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 June 30, 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 August 16, 2010

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 2010

INDEX

			PAGE
			NUMBER

PART I - FINANCIAL INFORMATION

	Item 1 -	Financial Statements

		Condensed Consolidated Statements of Financial Condition
		as of June 30, 2010 (Unaudited) and December 31, 2009	3

		Condensed Consolidated Statements of Operations and Comprehensive
		Income (Loss) for the Three and Six Months Ended June 30, 2010 and
		2009 (Unaudited)	4

		Condensed Consolidated Statement of Stockholders' Equity (Unaudited)	5

		Condensed Consolidated Statements of Cash Flows
		for the Three and Six Months Ended June 30, 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	40

PART II - OTHER INFORMATION			41

	Item 1 -	Legal Proceedings

	Item 1A -	Risk Factors

	Item 6 -	Exhibits

SIGNATURES			46

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Per Share Data)

	June 30, 2010			December 31,
	(Unaudited)			2009
ASSETS
Cash and due from banks	$	8,366		$	3,548
Interest-bearing deposits		24,765			27,535
Total cash and cash equivalents		33,131			31,083

Investment securities, available-for-sale		31,001			42,542
Investment securities, held-to-maturity (market value of $14,721 in 2010
and $14,748 in 2009)		14,986			14,989
Restricted stock, at cost		1,151			1,151
Loans, net		185,888			194,187
Bank premises and equipment, net		3,255			3,366
Other real estate owned		2,497			1,727
Accrued interest receivable		1,021			1,089
Deferred income taxes		500			708
Investment in unconsolidated subsidiary		93			93
Cash surrender value of bank-owned life insurance		142			5,097
Other assets		486			1,334

TOTAL	$	274,151		$	297,366


LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	33,901		$	35,409
Interest-bearing		212,168			234,575

Total deposits		246,069			269,984

Other borrowings
Long-term debt		15,393			15,393
Total other borrowings		15,393			15,393
Accrued interest payable		349			299
Other liabilities		2,366			2,010

Total liabilities		264,177			287,686

Commitments and contingencies		-			-

Stockholders' equity:
Common stock		12			12
Additional paid-in capital		11,788			11,788
Retained deficit		(2,372	)		(2,107	)
Accumulated other comprehensive income (loss):
Net unrealized holding gains (losses) on securities, available-for-sale		546			(13	)

Total stockholders' equity		9,974			9,680

TOTAL	$	274,151		$	297,366

Book value per common share	$	8.00		$	7.76

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

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

- 3 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Interest and fees on loans	$	2,749		$	3,098		$	5,574		$	6,252
Taxable interest income on investment securities and
interest-bearing deposits in banks		320			137			651			312
Tax-exempt interest income on investment securities		160			168			320			336
Interest on federal funds sold		-			-			-			1
Total interest income		3,229			3,403			6,545			6,901

Interest on deposits		957			1,566			2,091			3,182
Short-term borrowings		1			-			1			-
Long-term borrowings		128			143			255			261
Total interest expense		1,086			1,709			2,347			3,443

Net interest income before provision for loan losses		2,143			1,694			4,198			3,458

Provision for loan losses		90			133			962			367

Net interest income after provision for loan losses		2,053			1,561			3,236			3,091

Noninterest income:
Fees and service charges on deposit accounts		107			158			232			326
Other fee income for banking services		40			59			77			70
Dividends on restricted stock and trust-preferred securities		1			-			3			-
Gain on sale of investment securities		-			11			21			56
Income from bank-owned life insurance		51			58			111			115
Loss on sale of other real estate owned		-			(12	)		(50	)		(73	)
Loss on write-down of restricted stock		-			-			-			(179	)
Other income		6			-			12			14
Total noninterest income		205			274			406			329

