UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2010





Commission
file number: 000-50962





ATLANTIC
COAST FEDERAL CORPORATION


(Exact
name of registrant as specified in its charter)





Federal
            59-3764686(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer Identification No.)505
      Haines Avenue
              Waycross,
      Georgia
            31501(Address
      of principal executive offices)
            (Zip
      Code)Registrant's
      telephone number, including area code:  (800)
      342-2824





Indicate
by check mark whether the Registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 o.





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit
and post such files).


YES o  NO o.





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





Large
Accelerated Filer o   Accelerated
Filer o   Non-Accelerated
Filer   o  Smaller
Reporting Company x





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


YES o  NO x.





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
              Outstanding at August 12, 2010Common
      Stock, $0.01 Par Value
              13,415,874
      shares





ATLANTIC
COAST FEDERAL CORPORATION





Form
10-Q Quarterly Report





Table
of Contents





Page NumberPART
      I. FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                  27Item
      3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  46Item
      4.
                  Controls
      and Procedures
                  47PART
      II.  OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  48Item
      1A.
                  Risk
      Factors
                  48Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  50Item
      3.
                  Defaults
      upon Senior Securities
                  50Item
      4.
                  Removed
      and reserved
                  50Item
      5.
                  Other
      Information
                  50Item
      6.
                  Exhibits
                  50Form
      10-Q
                  Signature
      Page
                  51Ex-31.1
                  Section
      302 Certification of CEOEx-31.2
                  Section
      302 Certification of CFOEx-32
                  Section
      906 Certification of CEO and CFO





PART
I. FINANCIAL INFORMATION


Item
I.  Financial Statements


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


June
30, 2010 and December 31, 2009


(Dollars
in Thousands, Except Share Information)


(unaudited)





June 30,
                
                
                December 31,2010
                
                
                2009ASSETSCash
      and due from financial institutions
                
                $
                8,007
                
                
                $
                8,211Short-term
      interest-earning deposits
                
                
                21,885
                
                
                
                28,933Total
      cash and cash equivalents
                
                
                29,892
                
                
                
                37,144Securities
      available for sale
                
                
                200,040
                
                
                
                177,938Loans
      held for sale
                
                
                17,086
                
                
                
                8,990Loans,
      net of allowance of $10,236 in 2010 and $13,810 in 2009
                
                
                586,676
                
                
                
                614,371Federal
      Home Loan Bank stock, at cost
                
                
                10,023
                
                
                
                10,023Land,
      premises and equipment, net
                
                
                15,797
                
                
                
                16,014Bank
      owned life insurance
                
                
                23,176
                
                
                
                22,806Other
      real estate owned
                
                
                7,340
                
                
                
                5,028Accrued
      interest receivable and other assets
                
                
                11,344
                
                
                
                13,247Total
      assets
                
                $
                901,374
                
                
                $
                905,561LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
      demand
                
                $
                35,130
                
                
                $
                34,988Interest-bearing
      demand
                
                
                78,758
                
                
                
                79,192Savings
      and money market
                
                
                169,260
                
                
                
                160,784Time
                
                
                291,863
                
                
                
                280,480Total
      deposits
                
                
                575,011
                
                
                
                555,444Securities
      sold under agreement to repurchase
                
                
                92,800
                
                
                
                92,800Federal
      Home Loan Bank advances
                
                
                170,741
                
                
                
                182,694Other
      borrowings
                
                
                5,000
                
                
                
                12,200Accrued
      expenses and other liabilities
                
                
                4,606
                
                
                
                5,882Total
      liabilities
                
                
                848,158
                
                
                
                849,020Commitments
      and contingent liabilities
                
                
                -
                
                
                
                -Preferred
      stock: $0.01 par value; 2,000,000 shares authorized none
      issued
                
                
                -
                
                
                
                -Common
      stock: $0.01 par value; 18,000,000 shares authorized, shares issued
      14,813,469 at June 30, 2010 and December 31, 2009
                
                
                148
                
                
                
                148Additional
      paid in capital
                
                
                61,494
                
                
                
                61,225Unearned
      employee stock ownership plan (ESOP) shares of 162,932 at June 30, 2010
      and 186,208 at December 31, 2009
                
                
                (1,629
                )
                
                
                (1,862
                )Retained
      earnings
                
                
                9,940
                
                
                
                16,777Accumulated
      other comprehensive income
                
                
                3,164
                
                
                
                152Treasury
      stock, at cost, 1,390,924 shares at June 30, 2010 and 1,375,260 at
      December 31, 2009
                
                
                (19,901
                )
                
                
                (19,899
                )Total
      stockholders' equity
                
                
                53,216
                
                
                
                56,541Total
      liabilities and stockholders' equity
                
                $
                901,374
                
                
                $
                905,561





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


3


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars
in Thousands, Except Share Information)


(unaudited)





Three months ended June 30,
                                      
                                      Six months ended June 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Interest
      and dividend incomeLoans,
      including fees
                                      
                                      $
                                      9,491
                                      
                                      
                                      $
                                      10,266
                                      
                                      
                                      $
                                      18,681
                                      
                                      
                                      $
                                      21,088Securities
      and interest-earning depositsin
      other financial institutions
                                      
                                      
                                      2,201
                                      
                                      
                                      
                                      1,861
                                      
                                      
                                      
                                      4,213
                                      
                                      
                                      
                                      3,86411,692
                                      
                                      
                                      
                                      12,127
                                      
                                      
                                      
                                      22,894
                                      
                                      
                                      
                                      24,952Interest
      expenseDeposits
                                      
                                      
                                      2,643
                                      
                                      
                                      
                                      4,190
                                      
                                      
                                      
                                      5,463
                                      
                                      
                                      
                                      8,746Federal
      Home Loan Bank advances
                                      
                                      
                                      1,567
                                      
                                      
                                      
                                      1,709
                                      
                                      
                                      
                                      3,121
                                      
                                      
                                      
                                      3,421Securities
      sold under agreements to repurchase
                                      
                                      
                                      1,174
                                      
                                      
                                      
                                      1,017
                                      
                                      
                                      
                                      2,322
                                      
                                      
                                      
                                      2,000Other
      borrowings
                                      
                                      
                                      44
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      88
                                      
                                      
                                      
                                      -5,428
                                      
                                      
                                      
                                      6,916
                                      
                                      
                                      
                                      10,994
                                      
                                      
                                      
                                      14,167Net
      interest income
                                      
                                      
                                      6,264
                                      
                                      
                                      
                                      5,211
                                      
                                      
                                      
                                      11,900
                                      
                                      
                                      
                                      10,785Provision
      for loan losses
                                      
                                      
                                      7,494
                                      
                                      
                                      
                                      6,195
                                      
                                      
                                      
                                      11,217
                                      
                                      
                                      
                                      12,007Net
      interest income (loss) after provision for loan losses
                                      
                                      
                                      (1,230
                                      )
                                      
                                      
                                      (984
                                      )
                                      
                                      
                                      683
                                      
                                      
                                      
                                      (1,222
                                      )Non-interest
      income (loss)Service
      charges and fees
                                      
                                      
                                      963
                                      
                                      
                                      
                                      1,040
                                      
                                      
                                      
                                      1,832
                                      
                                      
                                      
                                      2,042Gain
      on sale of loans held for sale
                                      
                                      
                                      78
                                      
                                      
                                      
                                      189
                                      
                                      
                                      
                                      182
                                      
                                      
                                      
                                      374Gain
      (loss) on sale of portfolio loans
                                      
                                      
                                      113
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (160
                                      )
                                      
                                      
                                      -Gain
      on sale of securities available for sale
                                      
                                      
                                      1,229
                                      
                                      
                                      
                                      118
                                      
                                      
                                      
                                      1,229
                                      
                                      
                                      
                                      215Other
      than temporary impairment loss:Total
      impairment loss
                                      
                                      
                                      (10
                                      )
                                      
                                      
                                      (2,465
                                      )
                                      
                                      
                                      (710
                                      )
                                      
                                      
                                      (3,200
                                      )Gain
      (loss) recognized in other comprehensive income
                                      
                                      
                                      4
                                      
                                      
                                      
                                      1,319
                                      
                                      
                                      
                                      629
                                      
                                      
                                      
                                      1,880Net
      impairment loss recognized in earnings
                                      
                                      
                                      (6
                                      )
                                      
                                      
                                      (1,146
                                      )
                                      
                                      
                                      (81
                                      )
                                      
                                      
                                      (1,320
                                      )Interchange
      fees
                                      
                                      
                                      241
                                      
                                      
                                      
                                      235
                                      
                                      
                                      
                                      463
                                      
                                      
                                      
                                      450Other
                                      
                                      
                                      319
                                      
                                      
                                      
                                      326
                                      
                                      
                                      
                                      560
                                      
                                      
                                      
                                      5512,937
                                      
                                      
                                      
                                      762
                                      
                                      
                                      
                                      4,025
                                      
                                      
                                      
                                      2,312Non-interest
      expenseCompensation
      and benefits
                                      
                                      
                                      2,437
                                      
                                      
                                      
                                      2,967
                                      
                                      
                                      
                                      5,007
                                      
                                      
                                      
                                      5,542Occupancy
      and equipment
                                      
                                      
                                      531
                                      
                                      
                                      
                                      667
                                      
                                      
                                      
                                      1,084
                                      
                                      
                                      
                                      1,288FDIC
      insurance premiums
                                      
                                      
                                      398
                                      
                                      
                                      
                                      677
                                      
                                      
                                      
                                      846
                                      
                                      
                                      
                                      1,013Foreclosed
      assets, net
                                      
                                      
                                      30
                                      
                                      
                                      
                                      286
                                      
                                      
                                      
                                      121
                                      
                                      
                                      
                                      990Data
      processing
                                      
                                      
                                      402
                                      
                                      
                                      
                                      249
                                      
                                      
                                      
                                      657
                                      
                                      
                                      
                                      509Outside
      professional services
                                      
                                      
                                      371
                                      
                                      
                                      
                                      736
                                      
                                      
                                      
                                      730
                                      
                                      
                                      
                                      1,161Collection
      expense and repossessed asset losses
                                      
                                      
                                      605
                                      
                                      
                                      
                                      272
                                      
                                      
                                      
                                      997
                                      
                                      
                                      
                                      476Other
                                      
                                      
                                      1,011
                                      
                                      
                                      
                                      1,091
                                      
                                      
                                      
                                      2,103
                                      
                                      
                                      
                                      1,9955,785
                                      
                                      
                                      
                                      6,945
                                      
                                      
                                      
                                      11,545
                                      
                                      
                                      
                                      12,974Loss
      before income tax benefit
                                      
                                      
                                      (4,078
                                      )
                                      
                                      
                                      (7,167
                                      )
                                      
                                      
                                      (6,837
                                      )
                                      
                                      
                                      (11,884
                                      )Income
      tax benefit
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,533
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (4,190
                                      )Net
      loss
                                      
                                      $
                                      (4,078
                                      )
                                      
                                      $
                                      (4,634
                                      )
                                      
                                      $
                                      (6,837
                                      )
                                      
                                      $
                                      (7,694
                                      )Loss
      per common share:Basic
                                      
                                      $
                                      (0.31
                                      )
                                      
                                      $
                                      (0.36
                                      )
                                      
                                      $
                                      (0.52
                                      )
                                      
                                      $
                                      (0.59
                                      )Diluted
                                      
                                      $
                                      (0.31
                                      )
                                      
                                      $
                                      (0.36
                                      )
                                      
                                      $
                                      (0.52
                                      )
                                      
                                      $
                                      (0.59
                                      )Dividends
      declared per common share
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      0.01
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      0.02





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


4


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Six Months Ended June 30, 2010


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                                
                                
                                UNEARNED
                                
                                
                                
                                
                                
                                OTHERCOMMON
                                
                                
                                PAID IN
                                
                                
                                ESOP
                                
                                
                                RETAINED
                                
                                
                                COMPREHENSIVE
                                
                                
                                TREASURY
                                
                                
                                TOTALSTOCK
                                
                                
                                CAPITAL
                                
                                
                                SHARES
                                
                                
                                EARNINGS
                                
                                
                                INCOME (LOSS)
                                
                                
                                STOCK
                                
                                
                                EQUITYFor
      the six months ended June 30, 2010Balance
      at January 1, 2010
                                
                                $
                                148
                                
                                
                                $
                                61,225
                                
                                
                                $
                                (1,862
                                )
                                
                                $
                                16,777
                                
                                
                                $
                                152
                                
                                
                                $
                                (19,899
                                )
                                
                                $
                                56,541ESOP
      shares earned, 23,276 shares
                                
                                
                                -
                                
                                
                                
                                (179
                                )
                                
                                
                                233
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                54Management
      restricted stock expense
                                
                                
                                -
                                
                                
                                
                                323
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                323Stock
      options expense
                                
                                
                                -
                                
                                
                                
                                157
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                157Management
      restricted stock granted
                                
                                
                                
                                
                                
                                
                                (99
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                99
                                
                                
                                
                                -Director's
      deferred compensation
                                
                                
                                -
                                
                                
                                
                                67
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (67
                                )
                                
                                
                                -Treasury
      stock  purchased at cost, 22,500 shares
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (34
                                )
                                
                                
                                (34
                                )Comprehensive
      income (loss):Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,837
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,837
                                )Other
      comprehensive income (loss)Net
      change in unrealized losses onsecurities
      available-for-sale net ofreclassification
      and taxes
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,383
                                
                                
                                
                                -
                                
                                
                                
                                2,383Change
      in unrealized gains (losses)on
      securities available-for-sale forwhich
      a portion of an other-than-temporary impairment has been recognized in
      earnings,net
      of reclassification and taxes
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                629
                                
                                
                                
                                -
                                
                                
                                
                                629Total
      comprehensive income (loss)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,837
                                )
                                
                                
                                3,012
                                
                                
                                
                                -
                                
                                
                                
                                (3,825
                                )Balance
      at June 30, 2010
                                
                                $
                                148
                                
                                
                                $
                                61,494
                                
                                
                                $
                                (1,629
                                )
                                
                                $
                                9,940
                                
                                
                                $
                                3,164
                                
                                
                                $
                                (19,901
                                )
                                
                                $
                                53,216





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


5


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Six Months Ended June 30, 2009


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                                
                                
                                UNEARNED
                                
                                
                                
                                
                                
                                OTHERCOMMON
                                
                                
                                PAID IN
                                
                                
                                ESOP
                                
                                
                                RETAINED
                                
                                
                                COMPREHENSIVE
                                
                                
                                TREASURY
                                
                                
                                TOTALSTOCK
                                
                                
                                CAPITAL
                                
                                
                                SHARES
                                
                                
                                EARNINGS
                                
                                
                                INCOME (LOSS)
                                
                                
                                STOCK
                                
                                
                                EQUITYFor
      the six months ended June 30, 2009Balance
      at January 1, 2009
                                
                                $
                                148
                                
                                
                                $
                                60,061
                                
                                
                                $
                                (2,328
                                )
                                
                                $
                                46,201
                                
                                
                                $
                                (308
                                )
                                
                                $
                                (19,814
                                )
                                
                                $
                                83,960ESOP
      shares earned, 23,276 shares
                                
                                
                                -
                                
                                
                                
                                (110
                                )
                                
                                
                                233
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                123Management
      restricted stock expense
                                
                                
                                -
                                
                                
                                
                                319
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                319Stock
      options expense
                                
                                
                                -
                                
                                
                                
                                157
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                157Dividend
      declared ($0.02 per share)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (90
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (90
                                )Director's
      deferred compensation
                                
                                
                                -
                                
                                
                                
                                3
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3
                                )
                                
                                
                                -Capital
      ontribution by parent
                                
                                
                                -
                                
                                
                                
                                400
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                400Treasury
      stock  purchased at cost, 7,400 shares
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (29
                                )
                                
                                
                                (29
                                )Comprehensive
      income (loss):Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (7,694
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (7,694
                                )Other
      comprehensive income (loss)Net
      change in unrealized gains onsecurities
      available-for-sale net ofreclassification
      and taxes
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (70
                                )
                                
                                
                                -
                                
                                
                                
                                (70
                                )Change
      in unrealized gains (losses)on
      securities available-for-sale forwhich
      a portion of an other-than-temporary impairment has been recognized in
      earnings,net
      of reclassification and taxes
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                384
                                
                                
                                
                                -
                                
                                
                                
                                384Total
      comprehensive income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (7,694
                                )
                                
                                
                                314
                                
                                
                                
                                -
                                
                                
                                
                                (7,380
                                )Balance
      at June 30, 2009
                                
                                $
                                148
                                
                                
                                $
                                60,830
                                
                                
                                $
                                (2,095
                                )
                                
                                $
                                38,417
                                
                                
                                $
                                6
                                
                                
                                $
                                (19,846
                                )
                                
                                $
                                77,460





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


6


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)





Six months ended June
      30,2010
                                      
                                      
                                      2009Cash
      flows from operating activitiesNet
      loss
                                      
                                      
                                      (6,837
                                      )
                                      
                                      
                                      (7,694
                                      )Adjustments
      to reconcile net loss toto
      net cash from operating activities:Provision
      for loan losses
                                      
                                      
                                      11,217
                                      
                                      
                                      
                                      12,007Gain
      on sale of loans held for sale
                                      
                                      
                                      (182
                                      )
                                      
                                      
                                      (374
                                      )Loss
      on sale of portfolio loans
                                      
                                      
                                      160
                                      
                                      
                                      
                                      -Loans
      originated for sale
                                      
                                      
                                      (62,564
                                      )
                                      
