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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period ended June 30, 2010

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

For the Transition Period from to

Commission File No. 333-127242

Atlantic Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina

20-3047433

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

One Sheridan Park Circle, PO Box 3077

Bluffton, South Carolina 29910

(Address of principal executive offices)

(843) 815-7111

(Registrant’s telephone number, including area code)

1 Sheridan Drive, Suite J Bluffton, South Carolina 29910

(Address of former principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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 ¨ No x

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 ¨ No

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,403,147 shares of common stock, no par value per share, were issued and outstanding as of August 16, 2010.

INDEX


		Page No.
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets – June 30, 2010 and December 31, 2009	1

	Condensed Consolidated Statements of Operations – Six months ended June 30, 2010 and 2009 and Three months ended June 30, 2010 and 2009	2

	Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income – Three months ended June 30, 2010 and 2009	3

	Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2010 and 2009	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	21

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	[Reserved]	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

Signatures		25

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Balance Sheets

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.


	June 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	8,895,337		$	4,402,201

Total cash and cash equivalents		8,895,337			4,402,201


Securities available for sale		9,438,292			12,775,503
Nonmarketable equity securities		1,003,600			1,003,600

Loans receivable		70,915,754			73,228,508
Less allowance for loan losses		(895,851	)		(864,417	)

Loans, net		70,019,903			72,364,091

Accrued interest receivable		355,071			317,257
Premises, furniture and equipment, net		911,214			985,960
Other assets		871,849			897,377

Total assets	$	91,495,266		$	92,745,989


Liabilities:
Deposits:
Noninterest bearing transaction accounts	$	10,218,564		$	9,708,565
Interest-bearing transaction accounts		2,407,038			2,767,108
Savings and money market		16,847,628			15,781,257
Time deposits $100,000 and over		22,799,094			19,962,912
Other time deposits		16,030,529			14,508,623

Total deposits		68,302,853			62,728,465


Advances from Federal Home Loan Bank		12,500,000			17,500,000
Advances from Federal Reserve Bank		—			2,000,000
Accrued interest payable		194,102			212,107
Other liabilities		362,290			300,191

Total liabilities		81,359,245			82,740,763


Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized;
Series A, 2,000 shares issued and outstanding		1,888,720			1,878,008
Series B, $1,000 stated value; 98 shares issued and outstanding		106,222			106,992
Common stock, no par value, 10,000,000 shares authorized;
1,403,147 shares issued and outstanding		12,861,731			12,861,731
Additional paid in capital		441,779			385,432
Accumulated other comprehensive income		448,379			380,532
Deficit		(5,610,810	)		(5,607,469	)

Total shareholders’ equity		10,136,021			10,005,226

Total liabilities and shareholders’ equity	$	91,495,266		$	92,745,989

See notes to condensed consolidated financial statements.

- 1 -

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)


	For the six months ended June 30,						For the three months ended June 30,
	2010			2009			2010			2009
Interest income:
Loans, including fees	$	2,189,976		$	2,254,062		$	1,092,344		$	1,131,390
Securities, available for sale, taxable		255,013			383,158			116,730			187,393
Nonmarketable equity securities		1,326			—			643			—
Federal funds sold		—			118			—			—
Interest bearing deposits with other banks		171			39			71			21

Total		2,446,486			2,637,377			1,209,788			1,318,804


Interest expense:
Time deposits $100,000 and over		195,640			355,785			96,116			170,171
Other deposits		295,613			433,858			150,369			201,395
Other borrowings		233,866			285,168			106,285			144,214

Total		725,119			1,074,811			352,770			515,780


Net interest income		1,721,367			1,562,566			857,018			803,024

Provision for loan losses		338,000			468,300			155,000			243,300

Net interest income after provision for loan losses		1,383,367			1,094,266			702,018			559,724


Other operating income:
Service fees on deposit accounts		69,118			65,667			34,401			33,726
Residential mortgage origination fees		1,676			18,138			1,676			9,919
Gain on sale of investments		108,695			—			—			—
Other income		67,709			45,057			34,489			25,187

Total		247,198			128,862			70,566			68,832


Noninterest expense:
Salaries and employee benefits		764,489			795,982			378,623			389,313
Net occupancy		210,064			195,382			99,088			99,706
Professional fees		174,808			94,301			89,002			54,203
Marketing		25,104			80,893			6,997			46,411
Furniture and equipment		51,880			92,223			26,103			44,528
Data processing and related costs		151,670			155,225			76,393			78,211
FDIC assessments		59,722			91,043			28,865			66,191
Other operating		186,771			131,440			81,269			59,246

Total		1,624,508			1,636,489			786,340			837,809


Income (loss) before income tax benefit		6,057			(413,361	)		(13,756	)		(209,253	)

Income tax benefit		41,654			140,565			23,104			71,166


Net income (loss)	$	47,711		$	(272,796	)	$	9,348		$	(138,087	)


Net accretion of preferred stock to redemption value		9,942			—			4,998			—
Preferred stock dividends accrued		54,410			—			27,205			—

Net loss available to common shareholders	$	(16,641	)	$	(272,796	)	$	(22,855	)	$	(138,087	)


Basic loss per share	$	(.01	)	$	(.22	)	$	(.02	)	$	(.11	)


Diluted loss per common share	$	(.01	)	$	(.22	)	$	(.02	)	$	(.11	)


Average common shares outstanding		1,403,147			1,251,577			1,403,147			1,251,577

See notes to condensed consolidated financial statements.

