UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2010

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

For the transition period from to .

Commission File Number 001-15061

ATLANTIC BANCGROUP, INC.

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

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

1315 S. Third Street

Jacksonville Beach, Florida 32250

(Address of Principal Executive Offices)

(904) 247-9494

(Issuer’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

	Large accelerated filer	o	Accelerated filer	o

	Non-accelerated filer	o	Smaller reporting company	x

(Do not check if a smaller reporting company)

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

YES o NO x

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

Common Stock, par value $0.01 per share	1,247,516
(Class)	Outstanding at April 30, 2010

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

FORM 10-Q - FOR THE QUARTER ENDED MARCH 31, 2010

INDEX

			PAGE
			NUMBER

PART I - FINANCIAL INFORMATION

	Item 1 -	Financial Statements

		Condensed Consolidated Statements of Financial Condition as of March 31, 2010 (Unaudited) and December 31, 2009	3

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2010 and 2009 (Unaudited)	4

		Condensed Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2010 (Unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7

	Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 4 -	Controls and Procedures	33


PART II - OTHER INFORMATION			35

	Item 1 -	Legal Proceedings

	Item 1A -	Risk Factors

	Item 6 -	Exhibits


SIGNATURES			40

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Per Share Data)

	March 31, 2010			December 31,
	(Unaudited)			2009
ASSETS
Cash and due from banks	$	5,212		$	3,548
Interest-bearing deposits		28,751			27,535
Total cash and cash equivalents		33,963			31,083

Investment securities, available-for-sale		31,936			42,542
Investment securities, held-to-maturity (market value of $14,727 in 2010
and $14,748 in 2009)		14,988			14,989
Restricted stock, at cost		1,151			1,151
Loans, net		189,593			194,187
Bank premises and equipment		3,315			3,366
Other real estate owned		2,305			1,727
Accrued interest receivable		1,072			1,089
Deferred income taxes		624			708
Investment in unconsolidated subsidiary		93			93
Cash surrender value of bank-owned life insurance		5,152			5,097
Other assets		1,688			1,334

TOTAL	$	285,880		$	297,366


LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	35,009		$	35,409
Interest-bearing		223,454			234,575

Total deposits		258,463			269,984

Other borrowings
Short-term debt		200			-
Long-term debt		15,393			15,393
Total other borrowings		15,593			15,393
Accrued interest payable		316			299
Other liabilities		2,235			2,010

Total liabilities		276,607			287,686

Commitments and contingencies		-			-

Stockholders' equity:
Common stock		12			12
Additional paid-in capital		11,788			11,788
Retained deficit		(2,654	)		(2,107	)
Accumulated other comprehensive income (loss):
Net unrealized holding gains (losses) on securities, available-for-sale		127			(13	)

Total stockholders' equity		9,273			9,680

TOTAL	$	285,880		$	297,366

Book value per common share	$	7.43		$	7.76

Common shares outstanding		1,247,516			1,247,516

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

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS (UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

	For the Three Months Ended
	March 31,
	2010			2009

Interest and fees on loans	$	2,825		$	3,154
Taxable interest income on investment securities and
interest-bearing deposits in banks		331			175
Tax-exempt interest income on investment securities		160			168
Interest on federal funds sold		-			1
Total interest income		3,316			3,498

Interest on deposits		1,134			1,616
Other borrowings		127			118
Total interest expense		1,261			1,734

Net interest income before provision for loan losses		2,055			1,764

Provision for loan losses		872			234

Net interest income after provision for loan losses		1,183			1,530

Noninterest income:
Fees and service charges on deposit accounts		125			168
Other fee income for banking services		37			11
Dividends on restricted stock and trust-preferred securities		2			-
Gain on sale of investment securities		21			45
Income from bank-owned life insurance		60			57
Loss on sale of other real estate owned		(50	)		(61	)
Loss on write-down of restricted stock		-			(179	)
Other income		6			14
Total noninterest income		201			55

Noninterest expenses:
Salaries and employee benefits		705			735
Expenses of bank premises and fixed assets		239			256
Processing and settlement fees		201			204
Professional, legal, and audit fees		202			144
Pension expense		2			86
OREO and other loan collection expenses		123			127
Write-down of other real estate owned		30			-
Deposit insurance assessments		296			89
Advertising and business development		8			33
Telephone		33			33
Stationary, printing, and supplies		16			21
Postage, freight, and courier		16			13
Insurance (excluding group insurance)		14			13
Dues and subscriptions		13			12
Other operating expenses		33			37
Total noninterest expenses		1,931			1,803

Loss before benefit for income taxes		(547	)		(218	)
Benefit for income taxes		-			(150	)
Net loss		(547	)		(68	)

Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses) on securities arising during period		140			(28	)

Comprehensive loss	$	(407	)	$	(96	)

Loss per common share
Basic	$	(0.44	)	$	(0.05	)
Diluted	$	(0.44	)	$	(0.05	)

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

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2010 (UNAUDITED)

(Dollars In Thousands)

										Net
										Unrealized
										Holding
										Gains (Losses)
					Additional					on Securities,			Total
	Common Stock				Paid-in		Retained			Available-			Stockholders'
	Shares		Amount		Capital		Deficit			for-Sale			Equity

Balance, December 31, 2009		1,247,516	$	12	$	11,788	$	(2,107	)	$	(13	)	$	9,680

Comprehensive income (loss):
Net loss		-		-		-		(547	)		-
Net change in unrealized
holding gains on securities		-		-		-		-			140

Total comprehensive loss		-		-		-		-			-			(407	)

Balance, March 31, 2010		1,247,516	$	12	$	11,788	$	(2,654	)	$	127		$	9,273

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

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Thousands)

	For the Three Months Ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(547	)	$	(68	)
Provision for loan losses		872			234
Depreciation and amortization		51			63
Gain on sale of investment securities		(21	)		(45	)
Loss on sale of other real estate owned		50			61
Writedown of other real estate owned		30			-
Loss on writedown of restricted stock		-			179
Net premium amortization and discount accretion		137			14
Other, net		(66	)		(363	)

Net cash provided by operating activities		506			75

Cash flows from investing activities:
Net (increase) decrease in:
Investment securities		2,080			(7,091	)
Loans		2,770			(954	)
Proceeds from sales of investment securities		8,551			3,811
Proceeds from sale of other real estate owned		294			1,346
Purchases of bank premises and equipment, net		-			(17	)

Net cash provided (used) by investing activities		13,695			(2,905	)

Cash flows from financing activities:
Net increase (decrease) in deposits		(11,521	)		1,538
Net increase in other borrowings		200			8,000

Net cash provided (used) by financing activities		(11,321	)		9,538

Net increase in cash and cash equivalents		2,880			6,708

Cash and cash equivalents at beginning of period		31,083			17,177

Cash and cash equivalents at end of period	$	33,963		$	23,885


CONDENSED SUPPLEMENTAL DISCLOSURES
Non-cash transaction - loans transferred to
other real estate owned	$	952		$	324

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

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

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 activity is the operation of Oceanside, and it operates in only one reportable industry segment, banking. Collectively, the entities are referred to as “Atlantic.” References to Atlantic, Oceanside, and subsidiaries throughout these condensed consolidated financial statements are made using the first-person notations of “we,” “our,” and “us.” Oceanside has formed subsidiaries (“Subsidiaries”) for the sole purpose of holding and managing real estate properties acquired through foreclosure.