                                      
                                      (46,532
                                      )Proceeds
      from sales of loans held for sale
                                      
                                      
                                      54,649
                                      
                                      
                                      
                                      42,321Foreclosed
      assets, net
                                      
                                      
                                      121
                                      
                                      
                                      
                                      990Gain
      on sale of securities available for sale
                                      
                                      
                                      (1,229
                                      )
                                      
                                      
                                      (215
                                      )Other
      than temporary impairment loss on AFS securities
                                      
                                      
                                      81
                                      
                                      
                                      
                                      1,320Loss
      on disposal of equipment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      11ESOP
      compensation expense
                                      
                                      
                                      55
                                      
                                      
                                      
                                      123Share-based
      compensation expense
                                      
                                      
                                      480
                                      
                                      
                                      
                                      476Net
      depreciation and amortization
                                      
                                      
                                      1,267
                                      
                                      
                                      
                                      1,053Net
      change in accrued interest receivable
                                      
                                      
                                      51
                                      
                                      
                                      
                                      441Net
      change in cash surrender value of bank owned life
insurance
                                      
                                      
                                      (370
                                      )
                                      
                                      
                                      (354
                                      )Net
      change in other assets
                                      
                                      
                                      1,945
                                      
                                      
                                      
                                      (3,924
                                      )Net
      change in accrued expenses and other liabilities
                                      
                                      
                                      (1,276
                                      )
                                      
                                      
                                      (695
                                      )Net
      cash from operating activites
                                      
                                      
                                      (2,432
                                      )
                                      
                                      
                                      (1,046
                                      )Cash
      flows from investing activitiesProceeds
      from maturities and paymentsof
      securites available for sale
                                      
                                      
                                      39,768
                                      
                                      
                                      
                                      28,093Proceeds
      from the sales of securitiesavailable
      for sale
                                      
                                      
                                      17,901
                                      
                                      
                                      
                                      36,064Purchase
      of securities available for sale
                                      
                                      
                                      (76,283
                                      )
                                      
                                      
                                      (95,332
                                      )Proceeds
      from sale of portfolio loans
                                      
                                      
                                      7,173
                                      
                                      
                                      
                                      13,013Purchase
      of loans
                                      
                                      
                                      (2,420
                                      )
                                      
                                      
                                      -Net
      change in loans
                                      
                                      
                                      7,596
                                      
                                      
                                      
                                      32,732Expenditures
      on premises and equipment
                                      
                                      
                                      (259
                                      )
                                      
                                      
                                      (357
                                      )Proceeds
      from the sale of other real estate owned
                                      
                                      
                                      1,324
                                      
                                      
                                      
                                      1,073Purchase
      of FHLB stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,028
                                      )Redemption
      of FHLB stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,063Net
      cash from investing activities
                                      
                                      
                                      (5,200
                                      )
                                      
                                      
                                      15,321





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


7


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)





Six months ended June 30,2010
                  
                  
                  2009Cash
      flows from financing activitiesNet
      change in deposits
                  
                  $
                  19,567
                  
                  
                  $
                  4,881Proceeds
      from FHLB advances
                  
                  
                  13,000
                  
                  
                  
                  20,000Repayment
      of FHLB advances
                  
                  
                  (24,953
                  )
                  
                  
                  (27,203
                  )Proceeds
      from other borrowings
                  
                  
                  5,000
                  
                  
                  
                  -Repayment
      of other borrowings
                  
                  
                  (12,200
                  )
                  
                  
                  -Capital
      contribution from parent
                  
                  
                  -
                  
                  
                  
                  400Share
      based compensation items
                  
                  
                  -
                  
                  
                  
                  (5
                  )Treasury
      stock repurchased
                  
                  
                  (34
                  )
                  
                  
                  (29
                  )Dividends
      paid
                  
                  
                  -
                  
                  
                  
                  (90
                  )Net
      cash from financing activities
                  
                  
                  380
                  
                  
                  
                  (2,046
                  )Net
      change in cash and cash equivalents
                  
                  
                  (7,252
                  )
                  
                  
                  12,229Cash
      and equivalents beginning of period
                  
                  
                  37,144
                  
                  
                  
                  34,058Cash
      and equivalents at end of period
                  
                  $
                  29,892
                  
                  
                  $
                  46,287Supplemental
      information:Interest
      paid
                  
                  $
                  11,074
                  
                  
                  $
                  14,090Income
      tax paid
                  
                  
                  15
                  
                  
                  
                  9Supplemental
      noncash disclosures:Loans
      transferred to other real estate
                  
                  $
                  3,757
                  
                  
                  $
                  2,919




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


8


ATLANTIC
COAST FEDERAL CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2010


(Unaudited)





NOTE
1.  BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements include
Atlantic Coast Federal Corporation (or the “Company”) and its wholly owned
subsidiary, Atlantic Coast Bank (the “Bank”).  All significant
inter-company balances and transactions have been eliminated in
consolidation.  The principal activity of the Company is the ownership
of the Bank’s common stock, as such, the terms “Company” and “Bank” may be used
interchangeably throughout this Form 10-Q.





The
accompanying condensed consolidated balance sheet as of December 31, 2009, which
was derived from our audited financial statements, and the unaudited condensed
consolidated financial statements for the periods ended June 30, 2010 and June
30, 2009 have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions for Form 10-Q.  Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (all of
which are normal and recurring in nature) considered necessary for (i) a fair
presentation and (ii) to make such statements not misleading, have been
included.  Operating results for the six month period ended June 30,
2010 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2010.  The 2009 Atlantic Coast Federal
Corporation consolidated financial statements, as presented in the Company’s
Annual Report on Form 10-K, should be read in conjunction with these
statements.





Certain
items in the June 30, 2009 financial statements have been reclassified to
conform to the current presentation.  The reclassifications have no
effect on net income or stockholders’ equity as previously
reported.





NOTE
2.  USE OF ESTIMATES





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expense
during the reported periods, as well as the disclosures
provided.  Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses, realization of deferred tax
assets and the fair values of securities and other financial instruments are
particularly susceptible to material change in the near term.


9


NOTE
3.  IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS





In
June 2009, the FASB issued Statement of Financial Accounting Standards
No. 166, Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement No. 140
(ASC 810).  The new accounting requirement amends previous
guidance relating to the transfers of financial assets and eliminates the
concept of a qualifying special purpose entity. This Statement must be applied
as of the beginning of each reporting entity’s first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
This Statement must be applied to transfers occurring on or after the effective
date. Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. Therefore,
formerly qualifying special-purpose entities should be evaluated for
consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. Additionally, the
disclosure provisions of this Statement were also amended and apply to transfers
that occurred both before and after the effective date of this
Statement.  The adoption of this standard did not have a material
effect on the Company’s consolidated financial position or results of
operations.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB
Interpretation No. 46(R)(ASC 810), which amended
guidance for consolidation of variable interest entities by replacing the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and (1) the obligation to absorb losses
of the entity or (2) the right to receive benefits from the entity. This
Statement also requires additional disclosures about an enterprise’s involvement
in variable interest entities. This Statement is effective as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Early adoption
is prohibited.  The adoption of this standard did not have a material
effect on the Company’s consolidated financial position or results of
operations.





In
January 2010, the FASB issued Accounting Standards Update No. 210-06, an Amendment of FASB Statement
No. 157 Fair Value Measurements (ASC 820), which amended guidance
requiring new disclosures as follows:





1.
Transfers in and out of Levels 1 and 2. A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and  describe the reasons for the
transfers.





2.
Activity in Level 3 fair value measurements. In the reconciliation for fair
value measurements  using significant unobservable inputs (Level 3), a
reporting entity should present separately  information about
purchases, sales, issuances, and settlements (that is, on a gross basis
rather  than as one net number).





This
Update provides amendments to Subtopic 820-10 clarifying existing disclosures as
follows:





1. Level
of disaggregation. A reporting entity should provide fair value measurement
disclosures  for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line  item in the
statement of financial position. A reporting entity needs to use judgment
in  determining the appropriate classes of assets and
liabilities.





2.
Disclosures about inputs and valuation techniques. A reporting entity should
provide  disclosures about the valuation techniques and inputs used to
measure fair value for both  recurring and nonrecurring fair value
measurements. Those disclosures are required for fair  value
measurements that fall in either Level 2 or Level 3.


10


NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS (continued)





This
Update also includes conforming amendments to the guidance on employers’
disclosures about postretirement benefit plan assets (Subtopic 715-20). The
conforming amendments to Subtopic 715-20 change the terminology from major categoriesof assets to
classesof assets and
provide a cross reference to the guidance in Subtopic 820-10 on how to determine
appropriate classes to present fair value disclosures. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll- forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this standard did not have a material
effect on the Company’s consolidated financial position or results of
operations.





NOTE
4.  AVAILABLE FOR SALE SECURITIES





The
following table summarizes the amortized cost and fair value of the
available-for-sale investment securities and the corresponding amounts of
unrealized gains and losses therein:




AmortizedCost
                                    
                                    
                                    Unrealized Gains
                                    
                                    
                                    Unrealized Losses
                                    
                                    
                                    Fair ValueJune
      30, 2010
                                    
                                    (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                                    
                                    $
                                    20,088
                                    
                                    
                                    $
                                    191
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    20,279State
      and municipal
                                    
                                    
                                    946
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (61
                                    )
                                    
                                    
                                    885Mortgage-backed
      securities residential
                                    
                                    
                                    52,543
                                    
                                    
                                    
                                    2,117
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    54,660Collateralized
      mortgage obligations U.S. Govt.
                                    
                                    
                                    109,868
                                    
                                    
                                    
                                    1,701
                                    
                                    
                                    
                                    (247
                                    )
                                    
                                    
                                    111,322Collateralized
      mortgage obligations - other
                                    
                                    
                                    13,431
                                    
                                    
                                    
                                    712
                                    
                                    
                                    
                                    (1,249
                                    )
                                    
                                    
                                    12,894$
                                    196,876
                                    
                                    
                                    $
                                    4,721
                                    
                                    
                                    $
                                    (1,557
                                    )
                                    
                                    $
                                    200,040





December
      31, 2009
                                  
                                  (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                                  
                                  $
                                  15,998
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (246
                                  )
                                  
                                  $
                                  15,752State
      and municipal
                                  
                                  
                                  947
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (103
                                  )
                                  
                                  
                                  844Mortgage-backed
      securities residential
                                  
                                  
                                  37,390
                                  
                                  
                                  
                                  1,028
                                  
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  38,410Collateralized
      mortgage obligations U.S. Govt.
                                  
                                  
                                  101,236
                                  
                                  
                                  
                                  1,530
                                  
                                  
                                  
                                  (327
                                  )
                                  
                                  
                                  102,439Collateralized
      mortgage obligations - other
                                  
                                  
                                  22,116
                                  
                                  
                                  
                                  534
                                  
                                  
                                  
                                  (2,157
                                  )
                                  
                                  
                                  20,493$
                                  177,687
                                  
                                  
                                  $
                                  3,092
                                  
                                  
                                  $
                                  (2,841
                                  )
                                  
                                  $
                                  177,938





The
amortized cost and fair value of debt securities segregated by contractual
maturity as of June 30, 2010, is shown below.  Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.  Securities
not due at a single maturity date, primarily mortgage-backed securities, are
shown separately.


11




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
  June 30, 2010(Dollars in Thousands)Amortized
                    
                    
                    FairCost
                    
                    
                    ValueDue
      in one year or less
                    
                    $
                    -
                    
                    
                    $
                    -Due
      from one to five years
                    
                    
                    -
                    
                    
                    
                    -Due
      from five to ten years
                    
                    
                    -
                    
                    
                    
                    -Due
      after ten years
                    
                    
                    21,034
                    
                    
                    
                    21,164Mortgage-backed
      securities - residential
                    
                    
                    52,543
                    
                    
                    
                    54,660Collateralized
      mortgage obligations - U.S. Government
                    
                    
                    109,868
                    
                    
                    
                    111,322Collateralized
      mortgage obligations - other
                    
                    
                    13,431
                    
                    
                    
                    12,894Total
                    
                    $
                    196,876
                    
                    
                    $
                    200,040
 
 The
following table summarizes the investment securities with unrealized losses at
June 30, 2010 and December 31, 2009, aggregated by investment category and
length of time in a continuous unrealized loss position:
 
 (Dollars
      in Thousands)Less
      than 12 Months
                                
                                
                                12
      Months or More
                                
                                
                                TotalFair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                UnrealizedValue
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                LossesDescription
      of SecuritiesJune
      30, 2010Government-sponsored
      enterprises
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -State
      and municipal
                                
                                
                                885
                                
                                
                                
                                (61
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                885
                                
                                
                                
                                (61
                                )Mortgage-backed
      securities - residential
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Collateralized
      mortgage obligations - U.S. Govt.
                                
                                
                                39,100
                                
                                
                                
                                (247
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                39,100
                                
                                
                                
                                (247
                                )Collateralized
      mortgage obligations - other
                                
                                
                                8,655
                                
                                
                                
                                (1,249
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                8,655
                                
                                
                                
                                (1,249
                                )Total
                                
                                $
                                48,640
                                
                                
                                $
                                (1,557
                                )
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                48,640
                                
                                
                                $
                                (1,557
                                )December
      31, 2009Government-sponsored
      enterprises
                                
                                $
                                15,752
                                
                                
                                $
                                (246
                                )
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                15,752
                                
                                
                                $
                                (246
                                )State
      and municipal
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                844
                                
                                
                                
                                (103
                                )
                                
                                
                                844
                                
                                
                                
                                (103
                                )Mortgage-backed
      securities - residential
                                
                                
                                7,206
                                
                                
                                
                                (8
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                7,206
                                
                                
                                
                                (8
                                )Collateralized
      mortgage obligations - U.S. Govt.
                                
                                
                                34,820
                                
                                
                                
                                (327
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                34,820
                                
                                
                                
                                (327
                                )Collateralized
      mortgage obligations - other
                                
                                
                                7,118
                                
                                
                                
                                (203
                                )
                                
                                
                                9,462
                                
                                
                                
                                (1,954
                                )
                                
                                
                                16,580
                                
                                
                                
                                (2,157
                                )Total
                                
                                $
                                64,896
                                
                                
                                $
                                (784
                                )
                                
                                $
                                10,306
                                
                                
                                $
                                (2,057
                                )
                                
                                $
                                75,202
                                
                                
                                $
                                (2,841
                                )
  Proceeds
from sales, maturities and calls of securities available for sale were
$57.7 million and $64.2 million for the six months ended June 30, 2010 and
2009, respectively. Gross gains of $1.2 million and $265,000 and gross losses of
$0 and $50,000 were realized on these sales during the six months ended June 30,
2010 and 2009, respectively.  Gross gains of $1.2 million and $157,000
and gross losses of $0 and $39,000 were realized on these sales during the three
months ended June 30, 2010 and 2009, respectively.
  Gains and
losses on sales of securities are recorded on the trade date and determined
using the specific identification method.
  12
   NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
  Other-Than-Temporary-Impairment
  Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.
  In
evaluating OTTI, management considers many factors, including: (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgment and is based on the
information available to management at a point in time.
  When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between its amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI is separated into the amount
representing the credit loss and the amount related to all other factors. The
amount of the total related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized as a
charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.
  As of
June 30, 2010 the Company’s security portfolio consisted of 109 securities, 25
of which were in an unrealized loss position. Nearly all unrealized losses are
related to debt securities whose underlying collateral is residential
mortgages.  However, the majority of these securities were issued by
government sponsored organizations as discussed below.
  At June
30, 2010, approximately $186.3 million, or approximately 93% of the debt
securities held by the Company were issued by U.S. government-sponsored
entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae,
institutions which the government has affirmed its commitment to support.
Because the decline in fair value is attributable to changes in interest rates
and illiquidity, and not credit quality, and because the Company does not have
the intent to sell these securities and it is likely it will not be required to
sell the securities before their anticipated recovery, the Company does not
consider these securities to be other-than-temporarily impaired at June 30,
2010.
  Collateralized Mortgage
Obligations - Other
  The
Company’s securities portfolio included 14 non-agency collateralized
mortgage obligations with a fair value of $12.9 million at June 30,
2010. The Company evaluated the historical and expected future performance
of the underlying collateral to determine if a future loss is expected which
would result in a principal write-down.  As a part of the evaluation,
the Company reviewed deal specific data including loan-to-value (“LTV”),
delinquency, foreclosures and cumulative loss to insure it has adequate credit
support.  This evaluation was completed utilizing a model to project
future performance using collateral specific assumptions, such as expected
future default rates, loss severity and prepayments.
  13
  NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
 
 The
Company recorded an expense for other-than-temporary impairment of approximately
$(81,000) in non-interest income (loss) on two private label mortgage-backed
mezzanine (support) debt securities for the six months ended June 30,
2010.
 
