UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C.  20549










FORM
      10-QSB





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





For
      the
      Quarterly Period Ended September 30, 2007





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





For
      the
      transition period from
 to .





Commission
      File Number 001-15061








ATLANTIC
      BANCGROUP, INC.


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





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





1315
      S.
      Third Street


Jacksonville
      Beach, Florida  32250


(Address
      of Principal Executive Offices)








(904)
      247-9494


(Issuer’s
      telephone number)








Check
      whether the issuer (1) filed all reports required by Section 13 or 15 (d) of
      the
      Exchange Act during the past 12 months (or for such shorter period that the
      issuer was required to file such reports), and (2) has been subject to such
      filing requirements for the past 90 days.   YESýNO ̈





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


YES
 ̈    NO
      ý





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





Class
            Outstanding
                as of November 7, 2007Common
                Stock
            Common
                Stock – 1,247,516Par
                Value $0.01 per share








Transitional
      Small Business Format
      (check one):YES  ̈   NO
ý





**ATLANTIC
      BANCGROUP, INC. AND SUBSIDIARY**





**FORM
      10-QSB - FOR THE QUARTER ENDED SEPTEMBER 30, 2007**





**INDEX**





PAGENUMBER**PART
                I - FINANCIAL INFORMATION****Item
                1 -**
            **Financial
                Statements**Condensed
                Consolidated Statements of Financial Condition as of
                September 30, 2007 (Unaudited) and December 31, 2006
            3Condensed
                Consolidated Statements of Income and Comprehensive
                Income for the Three and Nine Months Ended September 30, 2007 and
                2006
                (Unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the Three
                and Nine Months Ended September 30, 2007 and 2006
                (Unaudited)
            5Condensed
                Consolidated Statements of Stockholders' Equity
                (Unaudited)
            6Notes
                to Consolidated Financial Statements
                (Unaudited)
            7**Item
                2 -**
            **Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations**
            13**Item
                3 -**
            **Controls
                and Procedures**
            23**PART
                II - OTHER INFORMATION**
            24**SIGNATURES**
            
            25








*Index*


**ATLANTIC
                BANCGROUP, INC. AND SUBSIDIARY****CONDENSED
                CONSOLIDATED STATEMENTS OF FINANCIAL
                CONDITION****(Dollars
                in Thousands, Except Per Share Data)**September
                30,2007
            
            
            December
                31,(Unaudited)
            
            
            2006**ASSETS**Cash
                and due from banks
            
            $
            9,481
            
            
            $
            6,566Federal
                funds sold
            
            
            -
            
            
            
            11,133Total
                cash and cash equivalents
            
            
            9,481
            
            
            
            17,699Investment
                securities, available-for-sale
            
            
            26,715
            
            
            
            29,805Investment
                securities, held-to-maturity (market value of $15,482 in 2007
                and$10,138
                in 2006)
            
            
            15,763
            
            
            
            10,032Restricted
                stock, at cost
            
            
            746
            
            
            
            735Loans,
                net
            
            
            193,556
            
            
            
            176,109Bank
                premises and equipment
            
            
            3,840
            
            
            
            3,960Accrued
                interest receivable
            
            
            1,569
            
            
            
            1,223Deferred
                income taxes
            
            
            999
            
            
            
            860Investment
                in unconsolidated subsidiary
            
            
            93
            
            
            
            93Cash
                surrender value of bank-owned life insurance
            
            
            4,630
            
            
            
            2,543Other
                assets
            
            
            788
            
            
            
            438TOTAL
            
            $
            258,180
            
            
            $
            243,497**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
            
            $
            29,184
            
            
            $
            32,006Interest-bearing
            
            
            172,691
            
            
            
            160,698Total
                deposits
            
            
            201,875
            
            
            
            192,704Short-term
                borrowings
            
            
            30,900
            
            
            
            26,921Long-term
                borrowings
            
            
            5,393
            
            
            
            5,393Accrued
                interest payable
            
            
            308
            
            
            
            279Other
                liabilities
            
            
            1,286
            
            
            
            949Total
                liabilities
            
            
            239,762
            
            
            
            226,246Commitments
                and contingencies
            
            
            -
            
            
            
            -Stockholders'
                equity:Common
                stock
            
            
            12
            
            
            
            12Additional
                paid-in capital
            
            
            11,788
            
            
            
            11,788Retained
                earnings
            
            
            6,866
            
            
            
            5,734Accumulated
                other comprehensive loss:Net
                unrealized holding losses on securities,
                available-for-sale
            
            
            (248
            )
            
            
            (283
            )Total
                stockholders' equity
            
            
            18,418
            
            
            
            17,251TOTAL
            
            $
            258,180
            
            
            $
            243,497Book
                value per common share
            
            $
            14.76
            
            
            $
            13.83Common
                shares outstanding
            
            
            1,247,516
            
            
            
            1,247,516


The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 -
          3
          -
 *Index*


**ATLANTIC
                BANCGROUP, INC. AND SUBSIDIARY****CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME****AND
                COMPREHENSIVE INCOME (UNAUDITED)****(Dollars
                in Thousands, Except Per Share Data)**For
                the Three Months Ended
            
            
            For
                the Nine Months EndedSeptember
                30,
            
            
            September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Interest
                and fees on loans
            
            $
            3,881
            
            
            $
            3,558
            
            
            $
            11,390
            
            
            $
            9,944Investment
                income on investment securities andinterest-bearing
                deposits in banks
            
            
            320
            
            
            
            332
            
            
            
            984
            
            
            
            954Tax-exempt
                interest income on investment securities
            
            
            171
            
            
            
            89
            
            
            
            427
            
            
            
            232Interest
                on federal funds sold
            
            
            22
            
            
            
            85
            
            
            
            216
            
            
            
            216Total
                interest income
            
            
            4,394
            
            
            
            4,064
            
            
            
            13,017
            
            
            
            11,346Interest
                on deposits
            
            
            2,100
            
            
            
            1,708
            
            
            
            6,210
            
            
            
            4,585Short-term
                borrowings
            
            
            235
            
            
            
            222
            
            
            
            639
            
            
            
            640Long-term
                borrowings
            
            
            73
            
            
            
            71
            
            
            
            217
            
            
            
            215Total
                interest expense
            
            
            2,408
            
            
            
            2,001
            
            
            
            7,066
            
            
            
            5,440Net
                interest income before provision for loan losses
            
            
            1,986
            
            
            
            2,063
            
            
            
            5,951
            
            
            
            5,906Provision
                for loan losses
            
            
            410
            
            
            
            48
            
            
            
            472
            
            
            
            144Net
                interest income after provision for loan losses
            
            
            1,576
            
            
            
            2,015
            
            
            
            5,479
            
            
            
            5,762Noninterest
                income:Fees
                and service charges on deposit accounts
            
            
            150
            
            
            
            166
            
            
            
            469
            
            
            
            461Other
                fee income for banking services
            
            
            50
            
            
            
            61
            
            
            
            153
            
            
            
            141Mortgage
                banking fees
            
            
            12
            
            
            
            23
            
            
            
            52
            
            
            
            84Income
                from bank-owned life insurance
            
            
            44
            
            
            
            27
            
            
            
            99
            
            
            
            79Dividends
                from restricted stock
            
            
            8
            
            
            
            8
            
            
            
            25
            
            
            
            21Dividends
                from unconsolidated subsidiary
            
            
            1
            
            
            
            1
            
            
            
            4
            
            
            
            4Other
                income
            
            
            8
            
            
            
            7
            
            
            
            20
            
            
            
            16Total
                noninterest income
            
            
            273
            
            
            
            293
            
            
            
            822
            
            
            
            806Noninterest
                expenses:Salaries
                and employee benefits
            
            
            800
            
            
            
            742
            
            
            
            2,342
            
            
            
            2,187Expenses
                of bank premises and fixed assets
            
            
            286
            
            
            
            289
            
            
            
            851
            
            
            
            876Other
                operating expenses
            
            
            574
            
            
            
            486
            
            
            
            1,596
            
            
            
            1,420Total
                noninterest expenses
            
            
            1,660
            
            
            
            1,517
            
            
            
            4,789
            
            
            
            4,483Income
                before provision for income taxes
            
            
            189
            
            
            
            791
            
            
            
            1,512
            
            
            
            2,085Provision
                for income taxes
            
            
            (12
            )
            
            
            255
            
            
            
            380
            
            
            
            677Net
                income
            
            
            201
            
            
            
            536
            
            
            
            1,132
            
            
            
            1,408Other
                comprehensive income, net of income taxes:Unrealized
                holding gains arising during period
            
            
            241
            
            
            
            377
            
            
            
            35
            
            
            
            17Comprehensive
                income
            
            $
            442
            
            
            $
            913
            
            
            $
            1,167
            
            
            $
            1,425Earnings
                per common shareBasic
            
            $
            0.16
            
            
            $
            0.43
            
            
            $
            0.91
            
            
            $
            1.13Diluted
            
            $
            0.16
            
            
            $
            0.43
            
            
            $
            0.91
            
            
            $
            1.13






The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 -
          4
          -
 *Index*




**ATLANTIC
                  BANCGROUP, INC. AND SUBSIDIARY****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                  (UNAUDITED)****(Dollars
                  in Thousands)**For
                  the Three Months Ended
              