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

Our condensed consolidated financial statements for the three months ended March 31, 2010 and 2009, have not been audited and do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair presentation. Our results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. The accounting policies followed by us are set forth in the consolidated financial statements for the year ended December 31, 2009, and are incorporated herein by reference.

Oceanside, through four banking offices, provides a wide range of banking services to individual and corporate customers primarily in East Duval and Northeast St. Johns Counties of Florida. We are subject to regulations of certain federal and state regulatory agencies and, accordingly, we are examined by those agencies. As a consequence of the extensive regulation of commercial banking activities, our business is particularly susceptible to being affected by federal and state legislation and regulations.

Regulatory Action. Effective January 7, 2010, Oceanside entered into a Stipulation to the Issuance of a Consent Order with the Federal Deposit Insurance Corporation (the “FDIC”) and the Florida Office of Financial Regulation (the “OFR”) (“Stipulation”). Pursuant to the Stipulation, Oceanside has consented, without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation, to the issuance of a Consent Order by the FDIC and the OFR, also effective as of January 7, 2010 (“Consent Order”).

The Consent Order represents an agreement among Oceanside, the FDIC, and the OFR as to areas of Oceanside’s operations that warrant improvement and presents a plan for making those improvements. The Consent Order imposes no fines or penalties on Oceanside.

Oceanside is in the process of evaluating and developing responses, policies, procedures, analyses, and training to address matters enumerated in the Consent Order. In management’s opinion, many of the cited criticisms have been addressed or Oceanside is no longer engaged in the activity.

Oceanside did not meet the April 7, 2010, deadline to raise additional capital as required by the Consent Order. However, on May 10, 2010, Atlantic entered into an agreement to merge into Jacksonville Bancorp, Inc. See Note 12 - Subsequent Event for further information regarding the proposed merger.

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

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

On March 26, 2010, the Holding Company entered into a mutual agreement (“Written Agreement”) with the Federal Reserve Bank of Atlanta (the "Reserve Bank") to maintain the financial soundness of the Holding Company so that the Holding Company may serve as a source of strength to Oceanside. The Written Agreement provides for restrictions on dividends declared or paid by the Holding Company, the receipt of dividends or other payments from the Bank, the distribution of interest, principal or other sums on trust-preferred securities, the guarantee of any debt by the Holding Company and the Subsidiaries, the redemption of stock by the Holding Company, and certain other operating restrictions and reporting requirements.

Liquidity. Atlantic actively manages liquidity. Cash and cash equivalents, which include interest-bearing deposits, totaled $34.0 million at March 31, 2010. In addition to cash and cash equivalents and unpledged investment securities, Atlantic has the following sources of available liquidity at March 31, 2010: lines of credit to purchase federal funds ($3.8 million) and, subject to prior approval, borrowings at the Federal Reserve discount window ($3.1 million). Based on current and expected liquidity needs and sources, management expects Atlantic to be able to meet its obligations.

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, valuation of other real estate owned (or foreclosed assets), the realization of deferred tax assets, and other-than-temporary impairment of securities, and the fair value of financial instruments.

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

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

While management uses available information to recognize losses on loans and 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 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.

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.

Atlantic has recorded a deferred tax asset (net of valuation allowances) to recognize the future income tax benefit of operating losses incurred for tax years 2009 and 2008, and for the three months ended March 31, 2010. Management believes that the tax benefits on the net operating loss carry forwards will be utilized when Atlantic returns to profitability. Generally, the net operating losses can be carried forward for up to 20 years.

On November 6, 2009, the “Worker, Homeownership, and Business Assistance Act of 2009” was signed into law, which relaxed the net operating loss carryback rules. As a result of this law, Atlantic was able to carryback net operating losses to obtain a tax refund of $1.024 million, which was received in April 2010.

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

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

In estimating the carrying value of deferred tax assets, management considered the cumulative loss position, projected taxable income, and available tax strategies in developing the analysis of any required deferred income tax asset valuation as of March 31, 2010 and December 31, 2009.

At March 31, 2010 and December 31, 2009, cumulative losses in recent quarters suggested the need for a valuation allowance. However, management believed that this negative evidence was partially offset by the following positive evidence, which mitigated the need for reducing the carrying value (net of valuation allowances) to zero.

·	Atlantic has a prior history of taxable earnings prior to losses that began in 2008. Since inception in 1997, Atlantic has reported taxable income in 10 of 12 years through 2008, with cumulative taxable income of nearly $9.0 million through 2008.

Atlantic has reported and believes that changes have been made to allow Atlantic to return to a taxable earnings position, including reductions in payroll and other operating costs. Within the next 2-5 years, internal projections indicate that book and taxable income are more likely than not to return to levels approaching those prior to 2008.

Management has received and considered offers to purchase two of its branch locations and relocate to leased space (or lease-back its existing facilities). While the sale-leaseback would not likely generate significant book income immediately, the taxable income was projected to exceed $1.3 million.

Management and the Board of Directors have discussed a tax strategy that would generate taxable income of approximately $1.1 million from the liquidation of bank-owned life insurance policies. Subsequent to March 31, 2010, Oceanside submitted its request to cash in the life insurance policies, and the proceeds from the cash surrender value less any charges or fees are expected in the second quarter of 2010.

·	Converting tax-exempt investment income to taxable investment income, which could increase taxable income by almost $1.0 million and book income by $0.4 million.

·	Repurchase of junior subordinated debentures at a discount.

·	Termination of all or a portion of the Bank’s deferred compensation plan, which would generate up to $1.6 million in book taxable income and reduce the deferred tax asset by $0.6 million.

Based on the above analysis, management believes it is more likely than not that Atlantic will realize the deferred tax asset of $0.6 million and $0.7 million (net of a valuation allowance of $3.4 million and $2.8 million) at March 31, 2010 and December 31, 2009, respectively, through future operating income and implementation of certain tax strategies.

Reclassifications - Certain amounts in the prior periods have been reclassified to conform to the presentation for the current period.

New Accounting Guidance - In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. insurers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, Atlantic may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. Atlantic is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

Consolidation: In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 810, Consolidation , which amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

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

involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and did not have a significant impact on Atlantic’s financial statements.

Fair Value Measurements and Disclosures: In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The adoption of ASU No. 2009-05 did not have a material impact on Atlantic’s financial condition, results of operations, and disclosures.