 The table
below presents a reconciliation of the credit losses recognized in earnings for
the six month period ended June 30, 2010 and 2009:
  June30,2010
                    
                    
                    2009(Dollars in Thousands)Beginning
      balance, January 1
                    
                    $
                    4,467
                    
                    
                    $
                    -Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                    
                    
                    -
                    
                    
                    
                    70Amounts
      realized for securities sold during the periodAmounts
      related to securities for which the company intends to sell or that it
      will be more likely than not the company will be required to sell prior to
      recovery of amortized cost basis
                    
                    
                    -
                    
                    
                    
                    -Reductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                    
                    
                    -
                    
                    
                    
                    -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                    
                    
                    81
                    
                    
                    
                    1,250Ending
      balance, June 30
                    
                    $
                    4,548
                    
                    
                    $
                    1,320
  14
  NOTE
5 - LOANS, NET
 
 Loans. Following is a
comparative composition of net loans as of June 30, 2010 and December 31,
2009:
 
 June30,2010
                        
                        
                        %oftotal
                          loans
                        
                        
                        December31,
                          2009
                        
                        
                        %oftotal
                          loans(Dollars in Thousands)Real estate loans:One-to-four family
                        
                        $
                        287,738
                        
                        
                        
                        48.7
                        %
                        
                        $
                        306,968
                        
                        
                        
                        49.3
                        %Commercial
                        
                        
                        78,085
                        
                        
                        
                        13.2
                        %
                        
                        
                        77,403
                        
                        
                        
                        12.4
                        %Other
      ( land and multi-family)
                        
                        
                        32,690
                        
                        
                        
                        5.5
                        %
                        
                        
                        37,591
                        
                        
                        
                        6.0
                        %Total
      real estate loans
                        
                        
                        398,513
                        
                        
                        
                        67.4
                        %
                        
                        
                        421,962
                        
                        
                        
                        67.7
                        %Real estate construction
    loans:One-to-four
      family
                        
                        
                        6,022
                        
                        
                        
                        1.0
                        %
                        
                        
                        4,189
                        
                        
                        
                        0.7
                        %Commercial
                        
                        
                        3,910
                        
                        
                        
                        0.7
                        %
                        
                        
                        8,022
                        
                        
                        
                        1.3
                        %Acquisition
      and development
                        
                        
                        2,737
                        
                        
                        
                        0.5
                        %
                        
                        
                        3,148
                        
                        
                        
                        0.5
                        %Total
      real estate construction loans
                        
                        
                        12,669
                        
                        
                        
                        2.1
                        %
                        
                        
                        15,359
                        
                        
                        
                        2.5
                        %Other loans:Home
      equity
                        
                        
                        89,193
                        
                        
                        
                        15.1
                        %
                        
                        
                        93,929
                        
                        
                        
                        15.1
                        %Consumer
                        
                        
                        72,972
                        
                        
                        
                        12.3
                        %
                        
                        
                        73,870
                        
                        
                        
                        11.9
                        %Commercial
                        
                        
                        17,759
                        
                        
                        
                        3.0
                        %
                        
                        
                        17,848
                        
                        
                        
                        2.9
                        %Total
      other loans
                        
                        
                        179,924
                        
                        
                        
                        30.4
                        %
                        
                        
                        185,647
                        
                        
                        
                        29.8
                        %Total
      loans
                        
                        
                        591,106
                        
                        
                        
                        100
                        %
                        
                        
                        622,968
                        
                        
                        
                        100
                        %Allowance
      for loan losses
                        
                        
                        (10,236
                        )
                        
                        
                        
                        
                        
                        
                        (13,810
                        )Net
      deferred loan costs
                        
                        
                        5,912
                        
                        
                        
                        
                        
                        
                        
                        5,122Premiums
      (discounts) on purchased loans
                        
                        
                        (106
                        )
                        
                        
                        
                        
                        
                        
                        91Loans,
      net
                        
                        $
                        586,676
                        
                        
                        
                        
                        
                        
                        $
                        614,371
  15
  NOTE 5 - LOANS, NET(continued)
 
 Allowance
for loan losses activity for the six months ended June 30, 2010 and 2009 was as
follows:
 
 2010
                    
                    
                    2009(Dollars
      in Thousands)Beginning
      balance, January 1
                    
                    $
                    13,810
                    
                    
                    $
                    10,598Loans
      charged-off
                    
                    
                    (15,581
                    )
                    
                    
                    (11,204
                    )Recoveries
                    
                    
                    790
                    
                    
                    
                    472Net
      charge-offs
                    
                    
                    (14,791
                    )
                    
                    
                    (10,732
                    )Provision
      for loan losses
                    
                    
                    11,217
                    
                    
                    
                    12,007Ending
      balance, June 30
                    
                    $
                    10,236
                    
                    
                    $
                    11,873
 
 Impaired
loans as of June 30, 2010 and December 31, 2009 were as follows:
 
 June 30, 2010
                          
                          
                          December 31,
                            2009(Dollars in Thousands)Loans
      with no allocated allowance for loan losses
                          
                          $
                          24,798
                          
                          
                          $
                          27,692Loans
      with an allocated allowance for loan losses
                          
                          
                          11,762
                          
                          
                          
                          16,700Total
                          
                          $
                          36,560
                          
                          
                          $
                          44,392Amount
      of the allowance for loan losses allocated to impaired
    loans
                          
                          $
                          2,307
                          
                          
                          $
                          5,398Amount
      of charge-offs taken on period-end impaired loans
                          
                          $
                          3,307
                          
                          
                          $
                          2,157
 
 Impaired
loans included troubled debt restructurings of $18.5 million at June 30, 2010
and $22.7 million at December 31, 2009, of which $16.6 million and $19.9 million
respectively, were performing according to the modified
terms.  Non-performing loans, including non-accrual loans, at June 30,
2010 and December 31, 2009 were $21.7 million and $35.2 million,
respectively.  There were no loans over 90 days past-due and still
accruing interest as of June 30, 2010 and December 31,
2009.  Non-performing loans include both smaller balance homogeneous
loans that are collectively evaluated for impairment and individually classified
as impaired loans.
 
 NOTE
6.  INTEREST RATE SWAPS
 
 The
Company utilizes interest rate swap agreements as part of its asset liability
management strategy to help manage its interest rate risk position by mitigating
the impact of significant unexpected fluctuations in earnings caused by interest
rate volatility or changes in the yield curve. The notional amount of the
interest rate swaps does not represent amounts exchanged by the parties. The
amount exchanged is determined by reference to the notional amount and the other
terms of the individual interest rate swap agreements.
 
 The
Company’s interest rate swap agreements do not qualify for hedge accounting
treatment; accordingly changes in fair value are reported in current period
earnings.
  16
  NOTE 6.  INTEREST RATE
SWAPS (continued)
 
 At June
30, 2010, summary information about these interest-rate swaps is as
follows:
 
 June 30, 2010(Dollars in Thousands)Notional
      amounts
                    
                    $
                    50,000Weighted
      average pay rates (3 month LIBOR, 2.50% floor)
                    
                    
                    2.50
                    %Weighted
      average receive rates (3 month LIBOR, 4.37% cap)
                    
                    
                    0.54
                    %Weighted
      average maturity (years)
                    
                    
                    0.75Fair
      value of interest rate swaps
                    
                    
                    (341
                    )
 
 The
following tables summarize the fair value of the interest rate swaps utilized by
the Company:
 
 Liability Interest RateSwapsJune 30, 2010
                  
                  December 31,2009(Dollars in thousands)Balance Sheet
                  
                  
                  
                  Balance SheetLocation
                  
                  Fair Value
                  
                  Location
                  
                  Fair ValueInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                  Accrued
      expenses and other liabilities
                  
                  $
                  (341
                  )
                  Accrued
      expenses and other liabilities
                  
                  $
                  (520
                  )Total
      interest rate swaps not designated as hedging instruments under SFAS
      133:Total
      interest rate swaps
                  
                  
                  $
                  (341
                  )
                  
                  
                  $
                  (520
                  )
 
 The
effect of interest rate swaps for the six months ended June 30, 2010 and 2009
are as follows:
 
 SixMonthsEndedJune30,2010
                  
                  
                  June30,2009Location of Gain or (Loss)
                  
                  (Dollars in Thousands)Recognized in Non-interest
                  
                  Amount of the Gain or (Loss)Income
                  
                  Recognized in IncomeInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                  Other
                  
                  $
                  (79
                  )
                  
                  $
                  (56
                  )Total
                  
                  
                  $
                  (79
                  )
                  
                  $
                  (56
                  )
 
 NOTE
7.   FEDERAL HOME LOAN BANK ADVANCES
 
 FHLB
advances had a weighted-average maturity of 58 months and a weighted-average
rate of 3.58% at June 30, 2010.   The decrease in FHLB borrowings
to $170.7 million at June 30, 2010 as compared to December 31, 2009 was due to
repayments of $25.0 million which exceeded proceeds from advances of $13.0
million.
 
 NOTE
8.  OTHER BORROWINGS
  Other
borrowings were $5.0 million at June 30, 2010.  The Company borrowed
$5.0 million, at market rates, from another financial institution in June 2010
which is secured by shares of the Company’s common stock owned by Atlantic Coast
Federal, MHC. The Company’s Executive Chairman of the Board also serves as the
president and chief executive officer and a director of the financial
institution from which the borrowing was obtained. The Company contributed $2.9
million to Atlantic Coast Bank as additional capital and used the remaining
proceeds to pay off the remaining balance of $2.1 million of other
borrowings.
  17
 NOTE
9.  LOSS PER COMMON SHARE
 
 Basic
loss per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the period, reduced for average
unallocated ESOP shares and average unearned restricted stock awards. Diluted
loss per common share is computed by dividing net loss by the average number of
common shares outstanding for the period increased for the dilutive effect of
unvested stock options and stock awards. The dilutive effect of the unvested
stock options and stock awards is calculated under the treasury stock method
utilizing the average market value of the Company’s stock for the period. A
reconciliation of the numerator and denominator of the basic and diluted loss
per common share computation for the three and six months ended June 30, 2010
and 2009 is as follows:
 
 (Dollars in Thousands, except per share data)For the three months
                        
                        
                        For the six monthsended June 30,
                        
                        
                        ended June 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009BasicNet
      loss
                        
                        $
                        (4,078
                        )
                        
                        $
                        (4,634
                        )
                        
                        $
                        (6,837
                        )
                        
                        $
                        (7,694
                        )Weighted
      average common shares outstanding
                        
                        
                        13,378,864
                        
                        
                        
                        13,428,263
                        
                        
                        
                        13,384,998
                        
                        
                        
                        13,431,670Less:
      Average unallocated ESOP shares
                        
                        
                        (186,208
                        )
                        
                        
                        (232,760
                        )
                        
                        
                        (186,208
                        )
                        
                        
                        (232,760
                        )Average
      unvested restricted stock awards
                        
                        
                        (56,325
                        )
                        
                        
                        (109,183
                        )
                        
                        
                        (57,022
                        )
                        
                        
                        (109,995
                        )Average
      Shares
                        
                        
                        13,136,331
                        
                        
                        
                        13,086,320
                        
                        
                        
                        13,141,768
                        
                        
                        
                        13,088,915Basic
      loss per common share
                        
                        $
                        (0.31
                        )
                        
                        $
                        (0.36
                        )
                        
                        $
                        (0.52
                        )
                        
                        $
                        (0.59
                        )DilutedNet
      loss
                        
                        $
                        (4,078
                        )
                        
                        $
                        (4,634
                        )
                        
                        $
                        (6,837
                        )
                        
                        $
                        (7,694
                        )Weighted
      average shares outstanding from above
                        
                        
                        13,136,331
                        
                        
                        
                        13,086,320
                        
                        
                        
                        13,141,768
                        
                        
                        
                        13,088,915Add:Dilutive
      effects of assumed exercise of stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Dilutive
      effects of full vesting of stock awards
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Average
      shares and dilutive potential common shares
                        
                        
                        13,136,331
                        
                        
                        
                        13,086,320
                        
                        
                        
                        13,141,768
                        
                        
                        
                        13,088,915Diluted
      loss per common share
                        
                        $
                        (0.31
                        )
                        
                        $
                        (0.36
                        )
                        
                        $
                        (0.52
                        )
                        
                        $
                        (0.59
                        )
 
 Stock
options for shares of common stock were not considered in computing diluted
earnings per common share for the three and six months ended June 30, 2010 and
2009, respectively.  There was no dilutive effect as each period
reported a net loss.
  18


NOTE
10.  TOTAL COMPREHENSIVE LOSS





Comprehensive
loss consists of net loss and other comprehensive income
(loss).  Other comprehensive income (loss) includes unrealized gains
and losses on securities available-for-sale and unrealized gains and losses on
cash flow  hedges.  Following is a summary  of
other comprehensive income (loss) for the three and six months ended June 30,
2010 and 2009:





(Dollars
      in Thousands)Three months ended June 30,
                      
                      
                      Six months ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Net
      loss
                      
                      $
                      (4,078
                      )
                      
                      $
                      (4,634
                      )
                      
                      $
                      (6,837
                      )
                      
                      $
                      (7,694
                      )Other
      comprehensive income (loss):Change
      in securities available for sale:Unrealized
      holding gains (losses) arising during the period
                      
                      
                      1,900
                      
                      
                      
                      (576
                      )
                      
                      
                      3,538
                      
                      
                      
                      (1,369
                      )Less
      reclassification adjustments for (gains) losses recognized in
      income
                      
                      
                      (1,229
                      )
                      
                      
                      (118
                      )
                      
                      
                      (1,229
                      )
                      
                      
                      (215
                      )Net
      unrealized gains
                      
                      
                      671
                      
                      
                      
                      (694
                      )
                      
                      
                      2,309
                      
                      
                      
                      (1,584
                      )Income
      tax effect
                      
                      
                      6
                      
                      
                      
                      (62
                      )
                      
                      
                      74
                      
                      
                      
                      18Net
      of tax effect
                      
                      
                      677
                      
                      
                      
                      (756
                      )
                      
                      
                      2,383
                      
                      
                      
                      (1,566
                      )Other-than-temporary-impairment
      on  available-for-sale debt securities recorded  in
      other comprehensive income
                      
                      
                      16
                      
                      
                      
                      506
                      
                      
                      
                      691
                      
                      
                      
                      806Less
      other-than-temporary-impairment on available-for-sale debt securities
      associated  with credit loss realized in income
                      
                      
                      (6
                      )
                      
                      
                      1,146
                      
                      
                      
                      (81
                      )
                      
                      
                      1,320Income
      tax effect
                      
                      
                      (6
                      )
                      
                      
                      (333
                      )
                      
                      
                      19
                      
                      
                      
                      (246
                      )Net
      of tax effect
                      
                      
                      4
                      
                      
                      
                      1,319
                      
                      
                      
                      629
                      
                      
                      
                      1,880Total
      other comprehensive income (loss)
                      
                      
                      681
                      
                      
                      
                      563
                      
                      
                      
                      3,012
                      
                      
                      
                      314Comprehensive
      loss
                      
                      $
                      (3,397
                      )
                      
                      $
                      (4,071
                      )
                      
                      $
                      (3,825
                      )
                      
                      $
                      (7,380
                      )




19


NOTE
11.  FAIR VALUE




Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The fair value hierarchy requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair values:




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





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





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





The
Company used the following methods and significant assumptions to estimate fair
values:





Investment
Securities:


The fair
values for investment securities are determined by quoted market prices, if
available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2).
For securities where quoted prices or market prices of similar securities are
not available, fair values are calculated using discounted cash flows or other
market indicators (Level 3). Discounted cash flows are calculated using spread
to swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading is more
liquid, broker quotes are used (if available) to validate the model. Rating
agency and industry research reports as well as defaults and deferrals on
individual securities are reviewed and incorporated into the
calculations.





Interest Rate
Swaps:


The fair
value of interest rate swaps is based on derivative valuation models using
market data inputs as of the valuation date (Level 2 inputs).


20





NOTE 11.  FAIR VALUE(continued)





Assets and Liabilities
Measured on a Recurring Basis





Assets
and liabilities measured at fair value on a recurring basis are summarized
below:





Fair
      Value Measurements at June 30, 2010 Using:Quoted
                      Prices
      in
                      Active
                      Markets
                      for
                      Identical
                      Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)(Dollars
      in Thousands)Assets:Available
      for saleU.S.
      government-sponsored entities and  agencies
                    
                    $
                    20,279
                    
                    
                    
                    -
                    
                    
                    $
                    20,279
                    
                    
                    
                    -State
      and municipal
                    
                    
                    885
                    
                    
                    
                    -
                    
                    
                    
                    885
                    
                    
                    
                    -Mortgage-backed
      securities – residential
                    
                    
                    54,660
                    
                    
                    
                    -
                    
                    
                    
                    54,660
                    
                    
                    
                    -Collateralized
      mortgage obligations – U.S. Govt.
                    
                    
                    111,322
                    
                    
                    
                    -
                    
                    
                    
                    111,322Collateralized
      mortgage obligations - other
                    
                    
                    12,894
                    
                    
                    
                    -
                    
                    
                    
                    9,972
                    
                    
                    
                    2,922Liabilities:Interest
      rate swap
                    
                    $
                    (341
                    )
                    
                    
                    -
                    
                    
                    $
                    (341
                    )





Fair
      Value Measurements at December 31, 2009 Using:Quoted
                    Prices
      in
                    Active
                    Markets
                    for
                    Identical
                    Assets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)(Dollars
      in Thousands)Assets:Available
      for sale securitiesU.S.
      government-sponsored entities and  agencies
                  
                  $
                  15,752
                  
                  
                  
                  -
                  
                  
                  $
                  15,752
                  
                  
                  
                  -State
      and municipal
                  
                  
                  844
                  
                  
                  
                  -
                  
                  
                  
                  844
                  
                  
                  
                  -Mortgage-backed
      securities – residential
                  
                  
                  38,410
                  
                  
                  
                  -
                  
                  
                  
                  38,410
                  
                  
                  
                  -Collateralized
      mortgage obligations – U.S. Govt.
                  