Noninterest expenses:
Salaries and employee benefits		640			710			1,345			1,445
Expenses of bank premises and fixed assets		257			259			496			515
Processing and settlement fees		231			206			432			410
Professional, legal, and audit fees		255			118			457			262
Pension expense		-			85			2			171
OREO and other loan collection expenses		165			96			288			223
Write-down of other real estate owned		-			20			30			20
Deposit insurance assessments		419			239			715			328
Advertising and business development		5			29			13			62
Telephone		33			34			66			67
Stationery, printing, and supplies		11			17			27			38
Postage, freight, and courier		21			19			37			32
Insurance (excluding group insurance)		10			9			24			22
Dues and subscriptions		12			10			25			22
Other operating expenses		35			77			68			114
Total noninterest expenses		2,094			1,928			4,025			3,731

Income (loss) before benefit for income taxes		164			(93	)		(383	)		(311	)
Benefit for income taxes		(118	)		(158	)		(118	)		(308	)
Net income (loss)		282			65			(265	)		(3	)

Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses) on securities available-for-sale arising during period		419			(104	)		559			(132	)

Comprehensive income (loss)	$	701		$	(39	)	$	294		$	(135	)

Income (loss) per common share
Basic	$	0.23		$	0.05		$	(0.21	)	$	-
Diluted	$	0.23		$	0.05		$	(0.21	)	$	-

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

- 4 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(Dollars In Thousands)

	Common Stock				Additional Paid-in		Retained			Unrealized Holding Gains (Losses) on Securities, Available-			Total 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

Comprehensive income:
Net income		-		-		-		282			-
Net change in unrealized
holding gains on securities		-		-		-		-			419

Total comprehensive income		-		-		-		-			-			701

Balance, June 30, 2010		1,247,516	$	12	$	11,788	$	(2,372	)	$	546		$	9,974

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

- 5 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Cash flows from operating activities:
Net income (loss)	$	282		$	65		$	(265	)	$	(3	)
Provision for loan losses		90			133			962			367
Depreciation and amortization		51			63			102			126
Gain on sale of investment securities		-			(11	)		(21	)		(56	)
Loss on sale of other real estate owned		-			12			50			73
Writedown of other real estate owned		-			20			30			20
Loss on writedown of restricted stock		-			-			-			179
Net premium amortization and discount accretion		90			78			227			92
Other, net		1,505			(71	)		1,439			(434	)

Net cash provided by operating activities		2,018			289			2,524			364

Cash flows from investing activities:
Net (increase) decrease in:
Investment securities		1,224			(5,473	)		3,304			(12,564	)
Loans		2,686			(155	)		5,456			(1,109	)
Proceeds from liquidation of bank-owned life insurance		5,055			-			5,055			-
Proceeds from sales of investment securities		42			7,621			8,593			11,432
Proceeds from sale of other real estate owned		737			-			1,031			1,346
Purchases of bank premises and equipment, net		-			(12	)		-			(29	)

Net cash provided (used) by investing activities		9,744			1,981			23,439			(924	)

Cash flows from financing activities:
Net increase (decrease) in deposits		(12,394	)		27,159			(23,915	)		28,697
Net increase (decrease) in other borrowings		(200	)		(2,000	)		-			6,000

Net cash provided (used) by financing activities		(12,594	)		25,159			(23,915	)		34,697

Net increase (decrease) in cash and cash equivalents		(832	)		27,429			2,048			34,137

Cash and cash equivalents at beginning of period		33,963			23,885			31,083			17,177

Cash and cash equivalents at end of period	$	33,131		$	51,314		$	33,131		$	51,314


CONDENSED SUPPLEMENTAL DISCLOSURES
Non-cash transaction - loans transferred to
other real estate owned	$	929		$	-		$	1,881		$	276

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

- 6 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 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 and six months ended June 30, 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 has evaluated and is responding with enhanced 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 - Merger for further information regarding the proposed merger.

- 7 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 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 $33.1 million at June 30, 2010. In addition to cash and cash equivalents and unpledged investment securities, Atlantic has the following sources of available liquidity at June 30, 2010: lines of credit to purchase federal funds ($9.0 million) and, borrowings at the Federal Reserve discount window ($3.1 million), subject to prior approval and limited to overnight secondary credit. 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, 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 and six months ended June 30, 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.

- 8 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 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 June 30, 2010 and December 31, 2009.

At June 30, 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 taken steps to improve its net interest margin and reduce operating costs such as payroll, which Atlantic believes will improve its core earnings. Although we cannot assure that these efforts will return us to consistent profitability, internal projections indicate, within the next 2-5 years, our 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 $1.0 million.

