UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 2010





Commission
file number: 000-50962





ATLANTIC
COAST FEDERAL CORPORATION


(Exact
name of registrant as specified in its charter)





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




Indicate
by check mark whether the Registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.


YES x  NO
 ̈.





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


YES  ̈  NO
 ̈.





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





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





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


YES  ̈  NO
x.





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





Class
              Outstanding
      at November 8, 2010Common
      Stock, $0.01 Par Value
              13,415,874
      shares





ATLANTIC
COAST FEDERAL CORPORATION





Form
10-Q Quarterly Report





Table
of Contents








Page NumberPART
      I. FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements
                    3Item
      2.
                    Management’s
      Discussion and Analysis of Financial
      Condition and Results of Operations
                    29Item
      3.
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    48Item
      4.
                    Controls
      and Procedures
                    49PART
      II.  OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    50Item
      1A.
                    Risk
      Factors
                    50Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    53Item
      3.
                    Defaults
      upon Senior Securities
                    53Item
      4.
                    Removed
      and reserved
                    53Item
      5.
                    Other
      Information
                    53Item
      6.
                    Exhibits
                    53Form
      10-Q
                    Signature
      Page
                    54Ex-31.1
                    Section
      302 Certification of CEOEx-31.2
                    Section
      302 Certification of CFOEx-32
                    Section
      906 Certification of CEO and CFO





PART
I. FINANCIAL INFORMATION


Item
I.  Financial Statements


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


September
30, 2010 and December 31, 2009


(Dollars
in Thousands, Except Share Information)


(unaudited)





September 30,
                
                
                December 31,2010
                
                
                2009ASSETSCash
      and due from financial institutions
                
                $
                6,042
                
                
                $
                8,211Short-term
      interest-earning deposits
                
                
                15,601
                
                
                
                28,933Total
      cash and cash equivalents
                
                
                21,643
                
                
                
                37,144Securities
      available for sale
                
                
                176,528
                
                
                
                177,938Loans
      held for sale
                
                
                49,597
                
                
                
                8,990Loans,
      net of allowance of $10,955 in 2010 and $13,810 in 2009
                
                
                575,780
                
                
                
                614,371Federal
      Home Loan Bank stock, at cost
                
                
                9,798
                
                
                
                10,023Land,
      premises and equipment, net
                
                
                15,854
                
                
                
                16,014Bank
      owned life insurance
                
                
                23,377
                
                
                
                22,806Other
      real estate owned
                
                
                8,604
                
                
                
                5,028Accrued
      interest receivable and other assets
                
                
                11,431
                
                
                
                13,247Total
      assets
                
                $
                892,612
                
                
                $
                905,561LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
      demand
                
                $
                37,046
                
                
                $
                34,988Interest-bearing
      demand
                
                
                71,773
                
                
                
                79,192Savings
      and money market
                
                
                182,143
                
                
                
                160,784Time
                
                
                279,401
                
                
                
                280,480Total
      deposits
                
                
                570,363
                
                
                
                555,444Securities
      sold under agreement to repurchase
                
                
                92,800
                
                
                
                92,800Federal
      Home Loan Bank advances
                
                
                167,765
                
                
                
                182,694Other
      borrowings
                
                
                5,000
                
                
                
                12,200Accrued
      expenses and other liabilities
                
                
                5,279
                
                
                
                5,882Total
      liabilities
                
                
                841,207
                
                
                
                849,020Commitments
      and contingent liabilities
                
                
                -
                
                
                
                -Preferred
      stock: $0.01 par value; 2,000,000 shares authorized none
      issued
                
                
                -
                
                
                
                -Common
      stock: $0.01 par value; 18,000,000 shares authorized, shares issued
      14,813,469 at September 30, 2010 and December 31, 2009
                
                
                148
                
                
                
                148Additional
      paid in capital
                
                
                61,500
                
                
                
                61,225Unearned
      employee stock ownership plan (ESOP) shares of 151,294 at September 30,
      2010 and 186,208 at December 31, 2009
                
                
                (1,513
                )
                
                
                (1,862
                )Retained
      earnings
                
                
                7,787
                
                
                
                16,777Accumulated
      other comprehensive income
                
                
                3,413
                
                
                
                152Treasury
      stock, at cost, 1,397,595 shares at September 30, 2010 and 1,375,260 at
      December 31, 2009
                
                
                (19,930
                )
                
                
                (19,899
                )Total
      stockholders' equity
                
                
                51,405
                
                
                
                56,541Total
      liabilities and stockholders' equity
                
                $
                892,612
                
                
                $
                905,561





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


3


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars
in Thousands, Except Share Information)


(unaudited)


Three months ended Sept. 30,
                
                
                Nine months ended Sept. 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      and dividend incomeLoans,
      including fees
                
                $
                9,316
                
                
                $
                10,094
                
                
                $
                27,997
                
                
                $
                31,183Securities
      and interest-earning deposits in other financial
    institutions
                
                
                1,883
                
                
                
                2,123
                
                
                
                6,096
                
                
                
                5,987Total
      interest and dividend income
                
                
                11,199
                
                
                
                12,217
                
                
                
                34,093
                
                
                
                37,170Interest
      expenseDeposits
                
                
                2,462
                
                
                
                3,819
                
                
                
                7,925
                
                
                
                12,566Federal
      Home Loan Bank advances
                
                
                1,554
                
                
                
                1,714
                
                
                
                4,675
                
                
                
                5,135Securities
      sold under agreements to repurchase
                
                
                1,186
                
                
                
                1,085
                
                
                
                3,508
                
                
                
                3,085Other
      borrowings
                
                
                114
                
                
                
                -
                
                
                
                203
                
                
                
                -Total
      interest expense
                
                
                5,316
                
                
                
                6,618
                
                
                
                16,311
                
                
                
                20,786Net
      interest income
                
                
                5,883
                
                
                
                5,599
                
                
                
                17,782
                
                
                
                16,384Provision
      for loan losses
                
                
                3,090
                
                
                
                6,650
                
                
                
                14,306
                
                
                
                18,657Net
      interest income (loss) after provision for loan losses
                
                
                2,793
                
                
                
                (1,051
                )
                
                
                3,476
                
                
                
                (2,273
                )Non-interest
      income (loss)Service
      charges and fees
                
                
                1,032
                
                
                
                1,099
                
                
                
                2,864
                
                
                
                3,119Gain
      on sale of loans held for sale
                
                
                349
                
                
                
                147
                
                
                
                531
                
                
                
                448Gain
      (loss) on sale of portfolio loans
                
                
                46
                
                
                
                (1,317
                )
                
                
                (114
                )
                
                
                (1,245
                )Gain
      (loss) on sale of securities available for sale
                
                
                (397
                )
                
                
                117
                
                
                
                831
                
                
                
                333Other
      than temporary impairment loss:Total
      impairment loss
                
                
                (444
                )
                
                
                (568
                )
                
                
                (1,154
                )
                
                
                (2,695
                )Gain
      (loss) recognized in other comprehensive income
                
                
                444
                
                
                
                316
                
                
                
                1,073
                
                
                
                1,122Net
      impairment loss recognized in earnings
                
                
                -
                
                
                
                (252
                )
                
                
                (81
                )
                
                
                (1,573
                )Interchange
      fees
                
                
                241
                
                
                
                235
                
                
                
                704
                
                
                
                685Other
                
                
                287
                
                
                
                2,210
                
                
                
                849
                
                
                
                2,762Total
      non-interest income
                
                
                1,558
                
                
                
                2,239
                
                
                
                5,584
                
                
                
                4,529Non-interest
      expenseCompensation
      and benefits
                
                
                2,838
                
                
                
                2,861
                
                
                
                7,845
                
                
                
                8,403Occupancy
      and equipment
                
                
                547
                
                
                
                674
                
                
                
                1,632
                
                
                
                1,962FDIC
      insurance premiums
                
                
                400
                
                
                
                422
                
                
                
                1,246
                
                
                
                1,435Foreclosed
      assets, net
                
                
                560
                
                
                
                318
                
                
                
                681
                
                
                
                1,308Data
      processing
                
                
                309
                
                
                
                251
                
                
                
                966
                
                
                
                760Outside
      professional services
                
                
                465
                
                
                
                316
                
                
                
                1,195
                
                
                
                1,477Collection
      expense and repossessed asset losses
                
                
                326
                
                
                
                355
                
                
                
                1,324
                
                
                
                831Goodwill
      impairment
                
                
                -
                
                
                
                2,811
                
                
                
                -
                
                
                
                2,811Other
                
                
                1,060
                
                
                
                864
                
                
                
                3,161
                
                
                
                2,837Total
      non-interest expense
                
                
                6,505
                
                
                
                8,872
                
                
                
                18,050
                
                
                
                21,824Loss
      before income tax expense
                
                
                (2,154
                )
                
                
                (7,684
                )
                
                
                (8,990
                )
                
                
                (19,568
                )Income
      tax expense
                
                
                -
                
                
                
                4,472
                
                
                
                -
                
                
                
                282Net
      loss
                
                $
                (2,154
                )
                
                $
                (12,156
                )
                
                $
                (8,990
                )
                
                $
                (19,850
                )Loss
      per common share:Basic
                
                $
                (0.16
                )
                
                $
                (0.93
                )
                
                $
                (0.68
                )
                
                $
                (1.52
                )Diluted
                
                $
                (0.16
                )
                
                $
                (0.93
                )
                
                $
                (0.68
                )
                
                $
                (1.52
                )Dividends
      declared per common share
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                0.02





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


4


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Nine Months Ended September 30, 2010


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                  
                  
                  UNEARNED
                  
                  
                  
                  
                  
                  OTHERCOMMON
                  
                  
                  PAID IN
                  
                  
                  ESOP
                  
                  
                  RETAINED
                  
                  
                  COMPREHENSIVE
                  
                  
                  TREASURY
                  
                  
                  TOTALSTOCK
                  
                  
                  CAPITAL
                  
                  
                  SHARES
                  
                  
                  EARNINGS
                  
                  
                  INCOME(LOSS)
                  
                  
                  STOCK
                  
                  
                  EQUITYFor
      the nine months ended September 30, 2010Balance
      at January 1, 2010
                  
                  $
                  148
                  
                  
                  $
                  61,225
                  
                  
                  $
                  (1,862
                  )
                  
                  $
                  16,777
                  
                  
                  $
                  152
                  
                  
                  $
                  (19,899
                  )
                  
                  $
                  56,541ESOP
      shares earned, 34,914 shares
                  
                  
                  -
                  
                  
                  
                  (267
                  )
                  
                  
                  349
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  82Management
      restricted stock expense
                  
                  
                  -
                  
                  
                  
                  356
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  356Stock
      options expense
                  
                  
                  -
                  
                  
                  
                  210
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  210Management
      restricted stock granted
                  
                  
                  -
                  
                  
                  
                  (99
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  99
                  
                  
                  
                  -Director's
      deferred compensation
                  
                  
                  -
                  
                  
                  
                  75
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (75
                  )
                  
                  
                  -RRP
      shares relinquished, 6,671 shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21
                  )
                  
                  
                  (21
                  )Treasury
      stock purchased at cost, 22,500 shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (34
                  )
                  