                  
                  102,439
                  
                  
                  
                  -
                  
                  
                  
                  102,439
                  
                  
                  
                  -Collateralized
      mortgage obligations – other
                  
                  
                  20,493
                  
                  
                  
                  -
                  
                  
                  
                  19,141
                  
                  
                  
                  1,352Liabilities:Interest
      rate swap
                  
                  $
                  (520
                  )
                  
                  $
                  -
                  
                  
                  $
                  (520
                  )
                  
                  $
                  -





Fair
value adjustments for interest rate swaps resulted in a gain of $179,000 for the
six months ended June 30, 2010.


21


NOTE 11.  FAIR VALUE(continued)


The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the six
month period ended June 30, 2010:


InvestmentSecuritiesAvailable-for-sale(Dollars
      in thousands)Balance
      of recurring Level 3 assets at January 1, 2010
                  
                  $
                  1,352Total
      realized and unrealized gains (losses):Included
      in earnings - realized
                  
                  
                  768Included
      in earnings - unrealized
                  
                  
                  -Included
      other comprehensive income
                  
                  
                  (781
                  )Proceeds
      from maturities and payments, net
                  
                  
                  (7,674
                  )Transfers
      in and/or out of Level 3
                  
                  
                  9,257Balance
      of recurring Level 3 assets at June 30, 2010
                  
                  $
                  2,922




Market
conditions for certain debt securities has resulted in unreliable or unavailable
fair values, often resulting in transfers in and / or out of Level
3.  The Company determined that one debt security totaling $2.9
million was more appropriately evaluated as a Level 3 asset as of June 30,
2010.  This one security was priced as a Level 2 asset at December 31,
2009.   Three securities evaluated as Level 3 assets as of
December 31, 2009 were priced as Level 2 assets as of June 30,
2010.





Level 3
assets were evaluated utilizing models, that included certain unobservable
inputs,  to project future performance using collateral assumptions,
such as expected future default rates, expected future severity rates,
prepayments and recoveries.




22


NOTE 11.  FAIR VALUE(continued)





Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:





Fair
      Value Measurements at June 30, 2010 Using:Quoted
                      Prices
      in
                      Active
                      Markets
                      for
                      Identical
                      Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)(Dollars
      in Thousands)Assets:Other
      real estate owned
                    
                    $
                    7,340
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    7,340Impaired
      loans – collateral dependent
                    
                    
                    21,998
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    21,998





Fair
      Value Measurements at December 31, 2009 Using:Quoted
                    Prices
      in
                    Active
                    Markets
                    for
                    Identical
                    Assets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)(Dollars
      in Thousands)Assets:Other
      real estate owned
                  
                  $
                  5,028
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,028Impaired
      loans – collateral dependent
                  
                  $
                  28,773
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  28,773





Other Real Estate
Owned:


Assets
acquired through or in lieu of loan foreclosure are initially recorded at fair
value, based on appraisals, less estimated selling costs, at the date of
foreclosure, establishing a new cost basis.  The fair value of the
Company’s other real estate owned is determined using Level 3 inputs which
include current and prior appraisals and estimated costs to
sell.  Changes in fair value are recorded directly as an adjustment to
current earnings through non-interest expense.  Costs relating to
improvement of property may be capitalized, whereas costs relating to the
holding of property are expensed.





Impaired
loans:


Impaired
loans which are collateral dependent are measured for impairment using the fair
value of the collateral.  Collateral dependent loans had a carrying
amount of $22.0 million and $28.8 million, net of a valuation allowance of $2.3
million and $5.4 million at June 30, 2010 and December 31, 2009,
respectively.  Provision for loan losses of $610,000 and $2.3 million
was recorded on impaired loans during the six months ended June 30, 2010 and
2009, respectively.




23




NOTE
12.  FAIR VALUE OF FINANCIAL INSTRUMENTS





Carrying
amount and estimated fair value of financial instruments, not previously
presented, were as follows:





As
      of June 30,
                  
                  
                  As
      of December 31,2010
                  
                  
                  2009Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair Value(Dollars
      in Thousands)FINANCIAL
      ASSETSCash
      and cash equivalents
                  
                  $
                  29,892
                  
                  
                  $
                  29,892
                  
                  
                  $
                  37,144
                  
                  
                  $
                  37,144Loans
      held for sale
                  
                  
                  17,086
                  
                  
                  
                  17,086
                  
                  
                  
                  8,990
                  
                  
                  
                  8,990Loans,
      net
                  
                  
                  586,676
                  
                  
                  
                  576,280
                  
                  
                  
                  614,371
                  
                  
                  
                  614,229Federal
      Home Loan Bank stock
                  
                  
                  10,023
                  
                  
                  
                  n/a
                  
                  
                  
                  10,023
                  
                  
                  
                  n/aAccrued
      interest receivable
                  
                  
                  3,210
                  
                  
                  
                  3,210
                  
                  
                  
                  3,261
                  
                  
                  
                  3,261FINANCIAL
      LIABILITIESDeposits
                  
                  
                  575,011
                  
                  
                  
                  576,078
                  
                  
                  
                  555,444
                  
                  
                  
                  557,094Securities
      sold under agreements to repurchase
                  
                  
                  92,800
                  
                  
                  
                  104,611
                  
                  
                  
                  92,800
                  
                  
                  
                  102,537Federal
      Home Loan Bank advances
                  
                  
                  170,741
                  
                  
                  
                  184,243
                  
                  
                  
                  182,694
                  
                  
                  
                  201,227Accrued
      interest payable
                  
                  
                  1,239
                  
                  
                  
                  1,239
                  
                  
                  
                  1,318
                  
                  
                  
                  1,318





The
methods and assumptions used to estimate fair value are described as
follows:





Carrying
amount is the estimated fair value for cash and cash equivalents, accrued
interest, demand and savings deposits and variable rate loans or deposits that
re-price frequently and fully.  For fixed rate loans or deposits and
for variable rate loans or deposits with infrequent re-pricing or re-pricing
limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk.  Fair value of debt
(FHLB advances and securities sold under agreements to repurchase) is based on
current rates for similar financing. It was not practicable to determine the
fair vale of FHLB stock due to restrictions placed on its
transferability.  The estimated fair value of other financial
instruments and off-balance-sheet loan commitments approximate cost and are not
considered significant to this presentation.





NOTE
13.  INCOME TAXES





Under
generally accepted accounting principles, the Company considers at each
reporting period all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed to reduce its deferred tax asset to an amount that is more likely than
not to be realized.





A
determination of the need for a valuation allowance for the deferred tax assets
is dependent upon management’s evaluation of both positive and negative
evidence.  Positive evidence includes the probability of achieving
forecasted future taxable income, applicable tax planning strategies and
assessments of the current and future economic and business
conditions.  Negative evidence includes the Company’s cumulative
losses and expiring tax credit carryforwards.





At June
30, 2010, the Company evaluated the expected realization of its federal and
state deferred tax assets which, prior to a valuation allowance, totaled $17.1
million and was primarily comprised of future tax benefits associated with the
allowance for loan losses and net operating loss carryforwards.  Based
on this evaluation it was concluded that a valuation allowance continues to be
required for the federal deferred tax asset.  The realization of the
deferred tax asset is dependent upon generating taxable income.  The
Company also continues to maintain a valuation allowance for the state deferred
tax asset.





If the
valuation allowance is reduced or eliminated, future tax benefits will be
recognized as a reduction to income tax expense which will have a positive
non-cash impact on our net income and stockholders’ equity.


24





NOTE 13.  INCOME
TAXES (continued)





Income
tax expense (benefit) was as follows:





Year to dateJune 30, 2010
                  
                  
                  June 30, 2009Pre-tax
      loss
                  
                  $
                  (6,837
                  )
                  
                  $
                  (11,884
                  )Effective
      tax rate
                  
                  
                  38.0
                  %
                  
                  
                  38.6
                  %Tax
      benefit
                  
                  
                  (2,598
                  )
                  
                  
                  (4,587
                  )Increase
      in valuation allowance - federal
                  
                  
                  2,421
                  
                  
                  
                  -Increase
      in valuation allowance - state
                  
                  
                  177
                  
                  
                  
                  397Income
      tax expense (benefit)
                  
                  $
                  -
                  
                  
                  $
                  (4,190
                  )





NOTE
14 - STOCK CONVERSION





On August
2, 2010, the Board of Directors of Atlantic Coast Federal Corporation amended a
plan originally approved on June 16, 2010, to convert the Mutual Holding Company
from the mutual to stock form of organization.  The Mutual Holding
Company is a federally chartered mutual holding company and currently owns
approximately 65%, of the outstanding shares of common stock of the Company,
which owns 100% of the issued and outstanding shares of the capital stock of
Atlantic Coast Bank (the "Bank").  Pursuant to the terms of Atlantic
Coast Federal, MHC’s plan of conversion and reorganization, Atlantic Coast
Federal, MHC will convert from the mutual holding company to the stock holding
company corporate structure.  As part of the conversion, we are
offering for sale in a subscription offering, and possibly in a community and/or
a syndicated community offering, the majority ownership interest of Atlantic
Coast Federal Corporation that is currently owned by Atlantic Coast Federal,
MHC.  Upon the completion of the conversion and offering, Atlantic
Coast Federal, MHC will cease to exist, and we will complete the transition from
partial to full public stock ownership.  Upon completion of the
conversion, existing public stockholders of Atlantic Coast Federal Corporation
will receive shares of common stock of Atlantic Coast Financial Corporation in
exchange for their shares of Atlantic Coast Federal Corporation common stock in
order to maintain the public stockholders’ existing percentage ownership in our
organization (excluding any new shares purchased by them in the
offering).





In
connection with the conversion, shares of common stock of a new successor
holding company, representing the ownership interest of the Mutual Holding
Company, will be offered for sale to depositors of the Bank.  The
following persons and employee benefit plan have subscription rights to purchase
shares of common stock of the new holding company in the following order of
priority: (1) depositors of record as of March 31, 2009; (2) the Bank's employee
stock ownership plan; (3) depositors of record as of the end of the calendar
quarter preceding the commencement of the offering; and (4) depositors entitled
to vote on the conversion proposal.  If necessary, shares will be
offered to the general public.  In addition, upon completion of the
conversion of the Mutual Holding Company, shares of the Company's common stock
held by public stockholders will be exchanged for shares of a new corporation,
which will become the Bank's new parent holding company.  As a result
of the conversion and offering, the Mutual Holding Company and Company will
cease to exist.




25





NOTE 14 - STOCK CONVERSION(continued)





The
conversion is subject to approval of the Office of Thrift Supervision as well as
the approval of the Mutual Holding Company's members (depositors of the Bank)
and the Company's stockholders.  Proxy materials setting forth
information relating to the conversion and offering will be sent to the members
of the Mutual Holding Company and stockholders of the Company for their
consideration.  The offering will be made only by means of a
prospectus in accordance with federal law and all applicable state securities
laws.  The conversion and offering are expected to be completed in the
fourth quarter of 2010.





Expenses
capitalized related to the stock conversion were $782,000 as of June 30, 2010.
Expenses capitalized will be netted from proceeds if the offering is successful.
Alternatively, expenses capitalized will be expensed in the event the offering
is terminated.


26





ATLANTIC
COAST FEDERAL CORPORATION





ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Forward-Looking
Statements




This
Form 10-Q contains forward-looking statements that are not historical or current
facts. When used in this filing and in future filings by Atlantic Coast Federal
Corporation with the Securities and Exchange Commission, in Atlantic Coast
Federal Corporation’s press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases, “anticipate,” “would be,” “will allow,”
“intends to,” “will likely result,” “are expected to,” will continue,” “is
anticipated,” “estimated,” “projected,” or similar expressions are intended to
identify, “forward looking statements.”  Such statements are subject
to risks and uncertainties, including but not limited to changes in economic
conditions in Atlantic Coast Federal Corporation’s market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Atlantic Coast Federal Corporation’s market area, changes in the
position of banking regulators on the adequacy of our allowance for loan losses,
and competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.




Atlantic
Coast Federal Corporation wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investing activities, and competitive and
regulatory factors, could affect Atlantic Coast Federal Corporation’s financial
performance and could cause Atlantic Coast Federal Corporation’s actual results
for future periods to differ materially from those anticipated or
projected.




Atlantic
Coast Federal Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such
statements.




Critical
Accounting Policies





Certain
accounting policies are important to the portrayal of the Company’s financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain.  Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and circumstances,
including, but without limitation, changes in interest rates, performance of the
economy, financial condition of borrowers and laws and
regulations.  Management believes that its critical accounting
policies include determining the allowance for loan losses, determining the fair
value of securities and accounting for deferred income
taxes.  Atlantic Coast Federal Corporation’s accounting policies are
discussed in detail in Note 1 of the Notes to the Consolidated Financial
Statements included in Item 8 of our Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the Securities and Exchange
Commission.





Allowance
for Loan Losses





An
allowance for loan losses (“allowance”) is maintained to reflect probable
incurred losses in the loan portfolio.  The allowance is based on
ongoing assessments of the estimated losses incurred in the loan portfolio and
is established as these losses are recognized through a provision for loan
losses charged to earnings. Generally, loan losses are charged against the
allowance when management believes the uncollectibity of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. Due to
declining real estate values in our markets and the condition of the United
States economy in general, it is increasingly likely that impairment allowances
on non-performing collateral dependent loans, particularly one-to four-family
residential loans, will not be recoverable and represent a confirmed loss. As a
consequence the Company recognizes the charge-off of impairment allowances on
non-performing one-to four family residential loans in the period the loan is
classified as such. This accelerates the recognition of charge-offs but has no
impact on the impairment evaluation process.




27


The
reasonableness of the allowance is reviewed and established by management,
within the context of applicable accounting and regulatory guidelines, based
upon its evaluation of then-existing economic and business conditions affecting
the Bank’s key lending areas.  Senior credit officers monitor the
conditions discussed above continuously and reviews are conducted quarterly with
the Bank’s senior management and Board of Directors.





Management’s
methodology for assessing the reasonableness of the allowance consists of
several key elements, which include a general loss component by type of loan and
specific allowances for identified problem loans.  The allowance also
incorporates the results of measuring impaired loans.





The
general loss component is calculated by applying loss factors to outstanding
loan balances based on the internal risk evaluation of the loans or pools of
loans.  Changes to the risk evaluations relative to both performing
and non-performing loans affect the amount of this component.  Loss
factors are based on the Bank’s recent loss experience, current market
conditions that may impact real estate values within the Bank’s primary lending
areas, and on other significant factors that, in management’s judgment, may
affect the ability to collect loans in the portfolio as of the evaluation
date.  Other significant factors that exist as of the balance sheet
date that may be considered in determining the adequacy of the allowance include
credit quality trends (including trends in non-performing loans expected to
result from existing conditions), collateral values, geographic foreclosure
rates, new and existing home inventories, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent charge-off
experience in particular segments of the portfolio. The impact of the general
loss component on the allowance began increasing during 2008 and
2009.  The increases reflected the deterioration of market conditions,
and the increase in the recent loan loss experience that has resulted from
management’s proactive approach to charging off losses on impaired
loans.





Management
also evaluates the allowance for loan losses based on a review of certain large
balance individual loans.  This evaluation is inherently subjective as
it requires material estimates including the amounts and timing of future cash
flows management expects to receive on impaired loans that may be susceptible to
significant change.  For all specifically reviewed loans where it is
probable the Bank will be unable to collect all amounts due according to the
terms of the loan agreement, impairment is determined by computing a fair value
based on either discounted cash flows using the loan’s initial interest rate or
the fair value of the collateral if the loan is collateral
dependent.  Large groups of smaller balance homogeneous loans, such as
individual consumer and residential loans are collectively evaluated for
impairment and are excluded from the specific impairment evaluation; for these
loans, the allowance for loan losses is calculated in accordance with the
allowance for loan losses policy described above.  Accordingly, the
Bank does not separately identify individual consumer and residential loans for
impairment disclosures.





Fair
Value of Securities Available for Sale




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. In determining OTTI, management considers many factors,
including: (1) the length of time and the extent to which the fair value
has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.


28




When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between its amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI is separated into the amount
representing the credit loss and the amount related to all other factors. The
amount of the total related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized as a
charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.  The Company recorded an
expense for other-than-temporary impairment of $(81,000) in non-interest income
(loss) on two private label mortgage-backed mezzanine (support) debt securities
for the six months ended June 30, 2010.  The Company recorded an
expense for other-than-temporary impairment of $1.3 million for the six months
ended June 30, 2009.





Deferred
Income Taxes





After
converting to a federally chartered savings association, Atlantic Coast Bank
became a taxable organization.  Income tax expense (benefit) is the
total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities.  Deferred tax assets and
liabilities are the expected future tax amounts for the temporary difference
between carrying amounts and tax basis of assets and liabilities, computed using
enacted tax rates and operating loss carryforwards.  The Company’s
principal deferred tax assets result from the allowance for loan losses and
operating loss carryforwards.  A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be
realized.  The Internal Revenue Code and applicable regulations are
subject to interpretation with respect to the determination of the tax basis of
assets and liabilities for credit unions that convert charters and become a
taxable organization.  Since Atlantic Coast Bank’s transition to a
federally chartered thrift, Atlantic Coast Federal Corporation has recorded
income tax expense based upon management’s interpretation of the applicable tax
regulations.  Positions taken by the Company in preparing our federal
and state tax returns are subject to the review of taxing authorities, and the
review by taxing authorities of the positions taken by management could result
in a material adjustment to the financial statements.





