**U.
        S.****SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 **x** **ANNUAL
            REPORT UNDER SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **for
        the fiscal year ended December 31, 2006**
 
 ** ̈** **TRANSITION
            REPORT UNDER SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **Commission
        File Number 001-15061**
 
 **ATLANTIC
        BANCGROUP, INC.**
 (Name
        of
        small business issuer in its charter)
 
 **Florida**
              
              **59-3543956**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**1315
                  South Third Street, Jacksonville Beach, Florida**
              
              **32250**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Issuer’s
        telephone number: **(904)
        247-9494**
 
 Securities
        registered pursuant to Section 12(b) of the Exchange Act: **None**
 
 Securities
        registered pursuant to Section 12(g) of the Exchange Act:
 
 **Common
        Stock, par value $0.01 per share**
 (Title
        of
        Class)
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act. ** ̈**
 
 Check
        whether the issuer has (1) filed all reports required to be filed by Section
        13
        or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
        (or
        for such shorter period that the issuer was required to file such reports),
        and
        (2) has been subject to such filing requirements for the past 90 days. YES **x** NO ** ̈**
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. ** ̈**
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 YES ** ̈** NO **x**
 
 The
        issuer’s revenues for its most recent fiscal year were $16,580,000.
 
 The
        aggregate market value of the common stock of the issuer held by non-affiliates
        of the issuer (1,009,195 shares) at February 28, 2007, was approximately
        $35.5
        million based on the initial bid quoted price of $35.13 per share as quoted
        on
        the NASDAQ Capital Market.
 
 As
        of
        February 28, 2007, there were issued and outstanding 1,247,516 shares of
        the
        issuer’s common stock.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 Portions
        of the definitive Proxy Statement for the Annual Meeting of Shareholders
        to be
        held on April 26, 2007, are incorporated into Part III, Items 9 through 13
        of
        this Annual Report on Form 10-KSB.
 
 
  
  **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **TABLE
        OF CONTENTS**
  Page**PART
                  I**Forward-Looking
                  Statements
              1Item
                  1.
              Description
                  of Business
              2General
              2Competition
              3Lending
                  Activities
              4Deposit
                  Activities
              5Investment
                  Activities
              5Correspondent
                  Banking
              5Interest
                  and Usury
              5Supervision
                  and Regulation
              6Future
                  Legislative Developments
              10Common
                  Stock
              10Preferred
                  Stock
              10Indemnification
                  of Directors and
                  Officers
              11Employees
              11Website
                  Availability of Reports Filed with the Securities and
                  Exchange Commission
              11Item
                  2.
              Description
                  of Properties
              12Item
                  3.
              Legal
                  Proceedings
              12Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              12**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Stockholder
                  Matters
              13Item
                  6.
              Management’s
                  Discussion and Analysis
              13Selected
                  Financial Data
              14Overview
              15Comparison
                  of Years Ended December 31, 2006 and
                  2005
              16Comparison
                  of Years Ended December 31, 2005 and
                  2004
              18Loan
                  Portfolio
              22Classification
                  of Assets and Nonaccrual or Impaired
                  Loans
              24Allowance
                  for Loan Losses
              25Securities
              26Deposits
              27Short-Term
                  and Long-Term Debt
              29Liquidity
              30Off-Balance
                  Sheet Arrangements and Contractual
                  Obligations
              31Capital
                  Resources
              31Related
                  Party Transactions
              33Interest
                  Rate Sensitivity
              33Recent
                  Accounting Pronouncements Impacting Future
                  Periods
              34Impact
                  of Inflation
              34Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              35
  ***Table
            of Contents***
 
 PageItem
                  7.
              Financial
                  Statements
              36Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              61Item
                  8A.
              Controls
                  and Procedures
              61Item
                  8B.
              Other
                  Information
              61**PART
                  III**Item
                9.
              Directors,
                  Executive Officers, Promoter, Control Persons, and Corporate Governance;Compliance
                  with Section 16(a) of the Exchange Act
              61Compliance
                  with Section 16(a) of the Exchange
                  Act
              62Code
                  of Ethics
              62Financial
                  Expert
              62Audit
                  Committee Charter
              62Item
                  10.
              Executive
                  Compensation
              62Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              62Item
                  12.
              Certain
                  Relationships and Related Transactions, and
                  Director Independence
              62Item
                  13.
              Exhibits
              62Item
                  14.
              Principal
                  Accountant Fees and
                  Services
              63SIGNATURES
              64EXHIBIT
                  INDEX
              65
  ***Table
            of Contents***
  **PART
        I**
 
 
 **FORWARD-LOOKING
        STATEMENTS**
 
 *Atlantic
        BancGroup, Inc., and our wholly-owned banking subsidiary, Oceanside Bank,
        may
        from time to time make written or oral statements, including statements
        contained in this report that may constitute forward-looking statements within
        the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange
        Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,”
“believe,” “seek,” “should,” “estimate,” and similar expressions are intended to
        identify such forward-looking statements, but other statements may constitute
        forward-looking statements. These statements should be considered subject
        to
        various risks and uncertainties. Such forward-looking statements are made
        based
        upon management’s belief as well as assumptions made by, and information
        currently available to, management pursuant to “safe harbor” provisions of the
        Private Securities Litigation Reform Act of 1995. Our actual results may
        differ
        materially from the results anticipated in forward-looking statements due
        to a
        variety of factors. Such factors are described below and include, without
        limitation:*
 
 ·
              *unanticipated
                  deterioration in the financial condition of borrowers resulting
                  in
                  significant increases in loan losses and provisions for those
                  losses,*
 ·
              *increased
                  competition with other financial
                  institutions,*
 ·
              *lack
                  of sustained growth in the economy in our trade
                  area,*
 ·
              *rapid
                  fluctuations or unanticipated changes in interest rates,
                  and*
 ·
              *changes
                  in the legislative and regulatory
                  environment.*
 
 *Many
        of such factors are beyond our ability to control or predict. Readers should
        not
        place undue reliance on any such forward-looking statements, which speak
        only as
        to the date made. Readers are advised that the factors listed above could
        affect
        our financial performance and could cause our actual results for future periods
        to differ materially from any opinions or statements expressed with respect to
        future periods in any current statements. We do not undertake, and specifically
        disclaim any obligation, to publicly release the result of any revisions
        that
        may be made to any forward-looking statements to reflect events or circumstances
        after the date of such statements or to reflect the occurrence of anticipated
        or
        unanticipated events* .
 
 *Unless
        this Form 10-KSB indicates otherwise or the context otherwise requires, the
        terms “we,” “our,” “us,” “Atlantic,” “Holding Company,” or “Oceanside” as used
        herein refer collectively to Atlantic BancGroup, Inc. and our subsidiary
        Oceanside Bank, which we sometimes refer to as “Oceanside,” “our bank
        subsidiary,” or “our bank.” References herein to the fiscal years 2004, 2005,
        and 2006 mean our fiscal years ended December 31, 2004, 2005, and 2006,
        respectively.*
  -1-
 ***Table
            of Contents***
  **ITEM
                  1.**
              **DESCRIPTION
                  OF
                  BUSINESS.**
 
 **General**
 
 *Atlantic
        BancGroup, Inc.* On
        October 23, 1998, Atlantic BancGroup, Inc. (“Atlantic” or “Holding Company”) was
        incorporated in the State of Florida. On April 3, 1999, the shareholders
        of
        Oceanside Bank (“Oceanside” or “Bank”) approved the Agreement and Plan of
        Reorganization (“Reorganization”) whereby Oceanside became a wholly-owned
        subsidiary of the Holding Company. The Reorganization was completed on May
        5,
        1999. The Holding Company is a registered bank holding company under the
        Bank
        Holding Company Act of 1956, as amended (the “BHC Act”), and now owns all of the
        voting shares of Oceanside. Our corporate offices are located at 1315 South
        Third Street, Jacksonville Beach, Florida.
 
 Atlantic
        presently has no significant operations other than the operations of Oceanside.
        Oceanside, which is our primary source of income, is a state-chartered
        commercial bank. Oceanside does not have trust powers and, accordingly, no
        trust
        services are provided.
 
 As
        is the
        case with banking institutions generally, our operations are materially and
        significantly influenced by general economic conditions and by related monetary
        and fiscal policies of financial institution regulatory agencies, including
        the
        Federal Reserve, the Federal Deposit Insurance Corporation, and the State
        of
        Florida Department of Financial Services. Deposit flows and costs of funds
        are
        influenced by interest rates on competing investments and general market
        rates
        of interest. Lending activities are affected by the demand for financing
        of real
        estate and other types of loans, which in turn is affected by the interest
        rates
        at which such financing may be offered and other factors affecting local
        demand
        and availability of funds. We face strong competition in attracting deposits
        (our primary source for funding loans) and in originating loans.
 
 *Oceanside
        Bank.* Oceanside
        opened July 21, 1997, and operates as a community bank within our assessment
        area. Oceanside provides general commercial banking services to businesses
        and
        individuals. The principal business of Oceanside is to receive demand and
        time
        deposits from the public and to make loans and other investments. Oceanside
        operates from a main office located at 1315 South Third Street, Jacksonville
        Beach, Florida, and three branch offices that are located at 560 Atlantic
        Boulevard, Neptune Beach, Florida; 13799 Beach Boulevard, Jacksonville, Florida;
        and 1790 Kernan Boulevard South, Jacksonville, Florida.
 
 Oceanside
        has defined its assessment area based on various factors, including its size,
        banking offices, geographic boundaries, lending expertise, management, and
        competition. Duval County and three census tracts in the Ponte Vedra area
        of St.
        Johns County have been designated as the institution's assessment area.
        Oceanside draws most of our customer deposits and conducts a significant
        portion
        of our lending transactions from and within our assessment area, which includes
        the “Beaches and West Beaches area” of Jacksonville, Florida. Duval and St.
        Johns Counties enjoy an abundant and educated work force, an attractive business
        environment, favorable cost-of-living comparisons to other metropolitan areas
        in
        the United States, and a good relationship between the private and public
        sectors.
 
 In
        general, commercial real estate in the assessment area consists of small
        shopping centers and office buildings. The type of residential real estate
        within our assessment area varies, with a number of condominiums, townhouses,
        and single-family housing dispersed throughout the area. New residential
        growth
        consists primarily of working professionals with families.
 
 We
        believe that our assessment area is a desirable market in which to operate
        an
        independent, locally-owned bank. Furthermore, since we have a large base
        of
        local shareholders and communicate frequently with our shareholders, additional
        opportunities exist for marketing that might not be found with other financial
        institutions in our assessment area. Our broad base of shareholders from
        the
        Beaches and surrounding areas of Jacksonville, and the favorable economic
        environment of our assessment area, should provide us with the opportunity
        to
        gain market share.
 
 As
        a
        locally-owned and operated institution, we emphasize providing prompt,
        efficient, and personalized service to individuals, small and medium-sized
        businesses, professionals and other local organizations. Generally, customers
        have one account officer to serve all of their banking needs and have ready
        access to senior management when necessary. In addition, our Board of Directors
        is responsible for maintaining a visible profile for, and providing business
        to,
        Oceanside within our local community.
  -2-
 ***Table
            of Contents***
  Our
        principal strategy is to:
 
 ·
              Expand
                  our commercial and small business customer base within our assessment
                  area,
 ·
              Make
                  real estate mortgage loans within our assessment area, as well
                  as
                  throughout Duval and the surrounding counties,
                  and
 ·
              Expand
                  our consumer loan base within our assessment
                  area.
 
 Our
        belief is that the most profitable deposit relationships are characterized
        by
        high deposit balances, low frequency of transactions, and low distribution
        requirements. Being a community bank with local management, we are
        well-positioned to establish these relationships with smaller commercial
        customers and households.
 
 Our
        sources of funds for loans and other investments include demand, time, savings,
        and other deposits, amortization and repayment of loans, sales to other lenders
        or institutions of loans or participations in loans, and other borrowings.
        Our
        principal sources of income are interest and fees collected on loans, and
        to a
        lesser extent, interest and dividends collected on other investments. Our
        principal expenses are interest paid on savings and other deposits, interest
        paid on other borrowings, employee compensation, office expenses, and other
        overhead and operational expenses. We offer several deposit accounts, including
        demand deposit accounts, negotiable order of withdrawal accounts (“NOW”
accounts), money market accounts, savings, certificates of deposit, and various
        retirement accounts. During 2004, 2005, and 2006, we also obtained funds
        from
        customer repurchase agreements, which have been classified as other
        borrowings.
 
 We
        have
        automated teller machines (the “ATMs”) located at each of our offices, and we
        are a member of an electronic banking network so that our customers may use
        the
        ATMs of other financial institutions. We also operate drive-in tellers and
        24-hour depositories at each of our offices. As part of the strategy to offer
        innovative services to our customers, we offer on-line banking (“Internet
        Banking”) and Dial-a-Bank (“Telephone Banking”).
 
 Our
        efforts are focused on filling the void created by the increasing number
        of
        locally-owned community banks that have been acquired by large regional holding
        companies, negatively impacting the personal nature of the delivery, quality,
        and availability of banking services in our assessment area and surrounding
        areas.
 
 **Competition**
 
 The
        banking industry, in general, and our market, in particular, is characterized
        by
        significant competition for both deposits and lending opportunities. In our
        market area, we compete with other commercial banks, savings and loan
        associations, credit unions, finance companies, mutual funds, insurance
        companies, brokerage and investment banking firms, and various other nonbank
        competitors. Competition for deposits may have the effect of increasing the
        rates of interest we will pay on deposits, which would increase our cost
        of
        money and possibly reduce our net earnings. Competition for loans may have
        the
        effect of lowering the rate of interest we will receive on our loans, which
        would lower our return on invested assets and possibly reduce our net earnings.
        Many of our competitors have been in existence for a significantly longer
        period
        of time than us, are larger and have greater financial and other resources
        and
        lending limits than us, and may offer certain services that we do not provide
        at
        this time. However, we feel the market is rich with opportunity to provide
        tailor-made custom banking products and services that cannot be provided
        by the
        large institutions that offer many banking products and services on an
        impersonal basis. As larger financial institutions have in recent years acquired
        community banks, we are able to cater to those customers looking for more
        personalized service.
 
 Our
        profitability depends upon our ability to compete in this market area. At
        the
        present time, we are unable to predict to what degree competition may adversely
        affect our financial condition and operating results.
 
 Our
        response to this highly competitive environment dictates that we:
 
 ·
              review
                  and act upon loan requests quickly with a locally-based loan
                  committee,
 ·
              maintain
                  flexible, but prudent lending
                  policies,
 ·
              personalize
                  service with emphasis on establishing long-term banking relationships
                  with
                  our customers, and
 ·
              maintain
                  a strong ratio of employees to customers to enhance the level of
                  service.
  -3-
 ***Table
            of Contents***
  **Lending
        Activities**
 
 We
        offer
        a wide range of loans to individuals and small businesses and other
        organizations that are located, or conduct a substantial portion of their
        business, in our assessment area. At December 31, 2006,
        our
        consolidated total loans were
        $177.7 million, or 73.0%, of our total consolidated assets. The interest
        rates
        charged on loans vary with the degree of risk, maturity, and amount of the
        loan,
        and are further subject to competitive pressures, money market rates,
        availability of funds, and government regulations. We have no foreign loans
        or
        loans for highly-leveraged transactions.
 
 Our
        loan
        portfolio is concentrated in three major areas: real estate loans, commercial
        loans, and consumer and other loans. A majority of our loans are made on
        a
        secured basis. As of December 31, 2006, approximately 91% of our total loan
        portfolio consisted of loans secured by mortgages on real estate. Of the
        total
        loans secured by mortgages on real estate, approximately 43% are secured
        by
        nonfarm nonresidential properties (commercial) and 32% are construction,
        land
        development, and other land loans, secured by real estate. The remaining
        25% are
        secured by 1-4 family and multifamily residential properties.
 
 Our
        real
        estate loans are secured by mortgages and consist primarily of loans to
        individuals and businesses for the purchase, improvement of, refinance of,
        or
        investment in, real estate and for the construction of 1-4 family residential
        units or the development of single-family residential building lots. These
        real
        estate loans may be made at fixed or variable interest rates. We generally
        do
        not make fixed-rate commercial real estate loans for terms exceeding three
        to
        five years. Loans in excess of three to five years are generally adjustable
        rate
        loans. Residential real estate loans ordinarily are repayable in monthly
        installments, based on up to a 30-year amortization schedule, with variable
        interest rates.
 
 We
        also
        solicit, accept applications for, and negotiate terms and conditions for
        fixed-rate and other residential mortgage loans on behalf of our customers
        that
        we broker to third-party correspondent mortgage lenders. During 2006, 2005,
        and
        2004, we brokered loans totaling $11.0 million, $12.7 million and $9.1 million,
        respectively, which were closed by the correspondent mortgage lenders. We
        recorded brokering fees of $119,000, $114,000, and $106,000 in 2006, 2005,
        and
        2004, respectively. Our ability to solicit, process, and broker residential
        mortgage loans is highly dependent on the general economy and interest rate
        environment as well as competition from other local and national mortgage
        bankers and brokers.
 
 Our
        commercial loans include loans to individuals and small-to-medium-sized
        businesses located primarily in Duval and St. Johns Counties for working
        capital, equipment purchases, and various other business purposes. A majority
        of
        commercial loans are secured by real estate, equipment, or similar assets,
        but
        these loans may also be made on an unsecured basis. Commercial loans may
        be made
        at variable or fixed rates of interest. Commercial lines of credit are typically
        granted on a one-year basis, with loan covenants. Other commercial loans
        with
        terms or amortization schedules of longer than one year will normally be
        made at
        interest rates that vary with the prime lending rate and will become payable
        in
        full in three to five years. Commercial loans not secured by real estate
        amounted to approximately 6% of our total loan portfolio as of December 31,
        2006.
 
 Our
        consumer loans and other loans consist primarily of loans to individuals
        for
        various consumer purposes, but include some business-purpose loans which
        are
        payable on an installment basis. The majority of these loans are for terms
        of
        less than five years and are secured by liens on various personal assets
        of the
        borrowers; however, consumer loans may also be made on an unsecured basis.
        Consumer loans are made at fixed and variable interest rates, and are often
        based on an amortization schedule of up to five years. Consumer and other
        loans
        represent approximately 3% of our total loan portfolio at December 31,
        2006.
 
 Loan
        originations are derived from a number of sources. Loan originations can
        be
        attributed to direct solicitation by our loan officers, referrals from existing
        customers and borrowers, advertising, walk-in customers, and, in some instances,
        referrals from brokers.
 
 Certain
        credit risks are inherent in making loans. These include prepayment risks,
        risks
        resulting from uncertainties in the future value of collateral, risks resulting
        from changes in economic and industry conditions, and risks inherent in dealing
        with individual borrowers. In particular, longer maturities increase the
        risk
        that economic conditions will change and adversely affect collectibility.
        We
        attempt to minimize loan losses through various means. In particular, on
        larger
        loans, we generally rely on the cash flow of a debtor as the source of repayment
        and secondarily on the value of the underlying collateral. In addition, shorter
        loan terms are utilized in order to reduce the risk of a decline in the value
        of
        such collateral.
  -4-
 ***Table
            of Contents***
  **Deposit
        Activities**
 
 Deposits
        are our major source of funds for loans and other investment activities.
        At
        December 31, 2006, our regular savings, demand, NOW, and money market deposit
        accounts comprised approximately 42% of our consolidated total deposits.
        Approximately 34% of our consolidated deposits at December 31, 2006, were
        certificates of deposit (or time deposits) of less than $100,000. Time deposits
        of $100,000 and over made up approximately 24% of our consolidated total
        deposits at December 31, 2006. Generally, our goal is to maintain the rates
        paid
        on our deposits at a competitive level. We do not currently have any brokered
        deposits.
 
 **Investment
        Activities**
 
 We
        are
        permitted to invest a portion of our assets in U.S. Government agency, state,
        county, and municipal obligations, certificates of deposit, collateralized
        mortgage obligations (“CMOs”), and federal funds sold. Our investments are
        managed in relation to loan demand and deposit growth, and are generally
        used to
        provide for the investment of excess funds at minimal risks while providing
        liquidity to fund increases in loan demand or to offset fluctuations in
        deposits.
 
 Our
        total
        investment portfolio may be invested in U.S. Treasury and general obligations
        of
        its agencies and state, county, and municipal obligations because such
        securities generally represent a minimal investment risk. Occasionally, we
        purchase certificates of deposits of national and state banks. These investments
        may exceed $100,000 in any one institution (the current limit of FDIC insurance
        for deposit accounts). CMOs are secured with Federal National Mortgage
        Association (“FNMA”) and General National Mortgage Association (“GNMA”)
        mortgage-backed securities and generally have a shorter life than the stated
        maturity. Federal funds sold is the excess cash we have available over and
        above
        daily cash needs. We invest this money on an overnight basis with approved
        correspondent banks.
 
 We
        monitor changes in financial markets that may affect our portfolio investments.
        We also monitor our daily cash position to ensure that all available funds
        earn
        interest at the earliest possible date.
 
 A
        portion
        of our investment account is designated as primary reserves and invested
        in
        liquid securities that can be readily converted to cash with minimum risk
        of
        market loss. These investments usually consist of U.S. Treasury obligations,
        U.S. government agencies, and federal funds. The remainder of our investment
        account (or secondary reserves) may be placed in investment securities of
        different types and longer maturities. The maturities of our securities are
        staggered whenever possible so as to produce a steady cash flow in the event
        we
        need cash, or economic conditions change to a more favorable rate
        environment.
 
 **Correspondent
        Banking**
 
 Correspondent
        banking involves one bank providing services to another bank that cannot
        provide
        those services for itself from an economic, regulatory, or practical standpoint.
        We purchase correspondent services offered by larger banks, including check
        collections, purchase of federal funds, security safekeeping, investment
        services, coin and currency supplies, overline and liquidity loan
        participations, and sales of loans to, or participation with, correspondent
        banks. We have ongoing banking relationships with several correspondent banks.
        We also sell loan participations to correspondent banks with respect to loans
        that would exceed our lending limit.
 
 **Interest
        and Usury**
 
 Like
        other commercial banks, we are subject to state and federal statutes that
        affect
        the interest rates that may be charged on loans. These laws do not, under
        present market conditions, deter us from continuing the process of originating
        loans.
  -5-
 ***Table
            of Contents***
  **Supervision
        and Regulation**
 
 Both
        the
        Holding Company and Oceanside are subject to comprehensive regulation,
        examination, and supervision by the Federal Reserve, the Florida Department
        of
        Financial Services (“Department”) and the Federal Deposit Insurance Corporation
        (“FDIC”) and are subject to other laws and regulations applicable to bank
        holding companies and banks. Such regulations include limitations on loans
        to
        any single borrower and to our directors, officers, and employees; restrictions
        on the opening and closing of branch offices; the maintenance of required
        capital and liquidity ratios; the granting of credit under equal and fair
        conditions; disclosure of the costs and terms of such credit; and restrictions
        as to permissible investments. The Holding Company is examined periodically
        by
        the Federal Reserve, and the Bank is regularly examined by the Department
        and
        the FDIC. Both the Bank and the Holding Company submit periodic reports
        regarding their financial condition and other matters to their respective
        regulators. These agencies have a broad range of powers to enforce regulations
        under their respective jurisdictions, and to take discretionary actions
        determined to be for the protection of the safety and soundness of the Holding
        Company and Oceanside, including the issuance of cease and desist orders
        and the
        removal of directors and officers.
 
 The
        following is a brief summary of certain statutes, rules, and regulations
        affecting us and our subsidiary bank. This summary is qualified in its entirety
        by reference to the particular statutory and regulatory provisions referred
        to
        below and is not intended to be an exhaustive description of the statutes
        or
        regulations applicable to our business and subsidiary bank. Supervision,
        regulation, and examination of banks by regulatory agencies are intended
        primarily for the protection of depositors, rather than shareholders.
 
 *Bank
        Holding Company Regulation.* Atlantic
        is a bank holding company, registered with the Federal Reserve under the
        BHC
        Act. As such, Atlantic is subject to the supervision, examination and reporting
        requirements of the BHC Act and the regulations of the Federal Reserve. The
        BHC
        Act requires that a bank holding company obtain the prior approval of the
        Federal Reserve before (i) acquiring direct or indirect ownership or control
        of
        more than 5% of the voting shares of any bank or bank holding company, (ii)
        acquiring all or substantially all of the assets of a bank, or (iii) merging
        or
        consolidating with any other bank holding company.
 
 The
        BHC
        Act further provides that the Federal Reserve may not approve any transaction
        that would result in a monopoly or would be in furtherance of any combination
        or
        conspiracy to monopolize or attempt to monopolize the business of banking
        in any
        section of the United States, or the effect of which may be to substantially
        lessen competition or to tend to create a monopoly in any section of the
        country, or that in any other manner would be in restraint of trade, unless
        the
        anticompetitive effects of the proposed transaction are clearly outweighed
        by
        the public interest in meeting the convenience and needs of the community
        to be
        served. The Federal Reserve is also required to consider the financial and
        managerial resources and future prospects of the bank holding companies and
        banks concerned and the convenience, and needs of the community to be served.
        Consideration of financial resources generally focuses on capital adequacy
        and
        consideration of convenience and needs issues includes the parties’ performance
        under the Community Reinvestment Act (“CRA”).
 
 Except
        as
        authorized by the Gramm-Leach-Bliley Act of 1999, the BHC Act generally
        prohibits a bank holding company from engaging in activities other than banking,
        or managing or controlling banks or other permissible subsidiaries, and from
        acquiring or retaining direct or indirect control of any company engaged
        in any
        activities other than those activities determined by the Federal Reserve
        to be
        so closely related to banking or managing or controlling banks as to be a
        proper
        incident thereto. In determining whether a particular activity is permissible,
        the Federal Reserve must consider whether the performance of such an activity
        can reasonably be expected to produce benefits to the public, such as greater
        convenience, increased competition, or gains in efficiency that outweigh
        possible adverse effects, such as undue concentration of resources, decreased
        or
        unfair competition, conflicts of interest, or unsound banking practices.
        For
        example, factoring accounts receivable, acquiring or servicing loans, leasing
        personal property, conducting securities brokerage activities, performing
        certain data processing services, acting as agent or broker in selling credit
        life insurance and certain other types of insurance in connection with credit
        transactions, and certain insurance underwriting activities have all been
        determined by regulations of the Federal Reserve to be permissible activities
        of
        bank holding companies. Despite prior approval, the Federal Reserve has the
        power to order a holding company or its subsidiaries to terminate any activity
        or terminate its ownership or control of any subsidiary, when it has reasonable
        cause to believe that continuation of such activity or such ownership or
        control
        constitutes a serious risk to the financial safety, soundness, or stability
        of
        any bank subsidiary of that bank holding company.
 
 Under
        federal law, federally insured banks are subject, with some exceptions, to
        certain restrictions on any extension of credit to their parent holding
        companies or other affiliates, on investment in the stock or other securities
        of
        affiliates, and on the taking of such stock or securities as collateral from
        any
        borrower. In addition, banks are
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  prohibited
        from engaging in certain tie-in arrangements in connection with any extension
        of
        credit or the providing of any property or service.
 
 *Gramm-Leach-Bliley
        Act.* Enacted
        in 1999, the Gramm-Leach-Bliley Act reforms and modernizes certain areas
        of
        financial services regulation. The law permits the creation of financial
        services holding companies that can offer a full range of financial products
        under a regulatory structure based on the principle of functional regulation.
        The legislation eliminates the legal barriers to affiliations among banks
        and
        securities firms, insurance companies, and other financial services companies.
        The law also provides financial organizations with the opportunity to structure
        these new financial affiliations through a holding company structure or a
        financial subsidiary. The law reserves the role of the Federal Reserve Board
        as
        the supervisor for bank holding companies. At the same time, the law also
        provides a system of functional regulation which is designed to utilize the
        various existing federal and state regulatory bodies. The law also sets up
        a
        process for coordination between the Federal Reserve Board and the Secretary
        of
        the Treasury regarding the approval of new financial activities for both
        bank
        holding companies and national bank financial subsidiaries.
 