Management and the Board of Directors have implemented a tax strategy that has generated taxable income of approximately $1.1 million from the liquidation of bank-owned life insurance policies. In the second quarter of 2010, Atlantic received proceeds from the liquidation of the policies of $5.1 million.

·	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 $0.5 million and $0.7 million (net of a valuation allowance of $2.3 million and $2.8 million) at June 30, 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 December 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2009-16, Transfer and Servicing (“Topic 860”) - Accounting for Transfers of Financial Assets (“ASU 09-16”) which amends ASC 860-10, Transfers and Servicing-Overall (“ASC 860-10”) and adds transition paragraphs 860-10-65-3 of ASC 860-10. ASC 860-10 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASC 860-10 is effective at the start of a company’s first fiscal year beginning after November 15, 2009. The adoption of ASC 860-10 did not have a material impact on Atlantic’s financial position, results of operations, or cash flows.

In December 2009, the FASB issued ASU 2009-17, Consolidation (“Topic 810”) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 09-17”) which amends ASC 810-10, Consolidations-Overall (“ASC 810-10”) and adds transition paragraphs 810-10-65-2 of ASC 810-10. ASC 810-10 changes 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

- 9 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 1 -

SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)

activities of the entity that most significantly impact the entity’s economic performance. ASC 810-10 is effective at the start of a company’s first fiscal year beginning after November 15, 2009. The adoption of ASC 810-10 did not have a material impact on Atlantic’s financial position, results of operations, or cash flows.

In January 2010, the FASB issued the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements, to improve disclosure requirements related to fair value measurements and disclosures. The guidance requires that a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and that activity in Level 3 should be presented on a gross basis rather than one net number for information about purchases, issuances, and settlements. The guidance also requires that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities and about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 31, 2009, except for the roll forward of activity in Level 3, which is effective for interim and annual reporting periods beginning after December 31, 2010. Adopting this pronouncement did not have a material effect on the results of operations or financial condition of Atlantic.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (“Topic 855”): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. This ASU became effective upon issuance. Removal of the disclosure requirement did not affect the nature or timing of subsequent events evaluations performed by Atlantic.

In July 2010, the FASB issued ASU 2010-20, Receivables (“Topic 310”) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 10-20”). ASU 10-20 requires a company to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from the ASU 10-20. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Management does not believe that the adoption of this ASU will have a material impact on Atlantic’s financial position, results of operation, or cash flows.

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 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. We continue to explore other options to restructure our balance sheet to generate income and capital.

- 10 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 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 entity. See Note 12 - Merger.

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 – Merger) 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 INCOME (LOSSES)

Basic income (loss) per share amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the three and six months ended June 30, 2010 and 2009. Diluted income (loss) per share is computed by dividing net income (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 income (loss) per share on both a basic and diluted basis for the three and six months ended June 30, 2010 and 2009 (dollars and number of shares in thousands):

	Three months ended June 30,
	2010		2009
Basic and diluted EPS computation:
Numerator - Net income (loss)	$	282	$	65
Denominator - Weighted average shares outstanding (rounded)		1,248		1,248
Basic and diluted income (loss) per share	$	0.23	$	0.05

- 11 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 3 -

COMPUTATION OF PER SHARE INCOME (LOSSES)(Continued)

	Six months ended June 30,
	2010			2009
Basic and diluted EPS computation:
Numerator - Net income (loss)	$	(265	)	$	(3	)
Denominator - Weighted average shares outstanding (rounded)		1,248			1,248
Basic and diluted income (loss) per share	$	(0.21	)	$	-

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):

	June 30, 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	$	100	$	3	$	-		$	103	$	134	$	3	$	-		$	137
MBS		30,024		874		-			30,898		42,428		217		(240	)		42,405
		30,124		877		-			31,001		42,562		220		(240	)		42,542
Held-to-maturity
State, county and
municipal bonds		14,986		107		(372	)		14,721		14,989		154		(395	)		14,748
Total investment securities	$	45,110	$	984	$	(372	)	$	45,722	$	57,551	$	374	$	(635	)	$	57,290