                  
                  (34
                  )Comprehensive
      income (loss):Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,990
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,990
                  )Other
      comprehensive income (loss)Net
      change in unrealized losses on securities available-for-sale net of
      reclassification and taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,188
                  
                  
                  
                  -
                  
                  
                  
                  2,188Change
      in unrealized gains (losses) on securities available-for-sale for which a
      portion of an other-than-temporary impairment has been recognized in
      earnings, net of reclassification and taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,073
                  
                  
                  
                  -
                  
                  
                  
                  1,073Total
      comprehensive income (loss)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,990
                  )
                  
                  
                  3,261
                  
                  
                  
                  -
                  
                  
                  
                  (5,729
                  )Balance
      at September 30, 2010
                  
                  $
                  148
                  
                  
                  $
                  61,500
                  
                  
                  $
                  (1,513
                  )
                  
                  $
                  7,787
                  
                  
                  $
                  3,413
                  
                  
                  $
                  (19,930
                  )
                  
                  $
                  51,405





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


5


ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Nine Months Ended September 30, 2009


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                  
                  
                  UNEARNED
                  
                  
                  
                  
                  
                  OTHERCOMMON
                  
                  
                  PAID IN
                  
                  
                  ESOP
                  
                  
                  RETAINED
                  
                  
                  COMPREHENSIVE
                  
                  
                  TREASURY
                  
                  
                  TOTALSTOCK
                  
                  
                  CAPITAL
                  
                  
                  SHARES
                  
                  
                  EARNINGS
                  
                  
                  INCOME(LOSS)
                  
                  
                  STOCK
                  
                  
                  EQUITYFor
      the nine months ended
                    September
      30, 2009Balance
      at January 1, 2009
                  
                  $
                  148
                  
                  
                  $
                  60,061
                  
                  
                  $
                  (2,328
                  )
                  
                  $
                  46,201
                  
                  
                  $
                  (308
                  )
                  
                  $
                  (19,814
                  )
                  
                  $
                  83,960ESOP
      shares earned, 34,914 shares
                  
                  
                  -
                  
                  
                  
                  (171
                  )
                  
                  
                  350
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  179Management
      restricted stock expense
                  
                  
                  -
                  
                  
                  
                  484
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  484Stock
      options expense
                  
                  
                  -
                  
                  
                  
                  236
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  236Dividend
      declared ($0.02 per share)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (89
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (89
                  )Director's
      deferred compensation
                  
                  
                  -
                  
                  
                  
                  16
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16
                  )
                  
                  
                  -Capital
      contribution by parent
                  
                  
                  -
                  
                  
                  
                  400
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  400RRP
      shares reliquished, 6,227 shares
                  
                  
                  -
                  
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (45
                  )
                  
                  
                  (16
                  )Treasury
      stock  purchased at cost, 7,400 shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (29
                  )
                  
                  
                  (29
                  )Comprehensive
      income (loss):Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (19,850
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (19,850
                  )Other
      comprehensive income (loss)Net
      change in unrealized gains on securities available-for-sale net of
      reclassification and taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,188
                  
                  
                  
                  -
                  
                  
                  
                  1,188Change
      in unrealized gains (losses) on securities available-for-sale for which a
      portion of an other-than-temporary impairment has been recognized in
      earnings, net of reclassification and taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (668
                  )
                  
                  
                  -
                  
                  
                  
                  (668
                  )Total
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (19,850
                  )
                  
                  
                  520
                  
                  
                  
                  -
                  
                  
                  
                  (19,330
                  )Balance
      at September 30, 2009
                  
                  $
                  148
                  
                  
                  $
                  61,055
                  
                  
                  $
                  (1,978
                  )
                  
                  $
                  26,262
                  
                  
                  $
                  212
                  
                  
                  $
                  (19,904
                  )
                  
                  $
                  65,795





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


6


ATLANTIC
COAST FEDERAL CORPORATION


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





Nine months ended Sept. 30,2010
                
                
                2009Cash
      flows from operating activitiesNet
      loss
                
                
                (8,990
                )
                
                
                (19,850
                )Adjustments
      to reconcile net loss to to net cash from operating
      activities:Provision
      for loan losses
                
                
                14,306
                
                
                
                18,657Gain
      on sale of loans held for sale
                
                
                (531
                )
                
                
                (448
                )Loss
      on sale of portfolio loans
                
                
                114
                
                
                
                1,245Loans
      originated for sale
                
                
                (214,032
                )
                
                
                (69,199
                )Proceeds
      from sales of loans held for sale
                
                
                180,390
                
                
                
                63,067Foreclosed
      assets, net
                
                
                681
                
                
                
                1,308Gain
      on sale of securities available for sale
                
                
                (831
                )
                
                
                (333
                )Other
      than temporary impairment loss on AFS securities
                
                
                81
                
                
                
                1,573Loss
      on disposal of equipment
                
                
                21
                
                
                
                52ESOP
      compensation expense
                
                
                82
                
                
                
                179Share-based
      compensation expense
                
                
                466
                
                
                
                720Net
      depreciation and amortization
                
                
                1,918
                
                
                
                1,691Net
      change in accrued interest receivable
                
                
                157
                
                
                
                518Net
      change in cash surrender value of bank owned life
insurance
                
                
                (571
                )
                
                
                (550
                )Goodwill
      impairment
                
                
                -
                
                
                
                2,811Net
      change in other assets
                
                
                1,752
                
                
                
                183Net
      change in accrued expenses and other liabilities
                
                
                (602
                )
                
                
                (1,015
                )Net
      cash (used in) from operating activites
                
                
                (25,589
                )
                
                
                609Cash
      flows from investing activitiesProceeds
      from maturities and payments of securites available for
    sale
                
                
                68,101
                
                
                
                40,622Proceeds
      from the sales of securities available for sale
                
                
                40,958
                
                
                
                47,295Purchase
      of securities available for sale
                
                
                (104,638
                )
                
                
                (113,674
                )Proceeds
      from sale of portfolio loans
                
                
                7,025
                
                
                
                16,020Purchase
      of loans
                
                
                (2,420
                )
                
                
                -Net
      change in loans
                
                
                6,480
                
                
                
                54,982Expenditures
      on premises and equipment
                
                
                (572
                )
                
                
                (758
                )Proceeds
      from the sale of other real estate owned
                
                
                2,095
                
                
                
                2,226Purchase
      of FHLB stock
                
                
                (135
                )
                
                
                (1,028
                )Redemption
      of FHLB stock
                
                
                360
                
                
                
                1,063Net
      cash from investing activities
                
                
                17,254
                
                
                
                46,748





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


7


ATLANTIC
COAST FEDERAL CORPORATION


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





Nine months ended September 30,2010
                
                
                2009Cash
      flows from financing activitiesNet
      change in deposits
                
                $
                14,919
                
                
                $
                (24,449
                )Proceeds
      from FHLB advances
                
                
                33,071
                
                
                
                20,000Repayment
      of FHLB advances
                
                
                (48,000
                )
                
                
                (27,180
                )Proceeds
      from other borrowings
                
                
                5,000
                
                
                
                -Repayment
      of other borrowings
                
                
                (12,200
                )
                
                
                -Capital
      contribution from parent
                
                
                -
                
                
                
                400Share
      based compensation items
                
                
                99
                
                
                
                28Treasury
      stock repurchased
                
                
                (34
                )
                
                
                (29
                )RRP
      shares relinquished
                
                
                (21
                )
                
                
                (45
                )Dividends
      paid
                
                
                -
                
                
                
                (89
                )Net
      cash from financing activities
                
                
                (7,166
                )
                
                
                (31,364
                )Net
      change in cash and cash equivalents
                
                
                (15,501
                )
                
                
                15,993Cash
      and equivalents beginning of period
                
                
                37,144
                
                
                
                34,058Cash
      and equivalents at end of period
                
                $
                21,643
                
                
                $
                50,051Supplemental
      information:Interest
      paid
                
                $
                16,384
                
                
                $
                20,973Income
      tax paid
                
                
                15
                
                
                
                9Supplemental
      noncash disclosures:Loans
      transferred to other real estate
                
                $
                6,372
                
                
                $
                3,333Loans
      transferred to held for sale
                
                
                6,434
                
                
                
                3,008





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


8


ATLANTIC
COAST FEDERAL CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010


(Unaudited)





NOTE
1.  BASIS OF PRESENTATION





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





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





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





NOTE
2.  USE OF ESTIMATES





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


9


NOTE
3.  IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS





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





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





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





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





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





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





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





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


10


NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS (continued)





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





On
July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses. This new
accounting guidance under Accounting Standards Codification (“ASC”) 310, Receivables, requires
disclosure of additional information about the credit quality of an entity’s
financing receivables and the allowance for credit losses. Disclosures must be
disaggregated by class or portfolio segment and include, among other things,
such items as a rollforward of the allowance for credit losses, certain credit
quality indicators, past due and impaired loan information, and loan
modification information. Except for the allowance rollforward and loan
modification information, the new requirements will become effective for interim
and annual reporting periods beginning with year-end December 31, 2010.
Disclosure of the allowance rollforward and loan modification information will
be required for the first quarter of 2011. The new guidance only relates to
financial statement disclosures and will not affect the Company’s financial
condition or results of operations.


11


NOTE
4.  AVAILABLE FOR SALE SECURITIES





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








Amortized
                                                Cost
                                              
                                              
                                              Unrealized
                                                Gains
                                              
                                              UnrealizedLosses
                                              
                                              FairValueSeptember
      30, 2010
                                              
                                              (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                                              
                                              $
                                              2,000
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              2,000State
      and municipal
                                              
                                              
                                              946
                                              
                                              
                                              
                                              15
                                              
                                              
                                              
                                              (42
                                              )
                                              
                                              
                                              919Mortgage-backed
      securities residential
                                              
                                              
                                              53,583
                                              
                                              
                                              
                                              1,796
                                              
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              55,360Collateralized
      mortgage obligations U.S. Govt.
                                              
                                              
                                              108,600
                                              
                                              
                                              
                                              2,003
                                              
                                              
                                              
                                              (244
                                              )
                                              
                                              
                                              110,359Collateralized
      mortgage obligations - other
                                              
                                              
                                              7,986
                                              
                                              
                                              
                                              114
                                              
                                              
                                              
                                              (210
                                              )
                                              
                                              
                                              7,890$
                                              173,115
                                              
                                              
                                              $
                                              3,928
                                              
                                              
                                              $
                                              (515
                                              )
                                              
                                              $
                                              176,528December
      31, 2009
                                              
                                              (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                                              
                                              $
                                              15,998
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (246
                                              )
                                              
                                              $
                                              15,752State
      and municipal
                                              
                                              
                                              947
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (103
                                              )
                                              
                                              
                                              844Mortgage-backed
      securities residential
                                              
                                              
                                              37,390
                                              
                                              
                                              
                                              1,028
                                              
                                              
                                              
                                              (8
                                              )
                                              
                                              
                                              38,410Collateralized
      mortgage obligations U.S. Govt.
                                              
                                              
                                              101,236
                                              
                                              
                                              
                                              1,530
                                              
                                              
                                              
                                              (327
                                              )
                                              
                                              
                                              102,439Collateralized
      mortgage obligations - other
                                              
                                              
                                              22,116
                                              
                                              
                                              
                                              534
                                              
                                              
                                              
                                              (2,157
                                              )
                                              