 The
        law
        also includes a minimum federal standard of financial privacy. Financial
        institutions are required to have written privacy policies that must be
        disclosed to customers. The disclosure of a financial institution’s privacy
        policy must take place at the time a customer relationship is established
        and
        not less than annually during the continuation of the relationship. The act
        also
        provides for the functional regulation of bank securities activities. The
        law
        repeals the exemption that banks were afforded from the definition of “broker,”
and replaces it with a set of limited exemptions that allow the continuation
        of
        some historical activities performed by banks. In addition, the act amends
        the
        securities laws to include banks within the general definition of dealer.
        Regarding new bank products, the law provides a procedure for handling products
        sold by banks that have securities elements. In the area of CRA activities,
        the
        law generally requires that financial institutions address the credit needs
        of
        low-to-moderate income individuals and neighborhoods in the communities in
        which
        they operate. Bank regulators are required to take the CRA ratings of a bank
        or
        of the bank subsidiaries of a holding company into account when acting upon
        certain branch and bank merger and acquisition applications filed by the
        institution. Under the law, financial holding companies and banks that desire
        to
        engage in new financial activities are required to have satisfactory or better
        CRA ratings when they commence the new activity.
 
 *FDIC
        and Other Banking Regulations* .
        Our
        deposit accounts are insured by the Bank Insurance Fund (“BIF”) of the FDIC up
        to a maximum of $100,000 per insured depositor. Beginning April 1, 2006,
        the
        FDIC began insuring retirement accounts up to $250,000. The FDIC issues
        regulations, conducts periodic examinations, requires the filing of reports,
        and
        generally supervises the operations of its insured banks. The approval of
        the
        FDIC is required prior to a merger or consolidation or the establishment
        or
        relocation of an office facility. This supervision and regulation is intended
        primarily for protection of depositors and not stockholders.
 
 The
        Federal Reserve and bank regulatory agencies require bank holding companies
        and
        financial institutions to maintain capital at adequate levels based on a
        percentage of assets and off-balance sheet exposures, adjusted for risk weights
        ranging from 0% to 100%. Under the risk-based standard, capital is classified
        into two tiers. Tier 1 capital consists of common shareholders’ equity,
        excluding the unrealized gain (loss) on available-for-sale securities, minus
        certain intangible assets. Tier 2 capital consists of the general allowance
        for
        loan losses except for certain limitations. An institution’s qualifying capital
        base for purposes of its risk-based capital ratio consists of the sum of
        its
        Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for
        Tier 1
        and 8% for total risk-based capital. At December 31, 2006, Oceanside’s Tier 1
        and total risk-based capital ratios were 10.16% and 10.95%, respectively.
        Under
        current regulations, bank holding companies with consolidated assets under
        $500
        million are not required to calculate and report risk-based capital
        ratios.
 
 Bank
        holding companies and banks are also required to maintain capital at a minimum
        level based on average total assets, which is known as the leverage ratio.
        The
        minimum requirement for the leverage ratio is 3%; however, all but the highest
        rated institutions are required to maintain ratios 100 to 200 basis points
        above
        the minimum. At December 31, 2006, Oceanside’s leverage ratio was 8.75 %, which
        was 3.75% in excess of its required 5.00%.
 
 The
        Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
        contains “prompt corrective action” provisions pursuant to which banks are to be
        classified into one of five categories based upon capital adequacy, ranging
        from
“well-capitalized” to “critically undercapitalized” and which require (subject
        to certain exceptions) the appropriate federal banking agency to take prompt
        corrective action with respect to an institution that becomes “significantly
        undercapitalized” or “critically undercapitalized.”
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  The
        FDIC
        has issued regulations to implement the “prompt corrective action” provisions of
        FDICIA. In general, the regulations define the five capital categories as
        follows:
 
 ·
              an
                  institution is “well-capitalized” if it has a total risk-based capital
                  ratio of 10% or greater, has a Tier 1 risk-based capital ratio
                  of 6% or
                  greater, has a leverage ratio of 5% or greater and is not subject
                  to any
                  written capital order or directive to meet and maintain a specific
                  capital
                  level for any capital measures;
 ·
              an
                  institution is “adequately capitalized” if it has a total risk-based
                  capital ratio of 8% or greater, has a Tier 1 risk-based capital
                  ratio of
                  4% or greater, and has a leverage ratio of 4% or
                  greater;
 ·
              an
                  institution is “undercapitalized” if it has a total risk-based capital
                  ratio of less than 8%, has a Tier 1 risk-based capital ratio that
                  is less
                  than 4% or has a leverage ratio that is less than
                  4%;
 ·
              an
                  institution is “significantly undercapitalized” if it has a total
                  risk-based capital ratio that is less than 6%, a Tier 1 risk-based
                  capital
                  ratio that is less than 3% or a leverage ratio that is less than
                  3%;
                  and
 ·
              an
                  institution is “critically undercapitalized” if its “tangible equity” is
                  equal to or less than 2% of its total
                  assets.
 
 After
        an
        opportunity for a hearing, the FDIC has the authority to downgrade an
        institution from “well-capitalized” to “adequately capitalized” or to subject an
“adequately capitalized” or “undercapitalized” institution to the supervisory
        actions applicable to the next lower category for supervisory
        concerns.
 
 The
        “prompt corrective action” provisions of FDICIA also provide that, in general,
        no institution may make a capital distribution if it would cause the institution
        to become “undercapitalized.” Capital distributions include cash (but not stock)
        dividends, stock purchases, redemptions, and other distributions of capital
        to
        the owners of an institution.
 
 FDICIA
        also contains a number of consumer banking provisions, including disclosure
        requirements and substantive contractual limitations with respect to deposit
        accounts.
 
 As
        of
        December 31, 2006, Oceanside met the capital requirements of a
“well-capitalized” institution.
 
 *Maximum
        Legal Interest Rates* .
        Like
        the laws of many states, Florida law contains provisions on interest rates
        that
        may be charged by banks and other lenders on certain types of loans. Numerous
        exceptions exist to the general interest limitations imposed by Florida law.
        The
        relative importance of these interest limitation laws to the financial
        operations of Oceanside will vary from time to time, depending on a number
        of
        factors, including conditions in the money markets, the costs and availability
        of funds, and prevailing interest rates.
 
 *Bank
        Branching* .
        Banks
        in Florida are permitted to branch state-wide. Such branch banking, however,
        is
        subject to prior approval by the Department and the FDIC. Any such approval
        would take into consideration several factors, including the bank’s level of
        capital, the prospects and economics of the proposed branch office, and other
        conditions deemed relevant by the Department and the FDIC for purposes of
        determining whether approval should be granted to open a branch
        office.
 
 The
        Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, provides
        for nationwide interstate banking and branching. Under the law, interstate
        acquisitions of banks or bank holding companies in any state by bank holding
        companies in any other state are permissible. Interstate branching and
        consolidation of existing bank subsidiaries in different states is permissible.
        Florida has a law that allows out-of-state bank holding companies (located
        in
        states that allow Florida bank holding companies to acquire banks and bank
        holding companies in that state) to acquire Florida banks and Florida bank
        holding companies. The law essentially provides for out-of-state entry by
        acquisition only (and not by interstate branching) and requires the acquired
        Florida bank to have been in existence for at least three years.
 
 *Dividend
        Restrictions* .
        In
        addition to dividend restrictions placed on Oceanside by the FDIC based on
        Oceanside’s minimum capital requirements, the *Florida
        Financial Institutions Code* prohibits
        the declaration of dividends in certain circumstances. Section 658.37, *Florida
        Statutes* ,
        prohibits the declaration of any dividend until a bank has charged off bad
        debts, depreciation, and other worthless assets, and has made provision for
        reasonably-anticipated future losses on loans and other assets. Such a dividend
        is limited to the aggregate of the net profits of the dividend period combined
        with a bank’s retained net profits of the preceding two years. A bank may
        declare a dividend from retained net profits accruing prior to the preceding
        two
        years with the approval of the Department. However, a bank will be required,
        prior to the declaration of a dividend on its common stock, to carry 20%
        of its
        net profits for such preceding period as is covered by the dividend to its
        surplus fund, until the surplus fund equals at least the amount of the bank’s
        common and preferred stock then issued and outstanding. In no event may a
        bank
        declare a dividend at
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  any
        time
        in which its net income from the current year, combined with the retained
        net
        income from the preceding two years is a loss or which would cause the capital
        accounts of the bank to fall below the minimum amount required by law,
        regulation, order, or any written agreement with the Department or the FDIC.
        We
        currently do not intend to pay a cash dividend. Instead, we are using our
        earnings to support our growth.
 
 *Change
        of Control* .
        Federal
        law restricts the amount of voting stock of a bank holding company and a
        bank
        that a person may acquire without the prior approval of banking regulators.
        The
        overall effect of such laws is to make it more difficult to acquire a bank
        or
        bank holding company by tender offer or similar means than another type of
        corporation. Consequently, shareholders of Atlantic may be less likely to
        benefit from the rapid increases in stock prices that may result from tender
        offers or similar efforts to acquire control of other companies. Federal
        law
        also imposes restrictions on acquisitions of stock in a bank holding company
        and
        a state bank. Under the federal Change in Bank Control Act and the regulations
        thereunder, a person or group must give advance notice to the Federal Reserve
        before acquiring control of any bank holding company and the FDIC before
        acquiring control of any state bank (such as Oceanside). Upon receipt of
        such
        notice, the FDIC may approve or disapprove the acquisition. The Change in
        Bank
        Control Act creates a rebuttable presumption of control if a member or group
        acquires 10% or more of a bank holding company’s or state bank’s voting stock,
        and if one or more other control factors set forth in the Act are
        present.
 
 *Enforcement
        Powers* .
        Congress has provided the federal bank regulatory agencies with an array
        of
        powers to enforce laws, rules, regulations and orders. Among other things,
        the
        agencies may require that institutions cease and desist from certain activities,
        may preclude persons from participating in the affairs of insured depository
        institutions, may suspend or remove deposit insurance, and may impose civil
        money penalties against institution-affiliated parties for certain
        violations.
 
 *Effect
        of Governmental Policies.* Our
        business and earnings are affected by the policies of various regulatory
        authorities of the United States, especially the Federal Reserve. The Federal
        Reserve, among other things, regulates the supply of credit and deals with
        general economic conditions within the United States. The instruments of
        monetary policy employed by the Federal Reserve for those purposes influence
        in
        various ways the overall level of investments, loans, other extensions of
        credit, and deposits, and the interest rates paid on liabilities and received
        on
        assets.
 
 *Corporate
        Governance.* The
        Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act” or “SOX”), which became law on
        July 30, 2002, added new legal requirements for public companies affecting
        corporate governance, accounting and corporate reporting. Some
        of
        the principal provisions of the Act include:
 
 ·
              the
                  creation of an independent accounting oversight board to oversee
                  the audit
                  of public companies and auditors who perform such audits;
 ·
              auditor
                  independence provisions which restrict non-audit services that
                  independent
                  accountants may provide to their audit clients;
 ·
              additional
                  corporate governance and responsibility measures which (a) require
                  the
                  chief executive officer and chief financial officer to certify
                  financial
                  statements and internal controls and to forfeit salary and bonuses
                  in
                  certain situations, and (b) protect whistleblowers and informants;
 ·
              expansion
                  of the authority and responsibilities of the company’s audit, nominating
                  and compensation committees;
 ·
              mandatory
                  disclosure by analysts of potential conflicts of interest; and
 ·
              enhanced
                  penalties for fraud and other violations.
 
 *USA
        Patriot Act.* As part
        of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted
        the International Money Laundering Abatement and Financial Anti-Terrorism
        Act of
        2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in
        consultation with the heads of other government agencies, to adopt special
        measures applicable to financial institutions such as banks, bank holding
        companies, broker-dealers and insurance companies. Among its other provisions,
        the Act requires each financial institution: (i) to establish an anti-money
        laundering program; (ii) to establish due diligence policies, procedures
        and
        controls that are reasonably designed to detect and report instances of money
        laundering in United States private banking accounts and correspondent accounts
        maintained for non-United States persons or their representatives; and (iii)
        to
        avoid establishing, maintaining, administering, or managing correspondent
        accounts in the United States for, or on behalf of, a foreign shell bank
        that
        does not have a physical presence in any country. In addition, the Act expands
        the circumstances under which funds in a bank account may be forfeited and
        requires covered financial institutions to respond under certain circumstances
        to requests for information from federal banking agencies within 120
        hours.
  -9-
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 Treasury
        regulations implementing the due diligence requirements were issued in 2002.
        These regulations required minimum standards to verify customer identity,
        encouraged cooperation among financial institutions, federal banking agencies,
        and law enforcement authorities regarding possible money laundering or terrorist
        activities, prohibited the anonymous use of “concentration accounts,” and
        required all covered financial institutions to have in place an anti-money
        laundering compliance program.
 
 The
        Act
        also amended the Bank Holding Company Act and the Bank Merger Act to require
        the
        federal banking agencies to consider the effectiveness of a financial
        institution’s anti-money laundering activities when reviewing an application
        under these acts. In the past three years, both state and federal banking
        regulators have significantly increased enforcement of the Act and other
        anti-money laundering laws and regulations, including levying civil money
        penalties and seeking cease and desist orders.
 
 *Check
        21.* **** On
        October 28, 2003, President Bush signed into law the Check Clearing for the
        21st
        Century Act, also known as Check 21. This law gives “substitute checks,” such as
        a digital image of a check and copies made from that image, the same legal
        standing as the original paper check. Some of the major provisions include:
 
 ·
              allowing
                  check truncation without making it mandatory;
 ·
              demanding
                  that every financial institution communicate to accountholders
                  in writing
                  a description of its substitute check processing program and their
                  rights
                  under the law;
 ·
              legalizing
                  substitutions for and replacements of paper checks without agreement
                  from
                  consumers;
 ·
              retaining
                  in place the previously mandated electronic collection and return
                  of
                  checks between financial institutions only when individual agreements
                  are
                  in place;
 ·
              requiring
                  that when accountholders request verification, financial institutions
                  produce the original check (or a copy that accurately represents
                  the
                  original) and demonstrate that the account debit was accurate and
                  valid;
                  and
 ·
              requiring
                  recrediting of funds to an individual’s account on the next business day
                  after a consumer proves that the financial institution has erred.
 
 This
        new
        legislation will likely continue to affect bank capital spending as many
        financial institutions assess whether technological or operational changes
        are
        necessary to stay competitive and take advantage of the new opportunities
        presented by Check 21.
 
 **Future
        LegislativeDevelopments**
 
 Various
        legislative acts, including proposals to modify the bank regulatory system,
        expand the powers of banking institutions and financial holding companies
        and
        limit the investments that a depository institution may make with insured
        funds,
        are from time to time introduced in Congress and the Florida legislature.
        Such
        legislation may change banking statutes and the environment in which we and
        our
        banking subsidiary operate in substantial and unpredictable ways. We cannot
        determine the ultimate effect that potential legislation, if enacted, or
        implementing regulations with respect thereto, would have upon our financial
        condition or results of operations or that of our banking subsidiary.
 
 **Common
        Stock**
 
 We
        have
        10,000,000 shares of our $0.01 par value common stock authorized. As of February
        28, 2007, there were 1,247,516 shares outstanding. Holders of our common
        stock
        are entitled to one vote for each share held of record on all matters to
        be
        voted on by stockholders. Upon liquidation, dissolution, or winding-up, holders
        of our common stock are entitled to receive pro rata all assets remaining
        legally available for distribution to shareholders. The holders of common
        stock
        have no right to cumulate their votes in the election of directors. The common
        stock has no preemptive or other subscription rights, and there are no
        conversion rights or redemption or sinking fund provisions with respect to
        such
        shares. All of the outstanding shares of common stock are fully paid and
        non-assessable.
 
 **Preferred
        Stock**
 
 In
        addition to the 10,000,000 shares of authorized common stock, our Articles
        of
        Incorporation authorize up to 2,000,000 shares of preferred stock. The Board
        of
        Directors is further authorized to establish designations, powers, preferences,
        rights, and other terms for preferred stock by resolution. No shares of
        preferred stock have been issued.
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  **Indemnification
        of Directors and Officers**
 
 Our
        Bylaws afford indemnification rights to our officers and directors to the
        fullest extent permitted or required by the Florida Business Corporation
        Act.
 
 Under
        Section 607.0850 of the Florida Business Corporation Act, officers and directors
        of a Florida corporation may be entitled to indemnification by the corporation
        against liability incurred in connection with any threatened, pending, or
        completed action, suit, or other type of proceeding, whether civil, criminal,
        administrative, or investigative and whether formal or informal; provided,
        however, that such officer or director acted in good faith and in a manner
        reasonably believed to be in, or not opposed to, the best interests of the
        corporation, and, with respect to any criminal action or proceeding, had
        no
        reasonable cause to believe such conduct was unlawful. Such indemnification
        includes obligations to pay a judgment, settlement, penalty, fine, and expenses
        actually and reasonably incurred with respect to a proceeding. In addition,
        Florida law provides that officers and directors shall be indemnified by
        a
        Florida corporation against expenses actually and reasonably incurred by
        such
        officer or director, to the extent that such officer or director has been
        successful on the merits or otherwise in defense of any proceeding (as defined
        in Section 607.0850) or in defense of any claim, issue, or matter
        therein.
 
 In
        addition, Section 607.0831 of the Florida Business Corporation Act provides
        that
        a director is not personally liable for monetary damages to a corporation
        or any
        other person for any statement, vote, decision, or failure to act, regarding
        corporate management or policy, by a director, unless such director breached
        or
        failed to perform such duties as a director and such breach or failure to
        perform constitutes:
 
 ·
              a
                  violation of the criminal law, unless the director had reasonable
                  cause to
                  believe the conduct was lawful or had no reasonable cause to believe
                  the
                  conduct was unlawful;
 ·
              a
                  transaction from which the director derived an improper personal
                  benefit,
                  either directly or indirectly;
 ·
              a
                  circumstance involving a director’s liability for unlawful distributions
                  under the Florida Business Corporation
                  Act;
 ·
              in
                  proceedings by or in the right of the corporation to procure a
                  judgment or
                  by or in the right of a shareholder, conscious disregard for the
                  best
                  interest of the corporation, or willful misconduct;
                  or
 ·
              in
                  a proceeding by or in the right of someone other than the corporation
                  or a
                  shareholder, recklessness or an act or omission which was committed
                  in bad
                  faith or with malicious purpose or in a manner exhibiting wanton
                  and
                  willful disregard of human rights, safety, or
                  property.
 
 **Employees**
 
 At
        December 31, 2006, we had approximately 47 full-time employees and 4 part-time employees
        for a full-time employee equivalent of 51. No
        significant changes in the number of our full-time employees are currently
        anticipated. Because we believe that one of the primary deficiencies of large
        regional banks is the constant turnover of personnel and therefore the lack
        of
        continuing personal relationships with local customers, our goal is to maintain
        a competently trained staff of local bankers who have settled in the community
        on a permanent basis. To maintain a skilled and knowledgeable staff, we allocate
        funds for continuing on-the-job and educational training, and employees are
        encouraged to enroll in various banking courses and other seminars to improve
        their overall knowledge of the banking business.
 
 The
        employees are not represented by a collective bargaining unit. We consider
        relations with employees to be good.
 
 **WebsiteAvailability
        of Reports Filed with the Securities and
        Exchange Commission**
 
 We
        maintain an Internet website located at www.oceansidebank.com on which, among
        other things, we make available, free of charge, various reports that we
        file
        with, or furnish to, the SEC, including our Annual Report on Form 10-KSB,
        Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and amendments
        to
        those reports. These reports are made available as soon as reasonably
        practicable after these reports are filed with, or furnished to, the SEC.
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  **ITEM
                  2.**
              **DESCRIPTION
                  OF PROPERTIES.**
 
 On
        October 29, 1996, Oceanside purchased from an unaffiliated entity the two-story,
        3,100 square-foot building at 1315 South Third Street, Jacksonville Beach,
        Florida, as our main office (“Main Office”). The Main Office includes three
        inside teller stations, four drive-up teller windows, an automated teller
        machine, and on-site parking. The Main Office is a former Barnett Bank branch
        office. Oceanside purchased the real property for $850,000 and used a portion
        of
        the proceeds of the initial offering of Atlantic’s common stock to add 2,200
        square feet to the facility. Oceanside originally acquired the Main Office
        with
        funds drawn on a line of credit with Columbus Bank and Trust Company, which
        was
        repaid out of the proceeds of Atlantic’s initial offering. Improvements totaling
        approximately $460,000, net of disposals, have been made through December
        31,
        2006.
 
 On
        June
        3, 1998, Oceanside purchased from SouthTrust Bank, N.A., a 1,968 square-foot
        building and real estate located at 560 Atlantic Boulevard, Neptune Beach,
        Florida. This facility was formerly a branch office of SouthTrust Bank, N.A.
        Oceanside purchased this building for $427,000 and, subsequently spent $93,000
        on renovations and upgrades, net of disposals. This facility includes two
        offices, three inside teller windows, general lobby space, three drive-up
        teller
        windows, an ATM, and on-site parking. There is no outstanding mortgage loan
        on
        this property.
 
 On
        September 27, 2000, Oceanside executed a lease for our third banking location,
        which opened in the third quarter of 2001. This branch is located at 13799
        Beach
        Boulevard, Jacksonville, Florida. The lease, which commenced upon execution,
        covers approximately 9,000 square feet. In addition to the branch, other
        operations of Atlantic and Oceanside were relocated to this facility. Rent
        commenced in May 2002, which was one year from the date of completion of
        the
        landlord’s work, and expires ten years thereafter, with two five-year renewal
        options. No rent was paid in the first year after completion of the landlord’s
        work. Oceanside acquired an additional 2,200 square feet of rental space
        during
        2004 adjacent to the operations area for its loan operations department.
        Scheduled annual rent payments for 2007 through 2011 for the branch and loan
        operations are: 2007 - $212,000; 2008 - $219,000; 2009 - $225,000; 2010 -
        $232,000; and 2011 - $78,000. Building improvements (including those completed
        during the fourth quarter of 2005 for the loan operations department) totaled
        $949,000, net of disposals.
 
 On
        August
        22, 2002, Oceanside executed a lease for our newest branch location, which
        opened December 15, 2003. This branch is located at the intersection of Kernan
        and Atlantic Boulevards, at 1790 Kernan Boulevard South, Jacksonville, Florida.
        The land lease covers approximately 42,000 square feet. The Bank constructed
        the
        branch building totaling approximately 3,200 square feet at a cost of
        approximately $1,388,000. Rent commenced in September 2003. The lease is
        for
        twenty years with two ten-year renewal options. Scheduled annual rent payments
        are: 2007 - $75,000; 2008 - $78,000; 2009 - 2012 - $84,000 annually; 2013
        -
        $87,000; 2014 - 2017 - $94,000 annually; 2018 - $100,000; 2019 - 2022 -
        $103,000, annually, and 2023 - $69,000.
 
 We
        believe all of our facilities are in good condition and
        well-maintained.
 
 
 **ITEM
                  3.**
              **LEGAL
                  PROCEEDINGS.**
 
 We
        are
        periodically parties to or otherwise involved in legal proceedings arising
        in
        the normal course of business, such as claims to enforce liens, claims involving
        the making and servicing of real property loans, and other issues incident
        to
        our operations. We do not believe that there are any pending or threatened
        proceedings against us, which, if determined adversely, would have a material
        effect on our consolidated financial position.
 
 
 **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
 
 No
        matters were submitted to a vote of Atlantic’s security holders during the
        fourth quarter of the year ended December 31, 2006.
  -12-
 ***Table
            of Contents***
  **PARTII**
 
 **ITEM
                  5.**
              **MARKET
                  FOR COMMONEQUITY AND RELATED STOCKHOLDER
                  MATTERS.**
 
 Prior
        to
        October 28, 1999, the shares of Atlantic common stock were not actively traded,
        and such trading activity, as it occurred, took place in privately negotiated
        transactions. On October 28, 1999, Atlantic’s common stock was approved for
        quotation on the Over-the-Counter Bulletin Board, and on August 29, 2003,
        Atlantic common stock commenced its listing on the NASDAQ Capital Market
        under
        the symbol “ATBC.” During 2006, 2005, and 2004, the reported periodic high and
        low quotes during each quarter follow:
 
 2006
              
              2005
              
              20044th
                  Qtr
              
              3rd
                  Qtr
              
              2nd
                  Qtr
              
              1st
                  Qtr
              
              4th
                  Qtr
              
              3rd
                  Qtr
              
              2nd
                  Qtr
              
              1st
                  Qtr
              
              4th
                  Qtr
              
              3rd
                  Qtr
              
              2nd
                  Qtr
              
              1st
                  QtrHigh
              
              $
              35.49
              
              $
              41.00
              
              $
              29.95
              
              $
              30.00
              
              $
              29.05
              
              $
              25.95
              
              $
              25.57
              
              $
              28.00
              
              $
              27.95
              
              $
              28.75
              
              $
              27.25
              
              $
              21.00Low
              
              $
              31.24
              
              $
              27.31
              
              $
              26.29
              
              $
              24.78
              
              $
              25.55
              
              $
              24.00
              
              $
              23.25
              
              $
              24.50
              
              $
              25.50
              
              $
              23.51
              
              $
              18.00
              
              $
              18.15
 
 Please
        note that the information above represents offers made to buy our stock and
        may
        not represent actual transactions or sales. The source of data used to prepare
        the above chart was taken from historical prices provided by Commodity Systems,
        Inc.
 
 At
        December 31, 2006, there were 624 shareholders of record with shares held
        by
        individuals and in nominee names.
 
 At
        February 28, 2007, the quoted market price for the common stock of Atlantic
        was
        $35.13. We anticipate that for the foreseeable future, earnings will be retained
        for business development and growth. Accordingly, we do not anticipate paying
        cash dividends on our common stock in the foreseeable future. The payment
        of
        future dividends will be at the sole discretion of the Board of Directors
        and
        will depend on, among other things, future earnings, capital requirements,
        and
        our general financial and business condition.
 
 Furthermore,
        the ability to pay dividends to our stockholders depends primarily on dividends
        received from our banking subsidiary, Oceanside. Oceanside’s ability to pay
        dividends is limited by federal and state banking regulations based upon
        Oceanside’s profitability and other factors. At December 31, 2006, retained
        earnings of Oceanside totaling approximately $1.9 million were available
        to pay
        dividends to the Holding Company in order to maintain Oceanside’s current
        regulatory capital classification.
 
