**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended June 30, 2006**





**OR**





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 000-50962**





**ATLANTIC
                COAST FEDERAL CORPORATION**
              (Exact
                name of registrant as specified in its charter)**FEDERAL**
              (State
                or other jurisdiction of incorporation or
                organization)
            
            **59-3764686**
              (I.R.S.
                Employer Identification Number)**505
                Haines Avenue**
              **Waycross,
                Georgia**
              (Address
                of principal Executive Offices)
            
            **31501**
              (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
xNO o




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





Large
      Accelerated Filer o Accelerated Filer o Non-Accelerated Filer 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 last practicable date.




Class
              Outstanding
                  at August 10,
                  2006Common
                  Stock, $0.01 Par Value
              14,147,254







**ATLANTIC
      COAST FEDERAL CORPORATION**





**Form
      10-Q Quarterly Report**





**Table
      of Contents**





Page
              Number**PART
                I.**Item
                1.
            Financial
                Statements
            2Item
                2.
            Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
            12Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            30Item
                4.
            Controls
                and Procedures
            32**PART
                II.**Item
                1.
            Legal
                Proceedings
            33Item
                1A
            Risk
                Factors
            33Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            33Item
                3.
            Defaults
                Upon Senior Securities
            33Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            33Item
                5.
            Other
                Information
            33Item
                6.
            Exhibits
            33Form
                10-Q
            Signature
                Page
            34Ex-31.1
            Section
                302 Certification of CEOEx-31.2
            Section
                302 Certification of CFOEx-32
            Section
                906 Certification of CEO and CFO







**PART
      I**





**I** **TEM
      1- FINANCIAL STATEMENTS**





**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of June 30, 2006 (unaudited) and December 31, 2005**




2006
            
            2005**ASSETS**Cash
                and due from financial institutions
            
            $
            14,016,007
            
            $
            22,041,346Short-term
                interest bearing deposits
            
            
            26,454,082
            
            
            15,917,657Total
                cash and cash equivalents
            
            
            40,470,089
            
            
            37,959,003Other
                interest bearing deposits in other financial institutions
            
            
            1,500,000
            
            
            1,800,000Securities
                available for sale
            
            
            69,143,183
            
            
            71,964,998Real
                estate mortgages held for sale
            
            
            1,154,818
            
            
            99,853Loans,
                net of allowance for loan losses of $4,619,231 at June 30, 2006 and
                $4,586,736 at December 31, 2005
            
            
            613,838,324
            
            
            580,440,609Federal
                Home Loan Bank stock
            
            
            6,822,700
            
            
            7,074,400Accrued
                interest receivable
            
            
            2,936,135
            
            
            2,722,398Land,
                premises and equipment
            
            
            15,247,032
            
            
            14,485,195Bank
                owned life insurance
            
            
            20,940,768
            
            
            20,526,254Other
                real estate owned
            
            
            320,325
            
            
            310,000Goodwill
            
            
            2,661,190
            
            
            2,661,190Other
                assets
            
            
            3,833,654
            
            
            3,804,603Total
                assets
            
            $
            778,868,218
            
            $
            743,848,503**LIABILITIES
                AND STOCKHOLDERS' EQUITY**DepositsNon-interest-bearing
                demand
            
            $
            46,631,022
            
            $
            38,454,438Interest-bearing
                demand
            
            
            51,590,579
            
            
            79,738,995Savings
                and money market
            
            
            129,158,989
            
            
            100,259,277Time
            
            
            320,663,317
            
            
            297,868,790Total
                deposits
            
            
            548,043,907
            
            
            516,321,500Securities
                sold under agreements to repurchase
            
            
            12,000,000
            
            
            -Federal
                Home Loan Bank advances
            
            
            119,000,000
            
            
            129,000,000Accrued
                expenses and other liabilities
            
            
            4,734,130
            
            
            5,610,335Total
                liabilities
            
            
            683,778,037
            
            
            650,931,835Commitments
                and contingencies
            
            
            -
            
            
            -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, 2006 and 14,805,969 at December 31, 2005;
                shares
                outstanding: 14,148,850 at June 30, 2006 and 14,141,350 at December
                31,
                2005
            
            
            148,135
            
            
            148,060Additional
                paid in capital
            
            
            57,434,938
            
            
            56,876,105Unearned
                employee stock ownership plan (ESOP) shares of 349,140 at June 30,
                2006
                and 372,416 at December 31, 2005
            
            
            (3,491,400
            )
            
            (3,724,160
            )Retained
                earnings
            
            
            50,829,926
            
            
            49,193,384Accumulated
                other comprehensive income (loss)
            
            
            (228,504
            )
            
            26,193Treasury
                stock, at cost, 664,619 shares at June 30, 2006 and at December 31,
                2005
            
            
            (9,602,914
            )
            
            (9,602,914
            )Total
                stockholders' equity
            
            
            95,090,181
            
            
            92,916,668Total
                liabilities and stockholders' equity
            
            $
            778,868,218
            
            $
            743,848,503





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




2


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(unaudited)**





Three
                  MonthsEnded
                June 30,
            
            Six
                  MonthsEnded
                June 30,2006
            
            2005
            
            2006
            
            2005Interest
                and dividend incomeLoans,
                including fees
            
            $
            9,995,282
            
            $
            8,359,595
            
            $
            19,402,494
            
            $
            16,201,776Securities
                and interest-bearing deposits in other financial
                institutions
            
            
            1,160,630
            
            
            859,808
            
            
            2,268,295
            
            
            1,387,946Securities
                purchased under agreements to resell
            
            
            -
            
            
            -
            
            
            -
            
            
            72,411Total
                interest and dividend income
            
            
            11,155,912
            
            
            9,219,403
            
            
            21,670,789
            
            
            17,662,133Interest
                expenseDeposits
            
            
            4,248,900
            
            
            2,893,957
            
            
            8,100,823
            
            
            5,319,207Federal
                Home Loan Bank advances
            
            
            1,292,602
            
            
            1,228,155
            
            
            2,619,550
            
            
            2,280,505Securities
                sold under agreements to repurchase
            
            
            137,187
            
            
            -
            
            
            194,566
            
            
            -Total
                interest expense
            
            
            5,678,689
            
            
            4,122,112
            
            
            10,914,939
            
            
            7,599,712Net
                interest income
            
            
            5,477,223
            
            
            5,097,291
            
            
            10,755,850
            
            
            10,062,421Provision
                for loan losses
            
            
            204,059
            
            
            577,048
            
            
            280,439
            
            
            1,100,289Net
                interest income after provision for loan losses
            
            
            5,273,164
            
            
            4,520,243
            
            
            10,475,411
            
            
            8,962,132Noninterest
                incomeService
                charges and fees
            
            
            1,501,926
            
            
            1,233,362
            
            
            2,843,688
            
            
            2,129,094Net
                gain (loss) on available for sale securities
            
            
            11,158
            
            
            -
            
            
            (165,495
            )
            
            -Gain
                on sale of real estate mortgages held for sale
            
            
            12,782
            
            
            53,235
            
            
            15,906
            
            
            64,634Gain
                (loss) on sale of foreclosed assets
            
            
            (4,162
            )
            
            40,875
            
            
            (1,201
            )
            
            41,727Commission
                income
            
            
            67,763
            
            
            102,996
            
            
            148,911
            
            
            202,240Interchange
                fees
            
            
            198,777
            
            
            192,795
            
            
            394,190
            
            
            373,237Bank
                owned life insurance earnings
            
            
            210,587
            
            
            153,090
            
            
            414,514
            
            
            204,040Other
            
            
            189,207
            
            
            18,614
            
            
            175,757
            
            
            66,6302,188,038
            
            
            1,794,967
            
            
            3,826,270
            
            
            3,081,602Noninterest
                expenseCompensation
                and benefits
            
            
            2,617,208
            
            
            2,352,317
            
            
            5,244,224
            
            
            4,583,781Occupancy
                and equipment
            
            
            489,691
            
            
            434,421
            
            
            997,415
            
            
            808,034Data
                processing
            
            
            440,162
            
            
            292,411
            
            
            805,586
            
            
            541,484Advertising
            
            
            214,658
            
            
            172,852
            
            
            430,489
            
            
            279,561Outside
                professional services
            
            
            456,522
            
            
            643,167
            
            
            949,723
            
            
            1,248,385Interchange
                charges
            
            
            161,574
            
            
            154,347
            
            
            328,043
            
            
            301,396Collection
                expense and repossessed asset losses
            
            
            80,686
            
            
            83,464
            
            
            163,359
            
            
            162,808Telephone
            
            
            119,963
            
            
            132,856
            
            
            242,857
            
            
            249,221Other
            
            
            674,200
            
            
            711,260
            
            
            1,326,832
            
            
            1,309,3745,254,664
            
            
            4,977,095
            
            
            10,488,528
            
            
            9,484,044Income
                before income tax expense
            
            
            2,206,538
            
            
            1,338,115
            
            
            3,813,153
            
            
            2,559,690Income
                tax expense
            
            
            713,882
            
            
            435,651
            
            
            1,213,560
            
            
            874,834Net
                income
            
            $
            1,492,656
            
            $
            902,464
            
            $
            2,599,593
            
            $
            1,684,856Earnings
                per common share:Basic
            
            $
            0.11
            
            $
            0.06
            
            $
            0.19
            
            $
            0.12Diluted
            
            $
            0.11
            
            $
            0.06
            
            $
            0.19
            
            $
            0.12Dividends
                declared per common share
            
            $
            0.10
            
            $
            0.06
            
            $
            0.19
            
            $
            0.05


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




3


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**





**ACCUMULATED****ADDITIONAL**
            
            **UNEARNED**
            
            
            
            **OTHER****COMMON**
            
            **PAID
                IN**
            
            **ESOP**
            
            **RETAINED**
            
            **COMPREHENSIVE**
            
            **TREASURY**
            
            **TOTAL****STOCK**
            
            **CAPITAL**
            
            **STOCK**
            
            **EARNINGS**
            
            **INCOME(LOSS)**
            
            **STOCK**
            
            **EQUITY**For
                the six months ended June 30, 2006Balance
                at January 1, 2006
            
            $
            148,060
            
            $
            56,876,105
            
            $
            (3,724,160
            )
            $
            49,193,384
            
            $
            26,193
            
            $
            (9,602,914
            )
            $
            92,916,668ESOP
                shares earned, 23,276 shares
            
            
            
            
            
            112,653
            
            
            232,760
            
            
            
            
            
            
            
            
            
            
            
            345,413Management
                restricted stock issued, 7,500 shares
            
            
            75
            
            
            (75
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Management
                restricted stock expense
            
            
            
            
            
            294,239
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            294,239Stock
                options expense
            
            
            
            
            
            152,016
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            152,016Dividends
                declared ( $.19 per share)
            
            
            
            
            
            
            
            
            
            
            
            (963,051
            )
            
            
            
            
            
            
            
            (963,051
            )Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            2,599,593
            
            
            
            
            
            
            
            
            2,599,593Other
                comprehensive income(loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (254,697
            )
            
            
            
            
            (254,697
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,344,896Balance
                at June 30, 2006 (unaudited)
            
            $
            148,135
            
            $
            57,434,938
            
            $
            (3,491,400
            )
            $
            50,829,926
            
            $
            (228,504
            )
            $
            (9,602,914
            )
            $
            95,090,181For
                the six months ended June 30, 2005Balance
                at January 1, 2005
            
            $
            145,475
            
            $
            56,332,850
            
            $
            (4,189,680
            )
            $
            46,412,522
            
            $
            (904
            )
            $
            -
            
            $
            98,700,263ESOP
                shares earned, 23,276 shares
            
            
            
            
            
            55,661
            
            
            232,760
            
            
            
            
            
            
            
            
            
            
            
            288,421Dividend
                declared ($.11 per share)
            
            
            
            
            
            
            
            
            
            
            
            (1,117,714
            )
            
            
            
            
            
            
            
            (1,117,714
            )Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            1,684,856
            
            
            
            
            
            
            
            
            1,684,856Other
                comprehensive income(loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,411
            )
            
            
            
            
            (17,411
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,667,445Balance
                at June 30, 2005 (unaudited)
            
            $
            145,475
            
            $
            56,388,511
            
            
            ($3,956,920
            )
            $
            46,979,664
            
            
            ($18,315
            )
            $
            -
            
            $
            99,538,415





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




4


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**




Six
                  MonthsEnded
                June 30,2006
            
            2005Cash
                flows from operating activitiesNet
                income
            