Transfers and Servicing: ASC 860 Transfers and Servicing improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860 is effective for annual reporting periods that begin after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter, with early adoption prohibited. ASC 860 must be applied to transfers occurring on or after the effective date. The adoption of ASC 860 did not have a material effect on Atlantic’s financial statements.

Other: 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 -

REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S PLANS

As a result of the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression, the capital of Atlantic and Oceanside have been significantly depleted. The impact of the current financial crisis in the U.S. and abroad is having far-reaching consequences and it is difficult to say at this point when the economy will begin to recover. As a result, we cannot assure you that we will be able to resume profitable operations in the near future, or at all.

We have determined that significant additional sources of capital or the implementation of strategies to enhance existing capital will be required for us to resume profitable operations beyond 2010. Atlantic has hired an investment banking firm to seek all strategic alternatives to enhance the stability of Atlantic including a capital investment, sale, strategic merger, or some form of restructuring. On May 10, 2010, Atlantic entered into an agreement to merge into Jacksonville Bancorp, Inc. (see Note 12 - Subsequent Event). We are also exploring other options to restructure our balance sheet to generate income and capital. There can be no assurance that Atlantic will consummate the proposed merger or otherwise succeed in these efforts and be able to comply with the new regulatory requirements. In addition, a transaction, which would involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If Atlantic does not comply with mandated capital requirements, the regulators could take additional enforcement action against the Holding Company and Oceanside.

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Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 2 -

REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S PLANS (Continued)

On May 10, 2010, Jacksonville Bancorp, Inc., the bank holding company for the Jacksonville Bank and Atlantic announced the signing of a definitive merger agreement providing for the merger of Atlantic into Jacksonville Bancorp, Inc. The completion of this merger would resolve the regulatory and capital challenges that Atlantic faces since Jacksonville Bancorp, Inc. would be the surviving bank. See Note 12 - Subsequent Event.

In the event that the merger is not completed, we will continue our efforts to raise additional capital and have identified transactions to increase our capital by approximately $4 million, including eliminating our bank owned life insurance, reducing or eliminating certain retirement benefits, and the potential sale of assets. In order to improve our Tier 1 leverage ratio, we may also shrink our total assets.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action, which would affect our ability to continue as a going concern.

In its report dated April 15, 2010, covering our audited consolidated financial statements for the year ended December 31, 2009, our independent registered public accounting firm stated that our net losses raise substantial doubts about our ability to continue as a going concern. In that firm’s opinion, our ability to continue as a going concern is in doubt as a result of the continued deterioration of our loan portfolio and is subject to our ability to service our existing loans in a manner that will return Atlantic to profitability or to identify and consummate a strategic transaction, including the potential sale of Atlantic. If we are not able to successfully accomplish such actions, it is possible that our subsidiary bank may fail and be placed into receivership with the FDIC.

Although the contemplated merger with Jacksonville Bancorp, Inc. (see Note 12 - Subsequent Event) is expected to result in our continued operation as a part of Jacksonville Bancorp, Inc. and The Jacksonville Bank, such transaction may prove to be insufficient due to the possible continued decline of the loan portfolio or other losses. If we are, or the surviving entity in the merger is, unable to return to profitability and if we are unable to identify and execute a viable strategic alternative, we may be unable to continue as a going concern.

NOTE 3 - COMPUTATION OF PER SHARE LOSSES

Basic losses per share amounts are computed by dividing net loss by the weighted average number of common shares outstanding for the three months ended March 31, 2010 and 2009. Diluted loss per share is computed by dividing net loss by the weighted average number of shares and all dilutive potential shares outstanding during the period. We have no dilutive potential shares outstanding for 2010 or 2009. The following information was used in the computation of loss per share on both a basic and diluted basis for the three months ended March 31, 2010 and 2009 (dollars and number of shares in thousands):

	Three Months Ended March 31,
	2010			2009
Basic and diluted EPS computation:
Numerator - Net loss	$	(547	)	$	(68	)
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Basic and diluted losses per share	$	(0.44	)	$	(0.05	)

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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 4 - INVESTMENT SECURITIES

Our investment securities, available-for-sale, consist of residential real estate mortgage investment conduits (“REMICs”) and residential mortgage pass-through securities (“MBS”) all of which are issued or guaranteed by U.S. Capital Government agencies such as FNMA, FHLMC, and GNMA. The amortized cost and estimated fair value of instruments in debt and equity securities are as follows (dollars in thousands):

	March 31, 2010									December 31, 2009
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-sale
REMICs	$	118	$	3	$	-		$	121	$	134	$	3	$	-		$	137
MBS		31,614		289		(88	)		31,815		42,428		217		(240	)		42,405
		31,732		292		(88	)		31,936		42,562		220		(240	)		42,542
Held-to-maturity
State, county and
municipal bonds		14,988		136		(397	)		14,727		14,989		154		(395	)		14,748
Total investment securities	$	46,720	$	428	$	(485	)	$	46,663	$	57,551	$	374	$	(635	)	$	57,290

Information pertaining to securities with gross unrealized losses at March 31, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

	Less Than Twelve Months					Over Twelve Months					Total
	Gross			Gross		Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
March 31, 2010:
Available-for-Sale
REMICs	$	-		$	-	$	-		$	-	$	-		$	-
MBS		(88	)		17,603		-			-		(88	)		17,603
	$	(88	)	$	17,603	$	-		$	-	$	(88	)	$	17,603
Held-to-Maturity
State, county, and municipal bonds	$	(167	)	$	4,780	$	(230	)	$	2,867	$	(397	)	$	7,647

December 31, 2009:
Available-for-Sale
REMICs	$	-		$	-	$	-		$	-	$	-		$	-
MBS		(240	)		23,020		-			-		(240	)		23,020
	$	(240	)	$	23,020	$	-		$	-	$	(240	)	$	23,020
Held-to-Maturity
State, county, and municipal bonds	$	(165	)	$	4,763	$	(230	)	$	2,867	$	(395	)	$	7,630

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. At March 31, 2010, Atlantic did not have any investment securities deemed other-than-temporarily-impaired debt securities.

The unrealized losses on investment securities were caused by interest rate changes. Temporary net decreases in fair value of securities available-for-sale at March 31, 2010, are regarded as an adjustment to stockholders' equity. The estimated fair value of investment securities is determined on the basis of market quotations. The following is a summary of the effects on the Condensed Consolidated Statement of Stockholders’ Equity at March 31, 2010 and December 31, 2009 (dollars in thousands):

- 12 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 4 - INVESTMENT SECURITIES (Continued)

	March 31,			December 31,
	2010			2009

Gross unrealized gains (losses) on investment securities available-for-sale	$	193		$	(20	)
Deferred tax benefit (expense) on unrealized gains (losses)		(66	)		7
Balance	$	127		$	(13	)

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 three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended March 31,
	2010			2009

Unrealized holding gains (losses) on investment securities arising during period	$	227		$	(1	)
Less: reclassification adjustment for gains included in net loss		(21	)		(45	)
Other comprehensive income (loss), before income tax expense (benefit)		206			(46	)
Income tax benefit (expense) related to items of other comprehensive income (loss)		(66	)		18
Other comprehensive income (loss), net of income tax expense (benefit)	$	140		$	(28	)

Gross gains and losses on sales of investment securities for the three months ended March 31, 2010, totaled $21,000 and $-0-, respectively. Gross gains and losses on sales of investment securities for the three months ended March 31, 2009, totaled $45,000 and $-0-, respectively.