                                              
                                              20,493$
                                              177,687
                                              
                                              
                                              $
                                              3,092
                                              
                                              
                                              $
                                              (2,841
                                              )
                                              
                                              $
                                              177,938





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





September 30, 2010(Dollars in Thousands)Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  -
                  
                  
                  $
                  -Due
      from one to five years
                  
                  
                  2,000
                  
                  
                  
                  2,000Due
      from five to ten years
                  
                  
                  -
                  
                  
                  
                  -Due
      after ten years
                  
                  
                  946
                  
                  
                  
                  919Mortgage-backed
      securities - residential
                  
                  
                  53,583
                  
                  
                  
                  55,360Collateralized
      mortgage obligations - U.S. Government
                  
                  
                  108,600
                  
                  
                  
                  110,359Collateralized
      mortgage obligations - other
                  
                  
                  7,986
                  
                  
                  
                  7,890Total
                  
                  $
                  173,115
                  
                  
                  $
                  176,528


12


NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)





The
following table summarizes the investment securities with unrealized losses at
September 30, 2010 and December 31, 2009, aggregated by investment category and
length of time in a continuous unrealized loss position:





(Dollars in Thousands)Lessthan12Months
                      
                      
                      12MonthsorMore
                      
                      
                      TotalFair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      UnrealizedDescription of Securities
                      
                      Value
                      
                      
                      Losses
                      
                      
                      Value
                      
                      
                      Losses
                      
                      
                      Value
                      
                      
                      LossesSeptember 30, 2010Government-sponsored
      enterprises
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -State
      and municipal
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      420
                      
                      
                      
                      (42
                      )
                      
                      
                      420
                      
                      
                      
                      (42
                      )Mortgage-backed
      securities - residential
                      
                      
                      10,293
                      
                      
                      
                      (19
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,293
                      
                      
                      
                      (19
                      )Collateralized
      mortgage obligations - U.S. Govt.
                      
                      
                      31,651
                      
                      
                      
                      (244
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,651
                      
                      
                      
                      (244
                      )Collateralized
      mortgage obligations - other
                      
                      
                      2,780
                      
                      
                      
                      (210
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,780
                      
                      
                      
                      (210
                      )Total
                      
                      $
                      44,724
                      
                      
                      $
                      (473
                      )
                      
                      $
                      420
                      
                      
                      $
                      (42
                      )
                      
                      $
                      45,144
                      
                      
                      $
                      (515
                      )December 31,
      2009Government-sponsored
      enterprises
                      
                      $
                      15,752
                      
                      
                      $
                      (246
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      15,752
                      
                      
                      $
                      (246
                      )State
      and municipal
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      844
                      
                      
                      
                      (103
                      )
                      
                      
                      844
                      
                      
                      
                      (103
                      )Mortgage-backed
      securities - residential
                      
                      
                      7,206
                      
                      
                      
                      (8
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,206
                      
                      
                      
                      (8
                      )Collateralized
      mortgage obligations - U.S. Govt.
                      
                      
                      34,820
                      
                      
                      
                      (327
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      34,820
                      
                      
                      
                      (327
                      )Collateralized
      mortgage obligations - other
                      
                      
                      7,118
                      
                      
                      
                      (203
                      )
                      
                      
                      9,462
                      
                      
                      
                      (1,954
                      )
                      
                      
                      16,580
                      
                      
                      
                      (2,157
                      )Total
                      
                      $
                      64,896
                      
                      
                      $
                      (784
                      )
                      
                      $
                      10,306
                      
                      
                      $
                      (2,057
                      )
                      
                      $
                      75,202
                      
                      
                      $
                      (2,841
                      )




Proceeds
from sales, maturities and calls of securities available for sale were
$109.1 million and $87.9 million for the nine months ended September 30,
2010 and 2009, respectively. Gross gains of $2.1 million and $502,000 and gross
losses of $1.3 million and $169,000 were realized on these sales during the nine
months ended September 30, 2010 and 2009, respectively.  Gross gains
of $866,000 and $237,000 and gross losses of $1.3 million and $120,000 were
realized on these sales during the three months ended September 30, 2010 and
2009, respectively.




Gains and
losses on sales of securities are recorded on the trade date and determined
using the specific identification method.




Other-Than-Temporary-Impairment




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.




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


13


NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)





When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between its amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI is separated into the


amount
representing the credit loss and the amount related to all other factors. The
amount of the total related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized as a
charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.




As of
September 30, 2010 the Company’s security portfolio consisted of 101 securities,
20 of which were in an unrealized loss position. Nearly all unrealized losses
are related to debt securities whose underlying collateral is residential
mortgages.  However, the majority of these securities were issued by
government sponsored organizations as discussed below.




At
September 30, 2010, approximately $167.7 million, or approximately 95% of the
debt securities held by the Company were issued by U.S.
government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac
and Ginnie Mae, institutions which the government has affirmed its commitment to
support. Because the decline in fair value is attributable to changes in
interest rates and illiquidity, and not credit quality, and because the Company
does not have the intent to sell these securities and it is likely it will not
be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired
at September 30, 2010.




Collateralized Mortgage
Obligations - Other




The
Company’s securities portfolio included 8 non-agency collateralized
mortgage obligations with a fair value of $7.9 million at September 30,
2010. The Company evaluated the historical and expected future performance
of the underlying collateral to determine if a future loss is expected which
would result in a principal write-down.  As a part of the evaluation,
the Company reviewed deal specific data including loan-to-value (“LTV”),
delinquency, foreclosures and cumulative loss to insure it has adequate credit
support.  This evaluation was completed utilizing a model to project
future performance using collateral specific assumptions, such as expected
future default rates, loss severity and prepayments.





The
Company recorded an expense for other-than-temporary impairment of approximately
$(81,000) in non-interest income on two private label mortgage-backed mezzanine
(support) debt securities for the nine months ended September 30,
2010.


14


NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)





The table
below presents a reconciliation of the credit losses recognized in earnings for
the nine month period ended September 30, 2010 and 2009:





September 30,2010
                  
                  
                  2009(Dollars
      in Thousands)Beginning
      balance, January 1
                  
                  $
                  4,467
                  
                  
                  $
                  -Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                  
                  
                  -
                  
                  
                  
                  182Amounts
      realized for securities sold during the period
                  
                  
                  (960
                  )
                  
                  
                  -Amounts
      related to securities for which the company intends to sell or that it
      will be more likely than not the company will be required to sell prior to
      recovery of amortized cost basis
                  
                  
                  -
                  
                  
                  
                  -Reductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                  
                  
                  -
                  
                  
                  
                  -Increases
      (decreases) to the amount related to the credit loss for which
      other-than-temporary impairment was previously recognized
                  
                  
                  (2,349
                  )
                  
                  
                  1,391Ending
      balance, September 30
                  
                  $
                  1,158
                  
                  
                  $
                  1,573


15


NOTE
5 - LOANS, NET





Loans. Following is a
comparative composition of net loans as of September 30, 2010 and
December 31, 2009:





September 30,
                                          2010
                                        
                                        
                                        % of total
                                          loans
                                        
                                        
                                        December 31,
                                          2009
                                        
                                        
                                        % of total
                                          loans(Dollars
      in Thousands)Real
      estate loans:One-to-four
      family
                                        
                                        $
                                        277,840
                                        
                                        
                                        
                                        47.9
                                        %
                                        
                                        $
                                        306,968
                                        
                                        
                                        
                                        49.3
                                        %Commercial
                                        
                                        
                                        73,196
                                        
                                        
                                        
                                        12.6
                                        %
                                        
                                        
                                        77,403
                                        
                                        
                                        
                                        12.4
                                        %Other
      ( land and multi-family)
                                        
                                        
                                        32,567
                                        
                                        
                                        
                                        5.6
                                        %
                                        
                                        
                                        37,591
                                        
                                        
                                        
                                        6.0
                                        %Total
      real estate loans
                                        
                                        
                                        383,603
                                        
                                        
                                        
                                        66.1
                                        %
                                        
                                        
                                        421,962
                                        
                                        
                                        
                                        67.7
                                        %Real estate construction
    loans:One-to-four
      family
                                        
                                        
                                        6,636
                                        
                                        
                                        
                                        1.1
                                        %
                                        
                                        
                                        4,189
                                        
                                        
                                        
                                        0.7
                                        %Commercial
                                        
                                        
                                        5,684
                                        
                                        
                                        
                                        1.0
                                        %
                                        
                                        
                                        8,022
                                        
                                        
                                        
                                        1.3
                                        %Acquisition
      and development
                                        
                                        
                                        2,358
                                        
                                        
                                        
                                        0.4
                                        %
                                        
                                        
                                        3,148
                                        
                                        
                                        
                                        0.5
                                        %Total
      real estate construction loans
                                        
                                        
                                        14,678
                                        
                                        
                                        
                                        2.5
                                        %
                                        
                                        
                                        15,359
                                        
                                        
                                        
                                        2.5
                                        %Other loans:Home
      equity
                                        
                                        
                                        86,896
                                        
                                        
                                        
                                        15.0
                                        %
                                        
                                        
                                        93,929
                                        
                                        
                                        
                                        15.1
                                        %Consumer
                                        
                                        
                                        75,296
                                        
                                        
                                        
                                        13.0
                                        %
                                        
                                        
                                        73,870
                                        
                                        
                                        
                                        11.9
                                        %Commercial
                                        
                                        
                                        19,553
                                        
                                        
                                        
                                        3.4
                                        %
                                        
                                        
                                        17,848
                                        
                                        
                                        
                                        2.9
                                        %Total
      other loans
                                        
                                        
                                        181,745
                                        
                                        
                                        
                                        31.3
                                        %
                                        
                                        
                                        185,647
                                        
                                        
                                        
                                        29.8
                                        %Total
      loans
                                        
                                        
                                        580,026
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        622,968
                                        
                                        
                                        
                                        100
                                        %Allowance
      for loan losses
                                        
                                        
                                        (10,955
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (13,810
                                        )Net
      deferred loan costs
                                        
                                        
                                        6,823
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        5,122Premiums
      (discounts) on purchased loans
                                        
                                        
                                        (114
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        91Loans,
      net
                                        
                                        $
                                        575,780
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        614,371


16


NOTE 5 - LOANS, NET(continued)





Allowance
for loan losses activity for the nine months ended September 30, 2010 and 2009
was as follows:





2010
                  
                  
                  2009(Dollars in Thousands)Beginning
      balance, January 1
                  
                  $
                  13,810
                  
                  
                  $
                  10,598Loans
      charged-off
                  
                  
                  (18,240
                  )
                  
                  
                  (15,202
                  )Recoveries
                  
                  
                  1,079
                  
                  
                  
                  722Net
      charge-offs
                  
                  
                  (17,161
                  )
                  
                  
                  (14,480
                  )Provision
      for loan losses
                  
                  
                  14,306
                  
                  
                  
                  18,657Ending
      balance, September 30
                  
                  $
                  10,955
                  
                  
                  $
                  14,775





Impaired
loans as of September 30, 2010 and December 31, 2009 were as
follows:





September 30,
                          2010
                        
                        
                        December 31,
                          2009(Dollars
      in Thousands)Loans
      with no allocated allowance for loan losses
                        
                        $
                        23,134
                        
                        
                        $
                        27,692Loans
      with an allocated allowance for loan losses
                        
                        
                        13,522
                        
                        
                        
                        16,700Total
                        
                        $
                        36,656
                        
                        
                        $
                        44,392Amount
      of the allowance for loan losses allocated to impaired
    loans
                        
                        $
                        2,260
                        
                        
                        $
                        5,398Amount
      of charge-offs taken on period-end impaired loans
                        
                        $
                        3,307
                        
                        
                        $
                        2,157





Impaired
loans included troubled debt restructurings of $20.9 million at September 30,
2010 and $22.7 million at December 31, 2009, of which $20.9 million and $19.9
million respectively, were performing according to the modified
terms.  Non-performing loans, including non-accrual loans, at
September 30, 2010 and December 31, 2009 were $21.6 million and $35.2 million,
respectively.  There were no loans over 90 days past-due and still
accruing interest as of September 30, 2010 and December 31,
2009.  Non-performing loans include both smaller balance homogeneous
loans that are collectively evaluated for impairment and individually classified
as impaired loans.





