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 September 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 x No ¨

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).


Large accelerated filer	¨		Accelerated filer	¨

Non-accelerated	¨	(do not check if smaller reporting company)	Smaller reporting company	x

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 November 12, 2010.

INDEX


		Page No.
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		1

	Condensed Consolidated Balance Sheets — September 30, 2010 and December 31, 2009		1

	Condensed Consolidated Statements of Operations — Nine months ended September 30, 2010 and 2009 and Three months ended September 30, 2010 and 2009		2

	Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income — Nine months ended September 30, 2010 and 2009		3

	Condensed Consolidated Statements of Cash Flows — Nine months ended September 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		22

Item 1A.	Risk Factors		22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3.	Defaults Upon Senior Securities		22

Item 4.	[Reserved]		22

Item 5.	Other Information		22

Item 6.	Exhibits		22

Signatures			23

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Balance Sheets

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements.


	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	6,038,163		$	4,402,161
Interest bearing deposits with other banks		40			40

Total cash and cash equivalents		6,038,203			4,402,201

Securities available for sale		8,644,793			12,775,503
Nonmarketable equity securities		931,600			1,003,600
Loans receivable		73,232,484			73,228,508
Less allowance for loan losses		(887,486	)		(864,417	)

Loans, net		72,344,998			72,364,091
Accrued interest receivable		299,554			317,257
Premises, furniture and equipment, net		872,581			985,960
Other assets acquired in settlement of loans		505,337			212,400
Other assets		698,425			684,977

Total assets	$	90,335,491		$	92,745,989

Liabilities:
Deposits:
Noninterest bearing transaction accounts	$	6,611,935		$	9,708,565
Interest-bearing transaction accounts		2,301,728			2,767,108
Savings and money market		15,122,638			15,781,257
Time deposits $100,000 and over		24,794,629			19,962,912
Other time deposits		18,914,759			14,508,623

Total deposits		67,745,689			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		199,427			212,107
Other liabilities		307,030			300,191

Total liabilities		80,752,146			82,740,763

Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized;
Series A, 2,000 shares issued and outstanding		1,894,165			1,878,008
Series B, $1,000 stated value; 98 shares issued and outstanding		105,831			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		470,419			385,432
Accumulated other comprehensive income		359,481			380,532
Deficit		(6,108,282	)		(5,607,469	)

Total shareholders’ equity		9,583,345			10,005,226

Total liabilities and shareholders’ equity	$	90,335,491		$	92,745,989

See notes to condensed consolidated financial statements.

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)


	For the nine months ended September 30,						For the three months ended September 30,
	2010			2009			2010			2009
Interest income:
Loans, including fees	$	3,220,710		$	3,388,171		$	1,030,734		$	1,134,109
Securities, available for sale, taxable		364,764			556,660			109,751			173,502
Nonmarketable equity securities		2,427			977			1,101			977
Federal funds sold		—			118			—			—
Interest bearing deposits with other banks		299			68			128			29

Total		3,588,200			3,945,994			1,141,714			1,308,617

Interest expense:
Time deposits $100,000 and over		319,348			505,957			107,152			150,172
Other deposits		410,735			630,366			131,678			196,508
Other borrowings		335,788			430,145			101,922			144,977

Total		1,065,871			1,566,468			340,752			491,657

Net interest income		2,522,329			2,379,526			800,962			816,960
Provision for loan losses		908,000			1,304,300			570,000			836,000

Net interest income (expense) after provision for loan losses		1,614,329			1,075,226			230,962			(19,040	)

Other operating income:
Service fees on deposit accounts		100,970			101,357			31,852			35,690
Residential mortgage origination fees		1,676			19,887			—			1,749
Gain on sale of investments		164,282			—			55,587			—
Bankcard fees		64,904			46,171			22,786			17,381
Other income		45,823			28,138			20,232			11,871