            $
            2,599,593
            
            $
            1,684,856Adjustments
                  to reconcile net income to net cash from operating
                  activities:Provision
                for loan losses
            
            
            280,439
            
            
            1,100,289Net
                loss on available for sale securities
            
            
            165,495
            
            
            -Gain
                on sale of real estate mortgages held for sale
            
            
            (15,906
            )
            
            (64,634
            )Loans
                originated for sale
            
            
            (2,248,398
            )
            
            (5,607,503
            )Proceeds
                from loan sales
            
            
            1,209,339
            
            
            5,666,379Gain
                on sale of other real estate owned
            
            
            1,201
            
            
            (41,727
            )Loss
                on disposal of equipment
            
            
            30,297
            
            
            -ESOP
                compensation expense
            
            
            345,413
            
            
            288,421Share-based
                compensation expense
            
            
            446,255
            
            
            -Net
                depreciation and amortization
            
            
            964,859
            
            
            855,878Net
                change in accrued interest receivable
            
            
            (213,737
            )
            
            (255,310
            )Increase
                in cash surreneder value of bank owned life insurance
            
            
            (414,514
            )
            
            (204,041
            )Net
                change in other assets
            
            
            265,224
            
            
            (293,264
            )Net
                  change in accrued expenses and other liabilities
            
            
            (966,873
            )
            
            728,719Net
                cash from operating activites
            
            
            2,448,687
            
            
            3,858,063Cash
                flows from investing activitiesNet
                  change in securities purchased underagreements
                  to resell
            
            
            -
            
            
            11,800,000Proceeds
                  from maturities and paymentsof
                  securites available for sale
            
            
            8,873,150
            
            
            16,834,841Proceeds
                  from the sales of securitiesavailable
                  for sale
            
            
            15,934,506
            
            
            500,000Purchase
                of securities available for sale
            
            
            (22,767,549
            )
            
            (29,685,798
            )Loans
                purchased
            
            
            (16,313,454
            )
            
            (22,591,484
            )Net
                change in loans
            
            
            (18,098,910
            )
            
            (12,149,246
            )Expenditures
                on premises and equipment
            
            
            (1,356,865
            )
            
            (1,791,344
            )Proceeds
                from the sale of other real estate owned
            
            
            389,797
            
            
            348,407Net
                (purchase) redemption of FHLB stock
            
            
            251,700
            
            
            (1,113,000
            )Purchase
                of bank owned life insurance
            
            
            -
            
            
            (10,000,000
            )Net
                change in other investments
            
            
            300,000
            
            
            900,000Net
                cash from investing activities
            
            
            (32,787,625
            )
            
            (46,947,624
            )





(Continued)


5


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**




Six
                  MonthsEnded
                  June 30,2006
            
            2005Cash
                flows from financing activitiesNet
                increase in deposits
            
            $
            31,722,407
            
            $
            49,885,043FHLB
                advances
            
            
            -
            
            
            20,000,000Net
                  change in securities sold underagreements
                  to repurchase
            
            
            12,000,000
            
            
            -Repayment
                of FHLB advances
            
            
            (10,000,000
            )
            
            (657,143
            )Dividends
                paid
            
            
            (872,383
            )
            
            (290,950
            )Net
                cash from financing activities
            
            
            32,850,024
            
            
            68,936,950Net
                change in cash and cash equivalents
            
            
            2,511,086
            
            
            25,847,389Cash
                and equivalents beginning of period
            
            
            37,959,003
            
            
            25,707,885Cash
                and equivalents at end of period
            
            $
            40,470,089
            
            $
            51,555,274Supplemental
                information:Interest
                paid
            
            $
            10,778,826
            
            $
            7,407,687Income
                taxes paid
            
            
            2,207,000
            
            
            657,500Supplemental
                noncash disclosures:Loans
                transferred to other real estate
            
            $
            401,323
            
            $
            494,000Other
                real estate exchanged for loans
            
            
            -
            
            
            826,764


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


6


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**


**(Unaudited)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      Atlantic Coast Federal Corporation (or the “Company”) and its wholly owned
      subsidiary, Atlantic Coast Bank (the “Bank”), which was formerly known as
      Atlantic Coast Federal. The Company changed the name of the Bank on July 17,
      2006 to better reflect the nature of the Bank’s operations. Also included in the
      unaudited consolidated statements is Atlantic Coast Holdings, Inc. (“Holdings”)
      a wholly owned subsidiary of the Bank, which manages and invests in certain
      securities, and owns 100% of the common stock and 85% of the Preferred Stock
      of
      Coastal Properties, Inc., a real estate investment trust (the “REIT”). All
      significant inter-company balances and transactions have been eliminated in
      consolidation.





The
      unaudited consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and with 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
      a
      fair presentation have been included. Operating results for the three and six
      month periods ending June 30, 2006 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2006. The 2005
      Atlantic Coast Federal Corporation consolidated financial statements, as
      presented in the Company’s Form 10-K, should be read in conjunction with these
      statements.





Some
      items in the prior year Form 10-Q were reclassified to conform to the current
      presentation.





**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 and liabilities, the disclosure of contingent assets and liabilities
      at
      the date of the consolidated financial statements, and the reported amounts
      of
      income and expenses during the reported periods. Actual results could differ
      from current estimates. Estimates associated with the allowance for loan losses,
      realization of deferred tax assets, valuation of intangible assets, including
      goodwill and the fair values of securities and other financial instruments
      are
      particularly susceptible to material change in the near term.





**NOTE
      3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS**





Statement
      of Financial Accounting Standards (SFAS) No. 123, Revised, requires all public
      companies to record compensation cost for stock or stock options awarded to
      employees in return for employee service. The cost is measured at the grant-date
      fair value of the award and recognized as compensation expense over the employee
      service period, which is normally the vesting period. This SFAS was to apply
      to
      awards granted or modified after the first quarter or year beginning after
      June
      15, 2005. However, the Securities and Exchange Commission (“SEC”) announced that
      they would allow public companies to delay adoption until the first interim
      period of 2006. The Company elected to early adopt SFAS No. 123, Revised as
      of
      July 1, 2005, to account for awards made during the quarter then ended. The
      Company’s stockholders approved a stock option plan and a stock award plan for
      recognition and retention of key employees and directors at the stockholders’
annual meeting on May 27, 2005. Initial awards under the 2005 Recognition and
      Retention Plan (the “Recognition Plan”) were made on July 1, 2005 and initial
      awards under our 2005 Stock Option Plan (the “Stock Option Plan”) were made on
      July 28, 2005.


7


**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2006**
 **(Unaudited)**
 **NOTE
        3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS
        (Continued)**





The
      Financial Accounting Standards Board (FASB) has issued FASB Staff Position
      (FSP)
      115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its
      Application to Certain Investments.” The guidance in this FSP addresses the
      determination of when an investment is considered impaired, whether that
      impairment is other than temporary, and the measurement of an impairment loss.
      The FSP also includes accounting considerations subsequent to the recognition
      of
      an other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for
      Certain Investments in Debt and Equity Securities,” and SFAS No. 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations.” The
      guidance in this FSP also nullifies certain requirements of EITF No. 03-1,
“The
      Meaning of Other-Than-Temporary Impairment and its Application to Certain
      Investments.” The guidance in FSP 115-1 and 124-1 is required to be applied to
      reporting periods beginning after December 15, 2005. Considering the latest
      guidance in FSP 115-1 and 124-1, management believes the Company’s current
      accounting for investment securities is appropriate for evaluating and
      accounting for any impairment of its investment security portfolio.





On
      July
      13, 2006 the FASB issued FASB Interpretation No. 48 (FIN 48), “ Accounting
      for Uncertainty in Income Taxes-An Interpretation of FASB No. 109*.*” FIN
      48
      clarifies the accounting for uncertainty recognized in an enterprise’s financial
      statements in accordance with SFAS No. 109, “ Accounting
      for Income Taxes .”
FIN
      48
      also defines how an enterprise will determine if a tax position taken or
      expected to be taken on its tax returns may be recognized and, if recognized,
      how to measure the amount of the tax position recognized. The provisions of
      FIN
      48 are effective for fiscal years beginning after December 15, 2006. The Company
      is presently assessing the impact FIN 48 may have on its financial statements,
      but no determination has been made at this time.





**NOTE
      4. AVAILABLE FOR SALE SECURITIES**





For
      purposes of managing its net interest margin, the Company had identified for
      disposal at March 31, 2006, certain FHLB debt securities. The securities, which
      were reported as available for sale securities, had an original cost of $16.0
      million, an approximate carrying value of $15.8 million and a weighted average
      yield of 3.84%. Due to the planned sale of the securities, the $177,000
      difference between the original acquired cost and the estimated market value
      at
      March 31, 2006, was deemed to be an other-than-temporary loss and, accordingly,
      was charged to earnings as a net loss on securities available for sale for
      the
      three months ended March 31, 2006.





As
      planned, the identified securities were sold during the quarter ended June
      30,
      2006 resulting in a realized loss of $166,000. The $11,000 difference between
      the estimated loss of $177,000 recorded at June 30, 2006, and the realized
      loss of $166,000 has been recorded as a gain from available for sale securities
      for the three months ended June 30, 2006.





The
      Company evaluates securities for other-than-temporary impairment, at least
      on a
      quarterly basis, and more frequently when economic or market concerns warrant
      such evaluation. Consideration is given to the length of time and the extent
      to
      which the fair value has been less than cost, the financial condition and
      near-term prospects of the issuer, and the intent and ability of the Company
      to
      retain its investment in the issuer for a period of time sufficient to allow
      for
      any anticipated recovery in fair value. In analyzing an issuer's financial
      condition, the Company may consider whether the securities are issued by the
      federal government or one of its agencies, whether downgrades by bond rating
      agencies have occurred, and the results of reviews of the issuer's financial
      condition. As of June 30, 2006 unrealized losses on available for sale
      securities were $1,210,000 and are largely due to the current interest rate
      environment, relative to the interest rate of the securities, and as the
      security approaches maturity the fair value will return to par.


8


**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2006**
 **(Unaudited)**


**NOTE
      5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE**





Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $12,794,000 at June 30, 2006. The Company had no
      such
      agreements as of December 31, 2005.





Securities
      sold under agreements to repurchase are financing arrangements that mature
      in
      February 2011, or, beginning in February 2007, may be terminated by the lender
      each following quarter. At maturity or termination, the securities underlying
      the agreements are returned to the Company. Information concerning securities
      sold under agreements to repurchase as of, and for the six months ended
      June 30, 2006 is summarized as follows:





Average
                daily balance
            
            $
            8,536,000Average
                interest rate
            
            
            4.53
            %Maximum
                month-end balance
            
            $
            12,000,000Weighted
                average interest rate at period end
            
            
            4.53
            %





The
      interest rate remains fixed at 4.53% until February 2007, at which time it
      converts to a floating rate of 8.50% minus 3-month LIBOR up to a maximum rate
      of
      5.75%.





**NOTE
      6. INTEREST RATE SWAPS**





In
      connection with its asset liability management strategy, the Company terminated,
      prior to its contractual maturity, an interest rate swap agreement during the
      second quarter of 2006. The interest rate swap agreement had a notional amount
      of $5,000,000 and was designated as a cash flow hedge of certain Federal Home
      Loan Bank (FHLB) advances. A gain of $208,000 was realized as a result of
      terminating the interest rate swap agreement early and is recorded in other
      non-interest income for the three and six months ended June 30, 2006. The
      $5,000,000 FHLB advance hedged by the interest rate swap was repaid at the
      time
      the interest rate swap was terminated. There were no early termination fees
      for
      repayment of the FHLB advance.





Summary
      information regarding interest-rate swaps designated as cash flow hedges as
      of
      June 30, 2006 is as follows:


Notional
                amounts
            
            $
            10,000,000Weighted
                average pay rates
            
            
            3.43
            %Weighted
                average receive rates
            
            
            5.23
            %Weighted
                average maturity
            
            
            7.6
                yearsFair
                value
            
            $
            856,000





**NOTE
      7. DIVIDENDS**





During
      the second quarter of 2006, the Company’s board of directors declared a regular
      quarterly cash dividend at a rate of $0.10 per share. The dividend is payable
      on
      July 31, 2006 for stockholders of record on July 14, 2006. Atlantic Coast
      Federal, MHC (MHC) which holds 8,728,500 shares, or 61.7% of the Company’s total
      outstanding stock has informed the Company that it will waive receipt of
      the second quarter dividend on their owned shares, as was done in the first
      quarter of 2006.