NOTE
6.  INTEREST RATE SWAPS





The
Company utilizes interest rate swap agreements as part of its asset liability
management strategy to help manage its interest rate risk position by mitigating
the impact of significant unexpected fluctuations in earnings caused by interest
rate volatility or changes in the yield curve. The notional amount of the
interest rate swaps does not represent amounts exchanged by the parties. The
amount exchanged is determined by reference to the notional amount and the other
terms of the individual interest rate swap agreements.





The
Company’s interest rate swap agreements do not qualify for hedge accounting
treatment; accordingly changes in fair value are reported in current period
earnings.


17


NOTE 6.  INTEREST RATE
SWAPS (continued)





At
September 30, 2010, summary information about these interest-rate swaps is as
follows:





September 30, 2010(Dollars in Thousands)Notional
      amounts
                    
                    $
                    25,000Weighted
      average pay rates (3 month LIBOR, 2.50% floor)
                    
                    
                    2.50
                    %Weighted
      average receive rates (3 month LIBOR, 4.37% cap)
                    
                    
                    0.29
                    %Weighted
      average maturity (years)
                    
                    
                    1.0Fair
      value of interest rate swaps
                    
                    
                    (267
                    )





The
following tables summarize the fair value of the interest rate swaps utilized by
the Company:





LiabilityInterestRateSwapsSeptember30,2010
                              
                              December31,2009(Dollars in thousands)Balance Sheet
                              
                              
                              
                              Balance SheetLocation
                              
                              FairValue
                              
                              Location
                              
                              FairValueInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                              
                              Accrued expenses and
      other liabilities
                              
                              $
                              (267
                              )
                              Accrued
      expenses and other liabilities
                              
                              $
                              (520
                              )Total
      interest rate swaps not designated as hedging instruments under SFAS
      133:Total
      interest rate swaps
                              
                              
                              
                              $
                              (267
                              )
                              
                              
                              $
                              (520
                              )





The
effect of interest rate swaps for the nine months ended September 30, 2010 and
2009 are as follows:





NineMonthsEndedSeptember30,2010
                            
                            
                            September30,2009Location of Gain or (Loss)
                            
                            (Dollars in Thousands)Recognized in Non-interest
                            
                            Amount of the Gain or (Loss)Income
                            
                            RecognizedinIncomeInterest
      rate swaps not designatedas
      hedging instruments underSFAS
      133:Interest
      rate contracts
                            
                            Other
                            
                            $
                            (253
                            )
                            
                            $
                            (237
                            )Total
                            
                            
                            
                            $
                            (253
                            )
                            
                            $
                            (237
                            )





NOTE
7.   FEDERAL HOME LOAN BANK ADVANCES





FHLB
advances had a weighted-average maturity of 62 months and a weighted-average
rate of 3.51% at September 30, 2010.   The decrease in FHLB
borrowings to $167.8 million at September 30, 2010 as compared to December 31,
2009 was due to repayments of $48.0 million which exceeded proceeds from
advances of $33.1 million.





NOTE
8.  OTHER BORROWINGS





Other
borrowings were $5.0 million at June 30, 2010.  The Company borrowed
$5.0 million, at market rates, from another financial institution in June 2010
which is secured by shares of the Company’s common stock owned by Atlantic Coast
Federal, MHC. The Company’s Executive Chairman of the Board also serves as the
president and chief executive officer and a director of the financial
institution from which the borrowing was obtained. The Company contributed $2.9
million to Atlantic Coast Bank as additional capital and used the remaining
proceeds to pay off the remaining balance of $2.1 million of other
borrowings.


18


NOTE
9.  LOSS PER COMMON SHARE





Basic
loss per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the period, reduced for average
unallocated ESOP shares and average unearned restricted stock awards. Diluted
loss per common share is computed by dividing net loss by the average number of
common shares outstanding for the period increased for the dilutive effect of
unvested stock options and stock awards. The dilutive effect of the unvested
stock options and stock awards is calculated under the treasury stock method
utilizing the average market value of the Company’s stock for the period. A
reconciliation of the numerator and denominator of the basic and diluted loss
per common share computation for the three and nine months ended September 30,
2010 and 2009 is as follows:





(Dollars in Thousands, except per share data)For the three months
                  
                  
                  For the nine monthsended September 30,
                  
                  
                  ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009BasicNet
      loss
                  
                  $
                  (2,154
                  )
                  
                  $
                  (12,156
                  )
                  
                  $
                  (8,990
                  )
                  
                  $
                  (19,850
                  )Weighted
      average common shares outstanding
                  
                  
                  13,375,999
                  
                  
                  
                  13,419,026
                  
                  
                  
                  13,381,965
                  
                  
                  
                  13,427,182Less:
      Average unallocated ESOP shares
                  
                  
                  (186,208
                  )
                  
                  
                  (232,760
                  )
                  
                  
                  (186,208
                  )
                  
                  
                  (232,760
                  )Average
      unvested restricted stock awards
                  
                  
                  (21,117
                  )
                  
                  
                  (63,955
                  )
                  
                  
                  (44,922
                  )
                  
                  
                  (94,253
                  )Average
      Shares
                  
                  
                  13,168,674
                  
                  
                  
                  13,122,311
                  
                  
                  
                  13,150,835
                  
                  
                  
                  13,100,169Basic
      loss per common share
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.93
                  )
                  
                  $
                  (0.68
                  )
                  
                  $
                  (1.52
                  )DilutedNet
      loss
                  
                  $
                  (2,154
                  )
                  
                  $
                  (12,156
                  )
                  
                  $
                  (8,990
                  )
                  
                  $
                  (19,850
                  )Weighted
      average shares outstanding from above
                  
                  
                  13,168,674
                  
                  
                  
                  13,122,311
                  
                  
                  
                  13,150,835
                  
                  
                  
                  13,100,169Add:Dilutive
      effects of assumed exercise of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Dilutive
      effects of full vesting of stock awards
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Average
      shares and dilutive potential common shares
                  
                  
                  13,168,674
                  
                  
                  
                  13,122,311
                  
                  
                  
                  13,150,835
                  
                  
                  
                  13,100,169Diluted
      loss per common share
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.93
                  )
                  
                  $
                  (0.68
                  )
                  
                  $
                  (1.52
                  )





Stock
options for shares of common stock were not considered in computing diluted
earnings per common share for the three and nine months ended September 30, 2010
and 2009, respectively.  There was no dilutive effect as each period
reported a net loss.


19


NOTE
10.  TOTAL COMPREHENSIVE LOSS





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





(Dollars in Thousands)ThreemonthsendedSeptember30,
                
                
                NinemonthsendedSeptember30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      loss
                
                $
                (2,154
                )
                
                $
                (12,156
                )
                
                $
                (8,990
                )
                
                $
                (19,850
                )Other
      comprehensive income (loss):Change
      in securities available for sale:Unrealized
      holding gains (losses) arising during the period
                
                
                (582
                )
                
                
                1,397
                
                
                
                2,956
                
                
                
                2,329Less
      reclassification adjustments for (gains) losses recognized in
      income
                
                
                398
                
                
                
                (117
                )
                
                
                (831
                )
                
                
                (333
                )Net
      unrealized gains
                
                
                (184
                )
                
                
                1,280
                
                
                
                2,125
                
                
                
                1,996Income
      tax effect
                
                
                (11
                )
                
                
                (486
                )
                
                
                63
                
                
                
                (808
                )Net
      of tax effect
                
                
                (195
                )
                
                
                794
                
                
                
                2,188
                
                
                
                1,188Other-than-temporary-impairment
      on available-for-sale debt securities recorded in other comprehensive
      income
                
                
                432
                
                
                
                (696
                )
                
                
                1,123
                
                
                
                451Less
      other-than-temporary-impairment on available-for-sale debt securities
      associated with credit loss realized in income
                
                
                -
                
                
                
                (252
                )
                
                
                (81
                )
                
                
                (1,573
                )Income
      tax effect
                
                
                12
                
                
                
                360
                
                
                
                31
                
                
                
                454Net
      of tax effect
                
                
                444
                
                
                
                (588
                )
                
                
                1,073
                
                
                
                (668
                )Total
      other comprehensive income (loss)
                
                
                249
                
                
                
                206
                
                
                
                3,261
                
                
                
                520Comprehensive
      loss
                
                $
                (1,905
                )
                
                $
                (11,950
                )
                
                $
                (5,729
                )
                
                $
                (19,330
                )


20


NOTE
11.  FAIR VALUE




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





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





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





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





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





Investment
Securities:


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





Interest Rate
Swaps:


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


21


NOTE 11.  FAIR VALUE(continued)





Assets and Liabilities
Measured on a Recurring Basis





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





Fair Value Measurements at September 30,2010 Using:Quoted
                  Prices in
                  Active
                  Markets
                  for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)(Dollars
      in Thousands)Assets:Available
      for saleU.S.
      government-sponsored entities and  agencies
                
                $
                2,000
                
                
                
                -
                
                
                $
                2,000
                
                
                
                -State
      and municipal
                
                
                919
                
                
                
                -
                
                
                
                919
                
                
                
                -Mortgage-backed
      securities – residential
                
                
                55,360
                
                
                
                -
                
                
                
                55,360
                
                
                
                -Collateralized
      mortgage obligations – U.S. Govt.
                
                
                110,359
                
                
                
                -
                
                
                
                110,359Collateralized
      mortgage obligations - other
                
                
                7,890
                
                
                
                -
                
                
                
                4,991
                
                
                
                2,899Liabilities:Interest
      rate swap
                
                $
                (267
                )
                
                
                -
                
                
                $
                (267
                )





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





Fair
value adjustments for interest rate swaps resulted in a gain of $253,000 for the
nine months ended September 30, 2010.


