U.
S. SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




x
                      ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
 for
the fiscal year ended December 31, 2008
  o
                      TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934




Commission
File Number  001-15061





ATLANTIC
BANCGROUP, INC.


(Exact
name of registrant as specified in its charter)





Florida
              59-3543956(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)1315
      South Third Street, Jacksonville Beach, Florida
              32250(Address
      of principal executive offices)
              (Zip
      Code)





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





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





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





Common
Stock, par value $0.01 per share


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.


YES £   NO
S





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.


YES £   NO
S





Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.


YES S   NO
£





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


£





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
      accelerated filer  £
              Accelerated
      filer  £Non-accelerated
      filer  £
              Smaller
      reporting company  S





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


YES £   NO
S





The
aggregate market value of the registrant’s common stock held by non-affiliates
at June 30, 2008:  $15,249,825.





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)





The
number of shares outstanding of the registrant’s common stock as of February 27,
2009:  1,247,516.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 23, 2009, are incorporated into Part III, Items 9 through 14 of
this Annual Report on Form 10-K.










ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES





TABLE
OF CONTENTS





PageForward-Looking
      Statements
                      1PART
      IItem
      1.
                      Business
                      3General
                      3Competition
                      4Lending Activities
                      5Deposit Activities
                      6Investment Activities
                      6Correspondent Banking
                      7Interest and Usury
                      7Supervision and Regulation
                      7Future Legislative Developments
                      12Common Stock
                      12Preferred Stock
                      12Indemnification of Directors and
    Officers
                      12Employees
                      13Website Availability of Reports Filed with the Securities
      and Exchange Commission
                      13Item
      1A.
                      Risk Factors
                      13Item
      1B.
                      Unresolved Staff Comments
                      13Item
      2.
                      Properties
                      14Item
      3.
                      Legal Proceedings
                      14Item
      4.
                      Submission of Matters to a Vote of Security
      Holders
                      14PART
      IIItem
      5.
                      Market for Registrant’s Common Equity, Related Stockholder
      Matters, and  Issuer
      Purchases of Equity Securities
                      15Item
      6.
                      Selected Financial Data
                      16Item
      7.
                      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      17Overview
                      17Comparison of Years Ended December 31, 2008 and
      2007
                      18Comparison of Years Ended December 31, 2007 and
      2006
                      20Loan Portfolio
                      24Classification of Assets and Nonaccrual or Impaired
      Loans
                      26Allowance for Loan Losses
                      28Securities
                      28Deposits
                      30Short-Term and Long-Term Debt
                      32Liquidity
                      33Off-Balance Sheet Arrangements and Contractual
      Obligations
                      34Capital Resources
                      34Related Party Transactions
                      36Interest Rate Sensitivity
                      36Recent Accounting Pronouncements Impacting Future
      Periods
                      37Impact of Inflation
                      37


Table of Contents




PageItem
      7A.
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      38Item
      8.
                      Financial Statements and Supplementary Data
                      39Item
      9.
                      Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                      68Item
      9A.
                      Controls and Procedures
                      68Item
      9B.
                      Other Information
                      69PART
      IIIItem
      10.
                      Directors, Executive Officers, and Corporate
      Governance
                      69Compliance with Section 16(a) of the Exchange
      Act
                      69Code of Ethics
                      69Financial Expert
                      69Corporate Governance
                      69Item
      11.
                      Executive Compensation
                      70Item
      12.
                      Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                      70Item
      13.
                      Certain Relationships and Related Transactions, and Director
      Independence
                      70Item
      14.
                      Principal Accounting Fees and Services
                      70PART
      IVItem
      15.
                      Exhibits
                      70SIGNATURES
                      72EXHIBIT INDEX
                      73


Table of Contents





FORWARD-LOOKING
STATEMENTS





Atlantic
BancGroup, Inc., and our wholly-owned banking subsidiary, Oceanside Bank, may
from time to time make written or oral statements, including statements
contained in this report that may constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange
Act”).  The words “expect,” “anticipate,” “intend,” “consider,”
“plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are
intended to identify such forward-looking statements, but other statements may
constitute forward-looking statements.  These statements should be
considered subject to various risks and uncertainties.  Such
forward-looking statements are made based upon management’s belief as well as
assumptions made by, and information currently available to, management pursuant
to “safe harbor” provisions of the Private Securities Litigation Reform Act of
1995.  Our actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of
factors.  Such factors are described below and include, without
limitation:





·
            Losses in our loan portfolio
      are greater than estimated or
expected;


·
            Unanticipated deterioration in
      the financial condition of borrowers may result in significant increases
      in loan losses and provisions for those
  losses.


·
            If real estate values in our
      target markets continue to decline, our loan portfolio could become
      impaired and losses from loan defaults may exceed our allowance for loan
      and lease losses established for that
  purpose.


·
            Economic conditions affecting
      real estate values and transactions in Atlantic’s market and/or general
      economic conditions, either nationally or regionally, that are less
      favorable or take longer to recover than
  expected;


·
            An inability to raise
      additional capital on terms and conditions that are
      satisfactory;


·
            The impact of current economic
      conditions and the impact of our results of operations on our ability to
      borrow additional funds to meet our liquidity
  needs;


·
            Changes in the interest rate
      environment which expand or reduce margins or adversely affect critical
      estimates as applied and projected returns on investments and fair values
      of assets;


·
            Deposit attrition, customer
      loss or revenue loss in the ordinary course of
      business;


·
            Increased competition with
      other financial institutions may affect our results of operations and
      liquidity.


·
            If our securities portfolio
      fails to perform, our securities may lose
  value.


·
            Changes in the legislative and
      regulatory environment may increase the cost of operations or limit our
      growth.


·
            Our common stock is not an
      insured bank deposit and is subject to market
  risk.


·
            Although publicly traded, our
      common stock has substantially less liquidity than the average trading
      market for a stock quoted on the NASDAQ Capital Market, and our stock
      price can be volatile.


·
            The inability of Atlantic to
      realize elements of its strategic and operating plans for 2009 and
      beyond;


·
            Natural disasters in
      Atlantic’s primary market areas result in prolonged business disruption or
      materially impair the value of collateral securing
      loans;


·
            Management’s assumptions and
      estimates underlying critical accounting policies prove to be inadequate
      or materially incorrect or are not borne out by subsequent
      events;


·
            The impact of recent and
      future federal and state regulatory
  changes;


·
            Current or future litigation,
      regulatory investigations, proceedings or
  inquiries;


·
            Strategies to manage interest
      rate risk may yield results other than those
      anticipated;


·
            A significant rate of
      inflation (deflation);


·
            Unanticipated litigation or
      claims;


·
            Changes in the securities
      markets;


·
            Acts of terrorism or war;
      and


·
            Details of the recently
      enacted Emergency Economic Stabilization Act of 2008, the American
      Recovery and Reinvestment Act of 2009 and various announced and
      unannounced programs implemented by the U.S. Treasury Department and bank
      regulators to address capital and liquidity concerns in the banking
      system, are still being finalized and may have a significant effect on the
      financial services industry and
Atlantic.


- 1
-
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Many of such factors are beyond our
ability to control or predict.  Readers should not place undue
reliance on any such forward-looking statements, which speak only as to the date
made.  Readers are advised that the factors listed above could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements.  We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.





Unless
this Form 10-K indicates otherwise or the context otherwise requires, the terms
“we,” “our,” “us,” “Atlantic,” “Holding Company,” or “Oceanside” as used herein
refer collectively to Atlantic BancGroup, Inc. and our subsidiary Oceanside
Bank, which we sometimes refer to as “Oceanside,” “our bank subsidiary,” or “our
bank.”  References herein to the fiscal years 2006, 2007, and 2008
mean our fiscal years ended December 31, 2006, 2007, and 2008,
respectively.














[Remainder
of page left intentionally blank.]


- 2
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 Table of Contents


PART
I





ITEM
      1.
            BUSINESS.





General





Atlantic BancGroup,
Inc.On October 23, 1998, Atlantic BancGroup, Inc. (“Atlantic”
or “Holding Company”) was incorporated in the State of Florida.  On
April 3, 1999, the shareholders of Oceanside Bank (“Oceanside” or “Bank”)
approved the Agreement and Plan of Reorganization (“Reorganization”) whereby
Oceanside became a wholly-owned subsidiary of the Holding
Company.  The Reorganization was completed on May 5, 1999. The Holding
Company is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended (the “BHC Act”), and now owns all of the voting shares of
Oceanside.  Our corporate offices are located at 1315 South Third
Street, Jacksonville Beach, Florida.  Atlantic presently has no
significant operations other than the operations of Oceanside.





Oceanside Bank.Oceanside
opened July 21, 1997, and operates as a Florida state-chartered community bank
within our assessment area.  Oceanside provides general commercial
banking services to businesses and individuals.  The principal
business of Oceanside is to receive demand and time deposits from the public and
to make loans and other investments.  Oceanside operates from a main
office located at 1315 South Third Street, Jacksonville Beach, Florida, and
three branch offices that are located at 560 Atlantic Boulevard, Neptune Beach,
Florida; 13799 Beach Boulevard, Jacksonville, Florida; and 1790 Kernan Boulevard
South, Jacksonville, Florida.  In 2008, Oceanside formed and began
operating a subsidiary, S. Pt. Properties, Inc., for the sole purpose of
managing a single real estate property acquired through
foreclosure.





As is the
case with banking institutions generally, our operations are materially and
significantly influenced by general economic conditions and by related monetary
and fiscal policies of financial institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation, and the State of
Florida Department of Financial Services.  Deposit flows and costs of
funds are influenced by interest rates on competing investments and general
market rates of interest.  Lending activities are affected by the
demand for financing of real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting local demand, the availability of funds, and our ability to
collect outstanding loans.  We face strong competition in attracting
deposits (our primary source for funding loans) and significant challenges with
realizing the full value of our loan portfolio.





Oceanside
has defined its assessment area based on various factors, including its size,
banking offices, geographic boundaries, lending expertise, management, and
competition.  Duval County and three census tracts in the Ponte Vedra
area of St. Johns County have been designated as the institution's assessment
area.  Oceanside draws most of our customer deposits and conducts a
significant portion of our lending transactions from and within our assessment
area, which includes the “Beaches and West Beaches area” of Jacksonville,
Florida.  Duval and St. Johns Counties enjoy an abundant and educated
work force, an attractive business environment, favorable cost-of-living
comparisons to other metropolitan areas in the United States, and a good
relationship between the private and public sectors.





In
general, commercial real estate in the assessment area consists of small
shopping centers and office buildings.  The type of residential real
estate within our assessment area varies, with a number of condominiums,
townhouses, and single-family housing developments dispersed throughout the
area.  New residential growth consists primarily of working
professionals with families.





We
believe that our assessment area has been desirable market in which to operate
an independent, locally-owned bank.  Furthermore, since we have a
large base of local shareholders and communicate frequently with our
shareholders, additional opportunities exist for marketing that might not be
found with other financial institutions in our assessment area.  Our
broad base of shareholders from the Beaches and surrounding areas of
Jacksonville, and the historically favorable economic environment of our
assessment area, should provide us with the opportunity to gain market
share.





As a
locally-owned and operated institution, we emphasize providing prompt,
efficient, and personalized service to individuals, small and medium-sized
businesses, professionals and other local organizations.  Generally,
customers have one account officer to serve all of their banking needs and have
ready access to senior management when necessary.  In addition, our
Board of Directors is responsible for maintaining a visible profile for, and
providing business to, Oceanside within our local community.


- 3
-
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Our
principal strategy is to:





·
            expand
      our commercial and small business customer base within our assessment
      area,


·
            make
      loans secured principally by commercial and residential real estate within
      our assessment area, as well as throughout Duval County and the
      surrounding counties, and


·
            expand
      our consumer loan base within our assessment
  area.





Our
belief is that the most profitable deposit relationships are characterized by
high deposit balances, low frequency of transactions, and low distribution
requirements.  Being a community bank with local management, we are
well-positioned to establish these relationships with smaller commercial
customers and households.





Our
sources of funds for loans and other investments include demand, time, savings,
and other deposits, amortization and repayment of loans, sales to other lenders
or institutions of loans or participations in loans, and other
borrowings.  Our principal sources of income are interest and fees
collected on loans, and to a lesser extent, interest and dividends collected on
other investments. Our principal expenses are interest paid on savings and other
deposits, interest paid on other borrowings, employee compensation, office
expenses, and other overhead and operational expenses.  We offer
several deposit accounts, including demand deposit accounts, negotiable order of
withdrawal accounts (“NOW” accounts), money market accounts, savings accounts,
certificates of deposit, and various retirement accounts.  During
2006, 2007, and 2008, we also obtained funds from customer repurchase agreements
that have been classified as other borrowings and brokered deposits that have
been classified as other time deposits.





We have
automated teller machines (the “ATMs”) located at each of our offices, and we
are a member of an electronic banking network so that our customers may use the
ATMs of other financial institutions.  We also operate drive-in
tellers and 24-hour depositories at each of our offices.  As part of
the strategy to offer innovative services to our customers, we provide on-line
banking (“Internet Banking”), Dial-a-Bank (“Telephone Banking”), remote deposit
capture, ACH origination, and lock-box cash management.





Our
efforts are focused on filling the void created by the increasing number of
locally-owned community banks that have been acquired by large regional holding
companies, negatively impacting the personal nature of the delivery, quality,
and availability of banking services in our assessment area and surrounding
areas.





Competition





The
banking industry, in general, and our market, in particular, is characterized by
significant competition for both deposits and lending
opportunities.  In our market area, we compete with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking firms, and various
other nonbank competitors.  Competition for deposits may have the
effect of increasing the rates of interest we will pay on deposits, which would
increase our cost of money and possibly reduce our net
earnings.  Competition for loans may have the effect of lowering the
rate of interest we will receive on our loans, which would lower our return on
invested assets and possibly reduce our net earnings.  Many of our
competitors have been in existence for a significantly longer period of time
than us, are larger and have greater financial and other resources and lending
limits than us, and may offer certain services that we do not provide at this
time.  However, we feel the market is rich with opportunity to provide
tailor-made custom banking products and services that cannot be provided by the
large institutions that offer many banking products and services on an
impersonal basis.  As larger financial institutions have in recent
years acquired community banks, we are able to cater to those customers looking
for more personalized service.





Our
profitability depends upon our ability to compete in this market
area.  At the present time, we are unable to predict to what degree
competition may adversely affect our financial condition and operating
results.





Our
response to this highly competitive environment dictates that we:





·
            review
      and act upon loan requests quickly with a locally-based loan
      committee,


·
            maintain
      flexible, but prudent lending
policies,


·
            personalize
      service with emphasis on establishing long-term banking relationships with
      our customers, and


·
            maintain
      a strong ratio of employees to customers to enhance the level of
      service.


- 4
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LendingActivities





We offer
a wide range of loans to individuals and small businesses and other
organizations that are located, or conduct a substantial portion of their
business, in our assessment area.  At December 31, 2008, our
consolidated total loans were $207.1 million, or 77.3%, of our total
consolidated assets.  The interest rates charged on loans vary with
the degree of risk, maturity, and amount of the loan, and are further subject to
competitive pressures, money market rates, availability of funds, and government
regulations.  We have no foreign loans or loans for highly-leveraged
transactions.





Our loan
portfolio is concentrated in three major areas: real estate loans, commercial
loans, and consumer and other loans.  A majority of our loans are made
on a secured basis.  As of December 31, 2008, approximately 92% of our
total loan portfolio consisted of loans secured by mortgages on real
estate.  Of the total loans secured by mortgages on real estate,
approximately 47% are secured by nonfarm nonresidential properties (commercial
real estate) and 21% are construction, land development, and other land loans,
secured by real estate.  The remaining 32% are secured by 1-4 family
and multifamily residential properties.





Our real
estate loans are secured by mortgages and consist primarily of loans to
individuals and businesses for the purchase, improvement of, refinance of, or
investment in, real estate and for the construction of 1-4 family residential
units or the development of single-family residential building
lots.  These real estate loans may be made at fixed or variable
interest rates.  We generally do not make fixed-rate commercial real
estate loans for terms exceeding three to five years.  Loans in excess
of three to five years are generally adjustable rate
loans.  Residential real estate loans ordinarily are repayable in
monthly installments, based on up to a 30-year amortization schedule, with
variable interest rates.





During
2008, 2007, and 2006, we brokered loans totaling $11.6 million, $7.6 million and
$11.0 million, respectively, which were closed by the correspondent mortgage
lenders.  We recorded brokering fees of $17,000, $69,000, and $119,000
in 2008, 2007, and 2006, respectively.  Our ability to solicit,
process, and broker residential mortgage loans is highly dependent on the
general economy and interest rate environment, the health of the residential
real estate market, and competition from other local and national mortgage
bankers and brokers.





Our
commercial loans include loans to individuals and small-to-medium-sized
businesses located primarily in Duval and St. Johns Counties for working
capital, equipment purchases, and various other business purposes.  A
majority of commercial loans are secured by real estate, equipment, or similar
assets, but these loans may also be made on an unsecured basis. Commercial loans
may be made at variable or fixed rates of interest.  Commercial lines
of credit are typically granted on a one-year basis, with loan
covenants.  Other commercial loans with terms or amortization
schedules of longer than one year will normally be made at interest rates that
vary with the prime lending rate and will become payable in full in three to
five years.  Commercial loans not secured by real estate amounted to
approximately 6% of our total loan portfolio as of December 31,
2008.





Our
consumer loans and other loans consist primarily of loans to individuals for
various consumer purposes, but include some business-purpose loans which are
payable on an installment basis.  The majority of these loans are for
terms of less than five years and are secured by liens on various personal
assets of the borrowers; however, consumer loans may also be made on an
unsecured basis.  Consumer loans are made at fixed and variable
interest rates, and are often based on an amortization schedule of up to five
years.  Consumer and other loans represent approximately 2% of our
total loan portfolio at December 31, 2008.





Loan
originations are derived from a number of sources.  Loan originations
can be attributed to direct solicitation by our loan officers, referrals from
existing customers and borrowers, advertising, walk-in customers, and, in some
instances, referrals from brokers.





Certain
credit risks are inherent in making loans.  These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers.  In particular, longer
maturities increase the risk that economic conditions will change and adversely
affect collectibility.  We attempt to minimize loan losses through
various means.  In particular, on larger loans, we generally rely on
the cash flow of a debtor as the source of repayment and secondarily on the
value of the underlying collateral.  In addition, shorter loan terms
are utilized in order to reduce the risk of a decline in the value of such
collateral.


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Real
estate values and real estate markets are generally affected by, among other
things, changes in national, regional or local economic conditions; fluctuations
in interest rates and the availability of loans to potential purchasers; changes
in the tax laws and other governmental statutes, regulations and policies; and
acts of nature.  Over the latter part of 2007 and in 2008, real estate
prices in our markets have declined rapidly, and if real estate prices continue
to decline, the value of the real estate collateral securing our loans will
decline.  Such a reduction in the value of our collateral could
increase the number of non-performing loans and adversely affect our financial
performance.




If the
strength of the local economy in which we conduct operations continues to
decline, this could result in, among other things, a further deterioration of
credit quality and availability of credit, which impacts our loan portfolio and
allowance for loan and lease losses.  The vast majority of our loan
portfolio is secured by real estate or other commercial assets in our
market.  Certain markets in Florida have been particularly adversely
affected by declines in real estate value, declines in home sale volumes, and
declines in new home building.  These declines continue to adversely
affect the general economy in our markets.  These factors could result
in higher delinquencies and greater charge-offs in future periods, which would
adversely affect our financial condition and results of operations.





The risk
of delinquent loans is inherent in banking; therefore, we may experience greater
levels of delinquencies than anticipated, and as a result, our earnings and
overall financial condition could be affected.  We cannot precisely
estimate economic conditions or be assured that our monitoring procedures and
policies will reduce lending risks and that our Allowance for Loan Loss (the
“Allowance”) will be adequate.  Loan losses in excess of what we
predict may result, causing Oceanside to fall in a capital category prompting
regulatory action.  In addition, future provisions for loan losses
could have an adverse effect on our profitability.  A loan loss will
reduce the Allowance, and a reduction to the Allowance will be restored by a
recovery of the loss.  If not recovered, a loan loss will result in an
increase to our expense provision for loan losses, thereby reducing earnings,
which could have an adverse effect on the market value of our common
stock.





DepositActivities





Deposits
are our major source of funds for loans and other investment
activities.  At December 31, 2008, our regular savings, demand, NOW,
and money market deposit accounts comprised approximately 39% of our
consolidated total deposits.  Approximately 39% of our consolidated
deposits at December 31, 2008, were certificates of deposit (or time deposits)
of less than $100,000.  Time deposits of $100,000 and over made up
approximately 22% of our consolidated total deposits at December 31,
2008.  Generally, our goal is to maintain the rates paid on our
deposits at a competitive level.  Brokered deposits of $26.3 million,
or approximately 11%, of consolidated total deposits at December 31, 2008, are
included in time deposits of $100,000 or less.





InvestmentActivities





We are
permitted to invest a portion of our assets in U.S. Government agency, state,
county, and municipal obligations, certificates of deposit, collateralized
mortgage obligations (“CMOs”), and federal funds sold.  Our
investments are managed in relation to loan demand and deposit growth, and are
generally used to provide for the investment of excess funds at minimal risks
while providing liquidity to fund increases in loan demand or to offset
fluctuations in deposits.





Our total
investment portfolio may be invested in U.S. Treasury and general obligations of
its agencies and state, county, and municipal obligations because such
securities generally represent a minimal investment
risk.  Occasionally, we purchase certificates of deposits of national
and state banks.  These investments may exceed $250,000 in any one
institution (the current limit of FDIC insurance for deposit
accounts).  CMOs are secured with Federal National Mortgage
Association (“FNMA”) and General National Mortgage Association (“GNMA”)
mortgage-backed securities and generally have a shorter life than the stated
maturity.  Federal funds sold is the excess cash we have available
over and above daily cash needs.  We invest this money on an overnight
basis with approved correspondent banks.





We
monitor changes in financial markets that may affect our portfolio
investments.  We also monitor our daily cash position to ensure that
all available funds earn interest at the earliest possible date.





A portion
of our investment account is designated as primary reserves and invested in
liquid securities that can be readily converted to cash with minimum risk of
market loss.  These investments usually consist of U.S. Treasury
obligations, U.S. government agencies, and federal funds.  The
remainder of our investment account (or secondary reserves) may be placed in
investment securities of different types and longer maturities.  The
maturities of our securities are staggered whenever possible so as to produce a
steady cash flow in the event we need cash, or economic conditions change to a
more favorable rate environment.


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CorrespondentBanking





Correspondent
banking involves one bank providing services to another bank that cannot provide
those services for itself from an economic, regulatory, or practical
standpoint.  We purchase correspondent services offered by larger
banks, including check collections, purchase of federal funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations, and sales of loans to, or participation with,
correspondent banks.  We have ongoing banking relationships with
several correspondent banks.  We also sell loan participations to
correspondent banks with respect to loans that would exceed our lending
limit.





Interestand Usury





Like
other commercial banks, we are subject to state and federal statutes that affect
the interest rates that may be charged on loans.  These laws do not,
under present market conditions, deter us from continuing the process of
originating loans.





Supervisionand Regulation





Both the
Holding Company and Oceanside are subject to comprehensive regulation,
examination, and supervision by the Federal Reserve, the Florida Department of
Financial Services (“Department”) and the Federal Deposit Insurance Corporation
(“FDIC”) and are subject to other laws and regulations applicable to bank
holding companies and banks. Such regulations include limitations on loans to
any single borrower and to our directors, officers, and employees; restrictions
on the opening and closing of branch offices; the maintenance of required
capital and liquidity ratios; the granting of credit under equal and fair
conditions; disclosure of the costs and terms of such credit; and restrictions
as to permissible investments.  The Holding Company is examined
periodically by the Federal Reserve, and the Bank is regularly examined by the
Department and the FDIC.  Both the Bank and the Holding Company submit
periodic reports regarding their financial condition and other matters to their
respective regulators.  These agencies have a broad range of powers to
enforce regulations under their respective jurisdictions, and to take
discretionary actions determined to be for the protection of the safety and
soundness of the Holding Company and Oceanside.





The
following is a brief summary of certain statutes, rules, and regulations
affecting us and our subsidiary bank. This summary is qualified in its entirety
by reference to the particular statutory and regulatory provisions referred to
below, and is not intended to be an exhaustive description of the statutes or
regulations applicable to our business and subsidiary bank. Supervision,
regulation, and examination of banks by regulatory agencies are intended
primarily for the protection of depositors, rather than
shareholders.





Bank Holding Company
Regulation.  Atlantic is a bank holding company, registered
with the Federal Reserve under the BHC Act.  As such, Atlantic is
subject to the supervision, examination and reporting requirements of the BHC
Act and the regulations of the Federal Reserve.  The BHC Act requires
that a bank holding company obtain the prior approval of the Federal Reserve
before (i) acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any bank or bank holding company, (ii) acquiring all or
substantially all of the assets of a bank, or (iii) merging or consolidating
with any other bank holding company.





The BHC
Act further provides that the Federal Reserve may not approve any transaction
that would result in a monopoly or would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any
section of the United States, or the effect of which may be to substantially
lessen competition or to tend to create a monopoly in any section of the
country, or that in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served.  The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience, and needs of the community to
be served.  Consideration of financial resources generally focuses on
capital adequacy and consideration of convenience and needs issues includes the
parties’ performance under the Community Reinvestment Act (“CRA”).





Except as
authorized by the Gramm-Leach-Bliley Act of 1999, the BHC Act generally
prohibits a bank holding company from engaging in activities other than banking,
or managing or controlling banks or other permissible subsidiaries, and from
acquiring or retaining direct or indirect control of any company engaged in any
activities other than those activities determined by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.  In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity can reasonably be expected to produce


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benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices.  For example, factoring accounts receivable,
acquiring or servicing loans, leasing personal property, conducting securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and certain insurance
underwriting activities have all been determined by regulations of the Federal
Reserve to be permissible activities of bank holding
companies.  Despite prior approval, the Federal Reserve has the power
to order a holding company or its subsidiaries to terminate any activity or
terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.





Under
federal law, federally insured banks are subject, with some exceptions, to
certain restrictions on any extension of credit to their parent holding
companies or other affiliates, on investment in the stock or other securities of
affiliates, and on the taking of such stock or securities as collateral from any
borrower.  In addition, banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the providing
of any property or service.





Gramm-Leach-Bliley
Act.  Enacted in 1999, the Gramm-Leach-Bliley Act reforms and
modernizes certain areas of financial services regulation.  The law
permits the creation of financial services holding companies that can offer a
full range of financial products under a regulatory structure based on the
principle of functional regulation.  The legislation eliminates the
legal barriers to affiliations among banks and securities firms, insurance
companies, and other financial services companies.  The law also
provides financial organizations with the opportunity to structure these new
financial affiliations through a holding company structure or a financial
subsidiary.  The law reserves the role of the Federal Reserve Board as
the supervisor for bank holding companies.  At the same time, the law
also provides a system of functional regulation which is designed to utilize the
various existing federal and state regulatory bodies.  The law also
sets up a process for coordination between the Federal Reserve Board and the
Secretary of the Treasury regarding the approval of new financial activities for
both bank holding companies and national bank financial
subsidiaries.