Total
      dividends charged to retained earnings for the six months ended June 30, 2006
      was $963,051.




9


**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2006**
 **(Unaudited)**


**NOTE
      8. EARNINGS PER COMMON SHARE**





Basic
      earnings per common share is computed by dividing net income 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 earnings per common share is computed by dividing net income by the
      weighted-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 earnings per common share computation for the three and six months
      ended June 30, 2006 and 2005, is as follows:





For
                the three-months
              ended
                June 30,
            
            For
                the six-months
              ended
                June 30,2006
            
            2005
            
            2006
            
            2005BasicNet
                income
            
            $
            1,492,656
            
            $
            902,464
            
            $
            2,599,593
            
            $
            1,684,856Weighted
                average common shares outstanding
            
            
            14,145,800
            
            
            14,547,500
            
            
            14,144,002
            
            
            14,547,500Less:
                Average unallocated ESOP shares
            
            
            372,416
            
            
            418,968
            
            
            372,416
            
            
            418,968Average unvested restricted stockawards
            
            
            262,919
            
            
            -
            
            
            261,121
            
            
            -Average
                shares
            
            
            13,510,465
            
            
            14,128,532
            
            
            13,510,465
            
            
            14,128,532Basic
                earnings per common share
            
            $
            0.11
            
            $
            0.06
            
            $
            0.19
            
            $
            0.12DilutedNet
                income
            
            $
            1,492,656
            
            $
            902,464
            
            $
            2,599,593
            
            $
            1,684,856Weighted
                  average common shares outstanding for basic earnings per common
                  share
            
            
            13,510,465
            
            
            14,128,532
            
            
            13,510,465
            
            
            14,128,532Add:
                Dilutive effects of assumed exercises of stock options
            
            
            -
            
            
            -
            
            
            -
            
            
            -Add:
                Dilutive effects of full vesting of stock awards
            
            
            91,385
            
            
            -
            
            
            80,536
            
            
            -Average shares and dilutive potential common shares
            
            
            13,601,850
            
            
            14,128,532
            
            
            13,591,001
            
            
            14,128,532Diluted
                earnings per common share
            
            $
            0.11
            
            $
            0.06
            
            $
            0.19
            
            $
            0.12





Stock
      options for 542,400 shares of common stock were not considered in computing
      diluted earnings per common share for the three and six months ended June 30,
      2006. There were no potentially dilutive securities for the three and six months
      ended June 30, 2005.




10


**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2006**
 **(Unaudited)**


**NOTE
      9. OTHER COMPREHENSIVE INCOME (LOSS)**





Comprehensive
      income (loss) components and related taxes for the three and six months ended
      June 30, 2006 and 2005 were as follows:





For
                the three-months
              ended
                June 30,
            
            For
                the six-months
              ended
                June 30,2006
            
            2005
            
            2006
            
            2005Unrealized
                holding gains and (losses) on securities available for sale
            
            $
            (396,971
            )
            $
            31,482
            
            $
            (714,468
            )
            $
            (147,137
            )Less
                reclassification adjustments for (gains) losses recognized in
                income
            
            
            11,158
            
            
            -
            
            
            (165,495
            )
            
            -Net
                unrealized gains and (losses)
            
            
            (408,129
            )
            
            31,482
            
            
            (548,973
            )
            
            (147,137
            )Tax
                effect
            
            
            148,049
            
            
            (11,963
            )
            
            198,768
            
            
            55,912Net-of-tax
                amount
            
            
            (260,080
            )
            
            19,519
            
            
            (350,205
            )
            
            (91,225
            )Change
                in fair value of derivatives used for cash flow hedges
            
            
            82,776
            
            
            (340,378
            )
            
            361,895
            
            
            119,055Less
                reclassification adjustments for (gains) recognized in income
            
            
            (207,850
            )
            
            -
            
            
            (207,850
            )
            
            -Net
                unrealized gains and (losses)
            
            
            (125,074
            )
            
            (340,378
            )
            
            154,045
            
            
            119,055Tax
                effect
            
            
            47,528
            
            
            129,344
            
            
            (58,537
            )
            
            (45,241
            )Net-of-tax
                amount
            
            
            (77,546
            )
            
            (211,034
            )
            
            95,508
            
            
            73,814Other
                comprehensive income (loss)
            
            $
            (337,626
            )
            $
            (191,515
            )
            $
            (254,697
            )
            $
            (17,411
            )




11


**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 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
      of our accounting policies are important to the portrayal of our 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. Facts and
      circumstances that could affect these judgments include, but without limitation,
      changes in interest rates, in the performance of the economy or in the financial
      condition of borrowers. Management believes that its critical accounting
      policies include determining the allowance for loan losses, determining the
      fair
      value of securities, accounting for deferred income taxes, and the valuation
      of
      intangible assets including goodwill. Atlantic Coast Federal Corporation’s
      accounting policies are discussed in detail in Note 1 of the Notes to
      Consolidated Financial Statements included in Item 8 of our Annual Report on
      Form 10-K filed with the Securities and Exchange Commission.





The
      allowance for loan losses is a valuation allowance for probable incurred credit
      losses, increased by the provision for loan losses and decreased by charge-offs
      less recoveries. Management estimates the allowance balance required by
      considering the past loan loss experience, the nature and volume of the
      portfolio, information about specific borrower situations and estimated value
      of
      any underlying collateral, whether the loan was originated through the Company’s
      retail network or through a broker, economic conditions and other factors.
      Allocations of the allowance may be made for specific loans, but the entire
      allowance is available for any loan that, in management’s judgment, should be
      charged-off. Loan losses are charged against the allowance when management
      believes the uncollectibility of a loan balance is confirmed.


12


The
      allowance consists of specific and general components. The specific component
      relates to loans that are individually evaluated and determined to be impaired.
      Loans individually evaluated are generally large balance and/or complex loans,
      such as multi-family and commercial real estate loans. This evaluation is often
      based on significant estimates and assumptions due to the level of subjectivity
      and judgment necessary to account for highly uncertain matters or the
      susceptibility of such matters to change. The general component relates to
      large
      groups of small balance homogeneous loans that are evaluated in the aggregate
      based on historical loss experience adjusted for current factors.





We
      believe that the allowance for loan losses and related provision expense are
      particularly susceptible to material change in the near term as a result of
      significant changes in individual borrower circumstances on larger balance
      loans. The provision for loan loss expense was $280,000 for the six months
      ended
      June 30, 2006, and $1.1 million for the same period in 2005. This decrease
      was
      due to the recording of a $400,000 specific reserve in the first quarter of
      2005
      on one impaired loan relationship and an additional provision for loan loss
      expense of $303,000 in the second quarter of 2005 when a loan charge-off of
      $605,000 exceeded the specific reserve. There were no significant changes to
      specific reserves in the first or second quarter of 2006.





Securities
      available for sale are carried at fair value, with unrealized holding gains
      and
      losses reported separately in accumulated other comprehensive income (loss),
      net
      of tax. Atlantic Coast Federal Corporation obtains market values from a third
      party on a monthly basis in order to adjust the securities to fair value. Other
      comprehensive income (loss) resulting from changes in the fair market value
      of
      Atlantic Coast Federal Corporation’s available for sale securities portfolio
      totaled $(350,000) and $(91,000) for the six months ended June 30, 2006 and
      2005, respectively. Additionally, securities available for sale are required
      to
      be written down to fair value when a decline in fair value is not temporary;
      therefore, future changes in the fair value of securities could have a
      significant impact on Atlantic Coast Federal Corporation’s operating results. In
      determining whether a market value decline is other than temporary, management
      considers the reason for the decline, the extent of the decline and the duration
      of the decline.





Atlantic
      Coast Federal Corporation assesses the carrying value of intangible assets
      and
      goodwill at least annually in order to determine if such intangible assets
      are
      impaired. In reviewing the carrying value of intangible assets, Atlantic Coast
      Federal Corporation assesses the recoverability of such assets by evaluating
      the
      fair value of Atlantic Coast Federal Corporation’s community banking segment,
      which is the Company’s only business segment. Any impairment would be required
      to be recorded during the period identified. Atlantic Coast Federal
      Corporation’s goodwill totaled $2.7 million as of June 30, 2006, therefore, if
      Atlantic Coast Federal Corporation’s goodwill was determined to be impaired,
      Atlantic Coast Federal Corporation’s financial results could be materially
      impacted.





After
      converting to a federally chartered savings association, Atlantic Coast Federal
      became a taxable organization. Income tax expense 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 bases
      of
      assets and liabilities, computed using enacted tax rates. 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 Federal’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 Atlantic Coast Federal Corporation in preparing our federal and state
      tax returns are subject to the review of taxing authorities, and the review
      of
      the positions we have taken by taxing authorities could result in a material
      adjustment to our financial statements.




13


**Comparison
      of Financial Condition at June 30, 2006 and December 31,
      2005**





**General.** Our
      balance sheet growth for the period ended June 30, 2006 as compared to
      December 31, 2005 indicates an annualized asset growth rate of
      approximately 9.4%, and reflects a slower pace of loan and deposit growth
      compared to recent previous quarters.





Following
      is a summarized comparative balance sheet as of June 30, 2006 and December
      31,
      2005:





June
                30,
            
            December
                31,
            
            Increase
                (decrease)2006
            
            2005
            
            Dollars
            
            PercentageAssets
            
            (Dollars
                in Thousands)Cash
                and cash equivalents
            
            $
            40,470
            
            $
            37,959
            
            $
            2,511
            
            
            6.6
            %Other
                interest bearing investments
            
            
            1,500
            
            
            1,800
            
            
            (300
            )
            
            -16.7
            %Securitites
                available for sale
            
            
            69,143
            
            
            71,965
            
            
            (2,822
            )
            
            -3.9
            %Loans
            
            
            618,457
            
            
            585,028
            
            
            33,429
            
            
            5.7
            %Allowance
                for loan losses
            
            
            (4,619
            )
            
            (4,587
            )
            
            (32
            )
            
            0.7
            %Loans,
                net
            
            
            613,838
            
            
            580,441
            
            
            33,397
            
            
            5.8
            %Loans
                held for sale
            
            
            1,155
            
            
            100
            
            
            1,055
            
            
            1055.0
            %Other
                assets
            
            
            52,762
            
            
            51,584
            
            
            1,178
            
            
            2.3
            %Total
                assets
            
            $
            778,868
            
            $
            743,849
            
            $
            35,019
            
            
            4.7
            %Liabilities
                and Stockholders' equityDepositsNon-interest
                bearing
            
            $
            46,631
            
            $
            38,454
            
            $
            8,177
            
            
            21.3
            %Interest
                bearing transaction accounts
            
            
            51,591
            
            
            79,739
            
            
            (28,148
            )
            
            -35.3
            %Savings
                and money-market
            
            
            129,159
            
            
            100,260
            
            
            28,899
            
            
            28.8
            %Time
            
            
            320,663
            
            
            297,869
            
            
            22,794
            
            
            7.7
            %Total
                deposits
            
            
            548,044
            
            
            516,322
            
            
            31,722
            
            
            6.1
            %Securities
                sold under agreements to repurchase
            
            
            12,000
            
            
            -
            
            
            12,000
            
            
            100.0
            %Federal
                Home Loan Bank advances
            
            
            119,000
            
            
            129,000
            
            
            (10,000
            )
            
            -7.8
            %Accrued
                expenses and other liabilities
            
            
            4,734
            
            
            5,610
            
            
            (876
            )
            
            -15.6
            %Total
                liabilities
            
            
            683,778
            
            
            650,932
            
            
            32,846
            
            
            5.0
            %Stockholders'
                equity
            
            
            95,090
            
            
            92,917
            
            
            2,173
            
            
            2.3
            %Total
                liabilities and stockholders' equity
            
            $
            778,868
            
            $
            743,849
            
            $
            35,019
            
            
            4.7
            %




**Cash
      and cash equivalents** .
      Cash
      and cash equivalents are comprised of cash-on-hand and interest earning and
      non-interest earning balances held in other depository institutions. We expect
      the balances we maintain in cash and cash equivalents will fluctuate as our
      other interest earning assets mature, or we identify opportunities for
      longer-term investments that fit the Company’s growth strategy.





