Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period ended June 30, 2009**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from             to             **

 

**Commission File No. 333-127242**

 

**Atlantic Bancshares, Inc.**

(Exact name of registrant as specified in its charter)

 

| **South Carolina**           | ** ** | **20-3047433**      |
|------------------------------|------------|---------------------|
| (State or other jurisdiction |       | (I.R.S. Employer    |
| of incorporation)            |       | Identification No.) |

 

**One Sheridan Park Circle, PO Box 3077**

**Bluffton, South Carolina 29910**

(Address of principal executive offices)

 

(**843**) **815-7111**

(Registrant’s telephone number, including area code)

 

**1 Sheridan Drive, Suite J Bluffton, South Carolina 29910**

(Address of former principal executive offices)

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).o Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                   |   | Accelerated filer o         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated o                           |   | Smaller reporting company x |
| (do not check if smaller reporting company) |   |                        |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:1,322,744 shares of common stock, no par valueper share, were issued and outstanding as of August 11, 2009.

 

 

 

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Tableof Contents

 

**INDEX**

 
|                                    |                                                                                                                                   |   | **Page No.** |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
| **PART I - FINANCIAL INFORMATION** |                                                                                                                                   |   |
|                                    |                                                                                                                                   |   |              |
| Item 1.                                 | Financial Statements (Unaudited)                                                                                                       |   |              |
|                                    |                                                                                                                                   |   |              |
|                                    | Condensed Balance Sheets –  June 30, 2009 and December 31, 2008                                                         |   | 3                 |
|                                    |                                                                                                                                   |   |              |
|                                    | Condensed Statements of  Operations - Six months ended June 30, 2009 and 2008 and Three months  ended June 30, 2009 and 2008 |   | 4                 |
|                                    |                                                                                                                                   |   |              |
|                                    | Condensed Statement of  Shareholders’ Equity (Deficit) - Six months ended June 30, 2009 and 2008                             |   | 5                 |
|                                    |                                                                                                                                   |   |              |
|                                    | Condensed Statement of Cash  Flows - Six months ended June 30, 2009 and 2008                                                      |   | 6                 |
|                                    |                                                                                                                                   |   |              |
|                                    | Notes to  Condensed Financial Statements                                                                                               |   | 7-11              |
|                                    |                                                                                                                                   |   |              |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            |   | 12-20             |
|                                    |                                                                                                                                   |   |              |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                                            |   | 20                |
|                                    |                                                                                                                                   |   |              |
| Item 4.                                 | Controls and Procedures                                                                                                                |   | 20                |
|                                    |                                                                                                                                   |   |              |
| **PART II - OTHER INFORMATION**    |                                                                                                                                   |   |
|                                    |                                                                                                                                   |   |              |
| Item 1.                                 | Legal Proceedings                                                                                                                      |   | 21                |
|                                    |                                                                                                                                   |   |              |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                           |   | 21                |
|                                    |                                                                                                                                   |   |              |
| Item 3.                                 | Defaults Upon  Senior Securities                                                                                                       |   | 21                |
|                                    |                                                                                                                                   |   |              |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                                                   |   | 21                |
|                                    |                                                                                                                                   |   |              |
| Item 5.                                 | Other Information                                                                                                                      |   | 21                |
|                                    |                                                                                                                                   |   |              |
| Item 6.                                 | Exhibits                                                                                                                               |   | 21                |

 

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Tableof Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Consolidated Balance Sheets**

 

**PART I - FINANCIAL INFORMATION**

**Item 1 - Financial Statements****.**

 
| ** **                                                                                         | ** ** | **June 30,** | ** **     | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|----------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2009**          | ** **     | **2008**              | ** ** |
| ** **                                                                                         | ** ** | **(Unaudited)**   | ** **     | **(Audited)**         | ** ** |
| **Assets:**                                                                                        | ** ** | ** **        | ** **     | ** **            | ** ** |
| Cash and cash equivalents:                                                                         |       |              |           |                  |       |
| Cash and due from banks                                                                            |       | $                 | 2,127,514      |                  | $          | 577,915 |   |
| Total cash and cash equivalents                                                                    |       | 2,127,514         |           | 577,915               |       |
|                                                                                               |       |              |           |                  |       |
| Securities available for sale                                                                      |       | 14,370,470        |           | 16,388,747            |       |
| Nonmarketable equity securities                                                                    |       | 1,003,600         |           | 891,200               |       |
|                                                                                               |       |              |           |                  |       |
| Loans receivable                                                                                   |       | 74,142,651        |           | 75,363,221            |       |
| Less allowance for loan losses                                                                     |       | (880,716          | )              | (1,075,776            | )          |
| Loans, net                                                                                         |       | 73,261,935        |           | 74,287,445            |       |
|                                                                                               |       |              |           |                  |       |
| Accrued interest receivable                                                                        |       | 301,684           |           | 319,048               |       |
| Premises, furniture and  equipment, net                                                            |       | 1,067,178         |           | 1,177,974             |       |
| Deferred tax asset                                                                                 |       | 1,316,900         |           | 1,137,312             |       |
| Other assets                                                                                       |       | 354,141           |           | 365,190               |       |
| Total assets                                                                                       | ** ** | **$**             | **93,803,422** | ** **            | **$**      | **95,144,831** | ** ** |
|                                                                                               |       |              |           |                  |       |
| **Liabilities:**                                                                                   | ** ** | ** **        | ** **     | ** **            | ** ** |
| Deposits:                                                                                          |       |              |           |                  |       |
| Noninterest bearing transaction  accounts                                                          |       | $                 | 5,752,262      |                  | $          | 5,722,426 |   |
| Interest-bearing transaction  accounts                                                             |       | 2,546,498         |           | 3,023,016             |       |
| Savings and money market                                                                           |       | 17,383,194        |           | 20,285,985            |       |
| Time deposits $100,000 and over                                                                    |       | 22,785,467        |           | 20,195,037            |       |
| Other time deposits                                                                                |       | 15,673,503        |           | 18,740,770            |       |
| Total deposits                                                                                     |       | 64,140,924        |           | 67,967,234            |       |
|                                                                                               |       |              |           |                  |       |
| Advances from Federal Home Loan  Bank                                                              |       | 18,500,000        |           | 16,500,000            |       |
| Advances from the Federal Reserve  Bank                                                            |       | 1,000,000         |           | —                |       |
| Federal funds purchased                                                                            |       | —            |           | 236,500               |       |
| Accrued interest payable                                                                           |       | 272,705           |           | 290,791               |       |
| Other liabilities                                                                                  |       | 211,990           |           | 180,302               |       |
| Total liabilities                                                                                  |       | 84,125,619        |           | 85,174,827            |       |
|                                                                                               |       |              |           |                  |       |
| Commitments and contingencies                                                                      |       |              |           |                  |       |
|                                                                                               |       |              |           |                  |       |
| **Shareholders’  equity:**                                                                    | ** ** | ** **        | ** **     | ** **            | ** ** |
| Preferred stock, no par value;  10,000,000 shares authorized; no shares issued and outstanding     |       | —            |           | —                |       |
| Common stock, no par value;  10,000,000 shares authorized; 1,251,577 shares issued and outstanding |       | 11,982,122        |           | 11,982,122            |       |
| Capital surplus                                                                                    |       | 328,153           |           | 271,806               |       |
| Accumulated other comprehensive  income                                                            |       | 309,313           |           | 385,065               |       |
| Deficit                                                                                            |       | (2,941,785        | )              | (2,668,989            | )          |
| Total shareholders’ equity                                                                    |       | 9,677,803         |           | 9,970,004             |       |
| Total liabilities and  shareholders’ equity                                                   | ** ** | **$**             | **93,803,422** | ** **            | **$**      | **95,144,831** | ** ** |

 

See notes to consolidated financial statements.

 

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** **

**ATLANTIC BANCSHARES, INC.**

 

**Condensed Statements of Operations**

**(Unaudited)**

** **
| ** **                                               | ** ** | **For the six months ended** | ** ** | **For the three months ended** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**            | ** ** | **June 30,**              | ** ** |
| ** **                                               | ** ** | **2009**                     | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                               | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest income:**                                     | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                    |       | $                            | 2,254,062  |                           | $          | 2,434,352 |   | $ | 1,131,390 |   | $ | 1,191,457 |   |
| Securities, available for sale, taxable                  |       | 383,158                      |       | 466,057                        |       | 187,393 |   | 244,404 |   |
| Nonmarketable equity securities                          |       | —                       |       | 17,636                         |       | — |   | 10,108 |   |
| Federal funds sold                                       |       | 118                          |       | 123                            |       | — |   | 123 |   |
| Interest bearing deposits with other banks               |       | 39                           |       | 3,722                          |       | 21 |   | 575 |   |
| Total                                                    |       | 2,637,377                    |       | 2,921,890                      |       | 1,318,804 |   | 1,446,667 |   |
|                                                     |       |                         |       |                           |       |   |   |   |   |
| **Interest expense:**                                    |       |                         |       |                           |       |   |   |   |   |
| Time deposits $100,000 and over                          |       | 355,785                      |       | 315,712                        |       | 170,171 |   | 168,452 |   |
| Other deposits                                           |       | 433,858                      |       | 951,831                        |       | 201,395 |   | 432,789 |   |
| Other borrowings                                         |       | 285,168                      |       | 212,495                        |       | 144,214 |   | 106,563 |   |
| Total                                                    |       | 1,074,811                    |       | 1,480,038                      |       | 515,780 |   | 707,804 |   |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| **Net interest income**                                  |       | 1,562,566                    |       | 1,441,852                      |       | 803,024 |   | 738,863 |   |
|                                                     |       |                         |       |                           |       |   |   |   |   |
| Provision for loan losses                                |       | 468,300                      |       | 427,950                        |       | 243,300 |   | 202,400 |   |
| **Net interest income after  provision for loan losses** |       | 1,094,266                    |       | 1,013,902                      |       | 559,724 |   | 536,463 |   |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| **Other operating income:**                              |       |                         |       |                           |       |   |   |   |   |
| Service fees on deposit accounts                         |       | 65,667                       |       | 43,118                         |       | 33,726 |   | 22,031 |   |
| Residential mortgage origination fees                    |       | 18,138                       |       | 25,524                         |       | 9,919 |   | 3,385 |   |
| Other income                                             |       | 45,057                       |       | 49,868                         |       | 25,187 |   | 26,867 |   |
| Total                                                    |       | 128,862                      |       | 118,510                        |       | 68,832 |   | 52,283 |   |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| **Noninterest expense:**                                 |       |                         |       |                           |       |   |   |   |   |
| Salaries and employee benefits                           |       | 795,982                      |       | 838,104                        |       | 389,313 |   | 419,406 |   |
| Net occupancy                                            |       | 195,382                      |       | 136,219                        |       | 99,706 |   | 77,096 |   |
| Professional fees                                        |       | 94,301                       |       | 87,399                         |       | 54,203 |   | 42,390 |   |
| Marketing                                                |       | 80,893                       |       | 77,377                         |       | 46,411 |   | 41,173 |   |
| Furniture and equipment                                  |       | 92,223                       |       | 95,424                         |       | 44,528 |   | 45,089 |   |
| Data processing and related costs                        |       | 155,225                      |       | 140,454                        |       | 78,211 |   | 71,813 |   |
| Other operating                                          |       | 222,483                      |       | 208,667                        |       | 125,437 |   | 111,685 |   |
| Total                                                    |       | 1,636,489                    |       | 1,583,644                      |       | 837,809 |   | 808,652 |   |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| **Loss before income tax benefit**                       |       | (413,361                     | )          | (451,232                       | )          | (209,253 | ) | (219,906 | ) |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| Income tax benefit                                       |       | 140,565                      |       | 153,420                        |       | 71,166 |   | 74,769 |   |
|                                                     |       |                         |       |                           |       |   |   |   |   |
| **Net loss**                                             |       | $                            | (272,796   | )                              | $          | (297,812 | ) | $ | (138,087 | ) | $ | (145,137 | ) |
| ** **                                               |       |                         |       |                           |       |   |   |   |   |
| **Losses per share**                                     |       |                         |       |                           |       |   |   |   |   |
| Basic loss per share                                     |       | $                            | (.22       | )                              | $          | (.24 | ) | $ | (.11 | ) | $ | (.12 | ) |