 
 **ITEM
                  6.**
              **MANAGEMENT’S
                  DISCUSSION AND
                  ANALYSIS.**
 
 Management’s
        discussion and analysis is included to provide the shareholders with an expanded
        narrative of our results of operations, changes in financial condition,
        liquidity, and capital adequacy. This narrative should be reviewed in
        conjunction with the audited consolidated financial statements and notes
        included in this report. Since our primary asset is our wholly-owned subsidiary,
        Oceanside Bank, most of the discussion and analysis relates to
        Oceanside.
  -13-
 ***Table
            of Contents***
 **SELECTED
        FINANCIAL DATA (dollars and shares in thousands,
        except per share data)**
 At
                  or for thePeriod
                  Ended December 31,2006
              
              2005
              
              2004
              
              2003
              
              2002**Statements
                  of Operations Data:**Total
                  interest income
              
              $
              15,502
              
              $
              11,259
              
              $
              8,241
              
              $
              6,837
              
              $
              6,331Total
                  interest expense
              
              
              7,584
              
              
              4,358
              
              
              2,278
              
              
              1,790
              
              
              1,894Net
                  interest income before provision for loan losses
              
              
              7,918
              
              
              6,901
              
              
              5,963
              
              
              5,047
              
              
              4,437Provision
                  for loan losses
              
              
              194
              
              
              334
              
              
              362
              
              
              319
              
              
              196Net
                  interest income after provision for loan losses
              
              
              7,724
              
              
              6,567
              
              
              5,601
              
              
              4,728
              
              
              4,241Noninterest
                  income
              
              
              1,078
              
              
              839
              
              
              923
              
              
              880
              
              
              916Noninterest
                  expense
              
              
              5,981
              
              
              5,283
              
              
              4,889
              
              
              4,158
              
              
              4,010Income
                  tax provision
              
              
              903
              
              
              645
              
              
              469
              
              
              463
              
              
              294Net
                  income
              
              
              1,918
              
              
              1,478
              
              
              1,166
              
              
              987
              
              
              853**Selected
                  End of Period Balances:**Total
                  assets
              
              $
              243,497
              
              $
              213,880
              
              $
              184,317
              
              $
              145,717
              
              $
              112,251Interest-earning
                  assets
              
              
              228,686
              
              
              196,931
              
              
              166,829
              
              
              124,675
              
              
              101,905Securities
                  and stock, at cost
              
              
              39,837
              
              
              38,290
              
              
              29,419
              
              
              23,308
              
              
              17,205Loans,
                  net of deferred fees
              
              
              177,708
              
              
              152,803
              
              
              129,801
              
              
              99,482
              
              
              79,107Allowance
                  for loan losses
              
              
              1,599
              
              
              1,552
              
              
              1,296
              
              
              1,220
              
              
              970Deposit
                  accounts
              
              
              192,704
              
              
              168,480
              
              
              146,352
              
              
              113,378
              
              
              83,524Other
                  borrowings
              
              
              32,314
              
              
              29,138
              
              
              23,004
              
              
              18,800
              
              
              15,873Stockholders’
                  equity
              
              
              17,251
              
              
              15,232
              
              
              14,033
              
              
              12,920
              
              
              12,154**Selected
                  Average Balances for the Period:**Total
                  assets
              
              $
              225,392
              
              $
              193,249
              
              $
              159,951
              
              $
              126,806
              
              $
              99,748Interest-earning
                  assets
              
              
              211,081
              
              
              179,001
              
              
              147,353
              
              
              115,741
              
              
              89,483Securities
                  and deposits
              
              
              37,278
              
              
              34,202
              
              
              27,064
              
              
              21,915
              
              
              14,335Loans,
                  net
              
              
              167,883
              
              
              141,587
              
              
              114,236
              
              
              88,922
              
              
              70,845Interest-bearing
                  deposit accounts
              
              
              150,762
              
              
              123,694
              
              
              104,174
              
              
              77,477
              
              
              62,727Other
                  borrowings
              
              
              24,186
              
              
              22,450
              
              
              14,608
              
              
              13,959
              
              
              10,164Stockholders’
                  equity
              
              
              16,042
              
              
              14,596
              
              
              13,445
              
              
              12,653
              
              
              9,557**Share
                  Data:**Earnings
                  per shareBasic
              
              $
              1.54
              
              $
              1.18
              
              $
              0.93
              
              $
              0.79
              
              $
              0.87Fully
                  diluted
              
              $
              1.54
              
              $
              1.18
              
              $
              0.93
              
              $
              0.79
              
              $
              0.83Book
                  value per share (period end)
              
              $
              13.83
              
              $
              12.21
              
              $
              11.25
              
              $
              10.36
              
              $
              9.74Common
                  shares outstanding (period end)
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              1,248Weighted
                  average shares outstandingBasic
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              980Fully
                  diluted
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              1,248
              
              
              1,025**Performance
                  Ratios:**Return
                  on average assets
              
              
              0.85
              %
              
              0.76
              %
              
              0.73
              %
              
              0.78
              %
              
              0.86
              %Return
                  on average equity
              
              
              11.96
              
              
              10.13
              
              
              8.67
              
              
              7.80
              
              
              8.93Interest-rate
                  spread during the period
              
              
              3.10
              
              
              3.40
              
              
              3.76
              
              
              4.05
              
              
              4.61Net
                  interest margin
              
              
              3.84
              
              
              3.95
              
              
              4.13
              
              
              4.46
              
              
              5.09Noninterest
                  expenses to average assets
              
              
              2.65
              
              
              2.75
              
              
              3.06
              
              
              3.28
              
              
              4.02**Asset
                  Quality Ratios:**Allowance
                  for loan losses to period end loans
              
              
              0.90
              %
              
              1.02
              %
              
              1.00
              %
              
              1.23
              %
              
              1.23
              %Net
                  charge-offs to average loans
              
              
              0.09
              
              
              0.06
              
              
              0.25
              
              
              0.08
              
              
              -0.01Nonperforming
                  assets to period end loans
              
              
              0.03
              
              
              0.13
              
              
              0.07
              
              
              0.04
              
              
              0.01Nonperforming
                  assets to period end total assets
              
              
              0.02
              
              
              0.09
              
              
              0.05
              
              
              0.03
              
              
              0.01**Capital
                  and Liquidity Ratios:**Average
                  equity to average assets (Consolidated)
              
              
              7.11
              %
              
              7.55
              %
              
              8.41
              %
              
              9.98
              %
              
              9.58
              %Leverage
                  (4.00% required minimum) (Oceanside)
              
              
              8.75
              
              
              8.93
              
              
              8.02
              
              
              8.12
              
              
              9.00Risk-based
                  capital (Oceanside):Tier
                  1
              
              
              10.16
              
              
              10.62
              
              
              9.55
              
              
              9.42
              
              
              9.67Total
              
              
              10.95
              
              
              11.52
              
              
              10.43
              
              
              10.46
              
              
              10.73Average
                  loans to average deposits (Consolidated)
              
              
              91.27
              
              
              91.18
              
              
              87.10
              
              
              89.22
              
              
              88.53**Full-time
                  Employee Equivalents (End of Period)**
              
              
              51
              
              
              50
              
              
              48
              
              
              47
              
              
              43
 -14-
 ***Table
            of Contents***
  **OVERVIEW**
 
 **How
        We Earn Income** *.* As
        stated elsewhere herein, our results of operations are primarily dependent
        upon
        the results of operations of Oceanside. Oceanside conducts commercial banking
        business consisting of attracting deposits from the general public and applying
        those funds to the origination of commercial, consumer, and real estate loans
        (including commercial loans collateralized by real estate). Profitability
        depends primarily on net interest income, which is the difference between
        interest income generated from interest-earning assets (i.e., loans and
        investments) less the interest expense incurred on interest-bearing liabilities
        (i.e., customer deposits and borrowed funds). Net interest income is affected
        by
        the relative amounts of interest-earning assets and interest-bearing
        liabilities, and 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 our interest-earning assets
        and
        the average rate paid on our interest-bearing liabilities. When interest-earning
        assets approximate or exceed interest-bearing liabilities, any positive interest
        rate spread will generate net interest income. The factors that influence
        net
        interest income include changes in interest rates and changes in the volume
        and
        mix of assets and liability balances. The interest rate spread is impacted
        by
        interest rates, deposit flows, and loan demand. Additionally, and to a lesser
        extent, Oceanside’s profitability is affected by such factors as the level of
        noninterest income and expenses, the provision for loan losses, and the
        effective tax rate. Noninterest income consists primarily of service fees
        on
        deposit accounts and mortgage banking operations. Noninterest expense consists
        of compensation and employee benefits, occupancy and equipment expenses,
        data
        processing costs, and other operating expenses.
 
 **Critical
        Accounting Policies and Use of Significant Estimates** .
        Our
        consolidated financial statements include the accounts of the Holding Company
        and the Bank. All significant intercompany accounts and transactions have
        been
        eliminated in consolidation. The accounting and reporting policies conform
        with
        accounting principles generally accepted in the United States of America
        and to
        general practices within the banking industry. Our significant accounting
        policies are described in *Note
        1* of the *Notes
        to Consolidated Financial Statements* .
        The
        majority of these accounting policies do not require our management to make
        difficult, subjective, or complex judgments. However, we believe the allowance
        for loan losses is a critical policy.
 
 **Allowance
        for Loan Losses** . The
        allowance for loan losses is a valuation allowance for probable or incurred
        credit losses. Loan
        losses are charged against the allowance when management believes the
        uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
        any,
        are credited to the allowance.
 
 Allocations
        of the allowance may be made for specific loans, but the entire allowance
        is
        available for any loan that, in management's judgment, should be
        charged-off.
 
 The
        allowance consists of specific and general components. The specific component
        relates to loans that are individually classified as impaired or loans otherwise
        classified as substandard or doubtful (impaired). The general component covers
        non-classified loans and is based on historical loss experience adjusted
        for
        current factors.
 
 A
        loan is
        impaired when full payment under the loan terms is not expected. Commercial
        loans and commercial real estate loans are individually evaluated for
        impairment. If a loan is impaired, a portion of the allowance is allocated
        so
        that the loan is reported, net, at the present value of estimated future
        cash
        flows using the loan's existing rate or at the fair value of collateral if
        repayment is expected solely from the collateral and accrual of interest
        is
        discontinued. Large groups of smaller balance homogeneous loans, such as
        consumer and residential real estate loans, are collectively evaluated for
        impairment, and accordingly, they are not separately identified for impairment
        disclosures.
 
 The
        allowance for loan losses is evaluated on a regular basis by management and
        is
        based upon management’s periodic review of the collectibility of the loans in
        light of historical experience, the nature and volume of the loan portfolio,
        adverse situations that may affect the borrower’s ability to repay, estimated
        value of any underlying collateral and prevailing economic conditions. There
        is
        no precise method of predicting specific loan losses or amounts that ultimately
        may be charged-off. Also, this evaluation is inherently subjective as it
        requires estimates that are susceptible to significant revision as more
        information becomes available. The determination that a loan may be
        uncollectible, in whole or in part, is a matter of judgment. Similarly, the
        adequacy of the allowance for loan losses can be determined only on a judgmental
        basis, after full review, including, consideration of economic conditions
        and
        their effect on particular industries and specific borrowers; a review of
        borrowers' financial data, together
        with industry data, their competitive situation, the borrowers' management
        capabilities and other factors; a continuing evaluation of the loan portfolio,
        including monitoring any loans that are identified as being of less than
        acceptable quality; a detailed analysis, on a quarterly basis, of all impaired
        loans; and an evaluation of the underlying collateral for secured
        lending.
  -15-
 ***Table
            of Contents***
  We
        maintain a formalized loan review process supported by a credit analysis
        and
        control system. We will maintain the allowance for loan losses at a level
        sufficient to absorb estimated uncollectible loans and, expect to make periodic
        additions to the allowance for loan losses.
 
 **Use
        of Estimates** .
        The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenue and expenses during the reporting period.
        Actual
        results could differ from those estimates. Material estimates that are
        particularly susceptible to significant change in the near term relate to
        the
        determination of the allowance for loan losses and valuation of foreclosed
        assets.
 
 The
        determination of the adequacy of the allowance for loan losses is based on
        estimates that may be affected by significant changes in the economic
        environment and market conditions. In connection with the determination of
        the
        estimated losses on loans and to support the carrying value of foreclosed
        assets, we obtain independent appraisals for significant
        collateral.
 
 Our
        loans
        are generally secured by specific items of collateral including real property,
        consumer assets, and business assets. Although we have a diversified loan
        portfolio, a substantial portion of our debtors’ ability to honor their
        contracts is dependent on local, state, and national economic conditions
        that
        may affect the value of the underlying collateral or the income of the
        debtor.
 
 While
        we
        use available information to recognize losses on loans, further reductions
        in
        the carrying amounts of loans or foreclosed assets may be necessary based
        on
        changes in economic conditions. In addition, regulatory agencies, as an integral
        part of their examination process, periodically review the estimated losses
        on
        loans and the carrying value of foreclosed assets. Such agencies may require
        us
        to recognize additional losses based on their judgments about information
        available to them at the time of their examination.
 
 **Interest
        Rate Risk** .
        Our
        asset base is exposed to risk including the risk resulting from changes in
        interest rates and changes in the timing of cash flows. Management monitors
        the
        effect of such risks by considering the mismatch of the maturities of our
        assets
        and liabilities in the current interest rate environment and the sensitivity
        of
        assets and liabilities to changes in interest rates. We have considered the
        effect of significant increases and decreases in interest rates and believe
        such
        changes, if they occurred, would be manageable and would not affect our ability
        to hold assets as planned. However, we are exposed to significant market
        risk in
        the event of significant and prolonged interest rate changes.
 
 **Regulatory
        Environment** .
        We are
        subject to regulations of certain federal and state agencies and, accordingly,
        are periodically examined by those regulatory authorities. As a consequence
        of
        the extensive regulation of commercial banking activities, our business is
        particularly susceptible to being affected by federal and state legislation
        and
        regulations.
 
 **COMPARISON
        OF YEARS ENDED DECEMBER 31, 2006 AND
        2005**
 
 *Highlights* .
        As of
        December 31, 2006, we had grown to approximately $243.5 million in total
        assets,
        $177.7 million in total loans, $192.7 million in deposits, and $17.3 million
        in
        stockholders’ equity.
 
 Net
        income in 2006 was $1,918,000 versus $1,478,000 in 2005, an increase of
        $440,000, or 29.8%. The primary reasons for the change in net income in 2006
        over 2005 were as follows:
 
 ·
              Interest
                  and fees on loans totaled $13,592,000 in 2006 compared with $9,870,000
                  in
                  2005, an increase of $3,722,000, or
                  37.7%.
 ·
              Our
                  income from average interest-earning assets grew 37.7% as a result
                  of
                  increases in average interest-earning assets of 17.9%, and improved
                  yields
                  that increased from 6.38% to 7.44%.
 ·
              Our
                  total interest expense rose 74.0% as our cost of funding increased
                  in 2006
                  from 2.98% to 4.34%. Our average 2006 interest-bearing deposits
                  and other
                  borrowings continued to grow at a pace of 19.7% over
                  2005.
 ·
              Partially
                  offsetting the positive gain in net interest income of $1,017,000,
                  noninterest expenses grew $698,000, or 13.2%, reflecting increased
                  expenses related to our expansion of the loan operations area,
                  support of
                  the branching network, and related personnel
                  costs.
  -16-
 ***Table
            of Contents***
  *Interest
        Income* .
        Interest income was $15,502,000 and $11,259,000 in 2006 and 2005, respectively.
        The increase of 37.7% was attributable to growth in our most significant
        interest-earning asset, loans, which grew 18.6% from average levels in 2005
        to
        2006. Average loans accounted for 79.5% of our average interest-earning assets
        in 2006 versus 79.1% in 2005. Our overall yield on interest-earning assets
        of
        7.44% also benefited from the rising interest rate environment in
        2006.
 
 *Interest
        Expense.* Interest
        expense was $7,584,000 and $4,358,000 in 2006 and 2005, respectively. As
        a
        result of the increasing interest rate environment and our growth in average
        interest-bearing liabilities of $28.8 million, or 19.7%, during this period,
        interest expense increased 74.0%. Our cost of funds rose to 4.34% in 2006
        compared with 2.98% in 2005. Interest expense from certificates of deposit
        outpaced overall interest expense from deposits (83.7% compared with 78.7%,
        respectively) as the growth in certificates of deposit more than offset declines
        in other deposits. Customer repurchase agreements and the junior subordinated
        debentures issued in 2006 contributed to the growth, with the average cost
        of
        funds for other borrowings at 4.75% in 2006 and 3.37% in 2005.
 
 *Net
        Interest Income* .
        Net
        interest income (before provision for loan losses) was $7,918,000 and $6,901,000
        for 2006 and 2005, respectively, an increase of 14.7% from 2005 to 2006,
        which
        was due to the increase in average interest-earning assets of 17.9%, partially
        offset by increases in our cost of funds and the growth in interest-bearing
        liabilities. The average balances, interest income and expense, and the average
        rates earned and paid for assets and liabilities are found in the tables
        that
        follow.
 
 During
        2006 and 2005, the average yield (on a tax-equivalent basis) on interest-earning
        assets was 7.44% and 6.38%, respectively, while the average cost of funds
        was
        4.34% in 2006 and 2.98% in 2005. Our net interest margin was lower (3.84%
        in
        2006 compared with 3.95% in 2005), which reflects the faster growth in
        interest-bearing deposits (19.7%) over interest-earning assets (17.9%) and
        cost
        of funds (136 basis points) versus yield on interest-earning assets (106
        basis
        points). The increase in loan yields from 6.97% to 8.10% was more than offset
        by
        the increase in volume of certificates of deposit and increases in our cost
        of
        funds, which contributed to the declines in interest-rate spread and net
        interest margin.
 
 *Provision
        for Loan Losses* .
        A
        provision for loan losses of $194,000 was recorded in 2006, reflecting our
        assessment of the needed level of the allowance for loan losses. This assessment
        is based on management’s evaluation of probable loan losses and considers the
        overall quality of the loan portfolio. The decrease in the provision for
        loan
        losses in 2006 versus the 2005 level of $140,000 was due to continuing favorable
        trends in most measures of loan portfolio quality. Net charge-offs in 2006
        were
        $147,000 as compared with $78,000 in 2005, an increase of $69,000.
 
 *Noninterest
        Income* .
        Noninterest income increased $239,000, or 28.5%, to $1,078,000 in 2006 from
        $839,000 in 2005.
        A
        summary of the more significant changes for 2006 compared with 2005
        follows:
 
 ·
              Fees
                  and service charges on deposit accounts grew by 20.3%, which reflects
                  recent increases in fees implemented in 2006 and increases in the
                  number
                  of demand accounts of 2.6%.
 ·
              Other
                  fee income for banking services increased $99,000, or 99.0% in
                  2006 versus
                  2005, reflecting increased usage and fees from wire transfers,
                  ATMs, and
                  other banking services.
 ·
              Mortgage
                  banking fees increased moderately from $114,000 to $119,000, or
                  4.4%.
 
 *Noninterest
        Expenses* .
        Total
        noninterest expenses increased to $5,981,000 in 2006 compared to $5,283,000
        for
        2005. This increase of $698,000, or 13.2%, reflects higher expenses due to
        growth in our operations. The more significant increases during 2006 over
        2005
        follow:
 
 ·
              Salaries
                  and employee benefits grew $352,000, or 13.5%, reflecting the increase
                  in
                  the average number of full-time equivalent employees of approximately
                  4.1%
                  and increases in salaries, bonuses, retirement plan contributions,
                  and
                  insurance costs.
 ·
              Expenses
                  of bank premises and fixed assets increased $124,000, or 12.1%,
                  in 2006
                  versus 2005, reflecting increased maintenance, utilities, insurance,
                  and
                  property taxes resulting, in part, from the new loan operations
                  office
                  added at the Beach Boulevard branch in late-2005, increased property
                  values, and higher utility rates.
 ·
              While
                  processing and settlement fees; postage, freight, and courier costs;
                  director fees; advertising and business development; and other
                  miscellaneous costs rose at double-digit rates, other operating
                  expense
                  grew at a relatively modest overall pace in 2006 over 2005, considering
                  the overall growth of banking
                  operations.
  -17-
 ***Table
            of Contents***
  *Provision
        for Income Taxes.* The
        income tax provision was $903,000 for 2006, an effective rate of 32.0%. This
        compares with an effective rate of 30.4% for 2005. The effective tax rates
        in
        2006 and 2005 differ from the federal and state
        statutory rates principally due to nontaxable investment income. While
        tax-exempt income increased 18.5% in 2006 over
        2005, this growth did not keep pace with the growth in overall interest income,
        contributing to the rise in the effective tax rate.
 
 **COMPARISON
        OF YEARS ENDED DECEMBER 31, 2005 AND
        2004**
 
 *Highlights* .
        As of
        December 31, 2005, we had grown to approximately $213.9 million in total
        assets,
        $152.9 million in total loans, $168.5 million in deposits, and $15.2 million
        in
        stockholders’ equity.
 
 Net
        income in 2005 was $1,478,000 versus $1,166,000 in 2004, an increase of
        $312,000, or 26.8%. The primary reasons for the change in net income in 2005
        over 2004 were as follows:
 
 ·
              Interest
                  and fees on loans totaled $9,870,000 in 2005 compared with $7,280,000
                  in
                  2004, an increase of $2,590,000, or
                  35.6%.
 ·
              Our
                  income from average interest-earning assets grew 36.6% as a result
                  of
                  increases in average interest-earning assets of 21.5%, and improved
                  yields
                  that increased from 5.68% to 6.38%.
 ·
              Our
                  total interest expense rose 91.3% as our cost of funding increased
                  in 2005
                  from 1.92% to 2.98%. Our average 2005 interest-bearing deposits
                  and other
                  borrowings continued to grow at a pace of 23.0% over
                  2004.
 ·
              Partially
                  offsetting the positive gain in net interest income of $940,000,
                  noninterest expenses grew $424,000 reflecting increased expenses
                  related
                  to our expansion of the loan operations area, recent branch openings,
                  and
                  related personnel costs.
 
 *Interest
        Income* .
        Interest income was $11,261,000 and $8,241,000 in 2005 and 2004, respectively.
        The increase of 36.6% was attributable to growth in our most significant
        interest-earning asset, loans, which grew 23.9% from average levels in 2004
        to
        2005. Average loans accounted for 79.1% of our average interest-earning assets
        in 2005 versus 77.5% in 2004. Our overall yield on interest-earning assets
        of
        6.97% also benefited from the rising interest rate environment in
        2005.
 
 *Interest
        Expense.* Interest
        expense was $4,358,000 and $2,278,000 in 2005 and 2004, respectively. As
        a
        result of the increasing interest rate environment and our growth in average
        interest-bearing liabilities of $27.4 million, or 23.0%, during this period,
        interest expense increased 91.3%. Our cost of funds rose to 2.98% in 2005
        compared with 1.92% in 2004. Interest expense from other borrowings outpaced
        interest expense from deposits (121.3% compared with 86.0%, respectively)
        as the
        growth in other borrowings outpaced deposit growth. Customer repurchase
        agreements and the junior subordinated debentures issued in 2005 contributed
        to
        the growth, with the average cost of funds for other borrowings at 3.37%
        in 2005
        and 2.34% in 2004.
 
 *Net
        Interest Income* .
        Net
        interest income (before provision for loan losses) was $6,903,000 and $5,963,000
        for 2005 and 2004, respectively, an increase of 15.8% from 2004 to 2005,
        which
        was due to the increase in average interest-earning assets of 21.5%, partially
        offset by increases in our cost of funds and the growth in interest-bearing
        liabilities. The average balances, interest income and expense, and the average
        rates earned and paid for assets and liabilities are found in the tables
        that
        follow.
 
 During
        2005 and 2004, the average yield (on a tax-equivalent basis) on interest-earning
        assets was 6.38% and 5.68%, respectively, while the average cost of funds
        was
        2.98% in 2005 and 1.92% in 2004. Our net interest margin was lower (3.95%
        in
        2005 compared with 4.13% in 2004), which reflects the faster growth in
        interest-bearing deposits and other borrowings (23.0%) over interest-earning
        assets (21.5%) and cost of funds (106 basis points) versus yield on
        interest-earning assets (70 basis points). The increase in loan yields from
        6.37% to 6.97% was more than offset by the increase in volume of certificates
        of
        deposit and increases in our cost of funds, which contributed to the declines
        in
        interest-rate spread and net interest margin.
 
 *Provision
        for Loan Losses* .
        A
        provision for loan losses of $334,000 was recorded in 2005, reflecting our
        assessment of the needed level of the allowance for loan losses. This assessment
        is based on management’s evaluation of probable loan losses and considers the
        overall quality of the loan portfolio. The decrease in the provision for
        loan
        losses in 2005 versus the 2004 level of $362,000 was due to lower net
        charge-offs offset partially by the overall growth in the loan portfolio.
        Net
        charge-offs in 2005 were $78,000 as compared with $286,000 in 2004, a decrease
        of $208,000.
  -18-
 ***Table
            of Contents***
  *Noninterest
        Income* .
        Noninterest income decreased $56,000, or 6.1%, to $867,000 in 2005 from $923,000
        in 2004.
        A
        summary of changes for 2005 compared with 2004 follows:
 
 ·
              Service
                  charges on deposit accounts declined by 5.7%, which reflects a
                  continuing
                  trend in competitive pressures on fees for basic checking
                  services.
 ·
              Mortgage
                  banking fees increased $8,000, or 7.5%, as brokered mortgage loans
                  increased from $9.1 million in 2004 to $12.7 million in 2005. This
                  increase reflects the continued growth of new home sales, generally
                  favorable interest rates, and the demand for refinancing of
                  mortgages.
 ·
              No
                  sales of SBA loans were completed in 2005. A gain of $33,000 on
                  the sale
                  of SBA loans was recorded in 2004.
 ·
              Other
                  income remained relatively flat in 2005 versus
                  2004.
 
 *Noninterest
        Expenses* .
        Total
        noninterest expenses increased to $5,313,000 in 2005 compared to $4,889,000
        for
        2004. This increase of $424,000, or 8.7%, reflects higher expenses due to
        growth
        in our operations. The more significant increases during 2005 over 2004
        follow:
 
 ·
              Salaries
                  and employee benefits grew 10.4% reflecting the increase in the
                  average
                  number of full-time equivalent employees of approximately 2.1%
                  and
                  increases in salaries, bonuses, commissions, and retirement plan
                  contributions.
 ·
              Expenses
                  of bank premises and fixed assets and other operating expenses
                  increased
                  $120,000, or 13.3%, in 2005 versus 2004, reflecting increased maintenance,
                  utilities, and property taxes resulting, in part, from the new
                  loan
                  operations office added at the Beach Boulevard branch, increased
                  property
                  values, and higher utility rates.
 ·
              While
                  processing and settlement fees, legal fees, and professional costs
                  for SOX
                  404 compliance rose at double-digit rates, other operating expense
                  grew at
                  a relatively modest overall pace of 3.6% in 2005 over
                  2004.
 
 *Provision
        for Income Taxes.* The
        income tax provision was $645,000 for 2005, an effective rate of 30.4%. This
        compares with an effective rate of 28.7% for 2004. The effective tax rates
        in
        2005 and 2004 differ from the federal and state statutory rates principally
        due
        to nontaxable investment income. While tax-exempt income increased 31.4%
        in 2005
        over 2004, this growth did not keep pace with the growth in overall interest
        income, contributing to the rise in the effective tax rate.
 