- 2 -

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income

For the six months ended June 30, 2010 and 2009

(Unaudited)


	Common Stock			Preferred Stock			Additional Paid-in Capital		Deficit			Accumulated other comprehensive income			Total Shareholder’s Equity (deficit)
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Deficit			Accumulated other comprehensive income			Total Shareholder’s Equity (deficit)
Balance, December 31, 2008	1,251,577	$	11,982,122	—	$	—	$	271,806	$	(2,668,989	)	$	385,065		$	9,970,004
Net loss	—		—	—		—		—		(272,796	)		—			(272,796	)
Other comprehensive loss, net of taxes of $39,023	—		—	—		—		—		—			(75,752	)		(75,752	)

Total comprehensive loss																(348,548	)
Stock based compensation	—		—	—		—		56,347		—			—			56,347

Balance, June 30, 2009	1,251,577	$	11,982,122	—	$	—	$	328,153	$	(2,941,785	)	$	309,313		$	9,677,803


Balance, December 31, 2009	1,403,147	$	12,861,731	2,098	$	1,985,000	$	385,432	$	(5,607,469	)	$	380,532		$	10,005,226
Net income	—		—	—		—		—		47,711			—			47,711
Other comprehensive income, net of taxes of $72,938 on unrealized holding gains on securities available for sale	—		—	—		—		—		—			141,586			141,586
Less reclassification adjustment for Gains included in net income, net of taxes of $34,956	—		—	—		—		—		—			(73,739	)		(73,739	)

Total comprehensive income																115,558
Net accretion/amortization of preferred stock discount premium	—		—	—		9,942		—		(9,942	)		—			—
Preferred stock dividends	—		—	—		—		—		(41,110	)		—			(41,110	)
Stock based compensation	—		—	—		—		56,347		—			—			56,347

Balance, June 30, 2010	1,403,147	$	12,861,731	2,098	$	1,994,942	$	441,779	$	(5,610,810	)	$	448,379		$	10,136,021

See notes to condensed consolidated financial statements.

- 3 -

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended
	June 30, 2010			June 30, 2009
Cash flows from operating activities:
Net income (loss)	$	47,711		$	(272,796	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		338,000			468,300
Loss (gain) on sale of repossessed assets		8,843			(600	)
Depreciation and amortization expense		77,923			110,796
Accretion on securities available for sale		(59,798	)		(27,352	)
Gain on sale of investments		(108,695	)		—
Stock-based compensation expense		56,347			56,347
Deferred income tax expense (benefit)		21,217			(140,565	)
Deferred tax valuation allowance		(62,871	)		—
(Increase) decrease in interest receivable		(37,814	)		17,364
Decrease in accrued interest payable		(18,005	)		(18,086	)
Decrease in other assets		39,167			11,049
Increase in other liabilities		27,148			31,688

Net cash provided by operating activities		329,173			236,145


Cash flows from investing activities:
Net decrease in loans receivable		1,932,703			553,110
Purchase of premises, furniture and equipment		(3,177	)		—
Proceeds from sale of repossessed assets		92,657			4,700
Proceeds from sale of securities available for sale		1,950,955			—
Repayments of securities available for sale		1,657,547			1,930,854
Purchase of nonmarketable equity securities		—			(112,400	)

Net cash provided by investing activities		5,630,685			2,376,264


Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction accounts and savings accounts		1,216,300			(3,349,473	)
Net increase (decrease) in certificate of deposit and other time deposits		4,358,088			(476,837	)
Net decrease in federal funds purchased		—			(236,500	)
Net (decrease) increase in advances from the Federal Reserve Bank		(2,000,000	)		1,000,000
Net (decrease) increase in Federal Home Loan Bank advances		(5,000,000	)		2,000,000
Payment of dividends on preferred stock and warrants		(41,110	)		—

Net cash used by financing activities		(1,466,722	)		(1,062,810	)


Net increase in cash and cash equivalents		4,493,136			1,549,599


Cash and cash equivalents, beginning of the period		4,402,201			577,915


Cash and cash equivalents, end of the period	$	8,895,337		$	2,127,514


Cash paid for:
Interest	$	743,124		$	1,092,897


Income taxes	$	—		$	—


Supplemental disclosures of noncash activities:
Other assets acquired in settlement of loans	$	73,485		$	4,100

See notes to condensed consolidated financial statements.

- 4 -

ATLANTIC BANCSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for Atlantic Bancshares, Inc. (“Company”) were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included. The results of operations for the six month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the entire year. These consolidated financial statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2009.

Note 2 – Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff’s understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements included in this report.

In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans do not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements included in this report.

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

Note 3 – Fair Value Measurements

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks – The carrying amount is a reasonable estimate of fair value.

Securities Available for Sale – Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

- 5 -

ATLANTIC BANCSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Nonmarketable Equity Securities – The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stocks.

Loans Receivable – Loans receivable are not recorded at fair value on a recurring basis. However, form time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management will measure impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, its liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments of collateral exceed the recorded investment in such loans. At June 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of collateral. Impaired loans where an allowance is established based on the fair value of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, management records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, management records the impaired loan as nonrecurring Level 3.

Foreclosed Assets – Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon individual market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, management records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, management records the foreclosed asset as nonrecurring Level 3.

Deposits – The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Advances from Federal Home Loan Bank – The fair value of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

Advances from the Federal Reserve Bank – Effective March 18, 2010, the maximum maturity for Federal Reserve Bank Advances is shortened to overnight. Previously, Federal Reserve Bank advances were for a term of up to 28 days. In either case, the carrying amount approximates the fair value.

Accrued Interest Receivable and Payable – The carrying value of these instruments is a reasonable estimate of fair value.

Off-Balance-Sheet Financial Instruments – The carrying amount for loan commitments and standby letters of credit which are off-balance-sheet financial instruments approximates the fair value since the obligations are typically based on current market rates.