Information pertaining to securities with gross unrealized losses at June 30, 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
June 30, 2010:
Available-for-Sale
REMICs	$	-		$	-	$	-		$	-	$	-		$	-
MBS		-			-		-			-		-			-
	$	-		$	-	$	-		$	-	$	-		$	-
Held-to-Maturity
State, county, and municipal bonds	$	(157	)	$	5,786	$	(215	)	$	2,882	$	(372	)	$	8,668

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

- 12 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 4 -

INVESTMENT SECURITIES(Continued)

Management evaluates securities for other-than-temporary impairment at least on a monthly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of Atlantic to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At June 30, 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 June 30, 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 stockholders’ equity (dollars in thousands):

	June 30,			December 31,
	2010			2009

Gross unrealized gains (losses) on investment securities available-for-sale	$	877		$	(20	)
Deferred tax benefit (expense) on unrealized gains (losses)		(331	)		7
	$	546		$	(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 and six months ended June 30, 2010 and 2009 (dollars in thousands):

	Three months ended June 30,
	2010			2009

Unrealized holding gains (losses) on investment securities arising during period	$	669		$	(156	)
Less: reclassification adjustment for gains included in net income (loss)		-			(11	)
Other comprehensive income (loss), before income tax expense (benefit)		669			(167	)
Income tax benefit (expense) related to items of other comprehensive income (loss)		(250	)		63
Other comprehensive income (loss), net of income tax expense (benefit)	$	419		$	(104	)

	Six months ended June 30,
	2010			2009

Unrealized holding gains (losses) on investment securities arising during period	$	896		$	(157	)
Less: reclassification adjustment for gains included in net income (loss)		(21	)		(56	)
Other comprehensive income (loss), before income tax expense (benefit)		875			(213	)
Income tax benefit (expense) related to items of other comprehensive income (loss)		(316	)		81
Other comprehensive income (loss), net of income tax expense (benefit)	$	559		$	(132	)

Gross gains and losses on sales of investment securities for the three and six months ended June 30, 2010, totaled $-0- and $21,000, respectively. Gross gains and losses on sales of investment securities for the three and six months ended June 30, 2009, totaled $11,000 and $56,000, respectively.

At June 30, 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 June 30, 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, investment securities with an amortized cost of $13.6 million and a fair value of $13.9 million were pledged to secure FHLB of Atlanta advances, and investment securities with an amortized cost and a fair value of $3.6 million were pledged to secure a line of credit to purchase federal funds (see Note 7).

- 13 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 4 -

INVESTMENT SECURITIES(Continued)

There were no securities of a single issuer, which are non-governmental or non-government sponsored, that exceeded 10% of stockholders’ equity at June 30, 2010.

The cost and estimated fair value of debt and equity securities at June 30, 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	$	36	$	37	$	-	$	-
Due after one through five years		5,580		5,908		271		281
Due after five through fifteen years		17,105		17,470		2,918		2,916
Due after fifteen years		7,403		7,586		11,797		11,524
	$	30,124	$	31,001	$	14,986	$	14,721

NOTE 5 -

LOANS

Loans consisted of (dollars in thousands):

	June 30,			December 31,
	2010			2009
Real estate loans:
Construction, land development, and other land	$	29,694		$	32,455
1-4 family residential:
Secured by first liens		33,557			33,281
Home equity lines of credit and junior liens		21,130			23,619
Multifamily residential		1,525			2,902
Commercial		90,830			93,455
		176,736			185,712
Commercial loans		11,162			11,703
Consumer and other loans		2,995			3,315
Total loan portfolio		190,893			200,730
Less, deferred fees		(9	)		(12	)
Less, allowance for loan losses		(4,996	)		(6,531	)
Loans, net	$	185,888		$	194,187

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

	For the Three			For the Six			For the Twelve
	Months Ended			Months Ended			Months Ended
	June 30, 2010			June 30, 2010			December 31, 2009

Balance, beginning of period	$	2,305		$	1,727		$	3,421
Transfers to OREO		929			1,881			513
Disposals		(737	)		(1,081	)		(1,621	)
Write-downs		-			(30	)		(586	)
Balance, end of period	$	2,497		$	2,497		$	1,727

