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

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

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

There are currently no pronouncements issued or that are scheduled for implementation during 2008 that are expected to have any significant impact on our accounting policies.

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

Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles ("GAAP"), and they conform to general practices within the banking industry. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations. We have identified our policy covering the allowance for loan losses as being particularly sensitive in terms of judgments and the extent to which significant estimates are used. For more information on this critical accounting policy, please refer to our 2007 Annual Report on Form 10-KSB.

Our net loss for the three and nine months ended September 30, 2008, was $839,000 and $994,000, respectively, as compared with net income of $201,000 and $1,132,000, respectively, as reported in the same periods of 2007. Average earning assets increased 5.0% for the first nine months of 2008 over the same period of 2007. For the three months ended September 30, 2008, the rate of growth in average interest earning assets was 4.5% over the same period of 2007. An overview of the more significant matters affecting our results of operations follows:

· Average loans grew at a pace of $19.0 million, or 10.4%, for the nine months ended September 30, 2008, over the same period of 2007. With the growth in average certificates of deposit of $21.7 million, or 17.3%, we were able to fund the increased loan demand.

· Net interest income (before provision for loan losses) decreased $809,000, or 13.6%, for the nine months ended September 30, 2008, over the same period in 2007. This decrease is due primarily to lower yields on loans, which have not been fully offset by the decline in yields on deposits, and the increase in nonaccrual loans for which interest is not recorded.

· Our results for 2008 included additional reserves set aside to offset loan charge-offs and real estate foreclosures during 2008. The provision for loan losses for the first nine months of 2008 totaled $2,620,000, rising 455.1% over 2007 levels.

· Total noninterest expenses increased $585,000, or 12.2%, for the nine months ended September 30, 2008, over the same period in 2007. The cost to manage the loan portfolio and carry foreclosed assets increased with direct expenses and losses for foreclosed assets charged to operations of $235,000 for the nine months ended September 30, 2008. Other related costs such as collection, legal, and audit expenses also rose at a faster pace.

· Pension expense reported in noninterest expenses increased $111,000 for the first nine months of 2008 as compared with 2007, which was partially offset by an increase in noninterest income of $66,000 from bank-owned life insurance used to fund the pension obligations.

                              Financial Condition

The following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the three and nine months ended September 30, 2008):

                                                     Three Months             Nine Months           Year Ended
                                                        Ended                    Ended             December 31,
                                                  September 30, 2008      September 30, 2008           2007

Return on average assets                                        -1.28 %                 -0.51 %             0.57 %
Return on average equity                                       -18.04 %                 -7.05 %             7.77 %
Interest-rate spread                                             2.54 %                  2.50 %             2.78 %
Net interest margin                                              3.00 %                  3.01 %             3.49 %
Noninterest expenses to average assets                           2.77 %                  2.78 %             2.59 %

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

We expect to meet our liquidity needs with:

· Available cash, including both interest and noninterest-bearing balances, and federal funds sold, which totaled $5.1 million at September 30, 2008;

· The repayment of loans, which include loans with a remaining maturity of one year or less (excluding those in nonaccrual status) totaling $41.4 million;

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

· Growth in deposits; and,

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

Short-Term Investments. Short-term investments, which consist of federal funds sold and interest-bearing deposits, were $100,000 at September 30, 2008, as compared to $-0- at December 31, 2007. These funds are a primary source of our liquidity and are generally invested in an earning capacity on an overnight basis. We regularly review our liquidity position and have implemented internal policies that establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the statement of financial condition and funding from non-core sources. To further enhance our liquidity, we have developed alternative funding strategies that have been approved by our Board of Directors.

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

Core Deposits. Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. We had core deposits totaling $159.3 million at September 30, 2008, and $159.7 million at December 31, 2007, a decrease of 0.3%. We anticipate that a stable base of deposits will be our primary source of funding to meet both short-term and long-term liquidity needs in the future.

Customers with large certificates of deposit tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions acquire funds in part through large certificates of deposit obtained through brokers. These brokered deposits are sometimes more costly and are less desirable as long-term funding sources; however, currently the rates on our brokered deposits are more favorable than the local retail deposit market. Brokered certificates of deposit issued by us totaled $26.2 million at September 30, 2008, and $17.9 million at December 31, 2007, an increase of 46.5%.