Total		377,655			195,553			130,457			66,691

Noninterest expense:
Salaries and employee benefits		1,147,233			1,197,353			382,744			401,371
Net occupancy		319,527			296,525			109,463			101,143
Professional fees		255,561			153,572			80,753			59,271
Marketing		37,083			118,500			11,979			37,607
Furniture and equipment		80,881			126,892			29,001			34,668
Data processing and related costs		229,074			228,314			77,404			73,089
FDIC assessments		91,519			126,215			31,797			35,172
Other operating		306,115			265,066			119,344			133,627

Total		2,466,993			2,512,437			842,485			875,948

Loss before income tax benefit		(475,009	)		(1,241,658	)		(481,066	)		(828,297	)
Income tax benefit (expense)		57,507			(1,269,305	)		15,853			(1,409,870	)

Net loss	$	(417,502	)	$	(2,510,963	)	$	(465,213	)	$	(2,238,167	)

Net accretion of preferred stock to redemption value		14,996			—			5,054			—
Preferred stock dividends accrued		81,615			—			27,205			—

Net loss available to common shareholders	$	(514,113	)	$	(2,510,963	)	$	(497,472	)	$	(2,238,167	)

Basic loss per share	$	(.37	)	$	(2.01	)	$	(.35	)	$	(1.79	)

Diluted loss per common share	$	(.37	)	$	(2.01	)	$	(.35	)	$	(1.79	)

Average common shares outstanding		1,403,147			1,252,132			1,403,147			1,253,225

See notes to condensed consolidated financial statements.

ATLANTIC BANCSHARES, INC.

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

For the nine months ended September 30, 2010 and 2009

(Unaudited)


	Common Stock						Preferred Stock				Additional Paid-in Capital		Deficit			Accumulated other comprehensive income			Total Shareholder’s Equity
	Shares			Amount			Shares		Amount		Additional Paid-in Capital		Deficit			Accumulated other comprehensive income			Total Shareholder’s Equity
Balance, December 31, 2008		1,251,577		$	11,982,122			—	$	—	$	271,806	$	(2,668,989	)	$	385,065		$	9,970,004
Proceeds from issuance of common stock, net of offering costs of $27,556		151,573			881,882			—		—		—		—			—			881,882
Cash paid for fractional shares		(3	)		(18	)		—		—		—		—			—			(18	)
Net loss		—			—			—		—		—		(2,510,963	)		—			(2,510,963	)
Other comprehensive income, net of taxes of $34,386		—			—			—		—		—		—			66,749			66,749

Total comprehensive loss																				(2,444,214	)
Stock based compensation		—			—			—		—		84,988		—			—			84,988

Balance, September 30, 2009		1,403,147		$	12,863,986			—	$	—	$	356,794	$	(5,179,952	)	$	451,814		$	8,492,642

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 loss		—			—			—		—		—		(417,502	)		—			(417,502	)
Other comprehensive income, net of taxes of $45,011 on unrealized holding gains on securities available for sale		—			—			—		—		—		—			87,375			87,375
Less reclassification adjustment for Gains included in net income, net of taxes of $55,856		—			—			—		—		—		—			(108,426	)		(108,426	)

Total comprehensive loss																				(438,553	)
Net accretion/amortization of preferred stock discount premium		—			—			—		14,996		—		(14,996	)		—			—
Preferred stock dividends		—			—			—		—		—		(68,315	)		—			(68,315	)
Stock based compensation		—			—			—		—		84,987		—			—			84,987

Balance, September 30, 2010		1,403,147		$	12,861,731			2,098	$	1,999,996	$	470,419	$	(6,108,282	)	$	359,481		$	9,583,345

See notes to condensed consolidated financial statements.