 

See notes to consolidated financial statements.

 

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**ATLANTIC BANCSHARES, INC.**

 

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

**For the six months ended June 30, 2009 and 2008**

**(Unaudited)**

** **
| ** **                                        | ** ** | ** **        | ** ** | ** **  | ** **     | ** **        | ** ** | **Accumulated** | ** ** | ** **             | ** **   | ** **           | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-------------|----------------|-------------------|------------|-----------------|------------|------------------------|--------------|----------------------|------------|
| ** **                                        | ** ** | ** **        | ** ** | ** **  | ** **     | **Additional**    | ** ** | **other**       | ** ** | ** **             | ** **   | **Total**            | ** ** |
| ** **                                        | ** ** | **Common  stock** | ** ** | **Paid-in** | ** **     | **comprehensive** | ** ** | ** **      | ** ** | **Shareholders’** | ** **   |
| ** **                                        | ** ** | **Shares**        | ** ** | **Amount**  | ** **     | **Capital**       | ** ** | **income**      | ** ** | **Deficit**            | ** **   | **Equity (deficit)** | ** ** |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| **December 31,  2007**                       |       | 1,251,577         |       | $           | 11,982,122     |              | $          | 159,781         |       | $                      | 20,518       |                 | $          | (2,180,163 | ) | $ | 9,982,258 |   |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Net loss                                          |       | —            |       | —      |           | —            |       | —          |       | (297,812               | )            | (297,812             | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Other comprehensive income, net of tax of $92,461 |       | —            |       | —      |           | —            |       | (179,483        | )          | —                 |         | (179,483             | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Total comprehensive loss                          |       | —            |       | —      |           | —            |       | —          |       | —                 |         | (477,295             | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Stock based compensation                          |       | —            |       | —      |           | 55,500            |       | —          |       | —                 |         | 55,500               |       |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| **June 30,  2008**                           | ** ** | **1,251,577**     | ** ** | **$**       | **11,982,122** | ** **        | **$**      | **215,281**     | ** ** | **$**                  | **(158,965** | **)**                | **$**      | **(2,477,975** | **)** | **$** | **9,560,463** | ** ** |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| **December 31,  2008**                       |       | 1,251,577         |       | $           | 11,982,122     |              | $          | 271,806         |       | $                      | 385,065      |                 | $          | (2,668,989 | ) | $ | 9,970,004 |   |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Net loss                                          |       | —            |       | —      |           | —            |       | —          |       | (272,796               | )            | (272,796             | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Other comprehensive income, net of tax of $39,023 |       | —            |       | —      |           | —            |       | (75,752         | )          | —                 |         | (75,752              | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Total comprehensive loss                          |       | —            |       | —      |           | —            |       | —          |       | —                 |         | (348,548             | )          |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| Stock based compensation                          |       | —            |       | —      |           | 56,347            |       | —          |       | —                 |         | 56,347               |       |
|                                              |       |              |       |        |           |              |       |            |       |                   |         |                 |       |
| **June 30,  2009**                           | ** ** | **1,251,577**     | ** ** | **$**       | **11,982,122** | ** **        | **$**      | **328,153**     | ** ** | **$**                  | **309,313**  | ** **           | **$**      | **(2,941,785** | **)** | **$** | **9,677,803** | ** ** |

 

See notes to consolidated financial statements.

 

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**ATLANTIC BANCSHARES, INC.**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                              | ** ** | **Six months ended**   | ** **     |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|
| ** **                                                                                              | ** ** | **June 30, 2009** | ** **     | **June 30, 2008** | ** ** |
|                                                                                                    |       |                   |           |   |   |
| **Cash flows from  operating activities:**                                                              |       |                   |           |   |   |
| Net loss                                                                                                |       | $                      | (272,796       | ) | $ | (297,812 | ) |
| Adjustments to reconcile net loss  to net cash provided by operating activities:                        |       |                   |           |   |   |
| Provision for loan losses                                                                               |       | 468,300                |           | 427,950 |   |
| Gain on sale of repossessed  assets                                                                     |       | (600                   | )              | — |   |
| Depreciation and amortization  expense                                                                  |       | 110,796                |           | 80,764 |   |
| Accretion on securities available  for sale                                                             |       | (27,352                | )              | (66,689 | ) |
| Stock-based compensation expense                                                                        |       | 56,347                 |           | 55,500 |   |
| Deferred income tax benefit                                                                             |       | (140,565               | )              | (153,420 | ) |
| Decrease in interest receivable                                                                         |       | 17,364                 |           | 39,587 |   |
| (Decrease) increase in interest  payable                                                                |       | (18,086                | )              | 81,488 |   |
| Decrease in other assets                                                                                |       | 11,049                 |           | 15,388 |   |
| Increase in other liabilities                                                                           |       | 31,688                 |           | 24,161 |   |
| Net cash provided by operating  activities                                                              |       | 236,145                |           | 206,917 |   |
|                                                                                                    |       |                   |           |   |   |
| **Cash flows from  investing activities:**                                                              | ** ** | ** **             | ** **     | ** ** | ** ** |
| Net decrease (increase) in loans  receivable                                                            |       | 553,110                |           | (5,308,496 | ) |
| Purchase of premises, furniture and  equipment                                                          |       | —                 |           | (662,800 | ) |
| Proceeds from sales of  repossessed assets                                                              |       | 4,700                  |           | — |   |
| Purchase of securities available  for sale                                                              |       | —                 |           | (8,436,871 | ) |
| Proceeds from pay downs of  securities available for sale                                               |       | 1,930,854              |           | 4,184,183 |   |
| Purchase of nonmarketable equity  securities                                                            |       | (112,400               | )              | (662,090 | ) |
| Proceeds from sales of  nonmarketable equity securities                                                 |       | —                 |           | 157,500 |   |
| Net cash provided (used) by  investing activities                                                       |       | 2,376,264              |           | (10,728,574 | ) |
|                                                                                                    |       |                   |           |   |   |
| **Cash flows from  financing activities:**                                                              | ** ** | ** **             | ** **     | ** ** | ** ** |
| Net (decrease) increase in demand  deposits, interest-bearing transaction accounts and savings accounts |       | (3,349,473             | )              | (459,841 | ) |
| Net (decrease) increase in  certificate of deposit and other time deposits                              |       | (476,837               | )              | 1,705,166 |   |
| Net (decrease) increase in  federal funds purchased                                                     |       | (236,500               | )              | (1,298,600 | ) |
| Net increase in FHLB advances                                                                           |       | 2,000,000              |           | 10,000,000 |   |
| Net increase in other borrowings                                                                        |       | 1,000,000              |           | — |   |
| Net cash (used) provided by  financing activities                                                       |       | (1,062,810             | )              | 9,946,725 |   |
|                                                                                                    |       |                   |           |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                                               |       | 1,549,599              |           | (574,932 | ) |
|                                                                                                    |       |                   |           |   |   |
| **Cash and cash  equivalents, beginning of the period**                                                 |       | 577,915                |           | 1,630,198 |   |
|                                                                                                    |       |                   |           |   |   |
| **Cash and cash  equivalents, end of the period**                                                       | ** ** | **$**                  | **2 ,127,514** | ** ** | **$** | **1,055,266** | ** ** |
|                                                                                                    |       |                   |           |   |   |
| **Cash paid for:**                                                                                      |       |                   |           |   |   |
| Interest                                                                                                |       | $                      | 1,092,897      |   | $ | 1,398,550 |   |
|                                                                                                    |       |                   |           |   |   |
| Income taxes                                                                                            |       | $                      | —         |   | $ | — |   |
|                                                                                                    |       |                   |           |   |   |
| **Supplemental  disclosures of noncash activities:**                                                    |       |                   |           |   |   |
| Other assets acquired in  settlement of loans                                                           |       | $                      | 4,100          |   | $ | 427,327 |   |

 

See notes to consolidated financial statements.

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**Note 1 - Basis of Presentation**

 

Theaccompanying unaudited consolidated condensed financial statements for AtlanticBancshares, Inc. (“Company”) were prepared in accordance with instructionsfor Form 10-Q and, therefore, do not include all disclosures necessary fora complete presentation of financial condition, results of operations, and cashflows in conformity with generally accepted accounting principles.  All adjustments, consisting only of normalrecurring accruals, which are, in the opinion of management, necessary for fairpresentation of the interim consolidated financial statements have beenincluded.  The results of operations forthe six month period ended June 30, 2009 are not necessarily indicative ofthe results that may be expected for the entire year.  These consolidated financial statements donot include all disclosures required by generally accepted accountingprinciples and should be read in conjunction with the Company’s auditedconsolidated financial statements and related notes for the year ended December 31,2008.