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Cash
                  flows from operating activities:Net
                  income
              
              $
              201
              
              
              $
              536
              
              
              $
              1,132
              
              
              $
              1,408Provision
                  for loan losses
              
              
              410
              
              
              
              48
              
              
              
              472
              
              
              
              144Depreciation
                  and amortization
              
              
              79
              
              
              
              89
              
              
              
              238
              
              
              
              266Net
                  premium amortization and discount accretion
              
              
              (7
              )
              
              
              8
              
              
              
              (21
              )
              
              
              34Net
                  change in other assets and liabilities
              
              
              (86
              )
              
              
              955
              
              
              
              (608
              )
              
              
              (264
              )Net
                  cash provided by operating activities
              
              
              597
              
              
              
              1,636
              
              
              
              1,213
              
              
              
              1,588Cash
                  flows from investing activities:Net
                  (increase) decrease in:Investment
                  securities
              
              
              1,093
              
              
              
              (3,470
              )
              
              
              (2,544
              )
              
              
              (1,095
              )Loans
              
              
              (12,837
              )
              
              
              (6,145
              )
              
              
              (17,919
              )
              
              
              (21,639
              )Purchase
                  of bank-owned life insurance forsalary
                  continuation plan
              
              
              -
              
              
              
              -
              
              
              
              (2,000
              )
              
              
              -Purchases
                  of bank premises and equipment, net
              
              
              (14
              )
              
              
              (24
              )
              
              
              (118
              )
              
              
              (110
              )Net
                  cash used in investing activities
              
              
              (11,758
              )
              
              
              (9,639
              )
              
              
              (22,581
              )
              
              
              (22,844
              )Cash
                  flows from financing activities:Net
                  increase (decrease) in deposits
              
              
              (5,677
              )
              
              
              5,572
              
              
              
              9,171
              
              
              
              20,593Net
                  increase (decrease) in other borrowings
              
              
              7,131
              
              
              
              (2,353
              )
              
              
              3,979
              
              
              
              (1,971
              )Net
                  cash provided by financing activities
              
              
              1,454
              
              
              
              3,219
              
              
              
              13,150
              
              
              
              18,622Net
                  decrease in cash and cash equivalents
              
              
              (9,707
              )
              
              
              (4,784
              )
              
              
              (8,218
              )
              
              
              (2,634
              )Cash
                  and cash equivalents at beginning of period
              
              
              19,188
              
              
              
              17,137
              
              
              
              17,699
              
              
              
              14,987Cash
                  and cash equivalents at end of period
              
              $
              9,481
              
              
              $
              12,353
              
              
              $
              9,481
              
              
              $
              12,353






The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 -
          5
          -
 *Index*




**ATLANTIC
                  BANCGROUP, INC. AND SUBSIDIARY****CONDENSED
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  (UNAUDITED)**(Dollars
                  In Thousands)**Net****Unrealized****Holding
                  Gains****(Losses)
                  on****Additional**
              
              
              
              
              
              **Securities**
              
              
              **Total****Common
                  Stock**
              
              
              **Paid-in**
              
              
              **Retained**
              
              
              **Available-**
              
              
              **Stockholders'****Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Earnings**
              
              
              **for-Sale**
              
              
              **Equity**Balance,
                  December 31, 2006
              
              
              1,247,516
              
              
              $
              12
              
              
              $
              11,788
              
              
              $
              5,734
              
              
              $
              (283
              )
              
              $
              17,251Comprehensive
                  income:Net
                  income for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              460
              
              
              
              -Net
                  change in unrealizedholding
                  gains on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              47Total
                  comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              507Balance,
                  March 31, 2007
              
              
              1,247,516
              
              
              
              12
              
              
              
              11,788
              
              
              
              6,194
              
              
              
              (236
              )
              
              
              17,758Comprehensive
                  income:Net
                  income for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              471
              
              
              
              -Net
                  change in unrealizedholding
                  losses on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (253
              )Total
                  comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              218Balance,
                  June 30, 2007
              
              
              1,247,516
              
              
              
              12
              
              
              
              11,788
              
              
              
              6,665
              
              
              
              (489
              )
              
              
              17,976Comprehensive
                  income:Net
                  income for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              201
              
              
              
              -Net
                  change in unrealizedholding gains
                  on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              241Total
                  comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              442Balance,
                  September 30, 2007
              
              
              1,247,516
              
              
              $
              12
              
              
              $
              11,788
              
              
              $
              6,866
              
              
              $
              (248
              )
              
              $
              18,418






The
            accompanying notes are an integral part of these condensed consolidated
            financial statements.
 -
            6
            -
 *Index*






**ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
        POLICIES**
 
 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 activity is the operation of Oceanside, and it operates in only
        one
        reportable industry segment, banking.  Collectively, the entities are
        referred to as “Atlantic.”  References to Atlantic and Oceanside
        throughout these condensed consolidated financial statements are made using
        the
        first-person notations of “we,” “our,” and “us.”
 
 The
        accompanying condensed 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
        accounting principles generally accepted in the United States of America
        and to
        general practices within the banking industry.
 
 Our
        condensed consolidated financial statements for the three and nine months
        ended
        September 30, 2007 and 2006, have not been audited and do not include
        information or footnotes necessary for a complete presentation of consolidated
        financial condition, results of operations, and cash flows in conformity
        with
        accounting principles generally accepted in the United States of
        America.  In management’s opinion, the accompanying condensed
        consolidated financial statements contain all adjustments, which are of a
        normal
        recurring nature, necessary for a fair presentation.  Our results of
        operations for the interim periods are not necessarily indicative of the
        results
        that may be expected for an entire year. The accounting policies followed
        by us
        are set forth in the consolidated financial statements for the year ended
        December 31, 2006, and are incorporated herein by reference.
 
 Oceanside
        provides a wide range of banking services to individual and corporate customers
        primarily in Duval County and St. Johns County, Florida.  We are
        subject to regulations of certain federal and state regulatory agencies and,
        accordingly, we are examined by those agencies.  As a consequence of
        the extensive regulation of commercial banking activities, our business is
        particularly susceptible to being affected by federal and state legislation
        and
        regulations.
 
 ***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.
 
 Our
        loans
        are generally secured by specific items of collateral including real property,
        consumer assets, and business assets.  Although we have a diversified
        loan portfolio, a substantial portion of our debtors’ ability to honor their
        contracts is dependent on local, state, and national economic conditions
        that
        may affect the value of the underlying collateral or the income of the
        debtor.
 
 While
        management uses available information to recognize losses on loans, 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 us to recognize additional losses
        based on their judgments about information available to them at the time
        of
        their examination.
 
  -
            7
            -
 *Index*
  **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES**(Continued)
 
 ***Fair
        Value of Financial Instruments******-***
        Financial instruments consist of cash, due from banks, federal funds sold,
        investment securities, loans receivable, accrued interest receivable, deposits,
        other borrowings, accrued interest payable, and off-balance sheet commitments
        such as commitments to extend credit and standby letters of
        credit.  On an interim basis, we consider the cost of providing
        estimated fair values by each class of financial instrument to exceed the
        benefits derived.
 
 ***Reclassifications******-*** Certain amounts in the prior periods have been reclassified
        to
        conform to the presentation for the current period.
 
 ***Recent
        Accounting Pronouncements******-***In March
        2006, the FASB issued Statement of Financial Accounting Standards No. 156,
        *Accounting
        for****Servicing****Financial****Assets**,
        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 will adopt FIN 48 for the year 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.
 
  -
            8
            -
 *Index*
  **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **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, the initial assessment is that adoption will not materially
        impact its financial position, results of operations, or liquidity.
 
 In
        June
        2007, the FASB ratified an Emerging Issues Task Force (EITF) consensus regarding
        *Accounting for Income Tax Benefits of Dividends on Share-Based Payment
        Awards,*which becomes effective for Atlantic January 1,
        2008.  Management has not completed its review of this guidance, but
        expects the effect upon implementation will not materially impact Atlantic’s
        financial position, results of operations, or liquidity.
 
 Also,
        recently, the FASB has issued several proposals to amend, supersede, or
        interpret existing accounting standards, which may impact Atlantic’s
        consolidated financial statements at a later date:
 
 ·
              Proposed
                  amendment to SFAS 128, *Earnings per
                  Share*;
 ·
              Proposed
                  replacement of SFAS 141 regarding *Business Combinations*;
                  and
 ·
              Proposed
                  replacement of Accounting Research Bulletin No. 151 regarding
                  *Consolidated Financial Statements, Including Accounting and
                  Reporting
                  for Noncontrolling Interests*.
 