ATLANTIC BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine months ended
	September 30, 2010			September 30, 2009
Cash flows from operating activities:
Net loss	$	(417,502	)	$	(2,510,963	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		908,000			1,304,300
Gain on sale of repossessed assets		(7,785	)		(600	)
Write down of other real estate owned		60,450			41,100
Depreciation and amortization expense		116,555			157,280
Net accretion/amortization on securities available for sale		(76,256	)		(40,640	)
Gain on sale of investments held for sale		(164,282	)		—
Stock-based compensation expense		84,987			84,988
Deferred income tax benefit		(132,607	)		(414,036	)
Deferred tax valuation allowance		75,100			1,683,342
Decrease in interest receivable		17,703			28,855
Decrease in accrued interest payable		(12,680	)		(51,635	)
Decrease (increase) in other assets		44,059			(19,635	)
Increase in other liabilities		17,683			15,991

Net cash provided by operating activities		513,425			278,347

Cash flows from investing activities:
Net (increase) decrease in loans receivable		(1,343,793	)		107,120
Purchase of premises, furniture and equipment		(3,177	)		(2,152	)
Proceeds from sale of repossessed assets		109,285			4,700
Purchase of securities available for sale		(1,072,690	)		—
Proceeds from sale of securities available for sale		2,939,842			—
Repayments of securities available for sale		2,472,201			2,888,660
Redemption (purchase) of nonmarketable equity securities		72,000			(112,400	)

Net cash provided by investing activities		3,173,668			2,885,928

Cash flows from financing activities:
Net decrease in demand deposits, interest-bearing transaction accounts and savings accounts		(4,220,629	)		(836,280	)
Net increase (decrease) in certificate of deposits and other time deposits		9,237,853			(3,466,403	)
Net decrease in federal funds purchased		—			(236,500	)
Net decrease in advances from the Federal Reserve Bank		(2,000,000	)		—
Net (decrease) increase in Federal Home Loan Bank advances		(5,000,000	)		2,000,000
Proceeds from sale of common stock, net of stock issuance costs		—			881,864
Payment of dividends on preferred stock and warrants		(68,315	)		—

Net cash used by financing activities		(2,051,091	)		(1,657,319	)

Net increase in cash and cash equivalents		1,636,002			1,506,956

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

Cash and cash equivalents, end of the period	$	6,038,203		$	2,084,871

Cash paid for:
Interest	$	1,078,551		$	1,618,103

Income taxes	$	—		$	—

Supplemental disclosures of noncash activities:
Other assets acquired in settlement of loans	$	454,887		$	4,100

See notes to condensed consolidated financial statements.

ATLANTIC BANCSHARES, INC.

Notes to Condensed 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 nine month period ended September 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.

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”. The updates were effective upon issuance but had no impact on the Company’s financial statements.

ATLANTIC BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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.

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

Loans Receivable — For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on carrying amounts. 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. However, from 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 September 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.

ATLANTIC BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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.

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


	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and due from banks	$	6,038,203	$	6,038,203	$	4,402,201	$	4,402,201
Securities available for sale		8,644,793		8,644,793		12,775,503		12,775,503
Nonmarketable equity securities		931,600		931,600		1,003,600		1,003,600
Loans receivable		73,232,484		73,486,000		73,228,508		73,651,000
Accrued interest receivable		299,554		299,554		317,257		317,257

Financial Liabilities:
Demand deposits, interest-bearing transaction and savings accounts		24,036,301		24,036,301		28,256,930		28,256,930
Time deposits		43,709,388		44,247,000		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		13,349,000		17,500,000		17,880,000
Accrued interest payable		199,427		199,427		212,107		212,107

	Notional Amount		Fair Value		Notional Amount		Fair Value
Commitments to extend credit	$	9,465,797	$	—	$	9,794,393	$	—
Standby letters of credit		75,000		—		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

ATLANTIC BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010
	Quoted Market Price in active markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	—	$	7,555,983	$	—

Municipal securities		—		1,088,810		—

Total investment securities	$	—	$	8,644,793	$	—


	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	$	—

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 $505,337 and $212,400 at September 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 $2,526,329 and $848,830 at September 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 — Loss Per Share

Net loss available to common shareholders represents net 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.