At March 31, 2010, investment securities with an amortized cost of $1.5 million and fair value of $1.4 million were pledged to secure deposits of public funds from the State of Florida and treasury tax and loan deposits with the Federal Reserve. At March 31, 2010, investment securities with an amortized cost of $4.2 million and a fair value of $4.0 million were pledged for the Federal Reserve discount window, and investment securities with an amortized cost of $13.9 million and a fair value of $13.8 million were pledged to secure FHLB of Atlanta advances (see Note 7).

There were no securities of a single issuer, which are non-governmental or non-government sponsored, that exceeded 10% of stockholders’ equity at March 31, 2010.

The cost and estimated fair value of debt and equity securities at March 31, 2010, by contractual maturities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	2,319	$	2,403	$	-	$	-
Due after one through five years		4,151		4,317		271		284
Due after five through fifteen years		17,732		17,707		2,048		2,065
Due after fifteen years		7,530		7,509		12,669		12,378
	$	31,732	$	31,936	$	14,988	$	14,727

- 13 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 5 - LOANS

Loans consisted of (dollars in thousands):

	March 31,			December 31,
	2010			2009
Real estate loans:
Construction, land development, and other land	$	30,447		$	32,455
1-4 family residential:
Secured by first liens		33,689			33,281
Home equity lines of credit and junior liens		23,055			23,619
Multifamily residential		2,926			2,902
Commercial		91,798			93,455
		181,915			185,712
Commercial loans		11,084			11,703
Consumer and other loans		3,256			3,315
Total loan portfolio		196,255			200,730
Less, deferred fees		(11	)		(12	)
Less, allowance for loan losses		(6,651	)		(6,531	)
Loans, net	$	189,593		$	194,187

A summary of the activity of loans transferred to Other Real Estate Owned follows (dollars in thousands):

	For the Three Months Ended March 31, 2010			For the Twelve Months Ended December 31, 2009

Balance, beginning of period	$	1,727		$	3,421
Transfers to OREO		952			513
Disposals		(344	)		(1,621	)
Write-downs		(30	)		(586	)
Balance, end of period	$	2,305		$	1,727

NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Our Board of Directors monitors the loan portfolio monthly in order to enable it to evaluate the adequacy of the allowance for loan losses. We maintain the allowance for loan losses at a level that we believe to be sufficient to absorb probable losses inherent in the loan portfolio. Activity in the allowance for loan losses follows (dollars in thousands):

	For the Three Months Ended March 31, 2010			For the Twelve Months Ended December 31, 2009

Balance, beginning of period	$	6,531		$	3,999
Provisions charged to operating expenses		872			6,268
Loans charged-off		(754	)		(3,761	)
Recoveries		2			25
Balance, end of period	$	6,651		$	6,531

- 14 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 6 - ALLOWANCE FOR LOAN LOSSES (Continued)

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

	March 31,		December 31,
	2010		2009
Loans evaluated for impairment with a measured impairment	$	16,179	$	16,061
Loans evaluated for impairment without a measured impairment		16,012		14,788
Total impaired loans	$	32,191	$	30,849
Valuation allowance related to impaired loans	$	4,347	$	4,380
Nonaccrual loans included above in impaired loan totals	$	6,282	$	6,715
Total loans past due ninety days or more and still accruing		119		8
Total nonperforming loans (“NPL”)		6,401		6,723
Restructured loans		16,122		17,372
Total NPL and restructured loans	$	22,523	$	24,095
Restructured loans included in nonaccrual loans above that are
considered troubled debt restructurings	$	2,179	$	1,842
Average nonaccrual loans during the period	$	7,107	$	7,031

At March 31, 2010 and December 31, 2009, interest income accrued and recorded on nonaccrual loans totaled $-0- and $40,000, respectively, and interest earned but not recorded on nonaccrual loans at March 31, 2010 and December 31, 2009, was $546,000 and $533,000, respectively. No additional funds are committed to be advanced in connection with nonaccrual loans.

NOTE 7 - OTHER BORROWINGS

A summary of other borrowings follows (dollars in thousands):

	March 31,		December 31,
	2010		2009
Short-term borrowings:
Loan from related party	$	200	$	-

Long-term borrowings:
FHLB of Atlanta advances
Convertible debt	$	2,300	$	2,300
Fixed debt		10,000		10,000
		12,300		12,300
Junior subordinated debentures		3,093		3,093
	$	15,393	$	15,393

The loan from the related party bears interest at 6% per annum, and is due upon the earlier of (1) February 22, 2011; or, (2) receipt by Atlantic of its federal income tax refund as a result of the carryback of net operating losses. The tax refund was received and the loan repaid in April 2010.

A summary of the FHLB of Atlanta advances follows (dollars in thousands):

	Maturity Date	Interest Rate	March 31, 2010		December 31, 2009

Convertible fixed rate debt	11/17/2010	4.45%	$	2,300	$	2,300
Fixed rate advances	12/20/2010	1.91%		2,000		2,000
Fixed rate advance	01/09/2012	2.30%		8,000		8,000
			$	12,300	$	12,300

- 15 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

We are a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments. Financial instruments at March 31, 2010, consisted of commitments to extend credit approximating $9.4 million and standby letters of credit of $1.2 million.

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

NOTE 9 - REGULATORY CAPITAL

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 March 31, 2010, Oceanside had not reached the capital levels specified in the Consent Order, and is an undercapitalized institution at less than 8% of total capital ratio to risk-weighted assets. As of March 31, 2010, there are no conditions or events, since the most recent notification, that management believes have changed the prompt corrective action category.

	Actual			Required by Consent Order

Total capital ratio to risk-weighted assets		7.74	%		11.00	%
Tier 1 capital ratio to risk-weighted assets		6.46	%		-
Tier 1 capital to average assets		4.32	%		8.00	%

NOTE 10 - FAIR VALUE MEASUREMENTS

Fair Value Measurements and Disclosure Topic of the ASC defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

- 16 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 10 - FAIR VALUE MEASUREMENTS (Continued)

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in market that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own estimates of the assumptions that market participants would use in pricing an asset or liability.

