from FHLB of
$2,300,000 collateralized by Oceanside’s FHLB capital stock in the amount of
$542,000 and a blanket lien on eligible wholly-owned residential (1-4 units)
first mortgage loans totaling approximately $6.3 million.  This
advance matures on November 17, 2010.





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




Other Short-term
Borrowings.  Oceanside purchases federal funds for liquidity
needs during the year.  At December 31, 2007, 2006, and 2005, federal
fund purchases were $4,372,000, $-0-, and $-0-, respectively.


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Selected
Data for Other Borrowings (dollars in thousands):





2007
            
            
            2006
            
            
            2005Interest
      rate at end of periodCustomer
      repurchase agreements (federal funds rate less 25 basis
      points)
            
            
            4.000
            %
            
            
            5.250
            %
            
            
            4.000
            %FHLB
      of Atlanta advances (fixed rate)
            
            
            4.450
            %
            
            
            4.450
            %
            
            
            4.450
            %Junior
      subordinated debentures (fixed rate for five years)
            
            
            5.886
            %
            
            
            5.886
            %
            
            
            5.886
            %Other
      short-term borrowings (federal funds purchased)
            
            
            4.600
            %
            
            
            0.000
            %
            
            
            0.000
            %Average
      balances during the periodCustomer
      repurchase agreements
            
            $
            15,054
            
            
            $
            18,098
            
            
            $
            18,254FHLB
      of Atlanta advances
            
            $
            2,300
            
            
            $
            2,300
            
            
            $
            2,300Junior
      subordinated debentures
            
            $
            3,093
            
            
            $
            3,093
            
            
            $
            907Other
      short-term borrowings (federal funds purchased)
            
            $
            2,441
            
            
            $
            695
            
            
            $
            863Weighted
      average interest rateCustomer
      repurchase agreements
            
            
            4.81
            %
            
            
            4.59
            %
            
            
            2.96
            %FHLB
      of Atlanta advances
            
            
            4.45
            %
            
            
            4.52
            %
            
            
            5.91
            %Junior
      subordinated debentures
            
            
            5.89
            %
            
            
            5.89
            %
            
            
            5.89
            %Other
      short-term borrowings (federal funds purchased)
            
            
            4.64
            %
            
            
            3.96
            %
            
            
            3.24
            %Short-term
      borrowings (customer repurchase agreements and federal funds
      purchased)Balance
      at end of period
            
            $
            18,188
            
            
            $
            26,921
            
            
            $
            23,745Weighted
      average interest rate at end of period
            
            
            4.00
            %
            
            
            5.25
            %
            
            
            4.00
            %Maximum
      amount outstanding at month end during the period
            
            $
            26,184
            
            
            $
            29,310
            
            
            $
            30,770Average
      amount outstanding during the period
            
            $
            17,495
            
            
            $
            18,793
            
            
            $
            19,117Weighted
      average interest rate during the period
            
            
            4.78
            %
            
            
            4.58
            %
            
            
            2.98
            %








Interest
Expense for Other Borrowings (dollars in thousands):





December 31,2007
            
            
            2006
            
            
            2005Customer
      repurchase agreements
            
            $
            724
            
            
            $
            830
            
            
            $
            541FHLB
      of Atlanta advances
            
            
            104
            
            
            
            104
            
            
            
            136Junior
      subordinated debentures
            
            
            185
            
            
            
            184
            
            
            
            52Other
      short-term borrowings (federal funds purchased)
            
            
            113
            
            
            
            31
            
            
            
            28$
            1,126
            
            
            $
            1,149
            
            
            $
            757








LIQUIDITY





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





Liquidity
management involves meeting the funds flow requirements of customers who may
either be depositors wanting to withdraw funds, or borrowers needing assurance
that sufficient funds will be available to meet their credit
needs.  Liquid assets consist of vault cash, securities, and principal
paydowns of other interest-earning assets.  Our principal sources of
asset liquidity are federal funds sold and the securities portfolio, including
principal paydowns from mortgage-backed securities.  In 2007, 2006,
and 2005, principal paydowns from mortgage-backed securities totaled $6,601,000,
$7,389,000, and $6,872,000, respectively.





Other
sources of funds are principal paydowns and maturities in the loan
portfolio.  The contractual loan maturity table
herein illustrates the maturities of loans receivable at December 31,
2007.





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 Table of Contents




We also
have sources of liability liquidity that include core deposits as previously
discussed and access to borrowed funds including overnight federal funds, lines
of credit, and customer repurchase agreements.  As mentioned
elsewhere, increased competition for all funding sources has reduced our
liquidity.





At
December 31, 2007, 2006, and 2005, our liquidity ratio of liquid assets to
transaction deposit accounts was 6.8%, 23.6%, and 19.1%,
respectively.  While we experienced a decline in the liquidity at
December 31, 2007, with no federal funds sold as compared with $11.1 million at
December 31, 2006, management believes that our liquidity is sufficient to meet
our anticipated needs.  We also have the ability to supplement our
liquidity by pursuing additional brokered deposits as have other community
banks.  At December 31, 2007, brokered deposits totaled $17,926,000,
which represented 8.2% of total deposits.








OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL
OBLIGATIONS





Contractual
Commitments (dollars in thousands)





December 31,2007
            
            
            2006
            
            
            2004Commitments
      to originate loansResidential
      real estate
            
            $
            8,796
            
            
            $
            10,550
            
            
            $
            9,524Commercial
      real estate, construction, and land development secured by real
      estate
            
            
            12,099
            
            
            
            15,691
            
            
            
            13,649Other
      unused commitments
            
            
            7,462
            
            
            
            5,221
            
            
            
            4,861Total
      commitments to originate loans
            
            
            28,357
            
            
            
            31,462
            
            
            
            28,034Financial
      standby letters of credit
            
            
            2,084
            
            
            
            1,712
            
            
            
            1,714Total
      contractual commitments
            
            $
            30,441
            
            
            $
            33,174
            
            
            $
            29,748








Contractual
Obligations (dollars in thousands)





1
      Year
            
            
            Years
      2
            
            
            Years
      4
            
            
            Afteror Less
            
            
            and 3
            
            
            and 5
            
            
            5 Years
            
            
            TotalDeposits
      without a stated maturity
            
            $
            71,353
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            71,353Certificates
      of deposit and other time deposits
            
            
            108,513
            
            
            
            32,773
            
            
            
            4,852
            
            
            
            -
            
            
            
            146,138Short-term
      borrowings
            
            
            18,188
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,188Federal
      Home Loan Bank advances
            
            
            -
            
            
            
            2,300
            
            
            
            -
            
            
            
            -
            
            
            
            2,300Junior
      subordinated debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,093
            
            
            
            3,093Operating
      leases
            
            
            312
            
            
            
            657
            
            
            
            252
            
            
            
            1,044
            
            
            
            2,265Total
      contractual obligations
            
            $
            198,366
            
            
            $
            35,730
            
            
            $
            5,104
            
            
            $
            4,137
            
            
            $
            243,337








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





CAPITAL RESOURCES





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





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





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We are
also subject to leverage capital requirements.  This requirement
compares capital (using the definition of Tier 1 capital) to balance sheet
assets and is intended to supplement the risk-based capital ratio in measuring
capital adequacy.  The guidelines set a minimum leverage ratio of 3%
for depository institutions that are highly rated in terms of safety and
soundness, and which are not experiencing or anticipating any significant
growth.  Other depository institutions are expected to maintain
capital levels of at least 1% or 2% above the minimum.  Our actual
capital amounts, capital ratios, and leverage ratios at December 31, 2007, 2006,
and 2005 (Bank Only), are reflected in the table below.





Capital
Ratios (dollars in thousands):





Bank OnlyAt December 31,2007
            
            
            2006
            
            
            2005Tier
      1 capitalStockholder’s
      equity
            
            $
            21,831
            
            
            $
            20,278
            
            
            $
            18,068Plus,
      qualifying trust preferred securities
            
            
            -
            
            
            
            -
            
            
            
            -Plus,
      unrealized gains on AFS securities
            
            
            84
            
            
            
            283
            
            
            
            384Less,
      intangible assets
            
            
            -
            
            
            
            -
            
            
            
            -21,915
            
            
            
            20,561
            
            
            
            18,452Tier
      2 capitalAllowable
      portion of allowance for loan losses and off-balance sheet
      committments
            
            
            2,200
            
            
            
            1,599
            
            
            
            1,552Total
      risk-based capital
            
            $
            24,115
            
            
            $
            22,160
            
            
            $
            20,004Total
      risk-weighted assets
            
            $
            234,940
            
            
            $
            202,463
            
            
            $
            173,688Tier
      1 risk-based capital ratio
            
            
            9.33
            %
            
            
            10.16
            %
            
            
            10.62
            %Total
      risk-based capital ratio
            
            
            10.26
            %
            
            
            10.95
            %
            
            
            11.52
            %Average
      total assets for leverage capital purposes
            
            $
            257,067
            
            
            $
            234,906
            
            
            $
            206,620Tier
      1 leverage ratio
            
            
            8.53
            %
            
            
            8.75
            %
            
            
            8.93
            %








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





During
2005 and 2004, the Holding Company used a portion of the proceeds from the trust
preferred securities and warrants exercised to provide additional capital to
Oceanside totaling $2.8 million and $1.8 million, respectively, which has been
eliminated in consolidation.