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

- 6 -

ATLANTIC BANCSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009 are as follows:


	June 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and due from banks	$	8,895,337	$	8,895,337	$	4,402,201	$	4,402,201
Securities available for sale		9,438,292		9,438,292		12,775,503		12,775,503
Nonmarketable equity securities		1,003,600		1,003,600		1,003,600		1,003,600
Loans receivable		70,915,754		71,387,000		73,228,508		73,651,000
Accrued interest receivable		355,071		355,071		317,257		317,257

Financial Liabilities:
Demand deposits, interest-bearing transaction and savings accounts		29,473,230		29,473,230		28,256,930		28,256,930
Time deposits		38,829,623		39,182,000		34,471,535		34,874,000
Advances from the Federal Reserve Bank		—		—		2,000,000		2,000,000
Advances from Federal Home Loan Bank		12,500,000		13,172,000		17,500,000		17,880,000
Accrued interest payable		194,102		194,102		212,107		212,107


	Notional Amount		Fair Value		Notional Amount		Fair Value
Commitments to extend credit	$	8,568,383	$	—	$	9,794,393	$	—
Standby letters of credit		450,000		—		212,073		—

Generally accepted accounting principles provide a framework for measuring and disclosing fair value. Required disclosures include the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition and whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Generally accepted accounting principles define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. They also establish 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 value:


Level 1		Quoted prices in active markets for identical assets or liabilities.

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

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009 are as follows:


	June 30, 2010
	Quoted Market Price in active markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	—	$	9,438,292	$	—

Total investment securities	$	—	$	9,438,292	$	—


	December 31, 2009
	Quoted Market Price in active markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	—	$	12,775,503	$	—

Total investment securities	$	—	$	12,775,503	$	—

- 7 -

ATLANTIC BANCSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Foreclosed assets acquired in the settlement of loans are carried at the lower of cost of carrying value or fair value on a nonrecurring basis. The fair value is dependent primarily upon independent appraisals, which the Company considers level 2 inputs. The aggregate carrying amount of repossessed assets acquired in the settlement of loans was $184,385 and $212,400 at June 30, 2010 and December 31, 2009, respectively.

The Company is predominantly a cash flow lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans was $4,033,628 and $2,783,520 at June 30, 2010 and December 31, 2009, respectively.

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

Note 4 – Income (Loss) Per Share

Net income (loss) available to common shareholders represents net income (loss) adjusted for preferred dividends including dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of period end.

The following is a summary of the loss per share calculations for the six months ended June 30, 2010 and 2009 and for the three months ended June 30, 2010 and 2009.


	Six months ended June 30,
	2010			2009
Loss available to common shareholders:

Net income (loss)	$	47,711		$	(272,796	)
Preferred stock dividends		54,410			—
Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium		9,942			—

Net loss available to common shareholders	$	(16,641	)	$	(272,796	)


Basic loss per share:

Net loss available to common shareholders	$	(16,641	)	$	(272,796	)

Average common shares outstanding – basic		1,403,147			1,251,577

Basic loss per share	$	(.01	)	$	(.22	)


	Three months ended June 30,
	2010			2009
Loss available to common shareholders:

Net income (loss)	$	9,348		$	(138,087	)
Preferred stock dividends		27,205			—
Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium		4,998			—

Net loss available to common shareholders	$	(22,855	)	$	(138,087	)


Basic loss per share:

Net loss available to common shareholders	$	(22,855	)	$	(138,087	)

Average common shares outstanding – basic		1,403,147			1,251,577

Basic loss per share	$	(.02	)	$	(.11	)

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ATLANTIC BANCSHARES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 5 – Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events have occurred requiring accrual or disclosure.

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ATLANTIC BANCSHARES, INC.

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

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

This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “SEC”) and the following:

•

our rapid growth to date and short operating history;

•

reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

•

reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

•

the amount of our real estate-based loan portfolio collateralized by real estate, and the weakness in the commercial real estate market;

•

our reliance on available secondary funding sources such as Federal Home Loan Bank advances, Federal Reserve Bank discount window borrowings, sales of securities and loans, federal funds lines of credit from correspondent banks, and out-of-market time deposits, including brokered deposits, to meet our liquidity needs;

•

significant increases in competitive pressure in the banking and financial services industries;

•

changes in the interest rate environment which could reduce anticipated or actual margins;

•

changes in political conditions or the legislative or regulatory environment;

•

general economic conditions, either nationally or regionally and especially in our primary service area, continuing to be weak resulting in, among other things, a deterioration in credit quality;

•

changes occurring in business conditions and inflation;

•

changes in technology;

•

changes in deposit flows;

•

the adequacy of the level of our allowance for loan loss;

•

the rate of delinquencies and amounts of loans charged-off;

•

the rates of loan growth;

•

increased funding costs due to market illiquidity, increased competition for funding, and/or regulatory requirements;

•

our ability to retain our existing customers, including our deposit relationships;

•

changes in monetary and tax policies;

•

loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;

•

changes in the securities markets; and

•

other risks and uncertainties detailed from time to time in our filings with the SEC.

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

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. During 2009 and through the second quarter of 2010, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not continue to materially and adversely affect our business, financial condition, and results of operations, as well as our ability to raise capital or other funding for liquidity and business purposes.

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ATLANTIC BANCSHARES, INC.

Overview

The following discussion describes our results of operations for the quarter and six-month period ended June 30, 2010 as compared to the quarter and six-month period ended June 30, 2009, and also analyzes our financial condition as of June 30, 2010 as compared to December 31, 2009.

Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the financial statements at December 31, 2009, as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our financial statements. Refer to the portions of the discussion in this report on Form 10-Q and in our Form 10-K that address our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Results of Operations

Net Interest Income

For the six months ended June 30, 2010, net interest income, the major component of our net income, increased $158,801, or 10.2%, to $1,721,367 as compared to $1,562,566 for the same period in 2009. Interest income of $2,446,486 for the six months ended June 30, 2010 mainly included $2,189,976 received on loans. For the six months ended June 30, 2010, interest income decreased $190,891, or 7.2%, from $2,637,377 for the six months ended June 30, 2009. Income on securities available for sale decreased $128,145 to $255,013 for the six months ended June 30, 2010 compared to $383,158 for the six months ended June 30, 2009 which was attributable to a $2 million investment sold for a gain in February 2010. Total interest expense of $725,119 for the six months ended June 30, 2010 decreased $349,692, or 32.5%, from $1,074,811 for the six months ended June 30, 2009.