All
available evidence, both positive and negative, is considered when determining
whether or not a valuation allowance is necessary to reduce the carrying amount
to a balance that is considered more likely than not to be
realized.  The determination of the realizability of deferred tax
assets is highly subjective and dependent upon judgment concerning management’s
evaluation of such evidence.  Positive evidence considered includes
the probability of achieving forecasted taxable income and the ability to
implement tax planning strategies to accelerate taxable income
recognition.  Negative evidence includes the Company’s cumulative
losses.  Following the initial establishment of a valuation allowance,
if the Company is unable to generate sufficient pre-tax income in future periods
or otherwise fails to meet forecasted operating results, an additional valuation
allowance may be required.  Any valuation allowance is required to be
recorded during the period identified.  As of June 30, 2010, the
Company had a valuation allowance of $17.1 million for the net deferred tax
asset.





Comparison
of Financial Condition at June 30, 2010 and December 31, 2009





General.Total assets
decreased $4.2 million to $901.4 million at June 30, 2010 as compared to $905.6
million at December 31, 2009.  The primary reason for the
decrease in assets was a decrease in net loans of $27.7 million as well as a
decrease in cash of $7.3 million, partially offset by the increase in available
for sale securities of $22.1 million as well as an increase in loans held for
sale of $8.1 million.  Total deposits increased $19.6 million to
$575.0 million at June 30, 2010 from $555.4 million at December 31,
2009.  Core deposits grew by $8.2 million, while time deposits
increased $11.4 million, primarily due to growth in brokered
deposits.


29


Following
is a summarized comparative balance sheet as of June 30, 2010 and December 31,
2009:





June 30,
                      
                      
                      December 31,
                      
                      
                      Increase(decrease)2010
                      
                      
                      2009
                      
                      
                      Dollars
                      
                      
                      Percentage(Dollars
      in Thousands)AssetsCash
      and cash equivalents
                      
                      $
                      29,892
                      
                      
                      $
                      37,144
                      
                      
                      $
                      (7,252
                      )
                      
                      
                      -19.5
                      %Securitites
      available for sale
                      
                      
                      200,040
                      
                      
                      
                      177,938
                      
                      
                      
                      22,102
                      
                      
                      
                      12.4
                      %Loans
                      
                      
                      596,912
                      
                      
                      
                      628,181
                      
                      
                      
                      (31,269
                      )
                      
                      
                      -5.0
                      %Allowance
      for loan losses
                      
                      
                      (10,236
                      )
                      
                      
                      (13,810
                      )
                      
                      
                      3,574
                      
                      
                      
                      -25.9
                      %Loans,
      net
                      
                      
                      586,676
                      
                      
                      
                      614,371
                      
                      
                      
                      (27,695
                      )
                      
                      
                      -4.5
                      %Loans
      held for sale
                      
                      
                      17,086
                      
                      
                      
                      8,990
                      
                      
                      
                      8,096
                      
                      
                      
                      90.1
                      %Other
      assets
                      
                      
                      67,680
                      
                      
                      
                      67,118
                      
                      
                      
                      562
                      
                      
                      
                      0.8
                      %Total
      assets
                      
                      $
                      901,374
                      
                      
                      $
                      905,561
                      
                      
                      $
                      (4,187
                      )
                      
                      
                      -0.5
                      %Liabilities
      and Stockholders' equityDepositsNon-interest
      bearing demand
                      
                      $
                      35,130
                      
                      
                      $
                      34,988
                      
                      
                      $
                      142
                      
                      
                      
                      0.4
                      %Interest
      bearing demand
                      
                      
                      78,758
                      
                      
                      
                      79,192
                      
                      
                      
                      (434
                      )
                      
                      
                      -0.5
                      %Savings
      and money market
                      
                      
                      169,260
                      
                      
                      
                      160,784
                      
                      
                      
                      8,476
                      
                      
                      
                      5.3
                      %Time
                      
                      
                      291,863
                      
                      
                      
                      280,480
                      
                      
                      
                      11,383
                      
                      
                      
                      4.1
                      %Total
      deposits
                      
                      
                      575,011
                      
                      
                      
                      555,444
                      
                      
                      
                      19,567
                      
                      
                      
                      3.5
                      %Federal
      Home Loan Bank advances
                      
                      
                      170,741
                      
                      
                      
                      182,694
                      
                      
                      
                      (11,953
                      )
                      
                      
                      -6.5
                      %Securities
      sold under agreements to repurchase
                      
                      
                      92,800
                      
                      
                      
                      92,800
                      
                      
                      
                      -
                      
                      
                      
                      0.0
                      %Other
      borrowings
                      
                      
                      5,000
                      
                      
                      
                      12,200
                      
                      
                      
                      (7,200
                      )
                      
                      
                      -59.0
                      %Accrued
      expenses and other liabilities
                      
                      
                      4,606
                      
                      
                      
                      5,882
                      
                      
                      
                      (1,276
                      )
                      
                      
                      -21.7
                      %Total
      liabilities
                      
                      
                      848,158
                      
                      
                      
                      849,020
                      
                      
                      
                      (862
                      )
                      
                      
                      -0.1
                      %Stockholders' equity
                      
                      
                      53,216
                      
                      
                      
                      56,541
                      
                      
                      
                      (3,325
                      )
                      
                      
                      -5.9
                      %Total
      liabilities and stockholders' equity
                      
                      $
                      901,374
                      
                      
                      $
                      905,561
                      
                      
                      $
                      (4,187
                      )
                      
                      
                      -0.5
                      %


30


Securities available for
sale.  Securities available for sale is comprised primarily of
debt securities





of U.S.
Government-sponsored enterprises and mortgage-backed securities
(MBS).  The investment portfolio increased approximately $22.1 million
to $200.0 million at June 30, 2010, net of purchases, sales and
maturities.  The increase in securities available for sale was the
result of the redeployment of proceeds received from the increased payoffs and
amortization of one- to four-family residential loans as opportunities were
limited for portfolio loan origination that were within the Company’s asset and
liability targets. Expense for other-than-temporary impairment was approximately
$(81,000) in non-interest income (loss) on two private label collateralized
mortgage obligation mezzanine (support) debt securities for the six months ended
June 30, 2010.





AtJune30,2010Amortized
                            
                            
                            Fair
                            
                            
                            Number
      of
                            
                            
                            CumulativeCost
                            
                            
                            Value
                            
                            
                            Securities
                            
                            
                            OTTI(Dollars
      in Thousands)Private
      label collateralized mortgage obligations with OTTI
                            
                            $
                            5,578
                            
                            
                            $
                            4,957
                            
                            
                            
                            9
                            
                            
                            $
                            4,548Private
      label collateralized mortgage obligations with no OTTI
                            
                            
                            7,853
                            
                            
                            
                            7,937
                            
                            
                            
                            5
                            
                            
                            
                            -Total
      private label collateralized mortgage obligations
                            
                            $
                            13,431
                            
                            
                            $
                            12,894
                            
                            
                            
                            14
                            
                            
                            $
                            4,548





At June
30, 2010, approximately $186.3. million, or 93% of the debt securities held
by the Company were issued by U.S. government-sponsored entities and agencies,
primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the
government has affirmed its commitment to support. Because the decline in fair
value is attributable to changes in interest rates and illiquidity, and not
credit quality, and because the Company does not have the intent to sell these
securities and it is likely it will not be required to sell the securities
before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at June 30, 2010.





Loans.  Portfolio
loans declined approximately 5% to $586.7 million at June 30, 2010 as compared
to $614.4 million at December 31, 2009 due to increased payoffs of one- to
four-family residential loans in the first six months of 2010, combined with the
sale of approximately $7.2 million of non-performing loans in the first six
months of 2010.





Total loan originations increased $35.4
million to $99.4 million for the six months ended June 30, 2010 from $63.9
million for the same period in 2009. Origination of loans held for sale in the
secondary market increased $16.1 million to $62.6 million during the first six
months of 2010, from $46.5 million for the same period in 2009, while portfolio
loan production increased $15.3 million to $37.1 million for the six months
ended June 30, 2010 from $21.8 million for the same period in
2009.Origination of residential
loans held for sale was strong as consumers took advantage of historically low
interest rates and the availability of certain federal income tax
credits.  However, the current level of interest rates limits
opportunities for portfolio loan origination within the Company’s asset and
liability management targets.





Until
critical economic factors stabilize, such as unemployment and residential real
estate values management believes portfolio loan balances will continue to
decline. However, due to a favorable interest rate environment, production of
one-to four-family residential loans held for sale in the secondary market is
expected to continue its moderate pace.  This strategy of selling the
majority of originated loans in the secondary market compliments the Bank’s
desire to reduce portfolio loan balances in order to maximize capital
efficiently.


31


Allowance for loan losses. The
allowance for loan losses was $10.2 million, or 1.71% of total loans compared to
$13.8 million or 2.22% of total loans outstanding at June 30, 2010 and December
31, 2009, respectively.


Non-performing assets:
                              
                              June 30,
                              
                              
                              December 31,2010
                              
                              
                              2009(Dollars
      in Thousands)Real Estate LoansOne-to-four-family
                              
                              $
                              8,213
                              
                              
                              $
                              12,343Commercial
                              
                              
                              1,433
                              
                              
                              
                              3,895Other
                              
                              
                              7,335
                              
                              
                              
                              9,638Construction
      - One-to-four-family
                              
                              
                              -
                              
                              
                              
                              -Construction
      - Commercial
                              
                              
                              1,682
                              
                              
                              
                              4,988Construction
      - Acquisition & Development
                              
                              
                              404
                              
                              
                              
                              404Other Loans - ConsumerHome
      Equity
                              
                              
                              1,976
                              
                              
                              
                              2,973Other
                              
                              
                              668
                              
                              
                              
                              909Commercial
                              
                              
                              14
                              
                              
                              
                              -Total
      non-performing loans
                              
                              
                              21,725
                              
                              
                              
                              35,150Foreclosed
      assets
                              
                              
                              7,340
                              
                              
                              
                              5,028Total
      non-performing assets
                              
                              $
                              29,065
                              
                              
                              $
                              40,178Total
      troubled debt restructurings (TDR)
                              
                              $
                              18,459
                              
                              
                              $
                              22,660Total
      impaired loans (including TDR)
                              
                              $
                              36,560
                              
                              
                              $
                              44,392Non-performing
      loans to total loans
                              
                              
                              3.64
                              %
                              
                              
                              5.64
                              %Non-performing
      loans to total assets
                              
                              
                              2.41
                              %
                              
                              
                              3.85
                              %Non-performing
      assets to total assets
                              
                              
                              3.22
                              %
                              
                              
                              4.44
                              %





Non-performing
loans were $21.7 million or 3.64% of total loans and $35.2 million, or 5.64% of
total loans at June 30, 2010, and December 31, 2009,
respectively.  The decrease was primarily due to the sale of $6.3
million of non-performing residential loans and a $3.3 million charge-off of a
non-performing commercial real estate loan.  Total impaired loans
decreased $7.8 million to $36.6 million at June 30, 2010 from $44.4 million at
December 31, 2009.  As of June 30, 2010 total non-performing one- to
four-family residential loans of $8.2 million included $6.1 million of one- to
four-family residential loans that had been written-down to the estimated fair
value of their collateral.  Further declines in the fair value of the
collateral, or a decision to sell loans as distressed assets, could result in
additional losses. The total allowance allocated for impaired loans decreased to
$2.3 million at June 30, 2010 from $5.4 million at December 31,
2009.  As of June 30, 2010, and December 31, 2009, all
non-performing loans were classified as non-accrual, and there were no loans 90
days past due and accruing interest as of June 30, 2010, and December 31,
2009.  Non-performing loans, excluding small balance homogeneous
loans, decreased to $9.5 million at June 30, 2010, from $17.2 million at
December 31, 2009.   Troubled debt restructured (“TDR”) loans
were $18.5 million as of June 30, 2010, as compared to $22.7 million at December
31, 2009.  These loans were primarily comprised of residential
mortgage loans collateralized by real estate and were evaluated for impairment
as required under GAAP.


32


The
tables below compare the general component, which is available for the entire
loan portfolio, and specific components of the allowance for loan losses to
non-performing loans as of June 30, 2010 and December 31, 2009:





Comparison
of Loan Loss Allowance to Non-Performing Loans


June 30,
2010





Non-
                                Performing
                                Loans
                              
                              
                              Amount of
                                General and
                                Specific Loan
                                Loss
                                Allowance
                              
                              
                              Percent of
                                General and
                                Specific Loan
                                Loss
                                Allowance to
                                Non-
                                Performing
                                Loans(Dollars
      in Thousands)Real Estate LoansOne-to
      four-family
                              
                              $
                              8,213
                              
                              
                              $
                              2,880
                              
                              
                              
                              35.07
                              %Commercial
                              
                              
                              1,433
                              
                              
                              
                              835
                              
                              
                              
                              58.27
                              %Other
      (land & multi-family)
                              
                              
                              7,335
                              
                              
                              
                              1,549
                              
                              
                              
                              21.12
                              %Real Estate ConstructionConstruction
      One-to four family
                              
                              
                              -
                              
                              
                              
                              14
                              
                              
                              
                              -Construction
      Commercial
                              
                              
                              1,682
                              
                              
                              
                              1
                              
                              
                              
                              0.06
                              %Acquistion
      & Development
                              
                              
                              404
                              
                              
                              
                              110
                              
                              
                              
                              27.23
                              %Other LoansHome
      Equity
                              
                              
                              1,976
                              
                              
                              
                              1,887
                              
                              
                              
                              95.50
                              %Consumer
                              
                              
                              668
                              
                              
                              
                              2,714
                              
                              
                              
                              406.29
                              %Commercial
                              
                              
                              14
                              
                              
                              
                              246
                              
                              
                              
                              1757.14
                              %Totals
                              
                              $
                              21,725
                              
                              
                              $
                              10,236
                              
                              
                              
                              47.12
                              %


33


Comparison
of Loan Loss Allowance to Non-Performing Loans


December
31, 2009





Non-
                          Performing
                          Loans
                        
                        
                        Amountof
                          LoanLoss
                          Allowance
                        
                        
                        %ofLoan
                          Loss
                          Allowanceto
                          Non-
                          Performing
                          Loans(Dollars
      in Thousands)Real Estate LoansOne-to
      four-family
                        
                        $
                        12,343
                        
                        
                        $
                        3,446
                        
                        
                        
                        27.92
                        %Commercial
                        
                        
                        3,895
                        
                        
                        
                        575
                        
                        
                        
                        14.76
                        %Other
      (land & multi-family)
                        
                        
                        9,638
                        
                        
                        
                        1,305
                        
                        
                        
                        13.54
                        %Real Estate ConstructionConstruction
      One-to four family
                        
                        
                        -
                        
                        
                        
                        47
                        
                        
                        
                        -Construction
      Commercial
                        
                        
                        4,988
                        
                        
                        
                        3,322
                        
                        
                        
                        66.60
                        %Acquistion
      & Development
                        
                        
                        404
                        
                        
                        
                        110
                        
                        
                        
                        27.23
                        %Other LoansHome
      Equity
                        
                        
                        2,973
                        
                        
                        
                        2,240
                        
                        
                        
                        75.34
                        %Consumer
                        
                        
                        909
                        
                        
                        
                        2,447
                        
                        
                        
                        269.20
                        %Commercial
                        
                        
                        -
                        
                        
                        
                        318
                        
                        
                        
                        -Totals
                        
                        $
                        35,150
                        
                        
                        $
                        13,810
                        
                        
                        
                        39.29
                        %


34


The
following table sets forth an analysis of the allowance for loan
losses:





June 30,
                                    
                                    
                                    June 30,2010
                                    
                                    
                                    2009Balance
      at beginning of period
                                    
                                    $
                                    13,810
                                    
                                    
                                    $
                                    10,598Charge-offs:Real Estate LoansOne-to
      four-family
                                    
                                    
                                    6,759
                                    
                                    
                                    
                                    3,989Commercial
                                    
                                    
                                    1,079
                                    
                                    
                                    
                                    590Other
      (Land & Multi-family)
                                    
                                    
                                    873
                                    
                                    
                                    
                                    3,393Real Estate Construction
    LoansConstruction
      One-to four family
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Construction
      Commercial
                                    
                                    
                                    3,307
                                    
                                    
                                    
                                    50Acquistion
      & Development
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other LoansHome
      equity
                                    
                                    
                                    2,032
                                    
                                    
                                    
                                    2,045Consumer
                                    
                                    
                                    833
                                    
                                    
                                    
                                    587Commercial
                                    
                                    
                                    698
                                    
                                    
                                    
                                    550Total
      charge-offs
                                    
                                    
                                    15,581
                                    
                                    
                                    
                                    11,204Recoveries:Real Estate LoansOne-to
      four-family
                                    
                                    
                                    548
                                    
                                    
                                    
                                    145Commercial
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other
      (Land & Multi-family)
                                    
                                    
                                    2
                                    
                                    
                                    
                                    16Real Estate Construction
    LoansConstruction
      One-to four family
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Construction
      Commercial
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Acquistion
      & Develpoment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other LoansHome
      equity
                                    
                                    
                                    87
                                    
                                    
                                    
                                    121Consumer
                                    
                                    
                                    149
                                    
                                    
                                    
                                    190Commercial
                                    
                                    
                                    4
                                    
                                    
                                    
                                    -Total
      recoveries
                                    
                                    
                                    790
                                    
                                    
                                    
                                    472Net
      charge-offs
                                    
                                    
                                    14,791
                                    
                                    
                                    
                                    10,732Provision
      for loan losses
                                    
                                    
                                    11,217
                                    
                                    
                                    
                                    12,007Balance
      at end of period
                                    
                                    $
                                    10,236
                                    
                                    
                                    $
                                    11,873





During
the six months ended June 30, 2010 loan charge-offs included approximately $4.5
million of partial charge-offs of one-to four- family residential loans
identified as non-performing,of which
$2.8 million was related to the sale of $6.3 million of non-performing one- to
four-family residential loans. Charge-offs in 2010 also included $3.3
million on one commercial loan for which a specific allowance had previously
been established.  Due to the decline in real estate values over the
past two years, the Company believes it is appropriate and prudent to reduce the
carrying balance of non-performing one-to four-family residential loans by the
expected loss amount rather than providing a general allowance.