 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.
  -
            9
            -
 *Index*
  **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **NOTE
        2 - 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 three and nine
        months ended September 30, 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.  We have 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 three and nine months ended September 30, 2007 and 2006 (dollars
        and
        number of shares in thousands):
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006**Basic
                  and diluted EPS computation:Numerator
                  - Net income
              
              $
              201
              
              
              $
              536Denominator
                  - Weighted average shares outstanding (rounded)
              
              
              1,248
              
              
              
              1,248Basic
                  and diluted EPS
              
              $
              0.16
              
              
              $
              0.43
 
 **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**Basic
                  and diluted EPS computation:Numerator
                  - Net income
              
              $
              1,132
              
              
              $
              1,408Denominator
                  - Weighted average shares outstanding (rounded)
              
              
              1,248
              
              
              
              1,248Basic
                  and diluted EPS
              
              $
              0.91
              
              
              $
              1.13
 
 **NOTE
        3 - INVESTMENT SECURITIES**
 
 The
        amortized cost and estimated fair value of instruments in debt and equity
        securities are as follows (dollars in thousands):
 
 **September
                  30, 2007**
              
              
              **December
                  31, 2006****Gross**
              
              
              **Gross**
              
              
              
              
              
              
              
              
              **Gross**
              
              
              **Gross****Amortized**
              
              
              **Unrealized**
              
              
              **Unrealized**
              
              
              **Fair**
              
              
              **Amortized**
              
              
              **Unrealized**
              
              
              **Unrealized**
              
              
              **Fair****Cost**
              
              
              **Gains**
              
              
              **Losses**
              
              
              **Value**
              
              
              **Cost**
              
              
              **Gains**
              
              
              **Losses**
              
              
              **Value**Available-for-saleU.S.
                  Government-sponsoredagency
                  securities
              
              $
              2,983
              
              
              $
              7
              
              
              $
              (38
              )
              
              $
              2,952
              
              
              $
              1,000
              
              
              $
              7
              
              
              $
              -
              
              
              $
              1,007Mortgage-backed
                  securities
              
              
              24,128
              
              
              
              9
              
              
              
              (374
              )
              
              
              23,763
              
              
              
              29,259
              
              
              
              24
              
              
              
              (485
              )
              
              
              28,79827,111
              
              
              
              16
              
              
              
              (412
              )
              
              
              26,715
              
              
              
              30,259
              
              
              
              31
              
              
              
              (485
              )
              
              
              29,805Held-to-maturityState,
                  county andmunicipal
                  bonds
              
              
              15,763
              
              
              
              110
              
              
              
              (391
              )
              
              
              15,482
              
              
              
              10,032
              
              
              
              144
              
              
              
              (38
              )
              
              
              10,138Total
                  investment securities
              
              $
              42,874
              
              
              $
              126
              
              
              $
              (803
              )
              
              $
              42,197
              
              
              $
              40,291
              
              
              $
              175
              
              
              $
              (523
              )
              
              $
              39,943
 
 
 Management
        evaluates securities for other-than-temporary impairment at least on a quarterly
        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 we have 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 September 30, 2007,
        of
  -
            10
            -
 *Index*
  **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **NOTE
        3 - INVESTMENT SECURITIES**(Continued)
 
 $396,000
        (less deferred income taxes of $148,000) are regarded as an adjustment to
        stockholders' equity totaling $248,000.  The estimated fair value of
        securities is determined on the basis of market quotations.
 
 At
        September 30, 2007, securities with an amortized cost of $868,000 and fair
        value
        of $903,000 were pledged to secure deposits of public funds from the State
        of
        Florida and treasury tax and loan deposits with the Federal
        Reserve.
 
 At
        September 30, 2007, securities were sold under an agreement to repurchase
        with a
        fair value of $16.3 million, which effectively collateralizes overnight customer
        repurchase agreements totaling $16.3 million.
 
 There
        were no securities of a single issuer, which are non-governmental or
        non-government sponsored, that exceeded 10% of stockholders’ equity at September
        30, 2007.
 
 
 **NOTE
        4 - LOANS**
 
 Loans
        consisted of (dollars in thousands):
 **September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006**Real
                  estate loans:Construction,
                  land development, and other land
              
              $
              53,214
              
              
              $
              51,5981-4
                  family residential
              
              
              43,157
              
              
              
              38,018Multifamily
                  residential
              
              
              1,797
              
              
              
              2,489Commercial
              
              
              82,357
              
              
              
              68,588180,525
              
              
              
              160,693Commercial
                  loans
              
              
              9,700
              
              
              
              11,214Consumer
                  and other loans
              
              
              5,435
              
              
              
              5,828Total
                  loan portfolio
              
              
              195,660
              
              
              
              177,735Less,
                  deferred fees
              
              
              (41
              )
              
              
              (27
              )Less,
                  allowance for loan losses
              
              
              (2,063
              )
              
              
              (1,599
              )Loans,
                  net
              
              $
              193,556
              
              
              $
              176,109
 
 
 **NOTE
        5 - ALLOWANCE FOR LOAN LOSSES**
 
 Our
        Board
        of Directors monitors the loan portfolio quarterly in order to enable it
        to
        evaluate the adequacy of the allowance for loan losses.  We maintain
        the allowance for loan losses at a level that we believe to be sufficient
        to
        absorb probable losses inherent in the loan portfolio.  Activity in
        the allowance for loan losses follows (dollars in thousands):
 
 **For
                  the Nine**
              
              
              **For
                  the Twelve****Months
                  Ended**
              
              
              **Months
                  Ended****September
                  30, 2007**
              
              
              **December
                  31, 2006**Balance,
                  beginning of period
              
              $
              1,599
              
              
              $
              1,552Provisions
                  charged to operating expenses
              
              
              472
              
              
              
              194Loans,
                  charged-off
              
              
              (21
              )
              
              
              (181
              )Recoveries
              
              
              13
              
              
              
              34Balance,
                  end of period
              
              $
              2,063
              
              
              $
              1,599
 
 
 We
        had
        three loans totaling $1,781,000 at September 30, 2007, categorized as
        nonaccrual, and one loan totaling $53,000 categorized as nonaccrual at December
        31, 2006.
 
  -
            11
            -
 *Index*
  
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2007**
 
 **NOTE
        6 - OTHER BORROWINGS**
 
 A
        summary
        follows (dollars in thousands):
 
 **September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006**Customer
                  repurchase agreements
              
              $
              16,320
              
              
              $
              26,921Federal
                  funds purchased
              
              
              14,580
              
              
              
              -$
              30,900
              
              
              $
              26,921FHLB
                  of Atlanta advances
              
              $
              2,300
              
              
              $
              2,300Junior
                  subordinated debentures
              
              
              3,093
              
              
              
              3,093Total
                  other borrowings
              
              $
              5,393
              
              
              $
              5,393
 
 
 **NOTE
        7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**
 
 We
        are a
        party to credit-related financial instruments with off-balance sheet risk
        in the
        normal course of business to meet the financing needs of our
        customers.  These financial instruments include commitments to extend
        credit, standby letters of credit, and commercial letters of
        credit.  Those instruments involve, to varying degrees, elements of
        credit and interest rate risk in excess of the amounts recognized in the
        statements of financial condition.  Our exposure to credit loss is
        represented by the contractual amount of these commitments.  We follow
        the same credit policies in making commitments as we do for on-balance sheet
        instruments.  Financial instruments at September 30, 2007, consisted
        of commitments to extend credit approximating $29.3 million and standby letters
        of credit of $2.6 million.
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract.  Commitments
        generally have fixed expiration dates or other termination clauses and may
        require payment of a fee.  The commitments for equity lines of credit
        may expire without being drawn upon.  Therefore, the total commitment
        amounts do not necessarily represent future cash requirements.  The
        amount of collateral obtained, if it is deemed necessary by us, is based
        on our
        credit evaluation of the customer.
 
 
 **NOTE
        8 - REGULATORY CAPITAL**
 
 Oceanside
        is required to maintain certain minimum regulatory capital
        requirements.  The following is a summary at September 30, 2007, of
        the regulatory capital requirements and actual capital on a percentage basis
        for
        Oceanside:
 **Regulatory****Actual**
              
              **Requirement**Total
                  capital ratio to risk-weighted assets
              
              
              10.40
              %
              
              
              8.00
              %Tier
                  1 capital ratio to risk-weighted assets
              
              
              9.50
              %
              
              
              4.00
              %Tier
                  1 capital to average assets
              
              
              8.77
              %
              
              
              4.00
              %
 
 Effective
        March 30, 2006, the Federal Reserve raised the threshold for reporting
        risk-based capital ratios for a Small Bank Holding Company from $150 million
        to
        $500 million.  Accordingly, we do not calculate or report risk-based
        capital ratios for the Holding Company.
 
 -
              12
              -
 *Index*
  **ITEM
                    2.**
                **MANAGEMENT'S
                    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                    OF OPERATIONS**
 
 **Overview**
 
 *Commercial
          Banking Operations.*Atlantic, through its wholly-owned
          subsidiary, Oceanside, conducts commercial banking business consisting
          of
          attracting deposits and applying those funds to the origination of commercial,
          consumer, and real estate loans (including commercial loans collateralized
          by
          real estate) and purchases of investments.  Our profitability depends
          primarily on net interest income, which is the difference between interest
          income generated from interest-earning assets (principally loans, investments,
          and federal funds sold), less the interest expense incurred on interest-bearing
          liabilities (customer deposits and borrowed funds).  Net interest
          income is affected by the relative amounts of interest-earning assets and
          interest-bearing liabilities, and the interest rate earned and paid on
          these
          balances.  Net interest income is dependent upon Oceanside’s
          interest-rate spread, which is the difference between the average yield
          earned
          on its interest-earning assets and the average rate paid on its interest-bearing
          liabilities.  When interest-earning assets approximate or exceed
          interest-bearing liabilities, any positive interest rate spread will generate
          net interest income.  The interest rate spread is impacted by interest
          rates, deposit flows, and loan demand. Additionally, and to a lesser extent,
          our
          profitability is affected by such factors as the level of noninterest income
          and
          expenses, the provision for loan losses, and the effective income tax rate.
          Noninterest income consists primarily of service fees on deposit accounts
          and
          mortgage banking fees. Noninterest expense consists of compensation and
          employee
          benefits, occupancy and equipment expenses, deposit insurance premiums
          paid to
          the FDIC, and other operating expenses.
 