Capital
Analysis:





For the Year Ended
      December 31,2007
            
            
            2006
            
            
            2005Average
      equity as a percentage of average assets
            
            
            7.30
            %
            
            
            7.11
            %
            
            
            7.55
            %Equity
      to total assets at end of year
            
            
            7.21
            
            
            
            7.08
            
            
            
            7.12Return
      on average equity
            
            
            7.77
            
            
            
            11.96
            
            
            
            10.13Return
      on average assets
            
            
            0.57
            
            
            
            0.85
            
            
            
            0.76Noninterest
      expenses to average assets
            
            
            2.59
            
            
            
            2.65
            
            
            
            2.73





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Stockholders’
equity is adjusted for the effect of unrealized appreciation or depreciation,
net of tax, on securities classified as available-for-sale.  As of
December 31, 2007, stockholders’ equity increased $1,605,000 from December 31,
2006, as a result of the net income of $1,406,000, and a decrease of $199,000 in
unrealized holding losses on available-for-sale securities.  As of
December 31, 2006, stockholders’ equity increased $2,019,000 from December 31,
2005, as a result of the net income of $1,918,000, and a decrease of $101,000 in
unrealized holding losses on available-for-sale securities.  The
return on average equity for the years ended December 31, 2007, 2006, and 2005,
totaled 7.77%, 11.96%, and 10.13%, respectively.  The decrease in
return on average equity in 2007 is the result of lower earnings due to higher
cost of funds resulting from increased competition for deposits and increasing
our allowance for loan losses to reflect higher nonperforming loans and lower
collateral values particularly in the real estate market we operate
in.  The increase in return on average equity for 2006 versus 2005 is
attributable primarily to the increase in net income in 2006.








RELATED PARTY TRANSACTIONS





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





2007
            
            
            2006
            
            
            2005Loans
            
            $
            6.2
            
            
            $
            2.0
            
            
            $
            2.3Unfunded
      loan commitments
            
            $
            1.9
            
            
            $
            1.6
            
            
            $
            1.3Deposits
      and customer repurchase agreements
            
            $
            24.2
            
            
            $
            37.6
            
            
            $
            36.7








INTEREST RATE SENSITIVITY





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





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





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





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





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Interest
Rate Sensitivity at December 31, 2007 (dollars in thousands):





Under
            
            
            3
      to 12
            
            
            
            
            
            Over3 Months
            
            
            Months
            
            
            1 - 5 Years
            
            
            5 Years
            
            
            TotalInterest-bearing
      deposits in other banks
            
            $
            13
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            13Loans(1)
            
            
            78,018
            
            
            
            25,775
            
            
            
            80,715
            
            
            
            13,330
            
            
            
            197,838Securities(2)
            
            
            99
            
            
            
            2,765
            
            
            
            6,769
            
            
            
            31,667
            
            
            
            41,300Total
      rate-sensitive assets
            
            $
            78,130
            
            
            $
            28,540
            
            
            $
            87,484
            
            
            $
            44,997
            
            
            $
            239,151Money
      market and NOW accounts(2)
            
            $
            36,835
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,440
            
            
            $
            41,275Savings
      accounts (2)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,800
            
            
            
            2,800Certificates
      of deposit (2)
            
            
            43,421
            
            
            
            65,092
            
            
            
            37,625
            
            
            
            -
            
            
            
            146,138Federal
      funds purchased
            
            
            4,372
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,372Total
      rate-sensitive liabilities
            
            $
            84,628
            
            
            $
            65,092
            
            
            $
            37,625
            
            
            $
            7,240
            
            
            $
            194,585Gap
      (repricing differences)
            
            $
            (6,498
            )
            
            $
            (36,552
            )
            
            $
            49,859
            
            
            $
            37,757
            
            
            $
            44,566Cumulative
      Gap
            
            $
            (6,498
            )
            
            $
            (43,050
            )
            
            $
            6,809
            
            
            $
            44,566Cumulative
      Gap/total assets
            
            
            -2.49
            %
            
            
            -16.47
            %
            
            
            2.60
            %
            
            
            17.05
            %Total
      assets
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            261,406







(1)
              In
      preparing the table above, adjustable-rate loans were included in the
      period in which the interest rates are next scheduled to adjust rather
      than in the period in which the loans mature.  Fixed-rate loans
      were scheduled according to their contractual
      maturities.  Nonaccrual loans of $6,222 (dollars in thousands)
      were excluded.





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








RECENT ACCOUNTING PRONOUNCEMENTSIMPACTING FUTURE
PERIODS





There are
currently no pronouncements issued or that are scheduled for implementation
during 2007 or 2008 that are expected to have any significant impact on our
accounting policies.  For a discussion of recent accounting
pronouncements, see the accompanying Notes to Consolidated Financial
Statements shown in Item 7.








IMPACT OF INFLATION





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





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QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET
RISK





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





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





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





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





Change in Prevailing
      Interest Rates
            
            2007
            
            
            2008+
      200 basis points
            
            
            (0.02
            %)
            
            
            (0.01
            %)Prevailing rates
            
            
            -
            
            
            
            -- 
      200 basis points
            
            
            (0.01
            %)
            
            
            (0.04
            %)





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





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ITEM
7.                      FINANCIAL STATEMENTS
 
 Certified
Public Accountants, LLC
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Atlantic
BancGroup, Inc.
 and
Subsidiary
 Jacksonville
Beach, Florida
 
 We have
audited the consolidated balance sheets of Atlantic BancGroup, Inc. and
Subsidiaryas of December 31, 2007 and 2006, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the two years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic BancGroup, Inc. and
Subsidiary as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting
principles.
 
 
 /s/ MAULDIN &
      JENKINS, LLC
 
 
 Albany,
Georgia
 March 14,
2008
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ATLANTIC BANCGROUP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS








December 31,2007
            
            
            2006(Dollars
      in Thousands, Except Per Share Data)ASSETSCash
      and due from banks
            
            $
            4,656
            
            
            $
            6,566Federal
      funds sold
            
            
            -
            
            
            
            11,133Total
      cash and cash equivalents
            
            
            4,656
            
            
            
            17,699Investment
      securities, available-for-sale
            
            
            25,538
            
            
            
            29,805Investment
      securities, held-to-maturity (market value of $15,522 in 2007 and $10,138
      in 2006)
            
            
            15,762
            
            
            
            10,032Restricted
      stock
            
            
            746
            
            
            
            735Loans,
      net
            
            
            201,891
            
            
            
            176,109Bank
      premises and equipment
            
            
            3,784
            
            
            
            3,960Accrued
      interest receivable
            
            
            1,538
            
            
            
            1,223Deferred
      income taxes
            
            
            996
            
            
            
            860Investment
      in unconsolidated subsidiary
            
            
            93
            
            
            
            93Cash
      surrender value of bank-owned life insurance
            
            
            4,680
            
            
            
            2,543Other
      assets
            
            
            1,722
            
            
            
            438Total
      assets
            
            $
            261,406
            
            
            $
            243,497LIABILITIESDeposits:Noninterest-bearing
            
            $
            27,278
            
            
            $
            32,006Interest-bearing
            
            
            190,213
            
            
            
            160,698Total
      deposits
            
            
            217,491
            
            
            
            192,704Other
      borrowings:Short-term
      borrowings, customer repurchase agreements
            
            
            18,188
            
            
            
            26,921Long-term
      debt
            
            
            5,393
            
            
            
            5,393Total
      other borrowings
            
            
            23,581
            
            
            
            32,314Accrued
      interest payable
            
            
            384
            
            
            
            279Other
      liabilities
            
            
            1,094
            
            
            
            949Total
      liabilities
            
            
            242,550
            
            
            
            226,246Commitments
      and contingencies
            
            
            -
            
            
            
            -STOCKHOLDERS’
      EQUITYPreferred
      stock, authorized 2,000,000 shares, none issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.01 par value, authorized 10,000,000 shares, issued and
      outstanding 1,247,516 shares in 2007 and 2006
            
            
            12
            
            
            
            12Additional
      paid-in capital
            
            
            11,788
            
            
            
            11,788Retained
      earnings
            
            
            7,140
            
            
            
            5,734Accumulated
      other comprehensive loss:Net
      unrealized holding losses on securities
            
            
            (84
            )
            
            
            (283
            )Total
      stockholders’ equity
            
            
            18,856
            
            
            
            17,251Total
      liabilities and stockholders’ equity
            
            $
            261,406
            
            
            $
            243,497Book
      value per common share
            
            $
            15.11
            
            
            $
            13.83Common
      shares outstanding
            
            
            1,247,516
            
            
            
            1,247,516








See
accompanying notes to consolidated financial statements.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME








Year ended
December 31,2007
            
            
            2006(Dollars
      in Thousands, Except Per Share Data)INTEREST
      INCOMEInterest
      and fees on loans
            
            $
            15,255
            
            
            $
            13,592Taxable
      interest income on investment securities and interest bearing deposits in
      banks
            
