UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549










FORM
10-Q





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





For the
Quarterly Period Ended September 30, 2008





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





For the
transition period from  to .





Commission
File Number 001-15061








ATLANTIC BANCGROUP,
INC.


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





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





1315 S.
Third Street


Jacksonville Beach,
Florida  32250


(Address
of Principal Executive Offices)










(904)
247-9494


(Issuer’s
telephone number)




---







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





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





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





(Do not
check if a smaller reporting company)





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


YES
[   ]    NO [X]





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





Common Stock, par
      value $0.01 per share
            1,247,516(Class)
            Outstanding
      at November 3, 2008















ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY





FORM
10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 2008





INDEX





PAGENUMBERPART I - FINANCIAL INFORMATIONItem 1 - Financial StatementsCondensed Consolidated Statements of Financial
      Condition  as of September 30, 2008 (Unaudited) and December 31,
      2007
            3Condensed Consolidated Statements of Operations and
      Comprehensive Income for the Three and Nine Months Ended September 30,
      2008 and 2007 (Unaudited)
            4Condensed Consolidated Statements of Cash Flows for the Three
      and Nine Months Ended September 30, 2008 and 2007
      (Unaudited)
            5Condensed Consolidated Statements of Stockholders' Equity
      (Unaudited)
            6Notes to Consolidated Financial Statements
      (Unaudited)
            7Item 2 - Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            16Item 4T - Controls and Procedures
            27PART II - OTHER INFORMATION
            28Item 1 - Legal Proceedings
            28Item 6 - Exhibits
            28SIGNATURES
            29





Index






ATLANTIC BANCGROUP, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL
    CONDITION(Dollars in Thousands, Except Per Share Data)September
      30, 2008
              
              
              December
      31,(Unaudited)
              
              
              2007ASSETSCash
      and due from banks
              
              $
              4,994
              
              
              $
              4,656Federal
      funds sold
              
              
              100
              
              
              
              -Total
      cash and cash equivalents
              
              
              5,094
              
              
              
              4,656Investment
      securities, available-for-sale
              
              
              18,948
              
              
              
              25,538Investment
      securities, held-to-maturity (market value of $14,406 in 2008
      and$15,522
      in 2007)
              
              
              15,537
              
              
              
              15,762Restricted
      stock, at cost
              
              
              1,090
              
              
              
              746Loans,
      net
              
              
              205,372
              
              
              
              201,891Bank
      premises and equipment
              
              
              3,604
              
              
              
              3,784Other
      real estate owned
              
              
              4,313
              
              
              
              -Accrued
      interest receivable
              
              
              1,163
              
              
              
              1,538Deferred
      income taxes
              
              
              1,625
              
              
              
              996Investment
      in unconsolidated subsidiary
              
              
              93
              
              
              
              93Cash
      surrender value of bank-owned life insurance
              
              
              4,833
              
              
              
              4,680Other
      assets
              
              
              1,369
              
              
              
              1,722TOTAL
              
              $
              263,041
              
              
              $
              261,406LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
              
              $
              26,395
              
              
              $
              27,278Interest-bearing
              
              
              182,077
              
              
              
              190,213Total
      deposits
              
              
              208,472
              
              
              
              217,491Short-term
      borrowings
              
              
              22,158
              
              
              
              18,188Long-term
      borrowings
              
              
              12,393
              
              
              
              5,393Accrued
      interest payable
              
              
              274
              
              
              
              384Other
      liabilities
              
              
              1,884
              
              
              
              1,094Total
      liabilities
              
              
              245,181
              
              
              
              242,550Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders'
      equity:Common
      stock
              
              
              12
              
              
              
              12Additional
      paid-in capital
              
              
              11,788
              
              
              
              11,788Retained
      earnings
              
              
              6,066
              
              
              
              7,140Accumulated
      other comprehensive loss:Net
      unrealized holding losses on securities,
available-for-sale
              
              
              (6
              )
              
              
              (84
              )Total
      stockholders' equity
              
              
              17,860
              
              
              
              18,856TOTAL
              
              $
              263,041
              
              
              $
              261,406Book
      value per common share
              
              $
              14.32
              
              
              $
              15.11Common
      shares outstanding
              
              
              1,247,516
              
              
              
              1,247,516




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






-3-
 Index


ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED) (Dollars
in Thousands, Except Per Share
Data)


For
      the Three Months Ended
              
              
              For
      the Nine Months EndedSeptember
      30,
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      and fees on loans
              
              $
              3,345
              
              
              $
              3,881
              
              
              $
              10,303
              
              
              $
              11,390Investment
      income on investment securities andinterest-bearing
      deposits in banks
              
              
              232
              
              
              
              320
              
              
              
              777
              
              
              
              984Tax-exempt
      interest income on investment securities
              
              
              167
              
              
              
              171
              
              
              
              506
              
              
              
              427Interest
      on federal funds sold
              
              
              8
              
              
              
              22
              
              
              
              28
              
              
              
              216Total
      interest income
              
              
              3,752
              
              
              
              4,394
              
              
              
              11,614
              
              
              
              13,017Interest
      on deposits
              
              
              1,854
              
              
              
              2,100
              
              
              
              5,980
              
              
              
              6,210Short-term
      borrowings
              
              
              79
              
              
              
              235
              
              
              
              258
              
              
              
              639Long-term
      borrowings
              
              
              89
              
              
              
              73
              
              
              
              234
              
              
              
              217Total
      interest expense
              
              
              2,022
              
              
              
              2,408
              
              
              
              6,472
              
              
              
              7,066Net
      interest income before provision for loan losses
              
              
              1,730
              
              
              
              1,986
              
              
              
              5,142
              
              
              
              5,951Provision
      for loan losses
              
              
              1,735
              
              
              
              410
              
              
              
              2,620
              
              
              
              472Net
      interest income after provision for loan losses
              
              
              (5
              )
              
              
              1,576
              
              
              
              2,522
              
              
              
              5,479Noninterest
      income:Fees
      and service charges on deposit accounts
              
              
              183
              
              
              
              150
              
              
              
              505
              
              
              
              469Other
      fee income for banking services
              
              
              36
              
              
              
              50
              
              
              
              110
              
              
              
              153Mortgage
      banking fees
              
              
              2
              
              
              
              12
              
              
              
              13
              
              
              
              52Investment
      in bank-owned life insurance
              
              
              56
              
              
              
              44
              
              
              
              165
              
              
              
              99Dividends
      from restricted stock
              
              
              9
              
              
              
              8
              
              
              
              26
              
              
              
              25Dividends
      on trust preferred securities
              
              
              1
              
              
              
              1
              
              
              
              4
              
              
              
              4Other
      income
              
              
              9
              
              
              
              8
              
              
              
              30
              
              
              
              36Total
      noninterest income
              
              
              296
              
              
              
              273
              
              
              
              853
              
              
              
              838Noninterest
      expenses:Salaries
      and employee benefits
              
              
              786
              
              
              
              800
              
              
              
              2,364
              
              
              
              2,342Expenses
      of bank premises and fixed assets
              
              
              280
              
              
              
              286
              
              
              
              822
              
              
              
              851Other
      operating expenses
              
              
              745
              
              
              
              574
              
              
              
              2,204
              
              
              
              1,612Total
      noninterest expenses
              
              
              1,811
              
              
              
              1,660
              
              
              
              5,390
              
              
              
              4,805Income
      (loss) before provision for income taxes
              
              
              (1,520
              )
              
              
              189
              
              
              
              (2,015
              )
              
              
              1,512Provision
      (benefit) for income taxes
              
              
              (681
              )
              
              
              (12
              )
              
              
              (1,021
              )
              
              
              380Net
      income (loss)
              
              
              (839
              )
              
              
              201
              
              
              
              (994
              )
              
              
              1,132Other
      comprehensive income, net of income taxes:Unrealized
      holding gains arising during period
              
              
              85
              
              
              
              241
              
              
              
              78
              
              
              
              35Comprehensive
      income (loss)
              
              $
              (754
              )
              
              $
              442
              
              
              $
              (916
              )
              
              $
              1,167Earnings
      (loss) per common shareBasic
              
              $
              (0.68
              )
              
              $
              0.16
              
              
              $
              (0.80
              )
              
              $
              0.91Diluted
              
              $
              (0.68
              )
              
              $
              0.16
              
              
              $
              (0.80
              )
              
              $
              0.91




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




ATLANTIC
      BANCGROUP, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
      (UNAUDITED)(Dollars
      in Thousands)
  For
      the Three Months Ended
              
              
              For
      the Nine Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (839
              )
              
              $
              201
              
              
              $
              (994
              )
              
              $
              1,132Provision
      for loan losses
              
              
              1,735
              
              
              
              410
              
              
              
              2,620
              
              
              
              472Depreciation
      and amortization
              
              
              79
              
              
              
              79
              
              
              
              236
              
              
              
              238Net
      premium amortization and discount accretion
              
              
              (4
              )
              
              
              (7
              )
              
              
              (19
              )
              
              
              (21
              )Net
      change in other assets and liabilities
              
              
              (511
              )
              
              
              (86
              )
              
              
              (5.353
              )
              
              
              (608
              )Net
      cash provided (used) by operating activities
              
              
              460
              
              
              
              597
              
              
              
              (3,510
              )
              
              
              1,213Cash
      flows from investing activities:Net
      (increase) decrease in:Investment
      securities
              
              
              1,282
              
              
              
              1,093
              
              
              
              6,709
              
              
              
              (2,544
              )Loans
              
              
              (5,549
              )
              
              
              (12,837
              )
              
              
              (6,101
              )
              
              
              (17,919
              )Proceeds
      from sales of other real estate owned
              
              
              55
              
              
              
              -
              
              
              
              1,445
              
              
              
              -Investment
      in bank-owned life insurance
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,000
              )Purchases
      of bank premises and equipment, net
              
              
              (4
              )
              
              
              (14
              )
              
              
              (56
              )
              
              
              (118
              )Net
      cash provided (used) by investing activities
              
              
              (4,216
              )
              
              
              (11,758
              )
              