 Our
          corporate offices are located at 1315 South Third Street, Jacksonville
          Beach,
          Florida.  This location is also our main banking office for Oceanside,
          which opened July 21, 1997, as a state-chartered banking
          organization.  We also operate branch offices located at 560 Atlantic
          Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, and 1790 Kernan
          Boulevard South, Jacksonville, Florida.
 
 **Forward-looking
          Statements**
 
 When
          used
          in this Form 10-QSB, the words or phrases “will likely result,” “are expected
          to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar
          expressions are intended to identify “forward-looking statements” within the
          meaning of the Private Securities Litigation Reform Act of 1995.  Such
          statements are subject to certain risks and uncertainties including changes
          in
          economic conditions in our market area, changes in policies by regulatory
          agencies, fluctuations in interest rates, demand for loans in our market
          area
          and competition, that could cause actual results to differ materially from
          historical earnings and those presently anticipated or projected. We caution
          readers not to place undue reliance on any such forward-looking statements,
          which speak only as to the date made.  We advise readers that the
          factors listed above, as well as others, could affect our financial performance
          and could cause our actual results for future periods to differ materially
          from
          any opinions or statements expressed with respect to future periods in
          any
          current statements. We do not undertake, and specifically disclaim any
          obligation, to publicly release the result of any revisions, which may
          be made
          to any forward-looking statements to reflect events or circumstances after
          the
          date of such statements, or to reflect the occurrence of anticipated or
          unanticipated events.
 
 **Future
          Accounting Requirements**
 
 There
          are
          currently no pronouncements issued or that are scheduled for implementation
          during 2007 that are expected to have any significant impact on our accounting
          policies.
 
 **Impact
          of Inflation**
 
 The
          consolidated financial statements and related data presented herein have
          been
          prepared in accordance with generally accepted accounting principles, which
          require the measurements of financial position and operating results in
          terms of
          historical dollars, without considering changes in the relative purchasing
          power
          of money over time due to inflation.  Unlike most industrial
          companies, substantially all of our assets and liabilities are monetary
          in
          nature.  As a result, interest rates have a more significant impact on
          our performance than the effects of general levels of
          inflation.  Interest rates do not necessarily move in the same
          direction or in the same magnitude as the prices of goods and services,
          since
          such prices are affected by inflation to a larger extent than interest
          rates.  As discussed previously, we seek to manage the relationships
          between interest-sensitive assets and liabilities in order to protect against
          wide interest rate fluctuations, including those resulting from
          inflation.
 
 
  -
              13
              -
 *Index*
  **Critical
          Accounting Policies**
 
 Our
          accounting and reporting policies are in accordance with U.S. generally
          accepted
          accounting principles (“GAAP”),
          and they
          conform to general practices within the banking industry.  We use a
          significant amount of judgment and estimates based on assumptions for which
          the
          actual results are uncertain when we make the estimations.  We have
          identified our policy covering the allowance for loan losses as being
          particularly sensitive in terms of judgments and the extent to which significant
          estimates are used.  For more information on this critical accounting
          policy, please refer to our 2006 Annual Report on Form 10-KSB.
 
 
 **Results
          of Operations**
 
 Our
          net
          income for the three and nine months ended September 30, 2007, was $201,000
          and
          $1,132,000, respectively, as compared with $536,000 and $1,408,000,
          respectively, reported in the same periods of 2006.  Average earning
          assets increased 10.4% in the first nine months of 2007 over the 2006 levels
          for
          the same period.  An overview of the more significant matters
          affecting our results of operations follows:
 
 ·
                Average
                    loans grew at a pace of 9.7% and 10.8% for the three and nine
                    months ended
                    September 30, 2007, respectively, over the same periods of
                    2006.  With the growth in average deposits of 8.4% and 11.9%,
                    respectively, we were able to fund the increased loan
                    demand.
 ·
                With
                    the double-digit growth in average earning assets, we grew our
                    net
                    interest income (before provision for loan losses) $45,000, or
                    0.8% for
                    the nine months ended September 30, 2007, over the same period
                    in
                    2006.  Net interest income decreased by $77,000, or 3.7%, for
                    the three months ended September 30, 2007, over the same period
                    in 2006,
                    due to a change in the mix of deposits and an increase in interest
                    rates,
                    which was partially offset by higher interest on earning
                    assets.
 ·
                Total
                    noninterest expenses increased $143,000 and $306,000, or 9.4%
                    and 6.8%,
                    for the three and nine months ended September 30, 2007, respectively,
                    over
                    the same periods in 2006.  This compares with the growth in
                    earning assets of 8.1% and 10.4% for the same
                    periods.
 
 **Financial
          Condition**
 
 The
          following table shows selected ratios for the periods ended or at the dates
          indicated (annualized for the three and nine months ended September 30,
          2007):
 
 **Three
                    Months**
                
                **Nine
                    Months**
                
                **Year
                    Ended****Ended**
                
                **Ended**
                
                **December
                    31,****September
                    30, 2007**
                
                **September
                    30, 2007**
                
                **2006**Return
                    on average assets
                0.32%
                
                0.62%
                
                0.85%Return
                    on average equity
                4.35%
                
                8.46%
                
                11.96%Interest-rate
                    spread
                2.86%
                
                2.87%
                
                3.10%Net
                    interest margin
                3.57%
                
                3.61%
                
                3.84%Noninterest
                    expenses to average assets
                2.67%
                
                2.62%
                
                2.65%
 
 
 **Liquidity
          and Capital Resources**
 
 *Liquidity
          Management*.  Liquidity management involves monitoring the sources
          and uses of funds in order to meet our day-to-day cash flow requirements
          while
          maximizing profits.  Liquidity represents the ability of a company to
          convert assets into cash or cash equivalents without significant loss and
          to
          raise additional funds by increasing liabilities.  Liquidity
          management is made more complicated because different statements of financial
          condition components are subject to varying degrees of management
          control.  For example, the timing of maturities of the investment
          portfolio is very predictable and subject to a high degree of control at
          the
          time investment decisions are made.  However, net deposit inflows and
          outflows are far less predictable and are not subject to the same degree
          of
          control. Asset liquidity is provided by cash and assets that are readily
          marketable, which can be pledged, or which will mature in the near
          future.  Liability liquidity is provided by access to core funding
          sources, principally the ability to generate customer deposits in our market
          area.  In addition, liability liquidity is provided through the
          ability to borrow against approved lines of credit (federal funds purchased)
          from correspondent banks and to borrow on a secured basis through securities
          sold under agreements to repurchase.
 
  -
              14
              -
 *Index*
  
 We
          expect
          to meet our liquidity needs with:
 
 ·
                Available
                    cash, including both interest and noninterest-bearing balances,
                    and
                    federal funds sold ,which totaled $9.5 million at September 30,
                    2007;
 ·
                The
                    repayment of loans, which include loans with a remaining maturity
                    of one
                    year or less (excluding those in nonaccrual status) totaling
                    $58.4
                    million;
 ·
                Proceeds
                    of unpledged securities available-for-sale and principal repayments
                    from
                    mortgage-backed securities;
 ·
                Growth
                    in deposits; and,
 ·
                If
                    necessary, borrowing against approved lines of credit and other
                    alternative funding strategies.
 
 *Short-Term
          Investments.*  Short-term investments, which consist of federal
          funds sold and interest-bearing deposits, were $-0- at September 30, 2007,
          as
          compared to $11.1 million at December 31, 2006.  These funds are a
          primary source of our liquidity and are generally invested in an earning
          capacity on an overnight basis.  We regularly review our liquidity
          position and have implemented internal policies that establish guidelines
          for
          sources of asset-based liquidity and limit the total amount of purchased
          funds
          used to support the statement of financial condition and funding from non-core
          sources.
 
 *Deposits
          and Other Sources of Funds*.  In addition to deposits, the sources
          of funds available for lending and other business purposes include loan
          repayments, loan sales, securities sold under agreements to repurchase,
          and
          advances under approved borrowings from the Federal Home Loan Bank of
          Atlanta.  Loan repayments are a relatively stable source of funds,
          while deposit inflows and outflows are influenced significantly by general
          interest rates and money market conditions.  Borrowings may be used on
          a short-term basis to compensate for reductions in other sources, such
          as
          deposits at less than projected levels.
 
 *Core
          Deposits*.  Core deposits, which exclude certificates of deposit
          of $100,000 or more, provide a relatively stable funding source for our
          loan
          portfolio and other earning assets.  We had core deposits totaling
          $144.7 million at September 30, 2007, and $146.6 million at December 31,
          2006, a
          decrease of 1.3%.  We anticipate that a stable base of deposits will
          be our primary source of funding to meet both short-term and long-term
          liquidity
          needs in the future.
 