 

**Note 2 - Recently Issued Accounting Pronouncements**

 

Thefollowing is a summary of recent authoritative pronouncements that could impactthe accounting, reporting, and / or disclosure of financial information by theCompany.

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162,” (“SFAS168”).  SFAS 168 establishes the FASB AccountingStandards Codification TM (“Codification”)as the source of authoritative generally accepted accounting principles (“GAAP”)for nongovernmental entities.  TheCodification does not change GAAP. Instead, it takes the thousands ofindividual pronouncements that currently comprise GAAP and reorganizes theminto approximately 90 accounting Topics, and displays all Topics using aconsistent structure.  Contents in eachTopic are further organized first by Subtopic, then Section and finallyParagraph. The Paragraph level is the only level that contains substantivecontent. Citing particular content in the Codification involves specifying theunique numeric path to the content through the Topic, Subtopic, Section andParagraph structure. FASB suggests that all citations begin with “FASB ASC,”where ASC stands for Accounting Standards Codification. SFAS 168, (FASB ASC105-10-05, 10, 15, 65, 70) is effective for interim and annual periods endingafter September 15, 2009 and will not have an impact on the Company’sfinancial position but will change the referencing system for accountingstandards.  The following pronouncementsprovide citations to the applicable Codification by Topic, Subtopic and Section inaddition to the original standard type and number.

 

FSP EITF 99-20-1, “Amendments to the ImpairmentGuidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”)was issued in January 2009.  Priorto the FSP, other-than-temporary impairment was determined by using eitherEmerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition ofInterest Income and Impairment on Purchased Beneficial Interests and BeneficialInterests that Continue to be Held by a Transferor in Securitized FinancialAssets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” (“SFAS 115”) depending on the typeof security.  EITF 99-20 required the useof market participant assumptions regarding future cash flows regarding theprobability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be otherthan temporary if it was probable that the holder would be unable to collectall amounts due according to the contractual terms. To achieve a moreconsistent determination of other-than-temporary impairment, the FSP amendsEITF 99-20 to determine any other-than-temporary impairment based on theguidance in SFAS 115, allowing management to use more judgment in determiningany other-than-temporary impairment.  TheFSP was effective for reporting periods ending after December 15,2008.  Management has reviewed theCompany’s security portfolio and evaluated the portfolio for anyother-than-temporary impairments.

 

On April 9, 2009, the FASB issued threestaff positions related to fair value which are discussed below.

 

FSP SFAS 115-2 and SFAS 124-2 (FASB ASC320-10-65), “Recognition and Presentation of Other-Than-Temporary Impairments,”(“FSP SFAS 115-2 and SFAS 124-2”) categorizes losses on debt securitiesavailable-for-sale or held-to-maturity determined by management to beother-than-temporarily impaired into losses due to credit issues and lossesrelated to all other factors. Other-than-temporary impairment (OTTI) exists when it is more likelythan not that the security will mature or be sold before its amortized costbasis can be recovered.  An OTTI relatedto credit losses should be recognized through earnings.  An OTTI related to other factors should berecognized in other comprehensive income. The FSP does not amend existing recognition and measurement guidancerelated to other-than-temporary impairments of equity securities.  Annual disclosures required in SFAS 115 andFSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (includingthe aging of securities with unrealized losses).

 

FSP SFAS 157-4 (FASB ASC 820-10-65), “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That are Not Orderly”recognizes that quoted prices may not be determinative of fair value when thevolume and level of trading activity has significantly decreased.  The evaluation of certain factors maynecessitate that fair value be determined using a different valuationtechnique.  Fair value should be theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction, not a forced liquidation or distressed sale.  If a transaction is considered to not beorderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information toconclude as to whether or not the transaction is orderly, the transaction priceshould be considered when

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

estimating fair value.  An entity’s intention to hold an asset orliability is not relevant in determining fair value.  Quoted prices provided by pricing servicesmay still be used when estimating fair value in accordance with SFAS 157;however, the entity should evaluate whether the quoted prices are based oncurrent information and orderly transactions. Inputs and valuation techniques are required to be disclosed in additionto any changes in valuation techniques.

 

FSP SFAS 107-1 and APB 28-1 (FASB ASC825-10-65), “Interim Disclosures about Fair Value of Financial Instruments”requires disclosures about the fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements and also requires those disclosures in summarized financialinformation at interim reporting periods A publicly traded company includes any company whose securities trade ina public market on either a stock exchange or in the over-the-counter market,or any company that is a conduit bond obligor. Additionally, when a company makes a filing with a regulatory agency inpreparation for sale of its securities in a public market it is considered apublicly traded company for this purpose.

 

The three staff positions are effective forperiods ending after June 15, 2009, with early adoption of all threepermitted for periods ending after March 15, 2009.  The Company adopted the staff positions forits second quarter 10-Q.  The staffpositions had  no material impact on thefinancial statements.  Additionaldisclosures have been provided where applicable.

 

Also on April 1, 2009, the FASB issued FSPSFAS 141(R)-1 (FASB ASC 805-20-25, 30, 35, 50), “Accounting for Assets Acquiredand Liabilities Assumed in a Business Combination That Arise fromContingencies.”  The FSP requires thatassets acquired and liabilities assumed in a business combination that arisefrom a contingency be recognized at fair value. If fair value cannot be determined during the measurement period asdetermined in SFAS 141 (R), the asset or liability can still be recognized ifit can be determined that it is probable that the asset existed or theliability had been incurred as of the measurement date and if the amount of theasset or liability can be reasonably estimated. If it is not determined to be probable that the asset/liabilityexisted/was incurred or no reasonable amount can be determined, no asset orliability is recognized. The entity should determine a rational basis forsubsequently measuring the acquired assets and assumed liabilities.  Contingent consideration agreements should berecognized initially at fair value and subsequently reevaluated in accordancewith guidance found in paragraph 65 of SFAS 141 (R).  The FSP is effective for businesscombinations with an acquisition date on or after the beginning of the Company’sfirst annual reporting period beginning on or after December 15,2008.  The Company will assess the impactof the FSP if and when a future acquisition occurs.

 

The Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1)on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment ofCertain Investments in Debt and Equity Securities” and to supplement FSP SFAS115-2 and SFAS 124-2.  SAB 111 maintainsthe staff’s previous views related to equity securities; however debtsecurities are excluded from its scope. The SAB provides that “other-than-temporary” impairment is notnecessarily the same as “permanent” impairment and unless evidence exists tosupport a value equal to or greater than the carrying value of the equitysecurity investment, a write-down to fair value should be recorded andaccounted for as a realized loss.  TheSAB was effective upon issuance and had no impact on the Company’s financialposition.

 

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50,55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and providesguidance on when a subsequent event should be recognized in the financialstatements.  Subsequent events thatprovide additional evidence about conditions that existed at the date of thebalance sheet should be recognized at the balance sheet date. Subsequent eventsthat provide evidence about conditions that arose after the balance sheet datebut before financial statements are issued, or are available to be issued, arenot required to be recognized. The date through which subsequent events havebeen evaluated must be disclosed as well as whether it is the date thefinancial statements were issued or the date the financial statements wereavailable to be issued.  Fornonrecognized subsequent events which should be disclosed to keep the financialstatements from being misleading, the nature of the event and an estimate ofits financial effect, or a statement that such an estimate cannot be made,should be disclosed.  The standard iseffective for interim or annual periods ending after June 15, 2009.  See Note 5 for Management’s evaluation ofsubsequent events.

 

The FASB issued SFAS 166 (not yet reflected inFASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASBStatement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which afinancial asset should be derecognized when the transferor has not transferredthe entire financial asset by taking into consideration the transferor’scontinuing involvement.  The standardrequires that a transferor recognize and initially measure at fair value allassets obtained (including a transferor’s beneficial interest) and liabilitiesincurred as a result of a transfer of financial assets accounted for as asale.  The concept of a qualifyingspecial-purpose entity is removed from SFAS 140 along with the exception fromapplying FIN 46(R).  The standard iseffective for the first annual reporting period that begins after November 15,2009, for interim periods within the first annual reporting period, and forinterim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the standard tohave any impact on the Company’s financial position.

 

SFAS 167 (not yet reflected in FASB ASC), “Amendmentsto FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009.  The standard amends FIN 46(R) to requirea company to analyze whether its interest in a variable interest entity (“VIE”)gives it a controlling financial interest. A company must assess whether it has an implicit financialresponsibility to ensure that the VIE operates as designed when determiningwhether it has the power to direct the activities of the VIE that significantlyimpact its economic performance.  Ongoingreassessments of whether a company is the primary beneficiary is also

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

required by the standard.  SFAS 167 amends the criteria to qualify as aprimary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certainexceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’sfirst annual reporting period that begins after November 15, 2009, forinterim periods within that first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effectivedate.  The Company does not expect thestandard to have any impact on the Company’s financial position.

 

Other accounting standards that have been issuedor proposed by the FASB or other standards-setting bodies are not expected tohave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

**Note 3 — Fair Value Measurements**

 

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

# ** **

The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

 

**Cash and Due from Banks** - The carrying amount is a reasonableestimate of fair value.

 

**Investment Securities** - For securities available for sale,fair value equals the carrying amount which is the quoted market price.

 

**Nonmarketable Equity Securities** — The carrying value of nonmarketableequity securities approximates the fair value since no ready market exists forthe stocks.

 

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

# ** **

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

 

**Advancesfrom Federal Home Loan Bank** - The fair value of fixed rate borrowings areestimated using a discounted cash flow calculation that applies the Company’scurrent borrowing rate from the Federal Home Loan Bank.  The carrying amounts of variable rateborrowings are reasonable estimates of fair value because they can be repricedfrequently.

 

**Advances from the Federal ReserveBank** — FederalReserve Bank advances are for a term of up to 28 days, and the carrying amountapproximates the fair value.

 

**Federal Funds Purchased** - Federal funds purchased are for a termof one day, and the carrying amount approximates the fair value.

 

**Accrued Interest Receivable andPayable** - Thecarrying value of these instruments is a reasonable estimate of fair value.

 

**Off-Balance-Sheet FinancialInstruments** - Thecarrying amount for loan commitments and standby letters of credit which areoff-balance-sheet financial instruments approximates the fair value since theobligations are typically based on current market rates.