ATLANTIC BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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


	Nine months ended September 30,
	2010			2009
Loss available to common shareholders:

Net loss	$	(417,502	)	$	(2,510,963	)
Preferred stock dividends accrued		81,615			—
Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium		14,996			—

Net loss available to common shareholders	$	(514,113	)	$	(2,510,963	)

Basic loss per share:

Net loss available to common shareholders	$	(514,113	)	$	(2,510,963	)

Average common shares outstanding — basic		1,403,147			1,252,132

Basic loss per share	$	(.37	)	$	(2.01	)


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

Net loss	$	(465,213	)	$	(2,238,167	)
Preferred stock dividends accrued		27,205			—
Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium		5,054			—

Net loss available to common shareholders	$	(497,472	)	$	(2,238,167	)

Basic loss per share:

Net loss available to common shareholders	$	(497,472	)	$	(2,238,167	)

Average common shares outstanding — basic		1,403,147			1,253,225

Basic loss per share	$	(.35	)	$	(1.79	)

Due to the net loss, common share equivalents were not included in loss per share calculations as their effect would be anti-dilutive.

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.

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 third 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.

ATLANTIC BANCSHARES, INC.

Overview

The following discussion describes our results of operations for the quarter and nine-month period ended September 30, 2010 as compared to the quarter and nine-month period ended September 30, 2009, and also analyzes our financial condition as of September 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 nine months ended September 30, 2010, net interest income, the major component of our net income, increased $142,803, or 6%, to $2,522,329 as compared to $2,379,526 for the same period in 2009. Interest income of $3,588,200 for the nine months ended September 30, 2010 mainly included $3,220,710 received on loans. For the nine months ended September 30, 2010, interest income decreased $357,794, or 9%, from $3,945,994 for the nine months ended September 30, 2009. Income on securities available for sale decreased $191,896 to $364,764 for the nine months ended September 30, 2010 compared to $556,660 for the nine months ended September 30, 2009 which was mainly attributable to a $2 million investment sold for a gain in February 2010. Interest expense of $1,065,871 for the nine months ended September 30, 2010 decreased $500,597, or 32%, from $1,566,468 for the nine months ended September 30, 2009.

The annualized average rate paid on interest-bearing liabilities for the nine months ended September 30, 2010 and 2009 was 2.02% and 2.71%, respectively, while the annualized average rate realized on interest-earning assets was 5.76% and 5.82%, respectively for the same period. The annualized net interest margin and annualized net interest spread were 4.05% and 3.74%, respectively, for the nine months ended September 30, 2010 compared to 3.51% and 3.11%, respectively, for the nine months ended September 30, 2009. For the nine months ended September 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 54 basis points and annualized net interest spread of 63 basis points during the nine month period ended September 30, 2010, as compared to the nine month period ended September 30, 2009.

For the three months ended September 30, 2010, net interest income was $800,962 as compared to $816,960 for the same period in 2009. The annualized average rate paid on interest-bearing liabilities for the three months ended September 30,

ATLANTIC BANCSHARES, INC.

2010 and 2009 was 1.92% and 2.56%, respectively, while the annualized average rate realized on interest-earning assets was 5.56% and 5.82% for the same periods. The annualized net interest margin and annualized net interest spread were 3.90% and 3.64% for the three month period ended September 30, 2010 compared to 3.64% and 3.26% for the three months ended September 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 $887,486 and $795,064, or 1.21% and 1.08% of total loans, as of September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, the provision expense was $908,000 and $1,304,300, respectively. As of September 30, 2010, 25 loans to 19 borrowers totaling $6,248,148 were impaired and loans totaling $7,644,264 were considered criticized (i.e., potentially impaired) loans. Included in the impaired loans at September 30, 2010 were nonaccrual loans totaling $3,664,991. As of September 30, 2009, 20 loans to 18 borrowers totaling $2,786,978 were impaired and loans totaling $3,696,253 were considered criticized (i.e., potentially impaired) loans. Included in the impaired loans at September 30, 2009 were nonaccrual loans totaling $1,471,192.

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 probable 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 of 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 $6,248,148 and $2,786,978 at September 30, 2010 and 2009, respectively. Specific valuation allowances related to these impaired loans totaled $43,500 and $100,204 at September 30, 2010 and 2009, respectively.

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 $843,986 as of September 30, 2010, as compared to $694,860 as of September 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.