The annualized average rate paid on interest-bearing liabilities for the six months ended June 30, 2010 and 2009 was 2.07% and 2.76%, respectively, while the annualized average rate realized on interest-earning assets was 5.96% and 5.83%, respectively for the same period. The annualized net interest margin and annualized net interest spread were 4.19% and 3.89%, respectively, for the six months ended June 30, 2010 compared to 3.45% and 3.07%, respectively, for the six months ended June 30, 2009. For the six months ended June 30, 2010, we continued to benefit from the repricing of our rate sensitive liabilities. The result was an increase in annualized net interest margin of 74 basis points and annualized net interest spread of 82 basis points during the six month period ended June 30, 2010, as compared to the six month period ended June 30, 2009.

For the three months ended June 30, 2010, net interest income was $857,018 as compared to $803,024 for the same period in 2009. The annualized average rate paid on interest-bearing liabilities for the three months ended June 30, 2010 and 2009

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ATLANTIC BANCSHARES, INC.

was 2.03% and 2.65%, respectively, while the annualized average rate realized on interest-earning assets was 5.96% and 5.83% for the same periods. The annualized net interest margin and annualized net interest spread were 4.22% and 3.93% for the three month period ended June 30, 2010 compared to 3.55% and 3.18% for the three months ended June 30, 2009.

Provision and Allowance for Loan Losses

General. We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. The allowance for loan losses was $895,851 and $880,716, or 1.26% and 1.19% of total loans, as of June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, the provision expense was $338,000 and $468,300, respectively. As of June 30, 2010, 18 loans to 15 borrowers totaling $4,224,308 were impaired and loans totaling $7,339,372 were considered criticized (i.e., potentially impaired) loans. Included in the impaired loans at June 30, 2010 were nonaccrual loans totaling $965,768. As of June 30, 2009, 18 loans to 16 borrowers totaling $2,767,637 were impaired and loans totaling $4,012,904 were considered criticized (i.e., potentially impaired) loans. Included in the impaired loans at June 30, 2009 were nonaccrual loans totaling $1,961,741.

The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Assessing the adequacy of the allowance for loan losses is a process that requires considerable judgment. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is established on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, the historical loss experience of our peers and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. We strive to follow a comprehensive, well-documented, and consistently applied analysis of our loan portfolio in determining an appropriate level for the loan loss allowance. We adjust the amount of the loan allowance periodically based on changing circumstances through an expense recorded to the provision for loan losses. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.

We calculate the allowance for loan losses for specific types of loans and evaluate the adequacy on an overall portfolio basis utilizing our credit grading system which we apply to each loan. We combine our estimates of the reserves needed for each component of the portfolio, including loans analyzed on a pool basis and loans analyzed individually. The allowance is divided into two portions: (1) an amount for specific allocations on significant individual credits and (2) a general reserve amount.

The process of reviewing and assessing the ratings on loans is performed by personnel in our credit administration area, including a special assets manager. A loan is determined to be impaired when it is probably that all principal and interest due according to the terms of the loan agreement will not be collected as scheduled. Criticized loans are loans that have potential weaknesses that require close attention and which could, if uncorrected, result in deterioration of the prospects for repayment or our credit position at a future date. Loans on our watch list are considered criticized assets. Classified loans are loans that are inadequately protected by the sound worth and paying capacity of the borrower or any collateral and as to which there is a distinct possibility or probability that we will sustain a loss if the deficiencies are not corrected. Loans in the substandard/special mention category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends and declining or inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses found in the substandard/special mention loans; however, the weaknesses are more pronounced. These loans, however, are not regularly rated as impaired because certain events may occur which could salvage the debt such as injection of capital, alternative financing, or liquidation of assets.

Specific Reserve. We analyze individual impaired loans within the portfolio and make allocations to the allowance based on each loan’s specific factors and other circumstances that affect the collectability of the credit. Significant individual credits classified as doubtful or substandard/special mention within our credit grading system that are determined to be impaired require both individual analysis and specific allocation. Management has determined that impaired loans totaled $4,224,308 and $2,767,637 at June 30, 2010 and 2009, respectively. Specific valuation allowances related to these impaired loans totaled $190,680 and $259,129 at June 30, 2010 and 2009, respectively.

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ATLANTIC BANCSHARES, INC.

The loans with specific reserves are typically identified by personnel in our credit administration area. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected. All loans on nonaccrual or that meet the definition of a troubled debt restructured loan are identified as impaired.

In situations where a loan is determined to be impaired, the loan is excluded from the general reserve calculations described below and is assigned a specific reserve. These reserves are based on a thorough analysis of the most probable source of repayment, which is usually the liquidation of the underlying collateral, but may also include discounted future cash flows or, in rare cases, the market value of the loan itself. The credit administration area periodically reviews the fair value assigned to each impaired loan and adjusts the specific reserve accordingly.

For collateral dependent loans where repayment of the loan is expected to be provided solely by the underlying collateral, current market appraisals are ordered to estimate the current fair value of the collateral. However, in situations where a current market appraisal is not available, management uses the best available information, including recent appraisals for similar properties, communications with qualified real estate professionals, information contained in reputable trade publications and other observable market data, to estimate the current fair value. The estimated costs to sell the subject property are then deducted from the estimated fair value to arrive at the “net realizable value” of the loan and to determine the specific reserve on each impaired loan reviewed. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is therefore deemed a confirmed loss, is promptly charged off against the loan loss allowance.