The law
also includes a minimum federal standard of financial
privacy.  Financial institutions are required to have written privacy
policies that must be disclosed to customers. The disclosure of a financial
institution’s privacy policy must take place at the time a customer relationship
is established and not less than annually during the continuation of the
relationship. The act also provides for the functional regulation of bank
securities activities.  The law repeals the exemption that banks were
afforded from the definition of “broker,” and replaces it with a set of limited
exemptions that allow the continuation of some historical activities performed
by banks.  In addition, the act amends the securities laws to include
banks within the general definition of dealer. Regarding new bank products, the
law provides a procedure for handling products sold by banks that have
securities elements.  In the area of CRA activities, the law generally
requires that financial institutions address the credit needs of low-to-moderate
income individuals and neighborhoods in the communities in which they
operate.  Bank regulators are required to take the CRA ratings of a
bank or of the bank subsidiaries of a holding company into account when acting
upon certain branch and bank merger and acquisition applications filed by the
institution.  Under the law, financial holding companies and banks
that desire to engage in new financial activities are required to have
satisfactory or better CRA ratings when they commence the new
activity.





FDIC and Other Banking
Regulations.  Our deposit accounts are insured by the Bank
Insurance Fund (“BIF”) of the FDIC up to a maximum of $100,000 per insured
depositor.  On October 3, 2008, the deposit insurance was increased to
$250,000 per insured depositor until December 31, 2009.  In addition,
Oceanside is participating in the FDIC’s Transaction Account Guarantee Program
(“TAGP”).  Under that program, all noninterest-bearing transaction
accounts are fully guaranteed by the FDIC for the entire amount in the account
through December 31, 2009. Coverage under the TAGP is in addition to and
separate from the coverage available under the FDIC’s general deposit insurance
rules.  The FDIC issues regulations, conducts periodic examinations,
requires the filing of reports, and generally supervises the operations of its
insured banks.  The approval of the FDIC is required prior to a merger
or consolidation or the establishment or relocation of an office
facility.  This supervision and regulation is intended primarily for
protection of depositors and not stockholders.





The
Federal Reserve and bank regulatory agencies require bank holding companies and
financial institutions to maintain capital at adequate levels based on a
percentage of assets and off-balance sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Under the risk-based standard, capital is classified
into two tiers.  Tier 1 capital


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consists
of common shareholders’ equity, excluding the unrealized gain (loss) on
available-for-sale securities, minus certain intangible assets.  Tier
2 capital consists of the general allowance for loan losses except for certain
limitations.  An institution’s qualifying capital base for purposes of
its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2
capital.  The regulatory minimum requirements are 4% for Tier 1 and 8%
for total risk-based capital.  At December 31, 2008, Oceanside’s Tier
1 and total risk-based capital ratios were 8.99% and 10.25%,
respectively.  Under current regulations, bank holding companies with
consolidated assets under $500 million are not required to calculate and report
risk-based capital ratios.





Bank
holding companies and banks are also required to maintain capital at a minimum
level based on average total assets, which is known as the leverage
ratio.  The minimum requirement for the leverage ratio is 3%; however,
all but the highest rated institutions are required to maintain ratios 100 to
200 basis points above the minimum.  At December 31, 2008, Oceanside’s
leverage ratio was 7.25 %, which was 2.25% in excess of its required
5.00%.





The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
contains “prompt corrective action” provisions pursuant to which banks are to be
classified into one of five categories based upon capital adequacy, ranging from
“well-capitalized” to “critically undercapitalized” and which require (subject
to certain exceptions) the appropriate federal banking agency to take prompt
corrective action with respect to an institution that becomes “significantly
undercapitalized” or “critically undercapitalized.”





The FDIC
has issued regulations to implement the “prompt corrective action” provisions of
FDICIA. In general, the regulations define the five capital categories as
follows:





·
            an
      institution is “well-capitalized” if it has a total risk-based capital
      ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
      greater, has a leverage ratio of 5% or greater and is not subject to any
      written capital order or directive to meet and maintain a specific capital
      level for any capital measures;


·
              an
      institution is “adequately capitalized” if it has a total risk-based
      capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of
      4% or greater, and has a leverage ratio of 4% or
  greater;


·
              an
      institution is “undercapitalized” if it has a total risk-based capital
      ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less
      than 4% or has a leverage ratio that is less than
  4%;


·
              an
      institution is “significantly undercapitalized” if it has a total
      risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
      ratio that is less than 3% or a leverage ratio that is less than 3%;
      and


·
              an
      institution is “critically undercapitalized” if its “tangible equity” is
      equal to or less than 2% of its total
assets.





After an
opportunity for a hearing, the FDIC has the authority to downgrade an
institution from “well-capitalized” to “adequately capitalized” or to subject an
“adequately capitalized” or “undercapitalized” institution to the supervisory
actions applicable to the next lower category for supervisory
concerns.





The
“prompt corrective action” provisions of FDICIA also provide that, in general,
no institution may make a capital distribution if it would cause the institution
to become “undercapitalized.”  Capital distributions include cash (but
not stock) dividends, stock purchases, redemptions, and other distributions of
capital to the owners of an institution.





FDICIA
also contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.





As of
December 31, 2008, Oceanside met the capital requirements of a
“well-capitalized” institution.





Maximum Legal Interest
Rates.  Like the laws of many states, Florida law contains
provisions on interest rates that may be charged by banks and other lenders on
certain types of loans. Numerous exceptions exist to the general interest
limitations imposed by Florida law.  The relative importance of these
interest limitation laws to the financial operations of Oceanside will vary from
time to time, depending on a number of factors, including conditions in the
money markets, the costs and availability of funds, and prevailing interest
rates.





Bank
Branching.  Banks in Florida are permitted to branch
state-wide.  Such branch banking, however, is subject to prior
approval by the Department and the FDIC.  Any such approval would take
into consideration several factors, including the bank’s level of capital, the
prospects and economics of the proposed branch office, and other conditions
deemed relevant by the Department and the FDIC for purposes of determining
whether approval should be granted to open a branch office.


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The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, provides
for nationwide interstate banking and branching. Under the law, interstate
acquisitions of banks or bank holding companies in any state by bank holding
companies in any other state are permissible. Interstate branching and
consolidation of existing bank subsidiaries in different states is
permissible.  Florida has a law that allows out-of-state bank holding
companies (located in states that allow Florida bank holding companies to
acquire banks and bank holding companies in that state) to acquire Florida banks
and Florida bank holding companies.  The law essentially provides for
out-of-state entry by acquisition only (and not by interstate branching) and
requires the acquired Florida bank to have been in existence for at least three
years.





Dividend
Restrictions.  In addition to dividend restrictions placed on
Oceanside by the FDIC based on Oceanside’s minimum capital requirements, the
Florida Financial Institutions
Codeprohibits the declaration of dividends in certain
circumstances.  Section 658.37, Florida Statutes, prohibits
the declaration of any dividend until a bank has charged off bad debts,
depreciation, and other worthless assets, and has made provision for
reasonably-anticipated future losses on loans and other assets. Such a dividend
is limited to the aggregate of the net profits of the dividend period combined
with a bank’s retained net profits of the preceding two years.  A bank
may declare a dividend from retained net profits accruing prior to the preceding
two years with the approval of the Department. However, a bank will be required,
prior to the declaration of a dividend on its common stock, to carry 20% of its
net profits for such preceding period as is covered by the dividend to its
surplus fund, until the surplus fund equals at least the amount of the bank’s
common and preferred stock then issued and outstanding.  In no event
may a bank declare a dividend at any time in which its net income from the
current year, combined with the retained net income from the preceding two years
is a loss or which would cause the capital accounts of the bank to fall below
the minimum amount required by law, regulation, order, or any written agreement
with the Department or the FDIC.  We currently do not intend to pay a
cash dividend.  Instead, we will use our earnings to increase our
capital.





Change of
Control.  Federal law restricts the amount of voting stock of a
bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank or bank holding company by tender offer or
similar means than another type of corporation.  Consequently,
shareholders of Atlantic may be less likely to benefit from the rapid increases
in stock prices that may result from tender offers or similar efforts to acquire
control of other companies.  Federal law also imposes restrictions on
acquisitions of stock in a bank holding company and a state
bank.  Under the federal Change in Bank Control Act and the
regulations thereunder, a person or group must give advance notice to the
Federal Reserve before acquiring control of any bank holding company and the
FDIC before acquiring control of any state bank (such as
Oceanside).  Upon receipt of such notice, the FDIC may approve or
disapprove the acquisition.  The Change in Bank Control Act creates a
rebuttable presumption of control if a member or group acquires 10% or more of a
bank holding company’s or state bank’s voting stock, and if one or more other
control factors set forth in the Act are present.





Enforcement
Powers.  Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and
orders.  Among other things, the agencies may require that
institutions cease and desist from certain activities, may preclude persons from
participating in the affairs of insured depository institutions, may suspend or
remove deposit insurance, and may impose civil money penalties against
institution-affiliated parties for certain violations.





Emergency Economic Stabilization Act
of 2008.  In October 2008, the Emergency Economic Stabilization
Act of 2008 (“EESA”) was signed into law.  The EESA temporarily
revises the federal deposit insurance laws by increasing the basic deposit
insurance coverage from $100,000 to $250,000 per depositor.  This
revision is currently effective through December 31, 2009.  The EESA
also authorized the United States Department of the Treasury to implement
programs to provide financial assistance and/or support to financial
institutions.  We have not participated in any such
programs.





Temporary Liquidity Guarantee
Program.  In order to promote financial stability in the
economy, the FDIC adopted the Temporary Liquidity Guarantee Program (“TLGP”) on
October 13, 2008.  Participation in the program is voluntary. However,
once participation is elected, it can not be revoked.  We have chosen
to participate in the Transaction Account Guarantee Program component of the
TLGP.  Under the Transaction Account Guarantee Program, the FDIC will
fully insure funds held in noninterest-bearing transaction
accounts.  Noninterest-bearing transaction accounts are ones that do
not accrue or pay interest and for which the institution does not require an
advance notice of withdrawal.  Also covered are interest on lawyers’
trust accounts and negotiable order of withdrawal (NOW) accounts with interest
rates lower than 50 basis points.  These revisions are only effective
through December 31, 2009.


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Effect of Governmental
Policies.  Our business and earnings are affected by the
policies of various regulatory authorities of the United States, especially the
Federal Reserve.  The Federal Reserve, among other things, regulates
the supply of credit and deals with general economic conditions within the
United States.  The instruments of monetary policy employed by the
Federal Reserve for those purposes influence in various ways the overall level
of investments, loans, other extensions of credit, and deposits, and the
interest rates paid on liabilities and received on assets.





Corporate
Governance.  The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley
Act” or “SOX”), which became law on July 30, 2002, added new legal requirements
for public companies affecting corporate governance, accounting and corporate
reporting.  Some of the principal provisions of the Act
include:





·
              the
      creation of an independent accounting oversight board to oversee the audit
      of public companies and auditors who perform such
  audits;


·
              auditor
      independence provisions which restrict non-audit services that independent
      accountants may provide to their audit
clients;


·
              additional
      corporate governance and responsibility measures which (a) require the
      chief executive officer and chief financial officer to certify financial
      statements and internal controls and to forfeit salary and bonuses in
      certain situations, and (b) protect whistleblowers and
      informants;


·
              expansion
      of the authority and responsibilities of the company’s audit, nominating
      and compensation committees;


·
              mandatory
      disclosure by analysts of potential conflicts of interest;
    and


·
              enhanced
      penalties for fraud and other
violations.





Community Reinvestment
Act.  The Community Reinvestment Act of 1977 requires federal
banking regulators to evaluate the record of financial institutions in meeting
the credit needs of their local communities, including low- and moderate-income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. To the best
knowledge of management, Oceanside is meeting its obligations under this
act.





Loans to
Insiders.  The Federal Reserve Act and related regulations
impose specific restrictions on loans to directors, executive officers, and
principal shareholder of banks.  Under Section 22(h) of the Federal
Reserve Act, any loan to a director, executive officer or principal shareholder
of a bank, or to entities controlled by any of the foregoing, may not exceed,
together with all outstanding loans to such persons or entities controlled by
such person, the bank’s loan to one borrower limit.  Loans in the
aggregate to insiders and their related interests as a class may not exceed two
times the bank’s unimpaired capital and unimpaired surplus until the bank’s
total assets equal or exceed $100 million, at which time the aggregate is
limited to the bank’s unimpaired capital and unimpaired
surplus.  Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers, and
principal shareholders of a bank or bank holding company, and to entities
controlled by such persons, unless such loans are approved in advance by a
majority of the Board of Directors of the bank with any “interested” director
not participating in the voting.  Our loan amount, which includes all
other outstanding loans to such persons, as to which such prior board of
director approval is required, must be the greater of $25,000 or 5% of capital
and surplus (up to $500,000).  Section 22(h) requires that loans to
directors, executive officers, and principal shareholders be made in terms and
underwriting standards substantially the same as offered in comparable
transactions to other persons.





USA Patriot
Act.  As part of the USA Patriot Act, signed into law on
October 26, 2001, Congress adopted the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001 (the “Act”).  The Act
authorizes the Secretary of the Treasury, in consultation with the heads of
other government agencies, to adopt special measures applicable to financial
institutions such as banks, bank holding companies, broker-dealers and insurance
companies.  Among its other provisions, the Act requires each
financial institution: (i) to establish an anti-money laundering program; (ii)
to establish due diligence policies, procedures and controls that are reasonably
designed to detect and report instances of money laundering in United States
private banking accounts and correspondent accounts maintained for non-United
States persons or their representatives; and (iii) to avoid establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign shell bank that does not have a physical
presence in any country.  In addition, the Act expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120
hours.


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Treasury
regulations implementing the due diligence requirements were issued in
2002.  These regulations required minimum standards to verify customer
identity, encouraged cooperation among financial institutions, federal banking
agencies, and law enforcement authorities regarding possible money laundering or
terrorist activities, prohibited the anonymous use of “concentration accounts,”
and required all covered financial institutions to have in place an anti-money
laundering compliance program.





The Act
also amended the Bank Holding Company Act and the Bank Merger Act to require the
federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts.  In the past few years, both state and federal
banking regulators have significantly increased enforcement of the Act and other
anti-money laundering laws and regulations, including levying civil money
penalties and seeking cease and desist orders.





Other
Regulation.  Oceanside is subject to a variety of other
regulations. State and federal laws restrict interest rates on loans,
potentially affecting our income. The Truth in Lending Act and the Home Mortgage
Disclosure Act impose information requirements on us in making loans. The Equal
Credit Opportunity Act prohibits discrimination in lending on the basis of race,
creed, or other prohibited factors. The Fair Credit Reporting Act governs the
use and release of information to credit reporting agencies. The Truth in
Savings Act requires disclosure of yields and costs of deposits and deposit
accounts. Other acts govern confidentiality of consumer financial records,
automatic deposits and withdrawals, check settlement, endorsement and
presentment, and reporting of cash transactions as required by the Internal
Revenue Service.





FutureLegislative Developments





Various
legislative acts, including proposals to modify the bank regulatory system,
expand the powers of banking institutions and financial holding companies and
limit the investments that a depository institution may make with insured funds,
are from time to time introduced in Congress and the Florida
legislature.  Such legislation may change banking statutes and the
environment in which we and our banking subsidiary operate in substantial and
unpredictable ways.  We cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon our financial condition or results of operations or
that of our banking subsidiary.





CommonStock





We have
10,000,000 shares of our $0.01 par value common stock authorized.  As
of February 27, 2009, there were 1,247,516 shares
outstanding.  Holders of our common stock are entitled to one vote for
each share held of record on all matters to be voted on by
stockholders.  Upon liquidation, dissolution, or winding-up, holders
of our common stock are entitled to receive pro rata all assets remaining
legally available for distribution to shareholders.  The holders of
common stock have no right to cumulate their votes in the election of
directors.  The common stock has no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares.  All of the outstanding shares
of common stock are fully paid and non-assessable.





PreferredStock





In
addition to the 10,000,000 shares of authorized common stock, our Articles of
Incorporation authorize up to 2,000,000 shares of preferred
stock.  The Board of Directors is further authorized to establish
designations, powers, preferences, rights, and other terms for preferred stock
by resolution.  No shares of preferred stock have been
issued.





Indemnificationof Directors and Officers





Our
Bylaws afford indemnification rights to our officers and directors to the
fullest extent permitted or required by the Florida Business Corporation
Act.





Under
Section 607.0850 of the Florida Business Corporation Act, officers and directors
of a Florida corporation may be entitled to indemnification by the corporation
against liability incurred in connection with any threatened, pending, or
completed action, suit, or other type of proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal; provided,
however, that such officer or director acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to





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any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful.  Such indemnification includes obligations to pay a
judgment, settlement, penalty, fine, and expenses actually and reasonably
incurred with respect to a proceeding.  In addition, Florida law
provides that officers and directors shall be indemnified by a Florida
corporation against expenses actually and reasonably incurred by such officer or
director, to the extent that such officer or director has been successful on the
merits or otherwise in defense of any proceeding (as defined in Section
607.0850) or in defense of any claim, issue, or matter therein.





In
addition, Section 607.0831 of the Florida Business Corporation Act provides that
a director is not personally liable for monetary damages to a corporation or any
other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless such director breached or
failed to perform such duties as a director and such breach or failure to
perform constitutes:





·
            a
      violation of the criminal law, unless the director had reasonable cause to
      believe the conduct was lawful or had no reasonable cause to believe the
      conduct was unlawful;


·
              a
      transaction from which the director derived an improper personal benefit,
      either directly or
indirectly;


·
            a
      circumstance involving a director’s liability for unlawful distributions
      under the Florida Business Corporation
Act;


·
            in
      proceedings by or in the right of the corporation to procure a judgment or
      by or in the right of a shareholder, conscious disregard for the best
      interest of the corporation, or willful misconduct;
  or


·
            in
      a proceeding by or in the right of someone other than the corporation or a
      shareholder, recklessness or an act or omission which was committed in bad
      faith or with malicious purpose or in a manner exhibiting wanton and
      willful disregard of human rights, safety, or
  property.





Employees





At
December 31, 2008, we had approximately 47 full-time employees and 4 part-time
employees for a full-time employee equivalent of 49.  No significant
changes in the number of our full-time employees are currently
anticipated.  Because we believe that one of the primary deficiencies
of large regional banks is the constant turnover of personnel and therefore the
lack of continuing personal relationships with local customers, our goal is to
maintain a competently trained staff of local bankers who have settled in the
community on a permanent basis.  To maintain a skilled and
knowledgeable staff, we allocate funds for continuing on-the-job and educational
training, and employees are encouraged to enroll in various banking courses and
other seminars to improve their overall knowledge of the banking
business.





The
employees are not represented by a collective bargaining unit.  We
consider relations with employees to be good.





WebsiteAvailability of Reports Filed with the Securities and
Exchange Commission





We
maintain an Internet website located at www.oceansidebank.com on which, among
other things, we make available, free of charge, various reports that we file
with, or furnish to, the SEC, including our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports. These reports are made available as soon as reasonably
practicable after these reports are filed with, or furnished to, the
SEC.








ITEM1A.
            RISK
      FACTORS.





Not
applicable.








ITEM1B.
            UNRESOLVED
      STAFF COMMENTS.





Not
applicable.




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ITEM2.
            PROPERTIES.





On
October 29, 1996, Oceanside purchased from an unaffiliated entity the two-story,
3,100 square-foot building at 1315 South Third Street, Jacksonville Beach,
Florida, as our main office (“Main Office”).  The Main Office includes
three inside teller stations, four drive-up teller windows, an automated teller
machine, and on-site parking.  The Main Office is a former Barnett
Bank branch office.  Oceanside purchased the real property for
$850,000 and used a portion of the proceeds of the initial offering of
Atlantic’s common stock to add 2,200 square feet to the
facility.  Oceanside originally acquired the Main Office with funds
drawn on a line of credit with Columbus Bank and Trust Company, which was repaid
out of the proceeds of Atlantic’s initial offering.  Improvements
totaling approximately $483,000, net of disposals, have been made through
December 31, 2008.





On June
3, 1998, Oceanside purchased from SouthTrust Bank, N.A., a 1,968 square-foot
building and real estate located at 560 Atlantic Boulevard, Neptune Beach,
Florida.  This facility was formerly a branch office of SouthTrust
Bank, N.A.  Oceanside purchased this building for $427,000 and,
subsequently spent $93,000 on renovations and upgrades, net of
disposals.  This facility includes two offices, three inside teller
windows, general lobby space, three drive-up teller windows, an ATM, and on-site
parking.  There is no outstanding mortgage loan on this
property.





On
September 27, 2000, Oceanside executed a lease for our third banking location,
which opened in the third quarter of 2001. This branch is located at 13799 Beach
Boulevard, Jacksonville, Florida.  The lease, which commenced upon
execution, covers approximately 9,000 square feet. In addition to the branch,
other operations of Atlantic and Oceanside were relocated to this
facility.  Rent commenced in May 2002, which was one year from the
date of completion of the landlord’s work, and expires ten years thereafter,
with two five-year renewal options.  No rent was paid in the first
year after completion of the landlord’s work.  Oceanside acquired an
additional 2,200 square feet of rental space during 2004 adjacent to the
operations area for its loan operations department.  Scheduled annual
rent payments for 2009 through 2011 for the branch and loan operations
are:  2009 - $241,000; 2010 - $248,000; and 2011 -
$84,000.  Building improvements totaled $951,000, net of
disposals.





On August
22, 2002, Oceanside executed a lease for our newest branch location, which
opened December 15, 2003. This branch is located at the intersection of Kernan
and Atlantic Boulevards, at 1790 Kernan Boulevard South, Jacksonville,
Florida.  The land lease covers approximately 42,000 square
feet.  The Bank constructed the branch building totaling approximately
3,200 square feet at a cost of approximately $1,388,000.  Rent
commenced in September 2003.  The lease is for twenty years with two
ten-year renewal options.  Scheduled annual rent payments
are:  2009-2012 - $84,000; 2013 - $88,000; 2014-2017 - $94,000; 2018 -
$100,000; 2019-2022 - $103,000; and 2023 - $68,000.





We
believe all of our facilities are in good condition and
well-maintained.








ITEM3.
            LEGAL
      PROCEEDINGS.





We are
periodically parties to or otherwise involved in legal proceedings arising in
the normal course of business, such as claims to enforce liens, claims involving
the making and servicing of real property loans, and other issues incident to
our operations.





We do not
believe that there are any pending or threatened proceedings against us, which,
if determined adversely, would have a material effect on our consolidated
financial position.








ITEM4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





No
matters were submitted to a vote of Atlantic’s security holders during the
fourth quarter of the year ended December 31, 2008.


- 14
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 Table of Contents


PART
II





ITEM5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS.





Prior to
October 28, 1999, the shares of Atlantic common stock were not actively traded,
and such trading activity, as it occurred, took place in privately negotiated
transactions.  On October 28, 1999, Atlantic’s common stock was
approved for quotation on the Over-the-Counter Bulletin Board, and on August 29,
2003, Atlantic common stock commenced its listing on the NASDAQ Capital Market
under the symbol “ATBC.”  During 2008 and 2007 the reported periodic
high and low quotes during each quarter follow:





2008
                  
                  
                  20074th Qtr
                  
                  
                  3rd Qtr
                  
                  
                  2nd Qtr
                  
                  
                  1st Qtr
                  
                  
                  4th Qtr
                  
                  
                  3rd Qtr
                  
                  
                  2nd Qtr
                  
                  
                  1st QtrHigh
                  
                  $
                  10.00
                  
                  
                  $
                  13.75
                  
                  
                  $
                  16.44
                  
                  
                  $
                  17.80
                  
                  
                  $
                  36.00
                  
                  
                  $
                  40.00
                  
                  
                  $
                  43.73
                  
                  
                  $
                  39.46Low
                  
                  $
                  5.75
                  
                  
                  $
                  5.09
                  
                  
                  $
                  12.57
                  
                  
                  $
                  14.29
                  
                  
                  $
                  16.42
                  
                  
                  $
                  32.00
                  
                  
                  $
                  36.15
                  
                  
                  $
                  33.35





Please
note that the information above represents offers made to buy our stock and may
not represent actual transactions or sales.  The source of data used
to prepare the above chart was taken from historical prices provided by
Commodity Systems, Inc.




At
December 31, 2008, there were 573 shareholders of record with shares held by
individuals and in nominee names.





At
February 27, 2009, the initial bid quoted price for the common stock of Atlantic
was $5.42.  We have never paid a cash dividend on our common
stock.  We anticipate that for the foreseeable future, any earnings
will be retained for capital.  Accordingly, we do not anticipate
paying cash dividends on our common stock in the foreseeable
future.  The payment of future dividends will be at the sole
discretion of the Board of Directors and will depend on, among other things,
future earnings, capital requirements, and our general financial and business
condition.





Furthermore,
the ability to pay dividends to our stockholders depends primarily on dividends
received from our banking subsidiary, Oceanside.  Oceanside’s ability
to pay dividends is limited by federal and state banking regulations based upon
Oceanside’s profitability and other factors.  At December 31, 2008,
retained earnings of Oceanside totaling approximately $532,000 were available to
pay dividends to the Holding Company in order to maintain Oceanside’s current
regulatory capital classification.











[Remainder
of page left intentionally blank.]