 
 [Remainder
        of page left blank.]
  -19-
 ***Table
            of Contents***
  **Rate/Volume
        Analysis (dollars in thousands):**
 
 Years
                                                                                                                                              Ended
                                                                                                                                              December
                                                                                                                                              31,2006
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2005
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2004Average
                                                                                                                                            Balance
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Interest
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Average
                                                                                                                                            Yield/
                                                                                                                                            Rate
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Average
                                                                                                                                            Balance
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Interest
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Average
                                                                                                                                            Yield/
                                                                                                                                            Rate
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Average
                                                                                                                                            Balance
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Interest
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Average
                                                                                                                                            Yield/
                                                                                                                                            RateInterest-earning
                                                                                                                                              assets:Loans(1)
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          167,883
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          13,592
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8.10
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          141,587
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          9,870
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6.97
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          114,236
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          7,280
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6.37
                                                                                                                                          %Securities
                                                                                                                                              and
                                                                                                                                              deposits(2)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          37,278
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,605
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.83
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          34,202
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,295
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.28
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          27,064
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          884
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.74Other
                                                                                                                                              interest-earning
                                                                                                                                              assets(3)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,920
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          305
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5.15
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3,212
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          94
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2.93
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6,053
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          77
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1.27Total
                                                                                                                                              interest-earning
                                                                                                                                              assets(2)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          211,081
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          15,502
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          7.44
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          179,001
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          11,259
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6.38
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          147,353
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8,241
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5.68
                                                                                                                                          %Noninterest-earning
                                                                                                                                              assets
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14,510
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14,248
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12,598Total
                                                                                                                                              assets
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          225,591
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          193,249
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          159,951Interest-bearing
                                                                                                                                              liabilities:Demand
                                                                                                                                              deposits
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          41,983
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,452
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.46
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          42,319
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          879
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2.08
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          39,079
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          476
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1.22
                                                                                                                                          %Savings
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,294
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          68
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1.28
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6,231
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          47
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          0.75
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6,213
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          35
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          0.56Certificates
                                                                                                                                              of
                                                                                                                                              deposit
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          103,485
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,915
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.75
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          75,144
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2,675
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.56
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          58,882
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,425
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2.42Other
                                                                                                                                              borrowings
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          24,186
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,149
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.75
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          22,450
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          757
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.37
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14,608
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          342
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2.34Total
                                                                                                                                              interest-bearing
                                                                                                                                              liabilities
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          174,948
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          7,584
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.34
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          146,144
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,358
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2.98
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          118,782
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2,278
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1.92
                                                                                                                                          %Noninterest-bearing
                                                                                                                                              liabilities
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          34,601
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          32,509
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          27,724Stockholders’
                                                                                                                                              equity
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          16,042
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14,596
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13,445Total
                                                                                                                                              liabilities
                                                                                                                                              and
                                                                                                                                              stockholders’
equity
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          225,591
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          193,249
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          159,951Net
                                                                                                                                              interest
                                                                                                                                              income
                                                                                                                                              (before
                                                                                                                                              provision
                                                                                                                                              for
                                                                                                                                              loan
                                                                                                                                              losses)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          7,918
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          6,901
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          5,963Interest-rate
                                                                                                                                              spread
(4)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.10
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.40
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.76
                                                                                                                                          %Net
                                                                                                                                              interest
                                                                                                                                              margin(2)
                                                                                                                                              (5)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.84
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3.95
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.13
                                                                                                                                          %Ratio
                                                                                                                                              of
                                                                                                                                              average
                                                                                                                                              interest-earning
                                                                                                                                              assets
                                                                                                                                              to
                                                                                                                                              average
                                                                                                                                              interest-bearing
                                                                                                                                              liabilities
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          120.65
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          122.48
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          124.05
                                                                                                                                          %
  
 (1)
              Average
                  loan balances include nonaccrual loans, which are not material.
                  Average
                  loans are net of deferred fees. Loan fees (in thousands) were $600,
                  $664,
                  and $568 in 2006, 2005, and 2004, respectively. Loan yields have
                  been
                  reported in total since a substantial portion of loans are secured
                  by real
                  estate.
 (2)
              Tax-exempt
                  income has been adjusted to a tax-equivalent basis using an incremental
                  rate of 37.6%.
 (3)
              Includes
                  federal funds sold.
 (4)
              Interest-rate
                  spread represents the difference between the average yield on
                  interest-earning assets and the average cost of interest-bearing
                  liabilities.
 (5)
              Net
                  interest margin is net interest income divided by average interest-earning
                  assets.
  -20-
 ***Table
            of Contents***
  **Rate/Volume
        Analysis (dollars in thousands):**
 
 Year
                  Ended December 31,2006
                  vs. 2005Increase
                  (Decrease) Due toRate
              
              Volume
              
              Rate/
                Volume
              
              TotalInterest-earning
                  assets:Loans(1)
              
              $
              1,593
              
              $
              1,833
              
              $
              296
              
              $
              3,722Securities
                  and other deposits
              
              
              178
              
              
              116
              
              
              16
              
              
              310Other
                  interest-earning assets(2)
              
              
              71
              
              
              79
              
              
              61
              
              
              211Total
                  interest-earning assets
              
              
              1,842
              
              
              2,028
              
              
              373
              
              
              4,243Interest-bearing
                  liabilities:Demand
                  deposits
              
              
              585
              
              
              (7
              )
              
              (5
              )
              
              573Savings
              
              
              33
              
              
              (7
              )
              
              (5
              )
              
              21Certificates
                  of deposit
              
              
              894
              
              
              1,009
              
              
              337
              
              
              2,240Other
                  borrowings
              
              
              310
              
              
              59
              
              
              23
              
              
              392Total
                  interest-bearing liabilities
              
              
              1,822
              
              
              1,054
              
              
              350
              
              
              3,226Net
                  interest income
              
              $
              20
              
              $
              974
              
              $
              23
              
              $
              1,017
 
 
 Year
                  Ended December 31,2005
                  vs. 2004Increase
                  (Decrease) Due toRate
              
              Volume
              
              Rate/
                Volume
              
              TotalInterest-earning
                  assets:Loans(1)
              
              $
              683
              
              $
              1,743
              
              $
              164
              
              $
              2,590Securities
                  and other deposits
              
              
              142
              
              
              233
              
              
              38
              
              
              413Other
                  interest-earning assets(2)
              
              
              100
              
              
              (36
              )
              
              (47
              )
              
              17Total
                  interest-earning assets
              
              
              925
              
              
              1,940
              
              
              155
              
              
              3,020Interest-bearing
                  liabilities:Demand
                  deposits
              
              
              336
              
              
              39
              
              
              28
              
              
              403Savings
              
              
              12
              
              
              -
              
              
              -
              
              
              12Certificates
                  of deposit
              
              
              671
              
              
              394
              
              
              185
              
              
              1,250Other
                  borrowings
              
              
              151
              
              
              184
              
              
              80
              
              
              415Total
                  interest-bearing liabilities
              
              
              1,170
              
              
              617
              
              
              293
              
              
              2,080Net
                  interest income
              
              $
              (245
              )
              $
              1,323
              
              $
              (138
              )
              $
              940
  
 (1)
              Average
                  loan balances include nonaccrual loans, which are not
                  material.
 (2)
              Includes
                  federal funds sold.
  -21-
 ***Table
            of Contents***
  **Weighted
        Average Yield or Rate:**
 
 For
                  the Year Ended December 31,2006
              
              2005
              
              2004Interest-earning
                  assets:Loans,
                  net
              8.10%
              
              6.97%
              
              6.37%Investment
                  securities
              4.83
              
              4.28
              
              3.74Other
                  interest-earning assets
              5.15
              
              2.93
              
              1.27All
                  interest-earning assets
              7.44
              
              6.38
              
              5.68Interest-bearing
                  liabilities:NOW
                  deposits
              1.09
              
              0.53
              
              0.28Money
                  market deposits
              3.84
              
              2.41
              
              1.52Savings
              1.28
              
              0.75
              
              0.56Certificates
                  of deposit
              4.75
              
              3.56
              
              2.42Other
                  borrowings
              4.75
              
              3.37
              
              2.34All
                  interest-bearing liabilities
              4.34
              
              2.98
              
              1.92Interest-rate
                  spread
              3.10
              
              3.40
              
              3.76Net
                  interest margin
              3.84
              
              3.95
              
              4.13
 
 
 **Change
        in Mix of Deposits and Other Borrowings (dollars in
        thousands):**
 
 At
                          December 31,2006
                      
                      
                      2005
                      
                      
                      2004Average
                        Balance
                      
                      
                      Percent
                        to
                        Total
                      
                      
                      Average
                        Balance
                      
                      
                      Percent
                        to
                        Total
                      
                      
                      Average
                        Balance
                      
                      
                      Percent
                        to
                        TotalInterest-earning
                          assets:Loans,
                          net
                      
                      $
                      167,883
                      
                      
                      
                      79.5
                      %
                      
                      $
                      141,587
                      
                      
                      
                      79.1
                      %
                      
                      $
                      114,236
                      
                      
                      
                      77.5
                      %Investment
                          securities
                      
                      
                      37,278
                      
                      
                      
                      17.7
                      %
                      
                      
                      34,202
                      
                      
                      
                      19.1
                      %
                      
                      
                      27,064
                      
                      
                      
                      18.4
                      %Other
                      
                      
                      5,920
                      
                      
                      
                      2.8
                      %
                      
                      
                      3,212
                      
                      
                      
                      1.8
                      %
                      
                      
                      6,053
                      
                      
                      
                      4.1
                      %Total
                          interest-earning assets
                      
                      $
                      211,081
                      
                      
                      
                      100.0
                      %
                      
                      $
                      179,001
                      
                      
                      
                      100.0
                      %
                      
                      $
                      147,353
                      
                      
                      
                      100.0
                      %Interest-bearing
                          deposits:Demand
                          deposits
                      
                      $
                      41,983
                      
                      
                      
                      20.2
                      %
                      
                      $
                      42,319
                      
                      
                      
                      23.8
                      %
                      
                      $
                      39,079
                      
                      
                      
                      26.8
                      %Savings
                      
                      
                      5,294
                      
                      
                      
                      2.6
                      %
                      
                      
                      6,231
                      
                      
                      
                      3.5
                      %
                      
                      
                      6,213
                      
                      
                      
                      4.3
                      %Certificates
                          of deposit
                      
                      
                      103,485
                      
                      
                      
                      49.7
                      %
                      
                      
                      75,144
                      
                      
                      
                      42.3
                      %
                      
                      
                      58,882
                      
                      
                      
                      40.4
                      %Total
                          interest-bearing deposits
                      
                      
                      150,762
                      
                      
                      
                      72.5
                      %
                      
                      
                      123,694
                      
                      
                      
                      69.6
                      %
                      
                      
                      104,174
                      
                      
                      
                      71.5
                      %Noninterest-bearing
                          deposits
                      
                      
                      33,177
                      
                      
                      
                      15.9
                      %
                      
                      
                      31,583
                      
                      
                      
                      17.8
                      %
                      
                      
                      26,979
                      
                      
                      
                      18.5
                      %Total
                          deposits
                      
                      $
                      183,939
                      
                      
                      
                      88.4
                      %
                      
                      $
                      155,277
                      
                      
                      
                      87.4
                      %
                      
                      $
                      131,153
                      
                      
                      
                      90.0
                      %Other
                          borrowings
                      
                      $
                      24,186
                      
                      
                      
                      11.6
                      %
                      
                      $
                      22,450
                      
                      
                      
                      12.6
                      %
                      
                      $
                      14,608
                      
                      
                      
                      10.0
                      %Total
                          deposits and other borrowings
                      
                      $
                      208,125
                      
                      
                      
                      100.0
                      %
                      
                      $
                      177,727
                      
                      
                      
                      100.0
                      %
                      
                      $
                      145,761
                      
                      
                      
                      100.0
                      %
 
 
 **LOANPORTFOLIO**
 
 Average
        loans receivable were $167,883,000 for the year 2006 as compared to $141,587,000
        for 2005, an increase of 18.6%. The year-to-year average increase in 2005
        over
        2004 was 23.9%. Management believes the growth in loans was directly
        attributable to the growth in our branch network, community acceptance, the
        reputations of our lending team, and favorable economic conditions in our
        market
        area. The following provides an analysis of our loan distribution at the
        end of
        2002 - 2006. Loans that are secured by real estate include residential and
        nonresidential mortgages, and home equity loans to individuals.
  -22-
 ***Table
            of Contents***
  **Loan
        Portfolio (dollars in thousands):**
 
 At
                  December 31,2006
              
              %
              
              2005
              
              %
              
              2004
              
              %
              
              2003
              
              %
              
              2002
              
              %Real
                  estateConstruction,
                  land development, and other land
              
              $
              51,598
              
              
              29
              %
              $
              37,905
              
              
              25
              %
              $
              27,246
              
              
              21
              %
              $
              17,295
              
              
              17
              %
              $
              14,033
              
              
              18
              %1-4
                  family residential
              
              
              38,018
              
              
              22
              %
              
              31,997
              
              
              21
              %
              
              19,283
              
              
              15
              %
              
              17,335
              
              
              17
              %
              
              14,892
              
              
              19
              %Multifamily
                  residential
              
              
              2,489
              
              
              1
              %
              
              3,051
              
              
              2
              %
              
              2,513
              
              
              2
              %
              
              2,003
              
              
              2
              %
              
              2,770
              
              
              3
              %Commercial
              
              
              68,588
              
              
              39
              %
              
              62,612
              
              
              41
              %
              
              60,869
              
              
              47
              %
              
              51,554
              
              
              52
              %
              
              35,628
              
              
              45
              %Total
                  real estate
              
              
              160,693
              
              
              91
              %
              
              135,565
              
              
              89
              %
              
              109,911
              
              
              85
              %
              
              88,187
              
              
              88
              %
              
              67,323
              
              
              85
              %Commercial
              
              
              11,214
              
              
              6
              %
              
              11,901
              
              
              8
              %
              
              13,817
              
              
              11
              %
              
              4,750
              
              
              5
              %
              
              4,776
              
              
              6
              %Consumer
                  and other loans
              
              
              5,828
              
              
              3
              %
              
              5,400
              
              
              3
              %
              
              6,147
              
              
              4
              %
              
              6,622
              
              
              7
              %
              
              7,105
              
              
              9
              %Total
                  loans
              
              
              177,735
              
              
              100
              %
              
              152,866
              
              
              100
              %
              
              129,875
              
              
              100
              %
              
              99,559
              
              
              100
              %
              
              79,204
              
              
              100
              %Less:Less,
                  deferred fees
              
              
              (27
              )
              
              
              
              
              (63
              )
              
              
              
              
              (74
              )
              
              
              
              
              (77
              )
              
              
              
              
              (97
              )Less,
                  allowance for loan losses
              
              
              (1,599
              )
              
              
              
              
              (1,552
              )
              
              
              
              
              (1,296
              )
              
              
              
              
              (1,220
              )
              
              
              
              
              (970
              )$
              176,109
              
              
              
              
              $
              151,251
              
              
              
              
              $
              128,505
              
              
              
              
              $
              98,262
              
              
              
              
              $
              78,137
 
 
 The
        following tables show the maturity data for loans receivable.
 
 **Contractual
        Loan Maturities at December 31, 2006 (dollars in
        thousands):**
 
 1
                  Year
                or
                  Less
              
              1
                  Through
                5
                  Years
              
              After
                5
                  Years
              
              TotalReal
                  estate loans
              
              $
              44,909
              
              $
              32,770
              
              $
              83,014
              
              $
              160,693Commercial
              
              
              5,705
              
              
              4,507
              
              
              1,002
              
              
              11,214Consumer
                  and other loans
              
              
              1,199
              
              
              3,853
              
              
              776
              
              
              5,828Total
                  loan portfolio
              
              $
              51,813
              
              $
              41,130
              
              $
              84,792
              
              $
              177,735Loans
                  with maturities over one year:Fixed
                  rate
              
              
              
              
              
              
              
              
              
              
              $
              23,187Variable
                  rate
              
              
              
              
              
              
              
              
              
              
              
              102,735Total
                  maturities greater than one year
              
              
              
              
              
              
              
              
              
              
              $
              125,922
 
 **Loan
        Maturities or Next Repricing Date at December 31, 2006, excluding nonaccrual
        loan (dollars in thousands):**
 
 Three
                  months or less
              
              $
              82,853Over
                  three months through twelve months
              
              
              21,930Over
                  one year through three years
              
              
              45,843Over
                  three through five years
              
              
              19,123Over
                  five years
              
              
              7,933$
              177,682
  -23-
 ***Table
            of Contents***
  **Loans
        Originated and Repaid (dollars in thousands):**
 
 Years
                  Ended December 31,2006
              
              2005
              
              2004
              
              2003
              
              2002Originations:Real
                  estate loansConstruction,
                  land development, and other land
              
              $
              39,551
              
              $
              33,561
              
              $
              16,911
              
              $
              10,696
              
              $
              4,7301-4
                  family residential
              
              
              15,744
              
              
              12,518
              
              
              8,689
              
              
              7,499
              
              
              6,904Multifamily
                  residential
              
              
              -
              
              
              -
              
              
              2,304
              
              
              224
              
              
              2,231Commercial
              
              
              17,548
              
              
              13,180
              
              
              16,776
              
              
              12,350
              
              
              4,26272,843
              
              
              59,259
              
              
              44,680
              
              
              30,769
              
              
              18,127Commercial
              
              
              4,452
              
              
              4,364
              
              
              11,360
              
              
              7,981
              
              
              9,083Consumer
                  and other loans
              
              
              2,807
              
              
              2,263
              
              
              3,390
              
              
              2,172
              
              
              3,731Total
              
              
              80,102
              
              
              65,886
              
              
              59,430
              
              
              40,922
              
              
              30,941Principal
                  reductions
              
              
              (55,233
              )
              
              (42,895
              )
              
              (29,114
              )
              
              (20,567
              )
              
              (13,464
              )Increase
                  in total loans
              
              $
              24,869
              
              $
              22,991
              
              $
              30,316
              
              $
              20,355
              
              $
              17,477
  **CLASSIFICATION
        OF ASSETS AND NONACCRUAL OR IMPAIRED
        LOANS**
 
 Generally,
        interest on loans accrues and is credited to income based upon the principal
        balance outstanding. It is management’s policy to discontinue the accrual of
        interest income and classify a loan as nonaccrual when principal or interest
        is
        past due 90 days or more and the loan is not adequately collateralized, or
        when
        in the opinion of management, principal or interest is not likely to be paid
        in
        accordance with the terms of the obligation. Interest accrued and unpaid
        at the
        time a loan is placed on nonaccrual status is charged against interest income.
        Subsequent payments received are applied to the outstanding principal balance.
        Consumer installment loans are generally charged-off after 90 days of
        delinquency unless adequately collateralized and in the process of collection.
        Loans are not returned to accrual status until principal and interest payments
        are brought current and future payments appear reasonably certain.
 
 Real
        estate acquired as a result of foreclosure, or by deed in lieu of foreclosure,
        is classified as foreclosed assets. Foreclosed assets are recorded at the
        lower
        of cost or fair value less estimated selling costs, and the estimated loss,
        if
        any, is charged to the allowance for loan losses at the time the real estate
        is
        transferred to foreclosed assets. Further allowances for losses in foreclosed
        assets are recorded at the time management believes additional deterioration
        in
        value has occurred.
 
 Management
        has adopted Statement of Financial Accounting Standards No. 114, *Accounting
        by Creditors for Impairment of a Loan* (“SFAS
        No. 114”), which considers a loan to be impaired if it is probable that we will
        be unable to collect all amounts due under the contractual terms of the loan
        agreement. If a loan is considered impaired, its value generally should be
        measured based on the present value of expected cash flows discounted at
        the
        loan’s effective interest rate. As a practical expedient, however, the loan’s
        value may be based on:
 
 ·
              the
                  loan’s market price; or
 ·
              the
                  fair value of the loan’s collateral, less discounted estimated costs to
                  sell, if the collateral is expected to be the sole source of
                  repayment.
 
 If
        the
        value of the loan is less than the recorded investment in the loan, a loss
        should be recognized by recording a valuation allowance and a corresponding
        increase to the provision for loan losses charged to operating expenses.
 
 Situations
        may occur where:
 
 ·
              we
                  receive physical possession of a debtor’s assets regardless of whether
                  formal foreclosure proceedings have been initiated or completed;
                  or
 ·
              the
                  debtor has effectively surrendered control of the underlying collateral
                  in
                  contemplation of foreclosure.
 
 These
        situations are referred to as “in-substance foreclosures.” SFAS No. 114
        recognizes the practical problems of accounting for the operation of an asset
        the creditor does not possess, and states that a loan for which foreclosure
        is
        probable should continue to be accounted for as a loan.
  -24-
 ***Table
            of Contents***
  At
        December 31, 2006, 2005, and 2004, loans past due for 30 days or more (but
        less
        than 89 days) totaled $197,000, $193,000, and $195,000, respectively. At
        December 31, 2006, one loan of $53,000 was past due more than 90 days, and
        was
        considered impaired and nonaccruing. At December 31, 2006, no other loans
        were
        past due 90 days or more.
 
 Management
        maintains a list of monitored loans risk-rated substandard or lower (referred
        to
        as “classified loans”). At December 31, 2006, management had fifteen classified
        loans totaling approximately $4.5 million, as compared with eighteen classified
        loans totaling $1.4 million at December 31, 2005, and nineteen classified
        loans
        totaling $1.4 million at December 31, 2004.
 
 **ALLOWANCE
        FOR LOAN LOSSES**
 
 The
        amount charged to operations and the related balance in the allowance for
        loan
        losses is based upon periodic evaluations of the loan portfolio by management.
        These evaluations consider several factors including but not limited to,
        current
        economic conditions, loan portfolio composition, prior credit loss experience,
        trends in portfolio volume, and management’s estimation of future potential
        losses. Management believes that the allowance for loan losses is adequate.
        The
        following is an analysis of the allowance for loan losses for 2002 -
        2006.
 
 **Allowance
        for Loan Losses (dollars in thousands):**
 Years
                  Ended December 31,2006
              
              2005
              
              2004
              
              2003
              
              2002Balance,
                  at beginning of period
              
              $
              1,552
              
              $
              1,296
              
              $
              1,220
              
              $
              970
              
              $
              766Provision
                  for loan losses
              
              
              194
              
              
              334
              
              
              362
              
              
              319
              
              
              196Loans
                  charged offReal
                  estate
              
              
              -
              
              
              (36
              )
              
              -
              
              
              -
              
              
              (4
              )Commercial
              
              
              (169
              )
              
              -
              
              
              -
              
              
              -
              
              
              (30
              )Consumer
                  and other loans
              
              
              (12
              )
              
              (50
              )
              
              (294
              )
              
              (73
              )
              
              (16
              )(181
              )
              
              (86
              )
              
              (294
              )
              
              (73
              )
              
              (50
              )RecoveriesReal
                  estate
              
              
              -
              
              
              1
              
              
              -
              
              
              -
              
              
              -Commercial
              
              
              31
              
              
              -
              
              
              -
              
              
              -
              
              
              58Consumer
                  and other loans
              
              
              3
              
              
              7
              
              
              8
              
              
              4
              
              
              -34
              
              
              8
              
              
              8
              
              
              4
              
              
              58Net
                  charge-offs
              
              
              (147
              )
              
              (78
              )
              
              (286
              )
              
              (69
              )
              
              8Balance,
                  at end of period
              
              $
              1,599
              
              $
              1,552
              
              $
              1,296
              
              $
              1,220
              
              $
              970Net
                  charge-offs to average loans
              
              
              0.09
              %
              
              0.06
              %
              
              0.25
              %
              
              0.08
              %
              
              -0.01
              %
  The
        specific allocations of the allowance for loan losses are based on management’s
        evaluation of the risks inherent in the specific portfolios for the dates
        indicated. Amounts in a particular category may be used to absorb losses
        if
        another category allocation proves to be inadequate.
 
 **Allocation
        of Allowance for Loan Losses (dollars in thousands):**
 At
                    December 31,2006
                
                2005
                
                2004
                
                2003
                
                2002Amount
                
                %
                    of
                  Loans
                    to
                  Total
                  Loans
                
                Amount
                
                %
                    of
                  Loans
                    to
                  Total
                  Loans
                
                Amount
                
                %
                    of
                  Loans
                    to
                  Total
                  Loans
                
                Amount
                
                %
                    of
                  Loans
                    to
                  Total
                  Loans
                
                Amount
                
                %
                    of
                  Loans
                    to
                  Total
                  LoansReal
                    estate loans
                
                $
                15
                
                
                91
                %
                $
                134
                
                
                89
                %
                $
                234
                
                
                85
                %
                $
                43
                
                
                89
                %
                $
                95
                
                
                85
                %Commercial
                    loans
                
                
                120
                
                
                6
                
                
                219
                
                
                8
                
                
                77
                
                
                11
                
                
                375
                
                
                5
                
                
                172
                
                
                6Consumer
                    and other loans
                
                
                23
                
                
                3
                
                
                37
                
                
                3
                
                
                39
                
                
                4
                
                
                15
                
                
                6
                
                
                14
                
                
                9Unallocated
                
                
                1,441
                
                
                -
                
                
                1,162
                
                
                -
                
                
                946
                
                
                -
                
                
                787
                
                
                -
                
                
                689
                
                
                -$
                1,599
                
                
                100
                %
                $
                1,552
                
                
                100
                %
                $
                1,296
                
                
                100
                %
                $
                1,220
                
                
                100
                %
                $
                970
                
                
                100
                %
  -25-
 ***Table
            of Contents***
  Highly
        leveraged transactions generally include loans and commitments made in
        connection with recapitalizations, acquisitions,
        and leveraged buyouts, and result in the borrower’s debt-to-total assets ratio
        exceeding 75%. At December 31, 2006, 2005, 2004, 2003, and 2002, there were
        no
        loans qualified as highly leveraged transactions. Loans restructured and in
        compliance with modified terms are commonly referred to as “troubled debt
        restructurings.” At December 31, 2006, 2005, 2004, 2003, and 2002, we had no
        restructured loans.
 
 **SECURITIES**
 
 Financial
        institutions classify their investment securities as either “held-to-maturity”
or “available-for-sale.” Securities classified as held-to-maturity are carried
        at amortized or accreted cost and include those securities that a bank has
        the
        intent and ability to hold to maturity. Securities classified as
        available-for-sale, which are those securities that a bank intends to hold
        for
        an indefinite amount of time, but not necessarily to maturity, are carried
        at
        fair value with the unrealized holding gains or losses, net of taxes, reported
        as a component of the stockholders’ equity on a bank’s balance sheet. The
        following tables set forth the carrying amount of securities at the dates
        indicated.
 
 **Carrying
        Value of Investment Securities (dollars in thousands):**
 
 At
                  December 31,2006
              
              2005
              
              2004Securities
                  available-for-sale:U.
                  S. Government-sponsored agency
              
              $
              1,007
              
              $
              -
              
              $
              -Mortgage-backed
                  securities
              
              
              28,798
              
              
              32,440
              
              
              22,97029,805
              
              
              32,440
              
              
              22,970Securities
                  held-to-maturity:Tax-exempt
                  state, county, and municipal bonds
              
              
              10,032
              
              
              5,850
              
              
              5,856Balance,
                  end of year
              
              $
              39,837
              
              $
              38,290
              
              $
              28,826
 
  **Investment
        Securities at Amortized Cost (dollars in thousands):**
 
 At
                  December 31,2006
              
              2005
              
              2004Securities
                  available-for-sale:U.
                  S. Government-sponsored agency
              
              $
              1,000
              
              $
              -
              
              $
              -Mortgage-backed
                  securities
              
              
              29,259
              
              
              33,056
              
              
              23,13930,259
              
              
              33,056
              
              
              23,139Securities
                  held-to-maturity:Tax-exempt
                  state, county, and municipal bonds
              
              
              10,032
              
              
              5,850
              
              
              5,856Balance,
                  end of year
              
              $
              40,291
              
              $
              38,906
              
              $
              28,995
  The
        following tables set forth the maturities (excluding principal paydowns on
        mortgage-backed securities) and the weighted average yields of securities
        by
        contractual maturities at December 31, 2006, 2005, and 2004.
 
 **Analysis
        of Investment Securities Available-for-Sale (dollars in thousands and average
        yield on a tax-equivalent basis):**
  Due
                                                                                                                        in
                                                                                                                        one
                                                                                                                      year
                                                                                                                        or
                                                                                                                        less
                                                                                                                    
                                                                                                                    Due
                                                                                                                        in
                                                                                                                        One
                                                                                                                      to
                                                                                                                        Five
                                                                                                                        Years
                                                                                                                    
                                                                                                                    Due
                                                                                                                        in
                                                                                                                        Five
                                                                                                                      to
                                                                                                                        Ten
                                                                                                                        Years
                                                                                                                    
                                                                                                                    Due
                                                                                                                        in
                                                                                                                        Ten
                                                                                                                      Years
                                                                                                                        or
                                                                                                                        More
                                                                                                                    
                                                                                                                    TotalAmount
                                                                                                                    
                                                                                                                    
                                                                                                                    Average
                                                                                                                      Yield
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    Average
                                                                                                                      Yield
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    Average
                                                                                                                      Yield
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    Average
                                                                                                                      Yield
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    Average
                                                                                                                      YieldAt
                                                                                                                        December
                                                                                                                        31,
                                                                                                                        2006:U.S.
                                                                                                                        Government-sponsored
                                                                                                                        agency
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,007
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.00
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,007
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.00
                                                                                                                    %Mortgage-backed
                                                                                                                        securities
                                                                                                                    
                                                                                                                    
                                                                                                                    293
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.26
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    6,280
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.91
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    12,125
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.61
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    10,100
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.56
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    28,798
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.45
                                                                                                                    %$
                                                                                                                    293
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.26
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    6,280
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.91
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    12,125
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.61
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    11,107
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.69
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    29,805
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.50
                                                                                                                    %At
                                                                                                                        December
                                                                                                                        31,
                                                                                                                        2005:Mortgage-backed
                                                                                                                        securities
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    8,191
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.25
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    11,152
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.61
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    13,097
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.04
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    32,440
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.04
                                                                                                                    %At
                                                                                                                        December
                                                                                                                        31,
                                                                                                                        2004:Mortgage-backed
                                                                                                                        securities
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    9,753
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.13
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    5,552
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.28
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    7,665
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.42
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    22,970
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.50
                                                                                                                    %
  -26-
 ***Table
            of Contents***
  **Analysis
        of Investment Securities Held-to-Maturity (dollars in thousands and average
        yield on a tax-equivalent basis):**
  Due
                                                          in one
                                                        year
                                                          or less
                                                      
                                                      
                                                      Due
                                                          in One
                                                        to
                                                          Five Years
                                                      
                                                      
                                                      Due
                                                          in Five
                                                        to
                                                          Ten Years
                                                      
                                                      
                                                      Due
                                                          in Ten
                                                        Years
                                                          or More
                                                      
                                                      
                                                      TotalAmount
                                                      
                                                      
                                                      Average
                                                        Yield
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Average
                                                        Yield
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Average
                                                        Yield
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Average
                                                        Yield
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Average
                                                        YieldAt
                                                          December 31, 2006:Tax-exempt
                                                          state, county, and municipal
                                                          bonds
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      625
                                                      
                                                      
                                                      
                                                      4.70
                                                      %
                                                      
                                                      $
                                                      9,407
                                                      
                                                      
                                                      
                                                      4.38
                                                      %
                                                      
                                                      $
                                                      10,032
                                                      
                                                      
                                                      
                                                      4.40
                                                      %At
                                                          December 31, 2005:Tax-exempt
                                                          state, county, and municipal
                                                          bonds
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      626
                                                      
                                                      
                                                      
                                                      4.73
                                                      %
                                                      
                                                      $
                                                      5,224
                                                      
                                                      
                                                      
                                                      4.72
                                                      %
                                                      
                                                      $
                                                      5,850
                                                      
                                                      
                                                      
                                                      4.72
                                                      %At
                                                          December 31, 2004:Tax-exempt
                                                          state, county, and municipal
                                                          bonds
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      %
                                                      
                                                      $
                                                      274
                                                      
                                                      
                                                      
                                                      4.70
                                                      %
                                                      
                                                      $
                                                      5,582
                                                      
                                                      
                                                      
                                                      4.72
                                                      %
                                                      
                                                      $
                                                      5,856
                                                      
                                                      
                                                      
                                                      4.72
                                                      %
  **DEPOSITS**
 
 Deposits
        are the major source of our funds for lending and other investment purposes.
        Deposits are attracted principally from within our assessment area through
        the
        offering of a broad variety of deposit instruments including checking accounts,
        money market accounts, regular savings accounts, term certificate accounts
        (including “jumbo” certificates in denominations of $100,000 or more), and
        retirement savings plans.
 