 Customers
          with large certificates of deposit tend to be extremely sensitive to interest
          rate levels, making these deposits less reliable sources of funding for
          liquidity planning purposes than core deposits.  Some financial
          institutions acquire funds in part through large certificates of deposit
          obtained through brokers.  These brokered deposits are generally
          expensive and are unreliable as long-term funding sources.
 
 We
          use
          our resources principally to fund existing and continuing loan commitments
          and
          to purchase investment securities.  At September 30, 2007, we had
          commitments to originate loans totaling $29.3 million, and had issued,
          but
          unused, standby letters of credit of $2.6 million for the same
          period.  In addition, scheduled maturities of certificates of deposit
          during the twelve months following September 30, 2007, total $94.0
          million.  We believe that adequate resources exist to fund all our
          anticipated commitments, and, if so desired, that we can adjust the rates
          and
          terms on certificates of deposit and other deposit accounts to retain deposits
          in a changing interest rate environment.
 
 *Capital*.  We
          are subject to various regulatory capital requirements administered by
          the
          federal and state banking agencies.  Failure to meet minimum capital
          requirements can initiate certain mandatory and possibly additional
          discretionary actions by regulators that, if undertaken, could have a direct
          material effect on our financial statements. Under capital adequacy guidelines
          and the regulatory framework for prompt corrective actions, we must meet
          specific capital guidelines that involve quantitative measures of our assets,
          liabilities, and certain off-balance sheet items as calculated under regulatory
          accounting practices.  The capital amounts and classification are also
          subject to qualitative judgments by the regulators about components, risk
          weightings, and other factors.  FDIC’s Prompt Corrective Action
          regulations are not applicable to bank holding companies.
 
 Quantitative
          measures established by regulation to ensure capital adequacy require us
          to
          maintain minimum amounts and ratios (set forth in the following table)
          of total
          and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
          assets (as defined in the regulations).  Management believes, as of
          September 30, 2007, that we met all minimum capital adequacy requirements
          to
          which we are subject.
 
 
  -
              15
              -
 *Index*
  As
          of the
          most recent reporting period for the quarter ended September 30, 2007,
          Oceanside’s ratios exceeded the minimum levels for the well-capitalized
          category.  An institution must maintain minimum total risk-based, Tier
          1 risk-based, and Tier 1 leverage ratios as set forth in the following
          tables.  At September 30, 2007, Oceanside’s actual capital amounts and
          percentages are presented in the following table (dollars in
          thousands):
 
 **Actual**
                
                **Minimum(1)**
                
                **Well-Capitalized(2)****Amount**
                
                
                **%**
                
                **Amount**
                
                
                **%**
                
                **Amount**
                
                
                **%**Total
                    capital to risk-weighted assets
                
                $
                23,712
                
                
                
                10.40
                %
                
                $
                18,232
                
                
                
                8.00
                %
                
                $
                22,790
                
                
                
                10.00
                %Tier
                    1 capital to risk-weighted assets
                
                $
                21,649
                
                
                
                9.50
                %
                
                $
                9,116
                
                
                
                4.00
                %
                
                $
                13,674
                
                
                
                6.00
                %Tier
                    1 capital to average assets
                
                $
                21,649
                
                
                
                8.77
                %
                
                $
                9,872
                
                
                
                4.00
                %
                
                $
                12,340
                
                
                
                5.00
                %
 
 (1)      The
          minimum required for adequately capitalized purposes.
 (2)      To
          be "well-capitalized" under the FDIC's Prompt Corrective Action regulations
          for
          banks.
 
 There
          are
          no conditions or events since September 30, 2007, that management believes
          have
          changed Oceanside’s category.
 
 **Asset
          Quality**
 
 We
          have
          developed policies and procedures for evaluating the overall quality of
          our
          credit portfolio and the timely identification of potential problem
          loans.  Our judgment as to the adequacy of the allowance is based upon
          a number of assumptions about future events that we believe to be reasonable,
          but which may or may not be valid.  Thus, there can be no assurance
          that charge-offs in future periods will not exceed the allowance for loan
          losses
          or that additional increases in the loan loss allowance will not be
          required.
 
 *Asset
          Classification.*Commercial banks are required to review and,
          when appropriate, classify their assets on a regular basis.  The State
          of Florida and the FDIC have the authority to identify problem assets and,
          if
          appropriate, require them to be classified.  There are three
          classifications for problem assets: substandard, doubtful, and loss. Substandard
          assets have one or more defined weaknesses and are characterized by the
          distinct
          possibility that the insured institution will sustain some loss if the
          deficiencies are not corrected.  Doubtful assets have the weaknesses
          of substandard assets with the additional characteristic that the weaknesses
          make collection or liquidation in full on the basis of currently existing
          facts,
          conditions, and values questionable, and there is a high possibility of
          loss.  An asset classified as loss is considered uncollectible and of
          such little value that continuance as an asset of the institution is not
          warranted.  If an asset or portion thereof is classified as loss, the
          insured institution establishes a specific reserve for the full amount
          of the
          portion of the asset classified as loss.  All or a portion of general
          loss allowances established to cover possible losses related to assets
          classified as substandard or doubtful may be included in determining an
          institution's regulatory capital, while specific valuation allowances for
          loan
          losses generally do not qualify as regulatory capital.  Assets that do
          not warrant classification in the aforementioned categories, but possess
          weaknesses, are classified by us as special mention and monitored.
 
 At
          September 30, 2007, we had fourteen loan relationships totaling approximately
          $5.2 million classified as substandard and four loan relationships totaling
          approximately $3.6 million classified as doubtful.  We had no loans
          classified as loss at September 30, 2007.  The largest substandard
          loan relationship at September 30, 2007, totaled $3.5 million, which management
          believed was well-secured.  The largest doubtful loan relationship at
          September 30, 2007, totaled $1.7 million for which management had provided
          a
          specific reserve of $387,000.
 
 *Allowance
          for Loan Losses*.  The allowance for loan losses is established
          through a provision for loan losses charged against income.  Loans are
          charged against the allowance when we believe that the collectibility of
          principal is unlikely.  The provision is an estimated amount that we
          believe will be adequate to absorb probable losses inherent in the loan
          portfolio based on evaluations of its collectibility.  The evaluations
          take into consideration such factors as changes in the nature and volume
          of the
          portfolio, overall portfolio quality, specific problem loans and commitments,
          and current anticipated economic conditions that may affect the borrower's
          ability to pay.  While we use the best information available to
          recognize losses on loans, future additions to the provision may be necessary
          based on changes in economic conditions.
  -
              16
              -
 *Index*
  A
          summary
          of balances in the allowance for loan losses and key ratios follows (dollars
          in
          thousands):
 
 **For
                    the Nine**
                
                
                **For
                    the Twelve****Months
                    Ended**
                
                
                **Months
                    Ended****September
                    30, 2007**
                
                
                **December
                    31, 2006**End
                    of period loans (net of deferred fees)
                
                $
                195,619
                
                
                $
                177,708End
                    of period allowance for loan losses
                
                $
                2,063
                
                
                $
                1,599%
                    of allowance for loan losses to total loans
                
                
                1.05
                %
                
                
                0.90
                %Average
                    loans for the period
                
                $
                183,276
                
                
                $
                167,883Net
                    charge-offs as a percentage of average loansfor
                    the period (annualized for 2007)
                
                
                0.01
                %
                
                
                0.09
                %Nonperforming
                    assets:Nonaccrual
                    loans
                
                $
                1,781
                
                
                $
                53Loans
                    past due 90 days or more and still accruing (*)
                
                
                3,710
                
                
                
                -Foreclosed
                    real estate
                
                
                -
                
                
                
                -Other
                    repossessed assets
                
                
                -
                
                
                
                -$
                5,491
                
                
                $
                53Nonperforming
                    assets to period end loans
                
                
                2.81
                %
                
                
                0.03
                %Nonperforming
                    assets to period end total assets
                
                
                2.13
                %
                
                
                0.02
                %(*)
                  One loan relationship that comprises $3.5 million of this total
                  is
                  classified substandard but believed to be well-secured and in process
                  of
                  collection.
 
 **Interest
          Rate Risk**
 
 Our
          asset
          base is exposed to risk including the risk resulting from changes in interest
          rates and changes in the timing of cash flows.  We monitor the effect
          of such risks by considering the mismatch of the maturities of our assets
          and
          liabilities in the current interest rate environment and the sensitivity
          of
          assets and liabilities to changes in interest rates.  We have
          considered the effect of significant increases and decreases in interest
          rates
          and believe such changes, if they occurred, would be manageable, and would
          not
          affect our ability to hold our assets as planned.  However, we would
          be exposed to significant market risk in the event of significant and prolonged
          interest rate changes.
 
 **Quantitative
          and Qualitative Disclosures about Market Risk**
 
 Market
          risk is the risk of loss from adverse changes in market prices and
          rates.  Our market risk arises primarily from interest rate risk
          inherent in our lending and deposit-taking activities.  We have little
          or no risk related to trading accounts, commodities or foreign
          exchange.
 