              
              1,997
              
              
              
              (22,581
              )Cash
      flows from financing activities:Net
      increase (decrease) in deposits
              
              
              (10,690
              )
              
              
              (5,677
              )
              
              
              (9,019
              )
              
              
              9,171Net
      increase in other borrowings
              
              
              9,978
              
              
              
              7,131
              
              
              
              10,970
              
              
              
              3,979Net
      cash provided (used) by financing activities
              
              
              (712
              )
              
              
              1,454
              
              
              
              1,951
              
              
              
              13,150Net
      increase (decrease) in cash and cash equivalents
              
              
              (4,468
              )
              
              
              (9,707
              )
              
              
              438
              
              
              
              (8,218
              )Cash
      and cash equivalents at beginning of period
              
              
              9,562
              
              
              
              19,188
              
              
              
              4,656
              
              
              
              17,699Cash
      and cash equivalents at end of period
              
              $
              5,094
              
              
              $
              9,481
              
              
              $
              5,094
              
              
              $
              9,481




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




ATLANTIC
      BANCGROUP, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
      (UNAUDITED)(Dollars
      In Thousands)
  NetUnrealizedHolding
      Gains(Losses)
      onAdditional
              
              
              
              
              
              Securities
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Retained
              
              
              Available-
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              for-Sale
              
              
              EquityBalance,
      December 31, 2007,as
      previously reported
              
              
              1,247,516
              
              
              $
              12
              
              
              $
              11,788
              
              
              $
              7,140
              
              
              $
              (84
              )
              
              $
              18,856Cumulative
      effect adjustment -Implementation
      of EITF 06-10(See Notes 1 and
      9)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (81
              )
              
              
              -
              
              
              
              (81
              )Balance,
      January 1, 2008
              
              
              1,247,516
              
              
              
              12
              
              
              
              11,788
              
              
              
              7,059
              
              
              
              (84
              )
              
              
              18,775Comprehensive
      income:Net
      income for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              47
              
              
              
              -Net
      change in unrealizedholding
      gains on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              351Total
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              398Balance,
      March 31, 2008
              
              
              1,247,516
              
              
              
              12
              
              
              
              11,788
              
              
              
              7,106
              
              
              
              267
              
              
              
              19,173Comprehensive
      loss:Net
      loss for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (202
              )
              
              
              -Net
      change in unrealizedholding
      losses on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (358
              )Total
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (560
              )Balance,
      June 30, 2008
              
              
              1,247,516
              
              
              
              12
              
              
              
              11,788
              
              
              
              6,904
              
              
              
              (91
              )
              
              
              18,613Comprehensive
      loss:Net
      loss for the quarter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (839
              )
              
              
              -Net
      change in unrealizedholding
      gains on securitiesavailable-for-sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              85Total
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (754
              )Rounding
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              -
              
              
              
              1Balance,
      September 30, 2008
              
              
              1,247,516
              
              
              $
              12
              
              
              $
              11,788
              
              
              $
              6,066
              
              
              $
              (6
              )
              
              $
              17,860




The accompanying notes are
an integral part of these condensed consolidated financial
statements.
  -6-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER 30, 2008
 
 
 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
 
 Atlantic
BancGroup, Inc. (the “Holding Company”) is a bank holding company registered
with the Federal Reserve and owns 100% of the outstanding stock of Oceanside
Bank (“Oceanside”).  Oceanside is a state-chartered commercial bank,
which opened July 21, 1997.  Oceanside’s deposits are insured by the
Federal Deposit Insurance Corporation.  Oceanside owns 100% of the
outstanding stock of S. Pt. Properties, Inc. (the “Subsidiary”), which was
formed in February 2008 to hold title to real estate owned acquired by the
Subsidiary through foreclosure.  The Holding Company’s primary
business activity is the operation of Oceanside, and it operates in only one
reportable industry segment, banking.  Collectively, the entities are
referred to as “Atlantic.”  References to Atlantic, Oceanside, and the
Subsidiary throughout these condensed consolidated financial statements are made
using the first-person notations of “we,” “our,” and “us.”
 
 The
accompanying condensed consolidated financial statements include the accounts of
the Holding Company, its wholly-owned subsidiary, Oceanside, and the
Subsidiary.  All significant intercompany accounts and transactions
have been eliminated in consolidation. The accounting and reporting policies of
Atlantic conform with accounting principles generally accepted in the United
States of America and to general practices within the banking
industry.
 
 Our
condensed consolidated financial statements for the three and nine months ended
September 30, 2008 and 2007, have not been audited and do not include
information or footnotes necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of
America.  In management’s opinion, the accompanying condensed
consolidated financial statements contain all adjustments, which are of a normal
recurring nature, necessary for a fair presentation.  Our results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for an entire year.  The accounting policies
followed by us are set forth in the consolidated financial statements for the
year ended December 31, 2007, and are incorporated herein by
reference.
 
 Oceanside
provides a wide range of banking services to individual and corporate customers
primarily in Duval County and St. Johns County, Florida.  We are
subject to regulations of certain federal and state regulatory agencies and,
accordingly, we are examined by those agencies.  As a consequence of
the extensive regulation of commercial banking activities, our business is
particularly susceptible to being affected by federal and state legislation and
regulations.
 
 Use
of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and valuation of foreclosed assets.
 
 The
determination of the adequacy of the allowance for loan losses and the valuation
of foreclosed assets is based on estimates that may be affected by significant
changes in the economic environment and market conditions.  In
connection with the determination of the estimated losses on loans and the
valuation of foreclosed assets, management obtains independent appraisals for
significant collateral.
 
 Our loans
are generally secured by specific items of collateral including real property,
consumer assets, and business assets.  Although we have a diversified
loan portfolio, a substantial portion of our debtors’ ability to honor their
contracts is dependent on local, state, and national economic conditions that
may affect the value of the underlying collateral or the income of the
debtor.
 
 While
management uses available information to recognize losses on loans and
foreclosed assets, further reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in economic
conditions.  In addition, regulatory agencies, as an integral part of
their examination process, periodically review the estimated losses on loans and
carrying value of foreclosed assets.  Such agencies may require us to
recognize additional losses based on their judgments about information available
to them at the time of their examination.
 
  -7-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
  
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES(Continued)
 
 Fair
Value of Financial Instruments - Financial instruments consist of cash,
due from banks, federal funds sold, investment securities, loans receivable,
accrued interest receivable, deposits, other borrowings, accrued interest
payable, and off-balance sheet commitments such as commitments to extend credit
and standby letters of credit.  On an interim basis, we consider the
cost of providing estimated fair values by each class of financial instrument to
exceed the benefits derived.
 
 Reclassifications
- Certain amounts in the prior periods have been reclassified to conform to the
presentation for the current period.
 
 Recent
Accounting Pronouncements - In 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”).  SFAS 159 allows an entity the irrevocable option
to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract
basis.  Subsequent changes in fair value of these financial assets and
liabilities would be recognized in earnings whey they occur. SFAS 159 became
effective beginning January 1, 2008.  Atlantic elected not to measure
any eligible items using the fair value option in accordance with SFAS 159 and
therefore, SFAS 159 did not have an impact on Atlantic’s financial position,
results of operations, or cash flows.
 
 In March
2007, the EITF reached a final consensus on Issue 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements (“EITF 06-10”).  EITF
06-10 stipulates that a liability should be recognized for a postretirement
benefit obligation associated with a collateral assignment arrangement if, on
the basis of the substantive agreement with the employee, the employer has
agreed to maintain a life insurance policy during the postretirement period or
provide a death benefit.  The employer also must recognize and measure
the associated asset on the basis of the terms of the collateral assignment
arrangement.  The consensus is effective for fiscal years beginning
after December 15, 2007.  Entities will have the option of applying
the provisions of EITF 06-10 as a cumulative effect adjustment to the opening
balance of retained earnings or retrospectively to all prior
periods.  EITF 06-10 did not have a material impact on Atlantic’s
financial position, results of operations, or liquidity.  As of
January 1, 2008, Atlantic recorded $81,000 (net of income taxes) as an
adjustment to beginning retained earnings as permitted by EITF 06-10, which
decreased stockholders’ equity from December 31, 2007, by less than
0.5%.  Any additional adjustments, if any, related to implementation
of EITF 06-10 are expected to be immaterial (see Note 9).
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (“SFAS
141(R)”) which replaces SFAS 141.  SFAS 141(R) establishes principles
and requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  FAS 141(R) is effective for acquisitions by Atlantic
taking place on or after January 1, 2009.  Early adoption is
prohibited.  Accordingly, a calendar year-end company is required to
record and disclose business combinations following existing accounting guidance
until January 1, 2009. Atlantic will assess the impact of SFAS 141(R) if and
when a future acquisition occurs.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS
160”).  SFAS 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  Before this statement, limited guidance existed for
reporting noncontrolling interests (minority interest).  As a result,
diversity in practice exists.  In some cases, minority interest is
reported as a liability and in others it is reported in the mezzanine section
between liabilities and equity.  Specifically, SFAS 160 requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s
equity.  The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement.  SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial
interest.  In addition, this statement requires that a parent
recognize gain or loss in net income when a subsidiary is
deconsolidated.  Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date.
  -8-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES(Continued)
 
 SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interests.  SFAS 160 is effective for
Atlantic on January 1, 2009.  Earlier adoption is
prohibited.  Atlantic is currently evaluating the impact, if any, the
adoption of SFAS 160 will have on its financial position, results of operations,
and cash flows.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (“SFAS 161”).  SFAS 161 requires enhanced disclosures about
derivatives and hedging activities.  It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.  Atlantic is currently assessing the extent, if any, of any
additional required disclosures.
 