- 15
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 Table of Contents


ITEM6.
            SELECTED
      FINANCIAL DATA (dollars and shares in thousands, except per share
      data)





At
      or for thePeriod Ended
    December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Statements
      of Operations Data:Total
      interest income
                
                $
                15,335
                
                
                $
                17,368
                
                
                $
                15,502
                
                
                $
                11,259
                
                
                $
                8,241Total
      interest expense
                
                
                8,390
                
                
                
                9,591
                
                
                
                7,584
                
                
                
                4,358
                
                
                
                2,278Net
      interest income before provision for loan losses
                
                
                6,945
                
                
                
                7,777
                
                
                
                7,918
                
                
                
                6,901
                
                
                
                5,963Provision
      for loan losses
                
                
                4,424
                
                
                
                629
                
                
                
                194
                
                
                
                334
                
                
                
                362Net
      interest income after provision for loan losses
                
                
                2,521
                
                
                
                7,148
                
                
                
                7,724
                
                
                
                6,567
                
                
                
                5,601Noninterest
      income
                
                
                1,509
                
                
                
                1,119
                
                
                
                1,078
                
                
                
                839
                
                
                
                923Noninterest
      expense
                
                
                7,649
                
                
                
                6,413
                
                
                
                5,981
                
                
                
                5,283
                
                
                
                4,889Income
      tax provision (benefit)
                
                
                (1,692
                )
                
                
                448
                
                
                
                903
                
                
                
                645
                
                
                
                469Net
      income (loss)
                
                
                (1,927
                )
                
                
                1,406
                
                
                
                1,918
                
                
                
                1,478
                
                
                
                1,166Selected
      End of Period Balances:Total
      assets
                
                $
                267,973
                
                
                $
                261,406
                
                
                $
                243,497
                
                
                $
                213,880
                
                
                $
                184,317Interest-earning
      assets
                
                
                237,689
                
                
                
                245,373
                
                
                
                228,686
                
                
                
                196,931
                
                
                
                166,829Investment
      securities
                
                
                30,406
                
                
                
                41,300
                
                
                
                39,837
                
                
                
                38,290
                
                
                
                29,419Loans,
      net of deferred fees
                
                
                207,029
                
                
                
                204,060
                
                
                
                177,708
                
                
                
                152,803
                
                
                
                129,801Allowance
      for loan losses
                
                
                3,999
                
                
                
                2,169
                
                
                
                1,599
                
                
                
                1,552
                
                
                
                1,296Deposit
      accounts
                
                
                239,844
                
                
                
                217,491
                
                
                
                192,704
                
                
                
                168,480
                
                
                
                146,352Other
      borrowings
                
                
                9,393
                
                
                
                23,581
                
                
                
                32,314
                
                
                
                29,138
                
                
                
                23,004Stockholders’
      equity
                
                
                16,932
                
                
                
                18,856
                
                
                
                17,251
                
                
                
                15,232
                
                
                
                14,033Selected
      Average Balances for the Period:Total
      assets
                
                $
                260,025
                
                
                $
                247,674
                
                
                $
                225,591
                
                
                $
                193,249
                
                
                $
                159,951Interest-earning
      assets
                
                
                242,648
                
                
                
                233,339
                
                
                
                211,081
                
                
                
                179,001
                
                
                
                147,353Securities
      and interest-earning deposits
                
                
                36,995
                
                
                
                41,696
                
                
                
                37,278
                
                
                
                34,202
                
                
                
                27,064Loans,
      net
                
                
                203,675
                
                
                
                187,544
                
                
                
                167,883
                
                
                
                141,587
                
                
                
                114,236Interest-bearing
      deposit accounts
                
                
                191,691
                
                
                
                175,922
                
                
                
                150,762
                
                
                
                123,694
                
                
                
                104,174Other
      borrowings
                
                
                21,046
                
                
                
                22,888
                
                
                
                24,186
                
                
                
                22,450
                
                
                
                14,608Stockholders’
      equity
                
                
                18,574
                
                
                
                18,086
                
                
                
                16,042
                
                
                
                14,596
                
                
                
                13,445Share
      Data:Earnings
      (loss) per shareBasic
                
                $
                (1.54
                )
                
                $
                1.13
                
                
                $
                1.54
                
                
                $
                1.18
                
                
                $
                0.93Fully
      diluted
                
                $
                (1.54
                )
                
                $
                1.13
                
                
                $
                1.54
                
                
                $
                1.18
                
                
                $
                0.93Book
      value per share (period end)
                
                $
                13.57
                
                
                $
                15.11
                
                
                $
                13.83
                
                
                $
                12.21
                
                
                $
                11.25Common
      shares outstanding (period end)
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248Weighted
      average shares outstandingBasic
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248Fully
      diluted
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248
                
                
                
                1,248Performance
      Ratios:Return
      on average assets
                
                
                -0.74
                %
                
                
                0.57
                %
                
                
                0.85
                %
                
                
                0.76
                %
                
                
                0.73
                %Return
      on average equity
                
                
                -10.37
                
                
                
                7.77
                
                
                
                11.96
                
                
                
                10.13
                
                
                
                8.67Interest-rate
      spread during the period
                
                
                2.55
                
                
                
                2.78
                
                
                
                3.10
                
                
                
                3.40
                
                
                
                3.76Net
      interest margin
                
                
                3.03
                
                
                
                3.49
                
                
                
                3.84
                
                
                
                3.95
                
                
                
                4.13Noninterest
      expenses to average assets
                
                
                2.94
                
                
                
                2.59
                
                
                
                2.65
                
                
                
                2.73
                
                
                
                3.06Asset
      Quality Ratios:Allowance
      for loan losses to period end loans
                
                
                1.93
                %
                
                
                1.06
                %
                
                
                0.90
                %
                
                
                1.02
                %
                
                
                1.00
                %Net
      charge-offs to average loans
                
                
                1.27
                
                
                
                0.03
                
                
                
                0.09
                
                
                
                0.06
                
                
                
                0.25Nonperforming
      assets to period end loans
                
                
                5.13
                
                
                
                3.13
                
                
                
                0.04
                
                
                
                0.13
                
                
                
                0.07Nonperforming
      assets to period end total assets
                
                
                3.96
                
                
                
                2.45
                
                
                
                0.03
                
                
                
                0.09
                
                
                
                0.05Capital
      and Liquidity Ratios:Average
      equity to average assets (Consolidated)
                
                
                7.14
                %
                
                
                7.30
                %
                
                
                7.11
                %
                
                
                7.55
                %
                
                
                8.41
                %Leverage
      (Oceanside)
                
                
                7.25
                
                
                
                8.53
                
                
                
                8.75
                
                
                
                8.93
                
                
                
                8.02Risk-based
      capital (Oceanside):Tier
      1
                
                
                8.99
                
                
                
                9.33
                
                
                
                10.16
                
                
                
                10.62
                
                
                
                9.55Total
                
                
                10.25
                
                
                
                10.26
                
                
                
                10.95
                
                
                
                11.52
                
                
                
                10.43Average
      loans to average deposits (Consolidated)
                
                
                92.92
                
                
                
                91.37
                
                
                
                91.27
                
                
                
                91.18
                
                
                
                87.10Full-time
      Employee Equivalents (End of Period)
                
                
                49
                
                
                
                53
                
                
                
                51
                
                
                
                50
                
                
                
                48





- 16
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 Table of Contents




ITEM7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





Management’s
discussion and analysis is included to provide the shareholders with an expanded
narrative of our results of operations, changes in financial condition,
liquidity, and capital adequacy.  This narrative should be reviewed in
conjunction with the audited consolidated financial statements and notes
included in this report.  Since our primary asset is our wholly-owned
subsidiary, Oceanside Bank, most of the discussion and analysis relates to
Oceanside.





Overview





How We Earn Income.  As stated
elsewhere herein, our results of operations are primarily dependent upon the
results of operations of Oceanside.  Oceanside conducts commercial
banking business consisting of attracting deposits from the general public and
applying those funds to the origination of commercial, consumer, and real estate
loans (including commercial loans collateralized by real
estate).  Profitability depends primarily on net interest income,
which is the difference between interest income generated from interest-earning
assets (i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed
funds).  Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and is dependent upon
Oceanside’s interest-rate spread, which is the difference between the average
yield earned on our interest-earning assets and the average rate paid on our
interest-bearing liabilities.  When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.  The factors that influence
net interest income include changes in interest rates and changes in the volume
and mix of assets and liability balances.  The interest rate spread is
impacted by interest rates, deposit flows, and loan
demand.  Additionally, and to a lesser extent, Oceanside’s
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for loan losses, and the effective tax
rate.  Noninterest income consists primarily of service fees on
deposit accounts and mortgage banking operations. Noninterest expense consists
of compensation and employee benefits, occupancy and equipment expenses, data
processing costs, and other operating expenses.





Critical Accounting Policies and Use
of Significant Estimates.  Our consolidated financial
statements include the accounts of the Holding Company and the
Bank.  All significant intercompany accounts and transactions have
been eliminated in consolidation.  The accounting and reporting
policies conform with accounting principles generally accepted in the United
States of America and to general practices within the banking
industry.  Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial
Statements.  The majority of these accounting policies do not
require our management to make difficult, subjective, or complex
judgments.  However, we believe the allowance for loan losses and the
valuations of foreclosed assets are critical estimates.





Allowance for Loan
Losses.  The allowance for loan losses is a valuation allowance
for probable or incurred credit losses.  Loan losses are charged
against the allowance when management believes the uncollectibility of a loan
balance is confirmed (that is, a confirmed loss exists).  Subsequent
recoveries, if any, are credited to the allowance.





Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be
charged-off.





The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful (impaired).  The
general component covers non-classified loans and is based on historical loss
experience adjusted for current trends.





Loans are
individually evaluated for impairment, if significant.  A loan is
impaired when full payment under the loan terms is not expected.  If a
loan is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral and accrual of interest is discontinued.





The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. There is
no precise method of predicting specific loan losses or amounts that ultimately
may be charged-off.  Also, this evaluation is inherently subjective as
it requires estimates




- 17
-
 Table of Contents


that are
susceptible to significant revision as more information becomes
available.  The determination that a loan may be uncollectible, in
whole or in part, is a matter of judgment.  Similarly, the adequacy of
the allowance for loan losses can be determined only on a judgmental basis,
after full review, including, consideration of economic conditions and their
effect on particular industries and specific borrowers; a review of borrowers'
financial data, together with industry data, their competitive situation, the
borrowers' management capabilities and other factors; a continuing evaluation of
the loan portfolio, including monitoring any loans that are identified as being
of less than acceptable quality; a detailed analysis, on a quarterly basis, of
all impaired loans; and an evaluation of the underlying collateral for secured
lending.





We
maintain a formalized loan review process supported by a credit analysis and
control system. We intend to maintain the allowance for loan losses at a level
sufficient to absorb estimated uncollectible loans and, expect to make periodic
additions to the allowance for loan losses, when warranted.





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





The
determination of the adequacy of the allowance for loan losses is based on
estimates that may be affected by significant changes in the economic
environment and market conditions.  In connection with the
determination of the estimated losses on loans and to support the carrying value
of foreclosed assets, we obtain independent appraisals for significant
collateral.





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





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





Interest Rate
Risk.  Our asset base is exposed to risk including the risk
resulting from changes in interest rates and changes in the timing of cash
flows.  Management monitors the effect of such risks by considering
the mismatch of the maturities of our assets and liabilities in the current
interest rate environment and the sensitivity of assets and liabilities to
changes in interest rates.  We have considered the effect of
significant increases and decreases in interest rates and believe such changes,
if they occurred, would be manageable and would not affect our ability to hold
assets as planned.  However, we are exposed to significant market risk
in the event of significant and prolonged interest rate changes.





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





COMPARISONOF YEARS ENDED DECEMBER 31, 2008 AND 2007





Highlights.  As of
December 31, 2008, we had grown to approximately $268.0 million in total assets,
with $207.1 million in total loans, $239.8 million in deposits, and $16.9
million in stockholders’ equity.





The net
loss in 2008 was $1,927,000 versus net income of $1,406,000 in
2007.  The primary reasons for the change of $3,333,000 in 2008 over
2007 were as follows:





·
            Interest
      and fees on loans totaled $13,637,000 in 2008 compared with $15,255,000 in
      2007, a decrease of $1,618,000, or 10.6%.  Other interest income
      also declined $415,000 in 2008 over 2007, or
  19.6%.


- 18
-
 Table of Contents


·
            Our
      income from average interest-earning assets decreased
    11.7%.


·
            Our
      total interest expense decreased $1,201,000, or
  12.5%.


·
            Net
      interest income declined by $832,000 in 2008 from
  2007.


·
            Noninterest
      income grew $390,000, or 34.9% in 2008 over
  2007.


·
            Noninterest
      expenses grew $1,236,000, or 19.3%.





Interest
Income.  Interest income was $15,335,000 and $17,368,000 in
2008 and 2007, respectively.  The decrease of $2.0 million resulted
from a decrease in the yield on interest-earning assets in 2008, which was
partially offset by growth in our most significant interest-earning asset,
loans, which grew 8.6% from average levels in 2007 to 2008.  Average
loans accounted for 83.9% of our average interest-earning assets in 2008 versus
80.4% in 2007.  Our overall yield on interest-earning assets of 6.49%
was down from the 2007 level of 7.60% due to a lower interest rate environment
throughout 2008.  Our overall yield on interest-earning assets in 2008
would have been 7 basis points higher, or 6.56%, if not for approximately
$176,000 in income earned but not collected on nonaccrual loans.





Interest
Expense.  Interest expense was $8,390,000 and $9,591,000 in
2008 and 2007, respectively.  As a result of the lower interest rate
environment during 2008 which was partially offset by our growth in average
interest-bearing liabilities of $13.9 million, or 7.0%, during this period,
interest expense decreased 12.5%.  Our cost of funds dropped to 3.94%
in 2008 compared with 4.82% in 2007.  Substantially all of the
decrease in interest expense was attributable to a decrease in rates, which was
partially offset by an increase in average certificates of deposit of $17.3
million, or 13.4%.





Net Interest
Income.  Net interest income (before provision for loan losses)
was $6,945,000 and $7,777,000 for 2008 and 2007, respectively, a decrease of
10.7% from 2007 to 2008.  The average balances, interest income and
expense, and the average rates earned and paid for assets and liabilities are
found in the tables that follow.





Our net
interest margin was lower (3.03% in 2008 compared with 3.49% in 2007), which
reflects the smaller decrease in our cost of funds (88 basis points) versus the
decrease in our yield on interest-earning assets (111 basis
points).  The decrease in net interest income of $832,000 was impacted
by the declining rate environment, while the net interest margin was most
impacted by the increase in certificates of deposit of
13.4%.  Certificates of deposit account for 76.5% of all
interest-bearing deposits in 2008 as compared with 73.5% in 2007.





Provision for Loan
Losses.  A provision for loan losses of $4,424,000 was recorded
in 2008, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The increase in the provision for loan losses in 2008
versus the 2007 level of $629,000 was due to unfavorable trends in most measures
of loan portfolio quality, including the growth in impaired and nonaccrual loans
and other nonperforming assets, which increased $4.2 million in 2008, or
65.9%.  Other real estate owned of $3.4 million at December 31, 2008,
accounted for 81.1% of the increase.  Included in other real estate
owned is a condominium development at Jacksonville Beach with 9 units remaining
at December 31, 2008.  Of the original 14 units acquired in
foreclosure in the first quarter of 2008, 5 units sold in the remainder of 2008,
leaving a carrying value of $2.0 million at December 31, 2008.  In the
first quarter of 2009, 2 additional units have sold for net proceeds in excess
of the individual carrying value of the units sold.  Net charge-offs
in 2008 were $2,594,000 as compared with $59,000 in 2007, an increase of
$2,535,000.





Noninterest
Income.  Noninterest income increased $390,000, or 34.9%, to
$1,509,000 in 2008 from $1,119,000 in 2007 primarily as a result of gains on the
sale of securities of $346,000 in the fourth quarter of 2008.





Noninterest
Expenses.  Total noninterest expenses increased to $7,649,000
in 2008 compared to $6,413,000 for 2007, an increase of $1,236,000, or
19.3%.  The more significant increases during 2008 over 2007
follow:





·
            Expenses
      related to other real estate owned totaled $807,000 in 2008 versus $-0- in
      2007, as a result of losses and ongoing expenses on properties that
      Oceanside obtained title in 2008.


·
            Professional,
      legal, and audit fees were $459,000 in 2008 versus $264,000 in 2007, an
      increase of $195,000, or 73.9%, as a result of increased costs of
      corporate governance and regulatory compliance
  matters.


·
            Pension
      expense totaled $294,000 in 2008, an increase of 63.3% from
      2007.  This increase of $114,000 was more than offset by the net
      increase in the cash surrender value of the life insurance policies, which
      totaled $206,000.


·
            Regulatory
      assessments increased by $60,000, or 35.5%, from 2007 to 2008 due to
      increased cost of maintaining the FDIC insurance
  fund.


- 19
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 Table of Contents


Provision for Income
Taxes.  The income tax benefit was $1,692,000 for 2008, an
effective rate of 46.8%.  This compares with an effective rate of
24.2% for 2007.  The effective tax rates in 2008 and 2007 differ from
the federal and state statutory rates principally due to nontaxable investment
income.  The growth of tax-exempt income in 2008 over 2007 of 13.1%,
compared with the overall decline in taxable interest, which contributed to the
swing in the effective tax rate.





COMPARISONOF YEARS ENDED DECEMBER 31, 2007 AND 2006





Highlights.  As of
December 31, 2007, we had grown to approximately $261.4 million in total assets,
$204.1 million in total loans, $217.5 million in deposits, and $18.9 million in
stockholders’ equity.





Net
income in 2007 was $1,406,000 versus $1,918,000 in 2006, a decrease of $512,000,
or 26.7%.  The primary reasons for the change in net income in 2007
over 2006 were as follows:





·
            Interest
      and fees on loans totaled $15,255,000 in 2007 compared with $13,592,000 in
      2006, an increase of $1,663,000, or
12.2%.


·
            Our
      income from average interest-earning assets grew
  12.0%.


·
            Our
      total interest expense rose $2,007,000, or
  26.5%.


·
            The
      increase in net interest expense exceeded the increase in interest income
      by $141,000, causing net interest income to decrease by
    1.8%.


·
            Noninterest
      expenses grew $432,000, or 7.2%.





Interest
Income.  Interest income was $17,368,000 and $15,502,000 in
2007 and 2006, respectively.  The increase of 12.0% was attributable
to growth in our most significant interest-earning asset, loans, which grew
11.7% from average levels in 2006 to 2007.  Average loans accounted
for 80.4% of our average interest-earning assets in 2007 versus 79.5% in
2006.  Our overall yield on interest-earning assets of 7.60% was
relatively unchanged from the 2006 level of 7.44% due to a more stable interest
rate environment throughout most of 2007.  Our overall yield on
interest-earning assets in 2007 would have been 9 basis points higher, or 7.69%,
if not for the increase in nonaccrual loans and approximately $216,000 in income
earned but not collected on nonaccrual loans.





Interest
Expense.  Interest expense was $9,591,000 and $7,584,000 in
2007 and 2006, respectively.  As a result of the increasing
competition for deposits and other funding sources, and our growth in average
interest-bearing liabilities of $23.9 million, or 13.6%, during this period,
interest expense increased 26.5%.  Our cost of funds rose to 4.82% in
2007 compared with 4.34% in 2006.  Substantially all of the increase
in interest expense was attributable to an increase in rates and volume of
certificates of deposit.  Interest expense from average certificates
of deposit increased 36.8% as compared with the total interest expense of all
other average deposits of 31.5%.  Average certificates of deposit
increased $25.8 million versus a decline in all average other interest bearing
deposits of $668,000.





Net Interest
Income.  Net interest income (before provision for loan losses)
was $7,777,000 and $7,918,000 for 2007 and 2006, respectively, a decrease of
1.8% from 2006 to 2007, which was due to the increase in our cost of funds
primarily caused by intense competition for funding.  The average
balances, interest income and expense, and the average rates earned and paid for
assets and liabilities are found in the tables that follow.





During
2007 and 2006, the average yield (on a tax-equivalent basis) on interest-earning
assets was 7.60% and 7.44%, respectively, while the average cost of funds was
4.82% in 2007 and 4.34% in 2006.  Our net interest margin was lower
(3.49% in 2007 compared with 3.84% in 2006), which reflects the faster growth in
interest-bearing liabilities (13.6%) over interest-earning assets (10.5%) and
cost of funds (48 basis points) versus yield on interest-earning assets (16
basis points).  The increase in interest income was due primarily to
the increased volume of average loans and securities, while the increases to
interest expense was a combination of increased cost of funds and changes in our
volume of interest-bearing liabilities.





Provision for Loan
Losses.  A provision for loan losses of $629,000 was recorded
in 2007, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The increase in the provision for loan losses in 2007
versus the 2006 level of $435,000 was due to unfavorable trends in most measures
of loan portfolio quality, including the growth in impaired and nonaccrual loans
and other nonperforming assets.  Net charge-offs in 2007 were $59,000
as compared with $147,000 in 2006, a decrease of $88,000.


- 20
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 Table of Contents


Noninterest
Income.  Noninterest income increased $41,000, or 3.8%, to
$1,119,000 in 2007 from $1,078,000 in 2006.  A
summary of the more significant changes for 2007 compared with 2006
follows:





·
            Fees
      and service charges on deposit accounts grew by $36,000. or 6.0%, which
      reflects increases in fees implemented in
  late-2006.


·
            Mortgage
      banking fees decreased from $119,000 to $69,000, or 42.0%, reflecting the
      depressed residential real estate
market.


·
            Income
      from bank-owned life insurance increased from $106,000 to $152,000, or
      43.4%, reflecting earnings on additional bank-owned life insurance
      purchased of $2.0 million during
2007.





Noninterest
Expenses.  Total noninterest expenses increased to $6,413,000
in 2007 compared to $5,981,000 for 2006, an increase of $432,000, or
7.2%.  The more significant increases during 2007 over 2006
follow:





·
            Salaries
      and employee benefits grew $101,000, or 3.4%, reflecting increases in
      salaries, bonuses, retirement plan contributions, and insurance
      costs.


·
            Processing
      and settlement fees increased by $185,000, or 29.6%, due to our growth in
      account activity and, price increases, which were partially offset by
      higher fees and service charges on deposit accounts.  Also,
      changes in capturing branch data for processing increased $58,000 in 2007
      over 2006, which allowed us to achieve certain efficiencies and cost
      reductions in other operating
expenses.


·
            The
      cost of regulatory assessments rose 156.1% from $66,000 to $169,000, due
      to FDIC deposit insurance fees of $119,000 in 2007 versus $21,000 in
      2006.  The increase was due in part to the new assessment
      calculation implemented by the FDIC in
2007.





Provision for Income
Taxes.  The income tax provision was $448,000 for 2007, an
effective rate of 24.2%.  This compares with an effective rate of
32.0% for 2006.  The effective tax rates in 2007 and 2006 differ from
the federal and state statutory rates principally due to nontaxable investment
income.  The growth of tax-exempt income in 2007 over 2006 of 82.3%
greatly exceeded the growth in overall interest income of 12.0%, contributing to
the decline in the effective tax rate.








[Remainder
of page left intentionally blank.]


- 21
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 Table of Contents




Rate/Volume
Analysis (dollars in thousands):





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006AverageBalance
                      
                      
                      Interest
                      
                      
                      Average
      Yield/Rate
                      
                      
                      AverageBalance
                      
                      
                      Interest
                      
                      
                      Average
      Yield/Rate
                      
                      
                      AverageBalance
                      
                      
                      Interest
                      
                      
                      Average
      Yield/RateInterest-earning
      assets:Loans
      (1)
                      
                      $
                      203,675
                      
                      
                      $
                      13,637
                      
                      
                      
                      6.70
                      %
                      
                      $
                      187,544
                      
                      
                      $
                      15,255
                      
                      
                      
                      8.13
                      %
                      
                      $
                      167,883
                      
                      
                      $
                      13,592
                      
                      
                      
                      8.10
                      %Securities
      and deposits (2)
                      
                      
                      36,995
                      
                      
                      
                      1,663
                      
                      
                      
                      5.59
                      
                      
                      
                      41,696
                      
                      
                      
                      1,886
                      
                      
                      
                      5.38
                      
                      
                      
                      37,278
                      
                      
                      
                      1,605
                      
                      
                      
                      4.83Other
      interest-earning assets (3)
                      
                      
                      1,978
                      
                      
                      
                      35
                      
                      
                      
                      1.77
                      
                      
                      
                      4,099
                      
                      
                      
                      227
                      
                      
                      
                      5.54
                      
                      
                      
                      5,920
                      
                      
                      
                      305
                      
                      
                      
                      5.15Total
      interest-earning assets (2)
                      
                      
                      242,648
                      
                      
                      
                      15,335
                      
                      
                      
                      6.49
                      %
                      
                      
                      233,339
                      
                      
                      
                      17,368
                      
                      
                      
                      7.60
                      %
                      
                      
                      211,081
                      
                      
                      
                      15,502
                      
                      
                      
                      7.44
                      %Noninterest-earning
      assets
                      
                      
                      17,381
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,335
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,510Total
      assets
                      
                      $
                      260,029
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      247,674
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      225,591Interest-bearing
      liabilities:Demand
      deposits
                      
                      $
                      42,108
                      
                      
                      
                      996
                      
                      
                      
                      2.37
                      %
                      
                      $
                      42,858
                      
                      
                      
                      1,683
                      
                      
                      
                      3.93
                      %
                      
                      $
                      41,983
                      
                      
                      
                      1,452
                      
                      
                      
                      3.46
                      %Savings
                      
                      
                      2,988
                      
                      
                      
                      33
                      
                      
                      
                      1.10
                      
                      
                      
                      3,751
                      
                      
                      
                      56
                      
                      
                      
                      1.49
                      
                      
                      
                      5,294
                      
                      
                      
                      68
                      
                      
                      
                      1.28Certificates
      of deposit
                      
                      
                      146,595
                      
                      
                      
                      6,741
                      
                      
                      
                      4.60
                      
                      
                      
                      129,313
                      
                      
                      
                      6,726
                      
                      
                      
                      5.20
                      
                      
                      
                      103,485
                      
                      
                      
                      4,915
                      
                      
                      
                      4.75Other
      borrowings
                      
                      
                      21,046
                      
                      
                      
                      620
                      
                      
                      
                      2.95
                      
                      
                      
                      22,888
                      
                      
                      
                      1,126
                      
                      
                      
                      4.92
                      
                      
                      
                      24,186
                      
                      
                      
                      1,149
                      
                      
                      
                      4.75Total
      interest-bearing liabilities
                      
                      
                      212,737
                      
                      
                      
                      8,390
                      
                      
                      
                      3.94
                      %
                      
                      
                      198,810
                      
                      
                      
                      9,591
                      
                      
                      
                      4.82
                      %
                      
                      
                      174,948
                      
                      
                      
                      7,584
                      
                      
                      
                      4.34
                      %Noninterest-bearing
      liabilities
                      
                      
                      28,718
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      30,778
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      34,601Stockholders’
      equity
                      
                      
                      18,574
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18,086
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,042Total
      liabilities and stockholders’ equity
                      
                      $
                      260,029
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      247,674
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      225,591Net
      interest income (before provision for loan losses)
                      
                      
                      
                      
                      
                      $
                      6,945
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      7,777
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      7,918Interest-rate
      spread (4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.55
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.78
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.10
                      %Net
      interest margin(2)
      (5)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.03
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.49
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.84
                      %Ratio
      of average interest-earning assets to average interest-bearingliabilities
                      
                      
                      114.06
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      117.37
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      120.65
                      %






(1)
              Average
      loan balances include nonaccrual loans, which averaged (in thousands)
      $5,130, $5,853, and $79 in 2008, 2007, and 2006,
      respectively.  Average loans are net of deferred
      fees.  Loan fees (in thousands) were $416, $536, and $600 in
      2008, 2007, and 2006, respectively.  Loan yields have been
      reported in total since a substantial portion of loans are secured by real
      estate.
 (2)
              Tax-exempt
      income has been adjusted to a tax-equivalent basis using an incremental
      rate of 37.6%.  Includes interest-earning
    deposits.
 (3)
              Includes
      federal funds sold.
 (4)
              Interest-rate
      spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest-bearing
      liabilities.
 (5)
              Net
      interest margin is net interest income divided by average interest-earning
      assets.