            
            1,290
            
            
            
            1,278Tax-exempt
      interest income on investment securities
            
            
            596
            
            
            
            327Interest
      on federal funds sold
            
            
            227
            
            
            
            305Total
      interest income
            
            
            17,368
            
            
            
            15,502INTEREST
      EXPENSEInterest
      on deposits
            
            
            8,465
            
            
            
            6,435Short-term
      borrowings
            
            
            837
            
            
            
            861Long-term
      borrowings
            
            
            289
            
            
            
            288Total
      interest expense
            
            
            9,591
            
            
            
            7,584NET
      INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
            
            
            7,777
            
            
            
            7,918PROVISION
      FOR LOAN LOSSES
            
            
            629
            
            
            
            194NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            7,148
            
            
            
            7,724NONINTEREST
      INCOMEFees
      and service charges on deposit accounts
            
            
            635
            
            
            
            599Other
      fee income for banking services
            
            
            200
            
            
            
            199Mortgage
      banking fees
            
            
            69
            
            
            
            119Income
      from bank-owned life insurance
            
            
            152
            
            
            
            106Dividends
      on restricted stock
            
            
            34
            
            
            
            29Dividends
      on trust-preferred securities
            
            
            5
            
            
            
            5Other
      income
            
            
            24
            
            
            
            21Total
      noninterest income
            
            
            1,119
            
            
            
            1,078NONINTEREST
      EXPENSESSalaries
      and employee benefits
            
            
            3,063
            
            
            
            2,962Expenses
      of bank premises and fixed assets
            
            
            1,096
            
            
            
            1,150Other
      operating expenses
            
            
            2,254
            
            
            
            1,869Total
      noninterest expenses
            
            
            6,413
            
            
            
            5,981INCOME
      BEFORE PROVISION FOR INCOME TAXES
            
            
            1,854
            
            
            
            2,821PROVISION
      FOR INCOME TAXES
            
            
            448
            
            
            
            903NET
      INCOME
            
            
            1,406
            
            
            
            1,918OTHER
      COMPREHENSIVE INCOMEUnrealized
      holding gains on securities arising during period, net of income tax
      expense of $119 in 2007 and $60 in 2006
            
            
            199
            
            
            
            101COMPREHENSIVE
      INCOME
            
            $
            1,605
            
            
            $
            2,019AVERAGE
      COMMON SHARES OUTSTANDINGBasic
      and fully diluted
            
            
            1,247,516
            
            
            
            1,247,516EARNINGS
      PER SHAREBasic
      and fully diluted
            
            $
            1.13
            
            
            $
            1.54








See
accompanying notes to consolidated financial statements.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY








AccumulatedOtherAdditional
            
            
            
            
            
            Comprehensive
            
            
            TotalCommon Stock
            
            
            Paid-in
            
            
            Retained
            
            
            Income
            
            
            Stockholders’Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            (Loss)
            
            
            Equity(Dollars
      in Thousands)Balance,
      December 31, 2005
            
            
            1,247,516
            
            
            $
            12
            
            
            $
            11,788
            
            
            $
            3,816
            
            
            $
            (384
            )
            
            $
            15,232Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,918Change
      in net unrealized holding gains on securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            101Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,019Balance,
      December 31, 2006
            
            
            1,247,516
            
            
            
            12
            
            
            
            11,788
            
            
            
            5,734
            
            
            
            (283
            )
            
            
            17,251Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,406Change
      in net unrealized holding gains on securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            199Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,605Balance,
      December 31, 2007
            
            
            1,247,516
            
            
            $
            12
            
            
            $
            11,788
            
            
            $
            7,140
            
            
            $
            (84
            )
            
            $
            18,856








See
accompanying notes to consolidated financial statements.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS








Year ended
December 31,2007
            
            
            2006(Dollars
      in Thousands)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
            
            $
            1,406
            
            
            $
            1,918Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses and off-balance sheet commitments
            
            
            660
            
            
            
            194Depreciation
      and amortization
            
            
            321
            
            
            
            339Net
      premium amortization and discount accretion
            
            
            (28
            )
            
            
            36Deferred
      income taxes
            
            
            (257
            )
            
            
            (70
            )Policy
      income from bank-owned life insurance
            
            
            (137
            )
            
            
            (90
            )Pension
      expense from indexed retirement plan
            
            
            181
            
            
            
            133Increase
      in accrued interest receivable and other assets
            
            
            (1,597
            )
            
            
            (535
            )Increase
      in accrued interest payable and other liabilities
            
            
            38
            
            
            
            65Net
      cash provided by operating activities
            
            
            587
            
            
            
            1,990CASH
      FLOWS FROM INVESTING ACTIVITIESSecurities
      available-for-sale:Purchases
            
            
            (1,982
            )
            
            
            (4,628
            )Principal
      repayments on mortgage-backed investment securities
            
            
            6,601
            
            
            
            7,389Securities
      held-to-maturityPurchases
            
            
            (5,736
            )
            
            
            (5,016
            )Calls
            
            
            -
            
            
            
            833Purchases
      of restricted stock
            
            
            (11
            )
            
            
            (59
            )Increase
      in loans
            
            
            (26,411
            )
            
            
            (25,052
            )Purchase
      of bank-owned life insurance for indexed retirement plan
            
            
            (2,000
            )
            
            
            -Purchases
      of bank premises and equipment
            
            
            (145
            )
            
            
            (145
            )Net
      cash used in investing activities
            
            
            (29,684
            )
            
            
            (26,678
            )CASH
      FLOWS FROM FINANCING ACTIVITIESIncrease
      (decrease) in deposits:Noninterest-bearing
            
            
            (4,728
            )
            
            
            (1,676
            )Interest-bearing
            
            
            29,515
            
            
            
            25,900Proceeds
      from other borrowings, net of repayments
            
            
            (8,733
            )
            
            
            3,176Net
      cash provided by financing activities
            
            
            16,054
            
            
            
            27,400NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (13,043
            )
            
            
            2,712CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            17,699
            
            
            
            14,987CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            4,656
            
            
            $
            17,699SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      received during the year for interest and dividends
            
            $
            17,053
            
            
            $
            15,120Cash
      paid during the year for interest
            
            $
            9,486
            
            
            $
            7,473Cash
      paid during the year for income taxes
            
            $
            1,139
            
            
            $
            998NONCASH
      TRANSACTIONSIncrease
      in cash surrender value of bank-owned life insurance
            
            $
            152
            
            
            $
            106Increase
      in deferred compensation arrangements
            
            $
            181
            
            
            $
            133Net
      change in unrealized holding gains on securities available-for-sale, net
      of income taxes
            
            $
            199
            
            
            $
            101








See
accompanying notes to consolidated financial statements.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES





General
- Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company
registered with the Federal Reserve and owns 100% of the outstanding stock of
Oceanside Bank (“Oceanside”).  Oceanside is a state-chartered
commercial bank, which opened July 21, 1997.  Oceanside’s deposits are
insured by the Federal Deposit Insurance Corporation.  The Holding
Company’s primary business activities are the operations of Oceanside, and it
operates in only one reportable industry
segment:  banking.  Collectively, the entities are referred
to as “Atlantic.”





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





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





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





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





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





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





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





Cash
and Cash Equivalents - For purposes of the statements of cash flows, cash
and cash equivalents include cash and due from banks and federal funds sold, all
of which mature within ninety days.  At December 31, 2007 and 2006,
cash and due from banks includes $13,000 and $8,000, respectively, of
interest-bearing deposits in the Federal Home Loan Bank.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








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





Oceanside
is required by law or regulation to maintain cash reserves with the Federal
Reserve Bank.  The minimum reserve balances were approximately
$661,000 and $619,000 at December 31, 2007 and 2006, respectively.





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





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





Equity
securities held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized gains and
losses on trading securities are included in noninterest
income.  During 2007 and 2006, Atlantic did not engage in trading
securities.





Declines
in the fair value of individual securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value.  The related write-downs are included in earnings as realized
losses.  As of December 31, 2007, no securities were determined to
have other than a temporary decline in fair value below cost.





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





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





Restricted
Stock - At December 31, 2007 and 2006, Oceanside owned Federal Home Loan
Bank stock, carried at cost, totaling $542,000 and $531,000,
respectively.  The stock is considered restricted, and the amount is
required to be maintained based on a percentage of Oceanside’s total
assets.  Oceanside also maintained stock, carried at cost, as a
condition of its correspondent banking relationship with two banks totaling
$204,000 at both December 31, 2007 and 2006.





Loans
Held-for-Sale - Residential loans held-for-sale are valued at the lower
of cost or market as determined by outstanding commitments from investors or
current investor yield requirements.  Gains and losses resulting from
sales of residential mortgage loans are recognized when Atlantic funds the loan
and has a commitment from the purchaser.  Atlantic had no significant
loans held-for-sale as of December 31, 2007 or 2006.  Loans originated
for sale in 2007 and 2006 totaled $7.6 million and $11.0 million,
respectively.  The income from mortgage banking operations totaled
$69,000 and $119,000 for 2007 and 2006, respectively.