 

The Company has usedmanagement’s best estimate of fair value based on the above assumptions.  Thus, the fair values presented may not bethe amounts that could be realized in an immediate sale or settlement of theinstrument.  In addition, any incometaxes or other expenses, which would be incurred in an actual sale orsettlement, are not taken into consideration in the fair value presented.

 

The estimated fairvalues of the Company’s financial instruments at June 30, 2009 and December 31,2008 are as follows:

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                          | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **Carrying**           | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Amount**             | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| **Financial Assets:**                                               | ** ** | ** **             |       |                       |       |   |   |   |   |
| Cash  and due from banks                                            |       | $                      | 2,127,514  |                       | $          | 2,127,514 |   | $ | 577,915 |   | $ | 577,915 |   |
| Securities  available for sale                                      |       | 14,370,470             |       | 14,370,470                 |       | 16,388,747 |   | 16,388,747 |   |
| Nonmarketable  equity securities                                    |       | 1,003,600              |       | 1,003,600                  |       | 891,200 |   | 891,200 |   |
| Loans  receivable                                                   |       | 74,142,651             |       | 73,699,000                 |       | 75,363,221 |   | 74,841,000 |   |
| Accrued  interest receivable                                        |       | 301,684                |       | 301,684                    |       | 319,048 |   | 319,048 |   |
|                                                                |       |                   |       |                       |       |   |   |   |   |
| **Financial Liabilities:**                                          | ** ** | ** **             |       |                       | ** ** | ** ** |   |   |   |
| Demand  deposits, interest-bearing transaction and savings accounts |       | 25,681,954             |       | 25,681,954                 |       | 29,031,427 |   | 29,031,427 |   |
| Time  deposits                                                      |       | 38,458,970             |       | 38,934,000                 |       | 38,935,807 |   | 39,448,000 |   |
| Advances  from Federal Home Loan Bank                               |       | 18,500,000             |       | 18,954,000                 |       | 16,500,000 |   | 17,365,000 |   |
| Advances  from the Federal Reserve Bank                             |       | 1,000,000              |       | 1,000,000                  |       | — |   | — |   |
| Federal  funds purchased                                            |       | —                 |       | —                     |       | 236,500 |   | 236,500 |   |
| Accrued  interest payable                                           |       | 272,705                |       | 272,705                    |       | 290,791 |   | 290,791 |   |
|                                                                | ** ** | ** **             | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Notional**           | ** ** | **Fair**                   | ** ** | **Notional** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Amount**             | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Commitments  to extend credit                                       |       | $                      | 10,765,069 |                       | $          | — |   | $ | 11,500,006 |   | $ | — |   |
| Standby  letters of credit                                          |       | 212,073                |       | —                     |       | 360,073 |   | — |   |

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”) which provides a framework for measuring and disclosing fair value undergenerally accepted accounting principles. SFAS 157 requires disclosures aboutthe fair value of assets and liabilities recognized in the balance sheet inperiods subsequent to initial recognition, whether the measurements are made ona recurring basis (for example, available-for-sale investment securities) or ona nonrecurring basis (for example, impaired loans).

 

SFAS 157 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

 
| Level  1 | Quoted  prices in active markets for identical assets or liabilities. Level 1 assets  and liabilities include debt and equity securities and derivative contracts  that are traded in an active exchange market, as well as U.S. Treasury  Securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Level  2 | Observable  inputs other than Level 1 prices such as quoted prices for similar assets or  liabilities; quoted prices in markets that are not active; or other inputs  that are observable or can be corroborated by observable market data. Level 2  assets and liabilities include debt securities with quoted prices that are  traded less frequently than exchange-traded instruments, mortgage-backed  securities, municipal bonds, corporate debt securities and derivative  contracts whose value is determined using a pricing model with inputs that  are observable in the market or can be derived principally from or  corroborated by observable market data. This category generally includes  certain derivative contracts and impaired loans. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Level  3 | Unobservable  inputs that are supported by little or no market activity and that are  significant to the fair value of the assets or liabilities. Level 3 assets  and liabilities include financial instruments whose value is determined using  pricing models, discounted cash flow methodologies, or similar techniques, as  well as instruments for which the determination of fair value requires  significant management judgment or estimation. For example, this category  generally includes certain private equity investments, retained residual  interests in securitizations, residential mortgage servicing rights, and  highly-structured or long-term derivative contracts.                                                                  |

 

Assets and liabilitiesmeasured at fair value on a recurring basis at June 30, 2009 are asfollows:

 
| ** **                    | ** ** | **Quoted  Market Price  in active  markets********(Level 1)** | ** ** | **Significant  Other  Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Available for Sale Securities |       | $                                                             | —     |                                                        | $          | 14,370,470                                             |       | $ | — |   |
| Total                         |       | $                                                             | —     |                                                        | $          | 14,370,470                                             |       | $ | — |   |

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

The Company has noliabilities carried at fair value or measured at fair value on a nonrecurringbasis.

 

The Company ispredominantly a cash flow lender with real estate serving as collateral on asubstantial majority of loans. Loans which are deemed to be impaired areprimarily valued on a nonrecurring basis at the fair values of the underlyingreal estate collateral. Such fair values are obtained using independentappraisals, which the Company considers to be level 2 inputs. The aggregatecarrying amount of impaired loans at June 30, 2009 was $2,767,637.

 

The Company has no assetsor liabilities whose fair values are measured using level 3 inputs.

 

**Note 4 -Loss Per Share**

 

Basic loss pershare is computed by dividing net loss by the weighted-average number of commonshares outstanding.  Diluted loss pershare is computed by dividing net loss by the weighted-average number of commonshares outstanding and dilutive common share equivalents using the treasurystock method.  There were no dilutivecommon share equivalents outstanding during the first six months of 2009 and2008 due to the net loss.  As a result,basic and dilutive loss per share and diluted earnings per share were the same.

 

**Net loss per share-basic computation:**

 
| ** **                                 | ** ** | **Six months ended**   | ** **   |
|--------------------------------------------|------------|------------------------|--------------|
| ** **                                 | ** ** | **June 30, 2009** | ** **   | **June 30, 2008** | ** ** |
| **Net loss per share-basic  computation:** |       |                   |         |   |   |
|                                       |       |                   |         |   |   |
| Net loss to common shareholders            | ** ** | **$**                  | **(272,796** | **)** | **$** | **(297,812** | **)** |
| ** **                                 | ** ** | ** **             | ** **   | ** ** | ** ** |
| Average common shares outstanding - basic  | ** ** | **1,251,577**          | ** **   | **1,251,577** | ** ** |
| ** **                                 | ** ** | ** **             | ** **   | ** ** | ** ** |
| Basic loss per share                       | ** ** | **$**                  | **(.22**     | **)** | **$** | **(.24** | **)** |
| ** **                                 | ** ** | ** **             | ** **   | ** ** | ** ** |
| ** **                                 | ** ** | **Three months ended** | ** **   |
| ** **                                 | ** ** | **June 30, 2009** | ** **   | **June 30,  2008** | ** ** |
| **Net loss per share-basic computation:**  |       |                   |         |   |   |
|                                       |       |                   |         |   |   |
| Net loss to common shareholders            | ** ** | **$**                  | **(138,087** | **)** | **$** | **(145,137** | **)** |
| ** **                                 | ** ** | ** **             | ** **   | ** ** | ** ** |
| Average common shares outstanding - basic  | ** ** | **1,251,577**          | ** **   | **1,251,577** | ** ** |
| ** **                                 | ** ** | ** **             | ** **   | ** ** | ** ** |
| Basic loss per share                       | ** ** | **$**                  | **(.11**     | **)** | **$** | **(.12** | **)** |

 

**Note 5 —Subsequent Events**

 

In preparing these financialstatements, the Company has evaluated events and transactions for potentialrecognition or disclosure through August 14, 2009, the date the financialstatements were issued, and have determined to disclose the following eventsand transactions.

 

Beginning July 14,2009, the Company commenced a private placement offering to issue up to 500,000shares of the Company’s common stock at $6.00 per share to raise up to$3,000,000.   This offering willterminate when we sell all of the shares, but we reserve the right to terminatethe offering at any time prior to the sale of all 500,000 shares.  As of August 11, 2009, we have acceptedsubscriptions for 71,167 shares of common stock and proceeds of $427,000.  Proceeds from the offering will be used tosupport the growth of the Company.

 

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**ATLANTIC BANCSHARES, INC.**

 

**Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Thefollowing is our discussion and analysis of certain significant factors thathave affected our financial position and operating results and those of oursubsidiary, Atlantic Community Bank (the “Bank”), during the periods includedin the accompanying financial statements. This commentary should be read in conjunction with the financialstatements and the related notes and the other statistical information includedin this report.

 

This report contains statements which constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements relate to thefinancial condition, results of operations, plans, objectives, futureperformance, and business of our Company. Forward-looking statements are based on many assumptions and estimatesand are not guarantees of future performance. Our actual results may differmaterially from those anticipated in any forward-looking statements, as theywill depend on many factors about which we are unsure, including many factorswhich are beyond our control. The words “may,” “would,” “could,” “should,” “will,”“expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,”“believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well assimilar expressions, are meant to identify such forward-lookingstatements.  Potential risks anduncertainties that could cause our actual results to differ materially fromthose anticipated in our forward-looking statements include, withoutlimitation, those described under the heading “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2008 as filedwith the Securities and Exchange Commission (the “SEC”) and the following:

 

·                  significant increases incompetitive pressure in the banking and financial services industries;

·                  changes in the interest rateenvironment which could reduce anticipated or actual margins;

·                  changes in political conditionsor the legislative or regulatory environment;

·                  general economicconditions, either nationally or regionally and especially in our primaryservice area, continuing to be weak resulting in, among other things, adeterioration in credit quality;

·                  changes occurring in businessconditions and inflation;

·                  changes in technology;

·                  changes in deposit flows;

·                  the adequacy of the level ofour allowance for loan loss;

·                  the rate of delinquencies andamounts of loans charged-off;

·                  the rates of loan growth;

·                  increased funding costs dueto market illiquidity, increased competition for funding, and/or regulatoryrequirements;

·                  our ability to retain ourexisting customers, including our deposit relationships;

·                  adverse changes in assetquality and resulting credit risk-related losses and expenses;

·                  the amount of our realestate-based loans, and the weakness in the commercial real estate market;

·                  changes in monetary and taxpolicies;

·                  loss of consumer confidenceand economic disruptions resulting from terrorist activities or other militaryactions;

·                  changes in the securitiesmarkets; and

·                  other risks and uncertaintiesdetailed from time to time in our filings with the SEC.