- 22
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 Table of Contents


Rate/Volume
Analysis (dollars in thousands):


Year
      Ended December 31,2008
      vs. 2007Increase (Decrease) Due toRate
                      
                      
                      Volume
                      
                      
                      Rate/
      Volume
                      
                      
                      TotalInterest-earning
      assets:Loans
      (1)
                      
                      $
                      (2,698
                      )
                      
                      $
                      1,312
                      
                      
                      $
                      (232
                      )
                      
                      $
                      (1,618
                      )Securities
      and other deposits
                      
                      
                      (12
                      )
                      
                      
                      (213
                      )
                      
                      
                      2
                      
                      
                      
                      (223
                      )Other
      interest-earning assets (2)
                      
                      
                      (154
                      )
                      
                      
                      (117
                      )
                      
                      
                      79
                      
                      
                      
                      (192
                      )Total
      interest-earning assets
                      
                      
                      (2,864
                      )
                      
                      
                      982
                      
                      
                      
                      (151
                      )
                      
                      
                      (2,033
                      )Interest-bearing
      liabilities:Demand
      deposits
                      
                      
                      (669
                      )
                      
                      
                      (29
                      )
                      
                      
                      11
                      
                      
                      
                      (687
                      )Savings
                      
                      
                      (15
                      )
                      
                      
                      (11
                      )
                      
                      
                      3
                      
                      
                      
                      (23
                      )Certificates
      of deposit
                      
                      
                      (780
                      )
                      
                      
                      899
                      
                      
                      
                      (104
                      )
                      
                      
                      15Other
      borrowings
                      
                      
                      (452
                      )
                      
                      
                      (91
                      )
                      
                      
                      37
                      
                      
                      
                      (506
                      )Total
      interest-bearing liabilities
                      
                      
                      (1,916
                      )
                      
                      
                      768
                      
                      
                      
                      (53
                      )
                      
                      
                      (1,201
                      )Net
      interest income
                      
                      $
                      (948
                      )
                      
                      $
                      214
                      
                      
                      $
                      (98
                      )
                      
                      $
                      (832
                      )Year
      Ended December 31,2007
      vs. 2006Increase (Decrease) Due toRate
                      
                      
                      Volume
                      
                      
                      Rate/Volume
                      
                      
                      TotalInterest-earning
      assets:Loans
      (1)
                      
                      $
                      64
                      
                      
                      $
                      1,592
                      
                      
                      $
                      7
                      
                      
                      $
                      1,663Securities
      and other deposits
                      
                      
                      81
                      
                      
                      
                      190
                      
                      
                      
                      10
                      
                      
                      
                      281Other
      interest-earning assets (2)
                      
                      
                      23
                      
                      
                      
                      (94
                      )
                      
                      
                      (7
                      )
                      
                      
                      (78
                      )Total
      interest-earning assets
                      
                      
                      168
                      
                      
                      
                      1,688
                      
                      
                      
                      10
                      
                      
                      
                      1,866Interest-bearing
      liabilities:Demand
      deposits
                      
                      
                      197
                      
                      
                      
                      30
                      
                      
                      
                      4
                      
                      
                      
                      231Savings
                      
                      
                      11
                      
                      
                      
                      (20
                      )
                      
                      
                      (3
                      )
                      
                      
                      (12
                      )Certificates
      of deposit
                      
                      
                      468
                      
                      
                      
                      1,227
                      
                      
                      
                      117
                      
                      
                      
                      1,812Other
      borrowings
                      
                      
                      41
                      
                      
                      
                      (62
                      )
                      
                      
                      (3
                      )
                      
                      
                      (24
                      )Total
      interest-bearing liabilities
                      
                      
                      717
                      
                      
                      
                      1,175
                      
                      
                      
                      115
                      
                      
                      
                      2,007Net
      interest income
                      
                      $
                      (549
                      )
                      
                      $
                      513
                      
                      
                      $
                      (105
                      )
                      
                      $
                      (141
                      )








(1)
            Average
      loan balances include nonaccrual
loans.


(2)
              Includes
      federal funds sold.




- 23
-
 Table of Contents


Weighted
Average Yield or Rate:


For the Years Ended December
      31,2008
                
                
                2007
                
                
                2006Interest-earning
      assets:Loans,
      net
                
                
                6.70
                %
                
                
                8.13
                %
                
                
                8.10
                %Investment
      securities
                
                
                5.59
                
                
                
                5.38
                
                
                
                4.83Other
      interest-earning assets
                
                
                1.77
                
                
                
                5.54
                
                
                
                5.15All
      interest-earning assets
                
                
                6.49
                
                
                
                7.60
                
                
                
                7.44Interest-bearing
      liabilities:NOW
      deposits
                
                
                0.70
                
                
                
                1.31
                
                
                
                1.09Money
      market deposits
                
                
                2.77
                
                
                
                4.22
                
                
                
                3.84Savings
                
                
                1.10
                
                
                
                1.49
                
                
                
                1.28Certificates
      of deposit
                
                
                4.60
                
                
                
                5.20
                
                
                
                4.75Other
      borrowings
                
                
                2.95
                
                
                
                4.92
                
                
                
                4.75All
      interest-bearing liabilities
                
                
                3.94
                
                
                
                4.82
                
                
                
                4.34Interest-rate
      spread
                
                
                2.55
                
                
                
                2.78
                
                
                
                3.10Net
      interest margin
                
                
                3.03
                
                
                
                3.49
                
                
                
                3.84








Change
in Mix of Interest-Earning Assets and Interest-Bearing Deposits and Other
Borrowings (dollars in thousands):





At December 31,2008
                
                
                2007
                
                
                2006AverageBalance
                
                
                PercenttoTotal
                
                
                AverageBalance
                
                
                Percent
      toTotal
                
                
                AverageBalance
                
                
                Percent
      toTotalInterest-earning
      assets:Loans,
      net
                
                $
                203,675
                
                
                
                83.9
                %
                
                $
                187,544
                
                
                
                80.4
                %
                
                $
                167,883
                
                
                
                79.5
                %Investment
      securities
                
                
                36,995
                
                
                
                15.3
                %
                
                
                41,696
                
                
                
                17.9
                %
                
                
                37,278
                
                
                
                17.7
                %Other
                
                
                1,978
                
                
                
                0.8
                %
                
                
                4,099
                
                
                
                1.7
                %
                
                
                5,920
                
                
                
                2.8
                %Total
      interest-earning assets
                
                $
                242,648
                
                
                
                100.0
                %
                
                $
                233,339
                
                
                
                100.0
                %
                
                $
                211,081
                
                
                
                100.0
                %Interest-bearing
      deposits:Demand
      deposits
                
                $
                42,108
                
                
                
                17.5
                %
                
                $
                42,858
                
                
                
                18.8
                %
                
                $
                41,983
                
                
                
                20.2
                %Savings
                
                
                2,988
                
                
                
                1.2
                %
                
                
                3,751
                
                
                
                1.7
                %
                
                
                5,294
                
                
                
                2.6
                %Certificates
      of deposit
                
                
                146,595
                
                
                
                61.0
                %
                
                
                129,313
                
                
                
                56.7
                %
                
                
                103,485
                
                
                
                49.7
                %Total
      interest-bearing deposits
                
                
                191,691
                
                
                
                79.7
                %
                
                
                175,922
                
                
                
                77.2
                %
                
                
                150,762
                
                
                
                72.5
                %Noninterest-bearing
      deposits
                
                
                27,504
                
                
                
                11.5
                %
                
                
                29,335
                
                
                
                12.9
                %
                
                
                33,177
                
                
                
                15.9
                %Total
      deposits
                
                
                219,195
                
                
                
                91.2
                %
                
                
                205,257
                
                
                
                90.1
                %
                
                
                183,939
                
                
                
                88.4
                %Other
      borrowings
                
                
                21,046
                
                
                
                8.8
                %
                
                
                22,888
                
                
                
                9.9
                %
                
                
                24,186
                
                
                
                11.6
                %Total
      deposits and other borrowings
                
                $
                240,241
                
                
                
                100.0
                %
                
                $
                228,145
                
                
                
                100.0
                %
                
                $
                208,125
                
                
                
                100.0
                %








LOANPORTFOLIO





Average
loans receivable were $203,675,000 for the year 2008 as compared to $187,544,000
for 2007, an increase of 8.6%.  The year-to-year average increase in
2007 over 2006 was 11.7%.  Management believes the growth in loans was
directly attributable to the growth in our branch network, community acceptance,
and the reputations of our lending team despite a significant downturn in
economic conditions in our market area during 2008.  The following
provides an analysis of our loan distribution at the end of 2004 -
2008.  Loans that are secured by real estate include residential and
nonresidential mortgages and home equity loans to individuals.


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Loan
Portfolio (dollars in thousands):





At December 31,2008
                
                
                %
                
                
                2007
                
                
                %
                
                
                2006
                
                
                %
                
                
                2005
                
                
                %
                
                
                2004
                
                
                %Real
      estateConstruction,
      land development, and other land
                
                $
                39,135
                
                
                
                19
                %
                
                $
                53,197
                
                
                
                25
                %
                
                $
                51,598
                
                
                
                29
                %
                
                $
                37,905
                
                
                
                25
                %
                
                $
                27,246
                
                
                
                21
                %1-4
      family residential
                
                
                57,814
                
                
                
                28
                %
                
                
                45,708
                
                
                
                23
                %
                
                
                38,018
                
                
                
                22
                %
                
                
                31,997
                
                
                
                21
                %
                
                
                19,283
                
                
                
                15
                %Multifamily
      residential
                
                
                4,481
                
                
                
                2
                %
                
                
                1,784
                
                
                
                1
                %
                
                
                2,489
                
                
                
                1
                %
                
                
                3,051
                
                
                
                2
                %
                
                
                2,513
                
                
                
                2
                %Commercial
                
                
                88,762
                
                
                
                43
                %
                
                
                86,785
                
                
                
                42
                %
                
                
                68,588
                
                
                
                39
                %
                
                
                62,612
                
                
                
                41
                %
                
                
                60,869
                
                
                
                47
                %Total
      real estate
                
                
                190,192
                
                
                
                92
                %
                
                
                187,474
                
                
                
                91
                %
                
                
                160,693
                
                
                
                91
                %
                
                
                135,565
                
                
                
                89
                %
                
                
                109,911
                
                
                
                85
                %Commercial
                
                
                13,314
                
                
                
                6
                %
                
                
                11,485
                
                
                
                6
                %
                
                
                11,214
                
                
                
                6
                %
                
                
                11,901
                
                
                
                8
                %
                
                
                13,817
                
                
                
                11
                %Consumer
      and other loans
                
                
                3,548
                
                
                
                2
                %
                
                
                5,138
                
                
                
                3
                %
                
                
                5,828
                
                
                
                3
                %
                
                
                5,400
                
                
                
                3
                %
                
                
                6,147
                
                
                
                4
                %Total
      loans
                
                
                207,054
                
                
                
                100
                %
                
                
                204,097
                
                
                
                100
                %
                
                
                177,735
                
                
                
                100
                %
                
                
                152,866
                
                
                
                100
                %
                
                
                129,875
                
                
                
                100
                %Less:Less,
      deferred fees
                
                
                (25
                )
                
                
                
                
                
                
                (37
                )
                
                
                
                
                
                
                (27
                )
                
                
                
                
                
                
                (63
                )
                
                
                
                
                
                
                (74
                )Less,
      allowance for loan losses
                
                
                (3,999
                )
                
                
                
                
                
                
                (2,169
                )
                
                
                
                
                
                
                (1,599
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,296
                )(1,552
                )$
                203,030
                
                
                
                
                
                
                $
                201,891
                
                
                
                
                
                
                $
                176,109
                
                
                
                
                
                
                $
                151,251
                
                
                
                
                
                
                $
                128,505








The
following tables show the maturity data for loans receivable.





Contractual
Loan Maturities at December 31, 2008 (dollars in thousands):





1
      Yearor Less
                
                
                1
      Through5 Years
                
                
                After5 Years
                
                
                TotalReal
      estateConstruction,
      land development, and other land
                
                $
                27,907
                
                
                $
                11,017
                
                
                $
                211
                
                
                $
                39,1351-4
      family residential
                
                
                37,050
                
                
                
                12,971
                
                
                
                7,793
                
                
                
                57,814Multifamily
      residential
                
                
                3,985
                
                
                
                496
                
                
                
                -
                
                
                
                4,481Commercial
                
                
                15,402
                
                
                
                65,436
                
                
                
                7,924
                
                
                
                88,76284,344
                
                
                
                89,920
                
                
                
                15,928
                
                
                
                190,192Commercial
                
                
                8,847
                
                
                
                4,058
                
                
                
                409
                
                
                
                13,314Consumer
      and other loans
                
                
                903
                
                
                
                2,263
                
                
                
                382
                
                
                
                3,548Total
      loan portfolio
                
                $
                94,094
                
                
                $
                96,241
                
                
                $
                16,719
                
                
                $
                207,054Loans
      with maturities over one year:Fixed
      rate
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                33,298Variable
      rate
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                79,662Total
      maturities greater than one year
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                112,960





Loan
Maturities or Next Repricing Date at December 31, 2008, excluding nonaccrual
loans (dollars in thousands):




Three
      months or less
                    
                    $
                    72,617Over
      three months through twelve months
                    
                    
                    15,999Over
      one year through three years
                    
                    
                    64,319Over
      three through five years
                    
                    
                    31,922Over
      five years
                    
                    
                    16,719$
                    201,576


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Loans
Originated and Repaid (dollars in thousands):


Years Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Originations:Real
      estate loansConstruction,
      land development, and other land
                
                $
                8,052
                
                
                $
                19,007
                
                
                $
                39,551
                
                
                $
                33,561
                
                
                $
                16,9111-4
      family residential
                
                
                14,563
                
                
                
                13,262
                
                
                
                15,744
                
                
                
                12,518
                
                
                
                8,689Multifamily
      residential
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,304Commercial
                
                
                2,946
                
                
                
                18,632
                
                
                
                17,548
                
                
                
                13,180
                
                
                
                16,77625,561
                
                
                
                50,901
                
                
                
                72,843
                
                
                
                59,259
                
                
                
                44,680Commercial
                
                
                2,971
                
                
                
                2,678
                
                
                
                4,452
                
                
                
                4,364
                
                
                
                11,360Consumer
      and other loans
                
                
                835
                
                
                
                2,047
                
                
                
                2,807
                
                
                
                2,263
                
                
                
                3,390Total
                
                
                29,367
                
                
                
                55,626
                
                
                
                80,102
                
                
                
                65,886
                
                
                
                59,430Principal
      reductions
                
                
                (26,410
                )
                
                
                (29,264
                )
                
                
                (55,233
                )
                
                
                (42,895
                )
                
                
                (29,114
                )Increase
      in total loans
                
                $
                2,957
                
                
                $
                26,362
                
                
                $
                24,869
                
                
                $
                22,991
                
                
                $
                30,316








CLASSIFICATIONOF ASSETS AND NONACCRUAL OR IMPAIRED
LOANS





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





Real
estate acquired as a result of foreclosure, or by deed in lieu of foreclosure,
is classified as other real estate owned.  Other real estate owned is
recorded at the lower of cost or fair value less estimated selling costs, and
the estimated loss, if any, is charged to the allowance for loan losses at the
time the loan is transferred to other real estate owned.  Further
allowances for losses in other real estate owned are recorded at the time
management believes additional deterioration in value has
occurred.  Gains or losses on the sale of other real estate owned are
recognized in the period closed.  However, gains on the sale of units
in a real estate development project may be deferred until management is
reasonably certain that its investment in the remaining units will not result in
losses.  In 2008, Oceanside sold 5 units of a condominium development
project with net proceeds exceeding the current carrying value of those units by
approximately $90,000.  No gain was recorded on the sale of these
units during 2008.  During 2008, Oceanside reduced its carrying value
on this project and other real estate owned with a charge to earnings of
$315,000, which has been included in noninterest expenses.





Management
has adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan(“SFAS No. 114”), which considers a loan to be
impaired if it is probable that all amounts due under the contractual terms of
the loan agreement will not be collected.  If a loan is considered
impaired, its value generally should be measured based on the present value of
expected cash flows discounted at the loan’s effective interest
rate.  As a practical expedient, however, the loan’s value may be
based on:





·
              the
      loan’s market price; or


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





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





Situations
may occur where:





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


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


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





At
December 31, 2008, 2007, and 2006, loans past due for 30 days or more (but less
than 89 days) totaled $3,340,000, $280,000, and $197,000,
respectively.  At December 31, 2008, one loan of $1,656,000 was past
due more than 90 days, but was not considered to be impaired and interest was
still being accrued on this loan.  At December 31, 2008, there was a
total of $5,459,000 of impaired and nonaccrual loans.





Management
maintains a list of monitored loans risk-rated substandard or lower (referred to
as “classified loans”). At December 31, 2008, management had fifty classified
loans totaling approximately $28.5 million, as compared with twenty-eight
classified loans totaling $8.0 million at December 31, 2007, and fifteen
classified loans totaling $4.5 million at December 31, 2006.  At
December 31, 2008, ten loan relationships comprise 78% of the total classified
loans.





Many of
the loans risk-rated substandard are currently performing with no expectation
that we will suffer any loss; however, we monitor these loans because many of
them are collateral-dependent and the current status of the borrower’s liquidity
and cash flow have not been confirmed.  Because some of these loans
exhibit well-defined credit weaknesses, we may incur losses if the underlying
collateral declines in value beyond our expectations or the borrower’s financial
condition deteriorates and payments are not made as agreed.





Nonperforming
Assets (dollars in thousands)





At December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Nonperforming
      loansNonaccrual
      (and impaired) loans
                
                $
                5,459
                
                
                $
                6,222
                
                
                $
                53
                
                
                $
                202
                
                
                $
                90Loans
      past due 90 days still accruing
                
                
                1,656
                
                
                
                164
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      nonperforming loans
                
                $
                7,115
                
                
                $
                6,386
                
                
                $
                53
                
                
                $
                202
                
                
                $
                90Other
      nonperforming assetsOther
      real estate owned
                
                $
                3,421
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Repossessed
      assets
                
                
                75
                
                
                
                9
                
                
                
                13
                
                
                
                -
                
                
                
                -$
                3,496
                
                
                $
                9
                
                
                $
                13
                
                
                $
                -
                
                
                $
                -Total
      nonperforming assets
                
                $
                10,611
                
                
                $
                6,395
                
                
                $
                66
                
                
                $
                202
                
                
                $
                90





Highly
leveraged transactions generally include loans and commitments made in
connection with recapitalizations, acquisitions, and leveraged buyouts, and
result in the borrower’s debt-to-total assets ratio exceeding 75%.  At
December 31, 2008, 2007, 2006, 2005, and 2004, there were no loans qualified as
highly leveraged transactions.





Loans
restructured and in compliance with modified terms are commonly referred to as
“troubled debt restructurings.”  A restructuring of debt constitutes a
Troubled Debt Restructuring (“TDR”) if a creditor for economic or legal reasons
related to the debtor’s financial difficulties grants a concession to the debtor
it would not otherwise consider. A summary of loans we classified TDR at
December 31 follows (dollars in thousands):





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Loans
      restructured and in compliance with modified terms
                
                $
                3,566
                
                
                $
                4,491
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Loans
      restructured and past due 30-89 days
                
                
                53
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Loans
      restructured and in nonaccrual status
                
                
                4,386
                
                
                
                782
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                8,005
                
                
                $
                5,273
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -


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ALLOWANCEFOR LOAN LOSSES





The
amount charged to operations and the related balance in the allowance for loan
losses is based upon periodic evaluations of the loan portfolio by
management.  These evaluations consider several factors including but
not limited to, current economic conditions, loan portfolio composition, prior
credit loss experience, trends in portfolio volume, and management’s estimation
of future potential losses.  Management believes that the allowance
for loan losses is adequate. The following is an analysis of the allowance for
loan losses for 2004 - 2008.





Allowance
for Loan Losses (dollars in thousands):


Years Ended
    December 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Balance,
      at beginning of period
                        
                        $
                        2,169
                        
                        
                        $
                        1,599
                        
                        
                        $
                        1,552
                        
                        
                        $
                        1,296
                        
                        
                        $
                        1,220Provision
      for loan losses
                        
                        
                        4,424
                        
                        
                        
                        629
                        
                        
                        
                        194
                        
                        
                        
                        334
                        
                        
                        
                        362Loans
      charged offReal
      estate
                        
                        
                        (1,979
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (36
                        )
                        
                        
                        -Commercial
                        
                        
                        (501
                        )
                        
                        
                        (49
                        )
                        
                        
                        (169
                        )
                        
                        
                        -
                        
                        
                        
                        -Consumer
      and other loans
                        
                        
                        (135
                        )
                        
                        
                        (26
                        )
                        
                        
                        (12
                        )
                        
                        
                        (50
                        )
                        
                        
                        (294
                        )(2,615
                        )
                        
                        
                        (75
                        )
                        
                        
                        (181
                        )
                        
                        
                        (86
                        )
                        
                        
                        (294
                        )RecoveriesReal
      estate
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        -Commercial
                        
                        
                        19
                        
                        
                        
                        11
                        
                        
                        
                        31
                        
                        
                        
                        -
                        
                        
                        
                        -Consumer
      and other loans
                        
                        
                        2
                        
                        
                        
                        5
                        
                        
                        
                        3
                        
                        
                        
                        7
                        
                        
                        
                        821
                        
                        
                        
                        16
                        
                        
                        
                        34
                        
                        
                        
                        8
                        
                        
                        
                        8Net
      charge-offs
                        
                        
                        (2,594
                        )
                        
                        
                        (59
                        )
                        
                        
                        (147
                        )
                        
                        
                        (78
                        )
                        
                        
                        (286
                        )Balance,
      at end of period
                        
                        $
                        3,999
                        
                        
                        $
                        2,169
                        
                        
                        $
                        1,599
                        
                        
                        $
                        1,552
                        
                        
                        $
                        1,296Net
      charge-offs to average loans
                        
                        
                        1.27
                        %
                        
                        
                        0.03
                        %
                        
                        
                        0.09
                        %
                        
                        
                        0.06
                        %
                        
                        
                        0.25
                        %





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





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





At December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Amount
                
                
                %
      of Loans to Total Loans
                
                
                Amount
                
                
                %
      of Loans to Total Loans
                
                
                Amount
                
                
                %
      of Loans to Total Loans
                
                
                Amount
                
                
                %
      of Loans to Total Loans
                
                
                Amount
                
                
                %
      of Loans to Total LoansReal
      estate loans
                
                $
                1,254
                
                
                
                92
                %
                
                $
                511
                
                
                
                92
                %
                
                $
                15
                
                
                
                91
                %
                
                $
                134
                
                
                
                89
                %
                
                $
                234
                
                
                
                85
                %Commercial
      loans
                
                
                435
                
                
                
                6
                
                
                
                205
                
                
                
                6
                
                
                
                120
                
                
                
                6
                
                
                
                219
                
                
                
                8
                
                
                
                77
                
                
                
                11Consumer
      and other loans
                
                
                28
                
                
                
                2
                
                
                
                12
                
                
                
                2
                
                
                
                23
                
                
                
                3
                
                
                
                37
                
                
                
                3
                
                
                
                39
                
                
                
                4Unallocated
                
                
                2,282
                
                
                
                -
                
                
                
                1,441
                
                
                
                -
                
                
                
                1,441
                
                
                
                -
                
                
                
                1,162
                
                
                
                -
                
                
                
                946
                
                
                
                -$
                3,999
                
                
                
                100
                %
                
                $
                2,169
                
                
                
                100
                %
                
                $
                1,599
                
                
                
                100
                %
                
                $
                1,552
                
                
                
                100
                %
                
                $
                1,296
                
                
                
                100
                %








SECURITIES





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





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Carrying
Value of Investment Securities (dollars in thousands):


At December 31,2008
                
                
                2007
                
                
                2006Securities
      available-for-sale:U.
      S. Government-sponsored agency
                
                $
                2,699
                
                
                $
                3,019
                
                
                $
                1,007Mortgage-backed
      securities
                
                
                12,171
                
                
                
                22,519
                
                
                
                28,79814,870
                
                
                
                25,538
                
                
                
                29,805Securities
      held-to-maturity:Tax-exempt
      state, county, and municipal bonds
                
                
                15,536
                
                
                
                15,762
                
                
                
                10,032Balance,
      end of year
                
                $
                30,406
                
                
                $
                41,300
                
                
                $
                39,837





Investment
Securities at Amortized Cost (dollars in thousands):


At December 31,2008
                
                
                2007
                
                
                2006Securities
      available-for-sale:U.
      S. Government-sponsored agency
                
                $
                2,700
                
                
                $
                2,983
                
                
                $
                1,000Mortgage-backed
      securities
                
                
                12,171
                
                
                
                22,691
                
                
                
                29,25914,871
                
                
                
                25,674
                
                
                
                30,259Securities
      held-to-maturity:Tax-exempt
      state, county, and municipal bonds
                
                
                15,536
                
                
                
                15,762
                
                
                
                10,032Balance,
      end of year
                
                $
                30,407
                
                
                $
                41,436
                
                
                $
                40,291








The
following tables set forth the maturities (excluding principal paydowns on
mortgage-backed securities) and the weighted average yields of securities by
contractual maturities at December 31, 2008, 2007, and 2006.





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




Due
      in one
                              
                              
                              Due
      in Five
                              
                              
                              Due
      in Five
                              
                              
                              Due
      in Tenyear or less
                              
                              
                              to Five Years
                              
                              
                              to Ten Years
                              
                              
                              Years or More
                              
                              
                              TotalAverage
                              
                              
                              
                              
                              
                              Average
                              
                              
                              
                              
                              
                              Average
                              
                              
                              
                              
                              
                              Average
                              
                              
                              
                              
                              
                              AverageAmount
                              
                              
                              Yield
                              
                              
                              Amount
                              
                              
                              Yield
                              
                              
                              Amount
                              
                              
                              Yield
                              
                              
                              Amount
                              
                              
                              Yield
                              
                              
                              Amount
                              
                              
                              YieldAt December 31, 2008:U.S.
      Government-sponsored agency
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              2,123
                              
                              
                              
                              4.01
                              %
                              
                              $
                              576
                              
                              
                              
                              4.26
                              %
                              
                              $
                              2,699
                              
                              
                              
                              4.06
                              %Mortgage-backed
      securities
                              
                              
                              639
                              
                              
                              
                              3.77
                              %
                              
                              
                              1,075
                              
                              
                              
                              3.79
                              %
                              
                              
                              973
                              
                              
                              
                              4.93
                              %
                              
                              
                              9,484
                              
                              
                              
                              4.37
                              %
                              
                              
                              12,171
                              
                              
                              
                              4.33
                              %$
                              639
                              
                              
                              
                              3.77
                              %
                              
                              $
                              1,075
                              
                              
                              
                              3.79
                              %
                              
                              $
                              3,096
                              
                              
                              
                              4.93
                              %
                              
                              $
                              10,060
                              
                              
                              
                              4.37
                              %
                              
                              $
                              14,870
                              
                              
                              
                              4.42
                              %At December 31, 2007:U.S.
      Government-sponsored agency
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              3,019
                              
                              
                              
                              5.64
                              %
                              
                              $
                              3,019
                              
                              
                              
                              5.64
                              %Mortgage-backed
      securities
                              
                              
                              2,803
                              
                              
                              
                              4.08
                              %
                              
                              
                              2,356
                              
                              
                              
                              3.85
                              %
                              
                              
                              10,594
                              
                              
                              
                              4.53
                              %
                              
                              
                              6,766
                              
                              
                              
                              4.90
                              %
                              
                              
                              22,519
                              
                              
                              
                              4.52
                              %$
                              2,803
                              
                              
                              
                              4.08
                              %
                              
                              $
                              2,356
                              
                              
                              
                              3.85
                              %
                              
                              $
                              10,594
                              
                              
                              
                              4.53
                              %
                              
                              $
                              9,785
                              
                              
                              
                              4.90
                              %
                              
                              $
                              25,538
                              
                              
                              
                              4.56
                              %At December 31, 2006:U.S.
      Government-sponsored agency
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              -
                              
                              
                              
                              -
                              %
                              
                              $
                              1,007
                              
                              
                              
                              6.00
                              %
                              
                              $
                              1,007
                              
                              
                              
                              6.00
                              %Mortgage-backed
      securities
                              
                              
                              293
                              
                              
                              
                              5.26
                              %
                              
                              
                              6,280
                              
                              
                              
                              3.91
                              %
                              
                              
                              12,125
                              
                              
                              
                              4.61
                              %
                              
                              
                              10,100
                              
                              
                              
                              4.56
                              %
                              
                              
                              28,798
                              
                              
                              
                              4.45
                              %$
                              293
                              
                              
                              
                              5.26
                              %
                              
                              $
                              6,280
                              
                              
                              
                              3.91
                              %
                              
                              $
                              12,125
                              
                              
                              
                              4.61
                              %
                              
                              $
                              11,107
                              
                              
                              
                              4.69
                              %
                              
                              $
                              29,805
                              
                              
                              
                              4.50
                              %








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




Due
      in one
                      
                      
                      Due
      in One
                      
                      
                      Due
      in Five
                      
                      
                      Due
      in Tenyear or less
                      
                      
                      to Five Years
                      
                      
                      to Ten Years
                      
                      
                      Years or More
                      
                      
                      TotalAverage
                      
                      
                      
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageAmount
                      
                      
                      Yield
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      Amount
                      
                      
                      YieldAt December 31, 2008:Tax-exempt
      state, county, and municipal bonds
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      1,010
                      
                      
                      
                      4.86
                      %
                      
                      $
                      14,526
                      
                      
                      
                      4.27
                      %
                      
                      $
                      15,536
                      
                      
                      
                      4.31
                      %At December 31, 2007:Tax-exempt
      state, county, and municipal bonds
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      1,057
                      
                      
                      
                      4.77
                      %
                      
                      $
                      14,705
                      
                      
                      
                      3.97
                      %
                      
                      $
                      15,762
                      
                      
                      
                      4.02
                      %At December 31, 2006:Tax-exempt
      state, county, and municipal bonds
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      625
                      
                      
                      
                      4.70
                      %
                      
                      $
                      9,407
                      
                      
                      
                      4.38
                      %
                      
                      $
                      10,032
                      
                      
                      
                      4.40
                      %





- 29
-
 Table of Contents


At
December 31, the weighted average life in years was as follows:


2008
                  
                  
                  2007
                  
                  
                  2006Securities
      available-for-sale:U.
      S. Government-sponsored agency
                  
                  
                  2.6
                  
                  
                  
                  14.0
                  
                  
                  
                  14.7Mortgage-backed
      securities
                  
                  
                  21.0
                  
                  
                  
                  9.5
                  
                  
                  
                  9.3Total
                  
                  
                  17.7
                  
                  
                  
                  14.1
                  
                  
                  
                  10.1Securities
      held-to-maturity:Tax-exempt
      state, county, and municipal bonds
                  
                  
                  18.4
                  
                  
                  
                  17.6
                  
                  
                  
                  16.1








DEPOSITS





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





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





The FDIC
regulations limit the ability of certain insured depository institutions to
accept, renew, or rollover deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institutions’ normal market area.  Under these regulations,
“well-capitalized” depository institutions may accept, renew, or rollover
deposits at such rates without restriction, “adequately capitalized” depository
institutions may accept, renew or rollover deposits at such rates with a waiver
from the FDIC (subject to certain restrictions on payments and rates), and
“undercapitalized” depository institutions may not accept, renew or rollover
deposits at such rates. The regulations contemplate that the definitions of
“well-capitalized,” “adequately capitalized” and “undercapitalized” will be the
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of applicable law.  See“Description of
Business/Supervision and Regulation.”  As of December 31, 2008,
Oceanside met the definition of a “well-capitalized” depository
institution.