The accuracy of the loan ratings is validated by a third party review that is performed semi-annually and covers a substantial sample of the loan portfolio. In addition, the FDIC and the South Carolina Board of Financial Institutions (“SCBFI”) review our allowance for loan losses through their periodic examinations, and they may require us to record additions to the allowance for loan losses based on their judgment about information made available to them at the time of their examination. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses estimated at any point in time.

General Reserve. Our general reserve was $705,171 as of June 30, 2010, as compared to $621,587 as of June 30, 2009. We calculate our general reserve based on a percentage allocation for each of the effective categories of unclassified loan types. Due to our short operating history, our historical loss rate may not represent realistic loss factors for pools of loans. Therefore, FDIC statistics for our peer group are used to estimate a historical loss percentage. In addition, qualitative and environmental factors, as discussed below, are considered. The general estimate is then added to the specific reserves made to determine the amount of the total allowance for loan losses.

We maintain the general reserve in accordance with December 2006 regulatory interagency guidance in our assessment of the loan loss allowance. The general reserve considers qualitative or environmental factors that are likely to cause estimated credit losses including, but not limited to: changes in delinquent loan trends, trends in risk grades and net charge-offs, concentrations of credit, trends in the nature and volume of the loan portfolio, general and local economic trends, collateral valuations, the experience and depth of lending management and staff, lending policies and procedures, the quality of loan review systems, and other external factors.

The downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses. Based on present information and an ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable but which may or may not be accurate. 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 allowance for loan losses will not be required, especially considering the overall weakness in the commercial real estate market in our market areas. Management believes estimates of the level of allowance for loan losses required have been appropriate and expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends. No assurances can be given in this regard, however, especially considering the overall weakness in the real estate market.

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ATLANTIC BANCSHARES, INC.

Noninterest Income

Total noninterest income for the six months ended June 30, 2010 and 2009 was $247,198 and $128,862, respectively. We realized a gain on the sale of an investment, a mortgage backed security, totaling $108,695 in February 2010. There were no investment sales in 2009. Lack of consumer demand and the weak economy continue to diminish mortgage loan sale volume. Mortgage origination fee income decreased $16,462 to $1,676 for the six months ended June 30, 2010 as compared to $18,138 for the six months ended June 30, 2009. Other noninterest income increased $22,652 to $67,709 for the six months ending June 30, 2010 as compared to $45,057 for the six months ended June 30, 2009. This increase was mainly driven by increased bankcard fees. Bankcard fees grew $13,328 to $42,118 for the six months ended June 30, 2010 compared to $28,790 for the six months ended June 30, 2009 as a result of increased bankcard transaction volume.

Total noninterest income for the three months ended June 30, 2010 and 2009 was $70,566 and $68,832, respectively. Mortgage loan origination income totaled $1,676 for the three months ended June 30, 2010 as compared to $9,919 for the three months ended June 30, 2009. Other income totaled $34,489 for the three months ended June 30, 2010 as compared to $25,187 for the three months ended June 30, 2009. This positive variance was mainly attributable to increased bankcard transaction volume.

Noninterest Expense

Total noninterest expense for the six months ended June 30, 2010 and 2009 was $1,624,508 and $1,636,489, respectively. The primary component of noninterest expense was salaries and benefits, which decreased $31,493 to $764,489 for the six months ended June 30, 2010 as compared to $795,982 for the six months ended June 30, 2009. Effective October 9, 2009, the Company suspended its matching contribution for a defined contribution plan established during fiscal year 2007 resulting in savings totaling $22,771 for the six months ended June 30, 2010. Professional fees increased $80,507 to $174,808 for the six months ended June 30, 2010 as compared to $94,301 for the six months ended June 30, 2009 chiefly as a result of fees connected to our prospective deregistration initiative, proxy solicitation fees and legal fees related to increased foreclosure activity. Other operating expenses increased $55,331 to $186,771 for the six months ended June 30, 2010 as compared to $131,440 for the six months ended June 30, 2009 mostly generated by losses and carrying costs associated with foreclosed assets and by increased disaster recovery contingency plan expenses.

Total noninterest expense for the three months ended June 30, 2010 and 2009 was $786,340 and $837,809, respectively. The primary component of noninterest expense was salaries and benefits, which were $378,623 and $389,313 for the three months ended June 30, 2010 and 2009, respectively. Increased professional fees and other operating costs for the three months ended June 30, 2010 were offset by reduced costs in marketing expense, furniture and equipment expense and FDIC assessments compared to the three months ended June 30, 2009. Marketing expense decreased $39,414 to $6,997 for the three months ended June 30, 2010 as compared to $46,411 for the three months ended June 30, 2009. Management’s efforts to refine and review marketing initiatives continue to produce reduced marketing costs. Furniture and fixture expenses decreased $18,425 to $26,103 for the three months ended June 30, 2010 as compared to $44,528 for the three months ended June 30, 2009 mainly attributable to reduced computer equipment depreciation expense. FDIC deposit insurance assessment decreased $37,326 to $28,865 for the three months ended June 30, 2010, as compared to $66,191 for the three months ended June 30, 2009. In June 2009, $42,500 was accrued for a special FDIC assessment required by the FDIC.

Net Loss

The combination of the above factors resulted in a net loss available to common shareholders for the six months ended June 30, 2010 of $16,641, after the recognition of an income tax benefit of $41,654 for the period, net accretion of preferred stock to redemption value of $9,942 and accrued preferred stock dividends of $54,410 for the period. For the period ended June 30, 2009, the net loss was $272,796, after the recognition of an income tax benefit of $140,565 for the period.