 Maturity
        terms, service charges, and withdrawal penalties are established by management
        on a periodic basis. The determination of rates and terms is predicated on
        loan
        funding and liquidity requirements, rates paid by competitors, growth goals,
        and
        federal regulations.
 
 The
        FDIC
        regulations limit the ability of certain insured depository institutions
        to
        accept, renew, or rollover deposits by offering rates of interest which are
        significantly higher than the prevailing rates of interest on deposits offered
        by other insured depository institutions having the same type of charter
        in such
        depository institutions’ normal market area. Under these regulations,
“well-capitalized” depository institutions may accept, renew, or rollover
        deposits at such rates without restriction, “adequately capitalized” depository
        institutions may accept, renew or rollover deposits at such rates with a
        waiver
        from the FDIC (subject to certain restrictions on payments and rates), and
        “undercapitalized” depository institutions may not accept, renew or rollover
        deposits at such rates. The regulations contemplate that the definitions
        of
“well-capitalized,” “adequately capitalized” and “undercapitalized” will be the
        same as the definitions adopted by the agencies to implement the prompt
        corrective action provisions of applicable law. *See
        “Description of Business/Supervision and Regulation.”* As of
        December 31, 2006, Oceanside met the definition of a “well-capitalized”
depository institution.
 
 Our
        primary source of funds is deposit accounts that include both interest- and
        noninterest-bearing demand, savings, and time deposits under $100,000 (referred
        to as “core deposits”). At December 31, 2006, 2005, and 2004, these core
        deposits accounted for approximately 76%, 84%, and 86%, respectively, of
        all
        deposits. At December 31, 2006, time deposits under $100,000 accounted for
        approximately 44% of these core deposits as compared with money market deposits
        at 28% and noninterest-bearing demand deposits at 22%. This compares with
        2005
        levels of 40%, 27%, and 24%, respectively, and with 2004 levels of 35%, 29%,
        and
        22%, respectively. At December 31, 2006, 2005, and 2004, jumbo certificates
        of
        deposit (time deposits $100,000 and greater) represented approximately 24%,
        16%,
        and 14%, respectively, of total deposits. At December 31, 2006, 2005, and
        2004,
        time deposits outstanding in an individual amount of $100,000 or more totaled
        $46,103,000, $27,234,000, and $20,380,000, respectively.
 
 Interest-bearing
        demand accounts, consisting of NOW and money market accounts, averaged
        $41,983,000 for the year ended 2006, $42,319,000 for the year ended 2005,
        and
        $39,079,000 for the year ended 2004, or approximately 23%, 27%, and 30% of
        average total deposits in 2006, 2005, and 2004, respectively.
  -27-
 ***Table
            of Contents***
  **Distribution
        of Deposit Accounts by Type (dollars in thousands):**
 
 At
                  December 31,2006
              
              2005
              
              2004Amount
              
              %
                  of
                Deposits
              
              Amount
              
              %
                  of
                Deposits
              
              Amount
              
              %
                  of
                DepositsDemand
                  deposits
              
              $
              32,006
              
              
              16.6
              %
              $
              33,682
              
              
              20.0
              %
              $
              27,782
              
              
              19.0
              %NOW
                  deposits
              
              
              3,970
              
              
              2.1
              
              
              6,264
              
              
              3.7
              
              
              10,293
              
              
              7.0Money
                  market deposits
              
              
              40,349
              
              
              20.9
              
              
              38,358
              
              
              22.8
              
              
              36,701
              
              
              25.1Savings
                  deposits
              
              
              5,347
              
              
              2.8
              
              
              6,059
              
              
              3.6
              
              
              6,626
              
              
              4.5Subtotal
              
              
              81,672
              
              
              42.4
              
              
              84,363
              
              
              50.1
              
              
              81,402
              
              
              55.6Certificates
                  of deposit:1.00%
                  - 1.99%
              
              
              -
              
              
              0.0
              
              
              178
              
              
              0.1
              
              
              9,927
              
              
              6.82.00%
                  - 2.99%
              
              
              90
              
              
              0.1
              
              
              11,561
              
              
              6.9
              
              
              36,800
              
              
              25.23.00%
                  - 3.99%
              
              
              3,741
              
              
              1.9
              
              
              26,523
              
              
              15.7
              
              
              7,926
              
              
              5.44.00%
                  - 4.99%
              
              
              40,915
              
              
              21.2
              
              
              34,282
              
              
              20.3
              
              
              9,268
              
              
              6.35.00%
                  - 5.99%
              
              
              66,286
              
              
              34.4
              
              
              11,573
              
              
              6.9
              
              
              1,029
              
              
              0.7Total
                  certificates of deposit(1)
              
              
              111,032
              
              
              57.6
              
              
              84,117
              
              
              49.9
              
              
              64,950
              
              
              44.4Total
                  deposits
              
              $
              192,704
              
              
              100.0
              %
              $
              168,480
              
              
              100.0
              %
              $
              146,352
              
              
              100.0
              %
 
 (1)
              Includesretirement
                  accounts (in thousands) totaling $3,954, $2,535, and $2,658, in
                  2006,
                  2005, and 2004,respectively, all of which were in the form of certificates of
                  deposit.
  **Average
        Deposits and Average Rates (dollars in thousands):**
 
 At
                  December 31,2006
              
              2005
              
              2004Average
                Balance
              
              Average
                Rate
              
              Average
                Balance
              
              Average
                Rate
              
              Average
                Balance
              
              Average
                RateDemand,
                  money market and NOW deposits
              
              $
              75,160
              
              
              1.93
              %
              $
              73,902
              
              
              1.19
              %
              $
              66,058
              
              
              0.72
              %Savings
                  deposits
              
              
              5,294
              
              
              1.28
              
              
              6,231
              
              
              0.75
              
              
              6,213
              
              
              0.56Certificates
                  of deposit
              
              
              103,485
              
              
              4.75
              
              
              75,144
              
              
              3.56
              
              
              58,882
              
              
              2.42Total
                  deposits
              
              $
              183,939
              
              
              3.50
              %
              $
              155,277
              
              
              2.32
              
              $
              131,153
              
              
              1.48
              %
  **Time
        Deposits of $100,000 or more with remaining maturities of (dollars in
        thousands):**
 
 December
                  31,2006
              
              2005
              
              2004Due
                  in three months or less
              
              $
              12,474
              
              $
              7,929
              
              $
              6,603Over
                  three through twelve months
              
              
              16,878
              
              
              10,142
              
              
              6,672Over
                  twelve months through three years
              
              
              10,565
              
              
              3,750
              
              
              4,885Over
                  three years
              
              
              6,186
              
              
              5,413
              
              
              2,220$
              46,103
              
              $
              27,234
              
              $
              20,380
  -28-
 ***Table
            of Contents***
  **Certificates
        of Deposits by Rate and Maturity Date (dollars in
        thousands):**
 
 Year
                  Ending December 31,2007
              
              2008
              
              2009
              
              2010
              
              2011+
              
              TotalAt
                  December 31, 2006:1.00%
                  - 1.99%
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -2.00%
                  - 2.99%
              
              
              58
              
              
              32
              
              
              -
              
              
              -
              
              
              -
              
              
              903.00%
                  - 3.99%
              
              
              2,707
              
              
              523
              
              
              505
              
              
              6
              
              
              -
              
              
              3,7414.00%
                  - 4.99%
              
              
              30,814
              
              
              7,365
              
              
              1,752
              
              
              968
              
              
              16
              
              
              40,9155.00%
                  - 5.99%
              
              
              33,802
              
              
              14,545
              
              
              7,721
              
              
              4,502
              
              
              5,716
              
              
              66,286Total
                  certificates of deposit
              
              $
              67,381
              
              $
              22,465
              
              $
              9,978
              
              $
              5,476
              
              $
              5,732
              
              $
              111,032
 
 Year
                  Ending December 31,2006
              
              2007
              
              2008
              
              2009
              
              2010+
              
              TotalAt
                  December 31, 2005:1.00%
                  - 1.99%
              
              $
              178
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1782.00%
                  - 2.99%
              
              
              11,454
              
              
              57
              
              
              50
              
              
              -
              
              
              -
              
              
              11,5613.00%
                  - 3.99%
              
              
              22,158
              
              
              3,235
              
              
              544
              
              
              580
              
              
              6
              
              
              26,5234.00%
                  - 4.99%
              
              
              14,296
              
              
              9,141
              
              
              8,033
              
              
              1,850
              
              
              962
              
              
              34,2825.00%
                  - 5.99%
              
              
              1,425
              
              
              754
              
              
              819
              
              
              4,479
              
              
              4,096
              
              
              11,573Total
                  certificates of deposit
              
              $
              49,511
              
              $
              13,187
              
              $
              9,446
              
              $
              6,909
              
              $
              5,064
              
              $
              84,117
 
 Year
                  Ending December 31,2005
              
              2006
              
              2007
              
              2008
              
              2009+
              
              TotalAt
                  December 31, 2004:1.00%
                  - 1.99%
              
              $
              9,902
              
              $
              25
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              9,9272.00%
                  - 2.99%
              
              
              30,417
              
              
              6,267
              
              
              65
              
              
              51
              
              
              -
              
              
              36,8003.00%
                  - 3.99%
              
              
              801
              
              
              3,298
              
              
              2,815
              
              
              442
              
              
              570
              
              
              7,9264.00%
                  - 4.99%
              
              
              100
              
              
              39
              
              
              3,374
              
              
              3,814
              
              
              1,941
              
              
              9,2685.00%
                  - 5.99%
              
              
              24
              
              
              -
              
              
              509
              
              
              -
              
              
              496
              
              
              1,029Total
                  certificates of deposit
              
              $
              41,244
              
              $
              9,629
              
              $
              6,763
              
              $
              4,307
              
              $
              3,007
              
              $
              64,950
  **SHORT-TERM
        AND LONG-TERM DEBT**
 
 **Other
        Borrowings (dollars in thousands):**
 December
                  31,2006
              
              2005
              
              2004Customer
                  repurchase agreements
              
              $
              26,921
              
              $
              23,745
              
              $
              20,704FHLB
                  of Atlanta advances
              
              
              2,300
              
              
              2,300
              
              
              2,300Junior
                  subordinated debentures
              
              
              3,093
              
              
              3,093
              
              
              -$
              32,314
              
              $
              29,138
              
              $
              23,004
 
 
 *Customer
        Repurchase Agreements* .
        Oceanside has sold securities under an agreement to repurchase with a par
        value
        of $27,720,000 and a fair value of $26,929,000, which effectively collateralizes
        overnight borrowings totaling $26,921,000.
 
 *FHLB
        of Atlanta Advances.* Oceanside has obtained an advance from FHLB of $2,300,000 collateralized
        by
        Oceanside’s FHLB capital stock in the amount of $531,000 and a blanket lien on
        eligible wholly-owned residential (1-4 units) first mortgage loans totaling
        approximately $5.6 million. This advance matures on November 17,
        2010.
 
 *Junior
        Subordinated Debentures.* On
        September 15, 2005, Oceanside issued $3,093,000 of fixed-rate junior
        subordinated debentures (the “debt securities”) to Atlantic BancGroup Statutory
        Trust I, a statutory trust created under the laws of the State of Delaware.
        These debt securities are subordinated to effectively all borrowings of Atlantic
        and are due and payable in thirty years.
 
 *Other
        Short-term Borrowings* .
        Oceanside purchases federal funds for liquidity needs during the year. At
        December 31, 2006, 2005, and 2004, no federal fund purchases
        existed.
  -29-
 ***Table
            of Contents***
 
 **Selected
        Data for Other Borrowings (dollars in thousands):**
 
 2006
              
              2005
              
              2004Interest
                  rate at end of periodCustomer
                  repurchase agreements (federal funds rate less 25 basis
                  points)
              
              
              5.250
              %
              
              4.000
              %
              
              2.000
              %FHLB
                  of Atlanta advances (fixed rate)
              
              
              4.450
              %
              
              4.450
              %
              
              6.050
              %Junior
                  subordinated debentures (fixed rate for five years)
              
              
              5.886
              %
              
              5.886
              %
              
              N/AAverage
                  balances during the periodCustomer
                  repurchase agreements
              
              $
              18,098
              
              $
              18,254
              
              $
              11,986FHLB
                  of Atlanta advances
              
              $
              2,300
              
              $
              2,300
              
              $
              2,300Junior
                  subordinated debentures
              
              $
              3,093
              
              $
              907
              
              
              N/AOther
                  short-term borrowings (federal funds purchased)
              
              $
              695
              
              $
              863
              
              $
              322Weighted
                  average interest rateCustomer
                  repurchase agreements
              
              
              4.59
              %
              
              2.96
              %
              
              1.64
              %FHLB
                  of Atlanta advances
              
              
              4.52
              %
              
              5.91
              %
              
              6.050
              %Junior
                  subordinated debentures
              
              
              5.89
              %
              
              5.89
              %
              
              N/AOther
                  short-term borrowings (federal funds purchased)
              
              
              4.46
              %
              
              3.24
              %
              
              2.17
              %Short-term
                  borrowings (customer repurchase agreements and federal funds
                  purchased)Balance
                  at end of period
              
              $
              26,921
              
              $
              23,745
              
              $
              20,704Weighted
                  average interest rate at end of period
              
              
              5.25
              %
              
              4.00
              %
              
              2.00
              %Maximum
                  amount outstanding at month end during the period
              
              $
              29,310
              
              $
              30,770
              
              $
              22,494Average
                  amount outstanding during the period
              
              $
              18,793
              
              $
              19,117
              
              $
              11,986Weighted
                  average interest rate during the period
              
              
              4.58
              %
              
              2.98
              %
              
              1.65
              %
  **Interest
        Expense for Other Borrowings (dollars in thousands):**
 
 December
                  31,2006
              
              2005
              
              2004Customer
                  repurchase agreements
              
              $
              830
              
              $
              541
              
              $
              196FHLB
                  of Atlanta advances
              
              
              104
              
              
              136
              
              
              139Junior
                  subordinated debentures
              
              
              184
              
              
              52
              
              
              -Other
                  short-term borrowings (federal funds purchased)
              
              
              31
              
              
              28
              
              
              7$
              1,149
              
              $
              757
              
              $
              342
  **LIQUIDITY**
 
 Our
        principal source of funds comes from Oceanside’s operations, including net
        increases in deposits, principal and interest payments on loans, and proceeds
        from sales and maturities of investment securities. We use our capital resources
        principally to fund existing and continuing loan commitments, purchase
        investment securities, and meet other contractual obligations.
 
 Liquidity
        management involves meeting the funds flow requirements of customers who
        may
        either be depositors wanting to withdraw funds, or borrowers needing assurance
        that sufficient funds will be available to meet their credit needs. Liquid
        assets consist of vault cash, securities, and principal paydowns of other
        interest-earning assets. Our principal sources of asset liquidity are federal
        funds sold and the securities portfolio, including principal paydowns from
        mortgage-backed securities. In 2006, 2005, and 2004, principal paydowns from
        mortgage-backed securities totaled $7,389,000, $6,872,000, and $6,841,000,
        respectively.
 
 Other
        sources of funds are principal paydowns and maturities in the loan portfolio.
        The contractual loan maturity table herein illustrates the maturities of
        loans
        receivable at December 31, 2006.
  -30-
 ***Table
            of Contents***
  We
        also
        have sources of liability liquidity that include core deposits as previously
        discussed and access to borrowed funds including overnight federal funds,
        lines
        of credit, and customer repurchase agreements. At December 31, 2006, 2005,
        and
        2004, our liquidity ratio of liquid assets to transaction deposit accounts
        was
        23.6%, 19.1%, and 24.3%, respectively. Management believes that our liquidity
        is
        sufficient to meet our anticipated needs. While we have elected not to accept
        brokered deposits, we have the ability to supplement our liquidity if we
        decided
        to pursue brokered deposits as have other community banks.
 
 **OFF-BALANCESHEET
        ARRANGEMENTS AND CONTRACTUAL
        OBLIGATIONS**
 
 **Contractual
        Commitments (dollars in thousands)**
 December
                  31,2006
              
              2005
              
              2004Commitments
                  to originate loansResidential
                  real estate
              
              $
              10,550
              
              $
              9,524
              
              $
              5,539Commercial
                  real estate, construction, and land development secured by real
                  estate
              
              
              15,691
              
              
              13,649
              
              
              6,993Other
                  unused commitments
              
              
              5,221
              
              
              4,861
              
              
              4,745Total
                  commitments to originate loans
              
              
              31,462
              
              
              28,034
              
              
              17,277Financial
                  standby letters of credit
              
              
              1,712
              
              
              1,714
              
              
              1,772Total
                  contractual commitments
              
              $
              33,174
              
              $
              29,748
              
              $
              19,049
  **Contractual
        Obligations (dollars in thousands)**
 
 1
                  Year
                or
                  Less
              
              Years
                  2
                and
                  3
              
              Years
                  4
                and
                  5
              
              After
                5
                  Years
              
              TotalDeposits
                  without a stated maturity
              
              $
              81,672
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              81,672Certificates
                  of deposit and other time deposits
              
              
              67,381
              
              
              32,443
              
              
              11,109
              
              
              99
              
              
              111,032Short-term
                  borrowings
              
              
              26,921
              
              
              -
              
              
              -
              
              
              -
              
              
              26,921Federal
                  Home Loan Bank advances
              
              
              -
              
              
              -
              
              
              2,300
              
              
              -
              
              
              2,300Junior
                  subordinated debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              3,093
              
              
              3,093Operating
                  leases
              
              
              287
              
              
              607
              
              
              478
              
              
              1,128
              
              
              2,500Total
                  contractual obligations
              
              $
              176,261
              
              $
              33,050
              
              $
              13,887
              
              $
              4,320
              
              $
              227,518
 
 
 Management
        believes that we have adequate resources to fund all our commitments and
        contractual obligations. If so desired, we can adjust the rates and terms
        on
        certificates of deposit and other deposit accounts to attract deposits and
        fund
        additional commitments. Other alternative funding sources include additional
        FHLB borrowings and brokered deposits, if necessary.
 
 **CAPITAL
        RESOURCES**
 
 We
        place
        a significant emphasis on maintaining a strong capital base. The capital
        resources consist of two major components of regulatory capital, stockholders’
equity and the allowance for loan losses. Current capital guidelines issued
        by
        federal regulatory authorities require a company to meet minimum risk-based
        capital ratios in an effort to make regulatory capital more responsive to
        the
        risk exposure related to a company’s on- and off-balance sheet
        items.
 
 Risk-based
        capital guidelines re-define the components of capital, categorize assets
        into
        risk classes, and include certain off-balance sheet items in the calculation
        of
        capital requirements. The components of risk-based capital are segregated
        as
        Tier 1 and total risk-based capital. Tier 1 capital is composed of total
        stockholders’ equity reduced by goodwill and other intangible assets. Total
        risk-based capital includes Tier 1 capital plus the allowance for loan losses
        and any qualifying debt obligations. Regulators also have adopted minimum
        requirements of 4% of Tier 1 capital and 8% of risk-adjusted assets in total
        capital.
  -31-
 ***Table
            of Contents***
  We
        are
        also subject to leverage capital requirements. This requirement compares
        capital
        (using the definition of Tier 1 capital) to balance sheet assets and is intended
        to supplement the risk-based capital ratio in measuring capital adequacy.
        The
        guidelines set a minimum leverage ratio of 3% for depository institutions
        that
        are highly rated in terms of safety and soundness, and which are not
        experiencing or anticipating any significant growth. Other depository
        institutions are expected to maintain capital levels of at least 1% or 2%
        above
        the minimum. Our actual capital amounts, capital ratios, and leverage ratios
        at
        December 31, 2006, 2005, and 2004 (Bank Only), are reflected in the table
        below.
  **Capital
        Ratios (dollars in thousands):**
 **Bank
                  Only**At
                  December 31,2006
              
              2005
              
              2004Tier
                  1 capitalStockholder’s
                  equity
              
              $
              20,278
              
              $
              18,068
              
              $
              13,918Plus,
                  qualifying trust preferred securities
              
              
              -
              
              
              -
              
              
              -Less,
                  unrealized gains on AFS securities
              
              
              283
              
              
              384
              
              
              105Less,
                  intangible assets
              
              
              -
              
              
              -
              
              
              -20,561
              
              
              18,452
              
              
              14,023Tier
                  2 capitalAllowable
                  portion of allowance for loan losses
              
              
              1,599
              
              
              1,552
              
              
              1,296Total
                  risk-based capital
              
              $
              22,160
              
              $
              20,004
              
              $
              15,319Total
                  risk-weighted assets
              
              $
              202,463
              
              $
              173,688
              
              $
              146,830Tier
                  1 risk-based capital ratio
              
              
              10.16
              %
              
              10.62
              %
              
              9.55
              %Total
                  risk-based capital ratio
              
              
              10.95
              %
              
              11.52
              %
              
              10.43
              %Average
                  total assets for leverage capital purposes
              
              $
              234,906
              
              $
              206,620
              
              $
              174,830Tier
                  1 leverage ratio
              
              
              8.75
              %
              
              8.93
              %
              
              8.02
              %
 
 
 *Trust
        Preferred Securities.* On
        September 15, 2005, Atlantic entered into a transaction commonly referred
        to as
        trust preferred securities. Subject to percentage limitations, the proceeds
        from
        the issuance of trust preferred securities are considered Tier 1 capital
        for
        regulatory purposes, which totaled $3.0 million (net of Atlantic’s investment in
        the unconsolidated subsidiary). However, as a result of the issuance of FIN
        46
        and FIN 46R, the trust subsidiary is not consolidated in these financial
        statements and therefore the proceeds received by Atlantic from the trust
        subsidiary is reported as junior subordinated debentures. On February 28,
        2005,
        the Federal Reserve Board issued a new rule which provides that, notwithstanding
        the deconsolidation of such trusts, junior subordinated debentures, such
        as
        those issued by Atlantic, may continue to constitute up to 25% of a bank
        holding
        company's Tier 1 capital, subject to certain new limitations which will not
        become effective until March 31, 2009, and which, in any event, are not expected
        to affect the treatment of Atlantic's junior subordinated debentures as Tier
        1
        capital for regulatory purposes.
 
 During
        2005 and 2004, the Holding Company used a portion of the proceeds from the
        trust
        preferred securities and warrants exercised to provide additional capital
        to
        Oceanside totaling $2.8 million and $1.8 million, respectively. This amount
        has
        been eliminated in consolidation.
 
 **Capital
        Analysis:**
 For
                  the Year Ended December 31,2006
              
              2005
              
              2004Average
                  equity as a percentage of average assets
              
              
              7.11
              %
              
              7.55
              %
              
              8.41
              %Equity
                  to total assets at end of year
              
              
              7.08
              
              
              7.12
              
              
              7.61Return
                  on average equity
              
              
              11.96
              
              
              10.13
              
              
              8.67Return
                  on average assets
              
              
              0.85
              
              
              0.76
              
              
              0.73Noninterest
                  expenses to average assets
              
              
              2.65
              
              
              2.73
              
              
              3.06
  -32-
 ***Table
            of Contents***
  Stockholders’
        equity is adjusted for the effect of unrealized appreciation or depreciation,
        net of tax, on securities classified as available-for-sale. As of December
        31,
        2006, stockholders’ equity increased $2,019,000 from December 31, 2005, as a
        result of the net income of $1,918,000, and a decrease of $101,000 in unrealized
        holding losses on available-for-sale securities. As of December 31, 2005,
        stockholders’ equity increased $1,199,000 from December 31, 2004, as a result of
        the net income of $1,478,000, and an increase of $279,000 in unrealized holding
        losses on available-for-sale securities. The return on average equity for
        the
        years ended December 31, 2006, 2005, and 2004, totaled 11.96%, 10.13%, and
        8.67%, respectively. The increase in return on average equity is attributable
        primarily to the increases in net income in 2006 and 2005.
  **RELATED
        PARTY TRANSACTIONS**
 
 We
        have
        entered into transactions with our directors, executive officers, significant
        stockholders, and their affiliates ( *insiders* ).
        Such
        transactions were made in the ordinary course of business on substantially
        the
        same terms and conditions, including interest rates and collateral, as those
        prevailing at the same time for comparable transactions with other customers,
        and did not, in the opinion of management, involve more than normal credit
        risk
        or present other unfavorable features. The following table summarizes the
        significant end of period insider transactions (dollars in
        millions):
  2006
              
              2005
              
              2004Loans
              
              $
              2.0
              
              $
              2.3
              
              $
              2.0Unfunded
                  loan commitments
              
              $
              1.6
              
              $
              1.3
              
              $
              1.1Deposits
                  and customer repurchase agreements
              
              $
              37.6
              
              $
              36.7
              
              $
              22.0
  **INTEREST
        RATE SENSITIVITY**
 
 Our
        operations are subject to risk resulting from interest rate fluctuations
        to the
        extent that there is a difference between the amount of interest-earning
        assets
        and the amount of interest-bearing liabilities that are prepaid/withdrawn,
        mature, or reprice in specified periods.
 
 The
        principal objective of asset/liability management activities is to provide
        consistently higher levels of net interest income while maintaining acceptable
        levels of interest rate and liquidity risk and facilitating our funding needs.
        We utilize an interest rate sensitivity model as the primary quantitative
        tool
        in measuring the amount of interest rate risk that is present. The traditional
        maturity “gap” analysis, which reflects the volume difference between interest
        rate sensitive assets and liabilities during a given time period, is reviewed
        regularly by management. A positive gap occurs when the amount of
        interest-sensitive assets exceeds interest-sensitive liabilities. This position
        would contribute positively to net income in a rising interest rate environment.
        Conversely, if the balance sheet has more liabilities repricing than assets,
        the
        balance sheet is liability sensitive or negatively gapped. We continue to
        monitor sensitivity in order to avoid overexposure to changing interest
        rates.
 
 Our
        operations do not subject us to foreign currency exchange or commodity price
        risk. Also, we do not use interest rate swaps, caps, or other hedging
        transactions. Our overall sensitivity to interest rate risk is low due to
        our
        non-complex balance sheet. We have implemented several strategies to manage
        interest rate risk that include originating residential mortgages for
        third-party lenders, increasing the volume of variable rate commercial loans,
        requiring interest rate calls on commercial loans, and maintaining a short
        repricing maturity for a significant portion of our investment
        portfolio.
 