 In
February 2008, the FASB issued FASB Staff Position No. 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions (“FSP
140-3”).  This FSP provides guidance on accounting for a transfer of a
financial asset and the transferor’s repurchase financing of the
asset.  This FSP presumes that an initial transfer of a financial
asset and a repurchase financing are considered part of the same arrangement
(linked transaction) under SFAS No. 140.  However, if certain criteria
are met, the initial transfer and repurchase financing are not evaluated as a
linked transaction and are evaluated separately under Statement
140.  FSP 140-3 will be effective for financial statements issued for
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years and earlier application is not permitted.  Accordingly,
this FSP is effective for Atlantic on January 1, 2009.  Atlantic is
currently evaluating the impact, if any, the adoption of FSP 140-3 will have on
its financial position, results of operations, and cash flows.
 
 In April
2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”).  This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets.  The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R), Business Combinations, and
other U.S. generally accepted accounting principles.  This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years and early
adoption is prohibited.  Accordingly, this FSP is effective for
Atlantic on January 1, 2009.  Atlantic does not believe the adoption
of FSP 142-3 will have a material impact on its financial position, results of
operations, or cash flows.
 
 In May,
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles, (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy).  SFAS No. 162 will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board’s amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.  The FASB has stated that it does not expect SFAS
No. 162 will result in a change in current practice.  The application
of SFAS No. 162 will have no effect on Atlantic’s financial position, results of
operations, or cash flows.
 
 The SEC’s
Office of the Chief Accountant and the staff of the FASB issued press release
2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on
fair value accounting.  The press release includes guidance on the use
of management’s internal assumptions and the use of “market”
quotes.  It also reiterates the factors in SEC Staff Accounting
Bulletin (“SAB”) Topic 5M which should be considered when determining
other-than-temporary impairment: the length of time and extent to which the
market value has been less than cost; financial condition, and near-term
prospects of the issuer; and the intent and ability of the holder to retain its
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
 
  -9-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES(Continued)
 
 On
October 10, 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP SFAS
157-3”).  This FSP clarifies the application of SFAS No. 157, Fair Value Measurements (see
Note 6) in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that asset is not active.  The FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued.  For Atlantic, this FSP is effective for the quarter ended
September 30, 2008.
 
 Atlantic
considered the guidance in the Press Release and in FSP SFAS 157-3 when
conducting its review for other-than-temporary impairment as of September 30,
2008, and determined that it did not result in a change to its impairment
estimation techniques.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on
Atlantic’s financial position, results of operations, or cash
flows.
 
 
 NOTE
2 - COMPUTATION OF PER SHARE EARNINGS (LOSS)
 
 Basic
earnings (loss) per share (“EPS”) amounts are computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding for the three
and nine months ended September 30, 2008 and 2007.  Diluted EPS are
computed by dividing net earnings (loss) by the weighted average number of
shares and all dilutive potential shares outstanding during the
period.  We have no dilutive potential shares outstanding for 2008 or
2007.  The following information was used in the computation of EPS on
both a basic and diluted basis for the three and nine months ended September 30,
2008 and 2007 (dollars and number of shares in thousands):
 
 Three
      Months Ended September 30,2008
                
                
                2007Basic
      and diluted EPS computation:Numerator
      - Net income (loss)
                
                $
                (839
                )
                
                $
                201Denominator
      - Weighted average shares outstanding (rounded)
                
                
                1,248
                
                
                
                1,248Basic
      and diluted earnings (loss) per share
                
                $
                (0.68
                )
                
                $
                0.16Nine
      Months Ended September 30,2008
                
                
                2007Basic
      and diluted EPS computation:Numerator
      - Net income (loss)
                
                $
                (994
                )
                
                $
                1,132Denominator
      - Weighted average shares outstanding (rounded)
                
                
                1,248
                
                
                
                1,248Basic
      and diluted earnings (loss) per share
                
                $
                (0.80
                )
                
                $
                0.91
 
  -10-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE
3 - INVESTMENT SECURITIES
 
 The
amortized cost and estimated fair value of instruments in debt and equity
securities are as follows (dollars in thousands):
 
 September 30, 2008
                
                
                December 31, 2007Gross
                
                
                Gross
                
                
                
                
                
                
                
                
                Gross
                
                
                GrossAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                Fair
                
                
                Amortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                Value
                
                
                Cost
                
                
                Gains
                
                
                Losses
                
                
                ValueAvailable-for-saleU.S.
      Government-sponsoredagency
      securities
                
                $
                2,984
                
                
                $
                9
                
                
                $
                (3
                )
                
                $
                2,990
                
                
                $
                2,983
                
                
                $
                36
                
                
                $
                -
                
                
                $
                3,019Mortgage-backed
      securities
                
                
                15,974
                
                
                
                57
                
                
                
                (73
                )
                
                
                15,958
                
                
                
                22,691
                
                
                
                46
                
                
                
                (218
                )
                
                
                22,51918,958
                
                
                
                66
                
                
                
                (76
                )
                
                
                18,948
                
                
                
                25,674
                
                
                
                82
                
                
                
                (218
                )
                
                
                25,538Held-to-maturityState,
      county andmunicipal
      bonds
                
                
                15,537
                
                
                
                100
                
                
                
                (1,231
                )
                
                
                14,406
                
                
                
                15,762
                
                
                
                131
                
                
                
                (371
                )
                
                
                15,522Total
      investment securities
                
                $
                34,495
                
                
                $
                166
                
                
                $
                (1,307
                )
                
                $
                33,354
                
                
                $
                41,436
                
                
                $
                213
                
                
                $
                (589
                )
                
                $
                41,060
 
 Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of Atlantic to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
 
 The unrealized gains on
investment securities were caused principally 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. Temporarynet decreases in fair value of securities
available-for-sale at September 30, 2008, of $10,000 (less deferred income taxes
of $4,000) are regarded as an adjustment to stockholders' equity totaling
$6,000.  The estimated fair value of securities is determined on the
basis of market quotations.
 
 At
September 30, 2008, securities with an amortized cost of $865,000 and fair value
of $887,000 were pledged to secure deposits of public funds from the State of
Florida and treasury tax and loan deposits with the Federal
Reserve.
 
 At
September 30, 2008, securities were sold under an agreement to repurchase with a
fair value in excess of $15.9 million, which effectively collateralizes
overnight customer repurchase agreements totaling $15.9 million.  At
September 30, 2008, securities with a fair value of $3.7 million were pledged
for overnight borrowings at the Federal Reserve discount window. At
September 30, 2008, no amounts were outstanding under this daily credit
facility.
 
 There
were no securities of a single issuer, which are non-governmental or
non-government sponsored, that exceeded 10% of stockholders’ equity at September
30, 2008.
  -11-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE
4 - LOANS
 
 Loans
consisted of (dollars in thousands):
 September
      30,
                
                
                December
      31,2008
                
                
                2007Real
      estate loans:Construction,
      land development, and other land (1)
                
                $
                44,419
                
                
                $
                53,1971-4
      family residential
                
                
                55,375
                
                
                
                45,708Multifamily
      residential
                
                
                1,244
                
                
                
                1,784Commercial
      (2)
                
                
                90,798
                
                
                
                86,785191,836
                
                
                
                187,474Commercial
      loans
                
                
                13,156
                
                
                
                11,485Consumer
      and other loans
                
                
                3,861
                
                
                
                5,138Total
      loan portfolio
                
                
                208,853
                
                
                
                204,097Less,
      deferred fees
                
                
                (28
                )
                
                
                (37
                )Less,
      allowance for loan losses
                
                
                (3,453
                )
                
                
                (2,169
                )Loans,
      net
                
                $
                205,372
                
                
                $
                201,891
 
 (1)
                includes $17,399 in 1-4 family
      residential construction loans at September 30,
    2008.
 (2)
                includes $63,311 in loans secured
      by owner-occupied nonfarm nonresidential properties at September 30,
      2008.
 
 
 A summary
of the activity in Other Real Estate Owned (foreclosed assets) for 2008
follows (dollars in thousands):
 
 For
      the Three
                
                
                For
      the NineMonths
      Ended
                
                
                Months
      EndedSeptember 30, 2008
                
                
                September 30, 2008Balance,
      beginning of period
                
                $
                4,149
                
                
                $
                -Loans
      transferred to Other Real Estate Owned(net
      of charge-offs, participations, and capitalized expenses)
                
                
                219
                
                
                
                5,758Sale
      of foreclosed assets
                
                
                (55
                )
                
                
                (1,445
                )Ending
      balance
                
                $
                4,313
                
                
                $
                4,313Costs
      charged to operating expenses forforeclosed
      assets, net
                
                $
                102
                
                
                $
                239Gain
      on disposal of foreclosed assets, net
                
                
                (36
                )
                
                
                (4
                )Total
      direct costs of foreclosed assets
                
                $
                66
                
                
                $
                235
 
  -12-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE
5 - ALLOWANCE FOR LOAN LOSSES
 
 Our Board
of Directors monitors the loan portfolio quarterly in order to enable it to
evaluate the adequacy of the allowance for loan losses.  We maintain
the allowance for loan losses at a level that we believe to be sufficient to
absorb probable losses inherent in the loan portfolio.  Activity in
the allowance for loan losses follows (dollars in thousands):
 
 For
      the Nine
                
                
                For
      the TwelveMonths
      Ended
                
                
                Months
      EndedSeptember 30, 2008
                
                
                December 31, 2007Balance,
      beginning of period
                
                $
                2,169
                
                
                $
                1,599Provisions
      charged to operating expenses
                
                
                2,620
                
                
                
                629Loans,
      charged-off
                
                
                (1,356
                )
                
                
                (75
                )Recoveries
                
                
                20
                
                
                
                16Balance,
      end of period
                
                $
                3,453
                
                
                $
                2,169
 
 
 We had
five loans totaling $5,284,000 at September 30, 2008, categorized as nonaccrual,
and eight loans totaling $6,222,000 categorized as nonaccrual at December 31,
2007. We had one loan totaling $1,451,000 past due 90 days or more and still
accruing interest at September 30, 2008, compared with one loan totaling
$164,000 at December 31, 2007. Loans over 90 days past due that are well secured
and in process of collection remain on accrual status in accordance with
regulatory guidelines.
 