ATLANTIC BANCSHARES, INC.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2010 and 2009 was $377,655 and $195,553, respectively. We realized gains on the sale of investments, three mortgage backed securities, totaling $164,282 during the nine months ended September 30, 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 $18,211 to $1,676 for the nine months ended September 30, 2010 as compared to $19,887 for the nine months ended September 30, 2009. Other noninterest income increased $36,418 to $110,727 for the nine months ending September 30, 2010 as compared to $74,309 for the nine months ended September 30, 2009. This increase was mainly driven by increased bankcard fees. Bankcard fees grew $18,733 to $64,904 for the nine months ended September 30, 2010 compared to $46,171 for the nine months ended September 30, 2009 as a result of increased bankcard transaction volume.

Total noninterest income for the three months ended September 30, 2010 and 2009 was $130,457 and $66,691, respectively. The increase was mainly attributable to a realized gain on the sale of two mortgage backed securities, totaling $55,587, in August 2010. Other income totaled $43,018 for the three months ended September 30, 2010 as compared to $29,252 for the three months ended September 30, 2009. This positive variance was mainly attributable to increased bankcard transaction volume.

Noninterest Expense

Total noninterest expense for the nine months ended September 30, 2010 and 2009 was $2,466,993 and $2,512,437, respectively. The primary component of noninterest expense was salaries and benefits, which decreased $50,120 to $1,147,233 for the nine months ended September 30, 2010 as compared to $1,197,353 for the nine months ended September 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 $34,802 for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Professional fees increased $101,989 to $255,561 for the nine months ended September 30, 2010 as compared to $153,572 for the nine months ended September 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 $41,049 to $306,115 for the nine months ended September 30, 2010 as compared to $265,066 for the nine months ended September 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 September 30, 2010 and 2009 was $842,485 and $875,948, respectively. The primary component of noninterest expense was salaries and benefits, which were $382,744 and $401,371 for the three months ended September 30, 2010 and 2009, respectively. Increased occupancy, professional fees and data processing costs for the three months ended September 30, 2010 were offset by reduced costs in marketing expense, furniture and equipment expense, FDIC assessments and other operating costs compared to the three months ended September 30, 2009. Marketing expense decreased $25,628 to $11,979 for the three months ended September 30, 2010 as compared to $37,607 for the three months ended September 30, 2009. Management’s efforts to refine and review marketing initiatives continue to produce reduced marketing costs.

Net Loss

The combination of the above factors resulted in a net loss available to common shareholders for the nine months ended September 30, 2010 of $514,113, after the recognition of an income tax benefit of $57,507 for the period, net accretion of preferred stock to redemption value of $14,996 and accrued preferred stock dividends of $81,615 for the period. For the period ended September 30, 2009, the net loss was $2,510,963, after the recognition of an income tax benefit of $414,037 for the period offset by $1,683,342 for the creation of a deferred tax valuation allowance.

Net loss for the three months ended September 30, 2010 was $465,213, after the recognition of an income tax benefit of $15,853 for the period, net accretion of preferred stock to redemption value of $5,054 and accrued preferred stock dividends of $27,205 for the period. For the three months ended September 30, 2009, the net loss was $2,238,167, after the recognition of an income tax benefit of $273,472 for the period offset by $1,683,342 for the creation of a deferred tax valuation allowance.

Assets and Liabilities

During the first nine months of 2010, total assets decreased $2,410,498, or 2.6%, to $90,335,491 at September 30, 2010 when compared to December 31, 2009. Loans receivable decreased $3,976 to $73,232,484 as of September 30, 2010 when

ATLANTIC BANCSHARES, INC.

compared to December 31, 2009. Securities available for sale decreased $4,130,710 to $8,644,793 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 nine months ended September 30, 2010. The proceeds from the February 2010 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 annualized average yield on available for sale investments was 4.83% and 4.98% at September 30, 2010 and 2009, respectively. The carrying values of the investments available for sale at September 30, 2010 and 2009 are as follows:


	INVESTMENT PORTFOLIO
	September 30,
	2010		2009
Mortgage-backed securities	$	7,555,983	$	13,641,862