 The
        following table provides information about our financial instruments that
        are
        sensitive to changes in interest rates. For securities, loans, and deposits,
        the
        table presents principal cash flows and related weighted average interest
        rates
        by maturity dates or repricing frequency. We have no market risk sensitive
        instruments entered into for trading purposes.
  -33-
 ***Table
            of Contents***
  **Interest
        Rate Sensitivity at December 31, 2006 (dollars in
        thousands):**
 
 Under
                3
                  Months
              
              3
                  to 12
                Months
              
              1
                  -
                  5 Years
              
              Over
                5
                  Years
              
              TotalFederal
                  funds sold
              
              $
              11,133
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              11,133Interest-bearing
                  deposits in other banks
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              8Loans(1)
              
              
              82,853
              
              
              21,930
              
              
              64,966
              
              
              7,933
              
              
              177,682Securities(2)
              
              
              91
              
              
              202
              
              
              12,596
              
              
              26,948
              
              
              39,837Total
                  rate-sensitive assets
              
              $
              94,085
              
              $
              22,132
              
              $
              77,562
              
              $
              34,881
              
              $
              228,660Money
                  market and NOW accounts(2)
              
              $
              40,349
              
              $
              -
              
              $
              -
              
              $
              3,970
              
              $
              44,319Savings
                  accounts(2)
              
              
              -
              
              
              -
              
              
              -
              
              
              5,347
              
              
              5,347Certificates
                  of deposit(2)
              
              
              33,165
              
              
              35,722
              
              
              42,145
              
              
              -
              
              
              111,032Total
                  rate-sensitive liabilities
              
              $
              73,514
              
              $
              35,722
              
              $
              42,145
              
              $
              9,317
              
              $
              160,698Gap
                  (repricing differences)
              
              $
              20,571
              
              $
              (13,590
              )
              $
              35,417
              
              $
              25,564
              
              $
              67,962Cumulative
                  Gap
              
              $
              20,571
              
              $
              6,981
              
              $
              42,398
              
              $
              67,962Cumulative
                  Gap/total assets
              
              
              8.45
              %
              
              2.87
              %
              
              17.41
              %
              
              27.91
              %Total
                  assets
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              243,497
  
 (1)
              In
                  preparing the table above, adjustable-rate loans were included
                  in the
                  period in which the interest rates are next scheduled to adjust
                  rather
                  than in the period in which the loans mature. Fixed-rate loans
                  were
                  scheduled according to their contractual maturities. Nonaccrual
                  loans are
                  excluded if material.
 
 (2)
              Excludes
                  noninterest-bearing deposit accounts. Money market deposits were
                  regarded
                  as maturing immediately, and other core deposits were assumed to
                  mature in
                  the over 5-year category. All other time deposits were scheduled
                  through
                  the maturity or repricing dates. Investments were scheduled through
                  their
                  contractual, repricing, or principal payment
                  dates.
 
 
 **RECENT
        ACCOUNTING PRONOUNCEMENTS IMPACTING FUTURE
        PERIODS**
 
 There
        are
        currently no pronouncements issued or that are scheduled for implementation
        during 2007 or 2008 that are expected to have any significant impact on our
        accounting policies. For a discussion of recent accounting pronouncements,
        see
        the accompanying *Notes
        to Consolidated Financial Statements* shown in
        Item 7.
 
 
 **IMPACTOF
        INFLATION**
 
 The
        financial statements and related data presented herein have been prepared
        in
        accordance with generally accepted accounting principles, which require the
        measurements of financial position and operating results in terms of historical
        dollars, without considering changes in the relative purchasing power of
        money
        over time due to inflation. Unlike most industrial companies, substantially
        all
        of the assets and liabilities of Atlantic are monetary in nature. As a result,
        interest rates have a more significant impact on our performance than the
        effects of general levels of inflation. Interest rates do not necessarily
        move
        in the same direction or with the same magnitude as the prices of goods and
        services, since such prices are affected by inflation to a larger extent
        than
        interest rates. As discussed previously, management seeks to manage the
        relationships between interest-sensitive assets and liabilities in order
        to
        protect against wide interest rate fluctuations, including those resulting
        from
        inflation.
  -34-
 ***Table
            of Contents***
  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 Oceanside’s
        earnings are dependent, to a large degree, on its net interest income, which
        is
        the difference between interest income earned on all interest-earning assets,
        primarily loans and securities, and interest paid on all interest-bearing
        liabilities, primarily deposits. Market risk is the risk of loss from adverse
        changes in market prices and interest rates. Oceanside’s market risk arises
        primarily from inherent interest rate risk in its lending, investing, and
        deposit gathering activities. Oceanside seeks to reduce its exposure to market
        risk through actively monitoring and managing its interest rate risk. Management
        relies upon static “gap” analysis to determine the degree of mismatch in the
        maturity and repricing distribution of interest-earning assets and
        interest-bearing liabilities which quantifies, to a large extent, the degree
        of
        market risk inherent in Oceanside’s balance sheet. Gap analysis is further
        augmented by simulation analysis to evaluate the impact of varying levels
        of
        prevailing interest rates and the sensitivity of specific interest-earning
        assets and interest-bearing liabilities to changes in those prevailing rates.
        Simulation analysis consists of evaluating the impact on net interest income
        given changes from 200 basis points below the current prevailing rates to
        200
        basis points above the current prevailing rates. Management makes certain
        assumptions as to the effect varying levels of interest rates have on certain
        interest-earning assets and interest-bearing liabilities, which consider
        both
        historical experience and consensus estimates of outside sources.
 
 With
        respect to the primary interest-earning assets, loans and securities, certain
        features of individual types of loans and specific securities introduce
        uncertainty as to their expected performance at varying levels of interest
        rates. In some cases, prepayment options exist whereby the borrower may elect
        to
        repay the obligation at any time prior to maturity. These prepayment options
        make anticipating the performance of those instruments difficult given changes
        in prevailing interest rates. Management believes that assumptions used in
        its
        simulation analysis about the performance of financial instruments with such
        prepayment options are appropriate. However, the actual performance of these
        financial instruments may differ from management’s estimates due to several
        factors, including the diversity and financial sophistication of the customer
        base, the general level of prevailing interest rates and the relationship
        to
        their historical levels, and general economic conditions. The difference
        between
        those assumptions and actual results, if significant, could cause the actual
        results to differ from those indicated by the simulation analysis.
 
 Deposits
        are the primary funding source for interest-earning assets and the associated
        market risk is considered by management in its simulation analysis. Generally,
        it is anticipated that deposits will be sufficient to support funding
        requirements. However, the rates paid for deposits at varying levels of
        prevailing interest rates have a significant impact on net interest
        income.
 
 The
        following table illustrates the results of simulation analysis used by Oceanside
        to determine the extent to which market risk would affect net interest margin
        for the next twelve and twenty-four months if prevailing interest rates
        increased or decreased the specified amounts from current prevailing rates.
        As
        noted above, this model uses estimates and assumptions in both balance sheet
        growth and asset and liability account rate reactions to changes in prevailing
        interest rates. Because of the inherent use of these estimates and assumptions
        in the simulation model used to derive this market risk information, the
        actual
        results of the future impact of market risk on Oceanside’s net interest margin
        may differ from that found in the table.
 
 Change
                  in Prevailing Interest Rates
              
              2007
              
              2008+
                  200 basis points
              
              
              0.08
              %
              
              0.23
              %Prevailing
                  rates
              
              
              -
              
              
              --
                  200 basis points
              
              
              (0.18
              %)
              
              (0.37
              %)
  
 We
        do not
        engage in trading or hedging activities and do not invest in interest-rate
        derivatives or enter into interest rate swaps. We actively monitor and manage
        our interest rate risk exposure. The primary objective in managing interest-rate
        risk is to limit, within established guidelines, the adverse impact of changes
        in interest rates on our net interest income and capital, while adjusting
        our
        asset-liability structure to obtain the maximum yield-cost spread on that
        structure. We rely primarily on the asset-liability structure to control
        interest rate risk. However, a sudden and substantial change in interest
        rates
        could adversely impact our earnings, to the extent that the interest rates
        borne
        by assets and liabilities do not change at the same speed, to the same extent,
        or on the same basis.
  -35-
 ***Table
            of Contents***
 
 **ITEM
                  7.**
              **FINANCIAL
                  STATEMENTS.**
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 **To
        the Board of Directors**
 **Atlantic
        BancGroup, Inc.**
 **and Subsidiary**
 **Jacksonville
        Beach, Florida**
 
 
 We
        have
        audited the consolidated balance sheet of **Atlantic
        BancGroup, Inc. and Subsidiary** as
        of
        December 31, 2006, and the related consolidated statements of income,
        comprehensive income, stockholders' equity and cash flows for the year ended
        December 31, 2006. These financial statements are the responsibility of the
        Company’s management. Our responsibility is to express an opinion on these
        financial statements based on our audit. The financial statements of Atlantic
        BancGroup, Inc. and Subsidiary for the year ended December 31, 2005 were
        audited
        by other auditors; whose report dated February 8, 2006 expressed an unqualified
        opinion on those statements.
 
 
 We
        conducted our audit in accordance with the
        standards of the Public Company Accounting Oversight Board (United
        States) .
        Those
        standards require that we plan and perform the audit to obtain reasonable
        assurance about whether the financial statements are free of material
        misstatement. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
        We believe that our audit provides a reasonable basis for our
        opinion.
 
 
 In
        our
        opinion, the 2006 consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of Atlantic BancGroup,
        Inc. and Subsidiary as of December 31, 2006, and the results of their operations
        and their cash flows for the year ended December 31, 2006, in conformity
        with
        U.S. generally accepted accounting principles.
 
  /s/
        Mauldin & Jenkins, LLC
  Albany,
        Georgia
 March
        21,
        2007
 
 -36-
 ***Table
              of
              Contents***
 
 **INDEPENDENT
        AUDITORS' REPORT**
 
 
 To
        the
        Board of Directors and Stockholders
 Atlantic
        BancGroup, Inc. and Subsidiary
 Jacksonville
        Beach, Florida
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Atlantic BancGroup,
        Inc.
        and Subsidiary (“Atlantic”) as of December 31, 2005, and the related
        consolidated statements of income and comprehensive income, cash flows, and
        stockholders' equity, for the year ended December 31, 2005. These consolidated
        financial statements are the responsibility of Atlantic's management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audit provides a reasonable basis for our opinion.
 
 In
        our
        opinion, the 2005 consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of Atlantic as of
        December 31, 2005, and the results of its consolidated operations and its
        cash
        flows for the year ended December 31, 2005, in conformity with U.S. generally
        accepted accounting principles.
 
 /s/
        Stevens, Powell & Company, P.A.
 
 STEVENS,
        POWELL & COMPANY, P.A.
 Jacksonville,
        Florida
 February
        8, 2006
 
 -37-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 
 **December
                  31,****2006**
              
              **2005****(Dollars
                  in Thousands, Except Per Share Data)****ASSETS**Cash
                  and due from banks
              
              $
              6,566
              
              $
              9,153Federal
                  funds sold
              
              
              11,133
              
              
              5,834Total
                  cash and cash equivalents
              
              
              17,699
              
              
              14,987Investment
                  securities, available-for-sale
              
              
              29,805
              
              
              32,440Investment
                  securities, held-to-maturity (market value of $10,138 in 2006 and
                  $5,983
                  in 2005)
              
              
              10,032
              
              
              5,850Restricted
                  stock, at cost
              
              
              735
              
              
              676Loans,
                  net
              
              
              176,109
              
              
              151,251Bank
                  premises and equipment
              
              
              3,960
              
              
              4,154Accrued
                  interest receivable
              
              
              1,223
              
              
              841Deferred
                  income taxes
              
              
              860
              
              
              851Investment
                  in unconsolidated subsidiary
              
              
              93
              
              
              93Cash
                  surrender value of bank-owned life insurance
              
              
              2,543
              
              
              2,453Other
                  assets
              
              
              438
              
              
              284Total
                  assets
              
              $
              243,497
              
              $
              213,880**LIABILITIES**Deposits:Noninterest-bearing
              
              $
              32,006
              
              $
              33,682Interest-bearing
              
              
              160,698
              
              
              134,798Total
                  deposits
              
              
              192,704
              
              
              168,480Other
                  borrowings:Short-term
                  borrowings, customer repurchase agreements
              
              
              26,921
              
              
              23,745Long-term
                  debt
              
              
              5,393
              
              
              5,393Total
                  other borrowings
              
              
              32,314
              
              
              29,138Accrued
                  interest payable
              
              
              279
              
              
              168Other
                  liabilities
              
              
              949
              
              
              862Total
                  liabilities
              
              
              226,246
              
              
              198,648Commitments
                  and contingencies
              
              
              -
              
              
              -**STOCKHOLDERS’
                  EQUITY**Preferred
                  stock, authorized 2,000,000 shares, none issued and
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $0.01 par value, authorized 10,000,000 shares, issued and
                  outstanding 1,247,516 shares in 2006 and 2005
              
              
              12
              
              
              12Additional
                  paid-in capital
              
              
              11,788
              
              
              11,788Retained
                  earnings
              
              
              5,734
              
              
              3,816Accumulated
                  other comprehensive income (loss):Net
                  unrealized holding losses on securities
              
              
              (283
              )
              
              (384
              )Total
                  stockholders’ equity
              
              
              17,251
              
              
              15,232Total
                  liabilities and stockholders’ equity
              
              $
              243,497
              
              $
              213,880Book
                  value per common share
              
              $
              13.83
              
              $
              12.21Common
                  shares outstanding
              
              
              1,247,516
              
              
              1,247,516
 
 See
        accompanying notes to consolidated financial statements.
 
 -38-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**
 
 
 **Year
                  ended December 31,****2006**
              
              **2005****(Dollars
                  in Thousands, Except Per Share Data)****INTEREST
                  INCOME**Interest
                  and fees on loans
              
              $
              13,592
              
              $
              9,870Taxable
                  interest income on investment securities and interest bearing deposits
                  in
                  banks
              
              
              1,278
              
              
              1,019Tax-exempt
                  interest income on investment securities
              
              
              327
              
              
              276Interest
                  on federal funds sold
              
              
              305
              
              
              94Total
                  interest income
              
              
              15,502
              
              
              11,259**INTEREST
                  EXPENSE**Interest
                  on deposits
              
              
              6,435
              
              
              3,601Short-term
                  borrowings
              
              
              861
              
              
              569Long-term
                  borrowings
              
              
              288
              
              
              188Total
                  interest expense
              
              
              7,584
              
              
              4,358**NET
                  INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES**
              
              
              7,918
              
              
              6,901**PROVISION
                  FOR LOAN LOSSES**
              
              
              194
              
              
              334**NET
                  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES**
              
              
              7,724
              
              
              6,567**NONINTEREST
                  INCOME**Fees
                  and service charges on deposit accounts
              
              
              599
              
              
              498Other
                  fee income for banking services
              
              
              199
              
              
              100Mortgage
                  banking fees
              
              
              119
              
              
              114Income
                  from bank-owned life insurance
              
              
              106
              
              
              103Dividends
                  on restricted stock
              
              
              29
              
              
              2Dividends
                  on trust-preferred securities
              
              
              5
              
              
              -Other
                  income
              
              
              21
              
              
              22Total
                  noninterest income
              
              
              1,078
              
              
              839**NONINTEREST
                  EXPENSES**Salaries
                  and employee benefits
              
              
              2,962
              
              
              2,610Expenses
                  of bank premises and fixed assets
              
              
              1,150
              
              
              1,026Other
                  operating expenses
              
              
              1,869
              
              
              1,647Total
                  noninterest expenses
              
              
              5,981
              
              
              5,283**INCOME
                  BEFORE PROVISION FOR INCOME TAXES**
              
              
              2,821
              
              
              2,123**PROVISION
                  FOR INCOME TAXES**
              
              
              903
              
              
              645**NET
                  INCOME**
              
              
              1,918
              
              
              1,478**OTHER
                  COMPREHENSIVE INCOME**Unrealized
                  holding gains (losses) on securities arising during period, net
                  of income
                  tax expense (benefit) of $60 in 2006 and $(168) in 2005
              
              
              101
              
              
              (279
              )**COMPREHENSIVE
                  INCOME**
              
              $
              2,019
              
              $
              1,199**AVERAGE
                  COMMON SHARES OUTSTANDING**Basic
                  and fully diluted
              
              
              1,247,516
              
              
              1,247,516**EARNINGS
                  PER SHARE**Basic
                  and fully diluted
              
              $
              1.54
              
              $
              1.18
 
 See
        accompanying notes to consolidated financial statements.
 
 -39-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
  **Common
                                        Stock**
                                    
                                    
                                    **Additional**
                                      **Paid-in**
                                    
                                    
                                    **Retained**
                                    
                                    
                                    **Accumulated**
                                      **Other**
                                      **Comprehensive**
                                      **Income**
                                    
                                    
                                    **Total**
                                      **Stockholders’****Shares**
                                    
                                    
                                    **Amount**
                                    
                                    
                                    **Capital**
                                    
                                    
                                    **Earnings**
                                    
                                    
                                    **(Loss)**
                                    
                                    
                                    **Equity****(Dollars
                                        in Thousands)****Balance,
                                        December 31, 2004**
                                    
                                    
                                    1,247,516
                                    
                                    
                                    $
                                    12
                                    
                                    
                                    $
                                    11,788
                                    
                                    
                                    $
                                    2,338
                                    
                                    
                                    $
                                    (105
                                    )
                                    
                                    $
                                    14,033Comprehensive
                                        income:Net
                                        income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,478Change
                                        in net unrealized holding losses on securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (279
                                    )Total
                                        comprehensive income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,199**Balance,
                                        December 31, 2005**
                                    
                                    
                                    1,247,516
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    11,788
                                    
                                    
                                    
                                    3,816
                                    
                                    
                                    
                                    (384
                                    )
                                    
                                    
                                    15,232Comprehensive
                                        income:Net
                                        income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,918Change
                                        in net unrealized holding gains on securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    101Total
                                        comprehensive income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,019**Balance,
                                        December 31, 2006**
                                    
                                    
                                    1,247,516
                                    
                                    
                                    $
                                    12
                                    
                                    
                                    $
                                    11,788
                                    
                                    
                                    $
                                    5,734
                                    
                                    
                                    $
                                    (283
                                    )
                                    
                                    $
                                    17,251
 
 See
        accompanying notes to consolidated financial statements.
 
 -40-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 
 **Year
                  ended December 31,****2006**
              
              **2005****(Dollars
                  in Thousands)****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              1,918
              
              $
              1,478Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              194
              
              
              334Depreciation
                  and amortization
              
              
              339
              
              
              351Net
                  premium amortization and discount accretion
              
              
              36
              
              
              139Deferred
                  income taxes
              
              
              (70
              )
              
              (58
              )Policy
                  income from bank-owned life insurance
              
              
              (90
              )
              
              (90
              )Pension
                  expense from indexed retirement plan
              
              
              133
              
              
              153Increase
                  in accrued interest receivable and other assets
              
              
              (535
              )
              
              (64
              )Increase
                  (decrease) in accrued interest payable and other
                  liabilities
              
              
              65
              
              
              (35
              )Net
                  cash provided by operating activities
              
              
              1,990
              
              
              2,208**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Securities
                  available-for-sale:Purchases
              
              
              (4,628
              )
              
              (16,922
              )Principal
                  repayments on mortgage-backed investment securities
              
              
              7,389
              
              
              6,872Securities
                  held-to-maturityPurchases
              
              
              (5,016
              )
              
              -Calls
              
              
              833
              
              
              -Purchases
                  of restricted stock
              
              
              (59
              )
              
              (83
              )Increase
                  in loans
              
              
              (25,052
              )
              
              (23,080
              )Purchases
                  of bank premises and equipment
              
              
              (145
              )
              
              (350
              )Net
                  cash used in investing activities
              
              
              (26,678
              )
              
              (33,563
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Increase
                  (decrease) in deposits:Noninterest-bearing
              
              
              (1,676
              )
              
              5,900Interest-bearing
              
              
              25,900
              
              
              16,228Proceeds
                  from junior subordinated debentures, net
              
              
              -
              
              
              3,000Proceeds
                  from other borrowings, net of repayments
              
              
              3,176
              
              
              3,041Net
                  cash provided by financing activities
              
              
              27,400
              
              
              28,169**NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              2,712
              
              
              (3,186
              )**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              14,987
              
              
              18,173**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              17,699
              
              $
              14,987**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION**Cash
                  received during the year for interest and dividends
              
              $
              15,120
              
              $
              11,009Cash
                  paid during the year for interest
              
              $
              7,473
              
              $
              4,295Cash
                  paid during the year for income taxes
              
              $
              998
              
              $
              645**NONCASH
                  TRANSACTIONS**Increase
                  in cash surrender value of bank-owned life insurance
              
              $
              90
              
              $
              90Increase
                  in deferred compensation arrangements
              
              $
              133
              
              $
              153Net
                  change in unrealized holding gains (losses) on securities
                  available-for-sale, net of income taxes
              
              $
              101
              
              $
              (279
              )
 
 See
        accompanying notes to consolidated financial statements.
 
 -41-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
        POLICIES**
 
 ***General*** -
        Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company
        registered with the Federal Reserve and owns 100% of the outstanding stock
        of
        Oceanside Bank (“Oceanside”). Oceanside is a state-chartered commercial bank,
        which opened July 21, 1997. Oceanside’s deposits are insured by the Federal
        Deposit Insurance Corporation. The Holding Company’s primary business activities
        are the operations of Oceanside, and it operates in only one reportable industry
        segment: banking. Collectively, the entities are referred to as
“Atlantic.”
 
 ***Competition*** -
        Oceanside, through four banking offices, provides a variety of banking services
        to individuals and businesses located primarily in East Duval and Northeast
        St.
        Johns counties of Florida. Atlantic funds its loans primarily by offering
        time,
        savings and money market, and demand deposit accounts to both commercial
        enterprises and individuals. Atlantic competes with other banking and financial
        institutions in its primary markets including Internet-based institutions.
        Commercial banks, savings banks, savings and loan associations, mortgage
        bankers
        and brokers, credit unions, and money market funds actively compete for deposits
        and loans. Such institutions, as well as consumer finance, mutual funds,
        insurance companies, and brokerage and investment banking firms, may be
        considered competitors of Atlantic with respect to one or more of the services
        it renders.
 
 ***Basis
        of Presentation*** - The
        accompanying consolidated financial statements include the accounts of the
        Holding Company and its wholly-owned subsidiary, Oceanside. All significant
        intercompany accounts and transactions have been eliminated in consolidation.
        The accounting and reporting policies of Atlantic conform with U.S. generally
        accepted accounting principles and to general practices within the banking
        industry.
 
 ***Regulatory
        Environment*** -
        Atlantic is subject to regulations of certain federal and state agencies
        and,
        accordingly, it is periodically examined by those regulatory authorities.
        As a
        consequence of the extensive regulation of commercial banking activities,
        Atlantic's business is particularly susceptible to being affected by federal
        legislation and regulations.
 
 ***Use
        of Estimates*** ***-*** The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenue and expenses during the reporting period.
        Actual
        results could differ from those estimates. Material estimates that are
        particularly susceptible to significant change in the near term relate to
        the
        determination of the allowance for loan losses and valuation of foreclosed
        assets.
 
 The
        determination of the adequacy of the allowance for loan losses is based on
        estimates that may be affected by significant changes in the economic
        environment and market conditions. In connection with the determination of
        the
        estimated losses on loans, management obtains independent appraisals for
        significant collateral.
 
 Atlantic’s
        loans are generally secured by specific items of collateral including real
        property, consumer assets, and business assets. Although Atlantic has a
        diversified loan portfolio, a substantial portion of its debtors’ ability to
        honor their contracts is dependent on local, state, and national economic
        conditions that may affect the value of the underlying collateral or the
        income
        of the debtor.
 
 While
        management uses available information to recognize losses on loans, further
        reductions in the carrying amounts of loans may be necessary based on changes
        in
        economic conditions. In addition, regulatory agencies, as an integral part
        of
        their examination process, periodically review the estimated losses on loans.
        Such agencies may require Atlantic to recognize additional losses based on
        their
        judgments about information available to them at the time of their
        examination.
 
 ***Cash
        and Cash Equivalents*** - For
        purposes of the statements of cash flows, cash and cash equivalents include
        cash
        and due from banks and federal funds sold, all of which mature within ninety
        days. At December 31, 2006 and 2005, cash and due from banks includes $8,000
        and
        $4,000, respectively, of interest-bearing deposits in the Federal Home Loan
        Bank.
 
 -42-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES** (Continued)
 
 Oceanside
        is required by law or regulation to maintain cash reserves with the Federal
        Reserve Bank. The reserve balances were approximately $619,000 and $803,000
        at
        December 31, 2006 and 2005, respectively.
 
 ***Investment
        Securities*** - Debt
        securities are classified as held-to-maturity when Atlantic has the positive
        intent and ability to hold the securities to maturity. Securities
        held-to-maturity are carried at amortized cost. The amortization of premiums
        and
        accretion of discounts are recognized in interest income using methods
        approximating the interest method over the period to maturity.
 
 Debt
        securities not classified as held-to-maturity are classified as
        available-for-sale. Securities available-for-sale are carried at fair value
        with
        unrealized gains and losses reported in other comprehensive income. Realized
        gains (losses) on securities available-for-sale are included in noninterest
        income and, when applicable, are reported as a reclassification adjustment,
        net
        of tax, in other comprehensive income. Gains and losses on sales of securities
        are determined on the specific-identification method.
 
 Equity
        securities held principally for resale in the near term are classified as
        trading securities and recorded at their fair values. Unrealized gains and
        losses on trading securities are included in noninterest income. During 2006
        and
        2005, Atlantic did not engage in trading securities.
 
 Declines
        in the fair value of individual securities below their cost that are other
        than
        temporary result in write-downs of the individual securities to their fair
        value. The related write-downs are included in earnings as realized losses.
        As
        of December 31, 2006, no securities were determined to have other than a
        temporary decline in fair value below cost.
 
 Atlantic
        does not purchase, sell, or utilize off-balance sheet derivative financial
        instruments or derivative commodity instruments for hedging
        purposes.
 
 ***Securities
        Purchased Under Agreements to Resell And Securities Sold Under Agreements
        to
        Repurchase*** -
        Securities purchased under agreements to resell and securities sold under
        agreements to repurchase are generally accounted for as collateralized financing
        transactions and are recorded at the amounts at which the securities were
        acquired or sold plus accrued interest. Securities, generally U.S. government
        and Federal agency securities, pledged as collateral under these financing
        arrangements cannot be sold or repledged by the secured party. The fair value
        of
        collateral either received from or provided to a third party is continually
        monitored, and additional collateral is obtained or requested to be returned
        as
        appropriate.
 
 ***Loans
        Held-for-Sale*** -
        Residential loans held-for-sale are valued at the lower of cost or market
        as
        determined by outstanding commitments from investors or current investor
        yield
        requirements. Gains and losses resulting from sales of residential mortgage
        loans are recognized when Atlantic funds the loan and has a commitment from
        the
        purchaser. Atlantic had no significant loans held-for-sale as of December
        31,
        2006 or 2005. Loans originated for sale in 2006 and 2005 totaled $11.0 million
        and $12.7 million, respectively. The income from mortgage banking operations
        totaled $119,000 and $114,000 for 2006 and 2005, respectively.
 
 Oceanside
        originates loans with a guaranty from the Small Business Administration (“SBA”).
        Oceanside does not classify SBA loans (or the SBA-guaranteed portion) as
        held-for-sale, as the intent is to generally hold SBA loans to maturity in
        Oceanside’s held-for-investment portfolio. There were no sales of SBA loans in
        2006 or 2005. Typically, if an SBA loan is sold, no loan servicing is retained
        by Oceanside.
 
 ***Loans
        Held-for-Investment***  **-** Loans
        originated with the intent and ability to hold for the foreseeable future
        or
        until maturity or payoff are categorized as loans held-for-investment. These
        loans are reported at their outstanding principal adjusted for any charge-offs,
        the allowance for loan losses, and any deferred fees or capitalized costs.
        Loan
        origination fees are capitalized and certain direct origination costs are
        deferred. Both are recognized as an adjustment of the yield of the related
        loan
        over the estimated life of the loan.
 
 -43-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES** (Continued)
 
 The
        accrual of interest on loans is discontinued at the time the loan is ninety
        days
        delinquent unless the loan is well collateralized and in process of collection.
        In all cases, loans are placed on nonaccrual or charged-off at an earlier
        date
        if collection of principal or interest is considered doubtful.
 
 All
        interest accrued but not collected for loans placed on nonaccrual or charged-off
        is reversed against interest income. The interest on these loans is accounted
        for on the cash-basis or cost-recovery method, until qualifying for return
        to
        accrual. Loans are returned to accrual status when all the principal and
        interest amounts contractually due are brought current and future payments
        are
        reasonably assured.
 
 ***Allowance
        for Loan Losses and Impaired Loans*** - The
        allowance for loan losses is established as probable losses are estimated
        through a provision for loan losses charged to earnings. Loan losses are
        charged
        against the allowance when management believes the uncollectibility of a
        loan
        balance is confirmed. Subsequent recoveries, if any, are credited to the
        allowance.
 
 The
        allowance for loan losses is evaluated on a regular basis by management and
        is
        based upon management’s periodic review of the collectibility of the loans in
        light of historical experience, the nature and volume of the loan portfolio,
        adverse situations that may affect the borrower’s ability to repay, estimated
        value of any underlying collateral and prevailing economic conditions. This
        evaluation is inherently subjective as it requires estimates that are
        susceptible to significant revision as more information becomes
        available.
 