Oceanside
originates loans with a guaranty from the Small Business Administration
(“SBA”).  Oceanside does not classify SBA loans (or the SBA-guaranteed
portion) as held-for-sale, as the intent is to generally hold SBA loans to
maturity in Oceanside’s held-for-investment portfolio.  There were no
sales of SBA loans in 2007 or 2006.  Typically, if an SBA loan is
sold, no loan servicing is retained by Oceanside.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








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





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





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





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





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





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





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





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





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








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





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





Foreclosed
Assets - Assets acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis.  After foreclosure, valuations are periodically performed
by management and the foreclosed asset is carried at the lower of carrying
amount or fair value less cost to sell.  Subsequent changes in value
are reported as adjustments to the carrying amount, not to exceed the initial
carrying value of the foreclosed assets at the time of the
transfer.  Revenue and expenses from operations and changes in the
valuation allowance are included in gains or losses on foreclosed
assets.  At December 31, 2007 and 2006, foreclosed assets including
repossessed vehicles and other assets totaled $9,000 and $13,000,
respectively.





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





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





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





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





Computation
of Per Share Earnings - Basic earnings per share (“EPS”) amounts are
computed by dividing net earnings by the weighted average number of common
shares outstanding for the years ended December 31, 2007 and
2006.  Diluted EPS are computed by dividing net earnings by the
weighted average number of shares and all dilutive potential shares outstanding
during the period.  Atlantic has no dilutive potential shares
outstanding for 2007 or 2006.  The following information was used in
the computation of EPS on both a basic and diluted basis for the years ended
December 31, 2007 and 2006 (dollars in thousands except per share
data):





For
      the Year Ended December 31,2007
            
            
            2006Basic
      EPS computation:Numerator
      - Net income
            
            $
            1,406
            
            
            $
            1,918Denominator
      - Weighted average shares outstanding (rounded)
            
            
            1,248
            
            
            
            1,248Basic
      EPS
            
            $
            1.13
            
            
            $
            1.54Diluted
      EPS computation:Numerator
      - Net income
            
            $
            1,406
            
            
            $
            1,918Denominator
      - Weighted average shares outstanding (rounded)
            
            
            1,248
            
            
            
            1,248Diluted
      EPS
            
            $
            1.13
            
            
            $
            1.54





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








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





Advertising
and Business Development - Atlantic expenses advertising and business
development costs as incurred. Advertising and business development costs for
2007 and 2006 as included in other operating expenses were $125,000 and $97,000,
respectively.





Reclassification
of Accounts - Certain items in the financial statements for 2006 have
been reclassified to conform to the classifications used for the current
year.





Recent
Accounting Pronouncements - In March
2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting forServicingFinancialAssets, an amendment of SFAS No.
140 (“SFAS 156”).  This statement amends SFAS 140 to require
that all separately recognized servicing assets and liabilities be initially
measured at fair value, if practical.  The effective date of this
statement is as of the beginning of its first fiscal year that begins after
September 15, 2006; however, early adoption is permitted as of the beginning of
any fiscal year, provided the entity has not issued financial statements for the
interim period.  The initial recognition and measurement of servicing
assets and servicing liabilities are required to be applied prospectively to
transactions occurring after the effective date.  The adoption of SFAS
156 did not have a material impact on Atlantic’s financial position, results of
operations, or liquidity.





In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”).  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS 109, Accounting for Income
Taxes.  FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.  FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and
transitions.  FIN 48 is effective for fiscal years beginning after
December 15, 2006.  Atlantic adopted FIN 48 beginning January 1,
2007.  The adoption of FIN 48 did not have a material impact on
Atlantic’s financial position, results of operations, or liquidity.





In
September, 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (“SFAS 157”).  This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements.  This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute.  Accordingly, this statement does not
require any new fair value measurements.  However, for some entities,
the application of this statement will change current practice.  In
developing this statement, the FASB considered the need for increased
consistency and comparability in fair value measurements and for expanded
disclosures about fair value measurements.  This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.  The
adoption of SFAS 157 is not expected to materially impact Atlantic’s financial
position, results of operations, or liquidity.





In March
2007, the EITF reached a final consensus on Issue 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements (“EITF 06-10”).  EITF
06-10 stipulates that a liability should be recognized for a postretirement
benefit obligation associated with a collateral assignment arrangement if, on
the basis of the substantive agreement with the employee, the employer has
agreed to maintain a life insurance policy during the postretirement period or
provide a death benefit.  The employer also must recognize and measure the
associated asset on the basis of the terms of the collateral assignment
arrangement.  The consensus is effective for fiscal years beginning after
December 15, 2007.  Entities will have the option of applying the
provisions of EITF 06-10 as a cumulative effect adjustment to the opening
balance of retained earnings or retrospectively to all prior periods.  EITF
06-10 is not expected to have a material impact on Atlantic’s financial
position, results of operations, or liquidity.  As of January 1, 2008,
Atlantic recorded $80,979 (net of income taxes) as an adjustment to beginning
retained earnings as permitted by EITF 06-10, which decreased stockholders’
equity from December 31, 2007, by less than 0.5%.  Any additional
adjustments related to implementation of EITF 06-10 are expected to be
immaterial.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








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





In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
108”).  SAB 108 provides interpretive guidance on how the effects of
the carryover or reversal of prior year misstatements should be considered in
quantifying a potential current year misstatement.  Prior to SAB 108,
companies might evaluate the materiality of financial statement misstatements
using either the income statement or balance sheet approach, with the income
statement approach focusing on new misstatements added in the current year, and
the balance sheet approach focusing on the cumulative amount of misstatement
present in a company’s balance sheet.





Misstatements
that would be material under one approach could be viewed as immaterial under
another approach, and not be corrected.  SAB 108 now requires that
companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet
approach.  Management has analyzed SAB 108 and determined that upon
adoption it will have no impact on Atlantic’s reported results of operations or
financial conditions.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115 (“SFAS 159”). This statement permits entities to choose
to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.  SFAS 159 is expected to expand the use of fair
value measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments.  SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007.  Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity also
elects to apply the provisions of SFAS 157.  Atlantic has not
completed its evaluation of this statement; however, Atlantic does not currently
intend to choose to measure any other financial instruments at fair
value.





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








NOTE
2 - INVESTMENT SECURITIES





The
amortized cost and estimated fair value of instruments in debt and equity
securities at December 31, 2007 and 2006, follow (dollars in
thousands):





December 31, 2007
            
            
            December 31, 2006Gross
            
            
            Gross
            
            
            
            
            
            
            
            
            Gross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair
            
            
            Amortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value
            
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            ValueAvailable-for-saleU.S.
      Government-sponsored agency
            
            $
            2,983
            
            
            $
            36
            
            
            $
            -
            
            
            $
            3,019
            
            
            $
            1,000
            
            
            $
            7
            
            
            $
            -
            
            
            $
            1,007Mortgage-backed
      securities
            
            
            22,691
            
            
            
            46
            
            
            
            (218
            )
            
            
            22,519
            
            
            
            29,259
            
            
            
            24
            
            
            
            (485
            )
            
            
            28,79825,674
            
            
            
            82
            
            
            
            (218
            )
            
            
            25,538
            
            
            
            30,259
            
            
            
            31
            
            
            
            (485
            )
            
            
            29,805Held-to-maturityState,
      county and municipal bonds
            
            
            15,762
            
            
            
            131
            
            
            
            (371
            )
            
            
            15,522
            
            
            
            10,032
            
            
            
            144
            
            
            
            (38
            )
            
            
            10,138Total
      investment securities
            
            $
            41,436
            
            
            $
            213
            
            
            $
            (589
            )
            
            $
            41,060
            
            
            $
            40,291
            
            
            $
            175
            
            
            $
            (523
            )
            
            $
            39,943





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 2 - INVESTMENT SECURITIES(Continued)





Information
pertaining to securities with gross unrealized losses at December 31, 2007 and
2006, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:





Less Than Twelve Months
            
            
            Over Twelve Months
            
            
            TotalGross
            
            
            
            
            
            Gross
            
            
            
            
            
            GrossUnrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            FairLosses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            ValueDecember 31,
      2007:Available-for-SaleMortgage-backed
      securities
            
            $
            (28
            )
            
            $
            6,063
            
            
            $
            (190
            )
            
            $
            12,746
            
            
            $
            (218
            )
            
            $
            18,809Held-to-MaturityState,
      county, and municipal bonds
            
            $
            (313
            )
            
            $
            8,987
            
            
            $
            (58
            )
            
            $
            2,758
            
            
            $
            (371
            )
            
            $
            11,745December 31,
      2006:Available-for-SaleMortgage-backed
      securities
            
            $
            -
            
            
            $
            131
            
            
            $
            (485
            )
            
            $
            24,563
            
            
            $
            (485
            )
            
            $
            24,694Held-to-MaturityState,
      county, and municipal bonds
            
            $
            (38
            )
            
            $
            4,740
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (38
            )
            
            $
            4,740





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





The
unrealized losses on investment securities available-for-sale were caused by
interest rate changes. It is expected that the securities would not be settled
at a price less than the par value of the investments. Because the decline in
fair value is attributable to changes in interest rates and not credit quality,
and because Atlantic has the ability and intent to hold these investments until
a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.  Temporary decreases in fair value of
securities available-for-sale at December 31, 2007, of $84,000 (net of deferred
income taxes of $52,000) are regarded as an adjustment to stockholders'
equity.  The estimated fair value of securities is determined on the
basis of market quotations.