**Securities
      available for sale** .
      Securities available for sale is comprised principally of debt securities of
      U.S. Government-sponsored organizations, or mortgage-backed securities. In
      the
      near-term we expect the composition of our investment in securities available
      for sale to continue to be heavily weighted in mortgage-backed securities or
      the
      debt of government-sponsored organizations. During the six months ended June
      30,
      2006, the Company purchased approximately $22.8 million of investment
      securities, which includes securities purchased to replace those designated
      for
      sale as of March 31, 2006 (see **** Comparison
      of Results of Operation for the Three Months Ended June 30, 2006 and 2005-
      Non-interest Expense), nearly all of which were mortgage-backed securities
      or
      the debt of government-sponsored organizations.


14




**Loans** .
      Following is a comparative composition of net loans as of June 30, 2006 and
      December 31, 2005:





Increase
                (decrease)As
                of June 30,2006
            
            %
                of total loans
            
            
            As
                of December 31, 2005
            
            %
                of total loans
            
            
            Dollars
            
            Percentage(Dollars
                In Thousands)Commercial
                non-mortgage
            
            $
            7,949
            
            
            1.3
            %
            
            $
            6,880
            
            
            1.2
            %
            
            $
            1,069
            
            
            15.5
            %Commercial
                real estate and multifamily
            
            
            70,878
            
            
            11.5
            %
            
            
            66,726
            
            
            11.5
            %
            
            
            4,152
            
            
            6.2
            %Construction
                loans
            
            
            46,056
            
            
            7.5
            %
            
            
            26,820
            
            
            4.6
            %
            
            
            19,236
            
            
            71.7
            %One-
                to four- family residential mortgages
            
            
            327,323
            
            
            53.2
            %
            
            
            324,681
            
            
            55.9
            %
            
            
            2,642
            
            
            0.8
            %Consumer
                and other loansAutomobile
            
            
            28,221
            
            
            4.6
            %
            
            
            31,133
            
            
            5.4
            %
            
            
            (2,912
            )
            
            -9.4
            %Unsecured
            
            
            17,827
            
            
            2.9
            %
            
            
            18,188
            
            
            3.1
            %
            
            
            (361
            )
            
            -2.0
            %Home
                equity
            
            
            85,732
            
            
            13.9
            %
            
            
            79,016
            
            
            13.6
            %
            
            
            6,716
            
            
            8.5
            %Land
            
            
            16,025
            
            
            2.6
            %
            
            
            14,200
            
            
            2.4
            %
            
            
            1,825
            
            
            12.9
            %Other
            
            
            14,895
            
            
            2.4
            %
            
            
            13,525
            
            
            2.3
            %
            
            
            1,370
            
            
            10.1
            %Total
                loans
            
            
            614,906
            
            
            
            
            
            
            581,169
            
            
            
            
            
            
            33,737
            
            
            5.8
            %Allowance
                for loan losses
            
            
            (4,619
            )
            
            -0.8
            %
            
            
            (4,587
            )
            
            -0.8
            %
            
            
            (32
            )
            
            0.7
            %Net
                deferred loan (fees) costs
            
            
            3,124
            
            
            0.5
            %
            
            
            3,164
            
            
            0.5
            %
            
            
            (40
            )
            
            -1.3
            %Premiums
                on purchased loans
            
            
            427
            
            
            0.1
            %
            
            
            695
            
            
            0.1
            %
            
            
            (268
            )
            
            -38.6
            %Loans,
                net
            
            $
            613,838
            
            
            
            
            
            $
            580,441
            
            
            
            
            
            $
            33,397
            
            
            5.8
            %







The
      composition of our net loan portfolio is heavily weighted toward loans secured
      by first mortgages, home equity loans, or second mortgages, all secured by
      one-
      to four-family residences, with approximately 67% of our loans invested in
      those
      types of loans at June 30, 2006, and 70% at December 31, 2005. The balance
      as of June 30, 2006 of our largest loan category, one- to four-family
      residential mortgages, has remained virtually flat compared to the year-end
      2005
      balance. The limited growth reflects a change made in the second half of 2005
      to
      reduce our emphasis on this category of loans due to the ongoing flat yield
      curve, which continued to hold interest rates on longer-term loans low relative
      to our cost of funds. Until rates on longer-term loans demonstrate more
      attractive yields relative to our cost of funds, we intend to maintain our
      current level of this category of loans. During the first half of 2006, we
      purchased $16.3 million of variable-rate one- to four-family residential loans,
      to supplement our normal retail loan originations. Depending on liquidity,
      earning needs, and the availability of high quality loans, we expect to continue
      to purchase adjustable rate one- to four-family residential mortgage loans
      to
      supplement our internal loan originations and maintain at least our current
      balance.





Our
      loan
      growth during the six months ended June 30, 2006, was primarily achieved with
      home equity lending and construction loans, primarily for the construction
      of
      one- to four-family residential properties. Interest terms for both loan types
      are generally indexed to the current prime rate and, as such, have more
      favorable interest margins relative to our cost of funds. The majority of the
      construction loan balances at June 30, 2006 and December 31, 2005 are composed
      of loans acquired from mortgage brokers under arrangements requiring that at
      the
      completion of construction the Company will sell the loan back to the mortgage
      broker at par, or the balance will be paid off with permanent financing from
      a
      third party lender. Given the current interest rate environment the Company
      expects to continue in the near term to focus its lending efforts on home equity
      lending products and financing the construction of one- to four-family
      residences.




15


**Allowance
      for loan losse** s.
      Our
      allowance for loan losses was .75% and .78% of total loans outstanding at June
      30, 2006 and December 31, 2005. Allowance for loan losses activity for the
      six
      months ended June 30, 2006 and 2005 was as follows:





2006
            
            2005(In
                Thousands)Beginning
                balance
            
            $
            4,587
            
            $
            3,956Loans
                charged-off
            
            
            (668
            )
            
            (1,284
            )Recoveries
            
            
            420
            
            
            417Net
                charge-offs
            
            
            (248
            )
            
            (867
            )Provision
                for loan losses
            
            
            280
            
            
            1,100Ending
                balance
            
            $
            4,619
            
            $
            4,189





Loans
      charged off in 2005 included a charge of $605,000 in the second quarter of
      that
      year for the remaining balance of a commercial real estate loan relationship
      which had been made for the construction of a commercial water treatment plant.
      There have been no similarly large charge-offs in the six months ended June
      30,
      2006.





The
      allowance for loan losses consists of general allowance allocations made for
      pools of homogeneous loans and specific allocations on individual loans for
      which management has significant concerns regarding the borrowers’ ability to
      repay the loans in accordance with the terms of the loans. Non-performing loans
      totaled approximately $3.8 million and $2.6 million at June 30, 2006, and
      December 31, 2005, respectively, and total impaired loans were
      approximately $3.8 million at June 30, 2006, and $4.5 million at December 31,
      2005. The increase in non-performing loans was primarily due to the
      classification of $1.5 million of commercial real estate loans as non-performing
      at June 30, 2006, that had been considered performing at December 31, 2005,
      and
      the reduction of $300,000 of non-performing small balance homogeneous loans.
      The
      increase in non-performing commercial real estate loans is primarily due to
      an
      individual loan of $900,000 that was considered impaired at both June 30, 2006,
      and December 31, 2005 and had specific reserves allocated as of those period
      ends of $193,000 and $100,000, respectively. The total allowance allocated
      for
      impaired loans was approximately $832,000 at June 30, 2006 and $1.0 million
      as
      of December 31, 2005. As of June 30, 2006, and December 31, 2005, all
      non-performing loans were classified as non-accrual, and we did not have any
      restructured loans or loans 90 days past due and accruing interest as of June
      30, 2006, and December 31, 2005. Non-performing loans, excluding small balance
      homogeneous loans, were $2.7 million and $1.2 million at June 30, 2006 and
      December 31, 2005, respectively, and, all such non-performing loans were also
      reported as impaired loans.





Other
      consumer loans include a non-performing loan representing a pool of leases
      we
      purchased in 2001 with a balance of approximately $777,000 as of June 30, 2006.
      We have $150,000 of our allowance for loan losses allocated for this loan.
      Collection of the total amount owed on the leases from the surety who had
      provided payment performance bonds for the leases, continues to be vigorously
      pursued in court under the terms of the bonds. The balance due is approximately
      $1.7 million (representing the balance outstanding prior to the charge-offs
      being taken). Total legal fees incurred on this matter for the six months ended
      June 30, 2006 and 2005 were $103,000 and $150,000, respectively. Collection
      of
      any amount, including the $627,000 net amount included in our consolidated
      financial statements at June 30, 2006, or the gross amount of $1.7 million,
      cannot be assured. We believe there is a possibility that no amount will be
      collected in the future; therefore, we may incur additional losses up to the
      $627,000 net amount remaining as an asset. Additionally, we anticipate we will
      incur additional legal costs as we pursue collection on the surety
      bonds.




16


**Deposits** .
      Savings
      and money market deposit account balances grew during the first half of 2006,
      as
      the Bank increased the interest rates paid on its money market products to
      meet
      the rate of competitors in its markets. While raising the interest rates was
      necessary to both protect and grow deposit balances, we believe to a certain
      degree it has led to a disintermediation within our deposit products,
      particularly from our interest-bearing demand accounts, whose balances have
      declined during the first six months of 2006 nearly off setting the growth
      in
      money market account balances over the same period of time. To increase the
      growth of new deposit balances, the Company began offering a unique interest-bearing
      demand account. The account offers the highest interest rate in the market
      for
      an interest-bearing demand account, has no tiers and no minimum balance
      requirement.




The
      growth in time deposits as of June 30, 2006, as compared to the end of 2005,
      includes approximately $16.1 million of additional brokered deposits. The
      brokered deposits have been used to replace maturing certificate of deposits
      and
      fund loan growth. We expect future deposit growth as we expand our products
      and
      services in new and existing markets particularly in core deposits, and we
      also
      anticipate we will continue to purchase brokered deposits to meet liquidity
      demands when interest rates are favorable.


The
        growth in non-interest bearing deposits as of June 30, 2006, as compared
        to
        December 31, 2005, is primarily due to timing associated with payroll and
        other
        month-end deposits.




**Securities
      sold under agreements to repurchase.** Historically, the Company has only utilized advances from the Federal Home
      Loan
      Bank of Atlanta (“FHLB”) as an alternative to deposits for funding its lending
      and investment activities. While we expect FHLB advances to continue to be
      a
      significant source of funds in the future, the Company also initiated its first
      financing arrangement involving the sale of securities under an agreement to
      repurchase during the first quarter of 2006 to take advantage of favorable
      interest rates relative to deposits with comparable maturities.




Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $12.8 million at June 30, 2006 and mature in February
      2011, or, beginning in February 2007, may be terminated in whole by the lender
      each following quarter. At maturity or termination, the securities underlying
      the agreements will be returned to the Company. At the date of the transaction,
      the interest rate was fixed at 4.53% until February 2007, at which time it
      converts to a floating rate of 8.50% minus 3-month LIBOR up to a maximum rate
      of
      5.75%.





Depending
      on the availability of suitable securities and the prevailing interest rates
      and
      terms of alternative source of funds, the Company may continue to sell
      securities under agreements to repurchase in the future.





**Federal
      Home Loan Bank advances** .
      In
      connection with its asset liability management strategy, the Company pre-paid
      a
      $5.0 million advance from the Federal Home Loan Bank (FHLB) during the quarter
      ended June 30, 2006. The advance, which did not have a pre-payment penalty,
      had
      an original maturity date of February 2014 and an interest rate based on the
      3-month LIBOR plus 22 basis points. At the same time the Company also terminated
      an interest rate swap agreement prior to maturity it had used to hedge the
      FHLB
      advance, recognizing a gain of approximately $208,000 during the three months
      ended June 30, 2006.




Following
      the pre-payment of the advance discussed above and the maturity of another
      $5.0
      million advance on April 6, 2006, FHLB advances had a weighted- average maturity
      of 72 months and a weighted- average rate of 4.30%. 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 cost
      of
      FHLB advances is attractive compared to deposits and other alternative source
      of
      funds.