 A
        loan is
        considered impaired when, based on current information and events, it is
        probable that Atlantic will be unable to collect the scheduled payments of
        principal or interest when due. Factors considered by management in determining
        impairment include payment status, collateral value, and the probability
        of
        collecting scheduled principal and interest payments when due. Loans that
        experience insignificant payment delays and payment shortfalls generally
        are not
        classified as impaired. Management determines the significance of payment
        delays
        and payment shortfalls on a case-by-case basis, taking into consideration
        all of
        the circumstances surrounding the loan and the borrower, including the length
        of
        the delay, the reasons for the delay, the borrower’s prior payment record, and
        the amount of the shortfall in relation to the principal and interest owed.
        Impairment is measured on a loan-by-loan basis for commercial loans by either
        the present value of expected future cash flows discounted at the loan’s
        effective interest rate, the loan’s obtainable market price, or the fair value
        of the collateral if the loan is collateral dependent.
 
 ***Interest
        Rate Risk*** -
        Atlantic’s asset base is exposed to risk including the risk resulting from
        changes in interest rates and changes in the timing of cash flows. Atlantic
        monitors the effect of such risks by considering the mismatch of the maturities
        of its assets and liabilities in the current interest rate environment and
        the
        sensitivity of assets and liabilities to changes in interest rates. Atlantic’s
        management has considered the effect of significant increases and decreases
        in
        interest rates and believes such changes, if they occurred, would be manageable
        and would not affect the ability of Atlantic to hold its assets as planned.
        However, Atlantic is exposed to significant market risk in the event of
        significant and prolonged interest rate changes.
 
 ***Facilities*** -
        Facilities are stated at cost, less accumulated depreciation and amortization.
        Charges to income for depreciation and amortization are computed on the
        straight-line method over the estimated useful lives of assets. When properties
        are sold or otherwise disposed of, the gain or loss resulting from the
        disposition is credited or charged to income. Expenditures for maintenance
        and
        repairs are charged against income, and renewals and betterments are
        capitalized.
 
 ***Long-Lived
        Assets*** -
        Long-lived assets to be held and used are reviewed for impairment whenever
        events or changes in circumstances indicate that the related carrying amount
        may
        not be recoverable. When required, impairment losses on assets to be held
        and
        used are recognized based on the fair value of the asset. Certain long-lived
        assets to be disposed of are reported at the lower of carrying amount or
        fair
        value less cost to sell.
 
 -44-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES** (Continued)
 
 ***Foreclosed
        Assets*** - Assets
        acquired through, or in lieu of, loan foreclosure are initially recorded
        at fair
        value at the date of foreclosure establishing a new cost basis. After
        foreclosure, valuations are periodically performed by management and the
        foreclosed asset is carried at the lower of carrying amount or fair value
        less
        cost to sell. Subsequent changes in value are reported as adjustments to
        the
        carrying amount, not to exceed the initial carrying value of the foreclosed
        assets at the time of the transfer. Revenue and expenses from operations
        and
        changes in the valuation allowance are included in gains or loss on foreclosed
        assets.
 
 ***Off-Balance
        Sheet Instruments*** - In the
        ordinary course of business, Atlantic has entered into off-balance sheet
        financial instruments consisting of commitments to extend credit, which may
        include standby letters of credit. Such financial instruments are recorded
        in
        the financial statements when they become payable.
 
 ***Transfers
        of Financial Assets*** -
        Transfers of financial assets are accounted for as sales, when control over
        the
        assets has been surrendered. Control over transferred assets is deemed to
        be
        surrendered when (i) the assets have been isolated from Atlantic, (ii) the
        transferee obtains the right (free of conditions that constrain it from taking
        advantage of that right) to pledge or exchange the transferred assets, and
        (iii)
        Atlantic does not maintain effective control over the transferred assets
        through
        an agreement to repurchase them before their maturity.
 
 ***Employee
        Benefits*** -
        Pension costs are charged to salaries and employee benefits expense when
        accrued. The accounting for income and costs associated with the Indexed
        Retirement Plans is more fully described at *Note
        8* .
 
 ***Income
        Taxes*** -
        Deferred income tax assets and liabilities are recorded to reflect the tax
        consequences on future years of temporary differences between revenues and
        expenses reported for financial statement purposes and those reported for
        income
        tax purposes. Deferred tax assets and liabilities are measured using the
        enacted
        tax rates expected to apply to taxable income in the years in which those
        temporary differences are expected to be realized or settled. Valuation
        allowances are provided against assets that are not likely to be
        realized.
 
 ***Computation
        of Per Share Earnings*** - Basic
        earnings per share (“EPS”) amounts are computed by dividing net earnings by the
        weighted average number of common shares outstanding for the years ended
        December 31, 2006 and 2005. Diluted EPS are computed by dividing net earnings
        by
        the weighted average number of shares and all dilutive potential shares
        outstanding during the period. Atlantic has no dilutive potential shares
        outstanding for 2006 or 2005. The following information was used in the
        computation of EPS on both a basic and diluted basis for the years ended
        December 31, 2006 and 2005 (dollars in thousands except per share
        data):
  **For
                  the Year Ended December 31,****2006**
              
              **2005**Basic
                  EPS computation:Numerator
                  - Net income
              
              $
              1,918
              
              $
              1,478Denominator
                  - Weighted average shares outstanding (rounded)
              
              
              1,248
              
              
              1,248Basic
                  EPS
              
              $
              1.54
              
              $
              1.18Diluted
                  EPS computation:Numerator
                  - Net income
              
              $
              1,918
              
              $
              1,478Denominator
                  - Weighted average shares outstanding (rounded)
              
              
              1,248
              
              
              1,248Diluted
                  EPS
              
              $
              1.54
              
              $
              1.18
 
 ***Advertising
        and Business Development*** -
        Atlantic expenses advertising and business development costs as incurred.
        Advertising and business development costs for 2006 and 2005 as included
        in
        other operating expenses were $97,000 and $75,000, respectively.
 
 ***Reclassification
        of Accounts*** -
        Certain items in the financial statements for 2005 have been reclassified
        to
        conform to the classifications used for the current year.
 
 -45-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES** (Continued)
 
 ***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 is not expected to materially impact Atlantic’s financial
        position, results of operations, or liquidity.
 
 In
        June
        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 is not expected to materially impact 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
        September 2006, the FASB reached a consensus on EITF No. 06-4, *Accounting
        for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
        Split-Dollar Life Insurance Arrangements* .
        The
        Task Force addressed the issue of how an employer should account for the
        deferred compensation or postretirement or postemployment benefit aspects
        of a
        split-dollar life insurance arrangement that is, in substance, an endorsement
        type of policy. The Task Force believes that an employer should recognize
        a
        liability for future benefits in accordance with SFAS 106 (if, in substance,
        a
        postretirement benefit plan exists) or APB Opinion 12 (if the arrangement
        is, in
        substance, an individual deferred compensation contract) based on the
        substantive agreement with the employee. For example, if the employer has
        effectively agreed to maintain a life insurance policy during the employee's
        retirement, the cost of the insurance policy during postretirement periods
        should be accrued in accordance with either SFAS 106 or APB Opinion 12.
        Similarly, if the employer has effectively agreed to provide the employee
        with a
        death benefit, the employer should accrue, over the service period, a liability
        for the actuarial present value of the future death benefit as of the employee's
        expected retirement date, in accordance with either SFAS 106 or APB Opinion
        12.
        This consensus is to be to be applied to fiscal years beginning after December
        15, 2007, with earlier application permitted. Atlantic has not completed
        its
        evaluation of this EITF; however, the initial assessment is that adoption
        will
        not materially impact its financial position, results of operations, or
        liquidity.
 
 -46-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES** (Continued)
 
 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.
  **NOTE
        2 - INVESTMENT SECURITIES**
 
 The
        amortized cost and estimated fair value of instruments in debt and equity
        securities at December 31, 2006 and 2005, follow (dollars in
        thousands):
 
 **December
                  31, 2006**
              
              **December
                  31, 2005****Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair**
                **Value**Available-for-saleU.S.
                  Government- sponsored agency
              
              $
              1,000
              
              $
              7
              
              $
              -
              
              $
              1,007
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Mortgage-backed
                  securities
              
              
              29,259
              
              
              24
              
              
              (485
              )
              
              28,798
              
              
              33,056
              
              
              29
              
              
              (645
              )
              
              32,44030,259
              
              
              31
              
              
              (485
              )
              
              29,805
              
              
              33,056
              
              
              29
              
              
              (645
              )
              
              32,440Held-to-maturityState,
                  county and municipal bonds
              
              
              10,032
              
              
              144
              
              
              (38
              )
              
              10,138
              
              
              5,850
              
              
              193
              
              
              (60
              )
              
              5,983Total
                  investment securities
              
              $
              40,291
              
              $
              175
              
              $
              (523
              )
              $
              39,943
              
              $
              38,906
              
              $
              222
              
              $
              (705
              )
              $
              38,423
  Information
        pertaining to securities with gross unrealized losses at December 31, 2006
        and
        2005, aggregated by investment category and length of time that individual
        securities have been in a continuous loss positions, follows:
 
 **Less
                  Than Twelve Months**
              
              **Over
                  Twelve Months**
              
              **Total****Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value****December
                  31, 2006**:Available-for-SaleU.S.
                  Government-sponsored agency
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Mortgage-backed
                  securities
              
              
              -
              
              
              131
              
              
              (485
              )
              
              24,563
              
              
              (485
              )
              
              24,694$
              -
              
              $
              131
              
              $
              (485
              )
              $
              24,563
              
              $
              (485
              )
              $
              24,694Held-to-MaturityState,
                  county, and municipal bonds
              
              $
              (38
              )
              $
              4,740
              
              $
              -
              
              $
              -
              
              $
              (38
              )
              $
              4,740
  -47-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        2 - INVESTMENT SECURITIES** (Continued)
 
 **Less
                  Than Twelve Months**
              
              **Over
                  Twelve Months**
              
              **Total****Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value****December
                  31, 2005**:Available-for-SaleMortgage-backed
                  securities
              
              $
              (274
              )
              $
              15,772
              
              $
              (371
              )
              $
              10,800
              
              $
              (645
              )
              $
              26,572Held-to-MaturityState,
                  county, and municipal bonds
              
              $
              (20
              )
              $
              573
              
              $
              (40
              )
              $
              1,327
              
              $
              (60
              )
              $
              1,900
  Management
        evaluates securities for other-than-temporary impairment at least on a monthly
        basis, and more frequently when economic or market concerns warrant such
        evaluation. Consideration is given to (i) the length of time and the extent
        to
        which the fair value has been less than cost, (ii) the financial condition
        and
        near-term prospects of the issuer, and (iii) the intent and ability of Atlantic
        to retain its investment in the issuer for a period of time sufficient to
        allow
        for any anticipated recovery in fair value.
 
 The
        unrealized losses on investment securities available-for-sale were caused
        by
        interest rate changes. It is expected that the securities would not be settled
        at a price less than the par value of the investments. Because the decline
        in
        fair value is attributable to changes in interest rates and not credit quality,
        and because Atlantic has the ability and intent to hold these investments
        until
        a market price recovery or maturity, these investments are not considered
        other-than-temporarily impaired. Temporary decreases
        in fair value of securities available-for-sale at December 31, 2006, of $283,000
        (net of deferred income taxes of $171,000) are regarded as an adjustment
        to
        stockholders' equity. The estimated fair value of securities is determined
        on
        the basis of market quotations.
 
 At
        December 31, 2006, securities with an amortized cost of $872,000 and fair
        value
        of $921,000 were pledged to secure deposits of public funds from the state
        of
        Florida and treasury tax and loan deposits with the Federal Reserve.
 
 At
        December 31, 2006, securities, with a fair value of $26.9 million, were sold
        under an agreement to repurchase which effectively collateralizes overnight
        customer repurchase agreements totaling $26.9 million ( *see
        Note 6* ).
        There
        were no securities of a single issuer (which were non-governmental or
        non-government sponsored) that exceeded 10% of stockholders’ equity at December
        31, 2006.
 
 The
        cost
        and estimated fair value of debt and equity securities at December 31, 2006,
        by
        contractual maturities, are shown below. Expected maturities will differ
        from
        contractual maturities because borrowers may have the right to call or prepay
        obligations with or without call or prepayment penalties (dollars in
        thousands).
 
 **Securities
                  Available-for-Sale**
              
              **Securities
                  Held-to-Maturity****Amortized**
                **Cost**
              
              **Fair**
                **Value**
              
              **Amortized**
                **Cost**
              
              **Fair**
                **Value**Due
                  in one year or less
              
              $
              216
              
              $
              293
              
              $
              -
              
              $
              -Due
                  after one through five years
              
              
              6,402
              
              
              6,280
              
              
              -
              
              
              -Due
                  after five through ten years
              
              
              12,334
              
              
              12,125
              
              
              625
              
              
              651Due
                  after ten years
              
              
              11,307
              
              
              11,107
              
              
              9,407
              
              
              9,487$
              30,259
              
              $
              29,805
              
              $
              10,032
              
              $
              10,138
  -48-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        3 - LOANS**
 
 The
        loan
        portfolio at December 31, 2006 and 2005, is composed of the following (dollars
        in thousands):
 
 **2006**
              
              **2005**Real
                  estate loansConstruction,
                  land development, and other land
              
              $
              51,598
              
              $
              37,9051-4
                  family residential
              
              
              38,018
              
              
              31,997Multifamily
                  residential
              
              
              2,489
              
              
              3,051Commercial
              
              
              68,588
              
              
              62,612Total
                  real estate loans
              
              
              160,693
              
              
              135,565Commercial
                  loans
              
              
              11,214
              
              
              11,901Consumer
                  and other loans
              
              
              5,828
              
              
              5,400Total
                  loan portfolio
              
              
              177,735
              
              
              152,866Less,
                  deferred fees and other
              
              
              (27
              )
              
              (63
              )Less,
                  allowance for loan losses
              
              
              (1,599
              )
              
              (1,552
              )Loans,
                  net
              
              $
              176,109
              
              $
              151,251
 
 At
        December 31, 2006 and 2005, fixed-rate loans (excluding nonaccrual loans)
        with
        maturities over one year totaled approximately $23.2 million and $29.0 million,
        respectively.
 
 The
        following is a summary of the transactions in the allowance for loan losses
        (dollars in thousands):
 
 **2006**
              
              **2005**Balance,
                  beginning of period
              
              $
              1,552
              
              $
              1,296Provisions
                  charged to operating expenses
              
              
              194
              
              
              334Loans
                  charged-off
              
              
              (181
              )
              
              (86
              )Recoveries
              
              
              34
              
              
              8Balance,
                  end of period
              
              $
              1,599
              
              $
              1,552
 
 Interest
        income recognized or received on impaired loans for 2006 and 2005 was not
        material. At December 31, 2006 and 2005, impaired loans, all collateral
        dependent, were as follows (dollars in thousands):
 
 **2006**
              
              **2005**Average
                  balance during year
              
              $
              79
              
              $
              195Total
                  impaired loans (excluding SBA-guaranteed portion of loan)
              
              $
              53
              
              $
              202Total
                  related allowance for loan losses (or SBA-guaranteed portion of
                  loan)
              
              
              (53
              )
              
              (202
              )Amount
                  of impaired loans without a specific allowance for loan
                  losses
              
              $
              -
              
              $
              -
  Nonaccrual
        and past due loans at December 31, 2006 and 2005, were as follows (dollars
        in
        thousands):
 
 **2006**
                  
                  **2005**Nonaccrual
                      loansImpaired
                      loans (excluding SBA-guaranteed portion of loans)
                  
                  $
                  53
                  
                  $
                  202SBA-guaranteed
                      portion of loans (past due but not considered impaired)
                  
                  
                  (53
                  )
                  
                  -Past
                      due ninety days or more, but still accruing
                  
                  
                  -
                  
                  
                  -$
                  -
                  
                  $
                  202
  -49-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        4 - FACILITIES**
 
 *Facilities* .
        A
        summary follows (dollars in thousands):
 **Cost**
              
              **Accumulated**
                **Depreciation
                  and**
                **Amortization**
              
              **Net
                  Book**
                **Value**
              
              **Estimated**
                **Useful**
                **Lives**December
                  31, 2006:Land
                  and land improvements
              
              $
              750
              
              $
              -
              
              $
              750Bank
                  building and improvements
              
              
              3,417
              
              
              637
              
              
              2,780
              
              
              5
                  - 40 yearsFurniture,
                  fixtures, and equipment
              
              
              2,047
              
              
              1,617
              
              
              430
              
              
              3
                  - 10 years$
              6,214
              
              $
              2,254
              
              $
              3,960December
                  31, 2005:Land
                  and land improvements
              
              $
              750
              
              $
              -
              
              $
              750Bank
                  building and improvements
              
              
              3,400
              
              
              519
              
              
              2,881
              
              
              5
                  - 40 yearsFurniture,
                  fixtures, and equipment
              
              
              1,919
              
              
              1,396
              
              
              523
              
              
              3
                  - 10 years$
              6,069
              
              $
              1,915
              
              $
              4,154
  Depreciation
        and amortization of facilities totaled $339,000 and $351,000 in 2006 and
        2005,
        respectively.
 
 *Operating
        Leases* .
        Atlantic leases property for a branch location and its operations center
        at
        13799 Beach Boulevard, Jacksonville, Florida, under a noncancelable operating
        lease dated September 27, 2000, that expires in 2011, subject to two five-year
        renewal options. On August 22, 2002, Atlantic entered into a 20-year
        noncancelable operating lease agreement for a new branch at the corner of
        Kernan
        Boulevard South and Atlantic Boulevard, Jacksonville, Florida. Lease payments
        commenced in September 2003, and the branch opened December 15, 2003. All
        other
        operating leases, consisting principally of computer and other equipment,
        are
        not material.
 
 Total
        rent expense for 2006 and 2005 was $428,000 and $336,000, respectively. The
        future annual rental payments for the branch leases are due as follows (dollars
        in thousands):
 
 **Years
                                Ending**
                              **December
                                31****,**
                            
                            **Amount**2007
                            
                            $
                            2872008
                            
                            
                            2972009
                            
                            
                            3102010
                            
                            
                            3162011
                            
                            
                            162Thereafter
                            
                            
                            1,128$
                            2,500
  -50-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        5 - TIME DEPOSITS**
 
 Time
        deposits at December 31, 2006 and 2005, totaled $111,032,000 and $84,117,000,
        respectively. The scheduled maturities of time deposits were as follows (dollars
        in thousands):
 
 **December
                  31, 2006**
              
              **December
                  31, 2005****Time,
                  $100,000**
                **And
                  Over**
              
              **Other
                  Time**
                **Deposits**
              
              **Time,
                  $100,000**
                **And
                  Over**
              
              **Other
                  Time**
                **Deposits**Three
                  months or less
              
              $
              12,474
              
              $
              15,273
              
              $
              7,929
              
              $
              12,831Over
                  three through twelve months
              
              
              16,878
              
              
              22,756
              
              
              10,142
              
              
              18,584Over
                  twelve months through three years
              
              
              10,565
              
              
              21,878
              
              
              3,750
              
              
              18,870Over
                  three years
              
              
              6,186
              
              
              5,022
              
              
              5,413
              
              
              6,598$
              46,103
              
              $
              64,929
              
              $
              27,234
              
              $
              56,883
 
 Time
        deposits of less than $100,000 with a remaining maturity of one year or less
        totaled $38,029,000 at December 31, 2006. Time deposits of $100,000 or more
        with
        a remaining maturity of one year or less totaled $29,352,000 at December
        31,
        2006.
 
 Interest
        expense on certificates of deposit of $100,000 or more totaled $1,764,000
        and
        $845,000 for 2006 and 2005, respectively. Interest expense on other time
        deposits totaled $3,167,000 and $1,831,000 for 2006 and 2005,
        respectively.
 
 Oceanside
        did not accept brokered deposits during 2006 and 2005.
  **NOTE
        6 - OTHER BORROWINGS**
 
 *Short-Term
        Debt, Customer Repurchase Agreements* .
        Atlantic has sold securities under an agreement to repurchase with a par
        value
        of $27,720,000 and a fair value of $26,929,000, which effectively collateralizes
        overnight borrowings totaling $26,921,000. The interest rate is based on
        the
        then current federal fund rate less 0.25%. The interest rate on this overnight
        borrowing was 5.25% at December 31, 2006. The average balance of customer
        repurchase agreements for 2006 and 2005 were $18,098,000 and $18,254,000,
        respectively, at a weighted average interest rate of 4.49% and 2.96%,
        respectively. Interest of $830,000 and $541,000 was recorded in 2006 and
        2005,
        respectively.
 
 *Other
        Short-term Borrowings* .
        Atlantic purchases federal funds for liquidity needs during the year. At
        December 31, 2006
        and 2005, no federal fund purchases existed. The average federal funds purchased
        during 2006 and 2005, were $695,000 and $863,000, respectively, at a weighted
        average interest rate of 3.96% and 3.24%, respectively. Interest of $31,000
        and
        $28,000 was recorded in 2006 and 2005, respectively.
 
 *Long-Term
        Debt* .
        A
        summary of long-term debt follows (dollars in thousands):
  **December
                  31,****2006**
              
              **2005**FHLB
                  of Atlanta advances
              
              $
              2,300
              
              $
              2,300Junior
                  subordinated debentures
              
              
              3,093
              
              
              3,093$
              5,393
              
              $
              5,393
  -51-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        6 - OTHER BORROWINGS** (Continued)
 
 *FHLB
        of Atlanta Advances.* Atlantic
        has obtained an advance from FHLB of $2,300,000 collateralized by Atlantic’s
        FHLB capital stock in the amount of $531,000 and a blanket lien on eligible
        wholly-owned residential (1-4 units) first mortgage loans totaling approximately
        $5.6 million. This advance matures on November 17, 2010, and has a fixed
        interest rate at 4.45%. Atlantic has also pledged approximately $4.3 million
        of
        qualifying collateral comprised of equity lines of credit and second mortgages
        for future FHLB advances. Interest of $104,000 and $136,000 was recorded
        in 2006
        and 2005, respectively.
 
 *Junior
        Subordinated Debentures.* On
        September 15, 2005, Atlantic participated in a pooled offering of trust
        preferred securities. Atlantic formed Atlantic BancGroup Statutory Trust
        I (the
        "Trust"), a wholly-owned statutory trust subsidiary for the purpose of issuing
        the trust preferred securities. The Trust used the proceeds from the issuance
        of
        $3,000,000 in trust preferred securities to acquire fixed/floating rate junior
        subordinated deferrable interest debentures of Atlantic in the amount of
        $3,093,000. The trust preferred securities essentially mirror the debt
        securities, carrying a cumulative preferred dividend at a fixed rate of 5.886%
        equal to the interest rate on the debt securities, both payable quarterly
        for
        five years. Beginning September 15, 2010, the quarterly rates vary based
        on the
        three month LIBOR plus 150 basis points. The debt securities and the trust
        preferred securities each have 30-year lives. The trust preferred securities
        and
        the debt securities are callable by Atlantic or the Trust, at their respective
        option after five years, and at varying premiums and sooner in specific events,
        subject to prior approval by the Federal Reserve Board, if then required.
        Atlantic has treated the trust preferred securities as Tier 1 capital up
        to the
        maximum amount allowed, and the remainder, if any, as Tier 2 capital for
        federal
        regulatory purposes. There are no required principal payments on the junior
        subordinated debentures over the next five years. Interest expense on the
        junior
        subordinated debentures totaled $184,000 and $52,000 in 2006 and 2005,
        respectively.
 
 Under
        new
        accounting guidance, FASB Interpretation Nos. 46 and 46R, the Trust is not
        consolidated with Atlantic. Accordingly, Atlantic does not report the securities
        issued by the Trust as liabilities, and instead reports as liabilities the
        junior subordinated debentures issued by Atlantic and held by the Trust.
 
 At
        December 31, 2006, Atlantic’s investment in the statutory trust of $93,000 has
        been included in *Other
        Assets* in
        the *Consolidated Balance Sheets* as an
        investment in an unconsolidated subsidiary.
  **NOTE
        7 - INCOME TAXES**
 
 The
        provision for income taxes on income is summarized as follows (dollars in
        thousands):
 
 **Year
                  Ended December 31,****2006**
              
              **2005**Current:Federal
              
              $
              831
              
              $
              434State
              
              
              142
              
              
              75973
              
              
              509Deferred:Federal
              
              
              (60
              )
              
              116State
              
              
              (10
              )
              
              20(70
              )
              
              136Total
                  income tax provision
              
              $
              903
              
              $
              645
 
 -52-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        7 - INCOME TAXES** (Continued)
 
 A
        reconciliation of the income tax provision computed at the federal statutory
        rate of 34% and the income tax provision shown on the statement of income,
        follows (dollars in thousands):
 
 **2006**
              
              **2005****Amount**
              
              **%
                  of**
                **Pretax**
              
              **Amount**
              
              **%
                  of**
                **Pretax**Tax
                  computed at statutory rate
              
              $
              959
              
              
              34.0
              %
              $
              722
              
              
              34.0
              %Increase
                  (decrease) resulting from:Nontaxable
                  interest income, net
              
              
              (118
              )
              
              (4.2
              )
              
              (99
              )
              
              (4.6
              )Other
              
              
              62
              
              
              2.2
              
              
              22
              
              
              1.0Income
                  tax provision
              
              $
              903
              
              
              32.0
              %
              $
              645
              
              
              30.4
              %
  The
        components of the net deferred income tax assets are as follows (dollars
        in
        thousands):
  **December
                  31,****2006**
              
              **2005**Deferred
                  tax asset:Federal
              
              $
              887
              
              $
              880State
              
              
              152
              
              
              1511,039
              
              
              1,031Deferred
                  tax liability:Federal
              
              
              (153
              )
              
              (154
              )State
              
              
              (26
              )
              
              (26
              )(179
              )
              
              (180
              )Net
                  deferred tax asset
              
              $
              860
              
              $
              851
  The
        tax
        effects of each type of significant item that gave rise to deferred taxes
        are
        (dollars in thousands):
 
 **December
                  31,****2006**
              
              **2005**Allowance
                  for loan losses
              
              $
              545
              
              $
              527Indexed
                  retirement plans
              
              
              292
              
              
              242Net
                  unrealized holding losses on securities
              
              
              171
              
              
              232Depreciation
              
              
              (179
              )
              
              (180
              )Other,
                  net
              
              
              31
              
              
              30Net
                  deferred tax asset
              
              $
              860
              
              $
              851
  Income
        tax expense of $60,000 for 2006 and income tax benefit of $168,000 for 2005
        have
        been netted in the caption “Unrealized holding gains (losses) on securities
        arising during period” found in the *Consolidated
        Statements of Income and Comprehensive Income* .
 
 -53-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        8 - EMPLOYEE BENEFITS AND INDEXED RETIREMENT PLANS**
 
 *SIMPLE
        Plan.* Atlantic
        sponsors a savings incentive plan (“SIMPLE Plan”) that covers substantially all
        employees. Atlantic matches each participant’s contribution, subject to a
        maximum of 3% of the participant's salary. The SIMPLE Plan is a prototype
        plan
        and has been approved by the Internal Revenue Service. The amount included
        in
        salaries and employee benefits as pension expense totaled $60,000 and $53,000
        for 2006 and 2005, respectively.
 
 *Indexed
        Retirement Plans.* Atlantic
        has adopted an Indexed Retirement Plan (“IRP”) for Atlantic’s seven directors
        and four of its current and former officers. The purpose of the IRP is to
        retain
        qualified directors and members of management by offering a retirement benefit.
        Benefits under the IRP began vesting over a five-year period, with service
        beginning in 1997. Upon his resignation from Atlantic, a former officer and
        director was 60% vested in the IRP. The remaining ten participants were each
        100% vested at the end of 2004.
 
 Atlantic
        has purchased a pool of life insurance policies with $2,050,000 that had
        previously been invested in overnight federal funds sold. The policies have
        cash
        surrender values that can progressively grow, based on a fluctuating index
        of
        life insurance securities, resulting in an earnings stream.
 