- 14 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

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			For the Six			For the Twelve
	Months Ended			Months Ended			Months Ended
	June 30, 2010			June 30, 2010			December 31, 2009

Balance, beginning of period	$	6,651		$	6,531		$	3,999
Provisions charged to operating expenses		90			962			6,268
Loans charged-off		(1,747	)		(2,501	)		(3,761	)
Recoveries		2			4			25
Balance, end of period	$	4,996		$	4,996		$	6,531

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

	June 30,		December 31,
	2010		2009
Loans evaluated for impairment with a measured impairment	$	15,644	$	16,061
Loans evaluated for impairment without a measured impairment		12,909		14,788
Total impaired loans	$	28,553	$	30,849
Valuation allowance related to impaired loans	$	3,421	$	4,380
Nonaccrual loans included above in impaired loan totals	$	3,814	$	6,715
Total loans past due ninety days or more and still accruing		2,029		8
Total nonperforming loans (“NPL”)		5,843		6,723
Restructured loans (1)		19,462		17,372
Total NPL and restructured loans	$	25,305	$	24,095
Restructured loans included in nonaccrual loans above that are
considered troubled debt restructurings	$	1,652	$	1,842
Average nonaccrual loans during the period	$	5,690	$	7,031

(1)	Restructured loans shown here are performing in compliance with modified terms and are not included in the definition of nonperforming loans.

At June 30, 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 June 30, 2010 and December 31, 2009, was $291,000 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):

	June 30,		December 31,
	2010		2009
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

- 15 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 7 -

OTHER BORROWINGS (Continued)

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

	Maturity Date	Interest Rate			June 30, 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

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 June 30, 2010, consisted of commitments to extend credit approximating $8.8 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 June 30, 2010, Oceanside had not reached the capital levels specified in the Consent Order. As of June 30, 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		8.20	%		11.00	%
Tier 1 capital ratio to risk-weighted assets		6.93	%		-
Tier 1 capital to average assets		4.64	%		8.00	%

- 16 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

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 that 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.

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 June 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in thousands).

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2010	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Investment securities, available-for-sale	$	-	$	31,001	$	-	$	31,001
Total assets at fair value	$	-	$	31,001	$	-	$	31,001

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 June 30, 2010 and December 31, 2009 (dollars in thousands).

- 17 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 10 -

FAIR VALUE MEASUREMENTS (Continued)

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Net Gains
June 30, 2010	(Level 1)		(Level 2)		(Level 3)			Total			(Losses) (1)
Assets:
Impaired loans, net of
direct write-offs	$	-	$	-	$	15,644		$	15,644
Specific valuation allowances		-		-		(3,421	)		(3,421	)
Impaired loans, net		-		-		12,223			12,223		$	(11	)
Foreclosed assets		-		-		2,497			2,497			(80	)
Total assets at fair value	$	-	$	-	$	14,720		$	14,720		$	(91	)

December 31, 2009
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 Loans			Foreclosed Assets			Total

Balance, December 31, 2008	$	11,333		$	3,496		$	14,829
Write-downs		(3,509	)		(586	)		(4,095	)
Net transfers in/out Level 3		3,857			(1,183	)		2,674
Balance, December 31, 2009		11,681			1,727			13,408
Write-downs		(11	)		(30	)		(41	)
Net transfers in/out Level 3		553			800			1,353
Balance, June 30, 2010	$	12,223		$	2,497		$	14,720

- 18 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

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.

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. 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 June 30, 2010 and December 31, 2009, follow (dollars in thousands):


June 30, 2010	Carrying Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	33,131	$	33,131
Investment securities and accrued interest receivable		46,255		45,990
Restricted stock		1,151		1,151
Loans and accrued interest receivable		186,641		181,343
Total assets valued	$	267,178	$	261,615

Financial Liabilities
Deposits and accrued interest payable	$	246,202	$	244,233
Other borrowings and accrued interest payable		15,609		15,609
Total liabilities valued	$	261,811	$	259,842

Off-Balance Sheet Commitments	$	9,976	$	9,976

- 19 -

Index

ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

NOTE 11 -

FAIR VALUE DISCLOSURES (Continued)

December 31, 2009	Carrying Amount		Fair 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 -

MERGER

On May 10, 2010, Jacksonville Bancorp, Inc. ("JBI"), 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 JBI. The merger agreement also contemplates the consolidation of Oceanside into The Jacksonville Bank. Additionally, JBI 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 JBI 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. JBI and Atlantic expect to close the transaction in the fourth quarter of 2010.