We use our resources principally to fund existing and continuing loan commitments and to purchase investment securities. At September 30, 2008, we had commitments to originate loans totaling $19.9 million, and had issued, but unused, standby letters of credit of $1.9 million for the same period. In addition, scheduled maturities of certificates of deposit during the twelve months following September 30, 2008, total $104.7 million. We believe that adequate resources exist to fund all our anticipated commitments, and, if so desired, that we can adjust the rates and terms on certificates of deposit and other deposit accounts to retain deposits in a changing interest rate environment.

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

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of September 30, 2008, that we met all minimum capital adequacy requirements to which we are subject.

As of the most recent reporting period for the quarter ended September 30, 2008, Oceanside's ratios exceeded the minimum levels for the well-capitalized category. An institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. At September 30, 2008, Oceanside's actual capital amounts and percentages are presented in the following table (dollars in thousands):

                                     Actual                 Minimum(1)            Well-Capitalized(2)
                               Amount         %         Amount         %          Amount            %

Total capital to
risk-weighted assets          $ 23,533       10.28 %   $ 18,305        8.00 %   $    22,882        10.00 %
Tier 1 capital to
risk-weighted assets          $ 20,665        9.03 %   $  9,153        4.00 %   $    13,729         6.00 %
Tier 1 capital to average
assets                        $ 20,665        7.95 %   $ 10,392        4.00 %   $    12,990         5.00 %

(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action regulations for banks.

There are no conditions or events since September 30, 2008, that management believes have changed Oceanside's category.

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

Asset Classification. Commercial banks are required to review and, when appropriate, classify their assets on a regular basis. The State of Florida and the FDIC have the authority to identify problem assets and, if appropriate, require them to be classified or require a different classification than management has assessed. There are three classifications for problem (or classified) assets: substandard, doubtful, and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes a specific reserve for the full amount of the portion of the asset classified as loss. All or a portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not warrant classification in the aforementioned categories, but possess weaknesses, are classified by us as special mention and monitored. We also monitor other loans based on a variety of factors and internally designate these loans as watch list loans.

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

At September 30, 2008, we had 64 loans totaling approximately $31.9 million classified as substandard and five loans totaling approximately $4.5 million classified as doubtful. We had no loans classified as loss at September 30, 2008. At September 30, 2008, management had provided specific reserves totaling $2.0 million for loans risk-rated substandard or lower.

The sharp increase in loans classified substandard or lower from December 31, 2007, levels of $8.0 million reflect the general economic downturn in real estate activities in our trade area. Five loan relationships account for approximately $18.8 million, or 51.6%, of all internally classified loans. Of the five loans, one is secured by residential condominiums, one is secured by a primary residence and approximately 17.8 surrounding acres, and the remaining three loans are secured principally by commercial real estate or land for real estate development and

vehicles. These five loan relationships have specific reserves of approximately $1.4 million, based on management's estimate of the underlying collateral value (net of liquidation costs).

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

A summary of balances in the allowance for loan losses and key ratios follows (dollars in thousands):

                                                       For the Nine                  For the Twelve
                                                       Months Ended                   Months Ended
                                                    September 30, 2008              December 31, 2007

End of period loans (net of deferred fees)         $            208,825            $           204,060
End of period allowance for loan losses            $              3,453            $             2,169
% of allowance for loan losses to total loans                      1.65 %                         1.06 %
Average loans for the period                       $            202,258            $           187,544
Net charge-offs as a percentage of average loans
  for the period (annualized for 2008)                             0.88 %                         0.03 %
Nonperforming assets:
   Nonaccrual loans                                $              5,284            $             6,222
   Loans past due 90 days or more and still
accruing (*)                                                      1,451                            164
   Foreclosed real estate                                         4,313                              -
   Other repossessed assets                                          77                              -
                                                   $             11,125            $             6,386
Nonperforming loans to period end loans                            3.23 %                         3.13 %
Nonperforming assets to period end total assets                    4.23 %                         2.44 %

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