Net loss for the three months ended June 30, 2010 was $22,855, after the recognition of an income tax benefit of $23,104 for the period, net accretion of preferred stock to redemption value of $4,998 and accrued preferred stock dividends of $27,205 for the period. For the three months ended June 30, 2009, the net loss was $138,087, after the recognition of an income tax benefit of $71,166 for the period.

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ATLANTIC BANCSHARES, INC.

Assets and Liabilities

During the first six months of 2010, total assets decreased $1,250,723, or 1.3%, to $91,495,266 at June 30, 2010 when compared to December 31, 2009. Loans receivable decreased $2,312,754 to $70,915,754 as of June 30, 2010 when compared to December 31, 2009. Securities available for sale decreased $3,337,211 to $9,438,292 when compared to December 31, 2009 mainly due to the sale of a mortgage backed security with a book value of $1,842,260 in February 2010 and to principal repayments on the remaining mortgage backed securities in the investment portfolio during the six months ended June 30, 2010. Management’s decision to sell a mortgage backed security generated a gain on the sale of an investment totaling $108,695 recorded in February 2010. The proceeds from the investment sale transaction were used to partially repay a Federal Home Loan Bank fixed rate advance, which matured in March 2010.

Investment Securities Available for Sale

The Company uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income from investment of funds, to provide liquidity to meet funding requirements and to provide collateral for pledges on public funds and as collateral for lines of credit and advances with correspondent banks. Investments are classified into three categories (1) Held to Maturity (2) Trading and (3) Available for Sale. Management believes that maintaining the Company’s securities in the Available for Sale category provides greater flexibility in the management of the overall investment portfolio. The average yield on available for sale investments at was 5.14% at June 30, 2010 and 2009. The carrying values of the investments available for sale at June 30, 2010 and 2009 and percentage of each category to total investments are as follows:

INVESTMENT PORTFOLIO


	June 30,
	2010		2009
Mortgage-backed securities	$	9,438,292	$	14,370,470

Total investment securities	$	9,438,292	$	14,370,470

The Company accounts for its investment securities in accordance with generally accepted accounting principles. All securities were classified as Available for Sale (debt and equity securities that may be sold under certain conditions), at June 30, 2010 and June 30, 2009. The securities were reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of income taxes. Unrealized losses on securities due to fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis.

The amortized cost and fair value of investment securities available for sale are summarized as follows:


	June 30, 2010
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Mortgage-backed securities	$	8,758,930	$	679,362	$	—	$	9,438,292

Total investment securities	$	8,758,930	$	679,362	$	—	$	9,438,292


	December 31, 2009
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Mortgage-backed securities	$	12,198,939	$	576,564	$	—	$	12,775,503

Total investment securities	$	12,198,939	$	576,564	$	—	$	12,775,503

The amortized cost and fair value of investment securities available for sale at June 30, 2010, by contractual maturity, are as follows:


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due in one year to five years		—		—
Due in five years to ten years		1,457,063		1,573,092
Due in ten years and over		7,301,867		7,865,200

Total	$	8,758,930	$	9,438,292

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ATLANTIC BANCSHARES, INC.

The Company had no unrealized losses as of June 30, 2010 or December 31, 2009. The Company sold one investment security for the six months ended June 30, 2010 which produced a realized gain totaling $108,695 in February 2010. There were no sales of investment securities for the year ended December 31, 2009.

Loans

Continued depressed loan demand from qualified applicants and repayments of existing loans produced a loan balance decline during the first six months of 2010. Net loans decreased by $2,344,188, or 3.2%, to $70,019,903 during the period. As shown below, the largest category of loans was real estate mortgage loans which decreased $684,467 to $49,421,154 from December 31, 2009 to June 30, 2010. Construction, land and land development loans decreased $1,229,402 to $16,807,483 from $18,036,885 as of June 30, 2010 and December 31, 2009, respectively. Balances within the major loans receivable categories as of June 30, 2010 and December 31, 2009 are as follows:


	June 30, 2010			December 31, 2009
Real estate:
Mortgage	$	49,421,154		$	50,105,621
Construction, land and land development		16,807,483			18,036,885

Total real estate loans		66,228,637			68,142,506

Commercial and industrial		4,019,872			4,158,554
Consumer and other		676,631			779,170
Agriculture and other farm		—			174,104
Deferred origination fees, net		(9,386	)		(25,826	)

Gross loans		70,915,754			73,228,508
Less allowance for loan losses		(895,851	)		(864,417	)

Loans, net	$	70,019,903		$	72,364,091

Risk Elements in the Loan Portfolio

At June 30, 2010, we had 18 loans totaling $4,224,308 that were impaired. Fifteen of these loans totaling $4,111,419 are secured by real estate, one loan totaling $24,419 is secured by an automobile, one loan totaling $54,843 is secured by business assets including accounts receivable, inventory, furniture, fixtures and equipment and one loan totaling $33,627 is unsecured. Included in the allowance for loan losses at June 30, 2010 was $190,680 related to impaired loans.

Nonaccrual loans totaled $965,768 and $1,961,741 at June 30, 2010 and 2009, respectively. As of June 30, 2010, the Bank had no loans 90 days or more past due and still accruing interest. The Bank had one loan totaling $29,115 which was 90 days or more past due and still accruing interest as of June 30, 2009.

During the quarter ended June 30, 2010, $116,261 was charged off as loss against allowance for loan and lease losses. The allowance for loan losses to loans outstanding increased to 1.26% from 1.19% as of June 30, 2010 and 2009, respectively. The following table depicts the activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009:


	June 30,
	2010			2009
Balance, January 1,		864,417		$	1,075,776
Provision for loan losses for the period		338,000			468,300
Net loans (charged-off) recovered during the period		(306,566	)		(663,360	)

Balance, end of period	$	(895,851	)	$	(880,716	)

Gross loans outstanding, end of period	$	70,915,754		$	74,142,651

Allowance for loan losses to loans outstanding		1.26	%		1.19	%

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ATLANTIC BANCSHARES, INC.