The table below presents the Atlantic’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

(dollars in thousands)
March 31, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Investment securities, available-for-sale	$	-	$	31,936	$	-	$	31,936
Total assets at fair value	$	-	$	31,936	$	-	$	31,936

December 31, 2009
Assets:
Investment securities, available-for-sale	$	-	$	42,542	$	-	$	42,542
Total assets at fair value	$	-	$	42,542	$	-	$	42,542

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 subdivisions.

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 March 31, 2010 and December 31, 2009.

(dollars in thousands)
March 31, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total			Net Gains (Losses) (1)
Assets:
Impaired loans, net of
direct write-offs	$	-	$	-	$	16,179		$	16,179
Specific valuation allowances		-		-		(4,347	)		(4,347	)
Impaired loans, net		-		-		11,832			11,832		$	(653	)
Foreclosed assets		-		-		2,305			2,305			(80	)
Total assets at fair value	$	-	$	-	$	14,137		$	14,137		$	(733	)

- 17 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 10 - FAIR VALUE MEASUREMENTS (Continued)

(dollars in thousands)
December 31, 2009	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total			Net Gains (Losses) (1)
Assets:
Impaired loans, net of
direct write-offs	$	-	$	-	$	16,061		$	16,061
Specific valuation allowances		-		-		(4,380	)		(4,380	)
Impaired loans, net		-		-		11,681			11,681		$	(3,509	)
Foreclosed assets		-		-		1,727			1,727			(728	)
Total assets at fair value	$	-	$	-	$	13,408		$	13,408		$	(4,237	)

(1) Gains and losses include write-offs

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 loan impairment accounting guidance. 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 repossession) or fair value written down by estimated selling costs. 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.

The following is a summary of activity of assets and liabilities measured at fair value on a nonrecurring basis (dollars in thousands):

	Impaired			Foreclosed
	Loans			Assets			Total

Balance, December 31, 2009	$	11,681		$	1,727		$	13,408
Write-downs		(38	)		(30	)		(68	)
Net transfers in/out Level 3		189			608			797
Balance, March 31, 2010	$	11,832		$	2,305		$	14,137

NOTE 11 - FAIR VALUE DISCLOSURES

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 Cash Equivalents - 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.

- 18 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 11 - FAIR VALUE DISCLOSURES (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 March 31, 2010 and December 31, 2009, follow (dollars in thousands):

	Carrying		Fair
March 31, 2010	Amount		Value
Financial Assets
Cash and cash equivalents	$	33,963	$	33,963
Investment securities and accrued interest receivable		47,266		47,005
Restricted stock		1,151		1,151
Loans and accrued interest receivable		190,323		184,920
Total assets valued	$	272,703	$	267,039

Financial Liabilities
Deposits and accrued interest payable	$	258,608	$	256,540
Other borrowings and accrued interest payable		15,764		15,764
Total liabilities valued	$	274,372	$	272,304

Off-Balance Sheet Commitments	$	10,564	$	10,564

- 19 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

NOTE 11 - FAIR VALUE DISCLOSURES (Continued)

	Carrying		Fair
December 31, 2009	Amount		Value
Financial Assets
Cash and cash equivalents	$	31,083	$	31,083
Investment securities and accrued interest receivable		57,844		57,603
Restricted stock		1,151		1,151
Loans and accrued interest receivable		194,963		189,436
Total assets valued	$	285,041	$	279,273

Financial Liabilities
Deposits and accrued interest payable	$	270,156	$	267,996
Other borrowings and accrued interest payable		15,520		15,520
Total liabilities valued	$	285,676	$	283,516

Off-Balance Sheet Commitments	$	10,538	$	10,538

There have been no changes since December 31, 2009, in the valuation techniques and related inputs noted herein.

NOTE 12 - SUBSEQUENT EVENT

On May 10, 2010, Jacksonville Bancorp, Inc. ("JAXB"), the bank holding company for The Jacksonville Bank, and Atlantic announced the signing of a definitive merger agreement providing for the merger of Atlantic into JAXB. The merger agreement also contemplates the consolidation of Oceanside into The Jacksonville Bank. Additionally, JAXB announced the signing of a stock purchase agreement with four private investors led by CapGen Capital Group IV LP ("CapGen") providing for $30 million in new capital through the sale of newly issued shares of JAXB common stock subject to completion of the mergers. The transactions have been approved by the Boards of Directors of each company and are subject to regulatory approval, shareholders' approvals, and other customary conditions. JAXB and Atlantic expect to close the transaction in late-third quarter or early-fourth quarter of 2010.

Under the terms of the merger agreement, Atlantic’s shareholders will receive 0.2 shares of JAXB common stock for each share of Atlantic’s common stock. Additionally, Atlantic’s shareholders may receive cash of up to approximately $0.65 per share, subject to the qualifying sale of certain Atlantic assets. A total of approximately 250,000 shares of JAXB common stock is expected to be issued to Atlantic’s shareholders.

- 20 -

Index

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Commercial Banking Operations. Atlantic, through its wholly-owned subsidiary, Oceanside, conducts commercial banking business consisting of attracting deposits and applying those funds to the origination of commercial, consumer, and real estate loans (including commercial loans collateralized by real estate) and purchases of investments. Our profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (principally loans, investments, and federal funds sold), less the interest expense incurred on interest-bearing liabilities (customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate earned and paid on these balances. Net interest income is dependent upon Oceanside’s interest-rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The interest rate spread is impacted by interest rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective income tax rate. Noninterest income consists primarily of service fees on deposit accounts and mortgage banking fees. Noninterest expense consists of compensation and employee benefits, occupancy and equipment expenses, deposit insurance premiums paid to the FDIC, and other operating expenses.

Our corporate offices are located at 1315 South First Street, Jacksonville Beach, Florida. This location is also our main banking office for Oceanside, which opened July 21, 1997, as a state-chartered banking organization. We also operate branch offices located at 560 Atlantic Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, and 1790 Kernan Boulevard South, Jacksonville, Florida.

Forward-looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as to the date made. We advise readers that the factors listed above, as well as others, could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Future Accounting Requirements

There are currently no pronouncements issued or that are scheduled for implementation during 2010 that are expected to have any significant impact on our accounting policies.

Impact of Inflation

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

- 21 -

Index

Critical Accounting Policies

Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles (“GAAP”), and they conform to general practices within the banking industry. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations. We have identified our policy covering the allowance for loan losses as being particularly sensitive in terms of judgments and the extent to which significant estimates are used. For more information on this critical accounting policy, please refer to our 2009 Annual Report on Form 10-K.

Results of Operations

We reported consolidated net losses of $547,000 for the three months ended March 31, 2010. During the first quarter of 2010, we recorded a provision for loan losses of $872,000 versus $234,000 for the three months ended March 31, 2009, based on management’s evaluation of probable loan losses and the overall quality of our loan portfolio. We also expensed deposit insurance assessments of $296,000 in the quarter ended March 31, 2010, as compared with $89,000 in the same period of 2009. Without these costs, we would have likely posted net income for the quarter reflecting our increased net interest income and lower noninterest expenses, excluding deposit insurance assessments.