Our
primary source of funds is deposit accounts that include both interest- and
noninterest-bearing demand, savings, and time deposits under $100,000 (referred
to as “core deposits”).  At December 31, 2008, 2007, and 2006, these
core deposits accounted for approximately 78%, 73%, and 76%, respectively, of
all deposits.  At December 31, 2008, time deposits under $100,000
accounted for approximately 50% of these core deposits as compared with money
market deposits at 15% and noninterest-bearing demand deposits at
23%.  This compares with 2007 levels of 55%, 23%, and 17%,
respectively, and with 2006 levels of 44%, 28%, and 22%,
respectively.  At December 31, 2008, 2007, and 2006, jumbo
certificates of deposit (time deposits $100,000 and greater) represented
approximately 22%, 27%, and 24%, respectively, of total deposits.  At
December 31, 2008, 2007, and 2006, time deposits outstanding in an individual
amount of $100,000 or more totaled $51,771,000, $57,785,000, and $46,103,000,
respectively.





Interest-bearing
demand accounts, consisting of NOW and money market accounts, averaged
$42,108,000 for the year ended 2008, $42,858,000 for the year ended 2007, and
$41,983,000 for the year ended 2006, or approximately 19%, 21%, and 23% of
average total deposits in 2008, 2007, and 2006, respectively.


- 30
-
 Table of Contents


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





At December 31,2008
                    
                    
                    2007
                    
                    
                    2006%
      of
                    
                    
                    %
      of
                    
                    
                    %
      ofAmount
                    
                    
                    Deposits
                    
                    
                    Amount
                    
                    
                    Deposits
                    
                    
                    Amount
                    
                    
                    DepositsDemand
      deposits
                    
                    
                    $
                    43,017
                    
                    
                    
                    17.9
                    %
                    
                    $
                    27,278
                    
                    
                    
                    12.5
                    %
                    
                    $
                    32,006
                    
                    
                    
                    16.6
                    %NOW
      deposits
                    
                    
                    
                    20,208
                    
                    
                    
                    8.4
                    
                    
                    
                    4,440
                    
                    
                    
                    2.1
                    
                    
                    
                    3,970
                    
                    
                    
                    2.1Money
      market deposits
                    
                    
                    
                    27,981
                    
                    
                    
                    11.7
                    
                    
                    
                    36,835
                    
                    
                    
                    16.9
                    
                    
                    
                    40,349
                    
                    
                    
                    20.9Savings
      deposits
                    
                    
                    
                    2,892
                    
                    
                    
                    1.2
                    
                    
                    
                    2,800
                    
                    
                    
                    1.3
                    
                    
                    
                    5,347
                    
                    
                    
                    2.8Subtotal
                    
                    
                    
                    94,098
                    
                    
                    
                    39.2
                    
                    
                    
                    71,353
                    
                    
                    
                    32.8
                    
                    
                    
                    81,672
                    
                    
                    
                    42.4Certificates
      of deposit:1.00%
      - 1.99%
                    
                    
                    
                    -
                    
                    
                    
                    0.0
                    
                    
                    
                    -
                    
                    
                    
                    0.0
                    
                    
                    
                    -
                    
                    
                    
                    0.02.00%
      - 2.99%
                    
                    
                    
                    6,250
                    
                    
                    
                    2.6
                    
                    
                    
                    -
                    
                    
                    
                    0.0
                    
                    
                    
                    90
                    
                    
                    
                    0.13.00%
      - 3.99%
                    
                    
                    
                    69,932
                    
                    
                    
                    29.2
                    
                    
                    
                    950
                    
                    
                    
                    0.4
                    
                    
                    
                    3,741
                    
                    
                    
                    1.94.00%
      - 4.99%
                    
                    
                    
                    42,947
                    
                    
                    
                    17.9
                    
                    
                    
                    40,953
                    
                    
                    
                    18.8
                    
                    
                    
                    40,915
                    
                    
                    
                    21.25.00%
      - 5.99%
                    
                    
                    
                    26,669
                    
                    
                    
                    11.1
                    
                    
                    
                    104,275
                    
                    
                    
                    48.0
                    
                    
                    
                    66,286
                    
                    
                    
                    34.4Less
      fees on brokered deposits
                    
                    
                    
                    (52
                    )
                    
                    
                    0.0
                    
                    
                    
                    (40
                    )
                    
                    
                    0.0
                    
                    
                    
                    -
                    
                    
                    
                    0.0Total
      certificates of deposit (1)
                    
                    
                    
                    145,746
                    
                    
                    
                    60.8
                    
                    
                    
                    146,138
                    
                    
                    
                    67.2
                    
                    
                    
                    111,032
                    
                    
                    
                    57.6Total
      deposits
                    
                    
                    $
                    239,844
                    
                    
                    
                    100.0
                    %
                    
                    $
                    217,491
                    
                    
                    
                    100.0
                    %
                    
                    $
                    192,704
                    
                    
                    
                    100.0
                    %








(1)
            Includes
      retirement accounts (in thousands) totaling $4,047, $5,281, and $3,954, in
      2008, 2007, and 2006, respectively, all of which were in the form of
      certificates of deposit.








Average
Deposits and Average Rates (dollars in thousands):





At December 31,2008
                
                
                2007
                
                
                2006Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                AverageBalance
                
                
                Rate
                
                
                Balance
                
                
                Rate
                
                
                Balance
                
                
                RateDemand,
      money market and NOW deposits
                
                $
                69,612
                
                
                
                1.43
                %
                
                $
                72,193
                
                
                
                2.33
                %
                
                $
                75,160
                
                
                
                1.93
                %Savings
      deposits
                
                
                2,988
                
                
                
                1.10
                
                
                
                3,751
                
                
                
                1.49
                
                
                
                5,294
                
                
                
                1.28Certificates
      of deposit
                
                
                146,595
                
                
                
                4.60
                
                
                
                129,313
                
                
                
                5.20
                
                
                
                103,485
                
                
                
                4.75Total
      deposits
                
                $
                219,195
                
                
                
                3.54
                %
                
                $
                205,257
                
                
                
                4.12
                %
                
                $
                183,939
                
                
                
                3.50
                %








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





December 31,2008
                
                
                2007
                
                
                2006Due
      in three months or less
                
                $
                21,648
                
                
                $
                20,720
                
                
                $
                12,474Over
      three through twelve months
                
                
                21,122
                
                
                
                22,686
                
                
                
                16,878Over
      twelve months through three years
                
                
                8,501
                
                
                
                11,561
                
                
                
                10,565Over
      three years
                
                
                500
                
                
                
                2,818
                
                
                
                6,186$
                51,771
                
                
                $
                57,785
                
                
                $
                46,103




- 31
-
 Table of Contents


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





Year Ending
    December 31,2009
                              
                              
                              2010
                              
                              
                              2011
                              
                              
                              2012
                              
                              
                              
                              2013
                              +
                              
                              TotalAt
      December 31, 2008:1.00%
      - 1.99%
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -2.00%
      - 2.99%
                              
                              
                              6,036
                              
                              
                              
                              213
                              
                              
                              
                              1
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              6,2503.00%
      - 3.99%
                              
                              
                              51,461
                              
                              
                              
                              17,772
                              
                              
                              
                              476
                              
                              
                              
                              -
                              
                              
                              
                              223
                              
                              
                              
                              69,9324.00%
      - 4.99%
                              
                              
                              34,078
                              
                              
                              
                              7,765
                              
                              
                              
                              761
                              
                              
                              
                              57
                              
                              
                              
                              286
                              
                              
                              
                              42,9475.00%
      - 5.99%
                              
                              
                              16,316
                              
                              
                              
                              6,192
                              
                              
                              
                              3,749
                              
                              
                              
                              412
                              
                              
                              
                              -
                              
                              
                              
                              26,669Less
      fees on brokered deposits
                              
                              
                              (52
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (52
                              )Total
      certificates of deposit
                              
                              $
                              107,839
                              
                              
                              $
                              31,942
                              
                              
                              $
                              4,987
                              
                              
                              $
                              469
                              
                              
                              $
                              509
                              
                              
                              $
                              145,746Year Ending
    December 31,2008
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2011
                              
                              
                              
                              2012
                              +
                              
                              TotalAt
      December 31, 2007:1.00%
      - 1.99%
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -2.00%
      - 2.99%
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -3.00%
      - 3.99%
                              
                              
                              446
                              
                              
                              
                              504
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              9504.00%
      - 4.99%
                              
                              
                              30,952
                              
                              
                              
                              8,762
                              
                              
                              
                              1,172
                              
                              
                              
                              11
                              
                              
                              
                              56
                              
                              
                              
                              40,9535.00%
      - 5.99%
                              
                              
                              77,138
                              
                              
                              
                              15,690
                              
                              
                              
                              6,662
                              
                              
                              
                              4,377
                              
                              
                              
                              408
                              
                              
                              
                              104,275Less
      fees on brokered deposits
                              
                              
                              (23
                              )
                              
                              
                              (17
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (40
                              )Total
      certificates of deposit
                              
                              $
                              108,513
                              
                              
                              $
                              24,939
                              
                              
                              $
                              7,834
                              
                              
                              $
                              4,388
                              
                              
                              $
                              464
                              
                              
                              $
                              146,138Year Ending
    December 31,2007
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              
                              2011
                              +
                              
                              TotalAt
      December 31, 2006:1.00%
      - 1.99%
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -2.00%
      - 2.99%
                              
                              
                              58
                              
                              
                              
                              32
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              903.00%
      - 3.99%
                              
                              
                              2,707
                              
                              
                              
                              523
                              
                              
                              
                              505
                              
                              
                              
                              6
                              
                              
                              
                              -
                              
                              
                              
                              3,7414.00%
      - 4.99%
                              
                              
                              30,814
                              
                              
                              
                              7,365
                              
                              
                              
                              1,752
                              
                              
                              
                              968
                              
                              
                              
                              16
                              
                              
                              
                              40,9155.00%
      - 5.99%
                              
                              
                              33,802
                              
                              
                              
                              14,545
                              
                              
                              
                              7,721
                              
                              
                              
                              4,502
                              
                              
                              
                              5,716
                              
                              
                              
                              66,286Total
      certificates of deposit
                              
                              $
                              67,381
                              
                              
                              $
                              22,465
                              
                              
                              $
                              9,978
                              
                              
                              $
                              5,476
                              
                              
                              $
                              5,732
                              
                              
                              $
                              111,032








SHORT-TERM AND LONG-TERM DEBT





Other
Borrowings (dollars in thousands):


December 31,2008
                  
                  
                  2007
                  
                  
                  2006Customer
      repurchase agreements
                  
                  $
                  -
                  
                  
                  $
                  13,816
                  
                  
                  $
                  26,921Federal
      funds purchased
                  
                  
                  -
                  
                  
                  
                  4,372
                  
                  
                  
                  -FHLB
      of Atlanta advances
                  
                  
                  6,300
                  
                  
                  
                  2,300
                  
                  
                  
                  2,300Junior
      subordinated debentures
                  
                  
                  3,093
                  
                  
                  
                  3,093
                  
                  
                  
                  3,093$
                  9,393
                  
                  
                  $
                  23,581
                  
                  
                  $
                  32,314





Customer Repurchase
Agreements.  Oceanside has sold securities under an agreement
to repurchase with during 2008, which effectively collateralizes overnight
borrowings.  At December 31, 2008, no borrowings were outstanding and
no securities were sold under agreements to repurchase.





FHLB of Atlanta
Advances.  Oceanside has obtained advances from FHLB totaling
$6,300,000 collateralized by Oceanside’s FHLB capital stock in the amount of
$751,000 and a blanket lien on eligible qualifying real estate mortgage loans
totaling approximately $41.4 million.  The advances mature in 2010,
and have fixed interest rates ranging from 1.91% to 4.54%.  Atlantic
has $18.4 million lendable collateral value for future FHLB
advances.





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


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Other Short-term
Borrowings.  Oceanside purchases federal funds for liquidity
needs during the year.  At December 31, 2008, 2007, and 2006, federal
fund purchases were $-0-, $4,372,000, and $-0-, respectively.





Selected
Data for Other Borrowings (dollars in thousands):





2008
                
                
                2007
                
                
                2006Interest
      rate at end of periodCustomer
      repurchase agreements (federal funds rate less 25 basis
      points)
                
                
                -
                %
                
                
                4.000
                %
                
                
                5.250
                %FHLB
      of Atlanta advances (fixed rate convertible debt)
                
                
                4.540
                %
                
                
                4.540
                %
                
                
                4.540
                %FHLB
      of Atlanta advances (fixed rate fixed debt)
                
                
                1.990
                %
                
                
                -
                %
                
                
                -
                %Junior
      subordinated debentures (fixed rate for five years)
                
                
                5.886
                %
                
                
                5.886
                %
                
                
                5.886
                %Other
      short-term borrowings (federal funds purchased)
                
                
                -
                %
                
                
                4.600
                %
                
                
                -
                %Average
      balances during the periodCustomer
      repurchase agreements
                
                $
                10,960
                
                
                $
                15,054
                
                
                $
                18,098FHLB
      of Atlanta advances
                
                $
                4,545
                
                
                $
                2,300
                
                
                $
                2,300Junior
      subordinated debentures
                
                $
                3,093
                
                
                $
                3,093
                
                
                $
                3,093Other
      short-term borrowings (federal funds purchased)
                
                $
                2,445
                
                
                $
                2,441
                
                
                $
                695Weighted
      average interest rateCustomer
      repurchase agreements
                
                
                1.88
                %
                
                
                4.81
                %
                
                
                4.59
                %FHLB
      of Atlanta advances
                
                
                3.30
                %
                
                
                4.45
                %
                
                
                4.52
                %Junior
      subordinated debentures
                
                
                5.89
                %
                
                
                5.89
                %
                
                
                5.89
                %Other
      short-term borrowings (federal funds purchased)
                
                
                3.27
                %
                
                
                4.64
                %
                
                
                3.96
                %Short-term
      borrowings (customer repurchase agreements and federal funds
      purchased)Balance
      at end of period
                
                $
                -
                
                
                $
                18,188
                
                
                $
                26,921Weighted
      average interest rate at end of period
                
                
                -
                %
                
                
                4.00
                %
                
                
                5.25
                %Maximum
      amount outstanding at month end during the period
                
                $
                22,159
                
                
                $
                26,184
                
                
                $
                29,310Average
      amount outstanding during the period
                
                $
                13,405
                
                
                $
                17,495
                
                
                $
                18,793Weighted
      average interest rate during the period
                
                
                2.13
                %
                
                
                4.78
                %
                
                
                4.58
                %








Interest
Expense for Other Borrowings (dollars in thousands):





December 31,2008
                
                
                2007
                
                
                2006Customer
      repurchase agreements
                
                $
                206
                
                
                $
                724
                
                
                $
                830FHLB
      of Atlanta advances
                
                
                149
                
                
                
                104
                
                
                
                104Junior
      subordinated debentures
                
                
                185
                
                
                
                185
                
                
                
                184Other
      short-term borrowings (federal funds purchased)
                
                
                80
                
                
                
                113
                
                
                
                31$
                620
                
                
                $
                1,126
                
                
                $
                1,149








LIQUIDITY





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





Liquidity
management involves meeting the funds flow requirements of customers who may
either be depositors wanting to withdraw funds, or borrowers needing assurance
that sufficient funds will be available to meet their credit
needs.  Liquid assets consist of vault cash, securities, and principal
paydowns of other interest-earning assets.  Our principal sources of
asset liquidity are federal funds sold and the securities portfolio, including
principal paydowns from mortgage-backed securities.  In 2008, 2007,
and 2006, principal paydowns from mortgage-backed securities totaled $7,163,000,
$6,601,000, and $7,389,000, respectively.





Other
sources of funds are principal paydowns and maturities in the loan
portfolio.  The contractual loan maturity table herein illustrates the
maturities of loans receivable at December 31, 2008.


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We also
have sources of liability liquidity that include core deposits as previously
discussed and access to borrowed funds including overnight federal funds, lines
of credit with the FHLB and Federal Reserve, and customer repurchase
agreements.  At December 31, 2008, we had approximately $42.8 million
available from these sources.  As mentioned elsewhere, increased
competition for all funding sources has reduced our liquidity.





At
December 31, 2008, 2007, and 2006, our liquidity ratio of liquid assets to
transaction deposit accounts was 20.5%, 10.9%, and 23.6%,
respectively.  Management believes that our liquidity is sufficient to
meet our anticipated needs, and we also have the ability to supplement our
liquidity by pursuing additional brokered deposits as have other community
banks.  At December 31, 2008, brokered deposits totaled $26,343,000,
which represented 11.0% of total deposits.








OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL
OBLIGATIONS





Contractual
Commitments (dollars in thousands)


December 31,2008
                
                
                2007
                
                
                2006Commitments
      to originate loansResidential
      real estate
                
                $
                4,983
                
                
                $
                8,796
                
                
                $
                10,550Commercial
      real estate, construction, and land development secured by real
      estate
                
                
                2,186
                
                
                
                12,099
                
                
                
                15,691Other
      unused commitments
                
                
                3,311
                
                
                
                7,462
                
                
                
                5,221Total
      commitments to originate loans
                
                
                10,480
                
                
                
                28,357
                
                
                
                31,462Financial
      standby letters of credit
                
                
                1,701
                
                
                
                2,084
                
                
                
                1,712Total
      contractual commitments
                
                $
                12,181
                
                
                $
                30,441
                
                
                $
                33,174








Contractual
Obligations (dollars in thousands)





1
      Year
                    
                    
                    Years
      2
                    
                    
                    Years
      4
                    
                    
                    Afteror Less
                    
                    
                    and 3
                    
                    
                    and 5
                    
                    
                    5 Years
                    
                    
                    TotalDeposits
      without a stated maturity
                    
                    $
                    94,098
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    94,098Certificates
      of deposit andother time deposits
                    
                    
                    107,841
                    
                    
                    
                    36,928
                    
                    
                    
                    977
                    
                    
                    
                    -
                    
                    
                    
                    145,746Federal
      Home Loan Bank advances
                    
                    
                    -
                    
                    
                    
                    6,300
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,300Junior
      subordinated debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,093
                    
                    
                    
                    3,093Operating
      leases
                    
                    
                    325
                    
                    
                    
                    500
                    
                    
                    
                    172
                    
                    
                    
                    956
                    
                    
                    
                    1,953Total
      contractual obligations
                    
                    $
                    202,264
                    
                    
                    $
                    43,728
                    
                    
                    $
                    1,149
                    
                    
                    $
                    4,049
                    
                    
                    $
                    251,190








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





CAPITALRESOURCES





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





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


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We are
also subject to leverage capital requirements.  This requirement
compares capital (using the definition of Tier 1 capital) to balance sheet
assets and is intended to supplement the risk-based capital ratio in measuring
capital adequacy.  The guidelines set a minimum leverage ratio of 3%
for depository institutions that are highly rated in terms of safety and
soundness, and which are not experiencing or anticipating any significant
growth.  Other depository institutions are expected to maintain
capital levels of at least 1% or 2% above the minimum.  Our actual
capital amounts, capital ratios, and leverage ratios at December 31, 2008, 2007,
and 2006 (Bank Only), are reflected in the table below.





Capital
Ratios (dollars in thousands):


Bank
      OnlyAt December 31,2008
                
                
                2007
                
                
                2006Tier
      1 capitalStockholder’s
      equity
                
                $
                19,899
                
                
                $
                21,831
                
                
                $
                20,278Plus,
      qualifying trust preferred securities
                
                
                -
                
                
                
                -
                
                
                
                -Plus,
      unrealized losses on AFS securities
                
                
                1
                
                
                
                84
                
                
                
                283Less
      disallowed deferred taxes for risk-based capital only
                
                
                (845
                )
                
                
                -
                
                
                
                -Less
      intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -19,055
                
                
                
                21,915
                
                
                
                20,561Tier
      2 capitalAllowable
      portion of allowance for loan losses and off-balance sheet
      commitments
                
                
                2,665
                
                
                
                2,200
                
                
                
                1,599Total
      risk-based capital
                
                $
                21,720
                
                
                $
                24,115
                
                
                $
                22,160Total
      risk-weighted assets
                
                $
                211,883
                
                
                $
                234,940
                
                
                $
                202,463Tier
      1 risk-based capital ratio
                
                
                8.99
                %
                
                
                9.33
                %
                
                
                10.16
                %Total
      risk-based capital ratio
                
                
                10.25
                %
                
                
                10.26
                %
                
                
                10.95
                %Average
      total assets for leverage capital purposes
                
                $
                262,982
                
                
                $
                257,067
                
                
                $
                234,906Tier
      1 leverage ratio
                
                
                7.25
                %
                
                
                8.53
                %
                
                
                8.75
                %








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





Capital
Analysis:


For the Year Ended
      December 31,2008
                
                
                2007
                
                
                2006Average
      equity as a percentage of average assets
                
                
                7.14
                %
                
                
                7.30
                %
                
                
                7.11
                %Equity
      to total assets at end of year
                
                
                6.32
                
                
                
                7.21
                
                
                
                7.08Return
      on average equity
                
                
                -10.37
                
                
                
                7.77
                
                
                
                11.96Return
      on average assets
                
                
                -0.74
                
                
                
                0.57
                
                
                
                0.85Noninterest
      expenses to average assets
                
                
                2.94
                
                
                
                2.59
                
                
                
                2.65


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Stockholders’
equity is adjusted for the effect of unrealized appreciation or depreciation,
net of tax, on securities classified as
available-for-sale.  Stockholders’ equity decreased $1,924,000 in 2008
and increased $1,605,000 and $2,019,000 in 2007 and 2006, respectively, as
follows (dollars in thousands):





2008
                
                
                2007
                
                
                2006Net
      income (loss)
                
                $
                (1,927
                )
                
                $
                1,406
                
                
                $
                1,918Change
      in unrealized gains (losses) on available-for-sale
    securities
                
                
                83
                
                
                
                199
                
                
                
                101Implementation
      of EITF 06-4 for indexed retirement plan
                
                
                (80
                )
                
                
                -
                
                
                
                -$
                (1,924
                )
                
                $
                1,605
                
                
                $
                2,019Return
      on average equity
                
                
                -10.37
                %
                
                
                7.77
                %
                
                
                11.96
                %








The
decrease in return on average equity in 2008 and 2007 is the result of the net
loss in 2008 and lower earnings for 2007 due to higher cost of funds resulting
from increased competition for deposits and the increased allowances for loan
losses to reflect higher nonperforming loans and lower collateral values
particularly in the real estate market in which we operate.





RELATEDPARTY TRANSACTIONS





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


2008
                
                
                2007
                
                
                2006Loans
                
                $
                6.6
                
                
                $
                6.2
                
                
                $
                2.0Unfunded
      loan commitments
                
                $
                0.6
                
                
                $
                1.9
                
                
                $
                1.6Deposits
      and customer repurchase agreements
                
                $
                10.1
                
                
                $
                24.2
                
                
                $
                37.6








INTERESTRATE SENSITIVITY





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





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





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


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





Interest
Rate Sensitivity at December 31, 2008 (dollars in thousands):


Under
                    
                    
                    3
      to 12
                    
                    
                    Over3 Months
                    
                    
                    Months
                    
                    
                    1 - 5 Years
                    
                    
                    5 Years
                    
                    
                    TotalFederal
      funds sold
                    
                    $
                    100
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    100Interest-bearing
      deposits in other banks
                    
                    
                    154
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    154Loans(1)
                    
                    
                    72,618
                    
                    
                    
                    15,999
                    
                    
                    
                    96,239
                    
                    
                    
                    16,720
                    
                    
                    
                    201,576Securities(2)
                    
                    
                    -
                    
                    
                    
                    639
                    
                    
                    
                    1,075
                    
                    
                    
                    28,692
                    
                    
                    
                    30,406Total
      rate-sensitive assets
                    
                    $
                    72,872
                    
                    
                    $
                    16,638
                    
                    
                    $
                    97,314
                    
                    
                    $
                    45,412
                    
                    
                    $
                    232,236Money
      market and NOW accounts(2)
                    
                    $
                    27,981
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    20,208
                    
                    
                    $
                    48,189Savings
      accounts (2)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,892
                    
                    
                    
                    2,892Certificates
      of deposit (2)
                    
                    
                    44,021
                    
                    
                    
                    63,818
                    
                    
                    
                    37,907
                    
                    
                    
                    -
                    
                    
                    
                    145,746Total
      rate-sensitive liabilities
                    
                    $
                    72,002
                    
                    
                    $
                    63,818
                    
                    
                    $
                    37,907
                    
                    
                    $
                    23,100
                    
                    
                    $
                    196,827Gap
      (repricing differences)
                    
                    $
                    870
                    
                    
                    $
                    (47,180
                    )
                    
                    $
                    59,407
                    
                    
                    $
                    22,312
                    
                    
                    $
                    35,409Cumulative
      Gap
                    
                    $
                    870
                    
                    
                    $
                    (46,310
                    )
                    
                    $
                    13,097
                    
                    
                    $
                    35,409Cumulative
      Gap/total assets
                    
                    
                    0.32
                    %
                    
                    
                    -17.28
                    %
                    
                    
                    4.89
                    %
                    
                    
                    13.21
                    %Total
      assets
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    267,973





(1)
            In
      preparing the table above, adjustable-rate loans were included in the
      period in which the interest rates are next scheduled to adjust rather
      than in the period in which the loans mature.  Fixed-rate loans
      were scheduled according to their contractual
      maturities.  Nonaccrual loans of $5,459 (net of $6 of deferred
      fees), or $5,453, were excluded (dollars in
  thousands).