35


Deferred Income
Taxes.  As of both June 30, 2010 and December 31, 2009 the
Company concluded that, while improved operating results are expected as the
economy begins to improve and the Bank’s non-performing assets decline, the
variability of the credit related costs are such that a more likely than not
conclusion of realization of the Company’s deferred tax asset could not be
supported. Consequently the Company has recorded a valuation allowance of $17.1
million for the full amount of the net federal and state deferred tax assets as
of June 30, 2010. Until such time as the Company determines it is more likely
than not that it is able to generate taxable income, no tax benefits will be
recorded in future periods to reduce net losses before taxes. However, at such
time in the future that the Company records taxable income or determines that
realization of the deferred tax asset is more likely than not, some or all of
the valuation allowance may be available as a tax benefit.




Deposits. Total deposits were
$575.0 million at June 30, 2010, an increase of $19.6 million from $555.4
million at December 31, 2009.  The $11.4 million increase in time
deposits was primarily due to higher brokered deposits acquired in conjunction
with the sale of our Lake City, Florida branch on December 31,
2009.  The relatively low rates on brokered deposits during the
quarter also made them an attractive source of funds.  The remainder
of the increase in deposits was an increase in savings and money market accounts
$8.5 million.  As a part of its capital preservation strategy, the
Bank intentionally lowered rates on time deposits in the second half of 2009 in
order to reduce those deposits consistent with loan balances decreases.
Management believes near term deposit growth will be moderate with an emphasis
on core deposits to match asset growth expectations. Dramatic changes in the
short-term interest rate environment could affect the availability of deposits
in our local market and therefore cause the Bank to promote time deposit growth
in order to meet liquidity needs.




Securities sold under agreements to
repurchase. Securities sold under agreements to repurchase are secured by
mortgage-backed securities with a carrying amount of $121.9 million at June 30,
2010, compared to $119.9 million at December 31, 2009.  The agreements
carry various periods of fixed interest rates that convert to callable floating
rates in the future.  Upon conversion, each agreement may be
terminated in whole by the lender each following quarter; there is no
termination penalty if terminated by the lender.  There have been no
early terminations as June 30, 2010.  At maturity or termination, the
securities underlying the agreements will be returned to the
Company.  The Company had $92.8 million of such agreements as of June
30, 2010 and December 31, 2009.





Securities
sold under agreements to repurchase are financing arrangements that mature
within ten years, beginning in January 2014.  At maturity, the
securities underlying the agreements are returned to the
Company.  Information concerning securities sold under agreements to
repurchase as of June 30, 2010 is summarized as follows:





(Dollars in Thousands)Average
      daily balance during the period
                  
                  $
                  92,800Average
      interest rate during the period
                  
                  
                  5.00
                  %Maximum
      month-end balance
                  
                  $
                  92,800Weighted
      average interest rate at period end
                  
                  
                  5.04
                  %





Depending
on the availability of suitable securities and the prevailing interest rates and
terms of alternative sources of funds, the Company may continue to sell
securities under agreements to repurchase in the future to fund growth; however
the Company does not plan to be active in the market in the near
term.


36





Federal Home Loan Bank
advances. FHLB advances had a weighted-average maturity of 58 months and
a weighted-average rate of 3.58% at June 30, 2010.   The decrease
in FHLB borrowings to $170.7 million at June 30, 2010 as compared to December
31, 2009 was due to repayments of $25.0 million which exceeded proceeds from
advances of $13.0 million.  The Company expects to continue to utilize
FHLB advances to manage short and long- term liquidity needs to the extent it
has borrowing capacity, needs funding and the interest expense of FHLB advances
is attractive compared to deposits and other alternative sources of funds.
However, with the FDIC’s new deposit insurance premium assessment schedule
raising assessment rates in order to recapitalize the Deposit Insurance Fund,
which takes into consideration an institution’s FHLB borrowings, our FDIC
assessment may increase, should any additional FHLB borrowings outpace deposit
growth.




Other
borrowings.  Other borrowings were $5.0 million at June 30,
2010.  The Company borrowed $5.0 million from another financial
institution in June 2010 which is secured by shares of the Company’s common
stock owned by Atlantic Coast Federal, MHC. The Company contributed $2.9 million
to Atlantic Coast Bank as additional capital and used the remaining proceeds to
pay off the remaining balance of $2.1 million of other borrowings.




Stockholders’
equity.  Stockholders’ equity decreased by approximately $3.3
million to $53.2 million at June 30, 2010 from $56.5 million at December 31,
2009 as the net loss of $6.8 million for the six months ended June 30, 2010 was
partially offset by the $3.0 million increase in other comprehensive
income.  Other comprehensive income for the six months ended June 30,
2010 was $3.2 million due to higher market values on available-for-sale
securities.




The
Company’s equity to assets ratio decreased to 5.90% at June 30, 2010, from 6.24%
at December 31, 2009. The decrease was due to the net loss of $6.8 million for
the six months ended June 30, 2010, partially offset by the increase in other
comprehensive income. Despite this decrease, Atlantic Coast Bank continued to be
well in excess of all minimum regulatory capital requirements, and is considered
“well capitalized” under those formulas.  Total risk-based capital to
risk-weighted assets was 11.1%, Tier 1 capital to risk-weighted assets was
9.8%, and Tier 1 capital to adjusted total assets was 5.8% at June 30, 2010.
These ratios as of December 31, 2009 were 11.4%, 10.2% and 6.1%,
respectively.





Comparison of Results of Operations
for the Three Months Ended June 30, 2010 and 2009.





General.Net loss for the three
months ended June 30, 2010, was $4.1 million, which was a decrease of $556,000
from a net loss of $4.6 million for the same period in 2009.  The net
loss for the three months ended June 30, 2009 was net of a tax benefit of $2.5
million.  The Company did not record any tax benefit for the three
months ended June 30, 2010 following the establishment of a valuation allowance
on the net deferred tax asset during 2009.  The loss before income
taxes was $4.1 million for the three months ended June 30, 2010 as compared to a
loss before income taxes of $7.2 million for the same period in
2009.  The reduction in loss before income taxes was primarily due to
a $1.1 million increase in net interest income, a $2.2 million increase in
non-interest income and a decrease in non-interest expense of $1.2 million,
partially offset by an increase in provision for loan losses of $1.3
million.





37





Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the three months ended June 30, 2010 and 2009. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.





ForthethreemonthsendedJune30,2010
                      
                      
                      2009(Dollars in Thousands)Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Average Yield
                        /Cost
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Average Yield
                        /CostINTEREST-EARNING ASSETSLoans
      receivable(1)
                      
                      $
                      619,306
                      
                      
                      $
                      9,491
                      
                      
                      
                      6.13
                      %
                      
                      $
                      716,871
                      
                      
                      $
                      10,266
                      
                      
                      
                      5.73
                      %Securites(2)
                      
                      
                      210,134
                      
                      
                      
                      2,155
                      
                      
                      
                      4.10
                      %
                      
                      
                      166,233
                      
                      
                      
                      1,838
                      
                      
                      
                      4.42
                      %Other interest-earning
      assets(3)
                      
                      
                      29,922
                      
                      
                      
                      46
                      
                      
                      
                      0.61
                      %
                      
                      
                      50,004
                      
                      
                      
                      23
                      
                      
                      
                      0.18
                      %Total
      interest-earning assets
                      
                      
                      859,362
                      
                      
                      
                      11,692
                      
                      
                      
                      5.44
                      %
                      
                      
                      933,108
                      
                      
                      
                      12,127
                      
                      
                      
                      5.20
                      %Non-interest
      earning assets
                      
                      
                      47,288
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      56,962Total
      assets
                      
                      $
                      906,650
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      990,070INTEREST-BEARING
LIABILITIESSavings
      deposits
                      
                      $
                      46,887
                      
                      
                      $
                      89
                      
                      
                      
                      0.76
                      %
                      
                      $
                      35,161
                      
                      
                      $
                      33
                      
                      
                      
                      0.38
                      %Interest
      bearing demand accounts
                      
                      
                      80,578
                      
                      
                      
                      299
                      
                      
                      
                      1.48
                      %
                      
                      
                      74,228
                      
                      
                      
                      360
                      
                      
                      
                      1.94
                      %Money
      market accounts
                      
                      
                      120,468
                      
                      
                      
                      322
                      
                      
                      
                      1.07
                      %
                      
                      
                      140,485
                      
                      
                      
                      581
                      
                      
                      
                      1.65
                      %Time
      deposits
                      
                      
                      296,162
                      
                      
                      
                      1,933
                      
                      
                      
                      2.61
                      %
                      
                      
                      341,339
                      
                      
                      
                      3,216
                      
                      
                      
                      3.77
                      %Securities
      sold under agreements to repurchase
                      
                      
                      92,800
                      
                      
                      
                      1,174
                      
                      
                      
                      5.06
                      %
                      
                      
                      92,800
                      
                      
                      
                      1,709
                      
                      
                      
                      7.37
                      %Federal
      Home Loan Bank advances
                      
                      
                      170,002
                      
                      
                      
                      1,567
                      
                      
                      
                      3.69
                      %
                      
                      
                      177,631
                      
                      
                      
                      1,017
                      
                      
                      
                      2.29
                      %Other
      borrowings
                      
                      
                      2,095
                      
                      
                      
                      44
                      
                      
                      
                      8.40
                      %
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      interest-bearing liabilities
                      
                      
                      808,992
                      
                      
                      
                      5,428
                      
                      
                      
                      2.68
                      %
                      
                      
                      861,644
                      
                      
                      
                      6,916
                      
                      
                      
                      3.21
                      %Non-interest
      bearing liabilities
                      
                      
                      40,183
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      48,648Total
      liabilities
                      
                      
                      849,175
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      910,292Stockholders'
      equity
                      
                      
                      57,475
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      79,778Total
      liabilities and stockholders' equity
                      
                      $
                      906,650
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      990,070Net
      interest income
                      
                      
                      
                      
                      
                      $
                      6,264
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      5,211Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.76
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.99
                      %Net
      earning assets
                      
                      $
                      50,370
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      71,464Net interest
      margin(4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.92
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.23
                      %Average
      interest-earning assets to average interest-bearing
      liabilities
                      
                      
                      
                      
                      
                      
                      106.23
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      108.29
                      %





(1)
            Calculated
      net of deferred loan fees. Nonaccrual loans included as loans carrying a
      zero yield.


(2)
            Calculated
      based on carrying value. Not full tax equivalents, as the numbers would
      not change materially from those presented  in the
      table.


(3)
            Includes
      Federal Home Loan Bank stock at cost and term deposits with other
      financial institutions.


(4)
            Net
      interest income divided by average interest-earning
  assets.





38





Rate/Volume Analysis. The
following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities as of and for the three months ended June 30, 2010
as compared to the same period in 2009. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                                  
                                  
                                  TotalDueto
                                  
                                  
                                  IncreaseVolume
                                  
                                  
                                  Rate
                                  
                                  
                                  (Decrease)(Dollars in Thousands)INTEREST-EARNING ASSETSLoans receivable
                                  
                                  $
                                  (1,462
                                  )
                                  
                                  $
                                  687
                                  
                                  
                                  $
                                  (775
                                  )Securities
                                  
                                  
                                  458
                                  
                                  
                                  
                                  (141
                                  )
                                  
                                  
                                  317Other
      interest-earning assets
                                  
                                  
                                  (12
                                  )
                                  
                                  
                                  35
                                  
                                  
                                  
                                  23Total
      interest-earning assets
                                  
                                  
                                  (1,016
                                  )
                                  
                                  
                                  581
                                  
                                  
                                  
                                  (435
                                  )INTEREST-BEARING
LIABILITIESSavings
      deposits
                                  
                                  
                                  14
                                  
                                  
                                  
                                  42
                                  
                                  
                                  
                                  56Interest
      bearing demand accounts
                                  
                                  
                                  29
                                  
                                  
                                  
                                  (90
                                  )
                                  
                                  
                                  (61
                                  )Money
      market accounts
                                  
                                  
                                  (74
                                  )
                                  
                                  
                                  (185
                                  )
                                  
                                  
                                  (259
                                  )Time
      deposits
                                  
                                  
                                  (386
                                  )
                                  
                                  
                                  (897
                                  )
                                  
                                  
                                  (1,283
                                  )Securities
      sold under agreements to repurchase
                                  
                                  
                                  -
                                  
                                  
                                  
                                  157
                                  
                                  
                                  
                                  157Federal
      Home Loan Bank advances
                                  
                                  
                                  (72
                                  )
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  (142
                                  )Other
      borrowings
                                  
                                  
                                  44
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  44Total
      interest-bearing liabilities
                                  
                                  
                                  (445
                                  )
                                  
                                  
                                  (1,043
                                  )
                                  
                                  
                                  (1,488
                                  )Net
      interest income
                                  
                                  $
                                  (571
                                  )
                                  
                                  $
                                  1,624
                                  
                                  
                                  $
                                  1,053





Interest income.Total
interest income declined $435,000 to $11.7 million for the three months ended
June 30, 2010 from $12.1 million for the three months ended June 30, 2009
primarily due the decrease in interest income on loans.  Interest
income on loans decreased to $9.5 million for the three months ended June 30,
2010 from $10.3 million for the same period in 2009.  This decrease
was due primarily to a decline in the average balance of loans, which decreased
$97.6 million, to $619.3 million for the three months ended June 30, 2010 from
$716.9 million for the prior year period.  Interest income earned on
securities increased for the three months ended June 30, 2010 as compared to the
same period in 2009, due to increase in the average balance of $43.9 million,
partially offset by lower interest rates on new purchases of comparable
securities, which resulted in a 32 basis point decline in average
rate.





Interest
income was adversely impacted by continued low interest rates and the
unavailability of higher yielding interest-earning assets.





Interest expense. Interest
expense declined by $1.5 million to $5.4 million for the three months ended June
30, 2010 from $6.9 million for the three months ended June 30,
2009.  The decrease in interest expense for the three months ended
June 30, 2010, as compared to the same period in 2009, was due to lower average
rates paid on interest-bearing liabilities, primarily time deposits, as well as
the decrease in average outstanding balances of time deposits.  The
average rate paid on time deposits decreased 116 basis points to 2.61% for the
three months ended June 30, 2010 as compared to 3.77% the same period in
2009.





39





Net interest
income.Net interest income increased $1.1 million to $6.3
million for the three months ended June 30, 2010 from $5.2 million for the three
months ended June 30, 2009, as the decrease in interest expense was greater than
the decrease in interest income. Our net interest rate spread, which is the
difference between the interest rate earned on interest-earning assets and the
interest rate paid on interest-bearing liabilities, increased 77 basis points to
2.76% for the second quarter of 2010 as compared to 1.99% for the same quarter
in 2009.  For the same comparative periods, our net interest margin,
which is net interest income expressed as a percentage of our average interest
earning assets, increased 69 basis points to 2.92% as compared to 2.23% for the
same quarter in 2009.  The improvement in net interest margin was
primarily due to the 88 basis point decrease in the average interest rate of
deposits, to 1.94% for the three months ended June 30, 2010 as compared to 2.82%
for the same period in 2009.





Provision for loan
losses. Provision for loan losses of $7.5 million and $6.2
million were made during the three months ended June 30, 2010 and 2009,
respectively.  The increase in the provision for loan losses was due
to higher charge-offs of one- to four-family residential loans of $4.9 million
during the three months ended June 30, 2010 as compared to $3.4 million during
the same period in 2009.  This increase was due to a $2.8 million loss
on a distressed loan sale of $6.3 million of non-performing one- to four-family
residential loans in June 2010.  Net charge-offs in 2010 also included
a charge-off of $3.3 million  on one commercial loan, for which a
specific allowance had previously been established and $706,000 of partial
write-downs on one- to four-family residential loans that became non-performing
during the three months ended June 30, 2010.  Net charge-offs for the
three months ended June 30, 2010 were $10.6 million as compared to $8.7 million
for the same period in 2009.  Beginning in the second quarter of 2009
the Company adopted the policy of writing down loans when they are classified as
non-performing rather than recording a general allocation.





Non-interest income. The
components of non-interest income for the three months ended June 30, 2010 and
2009 were as follows:





Increase(decrease)2010
                
                
                2009
                
                
                Dollars
                
                
                Percentage(Dollars in Thousands)Service
      charges and fees
                
                $
                963
                
                
                $
                1,040
                
                
                $
                (77
                )
                
                
                -7.4
                %Gain
      on sale of loans held for sale
                
                
                78
                
                
                
                189
                
                
                
                (111
                )
                
                
                -58.7
                %Gain
      on sale of portfolio loans
                
                
                113
                
                
                
                -
                
                
                
                113
                
                
                
                -Gain
      on available for sale securities
                
                
                1,229
                
                
                
                118
                
                
                
                1,111
                
                
                
                941.5
                %Other
      than temporary impairment losses
                
                
                (6
                )
                
                
                (1,146
                )
                
                
                1,140
                
                
                
                -99.5
                %Interchange
      fees
                
                
                241
                
                
                
                235
                
                
                
                6
                
                
                
                2.6
                %Other
                
                
                319
                
                
                
                326
                
                
                
                (7
                )
                
                
                -2.1
                %$
                2,937
                
                
                $
                762
                
                
                $
                2,175
                
                
                
                285.4
                %





Non-interest
income for the three months ended June 30, 2010 increased $2.2 million to $2.9
million as compared to $762,000 for the same three months in
2009.  The increase was primarily due to the $1.1 million higher gain
on sale of available-for-sale securities and the $1.1 million
other-than-temporary-impairment loss recorded during the three months ended June
30, 2009.