22


NOTE 11.  FAIR VALUE(continued)





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





InvestmentSecuritiesAvailable-for-sale(Dollars in thousands)Balance
      of recurring Level 3 assets at January 1, 2010
                  
                  $
                  1,352Total
      realized and unrealized gains (losses):Included
      in earnings - realized
                  
                  
                  768Included
      in earnings - unrealized
                  
                  
                  -Included
      other comprehensive income
                  
                  
                  (740
                  )Proceeds
      from maturities and payments, net
                  
                  
                  (7,738
                  )Transfers
      in and/or out of Level 3
                  
                  
                  9,257Balance
      of recurring Level 3 assets at September 30, 2010
                  
                  $
                  2,899





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





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


23


NOTE 11.  FAIR VALUE(continued)





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





Fair Value Measurements at September 30, 2010 Using:Quoted
                  Prices in
                  Active
                  Markets
                  for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)(Dollars
      in Thousands)Assets:Other
      real estate owned
                
                $
                8,604
                
                
                $
                -
                
                
                $
                -
                
                
                $
                8,604Impaired
      loans – collateral dependent
                
                
                24,830
                
                
                $
                -
                
                
                $
                -
                
                
                
                24,830





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





Other Real Estate
Owned:


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





Impaired
loans:


Impaired
loans which are collateral dependent are measured for impairment using the fair
value of the collateral.  Collateral dependent loans had a carrying
amount of $24.8 million and $28.8 million, net of a valuation allowance of $2.3
million and $5.4 million at September 30, 2010 and December 31, 2009,
respectively.  Provision for loan losses of $868,000 and $2.3 million
was recorded on impaired loans during the nine months ended September 30, 2010
and 2009, respectively.


24


NOTE
12.  FAIR VALUE OF FINANCIAL INSTRUMENTS





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





As of September 30,
                        
                        
                        As of December 31,2010
                        
                        
                        2009Carrying
                        
                        
                        Estimated
                        
                        
                        Carrying
                        
                        
                        EstimatedAmount
                        
                        
                        FairValue
                        
                        
                        Amount
                        
                        
                        FairValue(Dollars
      in Thousands)FINANCIAL
      ASSETSCash
      and cash equivalents
                        
                        $
                        21,643
                        
                        
                        $
                        21,643
                        
                        
                        $
                        37,144
                        
                        
                        $
                        37,144Loans
      held for sale
                        
                        
                        49,597
                        
                        
                        
                        49,597
                        
                        
                        
                        8,990
                        
                        
                        
                        8,990Loans,
      net
                        
                        
                        575,780
                        
                        
                        
                        581,609
                        
                        
                        
                        614,371
                        
                        
                        
                        614,229Federal
      Home Loan Bank stock
                        
                        
                        9,798
                        
                        
                        
                        n/a
                        
                        
                        
                        10,023
                        
                        
                        
                        n/aAccrued
      interest receivable
                        
                        
                        3,104
                        
                        
                        
                        3,104
                        
                        
                        
                        3,261
                        
                        
                        
                        3,261FINANCIAL
      LIABILITIESDeposits
                        
                        
                        570,363
                        
                        
                        
                        572,721
                        
                        
                        
                        555,444
                        
                        
                        
                        557,094Securities
      sold under agreements to repurchase
                        
                        
                        92,800
                        
                        
                        
                        106,739
                        
                        
                        
                        92,800
                        
                        
                        
                        102,537Federal
      Home Loan Bank advances
                        
                        
                        167,765
                        
                        
                        
                        184,746
                        
                        
                        
                        182,694
                        
                        
                        
                        201,227Other
      borrowings
                        
                        
                        5,000
                        
                        
                        
                        5,000
                        
                        
                        
                        12,200
                        
                        
                        
                        12,200Accrued
      interest payable
                        
                        
                        1,245
                        
                        
                        
                        1,245
                        
                        
                        
                        1,318
                        
                        
                        
                        1,318





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





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





The Bank
is a member of the Federal Home Loan Bank of Atlanta and as such, is required to
maintain a minimum investment in stock of the Federal Home Loan Bank that varies
with the level of advances outstanding with the Federal Home Loan
Bank.  The stock is bought from and sold to the Federal Home Loan Bank
based upon its $100 par value. The stock does not have a readily determinable
fair value and as such is classified as restricted stock, carried at cost and
evaluated for impairment.  In accordance with this guidance, the
stock’s value is determined by the ultimate recoverability of the par value
rather than by recognizing temporary declines. The determination of whether the
par value will ultimately be recovered is influenced by criteria such as the
following: (a) The significance of the decline in net assets of the Federal Home
Loan Bank as compared to the capital stock amount and the length of time this
situation has persisted (b) Commitments by the Federal Home Loan Bank to make
payments  required by law or regulation and the level of such payments
in relation to  the operating performance (c) The impact of
legislative and regulatory changes on the customer base of the Federal Home Loan
Bank and (d) The liquidity position of the Federal Home Loan
Bank.


25


NOTE
13.  INCOME TAXES





Under
generally accepted accounting principles, the Company considers at each
reporting period all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed to reduce its deferred tax asset to an amount that is more likely than
not to be realized.  A determination of the need for a valuation
allowance for the deferred tax assets is dependent upon management’s evaluation
of both positive and negative evidence.  Positive evidence includes
the probability of achieving forecasted  future taxable income,
applicable tax planning strategies and assessments of the current and future
economic and  business conditions.  Negative evidence
includes the Company’s cumulative losses and expiring tax credit
carryforwards.  At September 30, 2010, the Company evaluated the
expected realization of its federal and state deferred tax assets which, prior
to a valuation allowance, totaled $17.4 million and was primarily comprised of
future tax benefits associated with  the allowance for loan losses and
net operating loss carryforwards. Based on this evaluation it was concluded that
a valuation allowance continues to be required for the federal deferred tax
asset. The realization of the deferred tax asset is dependent upon generating
taxable income.  The Company also continues to maintain a valuation
allowance for the state deferred tax asset.





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





Income
tax expense (benefit) was as follows:





YeartodateSeptember30,2010
                  
                  
                  September30,2009Pre-tax
      loss
                  
                  $
                  (8,990
                  )
                  
                  $
                  (19,568
                  )Effective
      tax rate
                  
                  
                  37.8
                  %
                  
                  
                  38.1
                  %Tax
      benefit
                  
                  
                  (3,398
                  )
                  
                  
                  (7,448
                  )Increase
      in valuation allowance - federal
                  
                  
                  3,145
                  
                  
                  
                  7,142Increase
      in valuation allowance - state
                  
                  
                  253
                  
                  
                  
                  588Income
      tax expense (benefit)
                  
                  $
                  -
                  
                  
                  $
                  282





NOTE
14 - STOCK CONVERSION





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


26


NOTE 14 - STOCK CONVERSION(continued)





In
connection with the conversion, shares of common stock of a new successor
holding company, representing the ownership interest of the Mutual Holding
Company, will be offered for sale to depositors of the Bank.  The
following persons and employee benefit plan have subscription rights to purchase
shares of common stock of the new holding company in the following order of
priority: (1) depositors of record as of March
31, 2009; (2) the Bank's employee stock ownership plan; (3) depositors of record
as of the end of the calendar quarter preceding the commencement of the
offering; and (4) depositors entitled to vote on the conversion
proposal.  If necessary, shares will be offered to the general
public.  In addition, upon completion of the conversion of the Mutual
Holding Company, shares of the Company's common stock held by public
stockholders will be exchanged for shares of a new corporation, which will
become the Bank's new parent holding company.  As a result of the
conversion and offering, the Mutual Holding Company and Company will cease to
exist.  The conversion is subject to approval of the Office of Thrift
Supervision (“OTS”) as well as the approval of the Mutual Holding Company's
members (depositors of the Bank) and the Company's
stockholders.  Proxy materials setting forth information relating to
the conversion and offering will be sent to the members of the Mutual Holding
Company and stockholders of the Company for their consideration.  The
offering will be made only by means of a prospectus in accordance with federal
law and all applicable state securities laws.  The conversion and
offering are expected to be completed in the fourth quarter of
2010.





Expenses
capitalized related to the stock conversion were $1.1 million as of September
30, 2010. Expenses capitalized will be netted from proceeds if the offering is
successful. Alternatively, expenses capitalized will be expensed in the event
the offering is terminated.





NOTE
15 SUBSEQUENT EVENT




Following
its most recent examination, the Company was advised by the Office of Thrift
Supervision (“OTS”) that it would require the Company and its banking subsidiary
to enter into supervisory agreements with the agency containing certain
provisions and restrictions as described below. The Company was also informed
that in a separate informal agreement, the OTS will impose an Individual Minimum
Capital Requirement (IMCR) for Atlantic Coast Bank that will require it to
achieve and maintain levels of capital greater than those required for a federal
savings bank to be classified as well-capitalized.  The Company
anticipates, based upon discussions with the OTS, that the IMCR will require
that Atlantic Coast Bank reach a core capital level of up to 7% by March 30,
2011 or June 30, 2011 and a risk based capital level of up to 11% by March 30,
2011 or June 30, 2011and maintain these
levels until the OTS removes the requirement.


Based on
discussions with the OTS the Company expects the supervisory agreement will
require its board and management to prepare regular forecasts and projections
regarding Bank earnings and capital, along with monitoring of various financial
metrics. Further the Company expects to be subject to the
following  operating restrictions:  (1) Atlantic Coast
Federal Corporation and Atlantic Coast Bank may not increase their assets in any
quarter greater than the amount of interest credited on its deposit accounts
without prior written approval from the OTS; (2) Atlantic Coast Federal
Corporation and Atlantic Coast Bank may not add any new director to their Boards
of Directors, employ any new senior executive officer or change the duties of
any senior executive officer without providing 30 days advance written notice to
the OTS; (3) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not
make any payment or enter into an agreement to make a payment, to an officer or
employee that is contingent upon their termination of service, subject to
certain exceptions; (4) prior written approval of the OTS must be obtained
before the payment of any dividend or other capital distribution by Atlantic
Coast Federal Corporation or Atlantic Coast Bank; (5) Atlantic Coast Federal
Corporation and Atlantic Coast Bank may not enter into, renew or revise any
contractual arrangement related to compensation or benefits with any director or
officer unless they receive prior approval of the Office of Thrift Supervision;
(6) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not
enter
  27




NOTE 15 SUBSEQUENT EVENT (continued)




into any
third party contracts outside of the normal course of business without providing
30 days advance written notice to the OTS and receiving a written notice of
non-objection; (7) Atlantic Coast Federal Corporation and Atlantic Coast Bank
are not eligible to have applications or notices processed by the OTS on an
expedited basis which would make executing future mergers and acquisitions more
difficult; (8) Atlantic Coast Federal Corporation and Atlantic Coast Bank may
not engage in transactions with any affiliate or subsidiary without providing 30
days advance written notice to the OTS and receiving a written notice of
non-objection; and (9) Atlantic Coast Bank may not increase the level of
brokered deposits, excluding interest credited, without the prior written
approval of the OTS.
  28


ATLANTIC
COAST FEDERAL CORPORATION





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





Forward-Looking
Statements




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




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




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




Critical
Accounting Policies





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





Allowance
for Loan Losses





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


29


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





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





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





Management
also evaluates the allowance for loan losses based on a review of certain large
balance individual loans.  This evaluation is inherently subjective as
it requires material estimates including the amounts and timing of future cash
flows management expects to receive on impaired loans that may be susceptible to
significant change.  For all specifically reviewed loans where it is
probable the Bank will be unable to collect all amounts due according to the
terms of the loan agreement, impairment is determined by computing a fair value
based on either discounted cash flows using the loan’s initial interest rate or
the fair value of the collateral if the loan is collateral
dependent.  No specific allowance is recorded unless the fair value is
less than the carrying value.  Large groups of smaller balance
homogeneous loans, such as individual consumer and residential loans are
collectively evaluated for impairment and are excluded from the specific
impairment evaluation; for these loans, the allowance for loan losses is
calculated in accordance with the allowance for loan losses policy described
above.  Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.