17


**Stockholders’
      equity** .
      Activity in the Company’s stockholders’ equity for the six months ended June 30,
      2006 was as follows (in thousands):




Balance
                at December 31, 2005
            
            $
            92,917Increases
                to stockholders' equity:Net
                  income for the six months endedJune
                  30, 2006
            
            
            2,600Net
                other comprehensive income (loss)
            
            
            (255
            )ESOP
                shares allocated to employees
            
            
            345Management
                restricted stock earned under Recognition Plan
            
            
            294Stock
                options earned under Stock Option Plan
            
            
            152Total
                increases to stockholders' equity
            
            
            3,136Decreases
                to stockholders' equity:Dividends
            
            
            (963
            )Treasury
                stock purchased at cost
            
            
            -Total
                decreases to stockholders' equity
            
            
            (963
            )Balance
                at June 30, 2006
            
            $
            95,090





Net
      other
      comprehensive loss for the six months ending June 30, 2006 resulted from an
      increase in unrealized gains on an interest rate swap of $96,000, offset by
      additional unrealized losses on AFS securities of $350,000, net of taxes. The
      interest rate swap has been designated as a cash flow hedge of a particular
      FHLB
      advance, and the hedge was determined to be fully effective during the first
      half of 2006. The Company expects the hedge to remain fully effective during
      the
      remaining term of the swap. The unrealized losses on AFS securities are due
      to
      changes in interest rates, and we consider their decline in value below their
      cost to be temporary. Going forward, we expect changes in interest rates to
      continue to cause swings in unrealized gains and losses from our interest rate
      swaps and AFS securities.





Management
      restricted stock earned under the Recognition Plan and stock options earned
      under the Stock Option Plan reflect the recognition of compensation expense
      under SFAS No.123 Revised. The Company early adopted SFAS No. 123 Revised during
      the third quarter of 2005 to account for its share based compensation plans.
      Under this new accounting standard, the cost of awards granted under the
      Recognition Plan and the Stock Option Plan are being amortized over the vesting
      period of five years, which begins on the date of grant.





On
      June
      29, 2006, the Company’s board of directors declared a regular quarterly cash
      dividend at a rate of $0.10 per share. The dividend is payable on July 31,
      2006,
      for stockholders of record on July 14, 2006. Atlantic Coast Federal, MHC (MHC)
      which holds 8,728,500 shares, or 61.7% of the Company’s total outstanding stock
      has informed the Company that it will waive receipt of the second quarter
      dividend on their owned shares. Accordingly, stockholders’ equity for the three
      months ending June 30, 2006, was reduced approximately $505,000 for the declared
      dividend. Total dividends for the six months ended June 30, 2006, charged
      to stockholders’ equity was approximately $963,000, and approximately $1,658,000
      of dividend payments were waived by the MHC. We expect the MHC to waive receipt
      of payment on future dividends for its owned shares.





During
      the six months ended June 30, 2006, the Company did not repurchase any stock
      under the stock repurchase plan that began in early November 2005. Under this
      plan, the Company is permitted to purchase, over a 12-month period, up to 10%,
      or 579,520 shares of its outstanding common stock. As of June 30, 2006,
      approximately 200,000 shares of common stock remained to be repurchased under
      this plan although no assurances can be made about the number of shares, if
      any,
      that will actually be purchased, or the price that will be paid for such shares.


18


The
      equity to assets ratio decreased to 12.21% at June 30, 2006, from 12.49% at
      December 31, 2005. The decrease was primarily due to the rate of asset growth
      through June 30, 2006. Despite this decrease, we continued to be well in excess
      of all minimum regulatory capital requirements, and are considered “well
      capitalized” under those formulas. Total risk-based capital to risk-weighted
      assets was 14.50%, Tier 1 capital to risk-weighted assets was 13.69%, and
      Tier 1 capital to total adjusted total assets was 9.76% at June 30, 2006.
      These ratios as of December 31, 2005 were 15.90%, 15.00% and 10.00%,
      respectively.





**Comparison
      of Results of Operation for the Three Months Ended June 30, 2006 and
      2005** .





**General** . **** Our
      net
      income for the three months ended June 30, 2006, was $1.5 million, which was
      $590,000 more than for the same period in 2005. Net interest income increased
      7.5%, or $380,000 in the second quarter of 2006, compared to the same quarter
      in
      2005, as growth in interest earning assets combined with an increase in the
      interest yield on such assets, offsetting the rising cost of deposits. Provision
      for loan losses decreased 64.6%, or $373,000, to $204,000 in the quarter ended
      June 30, 2006, as compared to $577,000 for the same quarter in 2005.
      Non-interest income for the three months ended June 30, 2006 grew by 21.9%
      to
      $2.2 million as compared to $1.8 million for the same three months in 2005,
      due
      primarily to increased service charges and fees, along with a $208,000 gain
      on
      termination of interest rate swap agreement. The increase in non-interest
      income was partially offset by increased non-interest expense which grew
      $277,000, or 5.6%, to $5.3 million for the quarter ended June 30, 2006, from
      $5.0 million for the same quarter in 2005 due to increased compensation and
      benefit costs and other operating costs.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the three months ended June
      30, 2006 and 2005. 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.





For
                the three months ended June 30,2006
            
            
            2005(Dollars
                in Thousands)Average
                Balance
            
            Interest
            
            Average
                Yield /Cost
            
            
            Average
                Balance
            
            Interest
            
            Average
                Yield /CostINTEREST-EARNING
                ASSETSLoans
                receivable(1)
            
            $
            609,548
            
            $
            9,995
            
            
            6.56
            %
            
            $
            546,899
            
            $
            8,360
            
            
            6.11
            %Securites(2)
            
            
            68,536
            
            
            764
            
            
            4.46
            %
            
            
            58,510
            
            
            459
            
            
            3.14
            %Other
                interest-earning assets(3)
            
            
            30,690
            
            
            397
            
            
            5.17
            %
            
            
            50,378
            
            
            400
            
            
            3.18
            %Total
                interest-earning assets
            
            
            708,774
            
            
            11,156
            
            
            6.30
            %
            
            
            655,787
            
            
            9,219
            
            
            5.62
            %Non-interest
                earning assets
            
            
            55,658
            
            
            
            
            
            
            
            
            
            43,190Total
                assets
            
            $
            764,432
            
            
            
            
            
            
            
            
            $
            698,977INTEREST-BEARING
                LIABILITIESSavings
                deposits
            
            $
            52,073
            
            $
            51
            
            
            0.39
            %
            
            $
            62,783
            
            $
            67
            
            
            0.43
            %Interest
                bearing demand accounts
            
            
            57,219
            
            
            342
            
            
            2.39
            %
            
            
            56,147
            
            
            278
            
            
            1.98
            %Money
                market accounts
            
            
            71,923
            
            
            652
            
            
            3.63
            %
            
            
            57,935
            
            
            392
            
            
            2.71
            %Time
                deposits
            
            
            307,081
            
            
            3,205
            
            
            4.17
            %
            
            
            262,522
            
            
            2,157
            
            
            3.29
            %Federal
                Home Loan Bank advances
            
            
            123,010
            
            
            1,292
            
            
            4.20
            %
            
            
            117,569
            
            
            1,228
            
            
            4.18
            %Securities
                sold under agreements to repurchase
            
            
            12,000
            
            
            137
            
            
            4.53
            %
            
            
            -
            
            
            -
            
            
            -Total
                interest-bearing liabilities
            
            
            623,306
            
            
            5,679
            
            
            3.64
            %
            
            
            556,956
            
            
            4,122
            
            
            2.96
            %Non-interest
                bearing liabilities
            
            
            47,397
            
            
            
            
            
            
            
            
            
            41,293Total
                liabilities
            
            
            670,703
            
            
            
            
            
            
            
            
            
            598,249Stockholders'
                equity
            
            
            93,729
            
            
            
            
            
            
            
            
            
            100,728Total
                liabilities and stockholders' equity
            
            $
            764,432
            
            
            
            
            
            
            
            
            $
            698,977Net
                interest income
            
            
            
            
            $
            5,477
            
            
            
            
            
            
            
            
            $
            5,097Net
                interest spread
            
            
            
            
            
            
            
            
            2.65
            %
            
            
            
            
            
            
            
            
            2.66
            %Net
                earning assets
            
            $
            85,468
            
            
            
            
            
            
            
            
            $
            98,831Net
                interest margin(4)
            
            
            
            
            
            
            
            
            3.09
            %
            
            
            
            
            
            
            
            
            3.11
            %Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            113.71
            %
            
            
            
            
            
            
            
            
            117.74
            %





(1)
                Calculated net of deferred loan fees and loss reserve. 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.




19


**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,
      2006
      as compared to the same period in 2005. 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 the change due to volume and the change due to
      rate.




Increase/(Decrease)
            
            TotalDue
                to
            
            IncreaseVolume
            
            Rate
            
            (Decrease)(In
                Thousands)**INTEREST-EARNING
                ASSETS**Loans
                receivable
            
            $
            1,000
            
            $
            635
            
            $
            1,635Securites
            
            
            88
            
            
            217
            
            
            305Other
                interest-earning assets
            
            
            (195
            )
            
            192
            
            
            (3
            )Total
                interest-earning assets
            
            
            893
            
            
            1,044
            
            
            1,937**INTEREST-BEARING
                LIABILITIES**Savings
                deposits
            
            
            (11
            )
            
            (5
            )
            
            (16
            )Interest
                bearing demand accounts
            
            
            6
            
            
            58
            
            
            64Money
                market accounts
            
            
            108
            
            
            152
            
            
            260Time
                deposits
            
            
            404
            
            
            644
            
            
            1,048Federal
                Home Loan Bank advances
            
            
            57
            
            
            7
            
            
            64Securities
                sold under agreements to repurchase
            
            
            137
            
            
            -
            
            
            137Total
                interest-bearing liabilities
            
            
            701
            
            
            856
            
            
            1,557Net
                interest income
            
            $
            192
            
            $
            188
            
            $
            380




**Interest
      income.** As
      shown
      in the table above the increase in interest income for the three months ended
      June 30, 2006, as compared to the same period in 2005, is attributed nearly
      equally to growth in average outstanding interest-earning assets, and the rate
      of interest earned on those assets. Loans accounted for approximately 84% of
      the
      interest income growth, or $1.6 million for the quarter ended June 30,
      2006, as compared to the same quarter in 2005. While the majority of the
      increased interest income from loans is due to increased outstanding balances,
      the Company also increased its yield on average outstanding loan balances as
      a
      result of growth in prime interest rate-based loans. As discussed above in
      “Comparison of Financial Condition at June 30, 2006 and December 31, 2005 -
      Loans,” the flat yield curve over the last 12 months led the Company to increase
      its emphasis on prime rate interest-based loans, such as home equity lending
      and
      construction loans and reduce our focus on growing one- to four-family loans
      with interest rates that lagged increases in the Federal Reserve Bank discount
      rate. The growth in average outstanding balances of home equity loans and
      construction loans for the three months ended June 30, 2006, as compared to
      the
      same period in 2005, accounted for approximately 70%, or $44.1 million of the
      total $63.0 million in average loan growth. During these same periods, the
      average prime rate increased 170 basis points from 5.91% to 7.61%.





The
      growth in interest income from investment securities and other interest-earning
      assets for the quarter ended June 30, 2006, as compared to the same quarter
      in
      2005 is due to increased yields on these assets which have tracked upward
      consistent with increases to short-term interest rates.





We
      expect
      our interest income will increase as average interest earning assets and
      interest rates on such assets increase. Growth in interest earnings assets
      is
      partly dependent on funding from deposit growth in existing markets and the
      opening of new branches in the second-half of 2006. Our interest income could
      be
      adversely impacted by continued low interest rates on longer-term loans, such
      as
      one- to four-family residential loans and the availability of the type of
      interest earning-assets desired for investment by the Company.