40




Non-interest expense. The
components of non-interest expense for the three months ended June 30, 2010
and 2009 were as follows:
 
 Increase(decrease)2010
                      
                      
                      2009
                      
                      
                      Dollars
                      
                      
                      Percentage(Dollars in Thousands)Compensation
      and benefits
                      
                      $
                      2,437
                      
                      
                      $
                      2,967
                      
                      
                      $
                      (530
                      )
                      
                      
                      -17.9
                      %Occupancy
      and equipment
                      
                      
                      531
                      
                      
                      
                      667
                      
                      
                      
                      (136
                      )
                      
                      
                      -20.4
                      %FDIC
      insurance premiums
                      
                      
                      398
                      
                      
                      
                      677
                      
                      
                      
                      (279
                      )
                      
                      
                      -41.2
                      %Foreclosed
      assets, net
                      
                      
                      30
                      
                      
                      
                      286
                      
                      
                      
                      (256
                      )
                      
                      
                      -89.5
                      %Data
      processing
                      
                      
                      402
                      
                      
                      
                      249
                      
                      
                      
                      153
                      
                      
                      
                      61.4
                      %Outside
      professional services
                      
                      
                      371
                      
                      
                      
                      736
                      
                      
                      
                      (365
                      )
                      
                      
                      -49.6
                      %Collection
      expense and repossessed asset losses
                      
                      
                      605
                      
                      
                      
                      272
                      
                      
                      
                      333
                      
                      
                      
                      122.4
                      %Other
                      
                      
                      1,011
                      
                      
                      
                      1,091
                      
                      
                      
                      (80
                      )
                      
                      
                      -7.3
                      %$
                      5,785
                      
                      
                      $
                      6,945
                      
                      
                      $
                      (1,160
                      )
                      
                      
                      -16.7
                      %
 
 Non-interest
expense decreased $1.1 million to $5.8 million for the three months ended June
30, 2010 from $6.9 million for the same three months ended June 30,
2009.  Components of the decrease included lower compensation and
benefits due to expense reduction initiatives implemented during 2009, lower
outside professional services, lower FDIC insurance premiums and a lower loss on
foreclosed assets, partially offset by increased legal, collection and
administrative expenses associated with other real estate owned and
foreclosures.
 
 Income tax.The Company
recorded no income tax benefit for the three months ended June 30, 2010 as
compared to a benefit of $2.5 million for the same period in 2009 due to the
Company’s establishment of a valuation reserve for net deferred tax assets
during 2009.  The recognition of future tax benefits or the reversal
of the valuation reserve is dependent upon the Company’s ability to generate
future taxable income.
 
 Comparison of Results of Operations
for the Six Months Ended June 30, 2010 and 2009.
 
 General.Net loss for the six
months ended June 30, 2010, was $6.8 million, which was an improvement of
$900,000 from a net loss of $7.7 million for the same period in
2009.  The net loss for the six months ended June 30, 2009 was net of
a tax benefit of $4.2 million.  The Company did not record any tax
benefit for the six months ended June 30, 2010 following the establishment of a
valuation allowance on the net deferred tax asset during 2009.  The
loss before income taxes was $6.8 million for the six months ended June 30, 2010
as compared to a loss before income taxes of $11.9 million for the same period
in 2009.  The reduction in loss before income taxes was primarily due
to a $1.1 million increase in net interest income, a reduction in provision for
loans losses of $790,000, a $1.7 million increase in non-interest income and a
decrease in non-interest expense of $1.4 million.
  41
 
 Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the six months ended June 30, 2010 and 2009. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods
presented.
 
 ForthesixmonthsendedJune30,2010
                      
                      
                      2009(Dollars in Thousands)Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Average Yield
                        /Cost
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Average Yield
                        /CostINTEREST-EARNING ASSETSLoans
      receivable(1)
                      
                      $
                      623,879
                      
                      
                      $
                      18,681
                      
                      
                      
                      5.99
                      %
                      
                      $
                      729,514
                      
                      
                      $
                      21,088
                      
                      
                      
                      5.78
                      %Securites(2)
                      
                      
                      200,456
                      
                      
                      
                      4,119
                      
                      
                      
                      4.11
                      %
                      
                      
                      163,875
                      
                      
                      
                      3,821
                      
                      
                      
                      4.66
                      %Other interest-earning
      assets(3)
                      
                      
                      31,660
                      
                      
                      
                      94
                      
                      
                      
                      0.59
                      %
                      
                      
                      47,572
                      
                      
                      
                      43
                      
                      
                      
                      0.18
                      %Total
      interest-earning assets
                      
                      
                      855,995
                      
                      
                      
                      22,894
                      
                      
                      
                      5.35
                      %
                      
                      
                      940,961
                      
                      
                      
                      24,952
                      
                      
                      
                      5.30
                      %Non-interest
      earning assets
                      
                      
                      50,643
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      57,997Total
      assets
                      
                      $
                      906,638
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      998,958INTEREST-BEARING
LIABILITIESSavings
      deposits
                      
                      $
                      42,695
                      
                      
                      $
                      142
                      
                      
                      
                      0.67
                      %
                      
                      $
                      34,435
                      
                      
                      $
                      65
                      
                      
                      
                      0.38
                      %Interest
      bearing demand accounts
                      
                      
                      79,334
                      
                      
                      
                      644
                      
                      
                      
                      1.62
                      %
                      
                      
                      72,534
                      
                      
                      
                      723
                      
                      
                      
                      1.99
                      %Money
      market accounts
                      
                      
                      123,224
                      
                      
                      
                      734
                      
                      
                      
                      1.19
                      %
                      
                      
                      138,444
                      
                      
                      
                      1,309
                      
                      
                      
                      1.89
                      %Time
      deposits
                      
                      
                      296,142
                      
                      
                      
                      3,943
                      
                      
                      
                      2.66
                      %
                      
                      
                      345,974
                      
                      
                      
                      6,649
                      
                      
                      
                      3.84
                      %Securities
      sold under agreements to repurchase
                      
                      
                      92,800
                      
                      
                      
                      2,322
                      
                      
                      
                      5.00
                      %
                      
                      
                      92,800
                      
                      
                      
                      3,421
                      
                      
                      
                      7.37
                      %Federal
      Home Loan Bank advances
                      
                      
                      172,130
                      
                      
                      
                      3,121
                      
                      
                      
                      3.63
                      %
                      
                      
                      185,288
                      
                      
                      
                      2,000
                      
                      
                      
                      2.16
                      %Other
      borrowings
                      
                      
                      2,314
                      
                      
                      
                      88
                      
                      
                      
                      7.61
                      %
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      interest-bearing liabilities
                      
                      
                      808,639
                      
                      
                      
                      10,994
                      
                      
                      
                      2.72
                      %
                      
                      
                      869,475
                      
                      
                      
                      14,167
                      
                      
                      
                      3.26
                      %Non-interest
      bearing liabilities
                      
                      
                      40,575
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      48,328Total
      liabilities
                      
                      
                      849,214
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      917,803Stockholders'
      equity
                      
                      
                      57,424
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      81,155Total
      liabilities and stockholders' equity
                      
                      $
                      906,638
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      998,958Net
      interest income
                      
                      
                      
                      
                      
                      $
                      11,900
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      10,785Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.63
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.04
                      %Net
      earning assets
                      
                      $
                      47,356
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      71,486Net interest
      margin(4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.78
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.29
                      %Average
      interest-earning assets to average interest-bearing
      liabilities
                      
                      
                      
                      
                      
                      
                      105.86
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      108.22
                      %
 
 (1)
              Calculated
      net of deferred loan fees. Nonaccrual loans included as loans carrying a
      zero yield.
 (2)
              Calculated
      based on carrying value. Not full tax equivalents, as the numbers would
      not change materially from those presented  in the
      table.
 (3)
              Includes
      Federal Home Loan Bank stock at cost and term deposits with other
      financial institutions.
 (4)
              Net
      interest income divided by average interest-earning
  assets.
  42
  Rate/Volume Analysis. The
following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities as of and for the six months ended June 30, 2010 as
compared to the same period in 2009. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.
  Increase/(Decrease)
                        
                        
                        TotalDueto
                        
                        
                        IncreaseVolume
                        
                        
                        Rate
                        
                        
                        (Decrease)(Dollars in Thousands)INTEREST-EARNING ASSETSLoans
      receivable
                        
                        $
                        (3,141
                        )
                        
                        $
                        734
                        
                        
                        $
                        (2,407
                        )Securities
                        
                        
                        787
                        
                        
                        
                        (489
                        )
                        
                        
                        298Other
      interest-earning assets
                        
                        
                        (18
                        )
                        
                        
                        69
                        
                        
                        
                        51Total
      interest-earning assets
                        
                        
                        (2,372
                        )
                        
                        
                        314
                        
                        
                        
                        (2,058
                        )INTEREST-BEARING
LIABILITIESSavings
      deposits
                        
                        
                        18
                        
                        
                        
                        59
                        
                        
                        
                        77Interest
      bearing demand accounts
                        
                        
                        64
                        
                        
                        
                        (143
                        )
                        
                        
                        (79
                        )Money
      market accounts
                        
                        
                        (132
                        )
                        
                        
                        (443
                        )
                        
                        
                        (575
                        )Time
      deposits
                        
                        
                        (864
                        )
                        
                        
                        (1,842
                        )
                        
                        
                        (2,706
                        )Securities
      sold under agreements to repurchase
                        
                        
                        -
                        
                        
                        
                        321
                        
                        
                        
                        321Federal
      Home Loan Bank advances
                        
                        
                        (239
                        )
                        
                        
                        (60
                        )
                        
                        
                        (299
                        )Other
      borrowings
                        
                        
                        88
                        
                        
                        
                        -
                        
                        
                        
                        88Total
      interest-bearing liabilities
                        
                        
                        (1,065
                        )
                        
                        
                        (2,108
                        )
                        
                        
                        (3,173
                        )Net
      interest income
                        
                        $
                        (1,307
                        )
                        
                        $
                        2,422
                        
                        
                        $
                        1,115
 
 Interest income.Total
interest income declined $2.1 million to $22.9 million for the six months ended
June 30, 2010 from $25.0 million for the six months ended June 30, 2009 because
of a decrease in interest income on loans.  Interest income on loans
decreased to $18.7 million for the six months ended June 30, 2010 from $21.1
million for the same period in 2009.  This decrease was due primarily
to a decline in the average balance of loans, which decreased $105.6 million, to
$623.9 million for the six months ended June 30, 2010 from $729.5 million for
the prior year period.  Interest income earned on securities increased
for the six months ended June 30, 2010 as compared to the same period in 2009
due to an increase in the average balance of $36.6 million, partially offset by
lower interest rates on new purchases of comparable securities, which resulted
in a 55 basis point decline in average rate.
 
 Interest
income was adversely impacted by continued low interest rates and the
unavailability of higher yielding interest-earning assets.
 
 Interest expense. Interest
expense declined by $3.2 million to $11.0 million for the six months ended June
30, 2010 from $14.2 million for the six months ended June 30,
2009.  The decrease in interest expense for the six months ended June
30, 2010, as compared to the same period in 2009, was due to the combination of
lower average rates paid on interest-bearing liabilities, primarily time
deposits, as well as the decrease in average outstanding balances of time
deposits.  The average rate paid on time deposits decreased 118 basis
points to 2.66% for the six months ended June 30, 2010 as compared to 3.84% the
same period in 2009.
  43
 
 Net interest
income.Net interest income increased $1.1 million to $11.9
million for the six months ended June 30, 2010 from $10.8 million for the six
months ended June 30, 2009, as the decrease in interest expense was greater than
the decrease in interest income. Our net interest rate spread, which is the
difference between the interest rate earned on interest-earning assets and the
interest rate paid on interest-bearing liabilities, increased 59 basis points to
2.63% for the six months ended June 30, 2010 as compared to 2.04% for the same
period in 2009.  For the same comparative periods, our net interest
margin, which is net interest income expressed as a percentage of our average
interest earning assets, increased 49 basis points to 2.78% as compared to 2.29%
for the same period in 2009.  The improvement in net interest margin
was primarily due to the 94 basis point decrease in the average interest rate of
deposits, to 2.02% for the six months ended June 30, 2010 as compared to 2.96%
for the same period in 2009.
 
 Provision for loan
losses.Provision for loan losses of $11.2 million and $12.0
million were made during the six months ended June 30, 2010 and 2009,
respectively.  The decrease in provision for loan losses was primarily
due to the $95.9 million decrease in the balance of portfolio loans as of June
30, 2010 as compared to June 30, 2009, offset by an increase in
charge-offs.  Net charge-offs for the six months ended June 30, 2010
were $14.8 million as compared to $10.7 million for the same period in
2009.  The increased charge-offs included $2.8 million of loss on a
distressed loan sale of $6.3 million of non-performing one- to four-family
residential loans in June 2010. Net charge-offs in 2010 also included $2.0
million of partial write-downs on one- to four-family residential loans that
became non-performing during the six months ended June 30, 2010 as well as a
$3.3 million charge-off on one non-performing commercial loan, for which a
specific allowance had previously been established. Beginning in the second
quarter of 2009 the Company adopted the policy of writing down loans when they
are classified as non-performing rather than recording a general
allocation.
 
 Non-interest
income.  The components of non-interest income for the six
months ended June 30, 2010 and 2009 were as follows:
 
 Increase(decrease)2010
                    
                    
                    2009
                    
                    
                    Dollars
                    
                    
                    Percentage(Dollars in Thousands)Service
      charges and fees
                    
                    $
                    1,832
                    
                    
                    $
                    2,042
                    
                    
                    $
                    (210
                    )
                    
                    
                    -10.3
                    %Gain
      on sale of loans held for sale
                    
                    
                    182
                    
                    
                    
                    374
                    
                    
                    
                    (192
                    )
                    
                    
                    -51.3
                    %Loss
      on sale of portfolio loans
                    
                    
                    (160
                    )
                    
                    
                    -
                    
                    
                    
                    (160
                    )
                    
                    
                    -Gain
      on available for sale securities
                    
                    
                    1,229
                    
                    
                    
                    215
                    
                    
                    
                    1,014
                    
                    
                    
                    471.6
                    %Other
      than temporary impairment losses
                    
                    
                    (81
                    )
                    
                    
                    (1,320
                    )
                    
                    
                    1,239
                    
                    
                    
                    -93.9
                    %Interchange
      fees
                    
                    
                    463
                    
                    
                    
                    450
                    
                    
                    
                    13
                    
                    
                    
                    2.9
                    %Other
                    
                    
                    560
                    
                    
                    
                    551
                    
                    
                    
                    9
                    
                    
                    
                    1.6
                    %$
                    4,025
                    
                    
                    $
                    2,312
                    
                    
                    $
                    1,713
                    
                    
                    
                    74.1
                    %
 
 Non-interest
income for the six months ended June 30, 2010 increased $1.7 million to $4.0
million as compared to $2.3 million for the same six months in
2009.  The increase was primarily due to the $1.0 million higher gain
on sale of available-for-sale securities and the $1.3 million
other-than-temporary-impairment loss recorded during the six months ended June
30, 2009, partially offset by lower service fees, lower gain on sale of loans
held for sale and the loss on sale of portfolio loans.
  44




Non-interest expense. The
components of non-interest expense for the six months ended June 30, 2010
and 2009 were as follows:





Increase(decrease)2010
                        
                        
                        2009
                        
                        
                        Dollars
                        
                        
                        Percentage(Dollars
      in Thousands)Compensation
      and benefits
                        
                        $
                        5,007
                        
                        
                        $
                        5,542
                        
                        
                        $
                        (535
                        )
                        
                        
                        -9.7
                        %Occupancy
      and equipment
                        
                        
                        1,084
                        
                        
                        
                        1,288
                        
                        
                        
                        (204
                        )
                        
                        
                        -15.8
                        %FDIC
      insurance premiums
                        
                        
                        846
                        
                        
                        
                        1,013
                        
                        
                        
                        (167
                        )
                        
                        
                        -16.5
                        %Foreclosed
      assets, net
                        
                        
                        121
                        
                        
                        
                        990
                        
                        
                        
                        (869
                        )
                        
                        
                        -87.8
                        %Data
      processing
                        
                        
                        657
                        
                        
                        
                        509
                        
                        
                        
                        148
                        
                        
                        
                        29.1
                        %Outside
      professional services
                        
                        
                        730
                        
                        
                        
                        1,161
                        
                        
                        
                        (431
                        )
                        
                        
                        -37.1
                        %Collection
      expense and repossessedasset losses
                        
                        
                        997
                        
                        
                        
                        476
                        
                        
                        
                        521
                        
                        
                        
                        109.5
                        %Other
                        
                        
                        2,103
                        
                        
                        
                        1,995
                        
                        
                        
                        108
                        
                        
                        
                        5.4
                        %$
                        11,545
                        
                        
                        $
                        12,974
                        
                        
                        $
                        (1,429
                        )
                        
                        
                        -11.0
                        %





Non-interest
expense decreased $1.4 million to $11.5 million for the six months ended June
30, 2010 from $13.0 million for the same six months ended June 30,
2009.  Components of the decrease included lower compensation and
benefits due to expense reduction initiatives implemented during 2009, lower
outside professional services and a lower loss on foreclosed assets, partially
offset by increased legal, collection and administrative expenses associated
with other real estate owned and foreclosures.