 

Wehave based our forward-looking statements on our current expectations about futureevents. Although we believe that the expectations reflected in ourforward-looking statements are reasonable, we cannot guarantee you that theseexpectations will be achieved. We undertake no obligation to publicly update orotherwise revise any forward-looking statements, whether as a result of newinformation, future events, or otherwise.

 

Realestate markets continue to show signs of weakening and property values havebeen impacted negatively by the current economic operating environment.  Our primary service area, southern BeaufortCounty and a portion of Jasper County, are not immune to these pressures.  If prevailing economic conditions locally andnationally continue to decline, our business may be affected adversely.  A sustained economic downturn would likelycontribute to reduced deposits, the deterioration of the quality of our loanportfolio and increased nonperforming loans which could result in a net loss ofearnings, an increase in the provision for loan losses and an increase in loancharge offs, all of which could have a material adverse effect on our financialcondition and results of operations.

 

# **Overview**

# ** **

The following discussion describes our resultsof operations for the quarter ended June 30, 2009 as compared to thequarter ended June 30, 2008, and also analyzes our financial condition asof June 30, 2009 as compared to December 31, 2008.

 

Like most community banks, we derive most of ourincome from interest we receive on our loans and investments. Our primarysource of funds for making these loans and investments is our deposits, onwhich we pay interest.  Consequently, oneof the key measures of our success is our amount of net interest income, or thedifference between the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits. Another key measure is the spread between the yield we earn on theseinterest-earning assets and the rate we pay on our interest-bearingliabilities.

 

There are risks inherent in all loans, so wemaintain an allowance for loan losses to absorb probable losses on existingloans that may become uncollectible.  Weestablish and maintain this allowance by charging a provision for loan lossesagainst our operating earnings. In the following section we have included adetailed discussion of this process.   Inaddition to earning interest on our

 

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loans and investments, we earn income throughfees and other expenses we charge to our customers. We describe the variouscomponents of this non-interest income, as well as our non-interest expense, inthe following discussion.

 

**Effect of Economic Trends**

 

Followingan economic decline and historically low interest rates that ended in the firstsix months of 2004, the Federal Reserve began increasing short-term rates asthe economy showed signs of strengthening. Between July 2004 and July 2006, the Federal Reserve increasedrates at 17 of their meetings for a total of 425 basis points. Between July 2006 and September 18, 2007,the Federal Reserve allowed short-term rates to remain unchanged.  Beginning in July 2004 and continuinguntil September 18, 2007, our rates on both short-term or variable rateinterest-earning assets and interest-bearing liabilities increased.  The momentum of the 17 rate increasesresulted in higher rates on interest-earning assets and higher interest-bearingliabilities during the first nine months of 2007; subsequently, as fixed rateloans, deposits, and borrowings have matured they have repriced at higherinterest rates.  In late September 2007,the Federal Reserve reversed their position and has since lowered theshort-term rates by 500 basis points through December 2008, causing therates on our short-term or variable rate assets and liabilities todecline.  The majority of economicanalysts predict little to no change in short-term rates throughout theremainder of 2009.  The followingdiscussion includes our analysis of the effect that we anticipate changes ininterest rates will have on our financial condition.  However, we can give no assurances as to thefuture actions of the Federal Reserve or to the anticipated results that willactually occur.

 

**Recent Legislative and Regulatory Initiatives to Address Financial andEconomic Crises**

 

Markets in the United States and elsewhere have experiencedextreme volatility and disruption for more than 12 months.  These circumstances have exerted significantdownward pressure on prices of equity securities and virtually all other assetclasses, and have resulted in substantially increased market volatility,severely constrained credit and capital markets, particularly for financial institutions,and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutionsresulting from, among other factors, a weak economy and a decline in the valueof the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling homeprices and increasing foreclosures and unemployment, have created strains onfinancial institutions.  Many borrowersare now unable to repay their loans, and the collateral securing these loanshas, in some cases, declined below the loan balance.   In response to the challenges facing thefinancial services sector, several regulatory and governmental actions haverecently been announced including:

 

·                  The Emergency EconomicStabilization Act, approved by Congress and signed by President Bush on October 3,2008, which, among other provisions, allowed the U.S. Treasury to purchasetroubled assets from banks, authorized the Securities and Exchange Commissionto suspend the application of marked-to-market accounting, and temporarilyraised the basic limit of Federal Deposit Insurance Corporation (the “FDIC”)deposit insurance from $100,000 to $250,000 until December 31, 2013;

 

·                  On October 7, 2008, theFDIC approved a plan to increase the rates banks pay for deposit insurance;

 

·                  On October 14, 2008, theU.S. Treasury announced the creation of a new program, the Capital PurchaseProgram, that encourages and allows financial institutions to build capital throughthe sale of senior preferred shares to the U.S. Treasury on terms that arenon-negotiable;

 

·                  On October 14, 2008, theFDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”),which seeks to strengthen confidence and encourage liquidity in the bankingsystem.  The TLGP has two primarycomponents that are available on a voluntary basis to financial institutions:

 

·                  Guarantee of newly-issuedsenior unsecured debt; the guarantee would apply to new debt issued on orbefore June 30, 2009 and would provide protection until June 30,2012; issuers electing to participate would pay a 75 basis point fee for theguarantee;

 

·                  Unlimited deposit insurancefor non-interest bearing deposit transaction accounts; financial institutionselecting to participate will pay a 10 basis point premium in addition to theinsurance premiums paid for standard deposit insurance.

 

·                  On February 17, 2009,the American Recovery and Reinvestment Act (the “Recovery Act”) was signed intolaw in an effort to, among other things, create jobs and stimulate growth inthe United States economy.  The RecoveryAct specifies appropriations of approximately $787 billion for a wide range ofFederal programs and will increase or extend certain benefits payable under theMedicaid, unemployment compensation, and nutrition assistance programs.  The Recovery Act also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The Recovery Act also imposescertain limitations on compensation paid by participants in the U.S. Treasury’sTroubled Asset Relief Program (“TARP”).

 

·                  On March 23, 2009, theU.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announcedthe Public-Private Partnership Investment Program for Legacy Assets whichconsists of two separate plans, addressing two distinct asset groups:

 

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·                  The Legacy Loan Program,which the primary purpose will be to facilitate the sale of troubled mortgageloans by eligible institutions, which include FDIC-insured federal or statebanks and savings associations. Eligible assets may not be strictly limited toloans; however, what constitutes an eligible asset will be determined byparticipating banks, their primary regulators, the FDIC and the U.S. Treasury.Additionally, the Loan Program’s requirements and structure will be subject tonotice and comment rulemaking, which may take some time to complete.

 

·                  The Securities Program, whichwill be administered by the U.S. Treasury, involves the creation ofpublic-private investment funds to target investments in eligible residentialmortgage-backed securities and commercial mortgage-backed securities issuedbefore 2009 that originally were rated AAA or the equivalent by two or morenationally recognized statistical rating organizations, without regard torating enhancements (collectively, “Legacy Securities”). Legacy Securities mustbe directly secured by actual mortgage loans, leases or other assets, and maybe purchased only from financial institutions that meet TARP eligibilityrequirements.

 

Weare participating in both components of the TLGP; however, we do not expect toissue unsecured debt before the termination of that component of the TLGP.  As a result of the enhancements to depositinsurance protection and the expectation that there will be demands on the FDIC’sdeposit insurance fund, our deposit insurance costs have increased and willcontinue to increase significantly throughout 2009.  We have elected not to participate in theTARP Capital Purchase Program. Regardless of our lack of participation, governmental intervention andnew regulations under these programs could materially and adversely affect ourbusiness, financial condition and results of operations.****The following discussion and analysis describes ourperformance in this challenging economic environment.

 

**Results of Operations**

 

**Net Interest Income**

 

Forthe six months ended June 30, 2009, net interest income, the majorcomponent of our net income, was $1,562,566 as compared to $1,441,852 for thesame period in 2008.  The average ratepaid on interest-bearing liabilities for the six months ended June 30,2009 and 2008 was 2.76% and 4.07%, respectively, while the average raterealized on interest-earning assets was 5.83% and 6.80%, respectively for thesame period.  The net interest spread was3.07% and 2.73% for the six month period ended June 30, 2009 and 2008,respectively.   Decreases in the FederalReserve short-term rates and the resulting decrease in the yields we generatedon our earning assets (from variable rate loan repricing and new loans at lowerrates), has been offset by benefits we received from the repricing of our ratesensitive liabilities for the six-month period ended June 30, 2009.  The net result was an increase in netinterest spread of 34 basis points during the six-month period ended June 30,2009, as compared to the six-month period ended June 30, 2008.

 

For the three months ended June 30, 2009, net interest income was$803,024 as compared to $738,863 for the same period in 2008.  The average rate paid on interest-bearingliabilities for the three months ended June 30, 2009 and 2008 was 2.65%and 3.91%, respectively, while the average rate realized on interest-earningassets was 5.83% and 6.51% for the same periods.  The net interest spread was 3.18% and 2.60%for the three month period ended June 30, 2009 and 2008, respectively.

 

**Provisionand Allowance for Loan Losses**

 

We have established anallowance for loan losses through a provision for loan losses charged toexpense on our consolidated statement of operations.  The allowance for loan losses was $880,716and $1,041,065, or 1.19% and 1.48% of total loans, as of June 30, 2009 and2008, respectively.  The allowance forloan and lease losses as a percentage of total loans has decreased mainlyattributable to $659,842 charged off as loss against the allowance for loan andlease losses on five collateral dependent loans during the six-month periodended June 30, 2009.  As of December 31,2008, $341,023 of this charge off was included as specific reserves in the Bank’sallowance for loan and lease losses.   For the six months ended June 30, 2009 and 2008, the provision was$468,300 and $427,950, respectively. Nonperforming loans totaled $1,961,741 at June 30, 2009.  In addition, 16 loans totaling $2,767,637were impaired as of June 30, 2009 and loans totaling $4,012,904 wereconsidered criticized loans.  Theimpaired loans include a $708,046 loan secured by real estate for whichmanagement has not set aside a specific reserve due to our belief that a fullrecovery is likely pursuant to the legal actions which we are pursuing.  The impaired loans also include a collateraldependent participation loan we hold on a commercial real estate development onthe South Carolina coast.  The amount ofthe impairment on this loan is not easily determinable.  Based upon calculations of the present valueof the collateral supporting this loan, we believe our loan on this developmentis impaired by approximately $331,609, and we have charged this amount as lossagainst our reserves during the quarter ended March 31, 2009.  However, the actual impairment on this loanmay be greater than this amount and additional charge-offs may occur.   No principal payments on this loan have beenreceived during the quarter ended June 30, 2009 resulting in a netprincipal balance totaling $500,750. There were five loans totaling $1,238,473 that were impaired and loanstotaling $2,847,867 that were criticized at June 30, 2008.