Municipal securities		1,088,810		—

Total investment securities	$	8,644,793	$	13,641,862

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 September 30, 2010 and December 31, 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:


	September 30, 2010
	Amortized Cost		Gross Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair Value
Mortgage-backed securities	$	7,027,893	$	528,090	$	—	$	7,555,983

Municipal securities		1,072,231		16,579		—		1,088,810

Total investment securities	$	8,100,124	$	544,669	$	—	$	8,644,793


	December 31, 2009
	Amortized Cost		Gross Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair 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 September 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		1,575,423		1,713,388
Due in ten years and over		6,524,701		6,931,405

Total	$	8,100,124	$	8,644,793

ATLANTIC BANCSHARES, INC.

The Company had no unrealized losses as of September 30, 2010 or December 31, 2009. For the nine months ended September 30, 2010, the Company has sold one investment security which produced a realized gain totaling $108,695 in February 2010 and two additional investment securities which produced a realized gain totaling $55,587 in August 2010. There were no sales of investment securities for the year ended December 31, 2009.

Loans

Net loans decreased slightly by $19,093, to $72,344,998 during the first nine months of 2010. As shown below, the largest category of loans was real estate mortgage loans which increased $2,685,677 to $52,791,298 from December 31, 2009 to September 30, 2010. Construction, land and land development loans decreased $2,134,847 to $15,902,038 from $18,036,885 as of September 30, 2010 and December 31, 2009. Balances within the major loans receivable categories as of September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010			December 31, 2009
Real estate:
Mortgage	$	52,791,298		$	50,105,621
Construction, land and land development		15,902,038			18,036,885

Total real estate loans		68,693,336			68,142,506

Commercial and industrial		3,919,347			4,158,554
Consumer and other		646,886			779,170
Agriculture and other farm		—			174,104
Deferred origination fees, net		(27,085	)		(25,826	)

Gross loans		73,232,484			73,228,508
Less allowance for loan losses		(887,486	)		(864,417	)

Loans, net	$	72,344,998		$	72,364,091

Risk Elements in the Loan Portfolio

At September 30, 2010, we had 25 loans totaling $6,248,148 that were impaired. Twenty of these loans totaling $6,063,761 are secured by real estate, two loans totaling $114,310 are secured by business assets including accounts receivable, inventory, furniture, fixtures and equipment, one loan totaling $23,164 is secured by an automobile, one loan totaling $13,686 is secured by a boat and one loan totaling $33,227 is unsecured. Included in the allowance for loan losses at September 30, 2010 was a $43,500 specific reserve related to impaired loans.

Nonaccrual loans totaled $3,664,991 and $1,961,741 at September 30, 2010 and 2009, respectively. The Bank had no loans 90 days or more past due and still accruing interest as of September 30, 2010 and 2009.

During the quarter ended September 30, 2010, $578,365 was charged off as loss against allowance for loan and lease losses. The allowance for loan losses to loans outstanding increased to 1.21% from 1.08% as of September 30, 2010 and 2009, respectively. The following table depicts the activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009:


	September 30,
	2010			2009
Balance, January 1,	$	864,417		$	1,075,776
Provision for loan losses for the period		908,000			1,304,300
Net loans charged-off during the period		(884,931	)		(1,585,012	)

Balance, end of period	$	887,486		$	795,064

Gross loans outstanding, end of period	$	73,232,484		$	73,666,989

Allowance for loan losses to loans outstanding		1.21	%		1.08	%

Deposits

Total deposits were $67,745,689 at September 30, 2010, as compared to $62,728,465 at December 31, 2009. Noninterest bearing transaction accounts decreased $3,096,630 to $6,611,935 at September 30, 2010 as compared to $9,708,565 at

ATLANTIC BANCSHARES, INC.