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








RECENTACCOUNTING PRONOUNCEMENTS IMPACTING FUTURE
PERIODS





There are
currently no pronouncements issued or that are scheduled for implementation
during 2009 that are expected to have any significant impact on our accounting
policies.  For a discussion of recent accounting pronouncements, see
the accompanying Notes to
Consolidated Financial Statements shown in Item 8.








IMPACTOF INFLATION





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





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ITEM7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





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





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





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





Change in Prevailing
Interest Rates


Next 12 months
                  
                  
                  Next 24 months+   200
      basis points
                  
                  
                  (0.13
                  %)
                  
                  
                  (0.33
                  %)Prevailing
      rates
                  
                  
                  -
                  
                  
                  
                  --   200
      basis points
                  
                  
                  (0.20
                  %)
                  
                  
                  (0.32
                  %)





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


- 38
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 Table of Contents


ITEM8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA











REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To
the Board of Directors


Atlantic
BancGroup, Inc.


and
Subsidiaries


Jacksonville
Beach, Florida








We have
audited the consolidated balance sheets of Atlantic BancGroup, Inc. and
Subsidiariesas of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2008.  These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic BancGroup, Inc. and
Subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles.





As
discussed in Note 1 (page 50) to the consolidated financial statements,
effective January 1, 2008, the Corporation adopted Emerging Issues Task Force
No. 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit
Aspects of Endorsement Split – Dollar Life Insurance Arrangements”.







/s/
MAULDIN & JENKINS, LLC





Albany,
Georgia


March 23,
2009


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 Table of Contents




ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December 31,2008
                      
                      
                      2007(Dollars
      in Thousands, Except Per Share Data)ASSETSCash
      and due from banks
                      
                      $
                      17,077
                      
                      
                      $
                      4,656Federal
      funds sold
                      
                      
                      100
                      
                      
                      
                      -Total
      cash and cash equivalents
                      
                      
                      17,177
                      
                      
                      
                      4,656Investment
      securities, available-for-sale
                      
                      
                      14,870
                      
                      
                      
                      25,538Investment
      securities, held-to-maturity (market value of $14,898 in 2008 and $15,522
      in 2007)
                      
                      
                      15,536
                      
                      
                      
                      15,762Restricted
      stock
                      
                      
                      955
                      
                      
                      
                      746Loans,
      net
                      
                      
                      203,030
                      
                      
                      
                      201,891Bank
      premises and equipment
                      
                      
                      3,583
                      
                      
                      
                      3,784Other
      real estate owned
                      
                      
                      3,421
                      
                      
                      
                      -Accrued
      interest receivable
                      
                      
                      1,051
                      
                      
                      
                      1,538Deferred
      income taxes
                      
                      
                      2,003
                      
                      
                      
                      996Investment
      in unconsolidated subsidiary
                      
                      
                      93
                      
                      
                      
                      93Cash
      surrender value of bank-owned life insurance
                      
                      
                      4,886
                      
                      
                      
                      4,680Other
      assets
                      
                      
                      1,368
                      
                      
                      
                      1,722Total
      assets
                      
                      $
                      267,973
                      
                      
                      $
                      261,406LIABILITIESDeposits:Noninterest-bearing
                      
                      $
                      43,017
                      
                      
                      $
                      27,278Interest-bearing
                      
                      
                      196,827
                      
                      
                      
                      190,213Total
      deposits
                      
                      
                      239,844
                      
                      
                      
                      217,491Other
      borrowings:Short-term
      borrowings, customer repurchase agreements
                      
                      
                      -
                      
                      
                      
                      18,188Long-term
      debt
                      
                      
                      9,393
                      
                      
                      
                      5,393Total
      other borrowings
                      
                      
                      9,393
                      
                      
                      
                      23,581Accrued
      interest payable
                      
                      
                      321
                      
                      
                      
                      384Other
      liabilities
                      
                      
                      1,483
                      
                      
                      
                      1,094Total
      liabilities
                      
                      
                      251,041
                      
                      
                      
                      242,550Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS’
      EQUITYPreferred
      stock, authorized 2,000,000 shares, none issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.01 par value, authorized 10,000,000 shares, issued and
      outstanding 1,247,516 shares in 2008 and 2007
                      
                      
                      12
                      
                      
                      
                      12Additional
      paid-in capital
                      
                      
                      11,788
                      
                      
                      
                      11,788Retained
      earnings
                      
                      
                      5,133
                      
                      
                      
                      7,140Accumulated
      other comprehensive loss:Net
      unrealized holding losses on securities
                      
                      
                      (1
                      )
                      
                      
                      (84
                      )Total
      stockholders’ equity
                      
                      
                      16,932
                      
                      
                      
                      18,856Total
      liabilities and stockholders’ equity
                      
                      $
                      267,973
                      
                      
                      $
                      261,406Book
      value per common share
                      
                      $
                      13.57
                      
                      
                      $
                      15.11Common
      shares outstanding
                      
                      
                      1,247,516
                      
                      
                      
                      1,247,516




See
accompanying notes to consolidated financial statements.


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 Table of Contents




ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)





Year ended December 31,2008
                      
                      
                      2007(Dollars
      in Thousands, Except Per Share Data)INTEREST
      INCOMEInterest
      and fees on loans
                      
                      $
                      13,637
                      
                      
                      $
                      15,255Taxable
      interest income on investment securities and interest bearing deposits in
      banks
                      
                      
                      989
                      
                      
                      
                      1,290Tax-exempt
      interest income on investment securities
                      
                      
                      674
                      
                      
                      
                      596Interest
      on federal funds sold
                      
                      
                      35
                      
                      
                      
                      227Total
      interest income
                      
                      
                      15,335
                      
                      
                      
                      17,368INTEREST
      EXPENSEInterest
      on deposits
                      
                      
                      7,770
                      
                      
                      
                      8,465Short-term
      borrowings
                      
                      
                      286
                      
                      
                      
                      837Long-term
      borrowings
                      
                      
                      334
                      
                      
                      
                      289Total
      interest expense
                      
                      
                      8,390
                      
                      
                      
                      9,591NET
      INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
                      
                      
                      6,945
                      
                      
                      
                      7,777PROVISION
      FOR LOAN LOSSES
                      
                      
                      4,424
                      
                      
                      
                      629NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                      
                      
                      2,521
                      
                      
                      
                      7,148NONINTEREST
      INCOMEFees
      and service charges on deposit accounts
                      
                      
                      688
                      
                      
                      
                      635Other
      fee income for banking services
                      
                      
                      162
                      
                      
                      
                      200Mortgage
      banking fees
                      
                      
                      17
                      
                      
                      
                      69Income
      from bank-owned life insurance
                      
                      
                      221
                      
                      
                      
                      152Dividends
      on restricted stock
                      
                      
                      32
                      
                      
                      
                      34Dividends
      on trust-preferred securities
                      
                      
                      5
                      
                      
                      
                      5Gain
      on sale of investment securities
                      
                      
                      346
                      
                      
                      
                      -Gain
      on sale of other real estate owned
                      
                      
                      4
                      
                      
                      
                      -Other
      income
                      
                      
                      34
                      
                      
                      
                      24Total
      noninterest income
                      
                      
                      1,509
                      
                      
                      
                      1,119NONINTEREST
      EXPENSESSalaries
      and employee benefits
                      
                      
                      3,128
                      
                      
                      
                      3,063Expenses
      of bank premises and fixed assets
                      
                      
                      1,092
                      
                      
                      
                      1,096Other
      operating expenses
                      
                      
                      3,429
                      
                      
                      
                      2,254Total
      noninterest expenses
                      
                      
                      7,649
                      
                      
                      
                      6,413INCOME
      (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
                      
                      
                      (3,619
                      )
                      
                      
                      1,854PROVISION
      (BENEFIT) FOR INCOME TAXES
                      
                      
                      (1,692
                      )
                      
                      
                      448NET
      INCOME (LOSS)
                      
                      
                      (1,927
                      )
                      
                      
                      1,406OTHER
      COMPREHENSIVE INCOME (LOSS)Unrealized
      holding gains on securities arising during period, net of income tax
      expense of $51 in 2008 and $119 in 2007 (See Note
    2)
                      
                      
                      83
                      
                      
                      
                      199COMPREHENSIVE
      INCOME (LOSS)
                      
                      $
                      (1,844
                      )
                      
                      $
                      1,605AVERAGE
      COMMON SHARES OUTSTANDINGBasic
      and fully diluted
                      
                      
                      1,247,516
                      
                      
                      
                      1,247,516EARNINGS
      (LOSSES) PER SHAREBasic
      and fully diluted
                      
                      $
                      (1.54
                      )
                      
                      $
                      1.13




See
accompanying notes to consolidated financial statements.




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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





Common
      Stock
                          
                          
                          Accumulated
      Paid-in
                          
                          
                          Retained
                          
                          
                          Additional
      Other Comprehensive
                          
                          
                          Total
      Stockholders’Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Earnings
                          
                          
                          Loss
                          
                          
                          Equity(Dollars
      in Thousands)Balance,
      December 31, 2006
                          
                          
                          1,247,516
                          
                          
                          $
                          12
                          
                          
                          $
                          11,788
                          
                          
                          $
                          5,734
                          
                          
                          $
                          (283
                          )
                          
                          $
                          17,251Comprehensive
      income:Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,406Change
      in net unrealized holding gains on securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          199Total
      comprehensive income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,605Balance,
      December 31, 2007
                          
                          
                          1,247,516
                          
                          
                          
                          12
                          
                          
                          
                          11,788
                          
                          
                          
                          7,140
                          
                          
                          
                          (84
                          )
                          
                          
                          18,856Cumulative
      effect adjustment recorded as of January 1, 2008, for implementation of
      EITF 06-4 (See Notes 1
      and 9)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (80
                          )
                          
                          
                          -
                          
                          
                          
                          (80
                          )Comprehensive
      income (loss):Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,927
                          )Change
      in net unrealized holding gains on securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          83Total
      comprehensive loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,844
                          )Balance,
      December 31, 2008
                          
                          
                          1,247,516
                          
                          
                          $
                          12
                          
                          
                          $
                          11,788
                          
                          
                          $
                          5,133
                          
                          
                          $
                          (1
                          )
                          
                          $
                          16,932




See
accompanying notes to consolidated financial statements.





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 Table of Contents




ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year ended
December 31,2008
                      
                      
                      2007(Dollars
      in Thousands)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                      
                      $
                      (1,927
                      )
                      
                      $
                      1,406Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for loan losses
                      
                      
                      4,424
                      
                      
                      
                      629Provision
      for off-balance sheet commitments
                      
                      
                      -
                      
                      
                      
                      31Depreciation
      and amortization
                      
                      
                      313
                      
                      
                      
                      321Net
      premium amortization and discount accretion
                      
                      
                      (24
                      )
                      
                      
                      (28
                      )Gain
      on sale of investment securities
                      
                      
                      (346
                      )
                      
                      
                      -Gain
      on sale of other real estate owned
                      
                      
                      (4
                      )
                      
                      
                      -Deferred
      income taxes
                      
                      
                      (1,007
                      )
                      
                      
                      (295
                      )Policy
      income from bank-owned life insurance
                      
                      
                      (206
                      )
                      
                      
                      (137
                      )Pension
      expense from indexed retirement plan
                      
                      
                      295
                      
                      
                      
                      181Write-down
      of other real estate owned
                      
                      
                      315
                      
                      
                      
                      -(Increase)
      decrease in accrued interest receivable and other assets
                      
                      
                      526
                      
                      
                      
                      (1,559
                      )Increase
      (decrease) in accrued interest payable and other
    liabilities
                      
                      
                      (99
                      )
                      
                      
                      38Net
      cash provided by operating activities
                      
                      
                      2,260
                      
                      
                      
                      587CASH
      FLOWS FROM INVESTING ACTIVITIESSecurities
      available-for-sale:Purchases
                      
                      
                      (9,346
                      )
                      
                      
                      (1,982
                      )Proceeds
      from sales
                      
                      
                      12,751
                      
                      
                      
                      -Calls
      and maturities
                      
                      
                      610
                      
                      
                      
                      -Principal
      repayments on mortgage-backed investment securities
                      
                      
                      7,163
                      
                      
                      
                      6,601Securities
      held-to-maturity:Purchases
                      
                      
                      -
                      
                      
                      
                      (5,736
                      )Calls
                      
                      
                      220
                      
                      
                      
                      -Purchases
      of restricted stock
                      
                      
                      (209
                      )
                      
                      
                      (11
                      )Increase
      in loans
                      
                      
                      (11,282
                      )
                      
                      
                      (26,411
                      )Proceeds
      from sale of other real estate owned
                      
                      
                      2,302
                      
                      
                      
                      (2,000
                      )Purchases
      of bank premises and equipment
                      
                      
                      (113
                      )
                      
                      
                      (145
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      2,096
                      
                      
                      
                      (29,684
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESIncrease
      (decrease) in deposits:Noninterest-bearing
                      
                      
                      15,739
                      
                      
                      
                      (4,728
                      )Interest-bearing
                      
                      
                      6,614
                      
                      
                      
                      29,515Proceeds
      from other borrowings, net of repayments
                      
                      
                      (14,188
                      )
                      
                      
                      (8,733
                      )Net
      cash provided by financing activities
                      
                      
                      8,165
                      
                      
                      
                      16,054NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      12,521
                      
                      
                      
                      (13,043
                      )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      
                      
                      4,656
                      
                      
                      
                      17,699CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                      
                      $
                      17,177
                      
                      
                      $
                      4,656SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      received during the year for interest and dividends
                      
                      $
                      15,859
                      
                      
                      $
                      17,053Cash
      paid during the year for interest
                      
                      $
                      8,453
                      
                      
                      $
                      9,486Cash
      paid during the year for income taxes
                      
                      $
                      46
                      
                      
                      $
                      1,139NONCASH
      TRANSACTIONSLoans
      transferred to foreclosed real estate during the year
                      
                      $
                      5,719
                      
                      
                      $
                      -Increase
      in cash surrender value of bank-owned life insurance
                      
                      $
                      220
                      
                      
                      $
                      152Increase
      in deferred compensation arrangements
                      
                      $
                      295
                      
                      
                      $
                      181Net
      change in unrealized holding gains on securities available-for-sale, net
      of income taxes
                      
                      $
                      83
                      
                      
                      $
                      199








See
accompanying notes to consolidated financial statements.





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 Table of Contents





ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES





General
- Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company
registered with the Federal Reserve and owns 100% of the outstanding stock of
Oceanside Bank (“Oceanside”).  Oceanside is a Florida state-chartered
commercial bank, which opened July 21, 1997.  Oceanside’s deposits are
insured by the Federal Deposit Insurance Corporation.  The Holding
Company’s primary business activities are the operations of Oceanside, and it
operates in only one reportable industry
segment:  banking.  Collectively, the entities are referred
to as “Atlantic.”  In 2008, Oceanside formed and began operating a
subsidiary, S. Pt. Properties, Inc., for the sole purpose of managing a single
real estate property acquired through foreclosure.





Regulatory
Oversight, Capital Adequacy, Liquidity, and Management’s Plans - The
consolidated financial statements contemplate the realization of assets and the
discharge of liabilities in the normal course of business.  Due to
Atlantic’s 2008 financial results and the substantial uncertainty throughout the
U.S. banking industry, the following matters should be considered:





Regulatory
Oversight.  As described in Note 15 Regulatory Capital Matters,
Oceanside Bank is currently undergoing an FDIC regulatory examination and the
final results are unknown.  As noted herein, federal and state
regulatory examinations may result in enforcement actions that include
recognition of additional losses, stricter capital and liquidity thresholds, and
other restrictions.  At this time, management cannot predict the
outcome of the current FDIC examination.





Capital
Adequacy.  During 2008, the FDIC issued guidance to
institutions with significant concentrations of commercial real estate (“CRE”)
loans, particularly construction and development (“C&D”)
loans.  The FDIC strongly recommended that, as market conditions
warrant, institutions with CRE concentrations (particularly in C&D lending)
increase capital to provide ample protection from unexpected losses if market
conditions deteriorate further.  Other recommendations for managing
CRE concentrations included:





·
            Ensure
      that loan loss allowances are appropriately
  strong.


·
            Manage
      C&D and CRE loan portfolios
closely.


·
            Manage
      interest reserve and loan extension accommodations, reflecting the
      borrower's condition accurately in loan ratings and documented
      reviews.


·
            Maintain
      updated financial and analytical
information.


·
            Bolster
      the loan workout infrastructure.





In light
of the current economic environment, management is pursuing a number of sources
for raising additional capital.  However, current market conditions
for banking institutions, the overall uncertainty in financial markets, and the
Atlantic’s depressed stock price are significant barriers to obtaining
non-dilutive capital.





Liquidity.  Atlantic
actively manages liquidity.  Cash and cash equivalents at
December 31, 2008, were $17.2 million.  In addition to cash and
cash equivalents and un-pledged investment securities, Atlantic has the
following sources of available liquidity at December 31, 2008: lines of credit
to purchase federal funds ($19.5 million), Federal Reserve discount window ($3.1
million), FDIC Temporary Liquidity Guarantee Program ($4.8 million), and Federal
Home Loan Bank of Atlanta ($18.4 million).  Other funding sources
include brokered deposits, which currently represent less than 11% of total
deposits.  Based on current and expected liquidity needs and sources,
management expects Atlantic to be able to meet obligations.





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





- 44
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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




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





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





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





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





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





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





Management’s
determination of the realization of deferred tax assets is based upon
management’s judgment of various future events and uncertainties, including the
timing, nature, and amount of future income earned by certain subsidiaries and
the implementation of various plans to maximize realization of deferred tax
assets.  Management believes that the Company will generate sufficient
operating earnings to realize the deferred tax benefits.





Cash
and Cash Equivalents - For purposes of the Consolidated Statements of Cash
Flows, cash and cash equivalents include cash and due from banks and
federal funds sold, all of which mature within ninety days.  At
December 31, 2008 and 2007, cash and due from banks includes $154,000 and
$13,000, respectively, of interest-bearing deposits in the Federal Home Loan
Bank.





Oceanside
is required by law or regulation to maintain cash reserves on hand or with the
Federal Reserve Bank of Atlanta.  The minimum reserve balances were
approximately $1,664,000 and $1,765,000 at December 31, 2008 and 2007,
respectively.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




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





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





Equity
securities held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized gains and
losses on trading securities are included in noninterest
income.  During 2008 and 2007, Atlantic did not engage in trading
securities.





Declines
in the fair value of individual securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value.  The related write-downs are included in earnings as realized
losses.  As of December 31, 2008, no securities were determined to
have other than a temporary decline in fair value below cost.





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





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





Restricted
Stock - At December 31, 2008 and 2007, Oceanside owned Federal Home Loan
Bank stock, carried at cost, totaling $751,000 and $542,000,
respectively.  The stock is considered restricted, and the amount is
required to be maintained based on a percentage of Oceanside’s total
assets.  Oceanside also maintained stock, carried at cost, as a
condition of its correspondent banking relationship with two banks totaling
$204,000 at both December 31, 2008 and 2007.





Loans
Held-for-Sale - Residential loans held-for-sale are valued at the lower
of cost or market as determined by outstanding commitments from investors or
current investor yield requirements.  Gains and losses resulting from
sales of residential mortgage loans are recognized when Atlantic funds the loan
and has a commitment from the purchaser.  Atlantic had no significant
loans held-for-sale as of December 31, 2008 or 2007.  Loans originated
for sale in 2008 and 2007 totaled $11.6 million and $7.6 million,
respectively.  The income from mortgage banking operations totaled
$17,000 and $69,000 for 2008 and 2007, respectively.





Oceanside
originates loans with a guaranty from the Small Business Administration
(“SBA”).  Oceanside does not classify SBA loans (or the SBA-guaranteed
portion) as held-for-sale, as the intent is to generally hold SBA loans to
maturity in Oceanside’s held-for-investment portfolio.  There were no
sales of SBA loans in 2008 or 2007.  Typically, if an SBA loan is
sold, no loan servicing is retained by Oceanside.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




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





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





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





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





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





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





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





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





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




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





Foreclosed
Assets (Including Other Real Estate Owned) - Assets
acquired through, or in lieu of, loan foreclosure are initially recorded at fair
value at the date of foreclosure establishing a new cost basis.  After
foreclosure, valuations are periodically performed by management and the
foreclosed asset is carried at the lower of carrying amount or fair value less
cost to sell.  Subsequent changes in value are reported as adjustments
to the carrying amount, not to exceed the initial carrying value of the
foreclosed assets at the time of the transfer.  Revenue and expenses
from operations and changes in the valuation allowance are included in other
operating expenses.  At December 31, 2008 and 2007, foreclosed assets
including repossessed vehicles and other assets totaled $75,000 and $9,000,
respectively, and other real estate owned of $3,421,000 and $-0-,
respectively.





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





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





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





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





Comprehensive
Income - Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive
Income” (“SFAS 130”), establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements.  SFAS 130 was issued to address
concerns over the practice of reporting elements of comprehensive income
directly in equity.  In accordance with the provisions of the SFAS
130, Atlantic has included in the accompanying consolidated financial statements
comprehensive income resulting from such activities.  Comprehensive
income (loss) consists of the net income (loss) and net unrealized gains
(losses) on investment securities available-for-sale.





These
amounts are reported net of the income tax benefit (expense) less any related
allowance for realization.  Also, accumulated other comprehensive
income (loss) is included as a separate disclosure within the Consolidated Statements of
Stockholders’ Equity in the accompanying consolidated financial
statements.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




Computation
of Per Share Earnings - Basic earnings (losses) per share (“EPS”) amounts
are computed by dividing net earnings (losses) by the weighted average number of
common shares outstanding for the years ended December 31, 2008 and
2007.  Diluted EPS are computed by dividing net earnings (losses) by
the weighted average number of shares and all dilutive potential shares
outstanding during the period.  Atlantic has no dilutive potential
shares outstanding for 2008 or 2007.  The following information was
used in the computation of EPS on both a basic and diluted basis for the years
ended December 31, 2008 and 2007 (dollars in thousands except per share
data):


For
      the Years Ended December 31,2008
                  
                  
                  2007Basic
      EPS computation:Numerator
      - Net income (loss)
                  
                  $
                  (1,927
                  )
                  
                  $
                  1,406Denominator
      - Weighted average shares outstanding (rounded)
                  
                  
                  1,248
                  
                  
                  
                  1,248Basic
      EPS
                  
                  $
                  (1.54
                  )
                  
                  $
                  1.13Diluted
      EPS computation:Numerator
      - Net income (loss)
                  
                  $
                  (1,927
                  )
                  
                  $
                  1,406Denominator
      - Weighted average shares outstanding (rounded)
                  
                  
                  1,248
                  
                  
                  
                  1,248Diluted
      EPS
                  
                  $
                  (1.54
                  )
                  
                  $
                  1.13





Advertising
and Business Development - Atlantic expenses advertising and business
development costs as incurred. Advertising and business development costs for
2008 and 2007 as included in other operating expenses were $145,000 and
$125,000, respectively.





Reclassification
of Accounts - Atlantic’s management periodically revises its
classification of certain items within the consolidated financial statements in
order to provide a more meaningful presentation of Atlantic’s financial
position, results of operations, and cash flows.  In those cases where
the revisions in presentation have been adopted in the 2008 consolidated
financial statements, the corresponding 2007 balances have also been
reclassified to enhance comparability between periods.





Recent
Accounting Pronouncements - SFAS No 141, “Business Combinations
(Revised 2007).”SFAS 141R replaces SFAS 141, “Business Combinations,”
and applies to all transactions and other events in which one entity obtains
control over one or more other businesses.  SFAS 141R requires an
acquirer, upon initially obtaining control of another entity,
to  recognize the assets, liabilities and any non-controlling interest
in the acquiree at fair value as of the acquisition date.  Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt.  This
fair value approach replaces the cost-allocation process required under SFAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair
value.  SFAS 141R requires acquirers to expense acquisition-related
costs as incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141.  Under
SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with
Exit or Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting.  Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting, and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.”  SFAS 141R is expected to have a
significant impact on Atlantic’s accounting should it enter into any business
combinations closing on or after January 1, 2009.





SFAS No. 157, “Fair Value
Measurements.” SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157, with the exception of
certain provisions, became effective for Atlantic on January 1, 2008 (see Note 14).




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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115.”  SFAS 159 permits
entities to choose to measure eligible items at fair value at specified election
dates.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  The fair value option (i) may be applied instrument by
instrument, with certain exceptions, (ii) is irrevocable (unless a new election
date occurs) and (iii) is applied only to entire instruments and not to portions
of instruments.  SFAS 159 became effective for Atlantic on January 1,
2008.  The adoption of this statement did not have a significant
impact on Atlantic’s financial statements.





SFAS No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51.”  SFAS 160 amends Accounting Research Bulletin (ARB) No.
51, “Consolidated Financial Statements,” to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements.  Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest.  It also requires
disclosure, on the face of the consolidated income statement, of the amounts of
consolidated net income attributable to the parent and to the non-controlling
interest.  SFAS 160 is effective for Atlantic on January 1, 2009, and
is not expected to have a significant impact on Atlantic’s financial
statements.





SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles.” SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy).  The
hierarchical guidance provided by SFAS 162 did not have a significant impact on
Atlantic’s financial statements.





FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109.”Interpretation 48 prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax
return.  Benefits from tax positions should be recognized in the
financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that
would have full knowledge of all relevant information.  A tax position
that meets the more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is
met.  Previously recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer
met.  Interpretation 48 also provides guidance on the accounting for
and disclosure of unrecognized tax benefits, interest, and penalties. The
adoption of Interpretation 48 on January 1, 2007, did not significantly impact
Atlantic’s financial statements.





FSP No. 48-1 “Definition of
Settlement in FASB Interpretation No. 48.”FSP 48-1 provides guidance on
how to determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits.  FSP 48-1 was
effective retroactively to January 1, 2007, and did not significantly impact
Atlantic’s financial statements.





Emerging Issues Task Force (EITF)
Issue No. 06-4, “Accounting for Deferred Compensation and Post-retirement
Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements.”  EITF 06-4 requires the recognition of a
liability and related compensation expense for endorsement split-dollar life
insurance policies that provide a benefit to an employee that extends to
post-retirement periods.  Under EITF 06-4, life insurance policies
purchased for the purpose of providing such benefits do not effectively settle
an entity’s obligation to the employee.  Accordingly, the entity must
recognize a liability and related compensation expense during the employee’s
active service period based





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








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




on the
future cost of insurance to be incurred during the employee’s
retirement.  If the entity has agreed to provide the employee with a
death benefit, then the liability for the future death benefit should be
recognized by following the guidance in SFAS 106, “Employer’s Accounting for
Post-retirement Benefits Other Than Pensions.”  Atlantic adopted EITF
06-4 on January 1, 2008, as a change in accounting principle through a
cumulative-effect adjustment to retained earnings totaling $80,979.