At
December 31, 2007, securities with an amortized cost of $868,000 and fair value
of $911,000 were pledged to secure deposits of public funds from the state of
Florida and treasury tax and loan deposits with the Federal
Reserve.





At
December 31, 2007, securities, with a fair value of $16.0 million, were sold
under an agreement to repurchase which effectively collateralizes overnight
customer repurchase agreements totaling $13.8 million (see Note 6).  There
were no securities of a single issuer (which were non-governmental or
non-government sponsored) that exceeded 10% of stockholders’ equity at December
31, 2007.





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





Securities
    Available-for-Sale
            
            
            Securities Held-to-MaturityAmortized Cost
            
            
            Fair Value
            
            
            Amortized Cost
            
            
            Fair ValueDue
      in one year or less
            
            $
            2,816
            
            
            $
            2,803
            
            
            $
            -
            
            
            $
            -Due
      after one through five years
            
            
            2,408
            
            
            
            2,356
            
            
            
            -
            
            
            
            -Due
      after five through ten years
            
            
            10,657
            
            
            
            10,594
            
            
            
            1,057
            
            
            
            1,091Due
      after ten years
            
            
            9,793
            
            
            
            9,785
            
            
            
            14,705
            
            
            
            14,431$
            25,674
            
            
            $
            25,538
            
            
            $
            15,762
            
            
            $
            15,522





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
3 - LOANS





The loan
portfolio at December 31, 2007 and 2006, is composed of the following (dollars
in thousands):





2007
            
            
            2006Real
      estate loansConstruction,
      land development, and other land
            
            $
            53,197
            
            
            $
            51,5981-4
      family residential
            
            
            45,708
            
            
            
            38,018Multifamily
      residential
            
            
            1,784
            
            
            
            2,489Commercial
            
            
            86,785
            
            
            
            68,588Total
      real estate loans
            
            
            187,474
            
            
            
            160,693Commercial
      loans
            
            
            11,485
            
            
            
            11,214Consumer
      and other loans
            
            
            5,138
            
            
            
            5,828Total
      loan portfolio
            
            
            204,097
            
            
            
            177,735Less,
      deferred fees and other
            
            
            (37
            )
            
            
            (27
            )Less,
      allowance for loan losses
            
            
            (2,169
            )
            
            
            (1,599
            )Loans,
      net
            
            $
            201,891
            
            
            $
            176,109








At
December 31, 2007 and 2006, fixed-rate loans (excluding nonaccrual loans) with
maturities (or repricing) over one year totaled approximately $29.3 million and
$23.2 million, respectively.





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





2007
            
            
            2006Balance,
      beginning of period
            
            $
            1,599
            
            
            $
            1,552Provisions
      charged to operating expenses
            
            
            629
            
            
            
            194Loans
      charged-off
            
            
            (75
            )
            
            
            (181
            )Recoveries
            
            
            16
            
            
            
            34Balance,
      end of period
            
            $
            2,169
            
            
            $
            1,599








Nonaccrual
(and impaired) loans at December 31, 2007 and 2006, were as follows (dollars in
thousands):





2007
            
            
            2006Real
      estate loansConstruction,
      land development, and other land
            
            $
            4,008
            
            
            $
            -1-4
      family residential
            
            
            1,919
            
            
            
            -Multifamily
      residential
            
            
            -
            
            
            
            -Commercial
            
            
            -
            
            
            
            -Total
      real estate loans
            
            
            5,927
            
            
            
            -Commercial
      loans
            
            
            295
            
            
            
            -Consumer
      and other loans
            
            
            -
            
            
            
            -Total
      nonaccrual loans
            
            $
            6,222
            
            
            $
            -





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 3 - LOANS(Continued)





At
December 31, 2007 and 2006, impaired loans, all collateral dependent, were as
follows (dollars in thousands):





2007
            
            
            2006Average
      balance during year
            
            $
            5,853
            
            
            $
            79Total
      impaired loans (excluding SBA-guaranteed portion of loan)
            
            $
            6,222
            
            
            $
            53Total
      related allowance for loan losses (or SBA-guaranteed portion of
      loan)
            
            
            (562
            )
            
            
            (53
            )Amount
      of impaired loans without a specific allowance for loan
    losses
            
            $
            5,660
            
            
            $
            -








During
2007, interest collected on nonaccrual loans totaled $231,000 and interest
earned but not recorded on nonaccrual loans in 2007 was
$216,000.  Interest income collected and earned but not recorded in
2006 was not material.





Loans
past due 90 or more days and still accruing interest totaled $164,000 at
December 31, 2007, and none at December 31, 2006.








NOTE
4 - FACILITIES





Facilities.  A
summary follows (dollars in thousands):





Accumulated
            
            
            
            
            EstimatedDepreciation
      and
            
            
            Net
      Book
            
            UsefulCost
            
            
            Amortization
            
            
            Value
            
            LivesDecember
      31, 2007:Land
      and land improvements
            
            $
            750
            
            
            $
            -
            
            
            $
            750Bank
      building and improvements
            
            
            3,438
            
            
            
            757
            
            
            
            2,681
            
            5 -
      40 yearsFurniture,
      fixtures, and equipment
            
            
            2,171
            
            
            
            1,818
            
            
            
            353
            
            3 -
      10 years$
            6,359
            
            
            $
            2,575
            
            
            $
            3,784December
      31, 2006:Land
      and land improvements
            
            $
            750
            
            
            $
            -
            
            
            $
            750Bank
      building and improvements
            
            
            3,417
            
            
            
            637
            
            
            
            2,780
            
            5 -
      40 yearsFurniture,
      fixtures, and equipment
            
            
            2,047
            
            
            
            1,617
            
            
            
            430
            
            3 -
      10 years$
            6,214
            
            
            $
            2,254
            
            
            $
            3,960








Depreciation
and amortization of facilities totaled $321,000 and $339,000 in 2007 and 2006,
respectively.





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





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 4 - FACILITIES(Continued)





Total
rent expense for 2007 and 2006 was $385,000 and $428,000,
respectively.  The future annual rental payments for the branch leases
are due as follows (dollars in thousands):





Years
      EndingDecember 31,
            
            Amount2008
            
            $
            3122009
            
            
            3252010
            
            
            3322011
            
            
            1682012
            
            
            84Thereafter
            
            
            1,044$
            2,265








NOTE
5 - TIME DEPOSITS





Time
deposits at December 31, 2007 and 2006, totaled $146,138,000 and $111,032,000,
respectively.  The scheduled maturities of time deposits were as
follows (dollars in thousands):





December 31, 2007
            
            
            December 31, 2006Time,
      $100,000
            
            
            Other
      Time
            
            
            Time,
      $100,000
            
            
            Other
      TimeAnd Over
            
            
            Deposits
            
            
            And Over
            
            
            DepositsThree
      months or less
            
            $
            20,720
            
            
            $
            22,707
            
            
            $
            12,474
            
            
            $
            15,273Over
      three through twelve months
            
            
            22,686
            
            
            
            42,398
            
            
            
            16,878
            
            
            
            22,756Over
      twelve months through three years
            
            
            11,561
            
            
            
            21,212
            
            
            
            10,565
            
            
            
            21,878Over
      three years
            
            
            2,818
            
            
            
            2,036
            
            
            
            6,186
            
            
            
            5,022$
            57,785
            
            
            $
            88,353
            
            
            $
            46,103
            
            
            $
            64,929








Time
deposits of less than $100,000 with a remaining maturity of one year or less
totaled $65,105,000 at December 31, 2007.  Time deposits of $100,000
or more with a remaining maturity of one year or less totaled $43,406,000 at
December 31, 2007.





Interest
expense on certificates of deposit of $100,000 or more totaled $2,858,000 and
$1,764,000 for 2007 and 2006, respectively.  Interest expense on other
time deposits totaled $3,878,000 and $3,167,000 for 2007 and 2006,
respectively.  Early withdrawal penalties on certificates of deposit
totaled $10,000 and $16,000 for 2007 and 2006, respectively, and have been
netted against interest expense.





At
December 31, 2007, Oceanside had $17,926,000 of brokered deposits which are
reflected in other time deposits.  Interest expense on brokered
deposits totaled $203,000 for 2007.  Oceanside did not accept brokered
deposits during 2006.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
6 - OTHER BORROWINGS





Short-Term Debt, Customer Repurchase
Agreements.  Atlantic has sold securities under an agreement to
repurchase with a par value of $16,174,000 and a fair value of $15,963,000,
which effectively collateralizes overnight borrowings totaling
$13,816,000.  The interest rate is based on the then current federal
fund rate less 0.25%.  The interest rate on this overnight borrowing
was 4.00% at December 31, 2007.  The average balance of customer
repurchase agreements for 2007 and 2006 were $15,054,000 and $18,098,000,
respectively, at a weighted average interest rate of 4.81% and 4.49%,
respectively.  Interest of $724,000 and $830,000 was recorded in 2007
and 2006, respectively.