 
 NOTE
6 - OTHER BORROWINGS
 
 A summary
of other borrowings follows (dollars in thousands):
 
 September
      30,
                
                
                December
      31,2008
                
                
                2007Customer
      repurchase agreements
                
                $
                15,883
                
                
                $
                13,816Federal
      funds purchased
                
                
                6,275
                
                
                
                4,372Total
      short-term borrowings
                
                $
                22,158
                
                
                $
                18,188FHLB
      of Atlanta advances
                
                $
                9,300
                
                
                $
                2,300Junior
      subordinated debentures
                
                
                3,093
                
                
                
                3,093Total
      long-term borrowings
                
                $
                12,393
                
                
                $
                5,393
 
 
 During
the third quarter of 2008, we borrowed an additional $7.0 million from the FHLB
of Atlanta.  At September 30, 2008, the interest rate was 3.25% and
the advance matures in July 2009.
 
 
 NOTE
7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 
 We are a
party to credit-related financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our
customers.  These financial instruments include commitments to extend
credit, standby letters of credit, and commercial letters of
credit.  Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
statements of financial condition.  Our exposure to credit loss is
represented by the contractual amount of these commitments.  We follow
the same credit policies in making commitments as we do for on-balance sheet
instruments.  Financial instruments at September 30, 2008, consisted
of commitments to extend credit approximating $19.9 million and standby letters
of credit of $1.9 million.
  -13-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE 7 - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK(Continued)
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The commitments for equity lines of credit
may expire without being drawn upon.  Therefore, the total commitment
amounts do not necessarily represent future cash requirements.  The
amount of collateral obtained, if it is deemed necessary by us, is based on our
credit evaluation of the customer.
 
 
 NOTE
8 - REGULATORY CAPITAL
 
 Oceanside
is required to maintain certain minimum regulatory capital
requirements.  The following is a summary at September 30, 2008, of
the regulatory capital requirements and actual capital on a percentage basis for
Oceanside:
 RegulatoryActual
                
                
                RequirementTotal
      capital ratio to risk-weighted assets
                
                
                10.28
                %
                
                
                8.00
                %Tier
      1 capital ratio to risk-weighted assets
                
                
                9.03
                %
                
                
                4.00
                %Tier
      1 capital to average assets
                
                
                7.95
                %
                
                
                4.00
                %
 
 Effective
March 30, 2006, the Federal Reserve raised the threshold for reporting
risk-based capital ratios for a Small Bank Holding Company from $150 million to
$500 million.  Accordingly, we do not calculate or report risk-based
capital ratios for the Holding Company.
 
 
 NOTE
9 - RETAINED EARNINGS
 
 Effective
January 1, 2008, Atlantic recognized a postretirement benefit obligation
associated with a collateral assignment arrangement.  Atlantic has
substantive agreements with certain participants of its indexed retirement plan
to maintain bank-owned life insurance policies during the postretirement period
to provide a death benefit.  Under EITF 06-10, Atlantic also must
recognize and measure the associated asset on the basis of the terms of the
collateral assignment arrangement.
 
 Accordingly,
Atlantic increased its liability under the indexed retirement plan by $130,000
as of January 1, 2008.  Atlantic also recorded $81,000 (net of
deferred income taxes of $49,000) as an adjustment to beginning retained
earnings.  Under EITF 06-10, Atlantic elected to apply the provisions
of this consensus as a cumulative effect adjustment to the opening balance
of retained earnings as of January 1, 2008.
 
  -14-
 Index
  ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER
30, 2008
 
 
 NOTE
10 - FAIR VALUE MEASUREMENTS
 
 On
January 1, 2008, Atlantic adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements(“SFAS 157”).  SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.  SFAS 157 applies to reported balances that
are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
 
 SFAS 157
emphasizes that fair value is market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Level 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
 
 Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access.  Level 2
inputs are inputs other than quoted prices included in Level 1 that are
observable for the
asset or liability, either directly or indirectly.  Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and yield curves that
are observable at commonly quoted intervals.  Level 3 inputs are
unobservable inputs for the assets or liabilities, which are typically based on
an entity’s own assumptions, as there is little, if any, related market
activity.  In instances where more than one level of input exists for
assets or liabilities, the lowest level of input that is significant to the fair
value measurement in its entirety will be used in
determining the fair value hierarchy.  Atlantic’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.
 
 The table
below presents the Atlantic’s assets and liabilities measured at fair value on a
recurring basis as of September 30, 2008, aggregated by the level in the fair
value hierarchy within which those measurements fall.
 
 Quoted
      Prices
                
                
                Significantin
      Active
                
                
                Other
                
                
                SignificantMarkets
      for
                
                
                Observable
                
                
                UnobservableIdentical
      Assets
                
                
                Inputs
                
                
                Inputs(Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)
                
                
                TotalAssets(dollars in
      thousands):Investment
      securities, available-for-sale
                
                $
                -
                
                
                $
                18,948
                
                
                $
                -
                
                
                $
                18,948Total
      assets at fair value
                
                $
                -
                
                
                $
                18,948
                
                
                $
                -
                
                
                $
                18,948
 
   -15-
 Index
  ITEM
      2.
                MANAGEMENT'S
      DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
 
 Overview
 
 Commercial Banking
Operations.Atlantic, through its wholly-owned subsidiary,
Oceanside, conducts commercial banking business consisting of attracting
deposits and applying those funds to the origination of commercial, consumer,
and real estate loans (including commercial loans collateralized by real estate)
and purchases of investments.  Our profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (principally loans, investments, and federal funds
sold), less the interest expense incurred on interest-bearing liabilities
(customer deposits and borrowed funds).  Net interest income is
affected by the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate earned and paid on these
balances.  Net interest income is dependent upon Oceanside’s
interest-rate spread, which is the difference between the average yield earned
on its interest-earning assets and the average rate paid on its interest-bearing
liabilities.  When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.  The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for loan losses, and the effective income tax rate.
Noninterest income consists primarily of service fees on deposit accounts and
mortgage banking fees. Noninterest expense consists of compensation and employee
benefits, occupancy and equipment expenses, deposit insurance premiums paid to
the FDIC, and other operating expenses.
 
 Our
corporate offices are located at 1315 South Third Street, Jacksonville Beach,
Florida.  This location is also our main banking office for Oceanside,
which opened July 21, 1997, as a state-chartered banking
organization.  We also operate branch offices located at 560 Atlantic
Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, and 1790 Kernan
Boulevard South, Jacksonville, Florida.
 
 Forward-looking
Statements
 
 When used
in this Form 10-Q, the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project,” or similar expressions
are intended to identify “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995.  Such statements are
subject to certain risks and uncertainties including changes in economic
conditions in our market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in our market area and
competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. We caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as to the date made.  We advise readers that the
factors listed above, as well as others, could affect our financial performance
and could cause our actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods in any
current statements. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements, or to reflect the occurrence of anticipated or
unanticipated events.
 
 Future
Accounting Requirements
 
 There are
currently no pronouncements issued or that are scheduled for implementation
during 2008 that are expected to have any significant impact on our accounting
policies.
 
 Impact
of Inflation
 
 The
consolidated financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurements of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.  Unlike most industrial
companies, substantially all of our assets and liabilities are monetary in
nature.  As a result, interest rates have a more significant impact on
our performance than the effects of general levels of
inflation.  Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest
rates.  As discussed previously, we seek to manage the relationships
between interest-sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from
inflation.
 
  -16-
 Index
  Critical
Accounting Policies
 
 Our
accounting and reporting policies are in accordance with U.S. generally accepted
accounting principles (“GAAP”), and they conform to general practices within the
banking industry.  We use a significant amount of judgment and
estimates based on assumptions for which the actual results are uncertain when
we make the estimations.  We have identified our policy covering the
allowance for loan losses as being particularly sensitive in terms of judgments
and the extent to which significant estimates are used.  For more
information on this critical accounting policy, please refer to our 2007 Annual
Report on Form 10-KSB.
 
 Results
of Operations
 
 Our net
loss for the three and nine months ended September 30, 2008, was $839,000 and
$994,000, respectively, as compared with net income of $201,000 and $1,132,000,
respectively, as reported in the same periods of 2007.  Average
earning assets increased 5.0% for the first nine months of 2008 over the same
period of 2007.  For the three months ended September 30, 2008, the
rate of growth in average interest earning assets was 4.5% over the same period
of 2007.  An overview of the more significant matters affecting our
results of operations follows:
 
 ·
                Average
      loans grew at a pace of $19.0 million, or 10.4%, for the nine months ended
      September 30, 2008, over the same period of 2007.  With the
      growth in average certificates of deposit of $21.7 million, or 17.3%, we
      were able to fund the increased loan
demand.
 ·
                Net
      interest income (before provision for loan losses) decreased $809,000, or
      13.6%, for the nine months ended September 30, 2008, over the same period
      in 2007.  This decrease is due primarily to lower yields on
      loans, which have not been fully offset by the decline in yields on
      deposits, and the increase in nonaccrual loans for which interest is not
      recorded.
 ·
                Our
      results for 2008 included additional reserves set aside to offset loan
      charge-offs and real estate foreclosures during 2008.  The
      provision for loan losses for the first nine months of 2008 totaled
      $2,620,000, rising 455.1% over 2007
levels.
 ·
                Total
      noninterest expenses increased $585,000, or 12.2%, for the nine months
      ended September 30, 2008, over the same period in 2007.  The
      cost to manage the loan portfolio and carry foreclosed assets increased
      with direct expenses and losses for foreclosed assets charged to
      operations of $235,000 for the nine months ended September 30,
      2008.  Other related costs such as collection, legal, and audit
      expenses also rose at a faster
pace.
 ·
                Pension
      expense reported in noninterest expenses increased $111,000 for the first
      nine months of 2008 as compared with 2007, which was partially offset
      by an increase in noninterest income of $66,000 from bank-owned life
      insurance used to fund the pension
obligations.
 