 

The allowance for loan losses represents an amount which we believe willbe adequate to absorb probable losses on existing loans that may becomeuncollectible.  Our judgment as to theadequacy of the allowance for loan losses is based on a number of

 

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assumptions about future events, which we believe to be reasonable, butwhich may or may not prove to be accurate. Our determination of the allowance for loan losses is based onevaluations of the collectability of loans, including consideration of factorssuch as the balance of impaired loans, the quality, mix, and size of ouroverall loan portfolio, economic conditions that may affect the borrower’sability to repay, the amount and quality of collateral securing the loans, ourhistorical loan loss experience, and a review of specific problem loans.  We also consider subjective issues such aschanges in the lending policies and procedures, changes in the local/nationaleconomy, changes in volume or type of credits, changes in volume/severity ofproblem loans, quality of loan review and board of director oversight,concentrations of credit, and peer group comparisons.  Due to our limited operating history, to datethe provision for loan losses has been made primarily as a result of our assessmentof general loan loss risk compared to banks of similar size and maturity.  Due to our short operating history, the loansin our loan portfolio and our lending relationships are of very recentorigin.  In general, loans do not beginto show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process known as seasoning.  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher than current levels.  In addition,the recent downturn in the real estate market has resulted in an increase inloan delinquencies, defaults and foreclosures, and we believe these trends arelikely to continue.  In some cases, thisdownturn has resulted in a significant impairment to the value of ourcollateral and our ability to sell the collateral upon foreclosure, and thereis a risk that this trend will continue. The real estate collateral in each case provides an alternate source ofrepayment in the event of default by the borrower and may deteriorate in valueduring the time the credit is extended. If real estate values continue to decline, delinquencies and defaultswill likely increase, and it is more likely that we would be required toincrease our allowance for loan losses. Periodically, we will adjust the amount of the allowance based onchanging circumstances.  We will chargerecognized losses to the allowance and add subsequent recoveries back to theallowance for loan losses.  There can beno assurance that charge-offs of loans in future periods will not exceed theallowance for loan losses as estimated at any point in time or that provisionsfor loan losses will not be significant to a particular accounting period.

 

**Noninterest Income**

 

Totalnoninterest income for the six months ended June 30, 2009 and 2008 was$128,862 and $118,510, respectively.  Decreased mortgage loan sale volume caused mortgage origination feeincome to decrease $7,386 to $18,138 for the six months ended June 30,2009 as compared to $25,524 for the six months ended June 30, 2008.  This decrease was partially offset by servicefees on deposit accounts, which totaled $65,667 for the six months ended June 30,2009 as compared to $43,118 for the six months ended June 30, 2008 drivenmainly by non-sufficient funds/overdraft fees and also to an increased numberof accounts producing service charges.  Non-sufficient funds/overdraft fees on deposit accounts increased$21,377 to $57,270 for the six months ended June 30, 2009 as compared to$35,893 for the six months ended June 30, 2008.  This fee increase was attributable to anincreased number of accounts and to weak economic conditions.

 

Totalnoninterest income for the three months ended June 30, 2009 and 2008 was$68,832 and $52,283, respectively. Service charges on deposit accounts totaled $33,726 for the three monthsended June 30, 2009 as compared to $22,031 for the three months ended June 30,2008.    This increase was attributableto increased non-sufficient funds/overdraft fees on deposit accounts due toweak economic conditions and to an increased number of accounts.

 

**Noninterest Expense**

 

Totalnoninterest expense for the six months ended June 30, 2009 and 2008 was$1,636,489 and $1,583,644, respectively. The primary component of noninterestexpense was salaries and benefits, which were $795,982 and $838,104 for the sixmonths ended June 30, 2009 and 2008, respectively.   Salary expense decreased $38,358 to $611,907for the six months ending June 30, 2009 as compared to $650,265 for thesix months ended June 30, 2008 mainly driven by headcount reductions.  Net occupancy expense increased $59,163 to$195,382 for the six months ended June 30, 2009, as compared to $136,219for the six months ended June 30, 2008. Increased leasehold depreciation expense for the six months ending June 30,2009, as compared to the six months ended June 30, 2008, have  resulted from the consolidation andrelocation of our original main branch and the original operations center tothe renovated new main branch facility in the same commercial subdivision in July 2008.  Leasehold depreciation expense totaled$54,603 and $14,502 for the six months ending June 30, 2009 and 2008,respectively.  Other operating expensesincreased to $222,483 for the six months ended June 30, 2009, as comparedto $208,667 for the six months ended June 30, 2008.  FDIC deposit insurance increased $63,223 to$91,043 for the first six months ending June 30, 2009, as compared to$27,820 for the six months ended June 30, 2008.  This increase is due to the FDIC InsuranceReform Legislation that allows the FDIC to price deposit insurance according torisk for all insured institutions regardless of the level of the reserveratio.  In addition, $42,500 was accruedin June 2009 for a special assessment required by the FDIC.  This assessment was calculated using 5.0basis points of the estimated special assessment base (total assets less tierone capital) at June 30, 2009.  TheFDIC required the special assessment to be accrued in the second quarter to bepaid on September 30, 2009.  IncreasedFDIC assessments were somewhat offset by decreased dues and subscription costsand by decreased telephone/communication expense.

 

Totalnoninterest expense for the three months ended June 30, 2009 and 2008 was$837,809 and $808,652, respectively.  Theprimary component of noninterest expense was salaries and benefits, which were$389,313 and $419,406 for the three months ended June 30, 2009 and 2008,respectively.  Net occupancy expensesincreased to $99,706 from $77,096 for the three months ended June 30, 2009and 2008, respectively, mainly attributable to increased leasehold depreciationexpense.  FDIC deposit insuranceassessment totaling $66,191 for the three months ended June 30, 2009, ascompared to $14,168 for the three months

 

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endedJune 30, 2008, was somewhat offset by reduced other operating expensesmainly attributable to decreased dues and subscription costs and  telephone/communication expense.

 

**Net Loss**

 

Thecombination of the above factors resulted in a net loss for the six monthsended June 30, 2009 of $272,796, or $.22 per share, after the recognitionof an income tax benefit of $140,565 for the period.  For the period ended June 30, 2008, thenet loss was $297,812, or $0.24 per share, after the recognition of an incometax benefit of $153,420 for the period.

 

Netloss for the three months ended June 30, 2009 was $138,087, or $.11 pershare, after recognition of an income tax benefit of $71,166 for thequarter.  Net loss for the three monthsended June 30, 2008 was $145,137, or $.12 per share, after recognition ofan income tax benefit of $74,769 for the quarter.

 

**Assets and Liabilities**

 

During the first six months of 2009, total assets decreased $1,341,409,or .01%, to $93,803,422 at June 30, 2009 when compared to December 31,2008.  Loans receivable decreased$1,220,570 to $74,142,651 as of June 30, 2009 when compared to December 31,2008.  Securities available for saledecreased $2,018,277 to $14,370,470 when compared to December 31, 2008mainly due to principal repayments on mortgage backed securities.   The decrease in loans receivable andsecurities available for sale was partially offset by the $1,549,599 increasein cash and cash equivalents to $2,127,514 as of June 30, 2009 whencompared to $577,915 as of December 31, 2008.

 

**Loans**

 

We experienced a slight decrease in loans during the first six months of2009 due to loan payoffs paired with continued soft loan demand from qualifiedapplicants.  Net loans decreased by$1,025,510 to $73,261,935 during the period. As shown below, the largest category of loans was real estate mortgageloans which increased $1,032,128 to $51,839,026 from December 31, 2008 to June 30,2009.  Balances within the major loansreceivable categories as of June 30, 2009 and December 31, 2008 areas follows:

 
| ** **                              | ** ** | **June 30, 2009** | ** **     | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|------------------------|----------------|----------------------------|------------|
| Real estate:                            | ** ** | ** **             | ** **     | ** **                 | ** ** |
| Mortgage                                |       | $                      | 51,839,026     |                       | $          | 50,806,898 |   |
| Construction, land and land development |       | 16,963,743             |           | 17,995,142                 |       |
| Total real estate loans                 |       | 68,802,769             |           | 68,802,040                 |       |
| Commercial and industrial               |       | 4,579,646              |           | 4,793,257                  |       |
| Consumer and other                      |       | 801,198                |           | 984,411                    |       |
| Agriculture and other farm              |       | —                 |           | 850,000                    |       |
| Deferred origination fees, net          |       | (40,962                | )              | (66,487                    | )          |
| Gross loans                             |       | 74,142,651             |           | 75,363,221                 |       |
| Less allowance for loan losses          |       | (880,716               | )              | (1,075,776                 | )          |
| Loans, net                              | ** ** | **$**                  | **73,261,935** | ** **                 | **$**      | **74,287,445** | ** ** |

 

**Risk Elements in the Loan Portfolio**

 

Criticizedloans are loans that have potential weaknesses that deserve close attention andwhich could, if uncorrected, result in deterioration of the prospects forrepayment or our credit position at a future date.  Classified loans are loans that areinadequately protected by the sound worth and paying capacity of the borroweror any collateral and as to which there is a distinct possibility orprobability that we will sustain a loss if the deficiencies are notcorrected.  At June 30, 2009, we had 16 loans totaling $2,767,637 thatwere impaired.  Twelve of these loanstotaling $2,263,004 are secured by real estate, two loans totaling $35,696 aresecured by automobiles, one loan totaling $433,990 is secured by businessassets including accounts receivable, inventory, furniture, fixtures andequipment and one loan totaling $34,947 which was unsecured.   Included in the allowance for loan losses atJune 30, 2009 was $259,129 related to impaired loans.