Other Short-term
Borrowings.  Atlantic purchases federal funds for liquidity
needs during the year.  At December 31, 2007 and 2006, federal funds
purchased were $4,372,000 and $-0-, respectively.  The average federal
funds purchased during 2007 and 2006, were $2,441,000 and $695,000,
respectively, at a weighted average interest rate of 4.64% and 3.96%,
respectively.  Interest of $113,000 and $31,000 was recorded in 2007
and 2006, respectively.





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





December 31,2007
            
            
            2006FHLB
      of Atlanta advances
            
            $
            2,300
            
            
            $
            2,300Junior
      subordinated debentures
            
            
            3,093
            
            
            
            3,093$
            5,393
            
            
            $
            5,393








FHLB of Atlanta
Advances.  Atlantic has obtained an advance from FHLB of
$2,300,000 collateralized by Atlantic’s FHLB capital stock in the amount of
$542,000 and a blanket lien on eligible wholly-owned residential (1-4 units)
first mortgage loans totaling approximately $6.3 million.  This
advance matures on November 17, 2010, and has a fixed interest rate at
4.45%.  Atlantic has also pledged approximately $5.7 million of
qualifying collateral comprised of equity lines of credit and second mortgages
for future FHLB advances.  Interest of $104,000 was recorded in both
2007 and 2006.





Junior Subordinated
Debentures.On September 15, 2005, Atlantic participated in a
pooled offering of trust preferred securities.  Atlantic formed
Atlantic BancGroup Statutory Trust I (the "Trust"), a wholly-owned statutory
trust subsidiary for the purpose of issuing the trust preferred
securities.  The Trust used the proceeds from the issuance of
$3,000,000 in trust preferred securities to acquire fixed/floating rate junior
subordinated deferrable interest debentures of Atlantic in the amount of
$3,093,000.  The trust preferred securities essentially mirror the
debt securities, carrying a cumulative preferred dividend at a fixed rate of
5.886% equal to the interest rate on the debt securities, both payable quarterly
for five years.  Beginning September 15, 2010, the quarterly rates
vary based on the three month LIBOR plus 150 basis points.  The debt
securities and the trust preferred securities each have 30-year
lives.  The trust preferred securities and the debt securities are
callable by Atlantic or the Trust, at their respective option after five years,
and at varying premiums and sooner in specific events, subject to prior approval
by the Federal Reserve Board, if then required.  Atlantic has treated
the trust preferred securities as Tier 1 capital up to the maximum amount
allowed, and the remainder, if any, as Tier 2 capital for federal regulatory
purposes.  There are no required principal payments on the junior
subordinated debentures over the next five years.  Interest expense on
the junior subordinated debentures totaled $185,000 and $184,000 in 2007 and
2006, respectively.





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





At
December 31, 2007 and 2006, Atlantic’s investment in the statutory trust of
$93,000 has been included in Other Assetsin theConsolidated Balance Sheets
as an investment in an unconsolidated subsidiary.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
7 - INCOME TAXES





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





Year
      Ended December 31,2007
            
            
            2006Current:Federal
            
            $
            635
            
            
            $
            831State
            
            
            108
            
            
            
            142743
            
            
            
            973Deferred:Federal
            
            
            (252
            )
            
            
            (60
            )State
            
            
            (43
            )
            
            
            (10
            )(295
            )
            
            
            (70
            )Total
      income tax provision
            
            $
            448
            
            
            $
            903








A
reconciliation of the income tax provision computed at the federal statutory
rate of 34% and the income tax provision shown on the statement of income,
follows (dollars in thousands):





2007
            
            
            2006%
      of
            
            
            
            
            
            %
      ofAmount
            
            
            Pretax
            
            
            Amount
            
            
            PretaxTax
      computed at statutory rate
            
            $
            631
            
            
            
            34.0
            %
            
            $
            959
            
            
            
            34.0
            %Increase
      (decrease) resulting from:Nontaxable
      interest income, net
            
            
            (185
            )
            
            
            (9.9
            )
            
            
            (118
            )
            
            
            (4.2
            )Other
            
            
            2
            
            
            
            0.1
            
            
            
            62
            
            
            
            2.2Income
      tax provision
            
            $
            448
            
            
            
            24.2
            %
            
            $
            903
            
            
            
            32.0
            %








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





December 31,2007
            
            
            2006Deferred
      tax asset:Federal
            
            $
            1,030
            
            
            $
            887State
            
            
            176
            
            
            
            1521,206
            
            
            
            1,039Deferred
      tax liability:Federal
            
            
            (179
            )
            
            
            (153
            )State
            
            
            (31
            )
            
            
            (26
            )(210
            )
            
            
            (179
            )Net
      deferred tax asset
            
            $
            996
            
            
            $
            860





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 7 - INCOME TAXES(Continued)





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





December 31,2007
            
            
            2006Allowance
      for loan losses
            
            $
            761
            
            
            $
            545Indexed
      retirement plans
            
            
            359
            
            
            
            292Net
      unrealized holding losses on securities
            
            
            51
            
            
            
            171Depreciation
            
            
            (210
            )
            
            
            (179
            )Other,
      net
            
            
            35
            
            
            
            31Net
      deferred tax asset
            
            $
            996
            
            
            $
            860








Income
tax expense of $119,000 and $60,000 for 2007 and 2006, respectively, have been
netted in the caption “Unrealized holding gains (losses) on securities arising
during period” found in the Consolidated Statements of Income
and Comprehensive Income.








NOTE
8 - EMPLOYEE BENEFITS AND INDEXED RETIREMENT PLANS





SIMPLE
Plan.  Atlantic sponsors a savings incentive plan (“SIMPLE
Plan”) that covers substantially all employees.  Atlantic matches each
participant’s contribution, subject to a maximum of 3% of the participant's
salary.  The SIMPLE Plan is a prototype plan and has been approved by
the Internal Revenue Service.  The amount included in salaries and
employee benefits as pension expense totaled $65,000 and $60,000 for 2007 and
2006, respectively.





Indexed Retirement
Plans.  Atlantic has adopted an Indexed Retirement Plan (“IRP”)
for Atlantic’s seven directors (including one director emeritus) and four of its
current and former officers.  The purpose of the IRP is to retain
qualified directors and members of management by offering a retirement
benefit.  Benefits under the IRP began vesting over a five-year
period, with service beginning in 1997.  Upon his resignation from
Atlantic, a former officer and director was 60% vested in the
IRP.  All of the directors are vested and the three current officers
will be fully vested in December 2009.  At December 31, 2007, these
three officers were vested at 74% - 77%.





Atlantic
has purchased a pool of life insurance policies with $4,050,000 that had
previously been invested in overnight federal funds sold.  The
policies have cash surrender values that can progressively grow, based on a
fluctuating index of life insurance securities, resulting in an earnings
stream.





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





December 31,2007
            
            
            2006Policy
      income included in other income
            
            $
            152
            
            
            $
            106IRP
      expense included in other operating expenses
            
            
            (181
            )
            
            
            (133
            )Life
      insurance expense included in other operating expenses
            
            
            (17
            )
            
            
            (15
            )Deferred
      income tax benefit
            
            
            67
            
            
            
            50Net
      after income tax benefit
            
            $
            21
            
            
            $
            8





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
9 - COMMITMENTS AND CONTINGENCIES





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





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





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





Commercial
and standby letters-of-credit are conditional commitments issued by Atlantic to
guarantee the performance of a customer to a third party.  Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements.  All letters of credit issued and outstanding at
December 31, 2007, totaling $2,084,000, have expiration dates within one
year.  The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to
customers.  Atlantic generally holds collateral supporting those
commitments if deemed necessary.





At
December 31, 2007 and 2006, the following financial instruments were outstanding
whose contract amounts represent credit risk for Atlantic (dollars in
thousands):





December 31,2007
            
            
            2006Commitments
      to extend credit (including unused lines of credit):Revolving,
      open-end lines secured by 1-4 family residential properties (home equity
      lines)
            
            $
            8,796
            
            
            $
            10,550Commercial
      real estate, construction, and land development secured by real
      estate
            
            
            12,099
            
            
            
            15,691Other
            
            
            7,462
            
            
            
            5,22128,357
            
            
            
            31,462Standby
      letters of credit
            
            
            2,084
            
            
            
            1,712$
            30,441
            
            
            $
            33,174








Derivative Loan
Commitments.  At December 31, 2007, Atlantic did not have any
material amounts of commitments to originate residential mortgage loans that
will be sold to investors at a specified time in the future.





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 9 - COMMITMENTS AND
CONTINGENCIES(Continued)





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





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





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





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





Other.  At December
31, 2007, Oceanside had $19.5 million of lines of credit from other banks for
the purchase of overnight federal funds.  At December 31, 2007,
Atlantic had purchased $4.4 million in overnight federal funds, leaving $15.1
million available under these lines.  Additionally, Oceanside has an
available line of credit with the Federal Home Loan Bank, for which
approximately $9.7 million was available at December 31, 2007, based on loans
and other assets pledged to secure this line.