 Financial
Condition
 
 The
following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the three and nine months ended September 30,
2008):
  Three
      Months
                
                
                Nine
      Months
                
                
                Year
      EndedEnded
                
                
                Ended
                
                
                December
      31,September 30, 2008
                
                
                September 30, 2008
                
                
                2007Return
      on average assets
                
                
                -1.28
                %
                
                
                -0.51
                %
                
                
                0.57
                %Return
      on average equity
                
                
                -18.04
                %
                
                
                -7.05
                %
                
                
                7.77
                %Interest-rate
      spread
                
                
                2.54
                %
                
                
                2.50
                %
                
                
                2.78
                %Net
      interest margin
                
                
                3.00
                %
                
                
                3.01
                %
                
                
                3.49
                %Noninterest
      expenses to average assets
                
                
                2.77
                %
                
                
                2.78
                %
                
                
                2.59
                %
 
 Liquidity
and Capital Resources
 
 Liquidity
Management.  Liquidity management involves monitoring the
sources and uses of funds in order to meet our day-to-day cash flow requirements
while maximizing profits.  Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant loss
and to raise additional funds by increasing liabilities.  Liquidity
management is made more complicated because different statements of financial
condition components are subject to varying degrees of management
control.  For example, the timing of maturities of the investment
portfolio is very predictable and subject to a high degree of control at the
time investment decisions are made.  However, net deposit inflows and
outflows are far less predictable and are not subject to the same degree of
control. Asset liquidity is provided by cash and assets that are readily
marketable, which can be pledged, or which will mature in the near
future.  Liability liquidity is provided by access to core funding
sources, principally the ability to generate customer deposits in our market
area.  In addition, liability liquidity is provided through the
ability to borrow against approved lines of credit (federal funds purchased)
from correspondent banks and to borrow on a secured basis through securities
sold under agreements to repurchase.
  -17-
 Index
  
 We expect
to meet our liquidity needs with:
 
 ·
                Available
      cash, including both interest and noninterest-bearing balances, and
      federal funds sold, which totaled $5.1 million at September 30,
      2008;
 ·
                The
      repayment of loans, which include loans with a remaining maturity of one
      year or less (excluding those in nonaccrual status) totaling $41.4
      million;
 ·
                Proceeds
      of unpledged securities available-for-sale and principal repayments from
      mortgage-backed securities;
 ·
                Growth
      in deposits; and,
 ·
                If
      necessary, borrowing against approved lines of credit and other
      alternative funding strategies.
 
 Short-Term
Investments.  Short-term investments, which consist of federal
funds sold and interest-bearing deposits, were $100,000 at September 30, 2008,
as compared to $-0- at December 31, 2007.  These funds are a primary
source of our liquidity and are generally invested in an earning capacity on an
overnight basis.  We regularly review our liquidity position and have
implemented internal policies that establish guidelines for sources of
asset-based liquidity and limit the total amount of purchased funds used to
support the statement of financial condition and funding from non-core
sources.  To further enhance our liquidity, we have developed
alternative funding strategies that have been approved by our Board of
Directors.
 
 Deposits and Other Sources of
Funds.  In addition to deposits, the sources of funds available
for lending and other business purposes include loan repayments, loan sales,
securities sold under agreements to repurchase, and advances under approved
borrowings from the Federal Home Loan Bank of Atlanta.  Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are influenced significantly by general interest rates and money market
conditions.  Borrowings may be used on a short-term basis to
compensate for reductions in other sources, such as deposits at less than
projected levels.
 
 Core
Deposits.  Core deposits, which exclude certificates of deposit
of $100,000 or more, provide a relatively stable funding source for our loan
portfolio and other earning assets.  We had core deposits totaling
$159.3 million at September 30, 2008, and $159.7 million at December 31, 2007, a
decrease of 0.3%.  We anticipate that a stable base of deposits will
be our primary source of funding to meet both short-term and long-term liquidity
needs in the future.
 
 Customers
with large certificates of deposit tend to be extremely sensitive to interest
rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits.  Some financial
institutions acquire funds in part through large certificates of deposit
obtained through brokers.  These brokered deposits are sometimes more
costly and are less desirable as long-term funding sources; however,
currently the rates on our brokered deposits are more favorable than the local
retail deposit market.  Brokered certificates of deposit issued by us
totaled $26.2 million at September 30, 2008, and $17.9 million at December 31,
2007, an increase of 46.5%.
 
 We use
our resources principally to fund existing and continuing loan commitments and
to purchase investment securities.  At September 30, 2008, we had
commitments to originate loans totaling $19.9 million, and had issued, but
unused, standby letters of credit of $1.9 million for the same
period.  In addition, scheduled maturities of certificates of deposit
during the twelve months following September 30, 2008, total $104.7
million.  We believe that adequate resources exist to fund all our
anticipated commitments, and, if so desired, that we can adjust the rates and
terms on certificates of deposit and other deposit accounts to retain deposits
in a changing interest rate environment.
 
 Capital.  We are
subject to various regulatory capital requirements administered by the federal
and state banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective actions, we must meet
specific capital guidelines that involve quantitative measures of our assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices.  The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.  FDIC’s Prompt Corrective Action
regulations are not applicable to bank holding companies.
 
 Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the following table) of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets (as defined in the regulations).  Management believes, as of
September 30, 2008, that we met all minimum capital adequacy requirements to
which we are subject.
  -18-
 Index
  As of the
most recent reporting period for the quarter ended September 30, 2008,
Oceanside’s ratios exceeded the minimum levels for the well-capitalized
category.  An institution must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following
tables.  At September 30, 2008, Oceanside’s actual capital amounts and
percentages are presented in the following table (dollars in
thousands):
 
 Actual
                
                
                Minimum(1)
                
                
                Well-Capitalized(2)Amount
                
                
                %
                
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %Total
      capital to risk-weighted assets
                
                $
                23,533
                
                
                
                10.28
                %
                
                $
                18,305
                
                
                
                8.00
                %
                
                $
                22,882
                
                
                
                10.00
                %Tier
      1 capital to risk-weighted assets
                
                $
                20,665
                
                
                
                9.03
                %
                
                $
                9,153
                
                
                
                4.00
                %
                
                $
                13,729
                
                
                
                6.00
                %Tier
      1 capital to average assets
                
                $
                20,665
                
                
                
                7.95
                %
                
                $
                10,392
                
                
                
                4.00
                %
                
                $
                12,990
                
                
                
                5.00
                %
 (1)      The
minimum required for adequately capitalized purposes.
 (2)      To
be "well-capitalized" under the FDIC's Prompt Corrective Action regulations for
banks.
 
 There are
no conditions or events since September 30, 2008, that management believes have
changed Oceanside’s category.
 
 Asset
Quality
 
 We have
developed policies and procedures for evaluating the overall quality of our
credit portfolio and the timely identification of potential problem
loans.  Our judgment as to the adequacy of the allowance is based upon
a number of assumptions about future events that we believe to be reasonable,
but which may or may not be valid.  Thus, there can be no assurance
that charge-offs in future periods will not exceed the allowance for loan losses
or that additional increases in the loan loss allowance will not be
required.
 
 Asset
Classification.Commercial banks are required to review and,
when appropriate, classify their assets on a regular basis.  The State
of Florida and the FDIC have the authority to identify problem assets and, if
appropriate, require them to be classified or require a different
classification than management has assessed.  There are three
classifications for problem (or classified) assets: substandard, doubtful, and
loss.  Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected.  Doubtful
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions, and values questionable, and
there is a high possibility of loss.  An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted.  If an asset or portion thereof
is classified as loss, the insured institution establishes a specific reserve
for the full amount of the portion of the asset classified as
loss.  All or a portion of general loss allowances established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.  Assets that do not warrant classification in the
aforementioned categories, but possess weaknesses, are classified by us as
special mention and monitored.  We also monitor other loans based on a
variety of factors and internally designate these loans as watch list
loans.
 
 Management
monitors our loan portfolio throughout the month for classification
changes.  Each quarter, we perform a detailed internal review to
determine an appropriate level of reserves to set aside for probable losses in
our loan portfolio.  We supplement our internal reviews with
semiannual external loan reviews performed by an independent public accounting
firm.  The regulatory agencies also have the authority to require
additional levels of reserves if they deem necessary despite management’s best
efforts to establish an appropriate level of reserves consistent with generally
accepted accounting principles.  Sometimes our collective assessments
from internal and loan reviews may differ from the regulatory
assessment.
 
 At
September 30, 2008, we had 64 loans totaling approximately $31.9 million
classified as substandard and five loans totaling approximately $4.5 million
classified as doubtful.  We had no loans classified as loss at
September 30, 2008. At September 30, 2008, management had provided specific
reserves totaling $2.0 million for loans risk-rated substandard or
lower.
 
 The sharp
increase in loans classified substandard or lower from December 31, 2007, levels
of $8.0 million reflect the general economic downturn in real estate activities
in our trade area.  Five loan relationships account for approximately
$18.8 million, or 51.6%, of all internally classified loans.  Of the
five loans, one is secured by residential condominiums, one is secured by a
primary residence and approximately 17.8 surrounding acres, and the remaining
three loans are secured principally by commercial real estate or land for real
estate development and
  -19-
 Index
  vehicles.  These
five loan relationships have specific reserves of approximately $1.4 million,
based on management’s estimate of the underlying collateral value (net of
liquidation costs).
 
 Allowance for Loan
Losses.  The allowance for loan losses is established through a
provision for loan losses charged against income.  Loans are charged
against the allowance when we believe that the collectibility of principal is
unlikely.  The provision is an estimated amount that we believe will
be adequate to absorb probable losses inherent in the loan portfolio based on
evaluations of its collectibility.  The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, specific problem loans and commitments, and current
anticipated economic conditions that may affect the borrower's ability to
pay.  While we use the best information available to recognize losses
on loans, future additions to the provision may be necessary based on changes in
economic conditions.
 