Our net loss for the three months ended March 31, 2010, was $547,000, as compared with a net loss of $68,000 in the same period of 2009. In addition to the items discussed above for the first quarter of 2010, we continued to improve our liquidity with total cash and cash equivalents, which include interest-bearing deposits, reaching $34.0 million at March 31, 2010, as compared with $31.1 million at December 31, 2009.

Other significant items affecting 2010 results of operations include:

·	A decrease in total loan exposure from $200.7 million to $196.3 million, a decrease of 2.2%.

·	Noninterest expenses, excluding deposit insurance assessments, decreased from $1,714,000 to $1,635,000 for the three months ended March 31, 2009 and 2010, respectively.

·	Net interest income before provision for loan losses increased from $1,764,000 in 2009 to $2,055,000 in 2010, an increase of $291,000, or 16.5%, as a result of an increase in net interest-earning assets of $4.3 million and an increase in our net interest margin from 3.11% in 2009 to 3.18% in 2010.

·	Higher provisions for loan losses, which totaled $872,000 for the three months ended March 31, 2010, as compared with $234,000 for the same period of 2009, that contributed to an increase in our allowance for loan and lease losses from 3.25% to 3.39% of total loans outstanding.

·	During the first quarter of 2009, Oceanside Bank reported a write-down of $179,000 on its investment in a correspondent bank, Silverton Bank, National Association. Silverton Bank was closed by federal regulators on May 1, 2009. There was no such loss in 2010.

Financial Condition

The following table shows selected ratios for the periods ended or at the dates indicated (annualized for the three months ended March 31, 2010):

	Three Months Ended March 31, 2010			Year Ended December 31, 2009

Return on average assets		-0.78	%		-2.43	%
Return on average equity		-23.38	%		-45.70	%
Interest-rate spread		2.94	%		2.92	%
Net interest margin		3.18	%		2.98	%
Noninterest expenses to average assets		2.74	%		2.85	%

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Liquidity and Capital Resources

Liquidity Management. Liquidity management involves monitoring the sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different statements of financial condition components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets that are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase.

We expect to meet our liquidity needs with:

·	Available cash, including both interest and noninterest-bearing balances, and federal funds sold, which totaled $34.0 million at March 31, 2010;

·	The repayment of loans, which include loans with a remaining maturity or repricing of one year or less (excluding those in nonaccrual status) totaling $68.0 million;

·	Proceeds of unpledged securities available-for-sale and principal repayments from mortgage-backed securities;

·	Retention of and growth in deposits; and,

·	If necessary, borrowing against approved lines of credit and other alternative funding strategies.

Short-Term Investments. Short-term investments (which consist of federal funds sold, interest-bearing deposits, and investment securities maturing in three months or less) were $28.8 million at March 31, 2010, as compared to $31.7 at December 31, 2009. We regularly review our liquidity position and have implemented internal policies that establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the statement of financial condition and funding from non-core sources. To further enhance our liquidity, we have developed alternative funding strategies that have been approved by our Board of Directors. At March 31, 2010, alternate funding strategies included (dollars in thousands):

Lines of credit to purchase federal funds:
Secured (1)	$	2,800
Unsecured		1,000
Federal Reserve discount window (2)		3,131
	$	6,931
(1) On April 22, 2010, this amount was raised to $3.2 million and on May 12, 2010, lowered to $3.0 million
(2) Subject to prior approval

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, 2013. 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.

Deposits and Other Sources of Funds. In addition to deposits, the sources of funds available for lending and other business purposes include loan repayments, loan sales, securities sold under agreements to repurchase, and advances under lines of credit to purchase federal funds. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.

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Core Deposits. Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. We had core deposits totaling $191.5 million at March 31, 2010, and $223.3 million at December 31, 2009, a decrease of 14.2%. This decrease in core deposits was partially offset by a net increase in certificates of deposit of $8.6 million, as depositors sought higher yields. We anticipate that a stable base of deposits will be our primary source of funding to meet both short-term and long-term liquidity needs in the future.

Customers with large certificates of deposit tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions acquire funds in part through large certificates of deposit obtained through brokers. These brokered deposits have been historically expensive and unreliable as long-term funding sources. Pursuant to the Consent Order, we are prohibited, throughout the life of the Consent Order, from accepting, renewing, or rolling over any brokered deposits, and must comply with the restrictions on the effective yields on deposits exceeding national averages. Brokered certificates of deposit issued by us totaled $13.2 million at March 31, 2010, and $19.1 million at December 31, 2009, a decrease of 30.9%. This decline in brokered deposits was more than offset by our net increase of $14.5 million from certificates of deposits from our customers.

We use our resources principally to fund existing and continuing loan commitments and to purchase investment securities. At March 31, 2010, we had commitments to extend credit totaling $9.4 million, and had issued, but unused, standby letters of credit of $1.2 million for the same period. In addition, scheduled maturities of certificates of deposit during the twelve months following March 31, 2010, total $114.1 million. We believe that resources exist to fund all our anticipated commitments.

Capital. We are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. FDIC’s Prompt Corrective Action regulations are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations). At March 31, 2010, Oceanside’s actual capital amounts and percentages are presented in the following table (dollars in thousands):

	Actual					Required by Consent Order
	Amount		%			Amount		%

Total capital to risk-weighted assets	$	14,850		7.74	%	$	21,107		11.00	%
Tier 1 capital to risk-weighted assets	$	12,399		6.46	%		-		-
Tier 1 capital to average assets	$	12,399		4.32	%	$	22,987		8.00	%

At March 31, 2010, Oceanside did not meet the required ratios under the Consent Order. Notes 1 and 9 to Condensed Consolidated Financial Statements discuss events that may affect Oceanside’s required level of capital to maintain in the future.

Asset Quality

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans. Our judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that we believe to be reasonable, but which may or may not be valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

Asset Classification. Commercial banks are required to review and, when appropriate, classify their assets on a regular basis. The State of Florida and the FDIC have the authority to identify problem assets and, if appropriate, require them to be classified or require a harsher classification than management has assessed. There are three classifications for problem (or classified) assets: substandard, doubtful, and loss. Substandard assets have one or

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more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes a specific reserve for the full amount of the portion of the asset classified as loss. All or a portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

Assets that do not warrant classification in the aforementioned categories, but possess weaknesses, are classified by us as special mention and monitored. We also monitor other loans based on a variety of factors and internally designate these loans as watch list loans.