NOTE
10 - CONCENTRATIONS OF CREDIT





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





The
concentrations of credit by type of loan are set forth in Note 3.  The
distribution of commitments to extend credit approximates the distribution of
loans outstanding.  Standby letters of credit were granted primarily
to commercial borrowers.  Atlantic, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of
its legal lending limit.  As a state-chartered bank, Oceanside’s 15%
legal lending limit was approximately $3.6 million at December 31, 2007 ($6.0
million for loans qualifying for the 25% limit).  Atlantic does not
have any significant concentrations in any one industry or
customer.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
11 - RELATED PARTIES





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





A summary
of activity for 2007 and 2006 for such loans follows (dollars in
thousands):





2007
            
            
            2006Beginning
      of year balance
            
            $
            1,998
            
            
            $
            2,323Additions
            
            
            5,622
            
            
            
            1,645Reductions
            
            
            (1,456
            )
            
            
            (1,970
            )End
      of year balance
            
            $
            6,164
            
            
            $
            1,998








Unfunded
commitments to the same parties totaled $1,865,000 at December 31,
2007.  At December 31, 2007 and 2006, deposits and customer repurchase
agreements with insiders totaled approximately $24.2 million and $37.6 million,
respectively.








NOTE
12 - STOCKHOLDERS' EQUITY





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





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
13 - OTHER OPERATING EXPENSES





Other
operating expenses follow (dollars in thousands):





2007
            
            
            2006Processing
      and settlement fees
            
            $
            809
            
            
            $
            624Professional,
      legal, and audit fees
            
            
            264
            
            
            
            253Pension
      expense
            
            
            180
            
            
            
            133Stationery,
      printing, and supplies
            
            
            132
            
            
            
            128Postage,
      freight, and courier
            
            
            100
            
            
            
            97Director
      fees
            
            
            122
            
            
            
            122Telephone
            
            
            88
            
            
            
            82Advertising
      and business development
            
            
            125
            
            
            
            97Regulatory
      assessments
            
            
            169
            
            
            
            66Insurance
      (excluding group insurance)
            
            
            43
            
            
            
            38Dues
      and subscriptions
            
            
            39
            
            
            
            58Other
      miscellaneous expenses
            
            
            183
            
            
            
            171$
            2,254
            
            
            $
            1,869








NOTE
14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS





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





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





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





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





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





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





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





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE 14 - DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)





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





The
estimated fair values of Atlantic's financial instruments at December 31, 2007
and 2006, follow (dollars in thousands):





Carrying
            
            
            FairAmount
            
            
            ValueDecember
      31, 2007:Financial
      AssetsCash
      and due from banks
            
            $
            4,656
            
            
            $
            4,656Investment
      securities and accrued interest receivable
            
            
            41,599
            
            
            
            41,359Restricted
      stock
            
            
            746
            
            
            
            746Loans
      and accrued interest receivable
            
            
            203,130
            
            
            
            203,191Total
      assets valued
            
            $
            250,131
            
            
            $
            249,952Financial
      LiabilitiesDeposits
      and accrued interest payable
            
            $
            217,850
            
            
            $
            215,392Other
      borrowings and accrued interest payable
            
            
            23,608
            
            
            
            23,393Total
      liabilities valued
            
            $
            241,458
            
            
            $
            238,785Off-Balance
      Sheet Commitments
            
            $
            30,441
            
            
            $
            30,441December
      31, 2006:Financial
      AssetsCash
      and due from banks
            
            $
            6,566
            
            
            $
            6,566Federal
      funds sold
            
            
            11,133
            
            
            
            11,133Investment
      securities and accrued interest receivable
            
            
            40,083
            
            
            
            40,189Restricted
      stock
            
            
            735
            
            
            
            735Loans
      and accrued interest receivable
            
            
            177,086
            
            
            
            176,773Total
      assets valued
            
            $
            235,603
            
            
            $
            235,396Financial
      LiabilitiesDeposits
      and accrued interest payable
            
            $
            192,959
            
            
            $
            186,230Other
      borrowings and accrued interest payable
            
            
            32,338
            
            
            
            32,076Total
      liabilities valued
            
            $
            225,297
            
            
            $
            218,306Off-Balance
      Sheet Commitments
            
            $
            33,174
            
            
            $
            33,174





While
these estimates of fair value are based on management’s judgment of the most
appropriate factors, there is no assurance that, were Atlantic to have disposed
of such items at December 31, 2007, the estimated fair values would necessarily
have been achieved at that date, since market values may differ depending on
various circumstances. The estimated fair values at December 31, 2007, should
not necessarily be considered to apply at subsequent dates.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
15 - REGULATORY CAPITAL MATTERS





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





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





As of
December 31, 2007, the most recent notification from the FDIC, Oceanside was
categorized as well-capitalized under the regulatory framework for prompt
corrective action.  To remain categorized as well-capitalized, it will
have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the table below.  There are no
conditions or events, since the most recent notification, that management
believes have changed the prompt corrective action category.





To
      Be Well-CapitalizedUnder
      PromptFor
      Capital
            
            
            Corrective
      ActionActual
            
            
            Adequacy
      Purposes
            
            
            ProvisionsAmount
            
            
            Ratio
            
            
            > Amount
            
            
            > Ratio
            
            
            > Amount
            
            
            > Ratio(dollars
      in thousands)As of December 31,
      2007:Total
      capital to risk-weighted assets
            
            $
            24,115
            
            
            
            10.26
            %
            
            $
            18,795
            
            
            
            8.00
            %
            
            $
            23,494
            
            
            
            10.00
            %Tier
      1 capital to risk-weighted assets
            
            $
            21,915
            
            
            
            9.33
            %
            
            $
            9,398
            
            
            
            4.00
            %
            
            $
            14,096
            
            
            
            6.00
            %Tier
      1 capital to average assets
            
            $
            21,915
            
            
            
            8.53
            %
            
            $
            10,283
            
            
            
            4.00
            %
            
            $
            12,853
            
            
            
            5.00
            %As of December 31,
      2006:Total
      capital to risk-weighted assets
            
            $
            22,160
            
            
            
            10.95
            %
            
            $
            16,197
            
            
            
            8.00
            %
            
            $
            20,246
            
            
            
            10.00
            %Tier
      1 capital to risk-weighted assets
            
            $
            20,561
            
            
            
            10.16
            %
            
            $
            8,099
            
            
            
            4.00
            %
            
            $
            12,148
            
            
            
            6.00
            %Tier
      1 capital to average assets
            
            $
            20,561
            
            
            
            8.75
            %
            
            $
            9,398
            
            
            
            4.00
            %
            
            $
            11,748
            
            
            
            5.00
            %





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007 AND 2006








NOTE
16 - PARENT COMPANY FINANCIAL INFORMATION





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





Condensed
      Balance Sheets as of December 31:
            
            2007
            
            
            2006(Dollars
      In Thousands)AssetsCash
      and cash equivalents
            
            $
            8
            
            
            $
            9Investment
      in and advances to subsidiary bank
            
            
            21,831
            
            
            
            20,278Other
      assets
            
            
            156
            
            
            
            170Total
            
            $
            21,995
            
            
            $
            20,457Liabilities
      and Stockholders' EquityLiabilities
            
            $
            3,139
            
            
            $
            3,206Stockholders'
      equity
            
            
            18,856
            
            
            
            17,251Total
            
            $
            21,995
            
            
            $
            20,457Condensed
      Statements of Income and Stockholders' EquityYears
      Ended December 31:
            
            2007
            
            
            2006(Dollars
      In Thousands)Equity
      in net income of subsidiary bank
            
            $
            1,597
            
            
            $
            2,109Other
      income
            
            
            5
            
            
            
            6Interest
      expense
            
            
            (185
            )
            
            
            (184
            )Other
      expenses (net of income tax benefit)
            
            
            (11
            )
            
            
            (13
            )Net
      income
            
            
            1,406
            
            
            
            1,918Stockholders'
      Equity:Beginning
      of year
            
            
            17,251
            
            
            
            15,232Net
      change in unrealized holding gains (losses)on securities in subsidiary
      bank
            
            
            199
            
            
            
            101End
      of year
            
            $
            18,856
            
            
            $
            17,251Condensed
      Statements of Cash FlowsYears
      Ended December 31:
            
            2007
            
            
            2006(Dollars
      In Thousands)Operating
      ActivitiesNet
      income
            
            $
            1,406
            
            
            $
            1,918Adjustment
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed earnings of subsidiary bank
            
            
            (1,597
            )
            
            
            (2,109
            )Other
            
            
            190
            
            
            
            14Net
      Cash Used In Operating Activities
            
            
            (1
            )
            
            
            (177
            )Decrease
      in Cash and Cash Equivalents
            
            
            (1
            )
            
            
            (177
            )Cash
      and Cash Equivalents:Beginning
      of year
            
            
            9
            
            
            
            186End
      of year
            
            $
            8
            
            
            $
            9


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  ITEM
      8.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE.
 
 None
 
 ITEM
    8A(T).
              CONTROLS AND
PROCEDURES.
 