 We
          do not
          engage in trading or hedging activities and do not invest in interest-rate
          derivatives or enter into interest- rate swaps.  We actively monitor
          and manage interest-rate risk exposure.  The primary objective in
          managing interest-rate risk is to limit, within established guidelines,
          the
          adverse impact of changes in interest rates on our net interest income
          and
          capital, while adjusting our asset-liability structure to obtain the maximum
          yield-cost spread on that structure.  We rely primarily on the
          asset-liability structure to control interest-rate risk.  However, a
          sudden and substantial change in interest rates could adversely impact
          our
          earnings, to the extent that the interest rates borne by assets and liabilities
          do not change at the same speed, to the same extent, or on the same
          basis.  There have been no significant changes in our market risk
          exposure since December 31, 2006.
 
 
  -
              17
              -
 *Index*
  **Average
          Balances, Income and Expenses, and Rates**
 
 The
          following table depicts, for the periods indicated, certain information
          related
          to our average statements of financial condition and our average yields
          on
          assets and average costs of liabilities.  Such yields are derived by
          dividing income or expense by the average balance of the corresponding
          assets or
          liabilities.  Average balances have generally been derived from daily
          averages (dollars in thousands):
 
 **For
                    the Three Months Ended September 30,****2007**
                
                **2006****Interest**
                
                
                **Average**
                
                
                
                
                **Interest**
                
                
                **Average****Average**
                
                
                **and**
                
                
                **Yield/**
                
                **Average**
                
                
                **and**
                
                
                **Yield/****Balance**
                
                
                **Dividends**
                
                
                **Rate**
                
                **Balance**
                
                
                **Dividends**
                
                
                **Rate**Interest-earning
                    assets:Loans
                
                $
                187,393
                
                
                $
                3,881
                
                
                
                8.22
                %
                
                $
                170,753
                
                
                $
                3,558
                
                
                
                8.27
                %Investment
                    securities andinterest-bearing
                    deposits (1)
                
                
                43,230
                
                
                
                491
                
                
                
                5.45
                %
                
                
                37,862
                
                
                
                421
                
                
                
                4.98
                %Other
                    interest-earning assets
                
                
                1,465
                
                
                
                22
                
                
                
                5.96
                %
                
                
                6,175
                
                
                
                85
                
                
                
                5.46
                %Total
                    interest-earning assets (1)
                
                
                232,088
                
                
                
                4,394
                
                
                
                7.69
                %
                
                
                214,790
                
                
                
                4,064
                
                
                
                7.61
                %Noninterest-earning
                    assets
                
                
                14,910
                
                
                
                
                
                
                
                
                
                
                
                13,463Total
                    assets
                
                $
                246,998
                
                
                
                
                
                
                
                
                
                
                $
                228,253Interest-bearing
                    liabilities:Demand,
                    money marketand
                    NOW deposits
                
                $
                41,220
                
                
                
                408
                
                
                
                3.93
                %
                
                $
                42,515
                
                
                
                408
                
                
                
                3.81
                %Savings
                
                
                3,429
                
                
                
                13
                
                
                
                1.50
                %
                
                
                5,161
                
                
                
                19
                
                
                
                1.46
                %Certificates
                    of deposit
                
                
                128,365
                
                
                
                1,679
                
                
                
                5.19
                %
                
                
                105,012
                
                
                
                1,281
                
                
                
                4.84
                %Other
                    borrowings
                
                
                24,860
                
                
                
                308
                
                
                
                4.92
                %
                
                
                23,903
                
                
                
                293
                
                
                
                4.86
                %Total
                    interest-bearing liabilities
                
                
                197,874
                
                
                
                2,408
                
                
                
                4.83
                %
                
                
                176,591
                
                
                
                2,001
                
                
                
                4.50
                %Noninterest-bearing
                    liabilities
                
                
                30,800
                
                
                
                
                
                
                
                
                
                
                
                35,458Stockholders’
                    equity
                
                
                18,324
                
                
                
                
                
                
                
                
                
                
                
                16,204Total
                    liabilities andstockholders’
                    equity
                
                $
                246,998
                
                
                
                
                
                
                
                
                
                
                $
                228,253Net
                    interest income beforeprovision
                    for loan losses
                
                
                
                
                
                $
                1,986
                
                
                
                
                
                
                
                
                
                
                $
                2,063Interest-rate
                    spread
                
                
                
                
                
                
                
                
                
                
                2.86
                %
                
                
                
                
                
                
                
                
                
                
                3.11
                %Net
                    interest margin (1)
                
                
                
                
                
                
                
                
                
                
                3.57
                %
                
                
                
                
                
                
                
                
                
                
                3.91
                %Ratio
                    of average interest-earning assetsto
                    average interest-bearing liabilities
                
                
                117.29
                %
                
                
                
                
                
                
                
                
                
                
                121.63
                %
  (1)Tax-exempt
          income
          has been adjusted to a tax-equivalent basis using an incremental rate of
          37.6%
          for purposes of computing the average yield/rate.
  -
              18
              -
 *Index*
  
 **For
                    the Nine Months Ended September 30,****2007**
                
                **2006****Interest**
                
                
                **Average**
                
                
                
                
                **Interest**
                
                
                **Average****Average**
                
                
                **and**
                
                
                **Yield/**
                
                **Average**
                
                
                **and**
                
                
                **Yield/****Balance**
                
                
                **Dividends**
                
                
                **Rate**
                
                **Balance**
                
                
                **Dividends**
                
                
                **Rate**Interest-earning
                    assets:Loans
                
                $
                183,276
                
                
                $
                11,390
                
                
                
                8.31
                %
                
                $
                165,482
                
                
                $
                9,944
                
                
                
                8.03
                %Investment
                    securities andinterest-bearing
                    deposits (1)
                
                
                41,564
                
                
                
                1,411
                
                
                
                5.37
                %
                
                
                37,370
                
                
                
                1,186
                
                
                
                4.74
                %Other
                    interest-earning assets
                
                
                5,277
                
                
                
                216
                
                
                
                5.47
                %
                
                
                5,679
                
                
                
                216
                
                
                
                5.09
                %Total
                    interest-earning assets (1)
                
                
                230,117
                
                
                
                13,017
                
                
                
                7.71
                %
                
                
                208,531
                
                
                
                11,346
                
                
                
                7.36
                %Noninterest-earning
                    assets
                
                
                14,336
                
                
                
                
                
                
                
                
                
                
                
                13,849Total
                    assets
                
                $
                244,453
                
                
                
                
                
                
                
                
                
                
                $
                222,380Interest-bearing
                    liabilities:Demand,
                    money marketand
                    NOW deposits
                
                $
                43,336
                
                
                
                1,297
                
                
                
                4.00
                %
                
                $
                40,646
                
                
                
                1,000
                
                
                
                3.29
                %Savings
                
                
                4,046
                
                
                
                45
                
                
                
                1.49
                %
                
                
                5,266
                
                
                
                48
                
                
                
                1.22
                %Certificates
                    of deposit
                
                
                125,149
                
                
                
                4,868
                
                
                
                5.20
                %
                
                
                101,273
                
                
                
                3,537
                
                
                
                4.67
                %Other
                    borrowings
                
                
                22,756
                
                
                
                856
                
                
                
                5.03
                %
                
                
                24,370
                
                
                
                855
                
                
                
                4.69
                %Total
                    interest-bearing liabilities
                
                
                195,287
                
                
                
                7,066
                
                
                
                4.84
                %
                
                
                171,555
                
                
                
                5,440
                
                
                
                4.24
                %Noninterest-bearing
                    liabilities
                
                
                31,276
                
                
                
                
                
                
                
                
                
                
                
                35,089Stockholders’
                    equity
                
                
                17,890
                
                
                
                
                
                
                
                
                
                
                
                15,736Total
                    liabilities andstockholders’
                    equity
                
                $
                244,453
                
                
                
                
                
                
                
                
                
                
                $
                222,380Net
                    interest income beforeprovision
                    for loan losses
                
                
                
                
                
                $
                5,951
                
                
                
                
                
                
                
                
                
                
                $
                5,906Interest-rate
                    spread
                
                
                
                
                
                
                
                
                
                
                2.87
                %
                
                
                
                
                
                
                
                
                
                
                3.12
                %Net
                    interest margin (1)
                
                
                
                
                
                
                
                
                
                
                3.61
                %
                
                
                
                
                
                
                
                
                
                
                3.88
                %Ratio
                    of average interest-earning assetsto
                    average interest-bearing liabilities
                
                
                117.84
                %
                
                
                
                
                
                
                
                
                
                
                121.55
                %
 
 
 (1)Tax-exempt
          income
          has been adjusted to a tax-equivalent basis using an incremental rate of
          37.6%
          for purposes of computing the average yield/rate.
 