Under the terms of the merger agreement, Atlantic’s shareholders will receive 0.2 shares of JBI common stock for each share of Atlantic’s common stock. A total of approximately 250,000 shares of JBI common stock is expected to be issued to Atlantic’s shareholders.

Under the merger agreement, if Oceanside sold certain assets prior to the effective time of the merger of Atlantic and JBI, the proceeds from such sale are to be distributed on a pro rata basis to Atlantic’s shareholders as part of the merger consideration. On June 30, 2010, Oceanside Bank sold such assets to an unaffiliated third party in exchange for $700,000 in cash. Based on 1,247,516 shares of Atlantic common stock presently outstanding, Atlantic estimates the per share distribution from the sale will be $0.56112.

- 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 Third Street, Jacksonville Beach, Florida. This location is also our main banking office for Oceanside, which opened July 21, 1997, as a Florida state-chartered banking organization. We also operate branch offices located at 560 Atlantic Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, Jacksonville, Florida, 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 income of $282,000 for the three months ended June 30, 2010, after three consecutive quarters of losses stemming from the depressed real estate market and the effects of local, state, and national economic trends. We also experienced increased net interest margins in 2010 compared with 2009. Consolidated net income for the three months ended June 30, 2009 was $65,000. During the second quarter of 2010, net interest income was $2,053,000 versus $1,561,000 second quarter of 2009, reflecting a lower cost of funds of 1.02% and a decreased provision for loan losses. We also expensed deposit insurance assessments of $419,000 in the quarter ended June 30, 2010, as compared with $239,000 in the same period of 2009.

Our net loss for the six months ended June 30, 2010, was $265,000, as compared with a net loss of $3,000 in the same period of 2009. In addition to the items discussed above for the first half of 2010, we continued to improve our liquidity with total cash and cash equivalents, which include interest-bearing deposits, reaching $33.1 million at June 30, 2010, as compared with $31.1 million at December 31, 2009.

Other significant items affecting 2010 results of operations include:

·	A decrease in net loan exposure from $194.2 million to $185.9 million, a decrease of 4.3%.

·	Noninterest expenses, excluding deposit insurance assessments, decreased from $3,403,000 to $3,310,000 for the six months ended June 30, 2009 and 2010, respectively.

·	Net interest income before provision for loan losses increased from $3,458,000 in 2009 to $4,198,000 in 2010, an increase of $740,000, or 21.4%, as a result of an increase in our net interest margin from 2.89% in 2009 to 3.29% in 2010.

·	Higher provisions for loan losses, which totaled $962,000 for the six months ended June 30, 2010, as compared with $367,000 for the same period of 2009.

·	During the first quarter of 2009, Oceanside 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 and six months ended June 30, 2010):

	Three Months Ended June 30, 2010			Six Months Ended June 30, 2010			Year Ended December 31, 2009

Return on average assets		0.41	%		-0.19	%		-2.43	%
Return on average equity		11.88	%		-5.60	%		-45.70	%
Interest-rate spread		3.15	%		3.05	%		2.92	%
Net interest margin		3.40	%		3.29	%		2.98	%
Noninterest expenses to average assets		3.05	%		2.89	%		2.85	%

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

- 22 -

Index

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, which totaled $33.1 million at June 30, 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 $73.3 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 six months or less) were $24.8 million at June 30, 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 June 30, 2010, alternate funding strategies included (dollars in thousands):

Lines of credit to purchase federal funds:
Secured	$	8,000
Unsecured		1,000
Federal Reserve discount window (1)		3,131
	$	12,131

(1) 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. With the passage of the Wall Street Reform and Consumer Protection Act on July 21, 2010, the FDIC insurance limit of $250,000 per depositor per insured bank has been made permanent. 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.