20




**Interest
      expense.** The
      increase in interest expense for the three months ended June 30, 2006, as
      compared to the same period in 2005, is partially due to growth in average
      outstanding balances of interest-bearing deposit accounts, but more
      significantly due to increases to interest rates paid on those accounts. During
      the period of time from the end of the second quarter of 2005, until the end
      of
      the second quarter of 2006, the Federal Reserve Board increased the target
      rate
      for Federal Funds borrowings by 200 basis points, from 3.25% to 5.25%. In
      general, this led to significant rate increases on interest-bearing deposit
      accounts in our markets, where competition for deposits among financial
      institutions is stiff. In order to fund loan growth and maintain deposit market
      share, the Company has increased interest rates on its money-market accounts,
      interest bearing demand accounts and time deposits. The rate of interest expense
      on our FHLB advances has remained relatively flat for the first quarter of
      2006
      as compared to the first quarter of 2005, as the average interest rate on new
      advances have been slightly lower than the average rate of the total outstanding
      FHLB advances. We expect interest rates on deposits will continue to increase
      over the near term as market rates for deposits increase and competition for
      those deposits in our market intensifies.





**Net
      interest income.** Net
      interest income increased during the three months ended June 30, 2006, as
      compared to the same period in 2005, as the growth in interest income outpaced
      the growth in interest expense. As discussed above, increases in prime rate
      based loans has, in part, enabled the Company to increase the overall yield
      of
      the loan portfolio, in addition to strong growth in average outstanding
      balances. Our net interest spread, which is the difference between the interest
      yield earned on interest earning assets and the interest rate paid on interest
      bearing liabilities, declined 1 basis point for the second quarter of 2006
      as
      compared to the same quarter in 2005. For the same comparative periods, our
      net
      interest margin, which is net interest income expressed as a percentage of
      our
      average interest earning assets declined 2 basis points. The rate of decline
      in
      net interest spread and net interest margin has slowed considerably compared
      to
      the recent previous four quarters as shown below:





Net
                Interest
            
            Net
                InterestComparative
                Quarters
            
            Spread
            
            Margin2nd
                quarter-2006
            
            
            2.65
            %
            
            3.09
            %2005
            
            
            2.66
            %
            
            3.11
            %decline
            
            
            0.01
            %
            
            0.02
            %1st
                quarter-2006
            
            
            2.66
            %
            
            3.04
            %2005
            
            
            2.73
            %
            
            3.21
            %decline
            
            
            0.07
            %
            
            0.17
            %4th
                quarter-2005
            
            
            2.65
            %
            
            3.06
            %2004
            
            
            2.80
            %
            
            3.34
            %decline
            
            
            0.15
            %
            
            0.28
            %3rd
                quarter-2005
            
            
            2.42
            %
            
            2.86
            %2004
            
            
            3.12
            %
            
            3.50
            %decline
            
            
            0.70
            %
            
            0.64
            %2nd
                quarter-2005
            
            
            2.66
            %
            
            3.11
            %2004
            
            
            3.48
            %
            
            3.71
            %decline
            
            
            0.82
            %
            
            0.60
            %




Our
      rapid
      loan growth during 2004, primarily in adjustable rate one- to four-family
      residential mortgages (ARMs), as well as the near-complete refinancing of our
      existing residential mortgage portfolio, occurred during a period of
      unprecedented low interest rates. Due to the various interest rate reset terms
      of our ARM products, recent increases in market interest rates have not
      generally resulted in immediate increases in interest rate yields. Due to the
      fact that one- to four-family residential loans comprise over 50% of our total
      loan portfolio, we do not expect our net interest spread or net interest margin
      to increase in the near term. However, we believe our recent growth in prime
      rate based loans, along with limited repricing of our hybrid ARM loans will
      allow us to us to keep pace with future increases to cost of funds and limit
      the
      compression to interest margins. Management does expect net interest income
      to
      continue to grow as the Company utilizes deposit growth to expand its business
      and continues to emphasize loan growth in home equity, construction and
      commercial loans.


21





**Provision
      for loan losses.** We
      establish provisions for loan losses, which are charged to operations, at a
      level required to reflect probable incurred credit losses in the loan portfolio.
      In evaluating the level of the allowance for loan losses, management considers
      historical loss experience, the types of loans and the amount of loans in the
      loan portfolio, the source of origination of those loans, adverse situations
      that may affect borrowers’ ability to repay, estimated value of any underlying
      collateral, and prevailing economic conditions. Large groups of smaller balance
      homogeneous loans, such as residential real estate, small commercial real
      estate, home equity and consumer loans, are evaluated in the aggregate using
      historical loss factors adjusted for current economic conditions, source of
      loan
      origination, and other relevant data. Larger non-homogeneous loans, such as
      commercial loans for which management has concerns about the borrowers’ ability
      to repay, are evaluated individually, and specific allowance allocations are
      provided for such loans when necessary.





Based
      on
      management’s evaluation of these factors, provisions of $204,000 and $577,000
      were made during the three months ended June 30, 2006 and 2005, respectively.
      Comparatively, the provision for loan losses in the second quarter of 2006
      was
      reduced over same quarter in 2005, due to a $605,000 charge-off of a commercial
      real estate loan that exceeded the reserve of $302,000 and therefore required
      additional provision for loan loss of that amount.





Management
      assesses the allowance for loan losses on a quarterly basis and makes provisions
      for loan losses as necessary in order to maintain the allowance for loan losses
      based on all known and inherent losses that are both probable and can be
      reasonably estimated. While management uses available information to recognize
      losses on loans, future loan loss provisions may be necessary based on changes
      in economic conditions and changes in borrower situations. In addition, various
      regulatory agencies, as an integral part of their examination process,
      periodically review the allowance for loan losses and may require us to
      recognize additional provisions based on their judgment of information available
      to them at the time of their examination. The allowance for loan losses as
      of
      June 30, 2006, is maintained at a level that represents management’s best
      estimate of probable incurred losses in the loan portfolio.





**Non-interest
      income** .
      The
      components of non-interest income for the three months ended June 30, 2006
      and 2005 were as follows:




Increase(decrease)2006
            
            2005
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            1,502
            
            $
            1,233
            
            $
            269
            
            
            21.8
            %Net
                loss on available for sale securities
            
            
            11
            
            
            -
            
            
            11
            
            
            -100.0
            %Gain
                on sale of real estate mortgagesheld
                for sale
            
            
            13
            
            
            53
            
            
            (40
            )
            
            -75.5
            %Gain
                on sale of foreclosed assets
            
            
            (4
            )
            
            41
            
            
            (45
            )
            
            -109.8
            %Commission
                income
            
            
            68
            
            
            103
            
            
            (35
            )
            
            -34.0
            %Interchange
                fees
            
            
            199
            
            
            193
            
            
            6
            
            
            3.1
            %Bank
                owned life insurance earnings
            
            
            210
            
            
            153
            
            
            57
            
            
            37.3
            %Other
            
            
            189
            
            
            19
            
            
            170
            
            
            894.7
            %$
            2,188
            
            $
            1,795
            
            $
            393
            
            
            21.9
            %




22


Services
      charges and fees, which are earned primarily based on transaction services
      for
      deposit account customers, increased as a result of increased ATM and check
      card
      overdraft fees which began in the third quarter of 2005. The implementation
      of
      overdraft fees for ATM and check card overdrafts was part of several fee income
      initiatives started in 2005, which focused on improving our discipline over
      service charge fees and collections. We expect the growth of service charges
      and
      fees for the remainder of 2006, as compared to 2005, to be moderate as most
      of
      the initiatives became fully effective in the third and fourth quarters of
      2005.
      This growth will principally result from expanded products and services in
      existing markets and new branches opened in the second half of
      2006.





The
      growth in bank owned life insurance earnings for the three months ended June
      30,
      2006, as compared to the same period in 2005, was due to an increase in the
      average amount invested from $15.0 million in 2005 to $20.8 million in 2006.





Other
      non-interest income for the three months ended June 30, 2006 includes a gain
      of
      $208,000 resulting from the early termination of an interest rate swap agreement
      that had been used as a cash flow hedge for a FHLB advance of $5,000,000. In
      connection with our asset liability strategy, the FHLB advance was prepaid
      during the second quarter and the interest rate swap agreement was terminated
      with the counter-party resulting in the realized gain. We do not expect future
      gains from early termination of the remaining interest rate swap cash flow
      hedge, which at June 30, 2006 had a fair market value of $531,000, net of
      taxes.





**Non-interest
      expense** .
      The
      components of non-interest expense for the three months ended June 30, 2006
      and 2005 were as follows:





Increase(decrease)2006
            
            2005
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            2,617
            
            $
            2,352
            
            $
            265
            
            
            11.3
            %Occupancy
                and equipment
            
            
            490
            
            
            434
            
            
            56
            
            
            12.9
            %Data
                processing
            
            
            440
            
            
            292
            
            
            148
            
            
            50.7
            %Advertising
            
            
            215
            
            
            173
            
            
            42
            
            
            24.3
            %Outside
                professional services
            
            
            456
            
            
            643
            
            
            (187
            )
            
            -29.1
            %Interchange
                charges
            
            
            162
            
            
            155
            
            
            7
            
            
            4.5
            %Collection
                  expense and repossessedasset losses
            
            
            81
            
            
            84
            
            
            (3
            )
            
            -3.6
            %Telephone
            
            
            120
            
            
            133
            
            
            (13
            )
            
            -9.8
            %Other
            
            
            674
            
            
            711
            
            
            (37
            )
            
            -5.2
            %$
            5,255
            
            $
            4,977
            
            $
            278
            
            
            5.6
            %




Compensation
      and benefit expense for the three months ended June 30, 2006, as compared to
      the
      same period in 2005, increased $226,000 for the recognition of compensation
      expense for awards made under the Company’s share-based compensation plans which
      were initially awarded in the third quarter of 2005. Normal annual merit
      increases for associates as well as increased salary expense related to the
      operation and management of our retail branch network along with increased
      retirement expense was higher by $171,000 for the second quarter of 2006, as
      compared to the same period in 2005. Compensation and benefits expense in 2005
      included a payment of $152,000 made to retiring directors under the Company’s
      Director Emeritus program. The increased data processing costs for the three
      months ended June 30, 2006, as compared to the same period in 2005, are
      primarily due to increased software licensing costs for the Company’s operating
      system, the fees for which are based partly on the asset size of the Company.
      The Company is currently negotiating a new contract for software licensing
      with
      terms that we believe will reduce the rate of growth in these costs. We expect
      the new contract to begin in the third quarter of 2006. Outside and professional
      services cost decreased for the three months ended June 30, 2006 as compared
      to
      the same period in 2005, as the Company incurred significant fees associated
      with Sarbanes-Oxley initiatives and tax planning initiatives that have not
      been
      incurred in 2006.


23


In
      general, we expect non-interest expense will increase in future periods as
      a
      result of continued growth and expansion and the costs associated with our
      operation as a public company. Specifically, we expect compensation expense
      will
      increase in future periods as the Company makes additional awards under the
      Recognition Plan and Stock Option Plan and new branches are put into operation
      in the second half of 2006.





**Income
      tax expense.** Income
      tax expense increased to $714,000 for the three months ended June 30, 2006,
      from $436,000 for the same period in 2005. The
      increase is primarily due to an increase in income before income tax expense
      when comparing the two quarters. The effective income tax rate on income before
      income taxes for the three months ended June 30, 2006 was 32.3%, which is
      approximately the same rate as for second quarter 2005, but is less than federal
      and state statutory rates of 37.8%. The actual tax rate is less than the
      statutory rate primarily due to increased bank owned life insurance earnings
      of
      $211,000 for the three months ended June 30, 2006, and $153,000 for the same
      period in 2005, that are not taxable for federal income tax purposes. We
      anticipate that inco me
      tax
      expense will continue to vary as income before income taxes varies.





**Comparison
      of Results of Operation for the Six Months Ended June 30, 2006 and
      2005** .





**General** . **** Our
      net
      income for the six months ended June 30, 2006, was $2.6 million, which was
      $915,000 more than for the same period in 2005. Net interest income increased
      6.9%, or $694,000 in the first half of 2006, compared to the same period in
      2005, as growth in interest earning assets combined with an increase in the
      interest yield on such assets, offset the rising cost of deposits. Provision
      for
      loan losses decreased 74.5%, or $820,000, to $280,000 for the six months ended
      June 30, 2006, as compared to $1.1 million in the same period in 2005, on the
      basis of improved credit quality. Non-interest income for the six months ended
      June 30, 2006 grew by 24.1% to $3.8 million, as compared to $3.1 million for
      the
      same six months in 2005, due primarily to increased service charges and fees.
      The increase in non-interest income was offset by increased non-interest expense
      which grew $1.0 million, or 10.6%, to $10.5 million for the first half of 2006,
      from $9.50 million for the period 2005, due to increased compensation and
      benefit costs and other operating costs.