Fair
Value of Securities Available for Sale




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


30


When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between its amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI is separated into the amount
representing the credit loss and the amount related to all other factors. The
amount of the total related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized as a
charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.  The Company recorded an
other-than-temporary impairment charge of $81,000 in non-interest income on two
private label mortgage-backed mezzanine (support) debt securities for the nine
months ended September 30, 2010.  The Company recorded an
other-than-temporary impairment charge of $1.6 million for the nine months ended
September 30, 2009.
 
 Deferred
Income Taxes
 
 After
converting to a federally chartered savings association, Atlantic Coast Bank
became a taxable organization.  Income tax expense (benefit) is the
total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities.  Deferred tax assets and
liabilities are the expected future tax amounts for the temporary difference
between carrying amounts and tax basis of assets and liabilities, computed using
enacted tax rates and operating loss carryforwards.  The Company’s
principal deferred tax assets result from the allowance for loan losses and
operating loss carryforwards.  A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be
realized.  The Internal Revenue Code and applicable regulations are
subject to interpretation with respect to the determination of the tax basis of
assets and liabilities for credit unions that convert charters and become a
taxable organization.  Since Atlantic Coast Bank’s transition to a
federally chartered thrift, Atlantic Coast Federal Corporation has recorded
income tax expense based upon management’s interpretation of the applicable tax
regulations.  Positions taken by the Company in preparing our federal
and state tax returns are subject to the review of taxing authorities, and the
review by taxing authorities of the positions taken by management could result
in a material adjustment to the financial statements.
 
 All
available evidence, both positive and negative, is considered when determining
whether or not a valuation allowance is necessary to reduce the carrying amount
to a balance that is considered more likely than not to be
realized.  The determination of the realizability of deferred tax
assets is highly subjective and dependent upon judgment concerning management’s
evaluation of such evidence.  Positive evidence considered includes
the probability of achieving forecasted taxable income and the ability to
implement tax planning strategies to accelerate taxable income
recognition.  Negative evidence includes the Company’s cumulative
losses.  Following the initial establishment of a valuation allowance,
if the Company is unable to generate sufficient pre-tax income in future periods
or otherwise fails to meet forecasted operating results, an additional valuation
allowance may be required.  Any valuation allowance is required to be
recorded during the period identified.  As of September 30, 2010, the
Company had a valuation allowance of $17.4 million for the net deferred tax
asset.
  31
  Comparison
of Financial Condition at September 30, 2010 and December 31, 2009
 
 General.Total assets
decreased $13.0 million to $892.6 million at June 30, 2010 as compared to $905.6
million at December 31, 2009.  The primary reason for the
decrease in assets was a decrease in net loans of $38.6 million as well as a
decrease in cash of $15.5 million, partially offset by the increase in loans
held for sale of $40.6 million.  Total deposits increased $14.9
million to $570.4 million at September 30, 2010 from $555.4 million at December
31, 2009.  Core deposits grew by $16.0 million, while time deposits
decreased by $1.0 million.
 
 Following
is a summarized comparative balance sheet as of September 30, 2010 and December
31, 2009:
 
 September 30,
                            
                            
                            December 31,
                            
                            
                            Increase (decrease)2010
                            
                            
                            2009
                            
                            
                            Dollars
                            
                            
                            Percentage(Dollars in Thousands)AssetsCash
      and cash equivalents
                            
                            $
                            21,643
                            
                            
                            $
                            37,144
                            
                            
                            $
                            (15,501
                            )
                            
                            
                            -41.7
                            %Securitites
      available for sale
                            
                            
                            176,528
                            
                            
                            
                            177,938
                            
                            
                            
                            (1,410
                            )
                            
                            
                            -0.8
                            %Loans
                            
                            
                            586,735
                            
                            
                            
                            628,181
                            
                            
                            
                            (41,446
                            )
                            
                            
                            -6.6
                            %Allowance
      for loan losses
                            
                            
                            (10,955
                            )
                            
                            
                            (13,810
                            )
                            
                            
                            2,855
                            
                            
                            
                            -20.7
                            %Loans,
      net
                            
                            
                            575,780
                            
                            
                            
                            614,371
                            
                            
                            
                            (38,591
                            )
                            
                            
                            -6.3
                            %Loans
      held for sale
                            
                            
                            49,597
                            
                            
                            
                            8,990
                            
                            
                            
                            40,607
                            
                            
                            
                            451.7
                            %Other
      assets
                            
                            
                            69,064
                            
                            
                            
                            67,118
                            
                            
                            
                            1,946
                            
                            
                            
                            2.9
                            %Total
      assets
                            
                            $
                            892,612
                            
                            
                            $
                            905,561
                            
                            
                            $
                            (12,949
                            )
                            
                            
                            -1.4
                            %Liabilities
      and Stockholders' equityDepositsNon-interest
      bearing demand
                            
                            $
                            37,046
                            
                            
                            $
                            34,988
                            
                            
                            $
                            2,058
                            
                            
                            
                            5.9
                            %Interest
      bearing demand
                            
                            
                            71,773
                            
                            
                            
                            79,192
                            
                            
                            
                            (7,419
                            )
                            
                            
                            -9.4
                            %Savings
      and money market
                            
                            
                            182,143
                            
                            
                            
                            160,784
                            
                            
                            
                            21,359
                            
                            
                            
                            13.3
                            %Time
                            
                            
                            279,401
                            
                            
                            
                            280,480
                            
                            
                            
                            (1,079
                            )
                            
                            
                            -0.4
                            %Total
      deposits
                            
                            
                            570,363
                            
                            
                            
                            555,444
                            
                            
                            
                            14,919
                            
                            
                            
                            2.7
                            %Federal
      Home Loan Bank advances
                            
                            
                            167,765
                            
                            
                            
                            182,694
                            
                            
                            
                            (14,929
                            )
                            
                            
                            -8.2
                            %Securities
      sold under agreements to repurchase
                            
                            
                            92,800
                            
                            
                            
                            92,800
                            
                            
                            
                            -
                            
                            
                            
                            0.0
                            %Other
      borrowings
                            
                            
                            5,000
                            
                            
                            
                            12,200
                            
                            
                            
                            (7,200
                            )
                            
                            
                            -59.0
                            %Accrued
      expenses and other liabilities
                            
                            
                            5,279
                            
                            
                            
                            5,882
                            
                            
                            
                            (603
                            )
                            
                            
                            -10.3
                            %Total
      liabilities
                            
                            
                            841,207
                            
                            
                            
                            849,020
                            
                            
                            
                            (7,813
                            )
                            
                            
                            -0.9
                            %Stockholders'
      equity
                            
                            
                            51,405
                            
                            
                            
                            56,541
                            
                            
                            
                            (5,136
                            )
                            
                            
                            -9.1
                            %Total
      liabilities and stockholders' equity
                            
                            $
                            892,612
                            
                            
                            $
                            905,561
                            
                            
                            $
                            (12,949
                            )
                            
                            
                            -1.4
                            %
 
 Securities available for
sale.  Securities available for sale is comprised primarily of
debt securities of U.S. Government-sponsored enterprises and mortgage-backed
securities (MBS).  The investment portfolio decreased approximately
$1.4 million to $176.5 million at September 30, 2010, from $177.9 million at
December 31, 2009. We recognized a charge for other-than-temporary impairment
(OTTI) of approximately $(81,000) in non-interest income (loss) on two private
label collateralized mortgage obligation mezzanine (support) debt securities for
the nine months ended September 30, 2010.  In order to reduce risk of
additional OTTI charges the Company sold six securities totaling $3.4 million at
a loss of $1.3 million during the third quarter ended September 30,
2010.
  32
 
 At September 30, 2010Amortized
                      
                      
                      Fair
                      
                      
                      Number of
                      
                      
                      CumulativeCost
                      
                      
                      Value
                      
                      
                      Securities
                      
                      
                      OTTI(Dollars
      in Thousands)Private
      label collateralized mortgage obligations with OTTI
                      
                      $
                      1,492
                      
                      
                      $
                      1,301
                      
                      
                      
                      2
                      
                      
                      $
                      1,158Private
      label collateralized mortgage obligations with no OTTI
                      
                      
                      6,494
                      
                      
                      
                      6,588
                      
                      
                      
                      6
                      
                      
                      
                      -Total
      private label collateralized mortgage obligations
                      
                      $
                      7,986
                      
                      
                      $
                      7,889
                      
                      
                      
                      8
                      
                      
                      $
                      1,158
 
 At
September 30, 2010, approximately $167.7 million, or 95%, of the debt
securities held by the Company were issued by U.S. government-sponsored
entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae,
institutions which the government has affirmed its commitment to support.
Because the decline in fair value is attributable to changes in interest rates
and illiquidity, and not credit quality, and because the Company does not have
the intent to sell these securities and it is likely it will not be required to
sell the securities before their anticipated recovery, the Company does not
consider these securities to be other-than-temporarily impaired at September 30,
2010.
 
 Loans.  Portfolio
loans declined approximately 6.3% to $575.8 million at June 30, 2010 as compared
to $614.4 million at December 31, 2009 due to increased payoffs of one- to
four-family residential loans in the first nine months of 2010, the sale of
approximately $7.2 million of non-performing loans in the first nine months of
2010, and the transfer of $6.4 million from portfolio loans to loans held for
sale.
 
 Total
loan originations increased $168.2 million to $267.1 million for the nine months
ended September 30, 2010 from $98.9 million for the same period in 2009.
Origination of loans held for sale in the secondary market increased $144.9
million to $214.0 million during the first nine months of 2010, from $69.2
million for the same period in 2009. Portfolio loan production increased $23.3
million to $53.0 million for the nine months ended September 30, 2010 from $29.7
million for the same period in 2009.  Origination of residential loans
held for sale was strong as consumers took advantage of historically low
interest rates and the availability of certain federal income tax
credits.  The balance of loans held for sale increased as the Company
began to expand its mortgage lending business during the third quarter of
2010.
 
 Until
critical economic factors stabilize, such as unemployment and residential real
estate values management believes portfolio loan balances will continue to
decline as the Company emphasizes the sale of mortgages it originates in the
secondary market rather than retaining them in its portfolio. Due to a favorable
interest rate environment, production of one-to four-family residential loans
held for sale in the secondary market is expected to continue its moderate
pace.  The strategy of selling the majority of originated loans in the
secondary market also compliments the Bank’s desire to reduce portfolio loan
balances in order to maximize capital efficiently.
 