Management monitors our loan portfolio throughout the month for classification changes. Each month, we perform a detailed internal review to determine an appropriate level of reserves to set aside for probable losses in our loan portfolio. We supplement our internal reviews with external loan reviews performed by an independent loan review firm. The regulatory agencies also have the authority to require additional levels of reserves if they deem necessary despite management’s best efforts to establish an appropriate level of reserves consistent with generally accepted accounting principles. Sometimes our collective assessments from internal and loan reviews may differ from the regulatory assessment.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged against income. Loans are charged against the allowance when we believe that the collectibility of principal is unlikely. The provision is an estimated amount that we believe will absorb probable losses inherent in the loan portfolio based on evaluations of its collectibility. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and commitments, and current anticipated economic conditions that may affect the borrower's ability to pay. While we use the best information available to recognize losses on loans, future additions to the provision may be necessary based on changes in economic conditions. A summary of balances in the allowance for loan losses and key ratios follows (dollars in thousands):

	For the Three Months Ended March 31, 2010			For the Twelve Months Ended December 31, 2009

End of period loans (net of deferred fees)	$	196,244		$	200,718
End of period allowance for loan losses	$	6,651		$	6,531
% of allowance for loan losses to total loans		3.39	%		3.25	%
Average loans for the period	$	199,761		$	206,188
Net charge-offs as a percentage of average loans
for the period (annualized for 2010)		1.51	%		1.81	%
Nonperforming assets:
Nonaccrual loans	$	6,282		$	6,715
Loans past due 90 days or more and still accruing		119			8
Nonperforming loans		6,401			6,723
Foreclosed real estate		2,305			1,727
	$	8,706		$	8,450

Nonperforming loans to period end net loans		3.26	%		3.35	%
Nonperforming assets to period end total assets		3.05	%		2.84	%

At March 31, 2010, we had 63 loans totaling approximately $32.2 million classified as substandard, doubtful, or loss. At March 31, 2010, management had provided specific reserves totaling $4.3 million for loans risk-rated substandard or worse.

Our internally-classified loans increased 4.4% from December 31, 2009, levels of $30.8 million. Our nonperforming assets also increased 3.0%, which included an increase in other real estate owned and foreclosed assets of $0.6 million, or 33.5%, due to one loan transferred to other real estate owned.

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Included in our total classified loans of $32.2 million, we internally monitor classified loans that we believe continue to meet the regulatory definition of performing loans. While we may experience losses, many of these loans are believed to be well-secured and making payments.

Additional Disclosures - Higher Risk Loans. Certain types of loans, such as option ARM products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans (which are generally associated with construction and development loans), subprime loans, and loans with initial teaser rates, can have a greater risk of non-collection than other loans. We have not engaged in the practice of lending in the subprime market or offering loans with initial teaser rates and option ARM products. A summary of our loan portfolio by loan type follows:

	As of March 31, 2010						As of December 31, 2009
	Amount			% of Total			Amount			% of Total
Real estate loans:
Construction, land development, and other land	$	30,447			16	%	$	32,455			16	%
1-4 family residential:
Secured by first liens		33,689			17	%		33,281			16	%
Home equity lines of credit and junior liens		23,055			12	%		23,619			12	%
Multifamily residential		2,926			1	%		2,902			1	%
Commercial		91,798			47	%		93,455			47	%
		181,915			93	%		185,712			92	%
Commercial loans		11,084			6	%		11,703			6	%
Consumer and other loans		3,256			1	%		3,315			2	%
Total loan portfolio		196,255			100	%		200,730			100	%
Less, deferred fees		(11	)					(12	)
Less, allowance for loan losses		(6,651	)					(6,531	)
Loans, net	$	189,593					$	194,187

Substantially all our loans are in our trade area and have been affected by economic and real estate trends in North Florida. Our increases in past due loans, nonperforming assets, charge-offs, and allowance for loan losses over historical levels are directly related to declines in real estate activity, collateral values, and other negative economic trends such as rising unemployment. We monitor a number of key ratios to identify risks and focus management efforts to mitigate our exposure. We monitor loans in excess of federal supervisory loan-to-value limits. Such loans totaled $7.7 million and $9.2 million at March 31, 2010 and December 31, 2009, respectively. Delinquency amounts and delinquency amounts expressed as a percentage of total loan classification are as follows:

As of March 31, 2010	Past Due 30-89 Days and Still Accruing		% of Total Loans			Past Due 90 or More Days and Still Accruing		% of Total Loans			Nonaccrual Loans		% of Total Loans			Total Past Due Loans		% of Total Loans
Real estate:
Construction, land development and other land	$	610		2.00	%	$	8		0.03	%	$	547		1.80	%	$	1,165		3.83	%
1-4 family residential:
Secured by first liens		544		1.61	%		-		0.00	%		2,940		8.73	%		3,484		10.34	%
Home equity lines of credit and junior liens		1,179		5.11	%		-		0.00	%		450		1.95	%		1.629		7.06	%
Multifamily residential		-		0.00	%		-		0.00	%		1,350		46.14	%		1,350		46.14	%
Commercial		260		0.28	%		77		0.08	%		874		0.95	%		1,211		1.31	%
Total real estate		2,593		1.43	%		85		0.05	%		6,161		3.39	%		8,839		4.87	%
Commercial		13		0.12	%		22		0.20	%		-		0.00	%		35		0.32	%
Consumer and other loans		7		0.21	%		12		0.37	%		121		3.72	%		140		4.30	%
Total loans	$	2,613		1.33	%	$	119		0.06	%	$	6,282		3.20	%	$	9,014		4.59	%

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As of December 31, 2009	Past Due 30-89 Days and Still Accruing		% of Total Loans			Past Due 90 or More Days and Still Accruing		% of Total Loans			Nonaccrual Loans		% of Total Loans			Total Past Due Loans		% of Total Loans
Real estate:
Construction, land development and other land	$	89		0.27	%	$	7		0.02	%	$	2,019		6.22	%	$	2,115		6.51	%
1-4 family residential:
Secured by first liens		154		0.46	%		-		0.00	%		2,603		7.82	%		2,757		8.28	%
Home equity lines of credit and junior liens		570		2.41	%		-		0.00	%		530		2.24	%		1,100		4.65	%
Multifamily residential		-		0.00	%		-		0.00	%		1,350		46.52	%		1,350		46.52	%
Commercial		543		0.58	%		-		0.00	%		213		0.23	%		756		0.81	%
Total real estate		1,356		0.73	%		7		0.00	%		6,715		3.62	%		8,078		4.35	%
Commercial		140		1.20	%		-		0.00	%		-		0.00	%		140		1.20	%
Consumer and other loans		58		1.75	%		1		0.00	%		-		0.00	%		59		1.75	%
Total loans	$	1,554		0.77	%	$	8		0.00	%	$	6,715		3.35	%	$	8,277		4.12	%

The following shows the increases (decreases) in delinquent loans at March 31, 2010, as compared with December 31, 2009.