Income tax.The Company
recorded no income tax benefit for the six months ended June 30, 2010 as
compared to a benefit of $4.2 million for the same period in 2009 due to the
Company’s establishment of a valuation reserve for net deferred tax assets
during 2009.  The recognition of future tax benefits or the reversal
of the valuation reserve is dependent upon the Company’s ability to generate
future taxable income.





Liquidity





Management
maintains a liquidity position it believes adequate to provide funding for loan
demand and deposit run-off that may occur in the normal course of business. The
Company relies on a number of different sources in order to meet potential
liquidity demands. The primary sources of funds are increases in deposit
accounts and cash flows from loan payments and the securities
portfolio.  The scheduled amortization of loans and securities as well
as proceeds from borrowings, are predictable sources of funds.  Other
funding sources, however, such as deposit inflows from new deposits, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.





During
the six months ended June 30, 2010, cash and cash equivalents decreased $7.2
million from $37.1 million as of December 31, 2009, to $29.9 million as of June
30, 2010. Cash used in operating activities of $2.3 million, combined with cash
used in investing activities of $5.3 million, was more than cash from financing
activities of $400,000.  Primary sources of cash were from proceeds
from maturities and payments of available-for-sale securities of $39.8 million,
net increases in deposits of $19.6 million, proceeds from sales of securities
available-for-sale of $17.9 million, proceeds from FHLB advances of $13.0
million, proceeds from sale of portfolio loans of $7.2 million, net decreases in
loans of $5.1 million and proceeds from other borrowings of $5.0
million.  Primary uses of cash included purchases of
available-for-sale securities of $76.3 million and repayments of FHLB borrowings
of $25.0 million and repayments of other borrowings of $12.2
million.




45




During
2009, cash and cash equivalents increased $12.2 million from $34.1 million as of
December 31, 2008, to $46.3 million as of June 30, 2009.  Cash from
investing activities of $15.3 million was more than cash used in operating
activities of $1.0 million and cash used in financing activities of $2.0
million.  Primary sources of cash were proceeds from sales of
securities available-for-sale of $36.1 million, net decreases in loans of $32.7
million, proceeds from maturities and payments of available-for-sale securities
of $28.1 million, FHLB borrowings of $20.0 million, proceeds from sale of
portfolio loans of $13.0 million and net increases in deposit accounts of $4.9
million.  Primary uses of cash included purchases of
available-for-sale securities of $95.3 million.  The additional
borrowings from the FHLB as well as some cash were used to replace maturing FHLB
debt of $27.2 million.





ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
Company is subject to interest rate risk to the extent that its interest-bearing
liabilities, primarily deposits and FHLB advances, re-price more rapidly or at
different rates than its interest-earning assets. In order to minimize the
potential for adverse effects of material prolonged increases or decreases in
interest rates on our results of operations, management has adopted an asset and
liability management policy.  The Board of Directors sets the asset
and liability policy for the Company, which is implemented by the
Asset/Liability Committee (“Committee”).





The
purpose of this Committee is to communicate, coordinate and control
asset/liability management consistent with our business plan and board approved
policies.  The Committee establishes and monitors the volume and mix
of assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs.  The objectives are to
manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk, and profitability goals.





The
Committee generally meets at least monthly to review, among other things,
economic conditions and interest rate outlook, current and projected liquidity
needs and capital position, anticipated changes in the volume and mix of assets
and liabilities and interest rate exposure limits versus current projections
pursuant to market value of portfolio equity analysis and income
simulations.  The Committee utilizes two models, a Net Portfolio Value
model and a Net Interest Income Sensitivity model, as discussed below. The
Committee recommends appropriate strategy changes based on this
review.  The Committee is responsible for reviewing and reporting the
effects of the policy implementations and strategies to the Board of Directors
at least quarterly.





A key
element of Atlantic Coast Federal Corporation’s asset/liability plan is to
protect net earnings by managing the maturity or re-pricing mismatch between its
interest-earning assets and rate-sensitive liabilities.  Historically,
the Company has sought to reduce exposure to its earnings through the use of
adjustable rate loans and through the sale of certain fixed rate loans in the
secondary market, and by extending funding maturities through the use of FHLB
advances.





Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off-balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  Given
the current relatively low level of market interest rates, an NPV calculation
for an interest rate decrease of greater than 100 basis points has not been
prepared.  A basis point equals one-hundredth of one percent, and 100
basis points equals one percent.  An increase in interest rates from
3% to 4% would mean, for example, a 100 basis point increase in the “Change in
Interest Rates” column below.





Net Interest
Income Sensitivity.Net interest income is the difference
between the interest income we earn on our interest-earning assets, such as
loans and securities, and the interest we pay on our interest-bearing
liabilities, such as deposits and borrowings.  In our model, we
estimate what our net interest income would be for a rolling forward
twelve-month period using historical data for assumptions such as loan
prepayment rates and deposit decay rates, the current term structure for
interest rates, and current deposit and loan offering rates. We then calculate
what the net interest income would be for the same period in the event of an
instantaneous 100, 200 and 300 basis point increase or a 100 basis point
decrease in market interest rates.




46




At June 30, 2010NPV as a Percentage of
                  Present Value of Assets (3)
              
              
              Net Interest IncomeChange in
                  Interest Rates
                  (basis points)
              
              Estimated
              
              
              Estimated (Decrease) in NPV
              
              
              
              
              
              Increase
                  (Decrease)
              
              
              Estimated
                  Net Interest
              
              
              Increase (Decrease) in
                  Estimated Net Interest
                  Income(1)
              
              NPV (2)
              
              
              Amount
              
              
              Percent
              
              
              NPV Ratio (4)
              
              
              (basis points)
              
              
              Income
              
              
              Amount
              
              
              Percent(Dollars
      in Thousands)+300
              
              $
              36,315
              
              
              $
              (27,486
              )
              
              
              (43.1
              )%
              
              
              4.29
              %
              
              
              (264
              )
              
              $
              22,038
              
              
              $
              (2,359
              )
              
              
              (9.67
              )%+200
              
              
              50,023
              
              
              
              (13,778
              )
              
              
              (21.6
              )%
              
              
              5.73
              %
              
              
              (120
              )
              
              
              23,807
              
              
              
              (590
              )
              
              
              (2.42
              )%+100
              
              
              60,950
              
              
              
              (2,851
              )
              
              
              (4.5
              )%
              
              
              6.77
              %
              
              
              (15
              )
              
              
              24,102
              
              
              
              (295
              )
              
              
              (1.21
              )%0
              
              
              63,801
              
              
              
              -
              
              
              
              -
              
              
              
              6.93
              %
              
              
              -
              
              
              
              24,397
              
              
              
              -
              
              
              
              --100
              
              
              61,322
              
              
              
              (2,479
              )
              
              
              (3.9
              )%
              
              
              6.57
              %
              
              
              (36
              )
              
              
              24,284
              
              
              
              (113
              )
              
              
              (0.45
              )%





(1)
            Assumes
      an instantaneous uniform change in interest rates at all
      maturities.


(2)
            NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet
contracts.


(3)
            Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.


(4)
            NPV
      Ratio represents NPV divided by the present value of
    assets.




In
managing its asset/liability mix the Company, depending on the relationship
between long and short-term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities.  Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or re-pricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch.  Management believes that Atlantic Coast Federal
Corporation’s level of interest rate risk is acceptable under this
approach.  In evaluating Atlantic Coast Federal Corporation’s exposure
to interest rate movements, certain shortcomings inherent in the NII/NPV
methodology must be considered.  For example, although certain assets
and liabilities may have similar maturities or re-pricing periods, they may
react in different degrees to changes in market interest rates.  Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in interest rates.  Additionally, certain
assets, such as adjustable-rate mortgages, have features that restrict changes
in interest rates on a short-term basis and over the life of the
asset.  Further, in the event of a significant change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in our NII/NPV methodology.  Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.  Atlantic Coast Federal Corporation considers all of
these factors in monitoring its exposure to interest rate risk.





ITEM
4.   CONTROLS AND PROCEDURES





(a) Evaluation of disclosure
controls and procedures. As of the end of the period covered by this
Quarterly Report on Form 10-Q, the Registrant’s principal executive officer and
principal financial officer have concluded that the Registrant’s disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Securities and Exchange Act of 1934 (the “Exchange Act”)) are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and
forms.





(b) Changes in internal
controls. There were no changes in the Registrant’s internal control over
financial reporting (as defined in Rule 13a-15(f)) that occurred during the
quarter ended June 30, 2010, that have materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




47




ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





June
30, 2010





Part
II - Other Information


Item
1.       Legal
Proceedings


The
Company is involved in various legal actions and claims arising in the normal
course of business.  In the opinion of management, these legal actions
and claims are not expected to have a material adverse impact on the Company’s
financial condition and results of operations.





Item
1A.    Risk
Factors


We have experienced net losses for
the six months of 2010 and each of the last two fiscal years and we may not
return to profitability in the near future.





We
have experienced net losses of $6.8 million for the first six months of 2010 and
$29.3 million and $2.8 million for the years ended December 31, 2009 and 2008,
respectively. The losses have been primarily related to non-performing assets,
which necessitated a provision for loan losses of $24.9 million for the year
ended December 31, 2009, compared to a provision of $13.9 million for the year
ended December 31, 2008. We charged off $21.7 million of loans during 2009 as
compared to $9.8 million during 2008. Non-accrual loans (generally loans 90 days
or more past due in principal or interest payments) decreased to $21.7 million,
or 3.64% of total loans at June 30, 2010, compared to $25.5 million, or 3.43% of
total loans at December 31, 2008. We experienced other than temporary impairment
losses in the investment portfolio of $4.5 million and $81,000 for the year
ended December 31, 2009 and for the first six months of 2010, respectively. In
addition, during the year ended December 31, 2009, management deemed it
appropriate to write off our entire goodwill balance of $2.8 million, and
establish a valuation allowance of $16.2 million, or 100% of our net deferred
tax asset. As a result of these factors and other conditions such as weakness in
our local economy, we may not be able to generate sustainable net income or
achieve profitability in the near future.





Our
memorandum of understanding with the Office of Thrift Supervision imposes
certain limits on our operations and could affect our liquidity.





In
August 2009, Atlantic Coast Bank entered into a memorandum of understanding with
the Office of Thrift Supervision addressing certain areas of our operations.
Under the memorandum we are required to (1) utilize a four quarter roll forward
budget to address, among other things, capital adequacy, appropriate allowances
for loan and lease losses and a liquidity analysis, (2) ensure that the book
value of our bank owned life insurance does not exceed 25% of our total capital,
(3) review and enhance our liquidity policy, (4) develop a written plan to
mitigate any risks to our capital and liquidity from our repurchase agreements,
(5) reduce our brokered deposits to not more than $52.5 million by June 30,
2011, (6) obtain Office of Thrift Supervision approval for the payment of any
dividends, (7) develop a plan to enhance our compliance management program
(including Bank Secrecy Act and anti-money laundering programs) and (8) correct
all deficiencies and weaknesses identified in our 2009 Report of Examination.
The requirement to reduce the level of brokered deposits may affect our ability
to have sufficient liquid assets for our operations. It may also cause us to pay
higher rates on retail deposits to replace our use of brokered deposits. We may
not increase our level of brokered deposits above the limit permitted by the
Office of Thrift Supervision without the prior approval of the agency. We
believe we will be able to reduce the level of our brokered deposits from $69.9
million as of June 30, 2010 to the level required by the memorandum of
understanding within the required time period. The restriction on the payment of
dividends without Office of Thrift Supervision approval will affect our ability
to pay dividends in the future unless we have sufficient assets at Atlantic
Coast Financial Corporation to pay dividends without reliance on dividends from
Atlantic Coast Bank. We have addressed all the corrective actions mandated in
the memorandum and we believe we are in compliance with the requirements of the
memorandum. In the event that Atlantic Coast Bank should become in material
non-compliance with the memorandum of understanding, the Office of Thrift
Supervision has the authority to subject us to a more formal enforcement action,
such as a cease and desist order.




48




Financial reform legislation recently
enacted by Congress will, among other things, eliminate the Office of Thrift
Supervision, tighten capital standards, create a new Consumer Financial
Protection Bureau and result in new laws and regulations that are expected to
increase our costs of operations.





Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”), which will significantly change the current bank
regulatory structure and affect the lending, investment, trading and operating
activities of financial institutions and their holding companies. The Dodd-Frank
Act will eliminate our current primary federal regulator, the Office of Thrift
Supervision, and require Atlantic Coast Bank to be regulated by the Office of
the Comptroller of the Currency (the primary federal regulator for national
banks). The Dodd-Frank Act also authorizes the Board of Governors of the Federal
Reserve System to supervise and regulate all savings and loan holding companies
like Atlantic Coast Financial Corporation, in addition to bank holding companies
which it currently regulates. As a result, the Federal Reserve Board’s current
regulations applicable to bank holding companies, including holding company
capital requirements, will apply to savings and loan holding companies like
Atlantic Coast Financial Corporation. These capital requirements are
substantially similar to the capital requirements currently applicable to
Atlantic Coast Bank, as described in “Supervision and Regulation— Federal
Banking Regulation—Capital Requirements.” The Dodd-Frank Act also requires the
Federal Reserve Board to set minimum capital levels for bank holding companies
that are as stringent as those required for the insured depository subsidiaries,
and the components of Tier 1 capital would be restricted to capital instruments
that are currently considered to be Tier 1 capital for insured depository
institutions. The legislation also establishes a floor for capital of insured
depository institutions that cannot be lower than the standards in effect today,
and directs the federal banking regulators to implement new leverage and capital
requirements within 18 months that take into account off-balance sheet
activities and other risks, including risks relating to securitized products and
derivatives. The Dodd-Frank Act also creates a new Consumer Financial Protection
Bureau with broad powers to supervise and enforce consumer protection laws. The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as Atlantic Coast Bank, including the authority to prohibit
“unfair, deceptive or abusive” acts and practices. The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and savings
institutions with $10 billion or less in assets will be examined by their
applicable bank regulators. The new legislation also weakens the federal
preemption available for national banks and federal savings associations, and
gives state attorney generals the ability to enforce applicable federal consumer
protection laws.





The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments. Assessments will now be based on the average consolidated
total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increases the maximum amount of deposit
insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2009, and non-interest bearing transaction
accounts have unlimited deposit insurance through December 31, 2013. Lastly, the
Dodd-Frank Act will increase stockholder influence over boards of directors by
requiring companies to give stockholders a non-binding vote on executive
compensation and so-called “golden parachute” payments, and by authorizing the
Securities and Exchange Commission to promulgate rules that would allow
stockholders to nominate their own candidates using a company’s proxy materials.
The legislation also directs the Federal Reserve Board to promulgate rules
prohibiting excessive compensation paid to bank holding company executives,
regardless of whether the company is publicly traded or not.




49




It is
difficult to predict at this time what effect the new legislation and
implementing regulations will have on community banks with regards to the
lending and credit practices of such banks. Moreover, many of the provisions of
the Dodd-Frank Act will not take effect for at least a year, and the legislation
requires various federal agencies to promulgate numerous and extensive
implementing regulations over the next several years. Although the substance and
scope of these regulations cannot be determined at this time, it is expected
that the legislation and implementing regulations, particularly those relating
to the new Consumer Financial Protection Bureau, will increase our operating and
compliance costs.





Our Executive Chairman of the Board
also serves as the president and chief executive officer of another financial
institution and such responsibilities could affect his ability to devote
sufficient time to his position with Atlantic Coast Financial
Corporation.





Our
Executive Chairman of the Board, Jay S. Sidhu, also serves as the president and
chief executive officer and a director of New Century Bank, located in
Phoenixville, Pennsylvania. As the president and chief executive officer of New
Century Bank, Mr. Sidhu is a full-time employee. Mr. Sidhu’s duties at New
Century Bank have the potential to cause him to devote less of his time to his
responsibilities at Atlantic Coast Financial Corporation, thereby potentially
reducing his effectiveness in overseeing our strategic plan. A reduction in the
time that Mr. Sidhu may devote to our operations could adversely affect our
ability to successfully implement our strategic plan and our results of
operations.





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


None.   The
Company suspended its stock repurchase program in March 2009.





Item
      3.
            Defaults Upon Senior
      Securities


None





Item
      4.
            Removed
      andreserved





Item
      5.
            Other
      Information


None





Item
      6.
            Exhibits


a.
            Exhibits


31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.
              
              Certification
      of Chief Executive Officer and Chief Financial Officer of Atlantic Coast
      Federal Corporation pursuant to Section
906




50




ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





June
30, 2010





Part
II - Other Information





Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





ATLANTIC
      COAST FEDERAL CORPORATION(Registrant)Date:  August
      16, 2010
                  /s/   Robert
      J. Larison, Jr.Robert
      J. Larison, Jr., President and ChiefExecutive
      OfficerDate:  August
      16, 2010
                  /s/   Thomas
      B. Wagers, Sr.Thomas
      B. Wagers, Sr. Senior Vice–President andChief
      Financial Officer




51