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








NOTE
2 - INVESTMENT SECURITIES





The
amortized cost and estimated fair value of instruments in debt and equity
securities at December 31, 2008 and 2007, follow (dollars in
thousands):





December 31, 2008
                    
                    
                    December 31, 2007Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                        Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Amortized
                      Cost
                    
                    
                    GrossUnrealized
                      Gains
                    
                    
                    Gross
                        Unrealized
                      Losses
                    
                    
                    Fair
                      ValueAvailable-for-saleU.S.
      Government- sponsored agency
                    
                    $
                    2,700
                    
                    
                    $
                    5
                    
                    
                    $
                    (6
                    )
                    
                    $
                    2,699
                    
                    
                    $
                    2,983
                    
                    
                    $
                    36
                    
                    
                    $
                    -
                    
                    
                    $
                    3,019Mortgage-backed
      securities
                    
                    
                    12,171
                    
                    
                    
                    40
                    
                    
                    
                    (40
                    )
                    
                    
                    12,171
                    
                    
                    
                    22,691
                    
                    
                    
                    46
                    
                    
                    
                    (218
                    )
                    
                    
                    22,51914,871
                    
                    
                    
                    45
                    
                    
                    
                    (46
                    )
                    
                    
                    14,870
                    
                    
                    
                    25,674
                    
                    
                    
                    82
                    
                    
                    
                    (218
                    )
                    
                    
                    25,538Held-to-maturityState,
      county and municipal bonds
                    
                    
                    15,536
                    
                    
                    
                    133
                    
                    
                    
                    (771
                    )
                    
                    
                    14,898
                    
                    
                    
                    15,762
                    
                    
                    
                    131
                    
                    
                    
                    (371
                    )
                    
                    
                    15,522Total
      investment securities
                    
                    $
                    30,407
                    
                    
                    $
                    178
                    
                    
                    $
                    (817
                    )
                    
                    $
                    29,768
                    
                    
                    $
                    41,436
                    
                    
                    $
                    213
                    
                    
                    $
                    (589
                    )
                    
                    $
                    41,060








Information
pertaining to securities with gross unrealized losses at December 31, 2008 and
2007, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:





Less Than Twelve Months
                          
                          
                          Over Twelve Months
                          
                          
                          TotalGross
                            Unrealized
                            Losses
                          
                          
                          Fair
                            Value
                          
                          
                          Gross
                            Unrealized
                            Losses
                          
                          
                          Fair
                            Value
                          
                          
                          Gross
                            Unrealized
                            Losses
                          
                          
                          Fair
                            ValueDecember 31,
      2008:Available-for-SaleU.S.
      Government-sponsored agency
                          
                          $
                          (6
                          )
                          
                          $
                          927
                          
                          
                          $
                          -
                          
                          
                          $
                          88
                          
                          
                          $
                          (6
                          )
                          
                          $
                          1,015Mortgage-backed
      securities
                          
                          
                          (40
                          )
                          
                          
                          10,881
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (40
                          )
                          
                          
                          10,881$
                          (46
                          )
                          
                          $
                          11,808
                          
                          
                          $
                          -
                          
                          
                          $
                          88
                          
                          
                          $
                          (46
                          )
                          
                          $
                          11,896Held-to-MaturityState,
      county, and municipal bonds
                          
                          $
                          (393
                          )
                          
                          $
                          6,590
                          
                          
                          $
                          (378
                          )
                          
                          $
                          3,868
                          
                          
                          $
                          (771
                          )
                          
                          $
                          10,458December 31,
      2007:Available-for-SaleMortgage-backed
      securities
                          
                          $
                          (28
                          )
                          
                          $
                          6,063
                          
                          
                          $
                          (190
                          )
                          
                          $
                          12,746
                          
                          
                          $
                          (218
                          )
                          
                          $
                          18,809Held-to-MaturityState,
      county, and municipal bonds
                          
                          $
                          (313
                          )
                          
                          $
                          8,987
                          
                          
                          $
                          (58
                          )
                          
                          $
                          2,758
                          
                          
                          $
                          (371
                          )
                          
                          $
                          11,745


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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007




NOTE 2 - INVESTMENT SECURITIES(Continued)





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





The
unrealized losses on investment securities were caused by interest rate changes.
It is expected that the securities would not be settled at a price less than the
par value of the investments. Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because Atlantic has
the ability and intent to hold these investments until a market price recovery
or maturity, these investments are not considered other-than-temporarily
impaired.  The estimated fair value
of securities is determined on the basis of market
quotations.





The
following is a summary of the effects on the Consolidated Statements of
Stockholders’ Equity at December 31, 2008 and 2007 (dollars in
thousands):


2008
                
                
                2007Gross
      unrealized losses on investment securities
    available-for-sale
                
                $
                (1
                )
                
                $
                (136
                )Deferred
      tax benefit on unrealized losses
                
                
                -
                
                
                
                52Balance,
      December 31
                
                $
                (1
                )
                
                $
                (84
                )





The
following presents the net change in unrealized gains or losses on investment
securities available-for-sale that are shown as a component of stockholders’
equity and comprehensive income (loss) for the years ended December 31, 2008 and
2007 (dollars in thousands):


2008
                
                
                2007Unrealized
      holding gains on investment securities arising during
    period
                
                $
                480
                
                
                $
                318Less:
      reclassification adjustment for gains included in net income
      (loss)
                
                
                (346
                )
                
                
                -Other
      comprehensive income, before tax
                
                
                134
                
                
                
                318Income
      tax expense related to items of other comprehensive income
                
                
                (51
                )
                
                
                (119
                )Other
      comprehensive income, net of tax
                
                $
                83
                
                
                $
                199








Gross
gains and losses on sales of investment securities in 2008 totaled $346,000 and
$-0-, respectively.  There were no sales of investment securities in
2007.





At
December 31, 2008, securities with a carrying value of $864,000 and fair value
of $889,000 were pledged to secure deposits of public funds from the state of
Florida and treasury tax and loan deposits with the Federal
Reserve.  Securities were pledged as collateral for Federal Reserve
Borrowings and to secure public funds from the State of Florida, Federal Reserve
discount window, and treasury tax and loan deposits in 2008 and
2007.  The amortized cost of these securities was $5,023,000 and
$868,000, respectively, and the fair values of these pledged securities were
$4,711,000 and $911,000, respectively, as of December 31, 2008 and
2007.





There
were no securities of a single issuer (which were non-governmental or
non-government sponsored) that exceeded 10% of stockholders’ equity at December
31, 2008 or 2007.





The cost
and estimated fair value of debt and equity securities at December 31, 2008 and
2007, by contractual maturities, are shown below.  Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties (dollars
in thousands).





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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007





NOTE 2 - INVESTMENT SECURITIES(Continued)





Securities
    Available-for-Sale
                
                
                Securities Held-to-MaturityAmortized Cost
                
                
                Fair Value
                
                
                Amortized Cost
                
                
                Fair ValueDecember
      31, 2008:Due
      in one year or less
                
                $
                639
                
                
                $
                639
                
                
                $
                -
                
                
                $
                -Due
      after one through five years
                
                
                1,074
                
                
                
                1,075
                
                
                
                -
                
                
                
                -Due
      after five through ten years
                
                
                3,067
                
                
                
                3,096
                
                
                
                1,010
                
                
                
                1,044Due
      after ten years
                
                
                10,091
                
                
                
                10,060
                
                
                
                14,526
                
                
                
                13,854$
                14,871
                
                
                $
                14,870
                
                
                $
                15,536
                
                
                $
                14,898December
      31, 2007:Due
      in one year or less
                
                $
                2,816
                
                
                $
                2,803
                
                
                $
                -
                
                
                $
                -Due
      after one through five years
                
                
                2,408
                
                
                
                2,356
                
                
                
                -
                
                
                
                -Due
      after five through ten years
                
                
                10,657
                
                
                
                10,594
                
                
                
                1,057
                
                
                
                1,091Due
      after ten years
                
                
                9,793
                
                
                
                9,785
                
                
                
                14,705
                
                
                
                14,431$
                25,674
                
                
                $
                25,538
                
                
                $
                15,762
                
                
                $
                15,522








NOTE
3 - LOANS





The loan
portfolio at December 31, 2008 and 2007, is composed of the following (dollars
in thousands):





2008
                
                
                2007Real
      estate loansConstruction,
      land development, and other land
                
                $
                39,135
                
                
                $
                53,1971-4
      family residential
                
                
                57,814
                
                
                
                45,708Multifamily
      residential
                
                
                4,481
                
                
                
                1,784Commercial
                
                
                88,762
                
                
                
                86,785Total
      real estate loans
                
                
                190,192
                
                
                
                187,474Commercial
      loans
                
                
                13,314
                
                
                
                11,485Consumer
      and other loans
                
                
                3,548
                
                
                
                5,138Total
      loan portfolio
                
                
                207,054
                
                
                
                204,097Less,
      deferred fees and other
                
                
                (25
                )
                
                
                (37
                )Less,
      allowance for loan losses
                
                
                (3,999
                )
                
                
                (2,169
                )Loans,
      net
                
                $
                203,030
                
                
                $
                201,891





At
December 31, 2008 and 2007, fixed-rate loans (excluding nonaccrual loans) with
maturities (or repricing) over one year totaled approximately $33.3 million and
$29.3 million, respectively.





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





2008
                
                
                2007Balance,
      beginning of period
                
                $
                2,169
                
                
                $
                1,599Provisions
      charged to operating expenses
                
                
                4,424
                
                
                
                629Loans
      charged-off
                
                
                (2,615
                )
                
                
                (75
                )Recoveries
                
                
                21
                
                
                
                16Balance,
      end of period
                
                $
                3,999
                
                
                $
                2,169





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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007






NOTE 3 - LOANS(Continued)





The
following is a summary of information pertaining to impaired and nonaccrual
loans (dollars in thousands):





December
    31,2008
                      
                      
                      2007Impaired
      loans with a valuation allowance(net of direct write-off of $1,110
      in 2008 and $-0- in 2007)
                      
                      $
                      4,205
                      
                      
                      $
                      2,698Impaired
      loans without a valuation allowance
                      
                      
                      1,254
                      
                      
                      
                      3,524Total
      impaired loans
                      
                      $
                      5,459
                      
                      
                      $
                      6,222Valuation
      allowance related to impaired loans
                      
                      $
                      385
                      
                      
                      $
                      562Total
      nonaccrual loans
                      
                      $
                      5,459
                      
                      
                      $
                      6,222Total
      loans past due ninety days or more and still accruing
                      
                      $
                      1,656
                      
                      
                      $
                      164





No
additional funds are committed to be advanced in connection with impaired
loans.





2008
                
                
                2007Average
      impaired and nonaccrual loans during the year
                
                $
                5,130
                
                
                $
                5,853





During
2008 and 2007, interest income recorded on nonaccrual loans totaled $4,000 and
$231,000, respectively, and interest earned but not recorded on nonaccrual loans
in 2008 and 2007 was $176,000 and $216,000, respectively.





Loans
past due 90 or more days and still accruing interest totaled $1,656,000 at
December 31, 2008, and $164,000 at December 31, 2007.








NOTE
4 - FACILITIES





Facilities.  A
summary follows (dollars in thousands):


Cost
                  
                  
                  Accumulated
      Depreciation andAmortization
                  
                  
                  Net
      BookValue
                  
                  Estimated
      UsefulLivesDecember
      31, 2008:Land
      and land improvements
                  
                  $
                  750
                  
                  
                  $
                  -
                  
                  
                  $
                  750Bank
      building and improvements
                  
                  
                  3,443
                  
                  
                  
                  875
                  
                  
                  
                  2,568
                  
                  5 -
      40 yearsFurniture,
      fixtures, and equipment
                  
                  
                  2,248
                  
                  
                  
                  1,983
                  
                  
                  
                  265
                  
                  3 -
      10 years$
                  6,441
                  
                  
                  $
                  2,858
                  
                  
                  $
                  3,583December
      31, 2007:Land
      and land improvements
                  
                  $
                  750
                  
                  
                  $
                  -
                  
                  
                  $
                  750Bank
      building and improvements
                  
                  
                  3,438
                  
                  
                  
                  757
                  
                  
                  
                  2,681
                  
                  5 -
      40 yearsFurniture,
      fixtures, and equipment
                  
                  
                  2,171
                  
                  
                  
                  1,818
                  
                  
                  
                  353
                  
                  3 -
      10 years$
                  6,359
                  
                  
                  $
                  2,575
                  
                  
                  $
                  3,784





Depreciation
and amortization of facilities totaled $313,000 and $321,000 in 2008 and 2007,
respectively.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 4 - FACILITIES(Continued)





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





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





Total
branch rent expense for 2008 and 2007 was $392,000 and $385,000,
respectively.  The future annual rental payments for the branch leases
are due as follows (dollars in thousands):





Years
      Ending December 31,
                  
                  Amount2009
                  
                  $
                  3252010
                  
                  
                  3322011
                  
                  
                  1682012
                  
                  
                  842013
                  
                  
                  88Thereafter
                  
                  
                  956$
                  1,953








NOTE
5 - TIME DEPOSITS





Time
deposits at December 31, 2008 and 2007, totaled $145,746,000 and $146,138,000,
respectively.  The scheduled maturities of time deposits were as
follows (dollars in thousands):





December 31, 2008
                  
                  
                  December 31, 2007Time,
      $100,000And Over
                  
                  
                  Other
      TimeDeposits
                  
                  
                  Time,
      $100,000And Over
                  
                  
                  Other
      TimeDepositsThree
      months or less
                  
                  $
                  21,648
                  
                  
                  $
                  22,373
                  
                  
                  $
                  20,720
                  
                  
                  $
                  22,707Over
      three through twelve months
                  
                  
                  21,122
                  
                  
                  
                  42,696
                  
                  
                  
                  22,686
                  
                  
                  
                  42,398Over
      twelve months through three years
                  
                  
                  8,501
                  
                  
                  
                  28,428
                  
                  
                  
                  11,561
                  
                  
                  
                  21,212Over
      three years
                  
                  
                  500
                  
                  
                  
                  478
                  
                  
                  
                  2,818
                  
                  
                  
                  2,036$
                  51,771
                  
                  
                  $
                  93,975
                  
                  
                  $
                  57,785
                  
                  
                  $
                  88,353





Time
deposits of less than $100,000 with a remaining maturity of one year or less
totaled $65,069,000 at December 31, 2008.  Time deposits of $100,000
or more with a remaining maturity of one year or less totaled $42,770,000 at
December 31, 2008.





Interest
expense on certificates of deposit of $100,000 or more totaled $2,378,000 and
$2,858,000 for 2008 and 2007, respectively.  Interest expense on other
time deposits totaled $4,371,000 and $3,878,000 for 2008 and 2007,
respectively.  Early withdrawal penalties on certificates of deposit
totaled $8,000 and $10,000 for 2008 and 2007, respectively, and have been netted
against interest expense.





At
December 31, 2008, Oceanside had $26,343,000 of brokered deposits, which are
reflected in other time deposits.  Interest expense on brokered
deposits totaled $1,174,000 for 2008.  At December 31, 2007, Oceanside
had $17,926,000 of brokered deposits which are reflected in other time
deposits.  Interest expense on brokered deposits totaled $203,000 for
2007.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE
6 - OTHER BORROWINGS





Short-Term Debt, Customer Repurchase
Agreements.  Atlantic has sold securities under agreements to
repurchase during 2008, which effectively collateralize overnight
borrowings.  As of December 31, 2008, no borrowings were outstanding
and no securities were sold under agreements to repurchase.  The
average balance of customer repurchase agreements for 2008 and 2007 were
$10,960,000 and $15,054,000, respectively, at a weighted average interest rate
of 1.88% and 4.81%, respectively.  Interest of $206,000 and $724,000
was recorded in 2008 and 2007, respectively.





Other Short-term
Borrowings.  Atlantic purchases federal funds for liquidity
needs during the year.  At December 31, 2008 and 2007, federal funds
purchased were $-0- and $4,372,000, respectively.  The average federal
funds purchased during 2008 and 2007, were $2,445,000 and $2,441,000,
respectively, at a weighted average interest rate of 3.27% and 4.64%,
respectively.  Interest of $80,000 and $113,000 was recorded in 2008
and 2007, respectively.





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


December
      31,2008
                  
                  
                  2007FHLB
      of Atlanta advancesConvertible
      debt
                  
                  $
                  2,300
                  
                  
                  $
                  2,300Fixed
      debt
                  
                  
                  4,000
                  
                  
                  
                  -6,300
                  
                  
                  
                  2,300Junior
      subordinated debentures
                  
                  
                  3,093
                  
                  
                  
                  3,093$
                  9,393
                  
                  
                  $
                  5,393








FHLB of Atlanta
Advances.  At December 31, 2008 and 2007, Atlantic had obtained
advances from FHLB of $6,300,000 and $2,300,000, respectively.  At
December 31, 2008 and 2007, the advances were collateralized by Atlantic’s FHLB
capital stock in the amount of $751,000 and $542,000, respectively, and a
blanket lien on eligible wholly-owned residential (1-4 units) loans, commercial
first mortgage loans, and home equity loans with a carrying value of $41.4
million and $5.7 million, respectively.  A summary follows (dollars in
thousands):





Balance
      of Advances
                                  at December 31,
                                
                                
                                Interest ExpenseDate
                                
                                Interest Rate
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Convertible
      fixed rate debt
                                11/17/2010
                                
                                
                                4.45
                                %
                                
                                $
                                2,300
                                
                                
                                $
                                2,300
                                
                                
                                $
                                104
                                
                                
                                $
                                104Fixed
      rate advances
                                12/20/2010
                                
                                
                                1.91%-2.07
                                %
                                
                                
                                4,000
                                
                                
                                
                                -
                                
                                
                                
                                45
                                
                                
                                
                                -$
                                6,300
                                
                                
                                $
                                2,300
                                
                                
                                $
                                149
                                
                                
                                $
                                104





The
weighted average rate for FHLB advances was 3.27% in 2008 and 4.54% in
2007.  At December 31, 2008, the FHLB had determined that of the $41.4
million of pledged collateral, $24.7 million was the lendable collateral value.
The amount of advances available to Atlantic under this credit facility at
December 31, 2008, totaled $18.4 million.





Junior Subordinated
Debentures.On September 15, 2005, Atlantic participated in a
pooled offering of trust preferred securities.  Atlantic formed
Atlantic BancGroup Statutory Trust I (the "Trust"), a wholly-owned statutory
trust subsidiary for the purpose of issuing the trust preferred
securities.  The Trust used the proceeds from the issuance of
$3,000,000 in trust preferred securities to acquire fixed/floating rate junior
subordinated deferrable interest debentures of Atlantic in the amount of
$3,093,000.  The trust preferred securities essentially mirror the
debt securities, carrying a cumulative preferred dividend at a fixed rate of
5.886% equal to the interest rate on the debt securities, both payable quarterly
for five years.  Beginning September 15, 2010, the quarterly rates
vary based on the three month LIBOR plus 150 basis points.  The debt
securities and the trust preferred securities each have 30-year
lives.  The trust preferred securities and the debt securities are
callable by Atlantic or the Trust, at their respective option after five years,
and at varying premiums and sooner in specific events, subject to prior
approval





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 6 - OTHER BORROWINGS(Continued)





by the
Federal Reserve Board, if then required.  Atlantic has treated the
trust preferred securities as Tier 1 capital up to the maximum amount allowed,
and the remainder, if any, as Tier 2 capital for federal regulatory
purposes.  There are no required principal payments on the junior
subordinated debentures over the next five years.  Interest expense on
the junior subordinated debentures totaled $185,000 in both 2008 and
2007.





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





At
December 31, 2008 and 2007, Atlantic’s investment in the statutory trust of
$93,000 has been included in Other Assetsin theConsolidated Balance Sheets
as an investment in an unconsolidated subsidiary.








NOTE
7 - INCOME TAXES





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





Year
      Ended December 31,2008
                  
                  
                  2007Current:Federal
                  
                  $
                  (585
                  )
                  
                  $
                  635State
                  
                  
                  (100
                  )
                  
                  
                  108(685
                  )
                  
                  
                  743Deferred:Federal
                  
                  
                  (860
                  )
                  
                  
                  (252
                  )State
                  
                  
                  (147
                  )
                  
                  
                  (43
                  )(1,007
                  )
                  
                  
                  (295
                  )Total
      income tax provision (benefit)
                  
                  $
                  (1,692
                  )
                  
                  $
                  448








A
reconciliation of the income tax provision (benefit) computed at the federal
statutory rate of 34% and the income tax provision (benefit) shown on the Consolidated Statements of
Operations and Comprehensive Income, follows (dollars in
thousands):


2008
                  
                  
                  2007%
      of
                  
                  
                  
                  
                  
                  %
      ofAmount
                  
                  
                  Pretax
                  
                  
                  Amount
                  
                  
                  PretaxTax
      computed at statutory rate
                  
                  $
                  (1,230
                  )
                  
                  
                  34.0
                  %
                  
                  $
                  631
                  
                  
                  
                  34.0
                  %Increase
      (decrease) resulting from:State
      income taxes
                  
                  
                  (88
                  )
                  
                  
                  2.4
                  
                  
                  
                  131
                  
                  
                  
                  7.0Indexed
      retirement plan
                  
                  
                  (78
                  )
                  
                  
                  2.2
                  
                  
                  
                  (51
                  )
                  
                  
                  (2.7
                  )Nontaxable
      interest income, net
                  
                  
                  (217
                  )
                  
                  
                  6.0
                  
                  
                  
                  (185
                  )
                  
                  
                  (9.9
                  )Other
                  
                  
                  (79
                  )
                  
                  
                  2.2
                  
                  
                  
                  (78
                  )
                  
                  
                  (4.2
                  )Income
      tax provision (benefit)
                  
                  $
                  (1,692
                  )
                  
                  
                  46.8
                  %
                  
                  $
                  448
                  
                  
                  
                  24.2
                  %





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 7 - INCOME TAXES(Continued)





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


December
      31,2008
                  
                  
                  2007Deferred
      tax asset:Federal
                  
                  $
                  1,815
                  
                  
                  $
                  1,030State
                  
                  
                  311
                  
                  
                  
                  1762,126
                  
                  
                  
                  1,206Deferred
      tax liability:Federal
                  
                  
                  (105
                  )
                  
                  
                  (179
                  )State
                  
                  
                  (18
                  )
                  
                  
                  (31
                  )(123
                  )
                  
                  
                  (210
                  )Net
      deferred tax asset
                  
                  $
                  2,003
                  
                  
                  $
                  996





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





December
      31,2008
                  
                  
                  2007Allowance
      for loan losses
                  
                  $
                  1,250
                  
                  
                  $
                  761Indexed
      retirement plans
                  
                  
                  514
                  
                  
                  
                  359Net
      unrealized holding losses on securities
                  
                  
                  -
                  
                  
                  
                  51Other
      real estate owned write-downs
                  
                  
                  181
                  
                  
                  
                  -State
      income tax net operating loss carryforward
                  
                  
                  88
                  
                  
                  
                  -Nonaccrual
      interest
                  
                  
                  66
                  
                  
                  
                  -Depreciation
                  
                  
                  (123
                  )
                  
                  
                  (210
                  )Other,
      net
                  
                  
                  27
                  
                  
                  
                  35Net
      deferred tax asset
                  
                  $
                  2,003
                  
                  
                  $
                  996





Income
tax expense of $51,000 and $119,000 for 2008 and 2007, respectively, have been
netted in the caption “Unrealized holding gains (losses) on securities arising
during period” found in the Consolidated Statements of
Operations and Comprehensive Income (Loss).





During
2008, Atlantic reported net operating losses for income tax purposes of
$2,097,000 for Federal and $1,610,000 for State.  The Federal net
operating loss can be carried back to 2006 and 2007, fully recovered as an
income tax refund, and has been included in other assets on the Consolidated Balance
Sheets.  The State net operating loss can only be carried
forward and has been included in deferred tax assets at December 31,
2008.








NOTE
8 - EMPLOYEE BENEFITS AND INDEXED RETIREMENT PLANS





SIMPLE
Plan.  Atlantic sponsors a savings incentive plan (“SIMPLE
Plan”) that covers substantially all employees.  Atlantic matches each
participant’s contribution, subject to a maximum of 3% of the participant's
salary.  The SIMPLE Plan is a prototype plan and has been approved by
the Internal Revenue Service.  The amount included in salaries and
employee benefits as pension expense totaled $64,000 and $65,000 for 2008 and
2007, respectively.





Indexed Retirement
Plans.  Atlantic has adopted an Indexed Retirement Plan (“IRP”)
for Atlantic’s seven directors (including one director emeritus) and four of its
current and former officers.  The purpose of the IRP is to retain
qualified directors and members of management by offering a retirement
benefit.  Benefits under the IRP began vesting over a five-year
period, with service beginning in 1997.  Upon his resignation from
Atlantic, a former officer and director was 60% vested in the
IRP.  All of the directors are vested and the three current officers
will be fully vested in December 2009.  At December 31, 2008, these
three officers were vested at 86% - 88%.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 8 - EMPLOYEE BENEFITS AND
INDEXED RETIREMENT PLANS(Continued)





Atlantic
has purchased a pool of life insurance policies totaling $4,050,000 with funds
that had previously been invested in overnight federal funds
sold.  The policies have cash surrender values that can progressively
grow, based on a fluctuating index of life insurance securities, resulting in an
earnings stream to Atlantic.  At December 31, 2008 and 2007, the cash
surrender values of these life insurance policies totaled $4,886,000 and
$4,680,000, respectively.  For 2008, the average yield on these life
insurance policies was estimated at 4.45% (or a taxable equivalent yield of
7.12%).





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





A summary
of the activity for the IRP follows (dollars in thousands):


December 31,2008
                  
                  
                  2007Policy
      income included in other income
                  
                  $
                  220
                  
                  
                  $
                  152IRP
      expense included in other operating expenses
                  
                  
                  (294
                  )
                  
                  
                  (181
                  )Life
      insurance expense included in other operating expenses
                  
                  
                  (14
                  )
                  
                  
                  (17
                  )Deferred
      income tax benefit
                  
                  
                  110
                  
                  
                  
                  67Net
      after income tax benefit
                  
                  $
                  22
                  
                  
                  $
                  21








NOTE
9 - COMMITMENTS AND CONTINGENCIES





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





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





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





Commercial
and standby letters-of-credit are conditional commitments issued by Atlantic to
guarantee the performance of a customer to a third party.  Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements.  All letters of credit issued and outstanding at
December 31, 2008, totaling $1,701,000, have expiration dates within one
year.  The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to
customers.  Atlantic generally holds collateral supporting those
commitments if deemed necessary.





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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 9 - COMMITMENTS AND
CONTINGENCIES(Continued)





At
December 31, 2008 and 2007, the following financial instruments were outstanding
whose contract amounts represent credit risk for Atlantic (dollars in
thousands):


2008
                      
                      
                      2007Commitments
      to extend credit (including unused lines of credit):Revolving,
      open-end lines secured by 1-4 family residentialproperties (home
      equity lines)
                      
                      $
                      4,983
                      
                      
                      $
                      8,796Commercial
      real estate, construction, and land developmentsecured by real
      estate
                      
                      
                      2,186
                      
                      
                      
                      12,099Other
                      
                      
                      3,311
                      
                      
                      
                      7,46210,480
                      
                      
                      
                      28,357Standby
      letters of credit
                      
                      
                      1,701
                      
                      
                      
                      2,084$
                      12,181
                      
                      
                      $
                      30,441





Derivative Loan
Commitments.  At December 31, 2008, Atlantic did not have any
material amounts of commitments to originate residential mortgage loans that
will be sold to investors at a specified time in the future.