 

Nonaccrualloans totaled $1,961,741 and $1,035,644 at June 30, 2009 and 2008,respectively.   Additionally, as of June 30,2009, the Bank had one loan totaling $29,115 which was 90 days or more past dueand still accruing interest.   As of June 30,2008, the Bank had no loans 90 days or more past due and still accruinginterest.

 

Duringthe quarter ended June 30, 2009, $210,501 was charged off as loss againstallowance for loan and lease losses on three collateral dependent loans.   During the quarter ended March 31,2009, $449,341 was charged off as loss against allowance for loan and leaselosses on two collateral dependent loans.  As a result, the allowance for loan losses to loans outstandingdecreased to 1.19% from 1.48% as of June 30, 2009 and 2008,respectively.  As of December 31,2008, $341,023 of this charge off was

 

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includedas specific reserves in the Bank’s allowance for loan and lease losses.   The following table depicts the activity inthe allowance for loan losses for the periods ended June 30, 2009 and****2008:

 
| ** **                                                    | ** ** | **June 30,** | ** **     |
|---------------------------------------------------------------|------------|-------------------|----------------|
| ** **                                                    | ** ** | **2009**          | ** **     | **2008** | ** ** |
| Balance, January 1,                                      |       | $                 | 1,075,776      |   | $ | 677,850 |   |
| Provision for loan losses for the period                      |       | 468,300           |           | 427,950 |   |
| Net loans (charged-off) recovered during the periodthe period |       | (663,360          | )              | (64,735 | ) |
|                                                          |       |              |           |   |   |
| Balance, end of period                                        | ** ** | **$**             | **(880,716**   | **)** | **$** | **(1,041,065** | **)** |
|                                                          | ** ** | ** **        | ** **     | ** ** | ** ** |
| Gross loans outstanding, end of period                        | ** ** | **$**             | **74,142,651** | ** ** | **$** | **70,425,793** | ** ** |
|                                                          | ** ** | ** **        | ** **     | ** ** | ** ** |
| Allowance for loan losses to loans outstanding                | ** ** | **1.19**          | **%**          | **1.48** | **%** |

 

**Deposits**

 

Totaldeposits were $64,140,924 at June 30, 2009, as compared to $67,967,234 at December 31,2008.  The largest category of depositswas time deposits $100,000 and over which increased $2,590,430 to $22,785,467at June 30, 2009, as compared to $20,195,037 at December 31,2008.  In January 2009, the Bankobtained $2,500,000 in six month certificates of deposit from the SC StateTreasurer quarterly auction.  Securitiesfrom the investment portfolio are pledged as collateral for thesedeposits.  Savings and money marketaccounts totaled $17,383,194 at June 30, 2009, as compared to $20,285,985at December 31, 2008.  Brokeredmoney market accounts represent $101,094 and $2,503,376 of these savings andmoney market accounts at June 30, 2009 and December 31, 2008,respectively.  Other time depositsdecreased $3,067,267 to $15,673,503 at June 30, 2009, as compared to$18,740,770 at December 31, 2008. Brokered certificates of deposits represent $7,327,000 and $10,426,000of these other time deposits accounts at June 30, 2009 and December 31,2008, respectively.   Management’sstrategic decrease in brokered certificate of deposits and brokered moneymarket accounts contributed to $3,826,310 decline in total deposits from December 31,2008 to June 30, 2009.

 

Balanceswithin the major deposit categories as of June 30, 2009 and December 31,2008 are as follows:

 
| ** **                                | ** ** | **June 30, 2009** | ** **     | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|------------------------|----------------|----------------------------|------------|
| Non-interest bearing transaction accounts |       | $                      | 5,752,262      |                       | $          | 5,722,426 |   |
| Interest-bearing transaction accounts     |       | 2,546,498              |           | 3,023,016                  |       |
| Savings and money market                  |       | 17,383,194             |           | 20,285,985                 |       |
| Time deposit $100,000 and over            |       | 22,785,467             |           | 20,195,037                 |       |
| Other time deposits                       |       | 15,673,503             |           | 18,740,770                 |       |
|                                      |       |                   |           |                       |       |
| Total deposits                            | ** ** | **$**                  | **64,140,924** | ** **                 | **$**      | **67,967,234** | ** ** |

 

**OtherBorrowings**

 

Otherborrowings are comprised of Federal Home Loan Bank of Atlanta (“FHLBA”) advances,advances from the Federal Reserve Bank and federal funds purchased.  FHLBA advances are collateralized by pledgedFHLBA stock, certain commercial and residential loans, including home equitylines of credit, and by a portion of our investment portfolio.   FHLBA advances increased $2,000,000 to$18,500,000 at June 30, 2009, as compared to December 31, 2008.  During the quarter ended March 31, 2009,we replaced a portion of maturing brokered certificates of deposit totaling$3,000,000 with a $2,000,000 FHLBA advance.

 

FHLBAadvances as of June 30, 2009 and December 31, 2008 are as follows:

 
| **Maturity**              | ** ** | **Rate**   | ** ** | **June 30, 2009********Balance** | ** **     | **December 31, 2008********Balance** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------------|----------------|-------------------------------------------|------------|
| 11/30/2009                |       | 3.3400     | %          | $                                     | 1,000,000      |                                      | $          | 1,000,000 |   |
| 01/28/2010                |       | 1.1200     | %          | 2,000,000                             |           | —                                    |       |
| 03/12/2010                |       | 2.6400     | %          | 5,000,000                             |           | 5,000,000                                 |       |
| 05/28/2010                |       | 3.5800     | %          | 1,000,000                             |           | 1,000,000                                 |       |
| 05/31/2011                |       | 3.9300     | %          | 1,000,000                             |           | 1,000,000                                 |       |
| 07/11/2011                |       | 3.6675     | %          | 1,000,000                             |           | 1,000,000                                 |       |
| 07/10/2012                |       | 3.8990     | %          | 1,000,000                             |           | 1,000,000                                 |       |
| 09/12/2012                |       | 3.7000     | %          | 750,000                               |           | 750,000                                   |       |
| 09/12/2013                |       | 3.8500     | %          | 750,000                               |           | 750,000                                   |       |
| 11/29/2017                |       | 3.4840     | %          | 5,000,000                             |           | 5,000,000                                 |       |
|                      |       |       |       |                                  |           |                                      |       |
| Total advances from FHLBA | ** ** | ** ** | ** ** | **$**                                 | **18,500,000** | ** **                                | **$**      | **16,500,000** | ** ** |

 

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Therewas one advance outstanding from the Federal Reserve Bank totaling $1,000,000as of June 30, 2009.  The rate onthis advance was .50% and the stated maturity date was July 23, 2009.   Prepayments are permitted on this advancewithout penalty.  There were no advancesoutstanding from the Federal Reserve Bank as of December 31, 2008.

 

**Liquidity**

 

Liquidity represents theability of a company to convert assets into cash or cash equivalents withoutsignificant loss, and the ability to raise additional funds by increasingliabilities.  Liquidity managementinvolves monitoring our sources and uses of funds in order to meet ourday-to-day cash flow requirements while maximizing profits.  Liquidity management is made more complicatedbecause different balance sheet components are subject to varying degrees ofmanagement control.  For example, thetiming of maturities of our investment portfolio is fairly predictable andsubject to a high degree of control at the time investment decisions aremade.  However, net deposit inflows andoutflows are far less predictable and are not subject to the same degree ofcontrol.

 

Our primary sources of liquidity are deposits, scheduled repayments onour loans, and interest on and maturities of our investments.  We plan to meet our future cash needs throughthe liquidation of temporary investments and the generation of deposits.  Occasionally, we might sell investment securitiesin connection with the management of our interest sensitivity gap or to managecash availability.  We may also utilizeour cash and due from banks, security repurchase agreements, federal fundssold, and other borrowings to meet liquidity requirements as needed.  In addition, we have the ability, on ashort-term basis, to purchase federal funds from other financialinstitutions.  As of June 30, 2009,we had lines of credit to purchase federal funds from unrelated banks totaling$7,200,000, consisting of a $2,800,000 line secured by investment securitiesand $4,400,000 of unsecured lines.  As ofJune 30, 2009, there was no balance outstanding any line of credit. ** **The lenders havereserved the right to withdraw the unsecured lines at their option.  These lines of credit are available onvarious structures for general corporate purposes.

 

AtJune 30, 2009, we had remaining available credit from FHLBA totaling$233,931 based upon existing pledged investment and loan collateral.  At June 30, 2009, an additional$4,986,069 of credit was also available to the Bank upon the receipt of additionalcollateral pledged to FHLBA.

 

Asof June 30, 2009, we had $10,794,511 of lot loans pledged to FederalReserve Bank of Richmond which produced lendable collateral value totaling$7,016,432 available for short-term advances at the Discount Window.   For advances with maturities of 28 days orless, the total lendable collateral value was available to the Bank.  Seventy-five percent of the Bank’s lendablecollateral value was available for advances with maturities from 29 to 90days.  The rate on the advances from theDiscount Window is the Federal Reserve Discount Window rate.   Advances from the Federal Reserve DiscountWindow are not subject to prepayment penalties. As of June 30, 2009, one advance totaling $1,000,000 FederalReserve Bank was outstanding with a scheduled maturity of July 23, 2009.

 

**Capital Resources**

 

Totalshareholders’ equity decreased $292,201 during the first six months of 2009 to$9,677,803.  The decrease is attributableto the net loss for the period of $272,796 and by $75,752 related to unrealizedgains on securities offset by $56,347 for stock-based compensation expense.

 

TheFederal Reserve and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on a percentageof assets and off-balance sheet exposures, adjusted for risk weights rangingfrom 0% to 100%.  The Federal Reserveguidelines contain an exemption from the capital requirements for “small bankholding companies,” which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have amaterial amount of debt or equity securities outstanding registered with theSEC.  Although our class of common stockis registered under Section 12 of the Securities Exchange Act, we believethat because our stock is not listed on any exchange or otherwise activelytraded, the Federal Reserve Board will interpret its new guidelines to meanthat we qualify as a small bank holding company.  Nevertheless, our Bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.  Regardless, our Bank is “well capitalized”under these minimum capital requirements as set per bank regulatory agencies.