 Background of Internal Controls and
Internal Audits.  Oceanside is the sole financial subsidiary of
Atlantic.  Oceanside has in place extensive policies and operating
procedures for loans, operations, accounting, and compliance.  All
audits, whether internal or external are reported directly to the joint Audit
Committee of Oceanside and Atlantic, and the minutes of the Audit Committee
meetings are subsequently reported to the Boards of Directors of Oceanside and
Atlantic.
 
 The joint
Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
by the internal auditor for planning purposes.  This audit calendar is
submitted to the Boards of Oceanside and Atlantic for
approval.  Annually, Atlantic engages an external Certified Public
Accounting firm to perform an independent audit conducted in accordance with
generally accepted auditing standards.
 
 Periodically,
Oceanside and Atlantic undergo regulatory examinations that include tests of the
policies and operating procedures for loans, operations, accounting, and
compliance.  The results of these examinations are presented by the
regulators to the Boards of Oceanside and Atlantic.
 
 Evaluation of Disclosure Controls
and Procedures.Atlantic
maintains controls and procedures designed to ensure that information required
to be disclosed in the reports that Atlantic files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.  Based upon management’s evaluation of those
controls and procedures performed within the 90 days preceding the filing of
this Report, the Chief Executive Officer and Chief Financial Officer of Atlantic
concluded that, subject to the limitations noted below, Atlantic’s disclosure
controls and procedures (as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that the information required to
be disclosed by Atlantic in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities and Exchange
Commission’s rules and forms.
 
 Management’s Report on Internal
Control Over Financial Reporting.The
management of Atlantic is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this Annual
Report.  The financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and reflect management’s judgments and estimates concerning the effects of
events and transactions that are accounted for or disclosed.
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Such internal controls over financial reporting were
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
 
 Management
assessed the effectiveness of Atlantic’s internal control over financial
reporting as of December 31, 2007.  In making this assessment,
Atlantic used the criteria set forth in Internal Control Over Financial
Reporting – Guidance for Smaller Public Companies (2006) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
Sarbanes-Oxley Section 404 – A
Guide for Small Business, published by the U.S. Securities and Exchange
Commission.
 
 Based
upon management’s evaluation under the framework in Internal Control Over Financial
Reporting – Guidance for Smaller Public Companies (2006) and Sarbanes-Oxley Section 404 – A Guide
for Small Business, management concluded that Atlantic’s internal control
over financial reporting was effective as of December 31, 2007.  The
results of management’s assessment has been reviewed with the Audit
Committee.
 
 This
annual report does not include an attestation report of Atlantic’s registered
public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by Atlantic's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit Atlantic to provide only management’s report
in this annual report.
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  Changes in Internal
Controls.  Atlantic has made no significant changes in its
internal controls over financial reporting during the quarter ended December 31,
2007, which have materially affected or are reasonably likely to materially
affect their internal control over financial reporting.
 
 Limitations on the Effectiveness of
Controls.  Management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that disclosure controls and
internal controls will prevent all error and all fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within Atlantic have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control.
 
 The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
 
 
 ITEM
      8B.
              OTHER INFORMATION.
 
 There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of 2007 that was not reported.
 
 
 PART
III
 
 ITEM
      9.
              DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS, CONTROL PERSONS,
      AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT.
 
 The
information contained under the section captioned “Election of Directors”
beginning on page 5 of Atlantic’s definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 24, 2008, is incorporated
herein by reference.
 
 COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE
ACT
 
 The
information contained under the section captioned “Section 16(a) Beneficial
Ownership Compliance” at page 12 of Atlantic’s definitive Proxy Statement is
incorporated herein by reference.
 
 CODE OF ETHICS
 
 In 2003,
Atlantic adopted a Code of Ethics policy that applies to its principal executive
and financial officers (Incorporated by reference to Exhibit 14 to Atlantic’s
Form 10-KSB for year ended December 31, 2003).
 
 FINANCIAL EXPERT
 
 Atlantic
has at least one audit committee financial expert.  The information
contained in the section captioned “Report of the Audit Committee” at page 4 in
Atlantic’s definitive Proxy Statement is incorporated herein by
reference.
 
 AUDIT COMMITTEECHARTER
 
 The
Company has adopted an Audit Committee Charter which was amended in March
2001.
  - 62
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 Table of Contents
  ITEM
      10.
              EXECUTIVE
COMPENSATION.
 
 The
information contained in the sections captioned “Summary Compensation Table”
under “Executive Compensation” at page 8, “2008 Director Compensation Table” at
page 9, “Benefits,” at page 9 and “Employment Contracts” at page 10 in the
definitive Proxy Statement, is incorporated herein by reference.
 
 
 ITEM
      11.
              SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
 
 The
information contained in the section captioned “Beneficial Stock Ownership of
Directors and Executive Officers” at page 8 under “Election of Directors” in the
definitive Proxy Statement, is incorporated herein by reference.
 
 
 ITEM
      12.
              CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE.
 
 The
information contained in the section captioned “Certain Relationships and
Related Transactions” at page 10 in the definitive Proxy Statement is
incorporated herein by reference.
 
 
 ITEM
      13.
              EXHIBITS.
 
 The
following exhibits are filed with or incorporated by reference into this report
(see legend below).
  Legend
 
 (a)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      1999
 (b)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2000
 (c)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2002
 (d)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2003
 (e)
              Incorporated
      by reference on Atlantic’s Form 10-QSB for quarter ended September 30,
      2006
  Exhibit
      No.
              Description
      of Exhibit3.1
              Articles
      of Incorporation (a)
 3.2
              Bylaws
      (a)
 4.1
              Specimen
      Stock Certificate (a)
 10.1Software
      License Agreement dated as of October 6, 1997, between Oceanside and File
      Solutions, Inc. (a)
 10.2
              File
      Solutions Software Maintenance Agreement dated as of July 15, 1997,
      between Oceanside and SPARAK Financial Systems, Inc.
  (a)
 10.3
              Remote
      Data Processing Agreement dated as of March 3, 1997, between Oceanside and
      Bankers Data Services, Inc. (a)
 10.4
              Lease
      dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside.
      (b)
 10.5
              Lease
      dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and
      Oceanside. (c)
 10.6
              Change
      in Control Agreement for Barry W. Chandler.
(e)
 10.7
              Change
      in Control Agreement for David L. Young.
(e)
 10.8
              Change
      in Control Agreement for Grady R. Kearsey.
(e)
 11
              The
      computation of per share earnings is shown in the consolidated financial
      statements of Atlantic BancGroup, Inc. and Subsidiary for December 31,
      2007 and 2006, contained in Item 7, on Page 44 of the Notes to
      Consolidated Financial Statements
 14
              Code
      of Ethics for Senior Officers Policy.
(d)
 21.1
              Subsidiary
      of the Registrant
 31.1
              Certifications
      of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act
 31.2
              Certifications
      of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act
  - 63
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 Table of Contents
  32.1
              Certifications
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
 32.2
              Certifications
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
 
 
 Reports on Form
8-K.A Form 8-K was filed by Atlantic on November 9, 2007,
which reported a press release announcing the financial results for the quarter
ended September 30, 2007.
 
 A Form
8-K was filed by Atlantic on December 21, 2007, which reported under Item 5.02,
Departure of Directors or Certain Officers that Jimmy D. Dubberly, a founding
director of Atlantic, retired from Atlantic’s Board of Directors.
 
 
 ITEM
      14.
              PRINCIPAL ACCOUNTANTFEES AND
  SERVICES.
 
 The
information contained in the section captioned “Ratification of the Appointment
of the Independent Auditor for the Fiscal Year Ending December 31, 2008,” at
page 10 in the definitive Proxy Statement is incorporated herein by
reference.
  - 64
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 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be duly signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Jacksonville Beach,
State of Florida, on the twentieth day of March, 2008.
 
 ATLANTIC
      BANCGROUP, INC./s/     Barry W.
      ChandlerBarry
      W. ChandlerPrincipal
      Executive Officer/s/     David L.
      YoungDavid
      L. YoungPrincipal
      Financial Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the twentieth day of March, 2008:
 
 Signature
              
              Title/s/     Donald F.
      Glisson, Jr.
              
              Chairman
      of the BoardDonald
      F. Glisson, Jr./s/     Barry W.
      Chandler
              
              President
      and Chief Executive OfficerBarry
      W. Chandler/s/     David L.
      Young
              
              Executive
      Vice President, Chief Financial Officer,David
      L. Young
              
              and
      Corporate Secretary/s/      Frank J.
      Cervone
              
              DirectorFrank
      J. Cervone/s/     Robin H.
      Scheiderman
              
              DirectorRobin
      H. Scheiderman/s/     G. Keith
      Watson
              
              DirectorG.
      Keith Watson/s/     Conrad L.
      Williams
              
              DirectorConrad
      L. Williams/s/     Dennis M.
      Wolfson
              
              DirectorDennis
      M. Wolfson
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 Table of Contents
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 
 Form
10-KSB
 For
Fiscal Year Ended December 31, 2007
 
 EXHIBIT
INDEX
 
 ExhibitNo.
              
              Exhibit21.1
              
              Subsidiary
      of the Registrant31.1
              
              Certifications
      of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act31.2
              
              Certifications
      of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act32.1
              
              Certifications
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    200232.2
              
              Certifications
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
   - 66 -