 Allowance for loan losses. The
allowance for loan losses was $11.0 million, or 1.87% of total loans compared to
$13.8 million or 2.22% of total loans outstanding at September 30, 2010 and
December 31, 2009, respectively.
  33
 
 Non-performing assets:
                                
                                September 30,
                                
                                
                                December 31,2010
                                
                                
                                2009(Dollars in Thousands)Real Estate LoansOne-to-four-family
                                
                                $
                                9,573
                                
                                
                                $
                                12,343Commercial
                                
                                
                                1,025
                                
                                
                                
                                3,895Other
                                
                                
                                5,376
                                
                                
                                
                                9,638Construction
      - One-to-four-family
                                
                                
                                -
                                
                                
                                
                                -Construction
      - Commercial
                                
                                
                                1,681
                                
                                
                                
                                4,988Construction
      - Acquisition & Development
                                
                                
                                404
                                
                                
                                
                                404Other Loans - ConsumerHome
      Equity
                                
                                
                                2,295
                                
                                
                                
                                2,973Other
                                
                                
                                972
                                
                                
                                
                                909Commercial
                                
                                
                                227
                                
                                
                                
                                -Total
      non-performing loans
                                
                                
                                21,553
                                
                                
                                
                                35,150Other
      real estate owned
                                
                                
                                8,604
                                
                                
                                
                                5,028Total
      non-performing assets
                                
                                $
                                30,157
                                
                                
                                $
                                40,178Total
      troubled debt restructurings (TDR)
                                
                                $
                                20,880
                                
                                
                                $
                                22,660Total
      impaired loans (including TDR)
                                
                                $
                                36,656
                                
                                
                                $
                                44,392Non-performing
      loans to total loans
                                
                                
                                3.67
                                %
                                
                                
                                5.64
                                %Non-performing
      loans to total assets
                                
                                
                                2.41
                                %
                                
                                
                                3.88
                                %Non-performing
      assets to total assets
                                
                                
                                3.38
                                %
                                
                                
                                4.44
                                %
 
 Non-performing
loans were $21.6 million or 3.67% of total loans and $35.2 million, or 5.64% of
total loans at September 30, 2010, and December 31, 2009,
respectively.  The decrease was primarily due to the transfer of $6.4
million to other real estate owned, the sale of $6.3 million of non-performing
residential loans and a $3.3 million charge-off of a non-performing commercial
real estate loan.  Total impaired loans decreased $7.5 million to
$36.9 million at September 30, 2010 from $44.4 million at December 31,
2009.  As of September 30, 2010, total non-performing one- to
four-family residential loans of $9.6 million included $6.8 million of one- to
four-family residential loans that had been written-down to the estimated fair
value of their collateral.  Further declines in the fair value of the
collateral, or a decision to sell loans as distressed assets, could result in
additional losses. The total allowance allocated for impaired loans decreased to
$2.2 million at September 30, 2010 from $5.4 million at December 31,
2009.  As of September 30, 2010, and December 31, 2009, all
non-performing loans were classified as non-accrual, and there were no loans 90
days past due and accruing interest as of September 30, 2010 and December
31, 2009.  Troubled debt restructured (“TDR”) loans were $20.9 million
as of September 30, 2010, as compared to $22.7 million at December 31,
2009.  These loans were primarily comprised of residential mortgage
loans collateralized by real estate and were evaluated for impairment as
required under GAAP.
 
 The
tables below compare the general component, which is available for the entire
loan portfolio, and specific components of the allowance for loan losses to
non-performing loans as of September 30, 2010 and December 31,
2009:
  34
  Comparison
of Loan Loss Allowance to Non-Performing Loans
 September
30, 2010
 
 Non-
                                      Performing
                                      Loans
                                    
                                    
                                    Amount of
                                      General and
                                      Specific Loan
                                      Loss
                                      Allowance
                                    
                                    
                                    Percent of
                                      General and
                                      Specific Loan
                                      Loss
                                      Allowance to
                                      Non-
                                      Performing
                                      Loans(Dollars in Thousands)Real Estate LoansOne-to
      four-family
                                    
                                    $
                                    9,573
                                    
                                    
                                    $
                                    3,873
                                    
                                    
                                    
                                    40.46
                                    %Commercial
                                    
                                    
                                    1,025
                                    
                                    
                                    
                                    752
                                    
                                    
                                    
                                    73.37
                                    %Other
      (land & multi-family)
                                    
                                    
                                    5,376
                                    
                                    
                                    
                                    1,495
                                    
                                    
                                    
                                    27.81
                                    %Real Estate ConstructionConstruction
      One-to four family
                                    
                                    
                                    -
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    -Construction
      Commercial
                                    
                                    
                                    1,681
                                    
                                    
                                    
                                    13
                                    
                                    
                                    
                                    0.77
                                    %Acquistion
      & Development
                                    
                                    
                                    404
                                    
                                    
                                    
                                    110
                                    
                                    
                                    
                                    27.23
                                    %Other LoansHome
      Equity
                                    
                                    
                                    2,295
                                    
                                    
                                    
                                    2,044
                                    
                                    
                                    
                                    89.06
                                    %Consumer
                                    
                                    
                                    972
                                    
                                    
                                    
                                    2,421
                                    
                                    
                                    
                                    249.07
                                    %Commercial
                                    
                                    
                                    227
                                    
                                    
                                    
                                    231
                                    
                                    
                                    
                                    101.76
                                    %Totals
                                    
                                    $
                                    21,553
                                    
                                    
                                    $
                                    10,955
                                    
                                    
                                    
                                    50.83
                                    %
  35
  Comparison
of Loan Loss Allowance to Non-Performing Loans
 December
31, 2009
 
 Non-Performing
                          Loans
                        
                        
                        Amount of
                          Loan Loss
                          Allowance
                        
                        
                        % of Loan
                          Loss
                          Allowance to
                          Non-Performing
                          Loans(Dollars in Thousands)Real Estate LoansOne-to
      four-family
                        
                        $
                        12,343
                        
                        
                        $
                        3,446
                        
                        
                        
                        27.92
                        %Commercial
                        
                        
                        3,895
                        
                        
                        
                        575
                        
                        
                        
                        14.76
                        %Other
      (land & multi-family)
                        
                        
                        9,638
                        
                        
                        
                        1,305
                        
                        
                        
                        13.54
                        %Real Estate ConstructionConstruction
      One-to four family
                        
                        
                        -
                        
                        
                        
                        47
                        
                        
                        
                        -Construction
      Commercial
                        
                        
                        4,988
                        
                        
                        
                        3,322
                        
                        
                        
                        66.60
                        %Acquistion
      & Development
                        
                        
                        404
                        
                        
                        
                        110
                        
                        
                        
                        27.23
                        %Other LoansHome
      Equity
                        
                        
                        2,973
                        
                        
                        
                        2,240
                        
                        
                        
                        75.34
                        %Consumer
                        
                        
                        909
                        
                        
                        
                        2,447
                        
                        
                        
                        269.20
                        %Commercial
                        
                        
                        -
                        
                        
                        
                        318
                        
                        
                        
                        -Totals
                        
                        $
                        35,150
                        
                        
                        $
                        13,810
                        
                        
                        
                        39.29
                        %
  36
  The
following table sets forth an analysis of the allowance for loan
losses:
 
 September 30,
                                
                                
                                September 30,2010
                                
                                
                                2009Balance
      at beginning of period
                                
                                $
                                13,810
                                
                                
                                $
                                10,598Charge-offs:Real Estate LoansOne-to
      four-family
                                
                                
                                7,906
                                
                                
                                
                                5,982Commercial
                                
                                
                                1,261
                                
                                
                                
                                690Other
      (Land & Multi-family)
                                
                                
                                1,416
                                
                                
                                
                                3,393Real Estate Construction
    LoansConstruction
      One-to four family
                                
                                
                                -
                                
                                
                                
                                50Construction
      Commercial
                                
                                
                                3,307
                                
                                
                                
                                -Acquistion
      & Development
                                
                                
                                -
                                
                                
                                
                                -Other LoansHome
      equity
                                
                                
                                2,306
                                
                                
                                
                                3,696Consumer
                                
                                
                                1,346
                                
                                
                                
                                801Commercial
                                
                                
                                698
                                
                                
                                
                                590Total
      charge-offs
                                
                                
                                18,240
                                
                                
                                
                                15,202Recoveries:Real Estate LoansOne-to
      four-family
                                
                                
                                648
                                
                                
                                
                                212Commercial
                                
                                
                                -
                                
                                
                                
                                -Other
      (Land & Multi-family)
                                
                                
                                123
                                
                                
                                
                                17Real Estate Construction
    LoansConstruction
      One-to four family
                                
                                
                                -
                                
                                
                                
                                -Construction
      Commercial
                                
                                
                                -
                                
                                
                                
                                -Acquistion
      & Develpoment
                                
                                
                                -
                                
                                
                                
                                -Other LoansHome
      equity
                                
                                
                                88
                                
                                
                                
                                204Consumer
                                
                                
                                213
                                
                                
                                
                                271Commercial
                                
                                
                                7
                                
                                
                                
                                18Total
      recoveries
                                
                                
                                1,079
                                
                                
                                
                                722Net
      charge-offs
                                
                                
                                17,161
                                
                                
                                
                                14,480Provision
      for loan losses
                                
                                
                                14,306
                                
                                
                                
                                18,657Balance
      at end of period
                                
                                $
                                10,955
                                
                                
                                $
                                14,775
 
 During
the nine months ended September 30, 2010 loan charge-offs included approximately
$6.4 million of partial charge-offs of one-to four- family residential loans
identified as non-performing,of which
$2.8 million was related to the sale of $6.3 million of non-performing one- to
four-family residential loans. Charge-offs in 2010 also included $3.3
million on one commercial loan for which a specific allowance had previously
been established.  Due to the decline in real estate values over the
past two years, the Company believes it is appropriate and prudent to reduce the
carrying balance of non-performing one-to four-family residential loans by the
expected loss amount rather than providing a general allowance.
  37
  Deferred Income
Taxes.  As of both September 30, 2010 and December 31, 2009 the
Company concluded that, while improved operating results are expected as the
economy begins to improve and the Bank’s non-performing assets decline, the
variability of the credit related costs are such that a more likely than not
conclusion of realization of the Company’s deferred tax asset could not be
supported. Consequently the Company has recorded a valuation allowance of $17.4
million for the full amount of the net federal and state deferred tax assets as
of September 30, 2010. Until such time as the Company determines it is more
likely than not that it is able to generate taxable income, no tax benefits will
be recorded in future periods to reduce net losses before taxes. However, at
such time in the future that the Company records taxable income or determines
that realization of the deferred tax asset is more likely than not, some or all
of the valuation allowance may be available as a tax benefit.
  Deposits. Total deposits were
$570.4 million at September 30, 2010, an increase of $14.9 million from $555.4
million at December 31, 2009.   Core deposits grew by $16.0
million, while time deposits decreased by $1.0 million.  At September
30, 2010, time deposits include $61.4 million of brokered deposits acquired as
part of a liquidity management strategy following the sale of our Lake City,
Florida branch on December 31, 2009. As a part of its capital preservation
strategy, the Bank intentionally lowered rates on time deposits beginning in the
second half of 2009 in order to reduce those deposits consistent with loan
balances decreases. Management believes near term deposit growth will be
moderate with an emphasis on core deposits to match asset growth expectations.
Dramatic changes in the short-term interest rate environment could affect the
availability of deposits in our local market and therefore cause the Bank to
promote time deposit growth in order to meet liquidity needs.
  Securities sold under agreements to
repurchase. Securities sold under agreements to repurchase, which are
secured by mortgage-backed securities, had a carrying amount of $124.8 million
at September 30, 2010, compared to $119.9 million at December 31,
2009.  The agreements carry various periods of fixed interest rates
that convert to callable floating rates in the future.  Upon
conversion, each agreement may be terminated in whole by the lender each
following quarter.  There is no termination penalty if terminated by
the lender.  There have been no early terminations as of September 30,
2010.  At maturity or termination, the securities underlying the
agreements will be returned to the Company.  The Company had $92.8
million of such agreements as of September 30, 2010 and December 31,
2009.
 