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 $173.3 million at June 30, 2010, and $223.3 million at December 31, 2009, a decrease of 22.4%. This decrease in core deposits was attributed to:

·	Our liquidity targets were met without renewing higher-priced deposits as they matured and were settled;

·	A shift of core deposits (money market and NOW accounts) to higher-priced time deposits, $100,000 and over; and

·	The overall reduction in total assets of $23.2 million.

- 23 -

Index

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 June 30, 2010, and $19.1 million at December 31, 2009, a decrease of 30.9%.

We use our resources principally to fund existing and continuing loan commitments and to purchase investment securities. At June 30, 2010, we had commitments to extend credit totaling $8.8 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 June 30, 2010, total $111.0 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 June 30, 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	$	15,110		8.20	%	$	20,274		11.00	%
Tier 1 capital to risk-weighted assets	$	12,773		6.93	%		-		-
Tier 1 capital to average assets	$	12,773		4.64	%	$	22,021		8.00	%

At June 30, 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 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

- 24 -

Index

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 external loan reviews may differ from the regulatory assessment.

For regulatory and internal reporting purposes, including our ALLL methodology, we track the following loan pools or loan types: commercial real estate, residential real estate, commercial, and consumer and other loans. For regulatory and ALLL purposes, the following summarizes our classified loans at December 31, 2009 and June 30, 2010 (dollars in thousands)

December 31, 2009	Classified Loans
	Substandard		Doubtful		Loss		Total
Commercial real estate	$	24,552	$	1,350	$	-	$	25,902
Residential real estate		4,369		-		-		4,369
Total real estate		28,921		1,350		-		30,271
Commercial		494		-		-		494
Consumer and other loans		83		-		-		83
Total	$	29,498	$	1,350	$	-	$	30,848

June 30, 2010
Commercial real estate	$	23,486	$	-	$	-	$	23,486
Residential real estate		4,484		-		-		4,484
Total real estate		27,970		-		-		27,970
Commercial		520		-		-		520
Consumer and other loans		64		-		-		64
Total	$	28,554	$	-	$	-	$	28,554

Other classified assets include other real estate owned and foreclosed assets are considered classified assets, which totaled $1,727,000 and $2,497,000 at December 31, 2009 and June 30, 2010, respectively.

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):

- 25 -

Index

	For the Six Months Ended June 30, 2010			For the Twelve Months Ended December 31, 2009

End of period loans (net of deferred fees)	$	190,884		$	200,718
End of period allowance for loan losses	$	4,996		$	6,531
% of allowance for loan losses to total loans		2.62	%		3.25	%
Average loans for the period	$	197,115		$	206,188
Net charge-offs as a percentage of average loans
for the period (annualized for 2010)		2.55	%		1.81	%
Nonperforming assets:
Nonaccrual loans	$	3,814		$	6,715
Loans past due 90 days or more and still accruing		2,029			8
Nonperforming loans		5,843			6,723
Foreclosed real estate		2,497			1,727
	$	8,340		$	8,450
Nonperforming loans to end of period loans		3.06	%		3.35	%
Nonperforming assets to period end total assets		3.04	%		2.84	%

At June 30, 2010, we had 67 loans totaling approximately $28.6 million classified as substandard, doubtful, or loss. At June 30, 2010, management had provided specific reserves totaling $3.4 million for loans risk-rated substandard or worse.

Our internally-classified loans decreased 7.4% from December 31, 2009, levels of $30.8 million. Our nonperforming assets also decreased 1.3%, which included an increase in other real estate owned and foreclosed assets of $0.8 million, or 44.6%, and a decrease in nonperforming loans of $0.9 million, or 13.1%, principally due to four loans transferred to other real estate owned.

Included in our total classified loans of $28.6 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.