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





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





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





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





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





Other.  At December
31, 2008 and 2007, Oceanside had $19.5 million of lines of credit from other
banks for the purchase of overnight federal funds.  At December 31,
2008 and 2007, Atlantic had outstanding purchases in overnight federal funds of
$-0- and $4.4 million, respectively, leaving $19.5 million and $15.1 million,
respectively, available under these lines.  Additionally, Oceanside
has an available line of credit with the Federal Home Loan Bank, for which
approximately $18.4 million and $9.7 million, respectively, was available at
December 31, 2008 and 2007.




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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 9 - COMMITMENTS AND
CONTINGENCIES(Continued)





At
December 31, 2008, securities with an amortized cost of $4.2 million and fair
value of $3.8 were pledged to secure available advances of $3.1 million at the
Federal Reserve Discount Window.  At December 31, 2008, Oceanside also
had approximately $4.8 million available under the FDIC’s Temporary Liquidity
Guarantee Program.








NOTE
10 - CONCENTRATIONS OF CREDIT





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





The
concentrations of credit by type of loan are set forth in Note 3.  The
distribution of commitments to extend credit approximates the distribution of
loans outstanding.  Standby letters of credit were granted primarily
to commercial borrowers.  Atlantic, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of
its legal lending limit.  As a state-chartered bank, Oceanside’s 15%
legal lending limit was approximately $3.6 million at December 31, 2008 ($6.0
million for loans qualifying for the 25% limit).  Atlantic does not
have any significant concentrations in any one industry or
customer.








NOTE
11 - RELATED PARTIES





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





A summary
of activity for 2008 and 2007 for such loans follows (dollars in
thousands):


2008
                  
                  
                  2007Beginning
      of year balance
                  
                  $
                  6,164
                  
                  
                  $
                  1,998Additions
                  
                  
                  1,040
                  
                  
                  
                  5,622Reductions
                  
                  
                  (634
                  )
                  
                  
                  (1,456
                  )End
      of year balance
                  
                  $
                  6,570
                  
                  
                  $
                  6,164





Unfunded
commitments to the same parties totaled $579,000 and $1,865,000 at December 31,
2008 and 2007, respectively.  At December 31, 2008 and 2007, deposits
and customer repurchase agreements with insiders totaled approximately $10.1
million and $24.2 million, respectively.








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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE
12 - STOCKHOLDERS' EQUITY





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





Dividends.  The
ability of Atlantic to pay dividends to stockholders depends primarily on
dividends received by Atlantic from its subsidiary,
Oceanside.  Oceanside’s ability to pay dividends is limited by federal
and state banking regulations based upon Oceanside’s profitability and other
factors.  State banking statutes further require (i) prior approval,
(ii) that at least 20% of the prior year’s earnings be transferred to additional
paid-in capital (surplus) annually until
surplus equals or exceeds Oceanside’s common stock, and (iii) that certain
minimum capital levels are maintained.  At December 31, 2008 and 2007,
retained earnings of approximately $532,000 and $621,000, respectively, were
available to pay cash dividends to the holding company only (Atlantic) in order
to maintain Oceanside’s current regulatory capital
classification.  Atlantic’s dividend policy is to retain accumulated
earnings to support its growth and maintain its capital levels.








NOTE
13 - OTHER OPERATING EXPENSES





Other
operating expenses follow (dollars in thousands):


2008
                    
                    
                    2007Processing
      and settlement fees
                    
                    $
                    773
                    
                    
                    $
                    646OREO
      expenses
                    
                    
                    492
                    
                    
                    
                    -Professional,
      legal, and audit fees
                    
                    
                    459
                    
                    
                    
                    264Write-down
      of other real estate owned
                    
                    
                    315
                    
                    
                    
                    -Pension
      expense
                    
                    
                    295
                    
                    
                    
                    181Stationery,
      printing, and supplies
                    
                    
                    107
                    
                    
                    
                    132Postage,
      freight, and courier
                    
                    
                    80
                    
                    
                    
                    100Director
      fees
                    
                    
                    78
                    
                    
                    
                    122Telephone
                    
                    
                    134
                    
                    
                    
                    88Advertising
      and business development
                    
                    
                    145
                    
                    
                    
                    125Regulatory
      assessments
                    
                    
                    229
                    
                    
                    
                    169Insurance
      (excluding group insurance)
                    
                    
                    46
                    
                    
                    
                    43Dues
      and subscriptions
                    
                    
                    27
                    
                    
                    
                    39Other
      miscellaneous expenses
                    
                    
                    249
                    
                    
                    
                    345$
                    3,429
                    
                    
                    $
                    2,254








NOTE
14 - FAIR VALUE





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





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





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





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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 14 - FAIR VALUE
(Continued)





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





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





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





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





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





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





The
estimated fair values of Atlantic's financial instruments at December 31, 2008
and 2007, follow (dollars in thousands):




Carrying
                
                
                FairAmount
                
                
                ValueDecember
      31, 2008:Financial
      AssetsCash
      and due from banks and federal funds sold
                
                $
                17,177
                
                
                $
                17,177Investment
      securities and accrued interest receivable
                
                
                30,615
                
                
                
                29,977Restricted
      stock
                
                
                955
                
                
                
                955Loans
      and accrued interest receivable
                
                
                203,872
                
                
                
                205,897Total
      assets valued
                
                $
                252,619
                
                
                $
                254,006Financial
      LiabilitiesDeposits
      and accrued interest payable
                
                $
                240,134
                
                
                $
                261,720Other
      borrowings and accrued interest payable
                
                
                9,424
                
                
                
                9,424Total
      liabilities valued
                
                $
                249,558
                
                
                $
                271,144Off-Balance
      Sheet Commitments
                
                $
                12,181
                
                
                $
                12,181





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BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE 14 - FAIR VALUE
(Continued)


Carrying
                
                
                FairAmount
                
                
                ValueDecember
      31, 2007:Financial
      AssetsCash
      and due from banks and federal funds sold
                
                $
                4,656
                
                
                $
                4,656Investment
      securities and accrued interest receivable
                
                
                41,599
                
                
                
                41,359Restricted
      stock
                
                
                746
                
                
                
                746Loans
      and accrued interest receivable
                
                
                203,130
                
                
                
                203,191Total
      assets valued
                
                $
                250,131
                
                
                $
                249,952Financial
      LiabilitiesDeposits
      and accrued interest payable
                
                $
                217,850
                
                
                $
                215,392Other
      borrowings and accrued interest payable
                
                
                23,608
                
                
                
                23,393Total
      liabilities valued
                
                $
                241,458
                
                
                $
                238,785Off-Balance
      Sheet Commitments
                
                $
                30,441
                
                
                $
                30,441





While
these estimates of fair value are based on management’s judgment of the most
appropriate factors, there is no assurance that, were Atlantic to have disposed
of such items at December 31, 2008, the estimated fair values would necessarily
have been achieved at that date, since market values may differ depending on
various circumstances. The estimated fair values at December 31, 2008, should
not necessarily be considered to apply at subsequent dates.





On
January 1, 2008, Atlantic adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements(“SFAS 157”).  SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.  SFAS 157 applies to reported balances that
are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.





SFAS 157
emphasizes that fair value is market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Level 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).





Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access.  Level 2
inputs are inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly.  Level 2 inputs may include quoted prices for similar
assets and liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest rates,
foreign exchange rates and yield curves that are observable at commonly quoted
intervals.  Level 3 inputs are unobservable inputs for the asset or
liabilities, which are typically based on an entity’s own assumptions, as there
is little, if any, related market activity.  In instances where more
than one level of input exists for assets or liabilities, the lowest level of
input that is significant to the fair value measurement in its entirety will be
used in determining the fair value hierarchy.  Atlantic’s assessment
of the significance of a particular input to the fair value measurement in its
entirety requires judgment, and considers factors specific to the asset or
liability.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007






NOTE 14 - FAIR VALUE
(Continued)





The table
below presents Atlantic’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008, aggregated by the level in the fair
value hierarchy within which those measurements fall.





Quoted
      Prices
                  in
      Active
                  Markets
      for
                  Identical
      Assets
                
                
                Significant
                  Other
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  Inputs(Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                TotalAssets
      (dollars in thousands):Investment
      securities, available-for-sale
                
                $
                -
                
                
                $
                14,870
                
                
                $
                -
                
                
                $
                14,870Total
      assets at fair value
                
                $
                -
                
                
                $
                14,870
                
                
                $
                -
                
                
                $
                14,870





Securities
available-for-sale – The fair value of securities available for sale equals
quoted market prices, if available. If quoted market prices are not available,
fair value is determined using quoted market prices for similar securities.
Level 1 securities include those traded on an active exchange, such as the New
York Stock Exchange.  Level 2 securities include mortgage-backed
securities, other pass-through securities and collateralized mortgage
obligations of government sponsored entities (GSE’s) and private issuers and
obligations of states and political subdivision.





Certain
other assets are measured at fair value on a nonrecurring basis. These
adjustments to fair value usually result from application of lower of cost or
fair value accounting or write-downs of individual assets due to
impairment.  For assets measured at fair value on a nonrecurring
basis, the following table provides the level of valuation assumptions used to
determine each adjustment and the carrying value of the related individual
assets at December 31, 2008.





Quoted
      Prices
                  in
      Active
                  Markets
      for
                  Identical
      Assets
                
                
                Significant
                  Other
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  Inputs(Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                TotalAssets
      (dollars in thousands):Impaired
      loans, net of direct write-off and specific valuation
      allowances
                
                $
                -
                
                
                $
                -
                
                
                $
                5,074
                
                
                $
                5,074Foreclosed
      assets
                
                
                -
                
                
                
                -
                
                
                
                3,496
                
                
                
                3,496Total
      assets at fair value
                
                $
                -
                
                
                $
                -
                
                
                $
                8,570
                
                
                $
                8,570








Loans –
Nonrecurring fair value adjustments to loans reflect full or partial write-downs
that are based on the loan’s observable market price or current appraised value
of the collateral in accordance with SFAS 114, Accounting by Creditors for
Impairment of a Loan.  Since the market for impaired loans is
not active, loans subjected to nonrecurring fair value adjustments based on the
loan’s observable market price are generally classified as Level 2. Loans
subjected to nonrecurring fair value adjustments based on the current appraised
value of the collateral may be classified as Level 2 or Level 3 depending on the
type of asset and the inputs to the valuation.  When appraisals are
used to determine impairment and these appraisals are based on a market approach
incorporating a dollar-per-square-foot multiple, the related loans are
classified as Level 2.  If the appraisals require significant
adjustments to market-based valuation inputs or apply an income approach based
on unobservable cash flows to measure fair value, the related loans subjected to
nonrecurring fair value adjustments are typically classified as Level 3 due to
the fact that Level 3 inputs are significant to the fair value
measurement.





Foreclosed
assets – These assets are reported at the lower of the loan carrying amount at
foreclosure (or repossessions) or fair value written down by estimated cost to
sale. Fair value is based on third party appraisals for other real estate owned
and other independent sources for repossessed assets, considering the
assumptions in the valuation, and are considered Level 2 or Level 3
inputs.





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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE
15 - REGULATORY CAPITAL MATTERS





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





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





As of
December 31, 2008, the most recent notification from the FDIC, Oceanside was
categorized as well-capitalized under the regulatory framework for prompt
corrective action.  To remain categorized as well-capitalized, it will
have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the table below.  There are no
conditions or events, since the most recent notification, that management
believes have changed the prompt corrective action category.


For
      Capital
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        To
      Be Well-Capitalized Under Prompt Corrective ActionActual
                                                        
                                                        
                                                        Adequacy
      Purposes
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        ProvisionsAmount
                                                        
                                                        
                                                        Ratio
                                                        
                                                        
                                                        > Amount
                                                        
                                                        
                                                        > Ratio
                                                        
                                                        
                                                        > Amount
                                                        
                                                        
                                                        > Ratio(dollars
      in thousands)As of December 31, 2008:Total
      capital to risk-weighted assets
                                                        
                                                        $
                                                        21,720
                                                        
                                                        
                                                        
                                                        10.25
                                                        %
                                                        
                                                        $
                                                        16,951
                                                        
                                                        
                                                        
                                                        8.00
                                                        %
                                                        
                                                        $
                                                        21,188
                                                        
                                                        
                                                        
                                                        10.00
                                                        %Tier
      1 capital to risk-weighted assets
                                                        
                                                        $
                                                        19,055
                                                        
                                                        
                                                        
                                                        8.99
                                                        %
                                                        
                                                        $
                                                        8,475
                                                        
                                                        
                                                        
                                                        4.00
                                                        %
                                                        
                                                        $
                                                        12,713
                                                        
                                                        
                                                        
                                                        6.00
                                                        %Tier
      1 capital to average assets
                                                        
                                                        $
                                                        19,055
                                                        
                                                        
                                                        
                                                        7.25
                                                        %
                                                        
                                                        $
                                                        10,519
                                                        
                                                        
                                                        
                                                        4.00
                                                        %
                                                        
                                                        $
                                                        13,149
                                                        
                                                        
                                                        
                                                        5.00
                                                        %As of December 31, 2007:Total
      capital to risk-weighted assets
                                                        
                                                        $
                                                        24,115
                                                        
                                                        
                                                        
                                                        10.26
                                                        %
                                                        
                                                        $
                                                        18,795
                                                        
                                                        
                                                        
                                                        8.00
                                                        %
                                                        
                                                        $
                                                        23,494
                                                        
                                                        
                                                        
                                                        10.00
                                                        %Tier
      1 capital to risk-weighted assets
                                                        
                                                        $
                                                        21,915
                                                        
                                                        
                                                        
                                                        9.33
                                                        %
                                                        
                                                        $
                                                        9,398
                                                        
                                                        
                                                        
                                                        4.00
                                                        %
                                                        
                                                        $
                                                        14,096
                                                        
                                                        
                                                        
                                                        6.00
                                                        %Tier
      1 capital to average assets
                                                        
                                                        $
                                                        21,915
                                                        
                                                        
                                                        
                                                        8.53
                                                        %
                                                        
                                                        $
                                                        10,283
                                                        
                                                        
                                                        
                                                        4.00
                                                        %
                                                        
                                                        $
                                                        12,853
                                                        
                                                        
                                                        
                                                        5.00
                                                        %





As
previously mentioned in Note 1, Regulatory Oversight, Capital
Adequacy, Liquidity, and Management’s Plans, Oceanside is undergoing an
FDIC examination.  Given the current banking environment (which
includes concerns over CRE concentrations, liquidity, loan losses, and capital),
regulatory agencies are addressing these issues with enforcement actions ranging
from a written agreement (either informal or formal) that would preclude
Oceanside from being considered well-capitalized to the restriction or
prohibition of certain activities by Atlantic or Oceanside.  If
Oceanside was deemed an undercapitalized institution, the banking regulators
would likely require Atlantic and Oceanside to submit a plan for restoring
Oceanside to an acceptable capital category.




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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007








NOTE
16 - PARENT COMPANY FINANCIAL INFORMATION





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





Condensed
      Balance Sheets as of December 31:
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007(Dollars
      In Thousands)AssetsCash
      and cash equivalents
                                                                        
                                                                        $
                                                                        13
                                                                        
                                                                        
                                                                        $
                                                                        8Investment
      in and advances to subsidiary bank
                                                                        
                                                                        
                                                                        19,899
                                                                        
                                                                        
                                                                        
                                                                        21,831Other
      assets
                                                                        
                                                                        
                                                                        178
                                                                        
                                                                        
                                                                        
                                                                        156Total
                                                                        
                                                                        $
                                                                        20,090
                                                                        
                                                                        
                                                                        $
                                                                        21,995Liabilities
      and Stockholders' EquityLiabilities
                                                                        
                                                                        $
                                                                        3,158
                                                                        
                                                                        
                                                                        $
                                                                        3,139Stockholders'
      equity
                                                                        
                                                                        
                                                                        16,932
                                                                        
                                                                        
                                                                        
                                                                        18,856Total
                                                                        
                                                                        $
                                                                        20,090
                                                                        
                                                                        
                                                                        $
                                                                        21,995Condensed
      Statements of Operations and Stockholders' EquityYears
      Ended December 31:
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007(Dollars
      In Thousands)Equity
      in net income (loss) of subsidiary bank
                                                                        
                                                                        $
                                                                        (1,685
                                                                        )
                                                                        
                                                                        $
                                                                        1,597Other
      income
                                                                        
                                                                        
                                                                        5
                                                                        
                                                                        
                                                                        
                                                                        5Interest
      expense
                                                                        
                                                                        
                                                                        (185
                                                                        )
                                                                        
                                                                        
                                                                        (185
                                                                        )Other
      expenses (net of income tax benefit)
                                                                        
                                                                        
                                                                        (62
                                                                        )
                                                                        
                                                                        
                                                                        (11
                                                                        )Net
      income (loss)
                                                                        
                                                                        
                                                                        (1,927
                                                                        )
                                                                        
                                                                        
                                                                        1,406Stockholders'
      Equity:Beginning
      of  year
                                                                        
                                                                        
                                                                        18,856
                                                                        
                                                                        
                                                                        
                                                                        17,251Net
      change in unrealized holding gains (losses) on securities in subsidiary
      bank
                                                                        
                                                                        
                                                                        83
                                                                        
                                                                        
                                                                        
                                                                        199Cumulative
      effect adjustment - Implementation of EITF 06-4
                                                                        
                                                                        
                                                                        (80
                                                                        )
                                                                        
                                                                        
                                                                        -End
      of year
                                                                        
                                                                        $
                                                                        16,932
                                                                        
                                                                        
                                                                        $
                                                                        18,856Condensed
      Statements of Cash FlowsYears
      Ended December 31:
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007(Dollars
      In Thousands)Operating
      ActivitiesNet
      income (loss)
                                                                        
                                                                        $
                                                                        (1,927
                                                                        )
                                                                        
                                                                        $
                                                                        1,
      406Adjustment
      to reconcile net income (loss) to net cash provided by operating
      activities:Equity
      in undistributed earnings (losses) of subsidiary bank
                                                                        
                                                                        
                                                                        1,685
                                                                        
                                                                        
                                                                        
                                                                        (1,597
                                                                        )Other
                                                                        
                                                                        
                                                                        247
                                                                        
                                                                        
                                                                        
                                                                        190Net
      Cash Provided By (Used In) Operating Activities
                                                                        
                                                                        
                                                                        5
                                                                        
                                                                        
                                                                        
                                                                        (1
                                                                        )Increase
      (Decrease) in Cash and Cash Equivalents
                                                                        
                                                                        
                                                                        5
                                                                        
                                                                        
                                                                        
                                                                        (1
                                                                        )Cash
      and Cash Equivalents:Beginning
      of year
                                                                        
                                                                        
                                                                        8
                                                                        
                                                                        
                                                                        
                                                                        9End
      of year
                                                                        
                                                                        $
                                                                        13
                                                                        
                                                                        
                                                                        $
                                                                        8


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ITEM9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM9A.
            CONTROLS
      AND PROCEDURES.





Background of Internal Controls and
Internal Audits.  Oceanside is the sole financial subsidiary of
Atlantic.  Oceanside has in place extensive policies and operating
procedures for loans, operations, accounting, and compliance.  All
audits, whether internal or external are reported directly to the joint Audit
Committee of Oceanside and Atlantic, and the minutes of the Audit Committee
meetings are subsequently reported to the Boards of Directors of Oceanside and
Atlantic.





The joint
Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
by the internal auditor for planning purposes.  This audit calendar is
submitted to the Boards of Oceanside and Atlantic for
approval.  Annually, Atlantic engages an external Certified Public
Accounting firm to perform an independent audit conducted in accordance with
generally accepted auditing standards.





Periodically,
Oceanside and Atlantic undergo regulatory examinations that include tests of the
policies and operating procedures for loans, operations, accounting, and
compliance.  The results of these examinations are presented by the
regulators to the Boards of Oceanside and Atlantic.





Evaluation of Disclosure Controls
and Procedures.Atlantic
maintains controls and procedures designed to ensure that information required
to be disclosed in the reports that Atlantic files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.  Based upon management’s evaluation of those
controls and procedures performed within the 90 days preceding the filing of
this Report, the Chief Executive Officer and Chief Financial Officer of Atlantic
concluded that, subject to the limitations noted below, Atlantic’s disclosure
controls and procedures (as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that the information required to
be disclosed by Atlantic in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities and Exchange
Commission’s rules and forms.




Management’s Report on Internal
Control Over Financial Reporting.The
management of Atlantic is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this Annual
Report.  The financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and reflect management’s judgments and estimates concerning the effects of
events and transactions that are accounted for or disclosed.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Such internal controls over financial reporting were
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.





Management
assessed the effectiveness of Atlantic’s internal control over financial
reporting as of December 31, 2008.  In making this assessment,
Atlantic used the criteria set forth in Internal Control Over Financial
Reporting – Guidance for Smaller Public Companies (2006) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
Sarbanes-Oxley Section 404 – A
Guide for Small Business, published by the U.S. Securities and Exchange
Commission.





Based
upon management’s evaluation under the framework in Internal Control Over Financial
Reporting – Guidance for Smaller Public Companies (2006) and Sarbanes-Oxley Section 404 – A Guide
for Small Business, management concluded that Atlantic’s internal control
over financial reporting was effective as of December 31, 2008.  The
results of management’s assessment has been reviewed with the Audit
Committee.





This
annual report does not include an attestation report of Atlantic’s registered
public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by Atlantic's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit Atlantic to provide only management’s report
in this annual report.





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Changes in Internal
Controls.  Atlantic has made no significant changes in its
internal controls over financial reporting during the quarter ended December 31,
2008, which have materially affected or are reasonably likely to materially
affect their internal control over financial reporting.





Limitations on the Effectiveness of
Controls.  Management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that disclosure controls and
internal controls will prevent all error and all fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within Atlantic have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control.





The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.








ITEM9B.
            OTHER
      INFORMATION.





There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of 2008 that was not reported.





PART
III





ITEM10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





The
information contained under the section captioned “Proposal
I.  Election of Directors” beginning on page 6 of Atlantic’s
definitive Proxy Statement is incorporated herein by reference.





COMPLIANCEWITH SECTION 16(a) OF THE EXCHANGE ACT





The
information contained under the section captioned “Section 16(a) Beneficial
Ownership Compliance” on page 13 of Atlantic’s definitive Proxy Statement is
incorporated herein by reference.





CODEOF ETHICS





In 2003,
Atlantic adopted a Code of Ethics policy that applies to its principal executive
and financial officers (Incorporated by reference to Exhibit 14 to Atlantic’s
Form 10-KSB for year ended December 31, 2003).





FINANCIALEXPERT





Atlantic
has at least one audit committee financial expert.  The information
contained in the section captioned “Report of the Audit Committee” on page 4 in
Atlantic’s definitive Proxy Statement is incorporated herein by
reference.





CORPORATEGOVERNANCE





The
information contained under the sections captions “Director Independence,”
“Committees of the Board of Directors,” and “Report of the Audit Committee,”
beginning on page 3 of Atlantic’s definitive Proxy Statement is incorporated
herein by reference.








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ITEM11.
            EXECUTIVE
      COMPENSATION.





The
information contained in the sections captioned “Summary Compensation Table”
under “Executive Compensation” at page 9, “2009 Director Compensation Table” at
page 10, “Benefits,” at page 11 and “Employment Contracts” at page 11 in the
definitive Proxy Statement, is incorporated herein by reference.





ITEM12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





The
information contained in the section captioned “Beneficial Stock Ownership of
Directors and Executive Officers” at page 9 in the definitive Proxy Statement,
is incorporated herein by reference.








ITEM13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





The
information contained in the section captioned “Certain Relationships and
Related Transactions” at page 11 in the definitive Proxy Statement is
incorporated herein by reference.








ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.





The
information contained in the section captioned “Proposal
II.  Ratification of the Appointment of the Independent Auditor for
the Fiscal Year Ending December 31, 2009,” at page 11 in the definitive Proxy
Statement is incorporated herein by reference.





PART
IV





ITEM15.
            EXHIBITS.





The
following exhibits are filed with or incorporated by reference into this report
(see legend below).




Legend




(a) 
Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31,
1999


(b) 
Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31,
2000


(c) 
Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31,
2002


(d) 
Incorporated by reference on Atlantic’s Form 10-KSB for year ended December 31,
2003


(e) 
Incorporated by reference on Atlantic’s Form 10-QSB for quarter ended September
30, 2006





Exhibit
      No.
            Description of
      Exhibit





3.1
            Articles
      of Incorporation (a)


3.2
            Bylaws
      (a)


4.1
            Specimen
      Stock Certificate (a)


10.1Software
      License Agreement dated as of October 6, 1997, between Oceanside and File
      Solutions, Inc. (a)


10.2
            File
      Solutions Software Maintenance Agreement dated as of July 15, 1997,
      between Oceanside and SPARAK Financial Systems, Inc.
  (a)


10.3
            Remote
      Data Processing Agreement dated as of March 3, 1997, between Oceanside and
      Bankers Data Services, Inc. (a)


10.4
            Lease
      dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside.
      (b)


10.5
            Lease
      dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and
      Oceanside. (c)


10.6
            Change
      in Control Agreement for Barry W. Chandler.
(e)


10.7
            Change
      in Control Agreement for David L. Young.
(e)


10.8
            Change
      in Control Agreement for Grady R. Kearsey.
(e)





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11
            The
      computation of per share earnings is shown in the consolidated financial
      statements of Atlantic BancGroup, Inc. and Subsidiaries for December 31,
      2008 and 2007, contained in Item 8, on Page 49 of the Notes to
      Consolidated Financial Statements


14
            Code
      of Ethics for Senior Officers Policy.
(d)


21.1
            Subsidiaries
      of the Registrant


31.1
            Certifications
      of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act


31.2
            Certifications
      of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act


32.1
            Certifications
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002


32.2
            Certifications
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002


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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be duly signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Jacksonville Beach,
State of Florida, on the twenty-third day of March, 2009.





ATLANTIC
      BANCGROUP, INC./s/     Barry W.
      ChandlerBarry
      W. ChandlerPrincipal
      Executive Officer/s/     David L.
      YoungDavid
      L. YoungPrincipal
      Financial Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the twenty-third day of March, 2009:





Signature
              
              Title/s/     Donald F.
      Glisson, Jr.
              
              Chairman
      of the BoardDonald
      F. Glisson, Jr./s/     Barry W.
      Chandler
              
              President,
      Chief Executive Officer, and DirectorBarry
      W. Chandler/s/     David L.
      Young
              
              Executive
      Vice President, Chief Financial Officer,David
      L. Young
              
              and
      Corporate Secretary/s/     Frank J.
      Cervone
              
              DirectorFrank
      J. Cervone/s/      Robin H.
      Scheiderman
              
              DirectorRobin
      H. Scheiderman/s/     G. Keith
      Watson
              
              DirectorG.
      Keith Watson/s/     Conrad L.
      Williams
              
              DirectorConrad
      L. Williams/s/     Dennis M.
      Wolfson
              
              DirectorDennis
      M. Wolfson


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ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES





Form
10-K


For
Fiscal Year Ended December 31, 2008





EXHIBITINDEX





Exhibit
      No.
                    
                    Exhibit21.1
                    
                    Subsidiaries
      of the Registrant31.1
                    
                    Certifications
      of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act31.2
                    
                    Certifications
      of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
      the Exchange Act32.1
                    
                    Certifications
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    200232.2
                    
                    Certifications
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act of
    2002




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