 A summary
of balances in the allowance for loan losses and key ratios follows (dollars in
thousands):
 
 For
      the Nine
                  Months
      Ended
                
                
                For
      the Twelve
                  Months
      EndedSeptember 30, 2008
                
                
                December 31, 2007End
      of period loans (net of deferred fees)
                
                $
                208,825
                
                
                $
                204,060End
      of period allowance for loan losses
                
                $
                3,453
                
                
                $
                2,169%
      of allowance for loan losses to total loans
                
                
                1.65
                %
                
                
                1.06
                %Average
      loans for the period
                
                $
                202,258
                
                
                $
                187,544Net
      charge-offs as a percentage of average loansfor
      the period (annualized for 2008)
                
                
                0.88
                %
                
                
                0.03
                %Nonperforming
      assets:Nonaccrual
      loans
                
                $
                5,284
                
                
                $
                6,222Loans
      past due 90 days or more and still accruing (*)
                
                
                1,451
                
                
                
                164Foreclosed
      real estate
                
                
                4,313
                
                
                
                -Other
      repossessed assets
                
                
                77
                
                
                
                -$
                11,125
                
                
                $
                6,386Nonperforming
      loans to period end loans
                
                
                3.23
                %
                
                
                3.13
                %Nonperforming
      assets to period end total assets
                
                
                4.23
                %
                
                
                2.44
                %
 
 Interest
Rate Risk
 
 Our asset
base is exposed to risk including the risk resulting from changes in interest
rates and changes in the timing of cash flows.  We monitor the effect
of such risks by considering the mismatch of the maturities of our assets and
liabilities in the current interest rate environment and the sensitivity of
assets and liabilities to changes in interest rates.  We have
considered the effect of significant increases and decreases in interest rates
and believe such changes, if they occurred, would be manageable, and would not
affect our ability to hold our assets as planned.  However, we would
be exposed to significant market risk in the event of significant and prolonged
interest rate changes.
 
 Quantitative
and Qualitative Disclosures about Market Risk
 
 Market
risk is the risk of loss from adverse changes in market prices and
rates.  Our market risk arises primarily from interest rate risk
inherent in our lending and deposit-taking activities.  We have little
or no risk related to trading accounts, commodities or foreign
exchange.
 
 We do not
engage in trading or hedging activities and do not invest in interest-rate
derivatives or enter into interest- rate swaps.  We actively monitor
and manage interest-rate risk exposure.  The primary objective in
managing interest-rate risk is to limit, within established guidelines, the
adverse impact of changes in interest rates on our net interest income and
capital, while adjusting our asset-liability structure to obtain the maximum
yield-cost spread on that structure.  We rely primarily on the
asset-liability structure to control interest-rate risk.  However, a
sudden and substantial change in interest rates could adversely impact our
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same
basis.  There have been no significant changes in our market risk
exposure since December 31, 2007.
 
 
  -20-
 Index
  Average
Balances, Income and Expenses, and Rates
 
 The
following table depicts, for the periods indicated, certain information related
to our average statements of financial condition and our average yields on
assets and average costs of liabilities.  Such yields are derived by
dividing income or expense by the average balance of the corresponding assets or
liabilities.  Average balances have generally been derived from daily
averages (dollars in thousands):
 
 For
      the Three Months Ended September 30,2008
                
                
                2007Interest
                
                
                Average
                
                
                
                
                
                Interest
                
                
                AverageAverage
                
                
                and
                
                
                Yield/
                
                
                Average
                
                
                and
                
                
                Yield/Balance
                
                
                Dividends
                
                
                Rate
                
                
                Balance
                
                
                Dividends
                
                
                RateInterest-earning
      assets:Loans
                
                $
                206,206
                
                
                $
                3,345
                
                
                
                6.45
                %
                
                $
                187,393
                
                
                $
                3,881
                
                
                
                8.22
                %Investment
      securities andinterest-bearing
      deposits (1)
                
                
                35,169
                
                
                
                399
                
                
                
                5.66
                %
                
                
                43,230
                
                
                
                491
                
                
                
                5.45
                %Other
      interest-earning assets
                
                
                1,161
                
                
                
                8
                
                
                
                2.74
                %
                
                
                1,465
                
                
                
                22
                
                
                
                5.96
                %Total
      interest-earning assets (1)
                
                
                242,536
                
                
                
                3,752
                
                
                
                6.32
                %
                
                
                232,088
                
                
                
                4,394
                
                
                
                7.69
                %Noninterest-earning
      assets
                
                
                17,265
                
                
                
                
                
                
                
                
                
                
                
                14,910Total
      assets
                
                $
                259,801
                
                
                
                
                
                
                
                
                
                
                $
                246,998Interest-bearing
      liabilities:Demand,
      money marketand
      NOW deposits
                
                $
                39,124
                
                
                
                233
                
                
                
                2.37
                %
                
                $
                41,220
                
                
                
                408
                
                
                
                3.93
                %Savings
                
                
                2,959
                
                
                
                7
                
                
                
                0.94
                %
                
                
                3,429
                
                
                
                13
                
                
                
                1.50
                %Certificates
      of deposit
                
                
                143,961
                
                
                
                1,614
                
                
                
                4.46
                %
                
                
                128,365
                
                
                
                1,679
                
                
                
                5.19
                %Other
      borrowings
                
                
                26,620
                
                
                
                168
                
                
                
                2.51
                %
                
                
                24,860
                
                
                
                308
                
                
                
                4.92
                %Total
      interest-bearing liabilities
                
                
                212,664
                
                
                
                2,022
                
                
                
                3.78
                %
                
                
                197,874
                
                
                
                2,408
                
                
                
                4.83
                %Noninterest-bearing
      liabilities
                
                
                28,631
                
                
                
                
                
                
                
                
                
                
                
                30,800Stockholders’
      equity
                
                
                18,506
                
                
                
                
                
                
                
                
                
                
                
                18,324Total
      liabilities andstockholders’
      equity
                
                $
                259,801
                
                
                
                
                
                
                
                
                
                
                $
                246,998Net
      interest income beforeprovision
      for loan losses
                
                
                
                
                
                $
                1,730
                
                
                
                
                
                
                
                
                
                
                $
                1,986Interest-rate
      spread
                
                
                
                
                
                
                
                
                
                
                2.54
                %
                
                
                
                
                
                
                
                
                
                
                2.86
                %Net
      interest margin (1)
                
                
                
                
                
                
                
                
                
                
                3.00
                %
                
                
                
                
                
                
                
                
                
                
                3.57
                %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
                
                
                114.05
                %
                
                
                
                
                
                
                
                
                
                
                117.29
                %
 
 (1)Tax-exempt income has been adjusted to a tax-equivalent basis using
      an incremental rate of 37.6% for purposes of computing the average
      yield/rate.
  -21-
 Index
  
 For
      the Nine Months Ended September 30,2008
                
                
                2007Interest
                
                
                Average
                
                
                
                
                
                Interest
                
                
                AverageAverage
                
                
                and
                
                
                Yield/
                
                
                Average
                
                
                and
                
                
                Yield/Balance
                
                
                Dividends
                
                
                Rate
                
                
                Balance
                
                
                Dividends
                
                
                RateInterest-earning
      assets:Loans
                
                $
                202,258
                
                
                $
                10,303
                
                
                
                6.80
                %
                
                $
                183,276
                
                
                $
                11,390
                
                
                
                8.31
                %Investment
      securities andinterest-bearing
      deposits (1)
                
                
                38,031
                
                
                
                1,283
                
                
                
                5.58
                %
                
                
                41,564
                
                
                
                1,411
                
                
                
                5.37
                %Other
      interest-earning assets
                
                
                1,414
                
                
                
                28
                
                
                
                2.65
                %
                
                
                5,277
                
                
                
                216
                
                
                
                5.47
                %Total
      interest-earning assets (1)
                
                
                241,703
                
                
                
                11,614
                
                
                
                6.59
                %
                
                
                230,117
                
                
                
                13,017
                
                
                
                7.71
                %Noninterest-earning
      assets
                
                
                17,063
                
                
                
                
                
                
                
                
                
                
                
                14,336Total
      assets
                
                $
                258,766
                
                
                
                
                
                
                
                
                
                
                $
                244,453Interest-bearing
      liabilities:Demand,
      money marketand
      NOW deposits
                
                $
                40,026
                
                
                
                769
                
                
                
                2.57
                %
                
                $
                43,336
                
                
                
                1,297
                
                
                
                4.00
                %Savings
                
                
                3,013
                
                
                
                25
                
                
                
                1.11
                %
                
                
                4,046
                
                
                
                45
                
                
                
                1.49
                %Certificates
      of deposit
                
                
                146,818
                
                
                
                5,186
                
                
                
                4.72
                %
                
                
                125,149
                
                
                
                4,868
                
                
                
                5.20
                %Other
      borrowings
                
                
                21,683
                
                
                
                492
                
                
                
                3.03
                %
                
                
                22,756
                
                
                
                856
                
                
                
                5.03
                %Total
      interest-bearing liabilities
                
                
                211,540
                
                
                
                6,472
                
                
                
                4.09
                %
                
                
                195,287
                
                
                
                7,066
                
                
                
                4.84
                %Noninterest-bearing
      liabilities
                
                
                28,380
                
                
                
                
                
                
                
                
                
                
                
                31,276Stockholders’
      equity
                
                
                18,846
                
                
                
                
                
                
                
                
                
                
                
                17,890Total
      liabilities andstockholders’
      equity
                
                $
                258,766
                
                
                
                
                
                
                
                
                
                
                $
                244,453Net
      interest income beforeprovision
      for loan losses
                
                
                
                
                
                $
                5,142
                
                
                
                
                
                
                
                
                
                
                $
                5,951Interest-rate
      spread
                
                
                
                
                
                
                
                
                
                
                2.50
                %
                
                
                
                
                
                
                
                
                
                
                2.87
                %Net
      interest margin (1)
                
                
                
                
                
                
                
                
                
                
                3.01
                %
                
                
                
                
                
                
                
                
                
                
                3.61
                %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
                
                
                114.26
                %
                
                
                
                
                
                
                
                
                
                
                117.84
                %
 
 
 (1)Tax-exempt income has been adjusted to a tax-equivalent basis using
      an incremental rate of 37.6% for purposes of computing the average
      yield/rate.
 