The following summarizes our classified loans by loan pools and the amounts reserved as of December 31, 2009 and June 30, 2010 (dollars in thousands):

	Classified Loans
	Substandard		Doubtful		Loss		Total
December 31, 2009
Loan Balances by Loan Pools
Commercial real estate	$	24,552	$	1,350	$	-	$	25,902
Residential real estate		4,369		-		-		4,369
Total real estate		28,921		1,350		-		30,271
Commercial		494		-		-		494
Consumer and other loans		83		-		-		83
Total loan balances	$	29,498	$	1,350	$	-	$	30,848

ALLL - Reserves by Loan Pools
Commercial real estate	$	3,621	$	430	$	-	$	4,051
Residential real estate		2,223		-		-		2,223
Total real estate		5,844		430		-		6,274
Commercial		194		-		-		194
Consumer and other loans		63		-		-		63
Total reserves by loan pools	$	6,101	$	430	$	-		6,531
Unallocated								-
Total ALLL							$	6,531

- 26 -

Index

	Classified Loans
	Substandard		Doubtful		Loss		Total
June 30, 2010
Loan Balances by Loan Pools
Commercial real estate	$	23,486	$	-	$	-	$	23,486
Residential real estate		4,484		-		-		4,484
Total real estate		27,970		-		-		27,970
Commercial		520		-		-		520
Consumer and other loans		64		-		-		64
Total loan balances	$	28,554	$	-	$	-	$	28,554

ALLL - Reserves by Loan Pools
Commercial real estate	$	2,715	$	-	$	-	$	2,715
Residential real estate		2,073		-		-		2,073
Total real estate		4,788		-		-		4,788
Commercial		66		-		-		66
Consumer and other loans		117		-		-		117
Total reserves by loan pools	$	4,971	$	-	$	-		4,971
Unallocated								25
Total ALLL							$	4,996

Consent Order. The following summarizes the classified loans and assets identified by the FDIC in November 2008 and the timing of the anticipated reductions as required under the Consent Order executed January 7, 2010 (dollars in thousands):

	Asset Classifications
	Substandard		Doubtful		Loss		Total
Loans identified by FDIC in November 2008 Exam	$	23,547	$	-	$	1,217	$	24,764
Classified OREO and other assets identified by FDIC in November 2008 Exam		3,042		-		781		3,823
Total classified assets identified by FDIC in November 2008 Exam	$	26,589	$	-	$	1,998	$	28,587
Classified assets to be eliminated from books within 30 days from receipt of report	$	-	$	-	$	1,998	$	1,998

	Number of Days from Date of Consent Order
	(January 7, 2010)
	90 Days (March 31, 2010)			180 Days (June 30, 2010)			270 Days			360 Days
Allowable % of classified assets from November 2008 Exam to Tier 1 Capital plus ALLL		100	%		85	%		60	%		50	%
Tier 1 capital plus ALLL at end of quarter	$	19,050		$	17,769			N/A			N/A
Target for remaining balance of classified assets under Consent Order based on June 30, 2010 (1)	$	19,050		$	15,104		$	10,661		$	8,885
Remaining balance of classified assets at end of quarter	$	16,221		$	14,105			N/A			N/A
Percentage		85.1	%		79.4	%		N/A			N/A
Target has been met	Yes			Yes				N/A			N/A

(1)

Tier 1 capital plus ALLL calculated at end of period

- 27 -

Index

The following shows the composition of the assets classified by the FDIC in its November 2008 Exam (dollars in thousands):

	Asset Classifications
Assets Classified by FDIC in November 2008 Exam	Substandard		Doubtful		Loss		Total
Commercial real estate	$	19,422	$	-	$	1,110	$	20,532
Residential real estate		1,472		-		-		1,472
Total real estate		20,894		-		1,110		22,004
Commercial		2,584		-		93		2,677
Consumer and other loans		69		-		14		83
Total		23,547		-		1,217		24,764
Other real estate owned		2,967		-		781		3,748
Other foreclosed assets		75		-		-		75
	$	26,589	$	-	$	1,998	$	28,587

Twelve loan relationships accounted for 95% of the classified loans and 2 foreclosed real estate properties accounted for 85% of the other classified assets. The composition of these loan relationships and other real estate owned (each in excess of $500,000) follows (dollars in thousands):

	Classified Loans				OREO
Commercial real estate	$	19,989	85	%	$	2,444	76	%
Residential real estate		880

ATLANTIC BANCGROUP INC 10-Q