Increase (Decreases)	Past Due 30-89 Days and Still Accruing			Past Due 90 or More Days and Still Accruing		Nonaccrual Loans			Total Past Due Loans
Real estate:
Construction, land development and other land	$	521		$	1	$	(1,472	)	$	(950	)
1-4 family residential:
Secured by first liens		390			-		337			727
Home equity lines of credit and junior liens		609			-		(80	)		529
Multifamily residential		-			-		-			-
Commercial		(283	)		77		661			455
Total real estate		1,237			78		(554	)		761
Commercial		(127	)		22		-			(105	)
Consumer and other loans		(51	)		11		121			81
Total loans	$	1,059		$	111	$	(433	)	$	737

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Loans restructured and in compliance with modified terms are commonly referred to as “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 nonperforming assets and restructured loans follows (dollars in thousands):

Analysis of Nonperforming Assets (dollars in thousands):

	March 31,			December 31,
	2010			2009
Nonaccrual loans
Construction, land development, and other land	$	547		$	2,019
1-4 family residential:
Secured by first liens		2,940			2,603
Home equity lines of credit and junior liens		450			530
Multifamily residential		1,350			1,350
Commercial		874			213
Total real estate		6,161			6,715
Commercial		-			-
Consumer and other loans		121			-
Total	$	6,282		$	6,715

Loans 90 days or more past due and still on accrual status
Construction, land development, and other land	$	8		$	7
1-4 family residential:
Secured by first liens		-			-
Home equity lines of credit and junior liens		-			-
Multifamily residential		-			-
Commercial		77			-
Total real estate		85			7
Commercial		22			-
Consumer and other loans		12			1
Total	$	119		$	8

Total nonperforming loans	$	6,401		$	6,723
Foreclosed real estate		2,305			1,727
Total nonperforming assets	$	8,706		$	8,450

Restructured loans
1 to 4 family	$	4,728		$	5,968
All other		11,394			11,404
Total restructured loans	$	16,122		$	17,372

Total nonperforming assets and restructured loans	$	24,828		$	25,822

Restructured loans included in nonaccrual loans above that are
considered troubled debt restructurings	$	2,179		$	1,842

Ratios
Total loans	$	196,244		$	200,718
Total assets	$	285,880		$	297,366
Total nonperforming loans to total loans		3.26	%		3.35	%
Total nonperforming assets to total assets		3.05	%		2.84	%
Total nonperforming assets and restructured loans to total assets		8.68	%		8.68	%

We have been consistent in our practice of determining our allowance for loan losses with only minor refinements in establishing reserves for our performing loans. Impaired loans may be assigned a specific reserve and/or charged-down to estimated fair value less costs to liquidate. We consider the following in establishing reserves on loans other than impaired loans:

·	Recent historical loss data over the past five quarters is used as a starting point for estimating current losses;

·	We consider various economic and other qualitative factors affecting loan quality including changes in:

the volume (and trends) of delinquent and monitored loans,

lending policies,

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underlying collateral values,

concentrations in risk and levels of concentration risks,

quality of internal and external loan reviews, which includes risk-rating our loans according to federal regulatory guidelines,

competition and regulatory factors,

lending staff experience,

business and economic conditions, and

other factors.

In developing loss factors, we consider both internal historical data and external data such as changes in leading economic indicators, the consumer price index, delinquencies, employment data, cap rates, occupancy levels, rental rates, and single-family homes and condominium sales prices and sales activity.

We maintain formal policies that we believe are consistent with federal regulatory guidance for identifying and quantifying risks related to loan quality and other related matters including but not limited to:

the frequency of internal and external loan reviews,

obtaining appraisals or evaluations for monitored loans,

classifying loans from accrual to nonaccrual status (which is typically done when a loan reaches 90 days past due unless well-secured and in process of collection),

recognizing loan charge-offs on impaired loans, and

exercising judgment in determining the allowance for loan losses consistent with generally accepted accounting principles.

The following is a summary of the activity in the ALLL for the periods presented below (dollars in thousands):

	For the Three Months Ended March 31, 2010			For the Twelve Months Ended December 31, 2009

Allowance for loan losses at beginning of year	$	6,531		$	3,999

Charge-offs for the period
Construction, land development, and other land		(561	)		(135	)
1-4 family residential:
Secured by first liens		(154	)		(1,207	)
Home equity lines of credit and junior liens		-			(110	)
Multifamily residential		-			(2,040	)
Commercial		-			(156	)
Total real estate		(715	)		(3,648	)
Commercial		-			(39	)
Consumer and other loans		(39	)		(74	)
Total charge-offs		(754	)		(3,761	)

Recoveries for the period
Construction, land development, and other land		-			-
1-4 family residential:
Secured by first liens		-			1
Home equity lines of credit and junior liens		-			-
Multifamily residential		-			-
Commercial		-			-
Total real estate		-			1
Commercial		-			11
Consumer and other loans		2			13
Total recoveries		2			25
Net charge-offs for the period		(752	)		(3,736	)
Provision for loan losses for the period		872			6,268
Allowance for loan losses at end of period	$	6,651		$	6,531

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The following is the allocation of the ALLL for the periods presented (dollars in thousands):

	March 31, 2010						December 31, 2009
	Reserves for Impaired Loans		Reserves for Loss Contingencies		Total		Reserves for Impaired Loans		Reserves for Loss Contingencies		Total
Commercial real estate	$	3,073	$	687	$	3,760	$	3,547	$	504	$	4,051
Residential real estate		1,270		1,367		2,637		831		1,392		2,223
Total real estate		4,343		2,054		6,397		4,378		1,896		6,274
Commercial		-		123		123		-		194		194
Consumer and other loans		4		51		55		2		61		63
Unallocated		-		76		76		-		-		-
Totals	$	4,347	$	2,304	$	6,651	$	4,380	$	2,151	$	6,531

Interest Rate Risk

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

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. We have little or no risk related to trading accounts, commodities or foreign exchange.

We do not engage in trading or hedging activities and do not invest in interest-rate derivatives or enter into interest- rate swaps. We actively monitor and manage interest-rate risk exposure. The primary objective in managing interest-rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on the asset-liability structure to control interest-rate risk. However, a sudden and substantial change in interest rates could adversely impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. There have been no significant changes in our market risk exposure since December 31, 2009.

[Remainder of page left blank intentionally.]

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Average Balances, Income and Expenses, and Rates

The following table depicts, for the periods indicated, certain information related to our average statements of financial condition and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have generally been derived from daily averages (dollars in thousands):

	For the Three Months Ended March 31,
	2010							2009
			Interest		Average					Interest		Average
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Rate			Balance		Dividends		Rate
Interest-earning assets:
Loans	$	199,761	$	2,825		5.74	%	$	207,280	$	3,154		6.17	%
Investment securities and
interest-bearing deposits (1)		74,637		491		3.19	%		33,796		343		5.33	%
Other interest-earning assets		-		-		0.00	%		2,228		1		0.18	%

Total interest-earning assets (1)		274,398		3,316		5.04	%		243,304		3,498		6.00	%

Noninterest-earning assets		11,834							26,124

ATLANTIC BANCGROUP INC 10-Q