 
  -22-
 Index
  Analysis
of Changes in Net Interest Income
 
 The
following table sets forth, on a taxable equivalent basis, the effect which
varying levels of interest-earning assets and interest-bearing liabilities and
the applicable interest rates had on changes in net interest income for the
three and nine months periods ended September 30, 2008, compared to the same
period in 2007.  For purposes of this table, changes which are not
solely attributable to volume or rate are allocated to volume and rate on a pro
rata basis (dollars in thousands):
  Three
      Months Ended September 30, 20082008
      vs. 2007Increase (Decrease) Due toRate/Rate
                
                
                Volume
                
                
                Volume
                
                
                TotalInterest-earning
      assets:Loans
                
                $
                (834
                )
                
                $
                389
                
                
                $
                (91
                )
                
                $
                (536
                )Investment
      securities and interest-bearing deposits
                
                
                23
                
                
                
                (110
                )
                
                
                (5
                )
                
                
                (92
                )Other
      interest-earning assets
                
                
                (12
                )
                
                
                (5
                )
                
                
                3
                
                
                
                (14
                )Total
      interest-earning assets
                
                
                (823
                )
                
                
                274
                
                
                
                (93
                )
                
                
                (642
                )Interest-bearing
      liabilities:Demand,
      money market and NOW deposits
                
                
                (162
                )
                
                
                (21
                )
                
                
                8
                
                
                
                (175
                )Savings
                
                
                (5
                )
                
                
                (2
                )
                
                
                1
                
                
                
                (6
                )Certificates
      of deposit
                
                
                (236
                )
                
                
                203
                
                
                
                (32
                )
                
                
                (65
                )Other
      borrowings
                
                
                (151
                )
                
                
                22
                
                
                
                (11
                )
                
                
                (140
                )Total
      interest-bearing liabilities
                
                
                (554
                )
                
                
                202
                
                
                
                (34
                )
                
                
                (386
                )Net
      interest income
                
                $
                (269
                )
                
                $
                72
                
                
                $
                (59
                )
                
                $
                (256
                )
  Nine
      Months Ended September 30, 20082008
      vs. 2007Increase (Decrease) Due toRate/Rate
                
                
                Volume
                
                
                Volume
                
                
                TotalInterest-earning
      assets:Loans
                
                $
                (2,072
                )
                
                $
                1,181
                
                
                $
                (196
                )
                
                $
                (1,087
                )Investment
      securities and interest-bearing deposits
                
                
                65
                
                
                
                (142
                )
                
                
                (51
                )
                
                
                (128
                )Other
      interest-earning assets
                
                
                (111
                )
                
                
                (158
                )
                
                
                81
                
                
                
                (188
                )Total
      interest-earning assets
                
                
                (2,118
                )
                
                
                881
                
                
                
                (166
                )
                
                
                (1,403
                )Interest-bearing
      liabilities:Demand,
      money market and NOW deposits
                
                
                (464
                )
                
                
                (99
                )
                
                
                35
                
                
                
                (528
                )Savings
                
                
                (12
                )
                
                
                (12
                )
                
                
                4
                
                
                
                (20
                )Certificates
      of deposit
                
                
                (450
                )
                
                
                844
                
                
                
                (76
                )
                
                
                318Other
      borrowings
                
                
                (341
                )
                
                
                (40
                )
                
                
                17
                
                
                
                (364
                )Total
      interest-bearing liabilities
                
                
                (1,267
                )
                
                
                693
                
                
                
                (20
                )
                
                
                (594
                )Net
      interest income
                
                $
                (851
                )
                
                $
                188
                
                
                $
                (146
                )
                
                $
                (809
                )
 
 Comparison
of Three Months Ended September 30, 2008 and 2007
 
 Interest
Income and Expense
 
 Interest
Income.  Interest income was $3,752,000 and $4,394,000 for the
three months ended September 30, 2008 and 2007, respectively.  A
decrease in yields on average interest-earning assets of 137 basis points was
partially offset by a favorable growth in average interest-earning assets of
$10.4 million, or 4.5%, resulting in an overall decrease in interest income of
$642,000, or 14.6%.  The decrease in yields was the result of the
declining interest rate environment in which we operated during 2008 along with
competitive factors.  Recent trends in community banking show declines
in net interest margins below historical levels.  Average loans, as a
percentage of average interest-earning assets, increased to 85.0% in the third
quarter of 2008 as compared with 80.7% in 2007.
  -23-
 Index
  We saw a
shift in the percentage of average investment securities to total
interest-earning assets decrease to 14.5% in 2008 from 18.6% in 2007, while the
percentage of average other interest-earning assets to total average
interest-earning assets was 0.6% in 2007 and 0.5% in 2008.
 
 Interest
Expense.  Interest expense was $2,022,000 and $2,408,000 for
the three months ended September 30, 2008 and 2007,
respectively.  While most average interest-bearing deposits declined,
average certificates of deposit rose 12.1% in the quarter ended September 30,
2008, over the same period in 2007.  This resulted in an overall
increase in average interest-bearing liabilities of $14.8 million, or 7.5%. Our
average cost of funds (interest-bearing liabilities) decreased to 3.78% in 2008
compared with 4.83% over the same period in 2007.  A shift in the mix
of our interest-bearing deposits, along with decreases in the overall interest
rates in our market area, contributed to the decrease in our cost of
funds.  Certificates of deposit, with an average cost of funds of
4.46% in 2008 and 5.19% in 2007, represented 67.7% of our total interest-bearing
liabilities in 2008 as compared with 64.9% in 2007.  We experienced
declines in the rates we paid on other lower costing deposits and borrowed
funds, which outpaced the decline in our cost of funds on certificates of
deposit of 73 basis points.  A shift from lower costing deposits to
higher costing deposits attributable, in part, to the current interest rate
environment kept us from realizing further reductions in our overall interest
expense.
 
 Net Interest Income before Provision
for Loan Losses.  Net interest income before provision for loan
losses was $1,730,000 and $1,986,000 for the three months ended September 30,
2008 and 2007, respectively.  The net interest margin for the third
quarter of 2008 was 3.00% as compared with the net interest margin in 2007 of
3.57%, a decrease of 57 basis points, or 16.0%, which reflects the overall
declines in our yields and cost of funds of 17.8% and 21.7%,
respectively.
 
 Provision
for Loan Losses
 
 We
recorded provisions for loan losses totaling $1,735,000 and $410,000 for the
three months ended September 30, 2008 and 2007, respectively, which management
considered appropriate after its assessment of the overall quality of the loan
portfolio and the downturn in the real estate market that has increased the
number of classified and other loans we monitor.
 
 Noninterest
Income and Expenses
 
 Noninterest
Income.  Total noninterest income increased by $23,000, or 8.4%
for the three months ended September 30, 2008, to $296,000 compared with
$273,000 for the same period in September 30, 2007.  Fees and service
charges on deposit accounts increased $33,000, or 22.0%, in 2008 versus the same
period in 2007, primarily due to increased NSF fees.  Other fee income
for banking services decreased $14,000, or 28.0%, due to decreases in usage and
per item charges assessed by us for other banking services, principally for ATM
and debit card usage.  Mortgage banking fees decreased $10,000, or
83.3%, during this period reflecting a downturn in the residential lending
market. These decreases were offset by an increase in income from bank-owned
life insurance of $12,000, or 27.3%, related primarily to increased investment
in bank-owned life insurance during 2007 of $2.0 million.
 
 Noninterest
Expenses.  Salaries and employee benefits decreased $14,000, or
1.8%, in the third quarter of 2008 over 2007.  Expenses of bank
premises and fixed assets decreased $6,000, or 2.1%.  Other operating
expenses increased $171,000, or 29.8%.  The more significant increases
were:
 
 ·
                higher
      data processing and settlement fees of
$12,000;
 ·
                increases
      in audit, legal, and professional fees of
  $23,000;
 ·
                increases
      in regulatory assessments of
$13,000;
 ·
                increases
      in software and telephone expense of $18,000;
  and
 ·
                expenses
      related to other real estate owned, which were $66,000 in 2008 versus $-0-
      in 2007.
 
 These
increases are consistent with trends in our account and activity growth,
additional costs to manage the loan portfolio and carry foreclosed assets,
compliance with SOX 404, and inflationary increases in the overall cost of goods
and services.
 
 Pension
expense increased $34,000 for the three months ended September 30, 2008, as
compared with the same period in 2007.  Our noninterest income from
bank-owned life insurance used to fund the pension obligations rose by
$12,000.  Recent changes in the accounting for pension obligations
funded with bank-owned life insurance also contributed to the overall cost of
$14,000 (net of the income tax benefit of $8,000).
 
  -24-
 Index
  Provision
(Benefit) for Income Taxes
 
 An income
tax summary follows (dollars in thousands):
 Three
      Months Ended September 30,2008
                
                
                2007Book
      income (loss)
                
                $
                (1,520
                )
                
                $
                189Nontaxable
      interest income, net
                
                
                (167
                )
                
                
                (171
                )Other,
      net
                
                
                (123
                )
                
                
                (50
                )Taxable
      income (loss)
                
                $
                (1,810
                )
                
                $
                (32
                )Tax
      rate
                
                
                37.6
                %
                
                
                37.6
                %Tax
      provision (benefit)
                
                $
                (681
                )
                
                $
                (12
                )Effective
      rate
                
                
                44.8
                %
                
                
                6.3
                %
 
 The
effective tax rates differ from the federal and state statutory rates of 37.6%
principally due to nontaxable investment income.  Tax-exempt income
was $167,000 for the third quarter of 2008 as compared with $171,000 in 2007, a
decrease of 2.3%.
 
 Comparison
of Nine Months Ended September 30, 2008 and 2007
 
 Interest
Income and Expense
 
 Interest
Income.  Interest income was $11,614,000 and $13,017,000 for
the nine months ended September 30, 2008 and 2007, respectively.  A
decrease in yields on average interest-earning assets of 112 basis points was
partially offset by a favorable growth in average interest-earning assets of
$11.6 million, or 5.0%, resulting in an overall decrease in interest income of
$1,403,000, or 10.8%.  The decrease in yields was the result of the
declining interest rate environment in which we operated during 2008 along with
competitive factors.  Recent trends in community banking show declines
in net interest margins below historical levels.  Average loans, as a
percentage of average interest-earning assets, increased to 83.7% in 2008 as
compared with 79.6% in 2007.
 