24


**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the six months ended
      June 30, 2006 and 2005. 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.




For
                the six months ended June 30,2006
            
            
            2005Average
                Balance
            
            Interest
            
            Average
                Yield /Cost
            
            
            Average
                Balance
            
            Interest
            
            Average
                Yield /CostINTEREST-EARNING
                ASSETSLoans
                receivable(1)
            
            $
            599,976
            
            $
            19,402
            
            
            6.47
            %
            
            $
            539,213
            
            $
            16,202
            
            
            6.01
            %Securites(2)
            
            
            69,983
            
            
            1,500
            
            
            4.29
            %
            
            
            55,511
            
            
            804
            
            
            2.90
            %Other
                interest-earning assets(3)
            
            
            31,219
            
            
            769
            
            
            4.92
            %
            
            
            43,105
            
            
            656
            
            
            3.04
            %Total
                interest-earning assets
            
            
            701,178
            
            
            21,671
            
            
            6.18
            %
            
            
            637,830
            
            
            17,662
            
            
            5.54
            %Non-interest-earning
                assets
            
            
            56,778
            
            
            
            
            
            
            
            
            
            38,616Total
                assets
            
            $
            757,956
            
            
            
            
            
            
            
            
            $
            676,446INTEREST-BEARING
                LIABILITIESSavings
                deposits
            
            $
            52,594
            
            
            105
            
            
            0.40
            %
            
            $
            64,761
            
            
            142
            
            
            0.44
            %Interest
                on interest-bearing demand
            
            
            66,275
            
            
            800
            
            
            2.41
            %
            
            
            45,622
            
            
            382
            
            
            1.67
            %Money
                market accounts
            
            
            60,874
            
            
            1,035
            
            
            3.40
            %
            
            
            57,590
            
            
            729
            
            
            2.53
            %Time
                deposits
            
            
            304,134
            
            
            6,161
            
            
            4.05
            %
            
            
            256,822
            
            
            4,066
            
            
            3.17
            %Federal
                Home Loan Bank advances
            
            
            125,989
            
            
            2,620
            
            
            4.16
            %
            
            
            109,765
            
            
            2,281
            
            
            4.16
            %Securities
                sold under agreement to repurchase
            
            
            8,536
            
            
            195
            
            
            4.53
            %
            
            
            -
            
            
            -
            
            
            -Total
                interest-bearing liabilities
            
            
            618,402
            
            
            10,915
            
            
            3.53
            %
            
            
            534,559
            
            
            7,600
            
            
            2.84
            %Non-interest-bearing
                liabilities
            
            
            46,375
            
            
            
            
            
            
            
            
            
            41,703Total
                liabilities
            
            
            664,777
            
            
            
            
            
            
            
            
            
            576,262Stockholders'
                equity
            
            
            93,179
            
            
            
            
            
            
            
            
            
            100,184Total
                liabilities and stockholders' equity
            
            $
            757,956
            
            
            
            
            
            
            
            
            $
            676,446Net
                interest income
            
            
            
            
            $
            10,756
            
            
            
            
            
            
            
            
            $
            10,062Net
                interest spread
            
            
            
            
            
            
            
            
            2.65
            %
            
            
            
            
            
            
            
            
            2.69
            %Net
                earning assets
            
            $
            82,776
            
            
            
            
            
            
            
            
            $
            103,271Net
                interest margin(4)
            
            
            
            
            
            
            
            
            3.07
            %
            
            
            
            
            
            
            
            
            3.17
            %Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            113.39
            %
            
            
            
            
            
            
            
            
            119.32
            %





(1)
                Calculated net of deferred loan fees and loss reserve. 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.




25


**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, 2006
      as
      compared to the same period in 2005. 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 the change due to volume and the change due to rate.




Increase/(Decrease)
            
            TotalDue
                to
            
            IncreaseVolume
            
            Rate
            
            (Decrease)(In
                Thousands)**INTEREST-EARNING
                ASSETS**Loans
                receivable
            
            $
            1,909
            
            $
            1,291
            
            $
            3,200Securites
            
            
            245
            
            
            451
            
            
            696Other
                interest-earning assets
            
            
            (216
            )
            
            329
            
            
            113Total
                interest-earning assets
            
            
            1,938
            
            
            2,071
            
            
            4,009**INTEREST-BEARING
                LIABILITIES**Savings
                deposits
            
            
            (25
            )
            
            (12
            )
            
            (37
            )Interest
                bearing demand accounts
            
            
            211
            
            
            207
            
            
            418Money
                market accounts
            
            
            44
            
            
            262
            
            
            306Time
                deposits
            
            
            832
            
            
            1,262
            
            
            2,094Federal
                Home Loan Bank advances
            
            
            337
            
            
            2
            
            
            339Securities
                sold under agreements to repurchase
            
            
            195
            
            
            -
            
            
            195Total
                interest-bearing liabilities
            
            
            1,594
            
            
            1,721
            
            
            3,315Net
                interest income
            
            $
            344
            
            $
            350
            
            $
            694




**Interest
      income.** As
      shown
      in the table above the increase in interest income for the six months ended
      June
      30, 2006, as compared to the same period in 2005, is attributed nearly equally
      to growth in average outstanding interest-earning assets, and the rate of
      interest earned on those assets. Loans accounted for approximately 80% of the
      interest income growth, or $3.2 million for the six months ended June 30, 2006,
      as compared to for the same six months in 2005. While the majority of the
      increased interest income from loans is due to increased outstanding balances,
      the Company also increased its yield on average outstanding loan balances as
      a
      result of growth in prime interest rate-based loans. As discussed above in
      “Comparison of Financial Condition at June 30, 2006 and December 31, 2005 -
      Loans,” the flat yield curve over the last 12 months led the Company to increase
      its emphasis on prime rate interest-based loans, such as home equity lending
      and
      construction loans and reduce our focus on growing one- to four-family loans
      with interest rates that lagged increases in the Federal Reserve Bank discount
      rate. The growth in average outstanding balances of home equity loans and
      construction loans for the six months ended June 30, 2006, as compared to the
      same period in 2005, accounted for approximately 64%, or $38.4 million of the
      total $60.1 million in average loan growth. During these same periods, the
      average prime rate increased 180 basis points from 5.68% to 7.48%.





The
      growth in interest income from investment securities and other interest-earning
      assets for the six months ended June 30, 2006, as compared to the same period
      in
      2005 is due to increased yields on these assets which have tracked upward
      consistent with increases to short-term interest rates.





We
      expect
      our interest income will increase as average interest earning assets and
      interest rates on such assets increase. Growth in interest earnings assets
      is
      partly dependent on funding from deposit growth in existing markets and the
      opening of new branches in the second-half of 2006. Our interest income could
      be
      adversely impacted by continued low interest rates on longer-term loans, such
      as
      one- to four-family residential loans and the availability of the type of
      interest earning-assets desired for investment by the Company.


26


**Interest
      expense.** The
      increase in interest expense for the six months ended June 30, 2006, as compared
      to the same period in 2005, is partially due to growth in average outstanding
      balances of interest-bearing deposit accounts, but more significantly due to
      increases to interest rates paid on those accounts. During the period of time
      from the end of the second quarter of 2005, until the end of the second quarter
      of 2006, the Federal Reserve Board increased the target rate for Federal Funds
      borrowings by 200 basis points, from 3.25% to 5.25%. In general, this has led
      to
      significant rate increases to interest-bearing deposit accounts in our markets,
      where competition for deposits among financial institutions is stiff. In order
      to fund loan growth and maintain deposit market share, the Company has increased
      interest rates on its money-market accounts, interest bearing demand accounts
      and time deposits. The rate of interest expense on our FHLB advances has
      remained relatively flat for the first quarter of 2006 as compared to the first
      quarter of 2005, as the average interest rate on new advances have been slightly
      lower than the average rate of the total outstanding FHLB advances. We expect
      interest rates on deposits will continue to increase over the near term as
      market rates for deposits increase and competition for those deposits in our
      market intensifies.





**Net
      interest income.** Net
      interest income increased during the first half of 2006, as compared to the
      same
      period in 2005, as the growth in interest income outpaced the growth in interest
      expense. As discussed above, increases in prime rate based loans has, in part,
      enabled the Company to increase the overall yield of the loan portfolio, in
      addition to strong growth in average outstanding balances. Our net interest
      spread, which is the difference between the interest yield earned on interest
      earning assets and the interest rate paid on interest bearing liabilities,
      declined 4 basis points for the six months ended June 30, 2006 as compared
      to
      the six months in 2005. For the same comparative periods, our net interest
      margin, which is net interest income expressed as a percentage of our average
      interest earning assets declined 10 basis points. The rate of decline in net
      interest spread and net interest margin has slowed considerably compared to
      the
      recent previous four quarters as shown above (See “Comparison of Results of
      Operation for the Three Months Ended June 30, 2006 and 2005 - Net interest
      income”).





Our
      rapid
      loan growth during 2004, primarily in adjustable rate one- to four-family
      residential mortgages (ARMs), as well as the near-complete refinancing of our
      existing residential mortgage portfolio, occurred during a period of
      unprecedented low interest rates. Due to the various interest rate reset terms
      of our ARM products, recent increases in market interest rates have not
      generally, resulted in immediate increase in interest rate yields. Due to the
      fact that one- to four-family residential loans comprise over 50% of our total
      loan portfolio we do not expect our net interest spread or net interest margin
      to increase in the near term. However, we believe our recent growth in prime
      rate based loans, along with limited repricing of our hybrid ARM loans will
      allow us to us to keep pace with future increases to cost of funds and limit
      the
      compression to interest margins. Management does expect net interest income
      to
      continue to grow as the Company utilizes deposit growth to expand its business
      and continues to emphasize loan growth in home equity, construction and
      commercial loans.





**Provision
      for loan losses.** We
      establish provisions for loan losses, which are charged to operations, at a
      level required to reflect probable incurred credit losses in the loan portfolio.
      In evaluating the level of the allowance for loan losses, management considers
      historical loss experience, the types of loans and the amount of loans in the
      loan portfolio, the source of origination of those loans, adverse situations
      that may affect borrowers’ ability to repay, estimated value of any underlying
      collateral, and prevailing economic conditions. Large groups of smaller balance
      homogeneous loans, such as residential real estate, small commercial real
      estate, home equity and consumer loans, are evaluated in the aggregate using
      historical loss factors adjusted for current economic conditions, source of
      loan
      origination, and other relevant data. Larger non-homogeneous loans, such as
      commercial loans for which management has concerns about the borrowers’ ability
      to repay, are evaluated individually, and specific allowance allocations are
      provided for such loans when necessary.




27


Based
      on
      management’s evaluation of these factors, provisions of $280,000 and $1.1
      million were made during the six months ended June 30, 2006 and 2005,
      respectively. The provision for loan losses in 2005 included a specific
      allowance of $400,000 for a single commercial real estate loan, which
      subsequently was paid off entirely in the third quarter of 2005, and a $605,000
      charge-off of a commercial real estate loan that exceeded the reserve of
      $302,000 and therefore required additional provision for loan loss for the
      difference. There was not any similarly large activity to the allowance for
      loan
      loss reserve during the first six months of 2006.





Management
      assesses the allowance for loan losses on a quarterly basis and makes provisions
      for loan losses as necessary in order to maintain the allowance for loan losses
      based on all known and inherent losses that are both probable and can be
      reasonably estimated. While management uses available information to recognize
      losses on loans, future loan loss provisions may necessarily be based on changes
      in economic conditions and changes in borrower situations. In addition, various
      regulatory agencies, as an integral part of their examination process,
      periodically review the allowance for loan losses and may require us to
      recognize additional provisions based on their judgment of information available
      to them at the time of their examination. The allowance for loan losses as
      of
      June 30, 2006, is maintained at a level that represents management’s best
      estimate of probable incurred losses in the loan portfolio.