December 31, 2009 mainly associated with random balance swings in one noninterest bearing commercial account. The largest category of deposits was time deposits $100,000 and over which increased $4,831,717 to $24,794,629 at September 30, 2010, as compared to $19,962,912 at December 31, 2009. In April 2010, the Bank obtained a $1,000,000 six month certificate of deposit from the South Carolina State Treasurer quarterly auction. Securities from the investment portfolio are pledged as collateral for this deposit which matured in October 2010. Core time deposits $100,000 and over increased $2,215,503 to $19,440,477 at September 30, 2010, as compared to $17,224,974 at December 31, 2009. Other time deposits increased to $18,914,759 at September 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 September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010		December 31, 2009
Noninterest bearing transaction accounts	$	6,611,935	$	9,708,565
Interest-bearing transaction accounts		2,301,728		2,767,108
Savings and money market		15,122,638		15,781,257
Time deposit $100,000 and over		24,794,629		19,962,912
Other time deposits		18,914,759		14,508,623

Total deposits	$	67,745,689	$	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 September 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 six 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 September 30, 2010 and December 31, 2009 are as follows:


Maturity	Rate			September 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

ATLANTIC BANCSHARES, INC.

There were no Federal Reserve Bank advances outstanding as of September 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.

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


Maturity	Rate			September 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 September 30, 2010, we had unsecured lines of credit to purchase federal funds from unrelated banks totaling $3,770,000. As of September 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 September 30, 2010, the Bank had remaining available credit from the Federal Home Loan Bank totaling $1,252,141 based upon existing pledged investment and loan collateral. At September 30, 2010, an additional $10,340,000 of credit was also available to the Bank upon the receipt of additional collateral pledged to the Federal Home Loan Bank.

As of September 30, 2010, the Bank had $2,996,871 of total lendable collateral available for overnight advances at the Federal Reserve Discount Window based upon existing pledged lot loans totaling $7,886,502. 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 September 30, 2010, there were no advances outstanding from the Federal Reserve Bank of Richmond.

Capital Resources

Total shareholders’ equity decreased $421,881 during the first nine months of 2010 to $9,583,345 from $10,005,226 as of December 31, 2009. The decrease is attributable to the net loss for the period of $417,502, $21,051 related to unrealized losses on securities and to $68,315 dividends paid on the company’s preferred stock and warrants offset by $84,987 additional paid in capital related to stock-based compensation expense.

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.

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%. The Bank’s Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. The Bank’s 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 September 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 September 30, 2010:


Shareholders’ equity	$	8,209,000
Less-unrealized net gain on available-for-sale securities		(359,000	)

Tier 1 capital	$	7,850,000
Plus — allowance for loan losses⁽¹⁾		794,000

Total capital	$	8,644,000

Risk-weighted assets	$	63,437,000

Risk-based capital ratios:
Tier 1 capital (to risk-weighted assets)		12.37	%
Total capital (to risk-weighted assets)		13.63	%
Tier 1 capital (to total average assets)		8.77	%

⁽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 September 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 $1,894,165 and $105,831, 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 September 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 September 30, 2010, we had issued commitments to extend credit of $9,378,006 through various types of lending arrangements. We had $87,791 of unused credit under pre-arranged overdraft plans. There were also $75,000 outstanding commercial letters of credit at September 30, 2010.

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 September 30, 2010.


	Within Three Months		After Three Through Twelve Months		One Through Five Years		Greater Than Five Years		Total
Unused commitments to extend credit	$	1,013,572	$	4,353,797	$	1,241,406	$	2,857,022	$	9,465,797
Standby commercial letters of credit		25,000		50,000		—		—		75,000

Totals	$	1,038,572	$	4,403,797	$	1,241,406	$	2,857,022	$	9,540,797

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 and provides unlimited insurance for noninterest bearing transaction accounts from December 31, 2010 through December 31, 2012. 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

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 all 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 September 30, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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.

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

Not applicable

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.

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.



Date: November 12, 2010	By:	/S/ ROBERT P. TRASK
		Robert P. Trask
		President and Chief Executive Officer

Date: November 12, 2010	By:	/S/ MICHELLE M. PENNELL
		Michelle M. Pennell
		Principal Financial Officer

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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Atlantic Bancshares, Inc. 10-Q