 We saw a
shift in the percentage of average investment securities to total
interest-earning assets decrease to 15.7% in 2008 from 18.1% in 2007, while the
percentage of average other interest-earning assets to total average
interest-earning assets shifted from 2.3% in 2007 to 0.6% in 2008.
 
 Interest
Expense.  Interest expense was $6,472,000 and $7,066,000 for
the nine months ended September 30, 2008 and 2007,
respectively.  While most average interest-bearing deposits and other
borrowings declined, average certificates of deposit rose 17.3% for the nine
months ended September 30, 2008, over the same period of 2007.  This
resulted in an overall increase in average interest-bearing liabilities of $16.3
million, or 8.3%.  During 2008, the interest rates on certificates of
deposit declined 48 basis points, which is not as rapid a decrease as we
experienced on our interest-earning assets.  Our average cost of funds
(interest-bearing liabilities) decreased to 4.09% in 2008 compared with 4.84%
over the same period in 2007.  A shift in the mix of our
interest-bearing deposits, along with decreases in the overall interest rates in
our market area, contributed to the decrease in our cost of
funds.  Certificates of deposit, with an average cost of funds of
4.72% in 2008 and 5.20% in 2007, represented 69.4% of our total interest-bearing
liabilities in 2008 as compared with 64.1% in 2007.  We experienced
declines in the rates we paid on other lower costing deposits and borrowed
funds, which outpaced the decline in our cost of funds on certificates of
deposit.  A shift from lower costing deposits to higher costing
deposits attributable, in part, to the current interest rate environment kept us
from realizing further reductions in our overall interest expense.
 
 Net Interest Income before Provision
for Loan Losses.  Net interest income before provision for loan
losses was $5,142,000 and $5,951,000 for the nine months ended September 30,
2008 and 2007, respectively.  The net interest margin for the first
nine months of 2008 was 3.01% as compared with the net interest margin in 2007
of 3.61%, a decrease of 60 basis points, or 16.6%.  Given our
composition of interest-bearing liabilities, we experienced a less rapid
decrease in our cost of funds of 75 basis points, or 15.5%, while the rates we
earned on our earning assets decreased by 112 basis points, or 14.5%, in the
first nine months of 2008 over the same period of 2007.  Our growth in
interest-bearing liabilities of 8.4% outpaced the growth in interest earning
assets of 5.0%, which impacts our net interest margin.
 
 
 
 
  -25-
 Index
  Provision
for Loan Losses
 
 We
recorded provisions for loan losses totaling $2,620,000 and $472,000 for the
nine months ended September 30, 2008 and 2007, respectively, which management
considered appropriate after its assessment of the overall quality of the loan
portfolio and the downturn in the real estate market that has increased the
number of classified and other loans we monitor.
 
 Noninterest
Income and Expenses
 
 Noninterest
Income.  Total noninterest income increased $15,000, or 1.8%,
for the nine months ended September 30, 2008, to $853,000 compared with $838,000
for the same period in 2007.  Fees and service charges on deposit
accounts increased $36,000, or 7.7%, in 2008 versus the same period in 2007
primarily due to increased NSF fees.  Other fee income for banking
services decreased $43,000, or 28.1%, due to decreases in usage and per item
charges assessed by us for other banking services, principally for ATM and debit
card usage.  Mortgage banking fees decreased $39,000, or 75.0%, during
this period reflecting a downturn in the residential lending market. These
decreases were offset by an increase in income from bank-owned life insurance of
$66,000, or 66.7%, related primarily to increased investment in bank-owned life
insurance during 2007 of $2.0 million.
 
 Noninterest
Expenses.  Salaries and employee benefits increased $22,000, or
0.9%, in the first nine months of 2008 over 2007.  Expenses of bank
premises and fixed assets decreased $29,000, or 3.4%.  Other operating
expenses increased $592,000, or 36.7%.  The more significant increases
were:
 
 ·
                higher
      data processing and settlement fees of
$82,000;
 ·
                increases
      in audit, legal, and professional fees of
  $104,000;
 ·
                increases
      in regulatory assessments of
$48,000;
 ·
                increases
      in software and telephone expense of $69,000;
  and
 ·
                expenses
      related to other real estate owned, which were $235,000 in 2008 versus
      $-0- in 2007.
 
 These
increases are consistent with trends in our account and activity growth,
additional costs to manage the loan portfolio and carry foreclosed assets,
compliance with SOX 404, and inflationary increases in the overall cost of goods
and services.
 
 Pension
expense increased $111,000 for the nine months ended September 30, 2008, as
compared with the same period in 2007.  Our noninterest income from
bank-owned life insurance used to fund the pension obligations rose by
$66,000.  Recent changes in the accounting for pension obligations
funded with bank-owned life insurance also contributed to the overall cost of
$28,000 (net of the income tax benefit of $17,000).
 
 Provision
(Benefit) for Income Taxes
 
 An income
tax summary follows (dollars in thousands):
 Nine
      Months Ended September 30,2008
                
                
                2007Book
      income (loss)
                
                $
                (2,015
                )
                
                $
                1,512Nontaxable
      interest income, net
                
                
                (506
                )
                
                
                (427
                )Other,
      net
                
                
                (194
                )
                
                
                (74
                )Taxable
      income (loss)
                
                $
                (2,715
                )
                
                $
                1,011Tax
      rate
                
                
                37.6
                %
                
                
                37.6
                %Tax
      provision (benefit)
                
                $
                (1,021
                )
                
                $
                380Effective
      rate
                
                
                50.7
                %
                
                
                25.1
                %
 
 
 The
effective tax rates differ from the federal and state statutory rates of 37.6%
principally due to nontaxable investment income.  Tax-exempt income
was $506,000 for the first nine months of 2008 as compared with $427,000 in
2007, an increase of 18.5%.
 
  -26-
 Index
  ITEM
3.  CONTROLS AND PROCEDURES
 
 Background of Internal Controls and
Internal Audits.  Oceanside is the sole financial subsidiary of
Atlantic.  Oceanside has extensive policies and operating procedures
in place for loans, operations, accounting, and compliance.  All
audits, whether internal or external, are reported directly to the joint Audit
Committee of Oceanside and Atlantic and subsequently to the Boards of Directors
of Oceanside and Atlantic.
 
 The joint
Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
by the internal auditor for planning purposes.  This audit calendar is
submitted to the Boards of Oceanside and Atlantic for approval.
 
 Atlantic
engages an external certified public accounting firm registered with the Public
Company Accounting Oversight Board (“PCAOB”) to annually perform an independent
audit, conducted in accordance with generally accepted auditing standards
adopted by the PCAOB.
 
 Periodically,
Oceanside and Atlantic undergo regulatory examinations that include tests of the
policies and operating procedures for loans, operations, accounting, and
compliance.  The results of these examinations are presented by the
regulators to the Boards of Oceanside and Atlantic.
 
 Evaluation of Disclosure Controls
and Procedures.  Atlantic's Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of Atlantic's disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”).  Based on that evaluation, such
officers have concluded that, as of the Evaluation Date, Atlantic's disclosure
controls and procedures are effective in bringing to their attention, on a
timely basis, material information relating to Atlantic (including its
consolidated subsidiary) required to be included in Atlantic's periodic filings
under the Exchange Act.
 
 Changes in Internal
Controls.  Since the Evaluation Date, there have not been any
significant changes in Atlantic's internal controls or in other factors that
could significantly affect those controls.
  -27-
 Index
 ATLANTIC BANCGROUP, INC. AND
SUBSIDIARY


PART
II:                     OTHER
INFORMATION
 
 Item
1.                 Legal
Proceedings.
 
 Periodically,
we are parties to or otherwise involved in legal proceedings arising in the
normal course of business, such as claims to enforce liens, claims involving the
making and servicing of real property loans, and other issues incident to our
operations.  We do not believe that there are any pending or
threatened proceedings against us, which, if determined adversely, would have a
material effect on our consolidated financial position.
 
 Item
6.                 Exhibits.
 
 Exhibit
No.         Description of
Exhibit
 
 Legend
 
 (a)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      1999
 (b)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2000
 (c)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2002
 (d)
              Incorporated
      by reference on Atlantic’s Form 10-KSB for year ended December 31,
      2003
 (e)
              Incorporated
      by reference on Atlantic’s Form 10-QSB for quarter ended September 30,
      2006
 
 Exhibit
No.         Description of
Exhibit
 
 3.1
                Articles
      of Incorporation (a)3.2
                Bylaws
      (a)4.1
                Specimen
      Stock Certificate (a)10.1
                Software
      License Agreement dated as of October 6, 1997, between Oceanside and File
      Solutions, Inc. (a)10.2
                File
      Solutions Software Maintenance Agreement dated as of July 15, 1997,
      between Oceanside and SPARAK Financial Systems, Inc.
(a)10.3
                Remote
      Data Processing Agreement dated as of March 3, 1997, between Oceanside and
      Bankers Data Services, Inc. (a)10.4
                Lease
      dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside.
      (b)10.5
                Lease
      dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and
      Oceanside. (c)10.6
                Change
      in Control Agreement for Barry W. Chandler. (e)10.7
                Change
      in Control Agreement for David L. Young. (e)10.8
                Change
      in Control Agreement for Grady R. Kearsey. (e)14
                Code
      of Ethics for Senior Officers Policy. (d)31.1
                Certifications
      of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange 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








-28-
 Index






SIGNATURES
 
 
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
issuer has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
 
 
 
 Atlantic BancGroup,
      Inc.Date:  November 13,
      2008
                /s/ Barry W.
      ChandlerBarry
      W. ChandlerPresident
      and Principal Executive OfficerDate:
      November 13,
      2008
                /s/ David L.
      YoungDavid
      L. YoungExecutive
      Vice President,Principal
      Financial Officer, andCorporate
      Secretary
 
 
 
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