**Non-interest
      income** .
      The
      components of non-interest income for the six months ended June 30, 2006 and
      2005 were as follows:





Increase(decrease)2006
            
            2005
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            2,844
            
            $
            2,129
            
            $
            715
            
            
            33.6
            %Net
                loss on available for sale securities
            
            
            (166
            )
            
            -
            
            
            (166
            )
            
            -100.0
            %Gain
                  on sale of real estate mortgagesheld
                  for sale
            
            
            16
            
            
            65
            
            
            (49
            )
            
            -75.4
            %Gain
                on sale of foreclosed assets
            
            
            (1
            )
            
            42
            
            
            (43
            )
            
            -102.4
            %Commission
                income
            
            
            149
            
            
            202
            
            
            (53
            )
            
            -26.2
            %Interchange
                fees
            
            
            394
            
            
            373
            
            
            21
            
            
            5.6
            %Bank
                owned life insurance earnings
            
            
            414
            
            
            204
            
            
            210
            
            
            102.9
            %Other
            
            
            176
            
            
            67
            
            
            109
            
            
            162.7
            %$
            3,826
            
            $
            3,082
            
            $
            744
            
            
            24.1
            %





Services
      charges and fees, which are earned primarily based on transaction services
      for
      deposit account customers, increased as a result of increased ATM and check
      card
      overdraft fees which began in the third quarter of 2005. The implementation
      of
      overdraft fees for ATM and check card overdrafts was part of a several fee
      initiatives started in 2005, which focused on improving our discipline over
      service charge fees and collections. We expect the growth of service charges
      and
      fees for the remainder of 2006, as compared to 2005, to be moderate as most
      of
      the initiatives became fully effective in the third and fourth quarters of
      2005.
      This growth will principally result from expanded products and services in
      existing markets and new branches opened in the second half of
      2006.





The
      net
      loss on available for sale securities for the six months ended June 30, 2006,
      is
      due to the recognition of an impairment loss on certain FHLB debt securities
      held at the end of the first quarter of 2006 for $177,000. The impairment loss
      was estimated based on the difference between the original cost of the
      securities and their estimated fair value as March 31, 2006. The securities
      were
      sold during the second quarter for an actual loss of $166,000 and the loss
      recorded at the time the securities were identified for disposal was adjusted
      to
      the actual loss at the time of the sale. The securities disposed of had an
      original purchase cost of $16.0 million and a weighted average yield of 3.84%.
      They were identified for disposal in an effort to improve the Company’s net
      interest margin. During the second quarter of 2006 the Company purchased a
      like
      amount of securities with a weighted average interest rate of 5.77%.


28


The
      growth in bank owned life insurance earnings for the first half of 2006, as
      compared to the same period in 2005, was due to an increase in the average
      amount invested from $10.6 million in 2005 to $20.7 million in 2006.





Other
      non-interest income for the six months ended June 30, 2006 includes a gain
      of
      $208,000 resulting from the early termination of an interest rate swap agreement
      that had been used as a cash flow hedge for a FHLB advance of $5,000,000. In
      connection with our asset liability strategy, the FHLB advance was prepaid
      during the second quarter and the interest rate swap agreement was terminated
      with the counter-party resulting in the realized gain. We do not expect future
      gains from early termination of the remaining interest rate swap cash flow
      hedge, which at June 30, 2006 had a fair market value of $531,000, net of
      taxes.





**Non-interest
      expense** .
      The
      components of non-interest expense for the six months ended June 30, 2006 and
      2005 were as follows:





Increase(decrease)2006
            
            2005
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            5,244
            
            $
            4,584
            
            $
            660
            
            
            14.4
            %Occupancy
                and equipment
            
            
            997
            
            
            808
            
            
            189
            
            
            23.4
            %Data
                processing
            
            
            806
            
            
            542
            
            
            264
            
            
            48.7
            %Advertising
            
            
            431
            
            
            280
            
            
            151
            
            
            53.9
            %Outside
                professional services
            
            
            950
            
            
            1,248
            
            
            (298
            )
            
            -23.9
            %Interchange
                charges
            
            
            328
            
            
            301
            
            
            27
            
            
            9.0
            %Collection
                  expense and repossessedasset
                  losses
            
            
            163
            
            
            163
            
            
            -
            
            
            0.0
            %Telephone
            
            
            243
            
            
            249
            
            
            (6
            )
            
            -2.4
            %Other
            
            
            1,327
            
            
            1,309
            
            
            18
            
            
            1.4
            %$
            10,489
            
            $
            9,484
            
            $
            1,005
            
            
            10.6
            %




Compensation
      and benefit expense for the six months ended June 30, 2006, as compared to
      the
      same period in 2005, increased $442,000 for the recognition of compensation
      expense for awards made under the Company’s share-based compensation plans which
      were initially awarded in the third quarter of 2005. Normal annual merit
      increases for associates as well as increased salary expense related to the
      operation and management of our retail branch network along with increased
      retirement expense was higher by $324,000 for the first six months of 2006,
      as
      compared to the same period in 2005. Finally, compensation and benefits expense
      in 2005 included a payment of $152,000 made to retiring directors under the
      Company’s Director Emeritus program. Occupancy and equipment charges have
      increased for the six months ended June 30, 2006 as compared to the period
      in
      2005, due to higher real estate taxes and increased building and equipment
      maintenance costs along with additional lease expense associated with the
      Company’s Florida Regional Center, which we began occupying in latter part of
      the first quarter of 2005. The increased data processing costs for the first
      half of 2006, as compared to the same period in 2005, are primarily due to
      increased software licensing costs for the Company’s operating system, the fees
      for which are based partly on the asset size of the Company. The Company is
      currently negotiating a new contract for software licensing with terms that
      we
      believe will reduce the rate of growth in these costs. We expect the new
      contract to begin in the third quarter of 2006. Advertising expenses for the
      first six months of 2006 increased compared to the same period in 2005, as
      the
      Company has been more active in marketing through print and television
      advertisements. Outside and professional services cost decreased for the six
      months ended June 30, 2006 as compared to the same period in 2005, as the
      Company incurred significant fees associated with Sarbanes-Oxley initiatives
      and
      tax planning initiatives in 2005 that have not been incurred in 2006.




29


In
      general, we expect non-interest expense will increase in future periods as
      a
      result of continued growth and expansion and the costs associated with our
      operation as a public company. Specifically, we expect compensation expense
      will
      increase in future periods as the Company makes additional awards under the
      Recognition Plan and Stock Option Plan and new branches are put into operation
      in the second half of 2006.





**Income
      tax expense.** Income
      tax expense increased to $1.2 million for the six months ended June 30,
      2006, from $875,000 for the same period in 2005. The increase is primarily
      due
      to an increase in income before income tax expense when comparing the two
      periods. The effective income tax rate on income before income taxes for the
      first half of 2006 was 31.8%, compared to 34.2% for the same period in 2005.
      The
      actual tax rate is less than the federal and state statutory rate of 37.8%
      primarily due to increased bank owned life insurance earnings of $415,000 for
      the six months ended June 30, 2006, and $204,000 for the same period in 2005,
      which are not taxable for federal income tax purposes. We anticipate that income
      tax expense will continue to vary as income before income taxes
      varies.





**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, we have 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 on a quarterly basis 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 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.





As
      part
      of its efforts to monitor and manage interest rate risk, the Company uses a
      financial modeling tool that estimates the impact of different interest rate
      scenarios on the value of the company’s equity. This financial modeling tool is
      referred to as Economic Value of Equity (EVE). In essence, this tool measures
      the changes in equity due to the impact on net interest margin, over a five-
      year horizon, from instantaneous and sustained parallel shifts in the yield
      curve, in 100 basis point increments, up and down 300 basis points. We believe
      the use of EVE improves the visibility of the effect of current interest rate
      risk on future earnings under increasing or decreasing interest rate
      environments. Accordingly, the Company believes it is in a better position
      to be
      proactive in reducing future interest rate risk through management of the growth
      of interest earning assets and interest-bearing liabilities within a meaningful
      time horizon. The EVE, considering the assumed changes in interest rates as
      of
      June 30, 2006, is as follows:


30




Economic
                  Value of Equity and Duration of Assets and Liabilities at June
                  30,
                  2006Change
                  in Interest RateDecrease
            
            Decrease
            
            Decrease
            
            Increase
            
            Increase
            
            Increase3%
            
            2%
            
            1%
            
            1%
            
            2%
            
            3%Duration
                of assets(1)
            
            
            3.17
            
            
            3.17
            
            
            3.19
            
            
            3.25
            
            
            3.26
            
            
            3.26Duration
                of liabilities(1)
            
            
            2.89
            
            
            2.89
            
            
            2.89
            
            
            2.93
            
            
            2.93
            
            
            2.93Differential
                in duration
            
            
            0.28
            
            
            0.28
            
            
            0.30
            
            
            0.32
            
            
            0.33
            
            
            0.33Amount
                of change in Economic Value of Equity(2)
            
            $
            6,613,333
            
            $
            4,408,889
            
            $
            2,299,176
            
            $
            (2,453,845
            )
            $
            (5,161,347
            )
            $
            (7,742,020
            )Percentage
                change in Economic Value of Equity(2)
            
            
            6.63
            %
            
            4.42
            %
            
            2.31
            %
            
            -2.46
            %
            
            -5.18
            %
            
            -7.76
            %





(1)
                Expressed as number of years before the asset/liability reprices
                to
                achieve stated rate of interest rate increase/decrease(2)
                Represents the cummulative five year pre-tax impact on the Company's
                equity due to increased or (decreased) net interest margin





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 EVE 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 (ARM’s),
      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 EVE 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.





We
      believe that certain factors afford Atlantic Coast Federal Corporation the
      ability to operate successfully despite its exposure to interest rate risk.
      Atlantic Coast Federal Corporation manages its interest rate risk by originating
      and retaining adjustable-rate loans in its portfolio and by selling most of
      our
      currently originated fixed-rate, one- to four-family real estate loans. Also,
      to
      a limited degree, we have utilized interest rate swap agreements as a part
      of
      our asset/liability management strategy to reduce interest rate risk. As of
      June
      30, 2006, the Company held interest rate swaps agreements classified as cash
      flow hedges of certain FHLB advances with notional amounts totaling $10.0
      million. We have determined that the fair value of these interest rate swaps
      was
      approximately $856,000 as of June 30, 2006. The Company also had two interest
      rate swaps with a combined notional value of $10.0 million as of June 30,
      2006, used to promote our asset/liability management strategy by mitigating
      the
      impact to our net interest margin of sudden and unplanned interest rate changes.
      These swaps, which do not qualify for hedge accounting, had an estimated value
      on June 30, 2006 of $(91,000). Finally, Atlantic Coast Federal Corporation’s
      investment strategy is to maintain a diversified portfolio of high quality
      investments that balances the goals of minimizing interest rate and credit
      risks
      while striving to maximize investment return and provide the liquidity necessary
      to meet funding needs.


31




**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-14(c) and 15d-14(c) 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,
      2006, that have materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




32


**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**June
      30, 2006**





**Part
      II - Other Information**





Item
      1. Legal
      Proceedings


None.





Item
      1A.  Risk
      Factors


None.





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


None




Item
      3. Defaults
      Upon Senior Securities


None





Item
      4. Submission
      of Matters to a Vote of Security Holders




At
      the
      Company's Annual Stockholder's Meeting (the “Meeting”) held on May 12, 2006, all
      nominees for director proposed by the Company were elected. The votes cast
      for
      each nominee were as follows:





**For**
            
            **Withheld**Fred
                D. Franklin, Jr.
            
            
            13,044,993
            
            
            11,776Robert
                J. Smith
            
            
            13,043,993
            
            
            12,776H.
                Dennis Woods
            
            
            13,013,724
            
            
            43,045





Also
      at
      the Meeting, the stockholders ratified the appointment of Crowe Chizek and
      Company LLC as the independent registered public accounting firm for Atlantic
      Coast Federal Corporation for the fiscal year ending December 31, 2006. The
      votes cast for and against and the number of abstentions was as
      follows:





**For**
            
            **Against**
            
            **Abstain**
            
            **Broker**
              **Non-Vote**
            
            **Withheld**12,876,371
            
            42,799
            
            26,802
            
            110,797
            
            0





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 2002


31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002


32.
            Certification
                of Chief Executive Officer and Chief Financial Officer
                of
                Atlantic Coast Federal Corporation pursuant to Section
                906


33


**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**June
      30, 2006**





**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 11, 2006
            
            /s/
              Robert J. Larison, JrRobert J. Larison, Jr., President and Chief
              Executive Officer  Date:
              August 11, 2006
            
            /s/
              Jon
              C. Parker, Sr.Jon
                C. Parker, Sr., Senior Vice-President and
              Chief Financial
                Officer




34