  -
              19
              -
 *Index*
  **Analysis
          of Changes in Net Interest Income**
 
 The
          following table sets forth, on a taxable equivalent basis, the effect which
          varying levels of interest-earning assets and interest-bearing liabilities
          and
          the applicable interest rates had on changes in net interest income for
          the
          three and nine months periods ended September 30, 2007, compared to the
          same
          periods in 2006 respectively.  For purposes of these tables, changes
          which are not solely attributable to volume or rate are allocated to volume
          and
          rate on a pro rata basis (dollars in thousands):
 
 Three
                    Months Ended September 30,2007
                    vs. 2006Increase
                    (Decrease) Due toRate/Rate
                
                
                Volume
                
                
                Volume
                
                
                TotalInterest-earning
                    assets:Loans
                
                $
                (22
                )
                
                $
                347
                
                
                $
                (2
                )
                
                $
                323Investment
                    securities and interest-bearing deposits
                
                
                45
                
                
                
                67
                
                
                
                (42
                )
                
                
                70Other
                    interest-earning assets
                
                
                8
                
                
                
                (65
                )
                
                
                (6
                )
                
                
                (63
                )Total
                    interest-earning assets
                
                
                31
                
                
                
                349
                
                
                
                (50
                )
                
                
                330Interest-bearing
                    liabilities:Demand,
                    money market and NOW deposits
                
                
                13
                
                
                
                (13
                )
                
                
                -
                
                
                
                -Savings
                
                
                1
                
                
                
                (7
                )
                
                
                -
                
                
                
                (6
                )Certificates
                    of deposit
                
                
                93
                
                
                
                285
                
                
                
                20
                
                
                
                398Other
                    borrowings
                
                
                4
                
                
                
                11
                
                
                
                -
                
                
                
                15Total
                    interest-bearing liabilities
                
                
                111
                
                
                
                276
                
                
                
                20
                
                
                
                407Net
                    interest income
                
                $
                (80
                )
                
                $
                73
                
                
                $
                (70
                )
                
                $
                (77
                )
 
 Nine
                    Months Ended September 30,2007
                    vs. 2006Increase
                    (Decrease) Due toRate/Rate
                
                
                Volume
                
                
                Volume
                
                
                TotalInterest-earning
                    assets:Loans
                
                $
                347
                
                
                $
                1,069
                
                
                $
                30
                
                
                $
                1,446Investment
                    securities and interest-bearing deposits
                
                
                176
                
                
                
                149
                
                
                
                (100
                )
                
                
                225Other
                    interest-earning assets
                
                
                16
                
                
                
                (15
                )
                
                
                (1
                )
                
                
                -Total
                    interest-earning assets
                
                
                539
                
                
                
                1,203
                
                
                
                (71
                )
                
                
                1,671Interest-bearing
                    liabilities:Demand,
                    money market and NOW deposits
                
                
                216
                
                
                
                66
                
                
                
                15
                
                
                
                297Savings
                
                
                11
                
                
                
                (11
                )
                
                
                (3
                )
                
                
                (3
                )Certificates
                    of deposit
                
                
                401
                
                
                
                834
                
                
                
                96
                
                
                
                1,331Other
                    borrowings
                
                
                62
                
                
                
                (57
                )
                
                
                (4
                )
                
                
                1Total
                    interest-bearing liabilities
                
                
                690
                
                
                
                832
                
                
                
                104
                
                
                
                1,626Net
                    interest income
                
                $
                (151
                )
                
                $
                371
                
                
                $
                (175
                )
                
                $
                45
 
 **Comparison
          of Three Months Ended September 30, 2007 and 2006**
 
 **Interest
          Income and Expense**
 
 *Interest
          Income*.  Interest income was $4,394,000 and $4,064,000 for the
          three months ended September 30, 2007 and 2006, respectively.  An
          increase in yields on average interest-earning assets of 8 basis points,
          or
          1.1%, and the favorable growth in average interest-earning assets of $17.3
          million, or 8.1%, contributed to an overall growth rate of 8.1% for interest
          income.  The increase in yields was the result of increases in
          earnings on investment securities and other interest earning assets and
          an
          increase in the volume of average loans.  Average loans, as a
          percentage of average interest-earning assets, increased to 80.7% in the
          third
          quarter of 2007 as compared with 79.5% in 2006.
  -
              20
              -
 *Index*
  We
          saw a
          shift in the percentage of average investment securities and interest-bearing
          deposits to 18.6% in 2007 from 17.6% in 2006, while the percentage of average
          other interest-earning assets to total average interest-earning assets
          shifted
          from 2.9% in 2006 to 0.6% in 2007.
 
 *Interest
          Expense.*  Interest expense was $2,408,000 and $2,001,000 for the
          three months ended September 30, 2007 and 2006, respectively.  As a
          result of the increasing interest rate environment and our growth in average
          interest-bearing liabilities of $21.3 million, or 12.1%, during this period,
          interest expense increased $407,000, or 20.3%.  Our average cost of
          funds (interest-bearing liabilities) rose to 4.83% in 2007 compared with
          4.50%
          over the same period in 2006.  A shift in the mix of our
          interest-bearing deposits, along with increases in the overall interest
          rates in
          our market area, contributed to the rise in our cost of
          funds.  Certificates of deposit, with an average cost of funds of
          5.19% in 2007 and 4.84% in 2006, represented 64.9% of our total interest-bearing
          liabilities in 2007 as compared with 59.5% in 2006.  We also
          experienced declines in other lower costing deposits and borrowed
          funds.  The shift from lower costing deposits to higher costing
          deposits can be attributed, in part, to the current interest rate
          environment.
 
 *Net
          Interest Income before Provision for Loan Losses*.  Net interest
          income before provision for loan losses was $1,986,000 and $2,063,000 for
          the
          three months ended September 30, 2007 and 2006, respectively.  The net
          interest margin for the third quarter of 2007 was 3.57% as compared with
          the net
          interest margin in 2006 of 3.91%, a decrease of 34 basis
          points.  Given our composition of interest-bearing liabilities, we
          experienced a more rapid increase in our cost of funds of 33 basis points,
          while
          the rates we earned on our earning assets increased by 8 basis points in
          the
          third quarter of 2007 over the same period of 2006.
 
 **Provision
          for Loan Losses**
 
 We
          recorded provisions for loan losses totaling $410,000 and $48,000 for the
          three
          months ended September 30, 2007 and 2006, respectively, which management
          considered appropriate after its assessment of the overall quality of the
          loan
          portfolio and the recent downturn in the real estate market that has increased
          the number of classified and other loans we monitor.
 
 **Noninterest
          Income and Expenses**
 
 *Noninterest
          Income.*  Total noninterest income decreased by $20,000 for the
          three months ended September 30, 2007, to $273,000 compared with $293,000
          for
          the same period in September 30, 2006.  Fees and service charges on
          deposit accounts decreased by $16,000, or 9.6%, in 2007 versus the same
          period
          in 2006. During the third quarter of 2007, Oceanside implemented a
          marketing strategy aimed at improving its overall noninterest income. Part
          of
          this strategy is to offer free checking, which in the initial phase of
          this
          program reduces service charges until volume increases and other fee
          opportunities offset the lost income from free checking. Other fee income
          for banking services decreased $11,000, or 18.0%, due to decreases in usage
          and
          per item charges assessed by us for other banking services, principally
          for ATM
          and debit card usage.  Mortgage banking fees decreased $11,000, or
          47.8%, during this period reflecting a downturn in the residential
          lending market.
 
 *Noninterest
          Expenses.*  Salaries and employee benefits increased $58,000, or
          7.8%, in the third quarter of 2007 over 2006.  Employee compensation
          rose $46,000, or 7.8%.  All other employee benefits contributed the
          remaining net increase of $12,000.  Expenses of bank premises and
          fixed assets decreased $3,000, or 1.0%.  Other operating expenses
          increased $88,000, or 18.1%.  The more significant increases
          were:
 
 ·
                higher
                    data processing and settlement fees of
                    $75,000;
 ·
                increased
                    pension costs of $17,000;
 ·
                increases
                    in audit, legal, and professional fees of
                    $19,000;
 ·
                increases
                    in regulatory assessments of $28,000;
                    and
 ·
                increases
                    in advertising and business development of
                    $17,000.
 
 These
          increases are consistent with trends in our account and activity growth,
          compliance with SOX 404, and inflationary increases in the overall cost
          of goods
          and services.  Other miscellaneous expenses, which include other
          losses, decreased $42,000 to partially offset the overall increases in
          other
          operating expenses.
 
 
  -
              21
              -
 *Index*
  **Provision
          (Benefit) for Income Taxes**
 
 The
          income tax benefit was $(12,000) for the three months ended September 30,
          2007,
          an effective rate of (6.3)%. This compares with an effective rate of 32.2%
          for
          the same period in 2006.  The effective tax rates in 2007 and 2006
          differ from the federal and state statutory rates principally due to nontaxable
          investment income.  Tax-exempt income was $171,000 for the third
          quarter of 2007 as compared with $89,000 in 2006.  This increase of
          92.1% has outpaced our growth in taxable income and, accordingly, our effective
          rate has decreased in 2007.
 
 
 **Comparison
          of Nine Months Ended September 30, 2007 and 2006**
 
 **Interest
          Income and Expense**
 
 *Interest
          Income*.  Interest income was $13,017,000 and $11,346,000 for the
          nine months ended September 30, 2007 and 2006, respectively.  An
          increase in yields on average interest-earning assets of 35 basis points,
          or
          4.8%, and the favorable growth in average interest-earning assets of $21.6
          million, or 10.4%, contributed to an overall growth rate of 14.7% for interest
          income.  The increase in yields was the result of increases in the
          interest rate environment, and by changes in the mix in average interest-earning
          assets.  Average loans, as a percentage of average interest-earning
          assets, increased to 79.6% in 2007 as compared with 79.4% in 2006.  We
          saw a shift in the percentage of average other interest-earning assets
          to total
          average interest-earning assets from 17.9% in 2006 to 18.1% in
          2007.
 