 Under
        the
        IRP, as amended, eight of the current participants will begin receiving benefit
        payments for fifteen years following retirement. In addition, the beneficiaries
        of these eight participants will each receive 90% of the death benefits gains,
        payable upon the respective participant’s death, with the remaining 10% plus the
        policy cash value payable to Atlantic. The remaining three participants will
        receive benefit payments over a twenty-year period following retirement.
        Following a participant’s death, any unpaid benefits will continue to the
        beneficiary (or beneficiaries) over the remaining term. A summary of the
        activity for the IRP follows (dollars in thousands):
 
 **December
                  31,****2006**
              
              **2005**Policy
                  income included in other income
              
              $
              106
              
              $
              103IRP
                  expense included in other operating expenses
              
              
              (133
              )
              
              (155
              )Life
                  insurance expense included in other operating expenses
              
              
              (15
              )
              
              (13
              )Deferred
                  income tax benefit
              
              
              50
              
              
              58Net
                  after income tax benefit
              
              $
              8
              
              $
              (7
              )
  **NOTE
        9 - COMMITMENTS AND CONTINGENCIES**
 
 *Credit-Related
        Financial Instruments* .
        Atlantic is a party to credit-related financial instruments with off-balance
        sheet risk in the normal course of business to meet the financing needs of
        its
        customers. These financial instruments include commitments to extend credit,
        standby letters of credit, and commercial letters of credit. Such commitments
        involve, to varying degrees, elements of credit and interest rate risk in
        excess
        of the amount recognized in the consolidated balance sheets. Atlantic’s exposure
        to credit loss is represented by the contractual amount of these commitments.
        Atlantic follows the same credit policies in making commitments as it does
        for
        on-balance sheet instruments.
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. The commitments for equity lines of credit may expire without being
        drawn upon. Therefore, the total commitment amounts do not necessarily represent
        future cash requirements. The amount of collateral obtained, if it is deemed
        necessary by Atlantic, is based on management’s credit evaluation of the
        customer.
 
 -54-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        9 - COMMITMENTS AND CONTINGENCIES** (Continued)
 
 Unfunded
        commitments under commercial lines-of-credit, revolving credit lines, and
        overdraft protection agreements are commitments for possible future extensions
        of credit to existing customers. These lines-of-credit may not be fully
        collateralized but generally contain a specified maturity date. Certain
        conditions may exist that would prevent the customer from drawing upon the
        total
        amount to which Atlantic is committed.
 
 Commercial
        and standby letters-of-credit are conditional commitments issued by Atlantic
        to
        guarantee the performance of a customer to a third party. Those
        letters-of-credit are primarily issued to support public and private borrowing
        arrangements. All letters of credit issued and outstanding at December 31,
        2006,
        totaling $1,712,000, have expiration dates within one year. The credit risk
        involved in issuing letters-of-credit is essentially the same as that involved
        in extending loan facilities to customers. Atlantic generally holds collateral
        supporting those commitments if deemed necessary.
 
 At
        December 31, 2006 and 2005, the following financial instruments were outstanding
        whose contract amounts represent credit risk for Atlantic (dollars in
        thousands):
  **December
                  31,****2006**
              
              **2005**Commitments
                  to extend credit (including unused lines of credit)
              
              $
              31,462
              
              $
              28,034Standby
                  letters of credit
              
              $
              1,712
              
              $
              1,714
  *Derivative
        Loan Commitments.* At
        December 31, 2006, Atlantic did not have any material amounts of commitments
        to
        originate residential mortgage loans that will be sold to investors at a
        specified time in the future.
 
 *Collateral
        Requirements* .
        To
        reduce credit risk related to the use of credit-related financial instruments,
        Atlantic might deem it necessary to obtain collateral. The amount and nature
        of
        the collateral obtained is based on Atlantic’s credit evaluation of the
        customer. Collateral held varies but may include cash, securities, accounts
        receivable, inventory, property, plant and equipment, and real estate. Access
        to
        the collateral is generally achieved by either (i)
        maintaining possession of the collateral, (ii) placing a recorded lien in
        the
        appropriate jurisdiction, or (iii) other means such as an
        assignment.
 
 If
        the
        counterparty does not have the right and ability to redeem the collateral
        or
        Atlantic is permitted to sell or repledge the collateral on short notice,
        Atlantic records the collateral on its consolidated balance sheet at fair
        value
        with a corresponding obligation to return it.
 
 *Exposure
        to Transactions with Correspondent Banks and Related Limitations on Interbank
        Liabilities.* In
        the
        ordinary course of business, Oceanside may incur a loss if a correspondent
        bank
        defaults upon an obligation, which may include overnight federal funds, loan
        participations, and other interbank transactions. Management monitors its
        risks
        with these correspondents and places certain limitations upon the
        exposure.
 
 *Litigation* .
        Atlantic may periodically be a party to or otherwise involved in legal
        proceedings arising in the normal course of business, such as claims to enforce
        liens, claims involving the making and servicing of real property loans,
        and
        other issues incident to Atlantic’s operations. Management, after consultation
        with legal counsel, does not believe that there are any pending or threatened
        proceedings against Atlantic which, if determined adversely, would have a
        material effect on Atlantic’s consolidated financial position.
 
 *Change
        of Control Agreements.* Atlantic
        has entered into agreements with its three executive officers that would
        provide
        certain benefits in the event of a change of control (as defined in the
        agreement) and, within three years of the change in control, the executive
        officer is terminated (without cause) or resigns. The change of control benefits
        include cash payments equal to 2.99 times the executive officer’s base annual
        compensation (as defined in the agreement) and continuation of health benefits
        for six months.
 
 -55-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        9 - COMMITMENTS AND CONTINGENCIES** (Continued)
 
 *Other* .
        At
        December 31, 2006, Atlantic had $13.3 million of available lines of credit
        from
        other banks for the purchase of overnight federal funds.
  **NOTE
        10 - CONCENTRATIONS OF CREDIT**
 
 Substantially
        all of Atlantic's loans, commitments, and standby letters of credit have
        been
        granted to customers in northeast Florida, including Duval and St. Johns
        counties. Atlantic’s loans are generally secured by specific items of collateral
        including real property, consumer assets, and business assets. Although Atlantic
        has a diversified loan portfolio, a substantial portion of its debtors’ ability
        to honor their contracts is dependent on local, state, and national economic
        conditions, which can be affected by a number of events domestically and
        internationally.
 
 The
        concentrations of credit by type of loan are set forth in *Note
        3* .
        The
        distribution of commitments to extend credit approximates the distribution
        of
        loans outstanding. Standby letters of credit were granted primarily to
        commercial borrowers. Atlantic, as a matter of policy, does not extend credit
        to
        any single borrower or group of related borrowers in excess of its legal
        lending
        limit. As a state-chartered bank, Oceanside’s 15% legal lending limit was
        approximately $3.0 million at December 31, 2006 ($5.0 million for loans
        qualifying for the 25% limit). Atlantic does not have any significant
        concentrations in any one industry or customer.
  **NOTE
        11 - RELATED PARTIES**
 
 Atlantic
        has entered into transactions with its directors, executive officers,
        significant stockholders, and their affiliates ( *insiders* ).
        Such
        transactions were made in the ordinary course of business on substantially
        the
        same terms and conditions, including interest rates and collateral, as those
        prevailing at the same time for comparable transactions with other customers,
        and did not, in the opinion of management, involve more than normal credit
        risk
        or present other unfavorable features.
 
 A
        summary
        of activity for 2006 and 2005 for such loans follows (dollars in
        thousands):
 **2006**
              
              **2005**Beginning
                  of year balance
              
              $
              2,323
              
              $
              1,964Additions
              
              
              1,645
              
              
              1,501Reductions
              
              
              (1,970
              )
              
              (1,142
              )End
                  of year balance
              
              $
              1,998
              
              $
              2,323
  Unfunded
        commitments to the same parties totaled $1,649,000 at December 31, 2006.
        At
        December 31, 2006 and 2005, deposits and customer repurchase agreements with
        insiders totaled approximately $37.6 million and $36.7 million,
        respectively.
  **NOTE
        12 - STOCKHOLDERS' EQUITY**
 
 *Preferred
        Stock.*  ** In
        addition to the 10,000,000 shares of authorized common stock, Atlantic’s
        articles of incorporation authorize up to 2,000,000 shares of preferred stock.
        The Board of Directors is further authorized to establish designations, powers,
        preferences, rights, and other terms for preferred stock by resolution. No
        shares of preferred stock have been issued.
 
 -56-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        12 - STOCKHOLDERS' EQUITY** (Continued)
 
 *Dividends* .
        The
        ability of Atlantic to pay dividends to stockholders depends primarily on
        dividends received by Atlantic from its subsidiary, Oceanside. Oceanside’s
        ability to pay dividends is limited by federal and state banking regulations
        based upon Oceanside’s profitability and other factors. State banking statutes
        further require (i) prior approval, (ii) that at least 20% of the prior year’s
        earnings be transferred to additional paid-in capital ( *surplus* )
        annually until surplus equals or exceeds Oceanside’s common stock, and (iii)
        that certain minimum capital levels are maintained. At December 31, 2006,
        retained earnings of approximately $1,914,000 were available to pay cash
        dividends to the holding company only (Atlantic) in order to maintain
        Oceanside’s current regulatory capital classification. Atlantic’s dividend
        policy is to retain accumulated earnings to support its growth.
  **NOTE
        13 - OTHER OPERATING EXPENSES**
 
 Other
        operating expenses follow (dollars in thousands):
  **2006**
              
              **2005**Processing
                  and settlement fees
              
              $
              624
              
              $
              505Professional,
                  legal, and audit fees
              
              
              253
              
              
              250Pension
                  expense
              
              
              133
              
              
              155Stationery,
                  printing, and supplies
              
              
              128
              
              
              127Postage,
                  freight, and courier
              
              
              97
              
              
              88Director
                  fees
              
              
              122
              
              
              99Telephone
              
              
              82
              
              
              80Advertising
                  and business development
              
              
              97
              
              
              75Regulatory
                  assessments
              
              
              66
              
              
              60Insurance
                  (excluding group insurance)
              
              
              38
              
              
              41Dues
                  and subscriptions
              
              
              58
              
              
              55Other
                  miscellaneous expenses
              
              
              171
              
              
              112$
              1,869
              
              $
              1,647
  **NOTE
        14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instruments for which it is practicable to estimate that
        value:
 
 *Cash
        and Due from Banks and Federal Funds Sold* - For
        those short-term instruments, the carrying amount is a reasonable estimate
        of
        fair value.
 
 *Investment
        Securities* - For
        securities held as investments, fair value equals quoted market price, if
        available. If a quoted market price is not available, fair value is estimated
        using quoted market prices for similar securities.
 
 *Restricted
        Stock* - Fair
        value of Atlantic’s investment in Federal Home Loan Bank and correspondent
        banks’ stock is its cost.
 
 *Loans
        Receivable* - For
        loans subject to repricing and loans intended for sale within six months,
        fair
        value is estimated at the carrying amount plus accrued interest. The fair
        value
        of other types of loans is estimated by discounting the future cash flows
        using
        the current rates at which similar loans would be made to borrowers with
        similar
        credit ratings and for the same remaining maturities.
 
 -57-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS** (Continued)
 
 *Deposit
        Liabilities* - The
        fair value of demand deposits, savings accounts, certain money market deposits,
        and customer repurchase agreements is the amount payable on demand at the
        reporting date. The fair value of long-term fixed maturity certificates of
        deposit is estimated using the rates currently offered for deposits of similar
        remaining maturities.
 
 *Other
        Borrowings* - For
        short-term debt, including accounts and demand notes payable, the carrying
        amount is a reasonable estimate of fair value. The fair value of customer
        repurchase agreements is the amount payable on demand at the reporting date.
        For
        long-term debt, the fair value is estimated using discounted cash flow analyses
        based on current incremental borrowing rates for similar types of borrowing
        arrangements.
 
 *Off-Balance
        Sheet Instruments* - Fair
        values for off-balance sheet lending commitments are based on rates currently
        charged to enter into similar agreements, taking into account the remaining
        terms of the agreements and the counterparties’ credit standing.
 
 The
        estimated fair values of Atlantic's financial instruments at December 31,
        2006
        and 2005, follow (dollars in thousands):
  **December
                  31, 2006****Carrying**
                **Amount**
              
              **Fair**
                **Value****Financial
                  Assets**Cash
                  and due from banks
              
              $
              6,566
              
              $
              6,566Federal
                  funds sold
              
              
              11,133
              
              
              11,133Investment
                  securities
              
              
              39,837
              
              
              39,943Restricted
                  stock
              
              
              735
              
              
              735Loans,
                  net
              
              
              176,109
              
              
              175,796Total
                  assets valued
              
              $
              234,380
              
              $
              234,173**Financial
                  Liabilities**Deposits
              
              $
              192,704
              
              $
              185,975Other
                  borrowings
              
              
              32,314
              
              
              32,052Total
                  liabilities valued
              
              $
              225,018
              
              $
              218,027
   **December
                  31, 2005****Carrying**
                **Amount**
              
              **Fair**
                **Value****Financial
                  Assets**Cash
                  and due from banks
              
              $
              9,153
              
              $
              9,153Federal
                  funds sold
              
              
              5,834
              
              
              5,834Investment
                  securities
              
              
              38,290
              
              
              38,423Restricted
                  stock
              
              
              676
              
              
              676Loans,
                  net
              
              
              151,251
              
              
              149,789Total
                  assets valued
              
              $
              205,204
              
              $
              203,875**Financial
                  Liabilities**Deposits
              
              $
              168,480
              
              $
              160,683Other
                  borrowings
              
              
              29,138
              
              
              28,961Total
                  liabilities valued
              
              $
              197,618
              
              $
              189,644
  -58-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS** (Continued)
 
 While
        these estimates of fair value are based on management’s judgment of the most
        appropriate factors, there is no assurance that, were Atlantic to have disposed
        of such items at December 31, 2006, the estimated fair values would necessarily
        have been achieved at that date, since market values may differ depending
        on
        various circumstances. The estimated fair values at December 31, 2006, should
        not necessarily be considered to apply at subsequent dates.
  **NOTE
        15 - REGULATORY CAPITAL MATTERS**
 
 The
        Federal Reserve Board and other bank regulatory agencies have adopted risk-based
        capital guidelines for all banks and for bank holding companies whose
        consolidated assets are over $500 million. The main objectives of the risk-based
        capital framework are to provide a more consistent system for comparing capital
        positions of banking organizations and to take into account the different
        risks
        among banking organizations' assets, liabilities, and off-balance sheet items.
        Bank regulatory agencies have supplemented the risk-based capital standard
        with
        a leverage ratio for Tier 1 capital to total reported assets.
 
 Failure
        to meet the capital adequacy guidelines and the framework for prompt corrective
        actions could initiate actions by the regulatory agencies, which could have
        a
        material effect on the consolidated financial statements.
 
 As
        of
        December 31, 2006, the most recent notification from the FDIC, Oceanside
        was
        categorized as well-capitalized under the regulatory framework for prompt
        corrective action. To remain categorized as well-capitalized, it will have
        to
        maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
        ratios
        as disclosed in the table below. There are no conditions or events, since
        the
        most recent notification, that management believes have changed the prompt
        corrective action category.
  **Actual**
              
              **For
                  Capital**
                **Adequacy
                  Purposes**
              
              **To
                  Be Well-**
                **Capitalized**
                **Under
                  Prompt**
                **Corrective
                  Action**
                **Provisions****Amount**
              
              **Ratio**
              
              **>********Amount**
              
              **>********Ratio**
              
              **>
                  Amount**
              
              **>********Ratio**(dollars
                  in thousands)As
                  of December 31, 2006:Total
                  capital to risk-weighted assets
              
              $
              22,160
              
              
              10.95
              %
              $
              16,197
              
              
              8.00
              %
              $
              20,246
              
              
              10.00
              %Tier
                  1 capital to risk-weighted assets
              
              $
              20,561
              
              
              10.16
              %
              $
              8,099
              
              
              4.00
              %
              $
              12,148
              
              
              6.00
              %Tier
                  1 capital to average assets
              
              $
              20,561
              
              
              8.75
              %
              $
              9,398
              
              
              4.00
              %
              $
              11,748
              
              
              5.00
              %As
                  of December 31, 2005:Total
                  capital to risk-weighted assets
              
              $
              20,004
              
              
              11.52
              %
              $
              13,895
              
              
              8.00
              %
              $
              17,369
              
              
              10.00
              %Tier
                  1 capital to risk-weighted assets
              
              $
              18,452
              
              
              10.62
              %
              $
              6,948
              
              
              4.00
              %
              $
              10,421
              
              
              6.00
              %Tier
                  1 capital to average assets
              
              $
              18,452
              
              
              8.93
              %
              $
              8,265
              
              
              4.00
              %
              $
              10,331
              
              
              5.00
              %
  -59-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        16 - PARENT COMPANY FINANCIAL INFORMATION**
 
 Presented
        below are condensed financial statements for Atlantic BancGroup, Inc. (parent
        only):
 
 **Condensed
                  Balance Sheets as of December 31:**
              
              **2006**
              
              **2005**(Dollars
                  In Thousands)**Assets**Cash
                  and cash equivalents
              
              $
              9
              
              $
              186Investment
                  in and advances to subsidiary bank
              
              
              20,278
              
              
              18,069Other
                  assets
              
              
              170
              
              
              127Total
              
              $
              20,457
              
              $
              18,382**Liabilities
                  and Stockholders' Equity**Liabilities
              
              $
              3,206
              
              $
              3,150Stockholders'
                  equity
              
              
              17,251
              
              
              15,232Total
              
              $
              20,457
              
              $
              18,382
 
 **Condensed
                  Statements of Income and Stockholders' Equity****Years
                  Ended December 31:**
              
              **2006**
              
              **2005**(Dollars
                  In Thousands)Equity
                  in net income of subsidiary bank
              
              $
              2,109
              
              $
              1,590Other
                  income
              
              
              6
              
              
              1Interest
                  expense
              
              
              (184
              )
              
              (52
              )Other
                  expenses (net of income tax benefit)
              
              
              (13
              )
              
              (61
              )**Net
                  income**
              
              
              1,918
              
              
              1,478**Stockholders'
                  Equity:**Beginning
                  of year
              
              
              15,232
              
              
              14,033Net
                  change in unrealized holding gains (losses) on securities in subsidiary
                  bank
              
              
              101
              
              
              (279
              )End
                  of year
              
              $
              17,251
              
              $
              15,232
 
 **Condensed
                  Statements of Cash Flows****Years
                  Ended December 31:**
              
              **2006**
              
              **2005**(Dollars
                  In Thousands)**Operating
                  Activities**Net
                  income
              
              $
              1,918
              
              $
              1,478Adjustment
                  to reconcile net income to net cash provided by operating
                  activities:Equity
                  in undistributed earnings of subsidiary bank
              
              
              (2,109
              )
              
              (1,590
              )Other
              
              
              14
              
              
              101**Net
                  Cash Used In Operating Activities**
              
              
              (177
              )
              
              (11
              )**Investing
                  Activities**Capital
                  contributions to subsidiary bank
              
              
              -
              
              
              (2,840
              )**Net
                  Cash Used In Investing Activities**
              
              
              -
              
              
              (2,840
              )**Financing
                  Activities**Issuance
                  of Trust Preferred Securities
              
              
              -
              
              
              3,000**Net
                  Cash Provided In Financing Activities**
              
              
              -
              
              
              3,000**Increase
                  (Decrease) in Cash and Cash Equivalents**
              
              
              (177
              )
              
              149**Cash
                  and Cash Equivalents:**Beginning
                  of year
              
              
              186
              
              
              37End
                  of year
              
              $
              9
              
              $
              186
 
 -60-
 ***Table
              of
              Contents***
 
 **ITEM
                  8.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.**
  By
        letter
        dated September 29, 2006, Atlantic announced the resignation of Stevens,
        Powell
& Company, P.A. as the independent registered public accounting firm for
        Atlantic BancGroup, Inc. and Subsidiary. Stevens, Powell & Company, P.A.,
        has not issued any adverse opinion or disclaimer of opinion or qualification
        as
        to uncertainty, audit scope or accounting principles of the Company, or any
        opinion or statement as to uncertainty regarding the ability of the Company
        to
        continue as a going concern. There were no disagreements with Stevens, Powell
        & Company, P.A., on any matters of accounting principles or practices,
        financial statement disclosure, or auditing scope or procedure, which caused
        Stevens, Powell & Company, P.A., to tender their resignation. The Company’s
        board of directors approved this resignation. Effective September 29, 2006,
        Atlantic announced the appointment of Mauldin & Jenkins, Certified Public
        Accountants, LLC, as its independent registered public accounting
        firm.
  **ITEM
                  8A.**
              **CONTROLS
                  AND PROCEDURES.**
 
 *Background
        of Internal Controls and Internal Audits.* Oceanside is the sole financial subsidiary of Atlantic. Oceanside has in
        place
        extensive policies and operating procedures for loans, operations, accounting,
        and compliance. All audits, whether internal or external are reported directly
        to the joint Audit Committee of Oceanside and Atlantic, and the minutes of
        the
        Audit Committee meetings are subsequently reported to the Boards of Directors
        of
        Oceanside and Atlantic.
 
 The
        joint
        Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
        by the internal auditor for planning purposes. This audit calendar is submitted
        to the Boards of Oceanside and Atlantic for approval. Annually, Atlantic
        engages
        an external Certified Public Accounting firm to perform an independent audit
        conducted in accordance with generally accepted auditing standards.
 
 Periodically,
        Oceanside and Atlantic undergo regulatory examinations that include tests
        of the
        policies and operating procedures for loans, operations, accounting and
        compliance. The results of these examinations are presented by the regulators
        to
        the Boards of Oceanside and Atlantic.
 
 *Evaluation
        of Disclosure Controls and Procedures.* Atlantic'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 their
        evaluation, they 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.
 
 **ITEM
                  8B.**
              **OTHER
                  INFORMATION.**
 
 There
        is
        no information required to be disclosed in a report on Form 8-K during the
        fourth quarter of 2006 that was not reported.
 
 
 **PART
        III**
 
 **ITEM
                  9.**
              **DIRECTORS,EXECUTIVE
                  OFFICERS, PROMOTERS, CONTROL PERSONS,
                  AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE
                  EXCHANGE
                  ACT.**
 
 The
        information contained under the section captioned “Election of Directors”
beginning on page 5 of Atlantic’s definitive Proxy Statement for the Annual
        Meeting of Shareholders to be held on April 26, 2007, is incorporated herein
        by
        reference.
 
 -61-
 ***Table
              of
              Contents***
 
 **COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE
        ACT**
 
 The
        information contained under the section captioned “Section 16(a) Beneficial
        Ownership Compliance” at page 12 of
        Atlantic’s definitive Proxy Statement is incorporated herein by
        reference.
 
 **CODEOF
        ETHICS**
 
 In
        2003,
        Atlantic adopted a Code of Ethics policy that applies to its principal executive
        and financial officers (Incorporated by reference to Exhibit 14 to Atlantic’s
        Form 10-KSB for year ended December 31, 2003).
 
 **FINANCIAL
        EXPERT**
 
 Atlantic
        has at least one audit committee financial expert. The information contained
        in
        the section captioned “Report of the Audit Committee” at page 4 in Atlantic’s
        definitive Proxy Statement is incorporated herein by reference.
 
 **AUDITCOMMITTEE
        CHARTER**
 
 The
        Company has adopted an Audit Committee Charter which was amended in March
        2001.
  **ITEM
                  10.**
              **EXECUTIVE
                  COMPENSATION.**
 
 The
        information contained in the sections captioned “Summary Compensation Table”
under “Executive Compensation” at page 8, “2007 Director Compensation Table” at
        page 9, “Benefits,” at page 9 and “Employment Contracts” at page 10 in the
        definitive Proxy Statement, is incorporated herein by reference.
  **ITEM
                  11.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER
                  MATTERS.**
 
 The
        information contained in the section captioned “Beneficial Stock Ownership of
        Directors and Executive Officers” at page 8 under “Election of Directors” in the
        definitive Proxy Statement, is incorporated herein by reference.
  **ITEM
                12.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS,
                  AND DIRECTOR
                  INDEPENDENCE.**
 
 The
        information contained in the section captioned “Certain Relationships and
        Related Transactions” at page 10 in the definitive Proxy Statement is
        incorporated herein by reference.
  **ITEM
                  13.**
              **EXHIBITS.**
 
 The
        following exhibits are filed with or incorporated by reference into this
        report
        (see legend below).
 
 **Legend**
 
 (a)
              Incorporated
                  by reference on Atlantic’s Form 10-KSB for year ended December 31,
                  1999
 (b)
              Incorporated
                  by reference on Atlantic’s Form 10-KSB for year ended December 31,
                  2000
 (c)
              Incorporated
                  by reference on Atlantic’s Form 10-KSB for year ended December 31,
                  2002
 (d)
              Incorporated
                  by reference on Atlantic’s Form 10-KSB for year ended December 31,
                  2003
 (e)
              Incorporated
                  by reference on Atlantic’s Form 10-QSB for quarter ended September 30,
                  2006
 
 -62-
 ***Table
              of
              Contents***
  **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)11
              
              The
                  computation of per share earnings is shown in the consolidated
                  financial
                  statements of Atlantic BancGroup, Inc. and Subsidiary for December
                  31,
                  2006 and 2005, contained in Item 7, on Page 45 of the Notes to
                  Consolidated Financial Statements14
              
              Code
                  of Ethics for Senior Officers Policy. (d)16
              
              Letter
                  on Change of Certifying Accountant (incorporated by reference on
                  Form 8-K
                  - see “Reports on Form 8-K” below).21.1
              
              Subsidiary
                  of the Registrant31.1
              
              Certifications
                  of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a)
                  under
                  the Exchange Act31.2
              
              Certifications
                  of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a)
                  under
                  the Exchange Act32.1
              
              Certifications
                  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                  200232.2
              
              Certifications
                  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                  2002
 
 
 **Reports
        on Form 8-K.** A
        current
        report on Form 8-K was filed by Atlantic on October 2, 2006, for an event
        dated
        September 29, 2006, announcing the resignation of Stevens, Powell & Company,
        P.A., as Atlantic’s independent registered public accounting firm and the
        appointment of Mauldin & Jenkins, LLC, as Atlantic’s independent registered
        public accounting firm, effective September 29, 2006.
 
 A
        Form
        8-K was filed by Atlantic on November 2, 2006, which reported a press release
        announcing the financial results for the quarter ended September 30,
        2006.
  **ITEM
                  14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES.**
 
 The
        information contained in the section captioned “Ratification of the Appointment
        of the Independent Auditor for the Fiscal Year Ending December 31, 2007,” at
        page 10 in the definitive Proxy Statement is incorporated herein by
        reference.
 
 -63-
 ***Table
              of
              Contents***
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has caused this report to be duly signed on its behalf
        by
        the undersigned, thereunto duly authorized, in the City of Jacksonville Beach,
        State of Florida, on the fifteenth day of March, 2007.
 
 ATLANTIC
                  BANCGROUP, INC./s/
                  Barry W. ChandlerBarry
                  W. ChandlerPresident
                  and Chief Executive Officer
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the fifteenth day of March, 2007:
 
 **Signature**
              
              **Title**/s/ Donald
                  F. Glisson, Jr.
              
              Chairman
                  of the BoardDonald
                  F. Glisson, Jr./s/ Barry
                  W. Chandler
              
              President
                  and Chief Executive OfficerBarry
                  W. Chandler/s/ David
                  L. Young
              
              Executive
                  Vice President, Chief Financial Officer,David
                  L. Young
              
              and
                  Corporate Secretary/s/ Frank
                  J. Cervone
              
              DirectorFrank
                  J. Cervone/s/ Jimmy
                  Dubberly
              
              DirectorJimmy
                  Dubberly/s/ Robin
                  H. Scheiderman
              
              DirectorRobin
                  H. Scheiderman/s/ G.
                  Keith Watson
              
              DirectorG.
                  Keith Watson/s/ Conrad
                  L. Williams
              
              DirectorConrad
                  L. Williams/s/ Dennis
                  M. Wolfson
              
              DirectorDennis
                  M. Wolfson
  -64-
 ***Table
              of
              Contents***
 
 **ATLANTIC
        BANCGROUP, INC. AND SUBSIDIARY**
 
 **Form
        10-KSB**
 **For
        Fiscal Year Ended December 31, 2006**
 
 **EXHIBIT
        INDEX**
 
 **Exhibit****No.**
              
              **Exhibit**21.1
              
              Subsidiary
                  of the Registrant31.1
              
              Certifications
                  of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a)
                  under
                  the Exchange Act31.2
              
              Certifications
                  of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a)
                  under
                  the Exchange Act32.1
              
              Certifications
                  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                  200232.2
              
              Certifications
                  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of Sarbanes-Oxley Act of
                  2002






-65-