Deposits

Total deposits were $68,302,853 at June 30, 2010, as compared to $62,728,465 at December 31, 2009. The largest category of deposits was time deposits $100,000 and over which increased $2,836,182 to $22,799,094 at June 30, 2010, as compared to $19,962,912 at December 31, 2009. In January 2010 and April 2010, the Bank obtained $1,000,000 in six month certificates of deposit from the South Carolina State Treasurer quarterly auction. Securities from the investment portfolio are pledged as collateral for these deposits which total $2,000,000 as of June 30, 2010. Savings and money market accounts increased to $16,847,628 at June 30, 2010, as compared to $15,781,257 at December 31, 2009. Other time deposits increased to $16,030,529 at June 30, 2010, as compared to $14,508,623 at December 31, 2009 mainly attributable to increased internet deposits raised through the Bank’s subscription to Qwickrate.

Balances within the major deposit categories as of June 30, 2010 and December 31, 2009 are as follows:


	June 30, 2010		December 31, 2009
Noninterest bearing transaction accounts	$	10,218,564	$	9,708,565
Interest-bearing transaction accounts		2,407,038		2,767,108
Savings and money market		16,847,628		15,781,257
Time deposit $100,000 and over		22,799,094		19,962,912
Other time deposits		16,030,529		14,508,623


Total deposits	$	68,302,853	$	62,728,465

Other Borrowings

Other borrowings are comprised of Federal Home Loan Bank of Atlanta advances and advances from the Federal Reserve Bank. Federal Home Loan Bank advances are collateralized by pledged Federal Home Loan Bank stock, certain commercial and residential loans, including home equity lines of credit and by a portion of our investment portfolio. Federal Home Loan Bank advances decreased $5,000,000 to $12,500,000 at June 30, 2010, as compared to December 31, 2009. During the quarter ended March 31, 2010, two Federal Home Loan Bank advances totaling $7,000,000 matured and were replaced by a number of fixed rate advances totaling $3,000,000 with laddered maturities ranging from eighteen months to four years. Existing liquidity along with funds received from the sale of an investment in February were used to repay the residual first quarter 2010 advance maturities. One Federal Home Loan Bank advance totaling $1,000,000 matured in the quarter ended June 30, 2010 and was repaid from existing liquidity.

Federal Home Loan Bank advances as of June 30, 2010 and December 31, 2009 are as follows:


Maturity	Rate		June 30, 2010 Balance		December 31, 2009 Balance
01/25/2010	1.1400	%		—		2,000,000
03/12/2010	2.6400	%		—		5,000,000
05/28/2010	3.5800	%		—		1,000,000
05/31/2011	3.9300	%		1,000,000		1,000,000
07/11/2011	3.6675	%		1,000,000		1,000,000
09/12/2011	.8300	%		250,000		—
03/12/2012	1.1400	%		500,000		—
07/10/2012	3.8990	%		1,000,000		1,000,000
09/12/2012	3.7000	%		750,000		750,000
01/25/2013	1.8300	%		500,000		—
03/12/2013	1.7900	%		500,000		—
09/12/2013	3.8500	%		750,000		750,000
01/27/2014	2.4000	%		500,000		—
03/12/2014	2.3700	%		750,000		—
11/29/2017	3.4840	%		5,000,000		5,000,000


Total advances from Federal Home Loan Bank			$	12,500,000	$	17,500,000

There were no Federal Reserve Bank advances outstanding as of June 30, 2010. As of December 31, 2009, the Bank had two short term (maturities of 28 days or less) advances from the Federal Reserve Bank in the amount of $2,000,000. Certain lot loans and a portion of the investment portfolio comprise the lendable collateral available for Federal Reserve Bank advances.

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ATLANTIC BANCSHARES, INC.

Federal Reserve Bank advances as of June 30, 2010 and December 31, 2009:


Maturity	Rate		June 30, 2010 Balance		December 31, 2009 Balance
01/27/2010	.50	%		—		1,000,000
01/28/2010	.50	%		—		1,000,000

Total advances from Federal Reserve Bank			$	—	$	2,000,000

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly 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.

Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest on and maturities of our investments. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchase agreements, federal funds sold, and other borrowings to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions. As of June 30, 2010, we had unsecured lines of credit to purchase federal funds from unrelated banks totaling $3,770,000. As of June 30, 2010, there was no balance outstanding on any line of credit. The lenders have reserved the right to withdraw the unsecured lines at their option. These lines of credit are available on various structures for general corporate purposes.

At June 30, 2010, the Bank had remaining available credit from the Federal Home Loan Bank totaling $407,073 based upon existing pledged investment and loan collateral. At June 30, 2010, an additional $9,260,000 of credit was also available to the Bank upon the receipt of additional collateral pledged to the Federal Home Loan Bank.

As of June 30, 2010, the Bank had $4,466,167 of total lendable collateral available for overnight advances at the Federal Reserve Discount Window. Lot loans totaling $9,473,702 were pledged to Federal Reserve Bank of Richmond which produced lendable collateral value totaling $3,315,796 and $1,099,791 of securities were in safekeeping at the Federal Reserve Bank of Richmond which produced lendable collateral value totaling $1,150,371. The rate on the advances from the Discount Window is the Federal Reserve Discount Window rate. Advances from the Federal Reserve Discount Window are not subject to prepayment penalties. As of June 30, 2010, there were no advances outstanding from the Federal Reserve Bank of Richmond.

Capital Resources

Total shareholders’ equity increased $130,795 during the first six months of 2010 to $10,136,021 from $10,005,226 as of December 31, 2009. The increase is attributable to the net income for the period of $47,711, $56,347 for stock-based compensation expense and $67,847 related to unrealized gains on securities offset by $41,110 dividends paid on the company’s preferred stock and warrants.