 *Interest
          Expense.*  Interest expense was $7,066,000 and $5,440,000 for the
          nine months ended September 30, 2007 and 2006, respectively.  As a
          result of the fluctuating interest rate environment and our growth in
          average interest-bearing liabilities of $23.7 million, or 13.8%, during
          this
          period, interest expense increased $1,626,000, or 29.9%. Our average cost
          of
          funds (interest-bearing liabilities) rose to 4.84% in 2007 compared with
          4.24%
          over the same period in 2006.  A shift in the mix of our
          interest-bearing deposits, along with increases in the overall interest
          rates in
          our market area, contributed to the rise in our cost of
          funds.  Certificates of deposit, with an average cost of funds of
          5.20% in 2007 and 4.67% in 2006, represented approximately 64.1% of our
          total
          interest-bearing liabilities in 2007 as compared with 59.0% in
          2006.  We also experienced declines in other lower costing deposits
          and borrowed funds. The shift from lower costing deposits to higher costing
          deposits can be attributed, in part, to the current interest rate
          environment.
 
 *Net
          Interest Income before Provision for Loan Losses*.  Net interest
          income before provision for loan losses was $5,951,000 and $5,906,000 for
          the
          nine months ended September 30, 2007 and 2006, respectively.  The net
          interest margin for the first nine months of 2007 was 3.61% as compared
          with the
          net interest margin in 2006 of 3.88%, a decrease of 27 basis
          points.  Given our composition of interest-bearing liabilities, we
          experienced a more rapid increase in our cost of funds of 60 basis points,
          while
          the rates we earned on our earning assets increased by 35 basis points
          in the
          first nine months of 2007 over the same period of 2006.
 
 **Provision
          for Loan Losses**
 
 We
          recorded provisions for loan losses totaling $472,000 and $144,000 for
          the nine
          months ended September 30, 2007 and 2006, respectively, which management
          considered appropriate after its assessment of the overall quality of the
          loan
          portfolio and the recent downturn in the real estate market that has increased
          the number of classified and other loans we monitor.
 
 **Noninterest
          Income and Expenses**
 
 *Noninterest
          Income.*  Total noninterest income increased to $822,000 for the
          nine months ended September 30, 2007, compared with $806,000 for the same
          period
          in September 30, 2006.  Fees and service charges on deposit accounts
          increased by $8,000, or 1.7%, in 2007 versus the same period in
          2006.  Other fee income for banking services increased $12,000, or
          8.5%, due to increases in usage and per item charges assessed by us for
          other
          banking services, principally for ATM and debit card usage.  Mortgage
          banking fees declined $32,000, or 38.1%, during this period reflecting a
          downturn in the residential lending market.
 
  -
              22
              -
 *Index*
  *Noninterest
          Expenses.*  Salaries and employee benefits increased $155,000, or
          7.1%, in the first nine months of 2007 over 2006.  Employee
          compensation rose $114,000, or 6.5%.  All other employee benefits
          contributed to the remaining net increase of $41,000.  Lower
          depreciation costs contributed to a 2.9% decline in expenses of bank premises
          and fixed assets.  Other operating expenses increased $176,000, or
          12.4%.  The more significant increases were:
 
 ·
                higher
                    data processing and settlement fees of
                    $118,000;
 ·
                increased
                    pension costs of $31,000;
 ·
                increases
                    in audit, legal, and professional fees of
                    $44,000;
 ·
                increases
                    in regulatory assessments of $31,000;
                    and
 ·
                increases
                    in advertising and business development of
                    $22,000.
 
 These
          increases are consistent with trends in our account and activity growth,
          compliance with SOX 404, and inflationary increases in the overall cost
          of goods
          and services.  Other miscellaneous expenses, which include other
          losses, decreased $43,000 to partially offset the overall increases in
          other
          operating expenses.
 
 **Provision
          for Income Taxes**
 
 The
          income tax provision was $380,000 for the nine months ended September 30,
          2007,
          an effective rate of 25.1%. This compares with an effective rate of 32.5%
          for
          the same period in 2006.  The effective tax rates in 2007 and 2006
          differ from the federal and state statutory rates principally due to nontaxable
          investment income.  Tax-exempt income was $427,000 for the nine months
          ended September 30, 2007, as compared with $232,000 in 2006.  This
          increase of 84.1% has outpaced our growth in taxable income and, accordingly,
          our effective rate has decreased in 2007.
 
 
 **ITEM
          3.  CONTROLS AND PROCEDURES**
 
 *Background
          of Internal Controls and Internal Audits.*  Oceanside is the sole
          financial subsidiary of Atlantic.  Oceanside has extensive policies
          and operating procedures in place for loans, operations, accounting and
          compliance. All audits, whether internal or external are reported directly
          to
          the joint Audit Committee of Oceanside and Atlantic and subsequently to
          the
          Boards of Directors of Oceanside and Atlantic.
 
 The
          joint
          Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
          by the internal auditor for planning purposes.  This audit calendar is
          submitted to the Boards of Oceanside and Atlantic for
          approval.  Atlantic engages an external certified public accounting
          firm registered with the Public Company Accounting Oversight Board (“PCAOB”) to
          annually perform an independent audit, conducted in accordance with generally
          accepted auditing standards adopted by the PCAOB.
 
 Periodically,
          Oceanside and Atlantic undergo regulatory examinations that include tests
          of the
          policies and operating procedures for loans, operations, accounting and
          compliance.  The results of these examinations are presented by the
          regulators to the Boards of Oceanside and Atlantic.
 
 *Evaluation
          of Disclosure Controls and Procedures.*  Atlantic's Chief
          Executive Officer and Chief Financial Officer have evaluated the effectiveness
          of Atlantic's disclosure controls and procedures (as such term is defined
          in
          Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934,
          as
          amended (the “Exchange Act”)) as of a date within 90 days prior to the filing
          date of this quarterly report (the “Evaluation Date”).  Based on that
          evaluation, such officers have concluded that, as of the Evaluation Date,
          Atlantic's disclosure controls and procedures are effective in bringing
          to their
          attention, on a timely basis, material information relating to Atlantic
          (including its consolidated subsidiary) required to be included in Atlantic's
          periodic filings under the Exchange Act.
 
 *Changes
          in Internal Controls.*  Since the Evaluation Date, there have not
          been any significant changes in Atlantic's internal controls or in other
          factors
          that could significantly affect those controls.
  -
              23
              -
 *Index*
    **ATLANTIC
          BANCGROUP, INC. AND SUBSIDIARY**
 
 
 PART
                    II:
                OTHER
                    INFORMATION
 
 Item
                    1.
                Legal
                    Proceedings.
 
 Periodically,
          we are parties to or otherwise involved in legal proceedings arising in
          the
          normal course of business, such as claims to enforce liens, claims involving
          the
          making and servicing of real property loans, and other issues incident
          to our
          operations.  We do not believe that there are any pending or
          threatened proceedings against us, which, if determined adversely, would
          have a
          material effect on our consolidated financial position.
 
 Item
                    6.
                Exhibits.
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
 
 3.1
                Articles
                    of Incorporation (a)
 3.2
                Bylaws
                    (a)
 4.1
                Specimen
                    Stock Certificate (a)
 10.1
                Software
                    License Agreement dated as of October 6, 1997, between Oceanside
                    and File
                    Solutions, Inc. (a)
 10.2
                File
                    Solutions Software Maintenance Agreement dated as of July 15,
                    1997,
                    between Oceanside and SPARAK Financial Systems, Inc.
                    (a)
 10.3
                Remote
                    Data Processing Agreement dated as of March 3, 1997, between
                    Oceanside and
                    Bankers Data Services, Inc. (a)
 10.4
                Lease
                    dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside.
                    (b)
 10.5
                Lease
                    dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC.,
                    and
                    Oceanside. (c)
 10.6
                Change
                    in Control Agreement for Barry W. Chandler.
                    (e)
 10.7
                Change
                    in Control Agreement for David L. Young.
                    (e)
 10.8
                Change
                    in Control Agreement for Grady R. Kearsey.
                    (e)
 14
                Code
                    of Ethics for Senior Officers Policy.
                    (d)
 16
                Letter
                    on Change of Certifying Accountant (incorporated by reference
                    on Form 8-K
                    filed October 2, 2006).
 31.1
                Certifications
                    of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a)
                    under
                    the Exchange Act
 31.2
                Certifications
                    of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a)
                    under
                    the Exchange Act
 32.1
                Certifications
                    of Principal Executive Officer pursuant to 18 U.S.C. Section
                    1350, as
                    adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                    2002
 32.2
                Certifications
                    of Principal Financial Officer pursuant to 18 U.S.C. Section
                    1350, as
                    adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                    2002
 **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
  
 -
              24
              -
 *Index*
  **SIGNATURES**
 
 
 
 In
          accordance with the requirements of the Securities Exchange Act of 1934,
          the
          issuer has caused this report to be signed on its behalf by the undersigned,
          thereunto duly authorized.
 
 
 
 Atlantic
                    BancGroup, Inc.Date:  November
                    13, 2007
                /s/
                    Barry W. ChandlerBarry
                    W. ChandlerPresident
                    and Chief Executive OfficerDate:  November
                    13, 2007
                /s/
                    David L. YoungDavid
                    L. YoungExecutive
                    Vice President,Chief
                    Financial Officer, andCorporate
                    Secretary
 
 
 
 -
          25
          -