 

Under the capital adequacyguidelines, regulatory capital is classified into two tiers. These guidelinesrequire an institution to maintain a certain level of Tier 1 and Tier 2 capitalto risk-weighted assets. Tier 1 capital consists of common shareholders’equity,

 

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excluding the unrealized gainor loss on securities available for sale, minus certain intangible assets. Indetermining the amount of risk-weighted assets, all assets, including certainoff-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%based on the risks believed to be inherent in the type of asset. Tier 2 capitalconsists of Tier 1 capital plus the general reserve for loan losses, subject tocertain limitations. We are also required to maintain capital at a minimumlevel based on total average assets, which is known as the Tier 1 leverageratio.  To be considered “adequatelycapitalized” under these capital guidelines, we must maintain a minimum totalrisk-based capital of 8%, with at least 4% being Tier 1 capital.  In addition, we must maintain a minimum Tier1 leverage ratio of at least 4%.  To beconsidered “well capitalized,” we must maintain total risk-based capital of atleast 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

The Bank is also required tomaintain capital at a minimum level based on quarterly average assets, which isknown as the leverage ratio.  Only thestrongest banks are allowed to maintain capital at the minimum requirement of3%.  All others are subject tomaintaining ratios 1% to 2% above the minimum. The Bank exceeded its minimum regulatory capital ratios as of June 30,2009, as well as the ratios to be considered “well capitalized.”

 

The following tablesummarizes the Bank’s risk-based capital at June 30, 2009:

 
| Shareholders’ equity                                  |   | $          | 9,219,757  |   |
|------------------------------------------------------------|--------|------------|------------|--------|
| Less-unrealized net gain on available-for-sale  securities |   | (309,313   | )          |
| Less-disallowed deferred tax assets                        |   | (1,179,797 | )          |
|                                                       |   |       |       |
| Tier 1 capital                                             |   | $          | 7,730,647  |   |
|                                                       |   |       |       |
| Plus - allowance for loan losses(1)                        |   | 834,950    |       |
|                                                       |   |       |       |
| Total capital                                              |   | $          | 8,565,597  |   |
|                                                       |   |       |       |
| Risk-weighted assets                                       |   | $          | 66,750,000 |   |
|                                                       |   |       |       |
| Risk-based capital ratios:                                 |   |       |       |
|                                                       |   |       |       |
| Tier 1 capital (to risk-weighted assets)                   |   | 11.58      | %          |
| Total capital (to risk-weighted assets)                    |   | 12.83      | %          |
| Tier 1 capital (to total average assets)                   |   | 8.30       | %          |

 

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(1) Limited to 1.25% of risk-weighted assets

 

Subsequent to June 30, 2009, we commenced a private placementoffering to issue 500,000 shares of our authorized but unissued common stock at$6.00 per share to provide for approximately $3,000,000 in Tier 1 capital.  If we sell all of the 500,000 shares ofcommon stock, our Tier 1 risk-based capital, total risk-based capital and Tier1 leverage ratios would have been approximately 16.00%, 17.25%, and 11.46%,respectively, if the common stock had been issued as of June 30, 2009.

 

**Off-Balance Sheet Risk**

 

Through the operations of our Bank, we make contractual commitments toextend credit in the ordinary course of our business activities.  These commitments are legally bindingagreements to lend money to our customers at predetermined interest rates for aspecified period of time.  At June 30,2009, we had issued commitments to extend credit of $10,517,905 through varioustypes of lending arrangements.  We had$247,164 of unused credit under pre-arranged overdraft plans and overdraftprotection plans offered on deposit accounts. There were also $212,073 outstanding commercial letters of credit at June 30,2009.

 

The following table sets forth the length of time until maturity forunused commitments to extend credit and standby letters of credit at June 30,2009.

 
| ** **                           | ** ** | **Within********Three********Months** | ** **    | **After Three********Through Twelve Months** | ** ** | **One********Through********Five Years** | ** ** | **Greater********Than********Five Years** | ** **    | **Total**  | ** ** |
|--------------------------------------|------------|---------------------------------------|---------------|----------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|---------------|------------|------------|
| Unused commitments to extend credit  |       | $                                     | 1,381,458     |                                         | $          | 4,029,263                                |       | $                                         | 2,461,104     |       | $          | 2,893,244 |   | $ | 10,765,069 |   |
| Standby commercial letters of credit |       | —                                |          | 212,073                                      |       | —                                   |       | —                                    |          | 212,073    |       |
| Totals                               | ** ** | **$**                                 | **1,381,458** | ** **                                   | **$**      | **4,241,336**                            | ** ** | **$**                                     | **2,461,104** | ** ** | **$**      | **2,893,244** | ** ** | **$** | **10,977,142** | ** ** |

 

Based on historical experience, many of the commitments and letters ofcredit will expire unfunded. Accordingly, the amounts shown in the table above do not necessarilyreflect our need for funds in the periods shown.

 

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We evaluate each customer’s credit worthiness on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary by us upon extension of credit, is based on ourcredit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory,property, plant and equipment, commercial and residential real estate.

 

##### **Critical Accounting Policies**

##### ** **

We have adopted various accounting policieswhich govern the application of accounting principles generally accepted in theUnited States in the preparation of our financial statements.  Our significant accounting policies aredescribed in the notes to the financial statements at December 31, 2008,as filed on our annual report on Form 10-K.  Certain accounting policies involvesignificant judgments and assumptions by us which have a material impact on thecarrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  Thejudgments and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions we make, actual results could differ from these judgments andestimates which could have a material impact on our carrying values of assetsand liabilities and our results of operations.

 

Webelieve the allowance for loan losses is a critical accounting policy thatrequires the most significant judgments and estimates used in preparation ofour financial statements.  Refer to theportions of the discussion in this report on Form 10-Q and in our Form 10-Kthat address our allowance for loan losses for a description of our processesand methodology for determining our allowance for loan losses.

 

**OtherEvents**

 

In addition, dueto the disproportionately higher compliance costs associated with being asmaller public company, we are currently considering deregistering our commonstock under the Securities Exchange Act. Deregistration will allow us to save significant costs related to thepreparation, review and filing of our periodic reports.  We expect printing and mailing costs to belower also because the periodic reports that we deliver to shareholders afterthe deregistration will not include many of the disclosures required under theperiodic reporting rules, such as disclosures regarding executive compensation,corporate governance and management ownership, and management’s discussion andanalysis of our financial results. Further, in light of the limited market for our common stock and theavailability of capital from sources other than public markets, we believe thetermination of our status as an SEC-registered company is not likely to have asignificant impact on any future efforts to raise additional capital.  If we need to raise additional capital tosupport growth in the future, we have other financing alternatives that willnot be affected by our status as a private company, including raisingadditional equity through private offerings. Finally, we expect our business and operations to continue as they arecurrently being conducted and the deregistration is not anticipated to have anymaterial effect upon the conduct of our business.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

Notapplicable.

 

**Item 4. Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of June 30, 2009.  There have been no significant changes in ourinternal controls over financial reporting during the fiscal quarter ended June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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

 

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**PART II — OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

There are no pending legalproceedings to which we are a party or of which any of our property is thesubject.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

Not applicable.

 

**Item 3.Default Upon Senior Securities**

 

Not applicable.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

Therewere two matters submitted to a vote of security holders during the quarterended June 30, 2009 at our annual meeting of shareholders held on May 22,2009.   The matters were the election ofthe board of directors for a one-year term and to ratify the appointment ofElliott Davis, LLC as our independent registered public accounting firm forfiscal year 2009.  The followingdescribes the matters voted upon at the annual meeting and sets forth thenumber of votes cast for the proposals and those withheld or abstained (therewere no broker non-votes).

 

*Proposal #1 - Election of the Board of Directors to servefor a one-year term*

 

Ourdirectors are elected for one-year terms at each annual meeting.  The current directors are listed below.  Each director was nominated for election andstood for election at the annual meeting on May 22, 2009 for a one-yearterm. Votes for the election of the directors were as follows:

 
| ** **                         | ** ** | **Voting Shares in  Favor** | ** ** | **Withheld** | ** ** |
|------------------------------------|------------|-----------------------------|------------|--------------|------------|
| **Name of Directors**              | ** ** | **#**                       | ** ** | **%**        | ** ** | **Authority** | ** ** |
| Gary C. Davis                      |       | 834,351                     |       | 95.221       | %          | 41,875 |   |
| Frederick Anthony Nimmer, III |       | 831,851                     |       | 94.936       | %          | 44,375 |   |
| Robyn Josselson Shirley            |       | 834,351                     |       | 95.221       | %          | 41,875 |   |
| Mark S. Simpson                    |       | 834,351                     |       | 95.221       | %          | 41,875 |   |
| Brian J. Smith                     |       | 834,351                     |       | 95.221       | %          | 41,875 |   |
| Robert P. Trask                    |       | 834,351                     |       | 95.221       | %          | 41,875 |   |
| Allen B. Ward                      |       | 834,531                     |       | 95.221       | %          | 41,875 |   |
| Edgar L. Woods                     |       | 834,531                     |       | 95.221       | %          | 41,875 |   |
| Gary C. Davis                      |       | 834,531                     |       | 95.221       | %          | 41,875 |   |

 

*Proposal #2 — Ratify the appointment of Elliott Davis, LLCas our independent registered public accounting firm for fiscal year 2009*

 

The vote of the shareholdersto ratify the appointment of Elliott Davis as out independent registered publicaccounting firm for fiscal year 2009 was 867,726 shares voted in favor and8,500 shares abstained.

 

**Item 5.Other Information**

 

Not applicable.

 

**Item 6.Exhibits**

 

31.1         Rule 15d-14(a) Certificationof the Principal Executive Officer.

 

31.2                           Rule 15d-14(a) Certificationof the Principal Financial Officer.

 

32            Section 1350Certifications.

 

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# **SIGNATURES**

# ** **

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:  August 14, 2009 | By:    | /s/  Robert P. Trask                   |
|-----------------------------|--------|----------------------------------------|
|                        |   | Robert  P. Trask                       |
|                        |   | President  and Chief Executive Officer |
|                        |   |                                   |
|                        |   |                                   |
| Date:  August 14, 2009 | By:    | /s/  Michelle M. Pennell               |
|                        |   | Michelle  M. Pennell                   |
|                        |   | Principal Financial Officer            |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                  |
|-------------|------------|-----------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                             |
|        |       |                                                                        |
| 31.1        |       | Rule 15d-14(a) Certification  of the Principal Executive Officer. |
|        |       |                                                                        |
| 31.2        |       | Rule 15d-14(a) Certification  of the Principal Financial Officer. |
|        |       |                                                                        |
| 32          |       | Section 1350  Certifications.                                          |

 

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