The Bank is subject to various regulatory capital requirements administered by the federal 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 adverse material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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ATLANTIC BANCSHARES, INC.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Bank is also required to maintain capital at a minimum level based on total average assets, which is known as the leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

As of June 30, 2010, the Bank exceeded its minimum regulatory capital ratios, as well as the ratios to be considered

“well-capitalized.”

The following table summarizes the Bank’s risk-based capital at June 30, 2010:


Shareholders’ equity	$	8,704,000
Less-unrealized net gain on available-for-sale securities		(448,000	)


Tier 1 capital	$	8,256,000

Plus – allowance for loan losses⁽¹⁾		782,000


Total capital	$	9,038,000


Risk-weighted assets	$	62,459,000

Risk-based capital ratios:

Tier 1 capital (to risk-weighted assets)		13.22	%
Total capital (to risk-weighted assets)		14.47	%
Tier 1 capital (to total average assets)		9.38	%

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

The Company has paid all quarterly dividend payments to the U.S. Department of Treasury (“Treasury”) owed through the filing date of this report in connection with the Company’s issuance of Series A and Series B Preferred Stock to Treasury through the Capital Purchase Program. At June 30, 2010 the Series A and Series B Preferred Stock qualifies as Tier 1 capital and is presented in permanent equity on the Consolidated Statement of Condition in the amounts of $1,888,720 and $106,222, respectively, for the Series A and Series B Preferred Stock.

Proceeds from the sale of the Series A and Series B Preferred Stock will be used for general corporate purposes, primarily to support the operations and lending activity of the Bank. As of June 30, 2010 a total of $775,000 of the $2,000,000 proceeds from the sale of the Series A and Series B Preferred Stock has been used as a capital contribution to the Bank.

Off-Balance Sheet Risk

Through the operations of the Bank, we make contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At June 30, 2010, we had issued commitments to extend credit of $8,431,901 through various types of lending arrangements. We had $136,482 of unused credit under pre-arranged overdraft plans. There were also $450,000 outstanding commercial letters of credit at June 30, 2010.

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ATLANTIC BANCSHARES, INC.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at June 30, 2010.


	Within Three Months		After Three Through Twelve Months		One Through Five Years		Greater Than Five Years		Total
Unused commitments to extend credit	$	1,178,440	$	3,204,808	$	1,380,947	$	2,804,188	$	8,568,383
Standby commercial letters of credit		—		450,000		—		—		450,000

Totals	$	1,178,440	$	3,654,808	$	1,380,947	$	2,804,188	$	9,018,383

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

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

Financial Regulatory Reform

On July 21, 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. The following items provide a brief description of certain provisions of the Dodd-Frank Act.

•

Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

•

Trust Preferred Securities. Under the Dodd-Frank Act, bank holding companies are prohibited from including in their regulatory Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid debt and equity securities included in this prohibition are trust preferred securities.

•

The Consumer Financial Protection Bureau. The Dodd-Frank Act creates the Bureau of Consumer Financial Protection (the “Bureau”) within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.

•

Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay

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ATLANTIC BANCSHARES, INC.

dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.

•

Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

•

Transactions with Insiders. Insider transaction limitations are expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

•

Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Current banking law limits a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

•

Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including us. The Dodd-Frank Act enhances independence requirements for compensation committee members, and provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Other Events

As previously disclosed, due primarily to the disproportionately higher compliance costs associated with being a public reporting company, we are currently considering deregistering our common stock under the Securities Exchange Act.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) (collectively, the “Disclosure Controls”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current Disclosure Controls are effective at a reasonable assurance level as of June 30, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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ATLANTIC BANCSHARES, INC.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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ATLANTIC BANCSHARES, INC.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which we are a party or of which any of our property is the subject.

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. [Reserved]

Item 5. Other Information

At the Company’s annual meeting of shareholders on May 28, 2010, the shareholders considered proposals regarding the election the board of directors for a one-year term and the ratification of the appointment of Elliott Davis, LLC as the Company’s independent registered public accounting firm for fiscal year 2010. The following describes the matters voted upon at the annual meeting and sets forth the number of votes cast for the proposals and those withheld or abstained (there were no broker non-votes).

Proposal #1 – Election of the Board of Directors

Our directors are elected for one-year terms at each annual meeting. The current directors are listed below. Each director was nominated for election at the annual meeting for a one-year term. Votes for the election of the directors were as follows:


Name of Director	Shares Voted in Favor	Shares Voted Against	Abstentions
Gary C. Davis	745,649	—	18,257
Frederick Anthony Nimmer, III	745.649	—	18,257
Robyn Josselson Shirley	745.649	—	18,257
Mark S. Simpson	745.649	—	18,257
Brian J. Smith	745.649	—	18,257
Robert P. Trask	740,649	—	18,257
Allen B. Ward	745.649	—	18,257
Edgar L. Woods	745.649	—	18,257

Proposal #2 – Ratify the appointment of Elliott Davis, LLC as our independent registered public accounting firm for fiscal year 2109

The vote of the shareholders to ratify the appointment of Elliott Davis as out independent registered public accounting firm for fiscal year 2010 was 895,689 shares voted in favor, 5,000 shares voted against, and 18,757 shares abstained.

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ATLANTIC BANCSHARES, INC.

Item 6. Exhibits

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

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

32.1	Section 1350 Certifications.

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ATLANTIC BANCSHARES, INC.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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ATLANTIC BANCSHARES, INC.

EXHIBIT INDEX


Exhibit Number		Description

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

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

32.1	Section 1350 Certifications.

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Large accelerated filer

Accelerated filer

Non-accelerated

¨(do not check if smaller reporting company)

Smaller reporting company

Atlantic Bancshares, Inc. 10-Q