 Securities
sold under agreements to repurchase are financing arrangements that mature
within ten years, beginning in January 2014.  At maturity, the
securities underlying the agreements are returned to the
Company.  Information concerning securities sold under agreements to
repurchase as of September 30, 2010 is summarized as follows:
 
 (Dollars in Thousands)Average
      daily balance during the period
                        
                        $
                        92,800Average
      interest rate during the period
                        
                        
                        5.04
                        %Maximum
      month-end balance
                        
                        $
                        92,800Weighted
      average interest rate at period end
                        
                        
                        5.11
                        %
 
 Depending
on the availability of suitable securities and the prevailing interest rates and
terms of alternative sources of funds, the Company may continue to sell
securities under agreements to repurchase in the future to fund growth; however
the Company does not plan to be active in the market in the near
term.
  38
  Federal Home Loan Bank
advances. FHLB advances had a weighted-average maturity of 62 months and
a weighted-average rate of 3.51% at September 30, 2010.   The
decrease in FHLB borrowings to $167.8 million at September 30, 2010 as compared
to December 31, 2009 was due to repayments of $48.0 million which exceeded
proceeds from advances of $33.1 million.  The Company expects to
continue to utilize FHLB advances to manage short and long- term liquidity needs
to the extent it has borrowing capacity, needs funding and the interest expense
of FHLB advances is attractive compared to deposits and other alternative
sources of funds. However, with the FDIC’s new deposit insurance premium
assessment schedule raising assessment rates in order to recapitalize the
Deposit Insurance Fund, which takes into consideration an institution’s FHLB
borrowings, our FDIC assessment may increase, should any additional FHLB
borrowings outpace deposit growth.
  Other
borrowings.  Other borrowings were $5.0 million at September
30, 2010.  The Company borrowed $5.0 million from another financial
institution in June 2010 which is secured by shares of the Company’s common
stock owned by Atlantic Coast Federal, MHC. The Company contributed $2.9 million
to Atlantic Coast Bank as additional capital and used the remaining proceeds to
pay off the remaining balance of $2.1 million of other
borrowings.
  Stockholders’
equity.  Stockholders’ equity decreased by approximately $5.1
million to $51.4 million at September 30, 2010 from $56.5 million at December
31, 2009 as the net loss of $9.0 million for the nine months ended September 30,
2010 was partially offset by the $3.3 million increase in other comprehensive
income.  Other comprehensive income for the nine months ended
September 30, 2010 was $3.3 million due to higher market values on
available-for-sale securities.
  The
Company’s equity to assets ratio decreased to 5.76% at September 30, 2010, from
6.24% at December 31, 2009. The decrease was due to the net loss of $9.0 million
for the nine months ended September 30, 2010, partially offset by the increase
in other comprehensive income. Despite this decrease, Atlantic Coast Bank
continued to be well in excess of all minimum regulatory capital requirements,
and is considered “well capitalized” under those formulas.  Total
risk-based capital to risk-weighted assets was 10.7%, Tier 1 capital to
risk-weighted assets was 9.4%, and Tier 1 capital to adjusted total assets was
5.6% at September 30, 2010. These ratios as of December 31, 2009 were 11.4%,
10.2% and 6.1%, respectively.
 
 Comparison of Results of Operations
for the Three Months Ended September 30, 2010 and 2009.
 
 General.Net loss for the three
months ended September 30, 2010, was $2.2 million, which was an improvement of
$10.0 million from a net loss of $12.2 million for the same period in
2009.  The Company did not record any tax benefit for the three months
ended September 30, 2010 following the establishment of a valuation allowance on
the net deferred tax asset during 2009.  The loss before income taxes
was $2.2 million for the three months ended September 30, 2010 as compared to a
loss before income taxes of $7.7 million for the same period in
2009.  The reduction in loss before income taxes was primarily due to
a $3.6 million decrease in provision for loan losses, a $284,000 increase in net
interest income, and a decrease in non-interest expense of $2.4 million,
partially offset by a $693,000 decrease in non-interest income
  39
  Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the three months ended September 30, 2010 and 2009. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
 
 For the three months ended September 30,2010
                              
                              
                              2009(Dollars in Thousands)Average
                                Balance
                              
                              
                              Interest
                              
                              
                              AverageYield
                                /Cost
                              
                              
                              Average
                                Balance
                              
                              
                              Interest
                              
                              
                              AverageYield
                                /CostINTEREST-EARNING ASSETSLoans
      receivable(1)
                              
                              $
                              617,473
                              
                              
                              $
                              9,316
                              
                              
                              
                              6.03
                              %
                              
                              $
                              684,784
                              
                              
                              $
                              10,094
                              
                              
                              
                              5.90
                              %Securites(2)
                              
                              
                              198,620
                              
                              
                              
                              1,835
                              
                              
                              
                              3.70
                              %
                              
                              
                              180,391
                              
                              
                              
                              2,080
                              
                              
                              
                              4.61
                              %Other
      interest-earning assets(3)
                              
                              
                              30,360
                              
                              
                              
                              48
                              
                              
                              
                              0.63
                              %
                              
                              
                              46,365
                              
                              
                              
                              43
                              
                              
                              
                              0.37
                              %Total
      interest-earning assets
                              
                              
                              846,453
                              
                              
                              
                              11,199
                              
                              
                              
                              5.29
                              %
                              
                              
                              911,540
                              
                              
                              
                              12,217
                              
                              
                              
                              5.36
                              %Non-interest
      earning assets
                              
                              
                              52,754
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              60,138Total
      assets
                              
                              $
                              899,207
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              971,678INTEREST-BEARING
LIABILITIESSavings
      deposits
                              
                              $
                              52,923
                              
                              
                              $
                              91
                              
                              
                              
                              0.69
                              %
                              
                              $
                              34,978
                              
                              
                              $
                              34
                              
                              
                              
                              0.39
                              %Interest
      bearing demand accounts
                              
                              
                              75,585
                              
                              
                              
                              240
                              
                              
                              
                              1.27
                              %
                              
                              
                              76,012
                              
                              
                              
                              353
                              
                              
                              
                              1.86
                              %Money
      market accounts
                              
                              
                              122,807
                              
                              
                              
                              342
                              
                              
                              
                              1.11
                              %
                              
                              
                              142,344
                              
                              
                              
                              525
                              
                              
                              
                              1.48
                              %Time
      deposits
                              
                              
                              284,606
                              
                              
                              
                              1,789
                              
                              
                              
                              2.51
                              %
                              
                              
                              322,273
                              
                              
                              
                              2,907
                              
                              
                              
                              3.61
                              %Securities
      sold under agreements to repurchase
                              
                              
                              92,800
                              
                              
                              
                              1,186
                              
                              
                              
                              5.11
                              %
                              
                              
                              92,800
                              
                              
                              
                              1,714
                              
                              
                              
                              7.39
                              %Federal
      Home Loan Bank advances
                              
                              
                              170,511
                              
                              
                              
                              1,554
                              
                              
                              
                              3.65
                              %
                              
                              
                              177,656
                              
                              
                              
                              1,085
                              
                              
                              
                              2.44
                              %Other
      borrowings
                              
                              
                              5,000
                              
                              
                              
                              114
                              
                              
                              
                              9.12
                              %
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      interest-bearing liabilities
                              
                              
                              804,232
                              
                              
                              
                              5,316
                              
                              
                              
                              2.64
                              %
                              
                              
                              846,063
                              
                              
                              
                              6,618
                              
                              
                              
                              3.13
                              %Non-interest
      bearing liabilities
                              
                              
                              41,584
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              48,276Total
      liabilities
                              
                              
                              845,816
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              894,339Stockholders'
      equity
                              
                              
                              53,391
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              77,339Total
      liabilities and stockholders' equity
                              
                              $
                              899,207
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              971,678Net
      interest income
                              
                              
                              
                              
                              
                              $
                              5,883
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              5,599Net
      interest spread
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.65
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.23
                              %Net
      earning assets
                              
                              $
                              42,221
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              65,477Net
      interest margin(4)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.78
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.46
                              %Average
      interest-earning assets to average interest-bearing
      liabilities
                              
                              
                              
                              
                              
                              
                              105.25
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              107.74
                              %
 
 (1)
              Calculated
      net of deferred loan fees. Nonaccrual loans included as loans carrying a
      zero yield, includes loans held for
sale.
 (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.
  40
  Rate/Volume Analysis. The
following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities as of and for the three months ended June 30, 2010
as compared to the same period in 2009. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.
  Increase/(Decrease)
                                  
                                  
                                  TotalDue to
                                  
                                  
                                  IncreaseVolume
                                  
                                  
                                  Rate
                                  
                                  
                                  (Decrease)(Dollars in Thousands)INTEREST-EARNING ASSETSLoans
      receivable
                                  
                                  $
                                  (1,011
                                  )
                                  
                                  $
                                  233
                                  
                                  
                                  $
                                  (778
                                  )Securities
                                  
                                  
                                  204
                                  
                                  
                                  
                                  (448
                                  )
                                  
                                  
                                  (244
                                  )Other
      interest-earning assets
                                  
                                  
                                  (20
                                  )
                                  
                                  
                                  24
                                  
                                  
                                  
                                  4Total
      interest-earning assets
                                  
                                  
                                  (827
                                  )
                                  
                                  
                                  (191
                                  )
                                  
                                  
                                  (1,018
                                  )INTEREST-BEARING
LIABILITIESSavings
      deposits
                                  
                                  
                                  23
                                  
                                  
                                  
                                  33
                                  
                                  
                                  
                                  56Interest
      bearing demand accounts
                                  
                                  
                                  (2
                                  )
                                  
                                  
                                  (110
                                  )
                                  
                                  
                                  (112
                                  )Money
      market accounts
                                  
                                  
                                  (66
                                  )
                                  
                                  
                                  (118
                                  )
                                  
                                  
                                  (184
                                  )Time
      deposits
                                  
                                  
                                  (311
                                  )
                                  
                                  
                                  (807
                                  )
                                  
                                  
                                  (1,118
                                  )Securities
      sold under agreements to repurchase
                                  
                                  
                                  -
                                  
                                  
                                  
                                  101
                                  
                                  
                                  
                                  101Federal
      Home Loan Bank advances
                                  
                                  
                                  (67
                                  )
                                  
                                  
                                  (93
                                  )
                                  
                                  
                                  (160
                                  )Other
      borrowings
                                  
                                  
                                  115
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  115Total
      interest-bearing liabilities
                                  
                                  
                                  (308
                                  )
                                  
                                  
                                  (994
                                  )
                                  
                                  
                                  (1,302
                                  )Net
      interest income
                                  
                                  $
                                  (519
                                  )
                                  
                                  $
                                  803
                                  
                                  
                                  $
                                  284
 
 Interest income.Total
interest income declined $1.0 million to $11.2 million for the three months
ended September 30, 2010 from $12.2 million for the three months ended September
30, 2009 primarily due the decrease in interest income on
loans.  Interest income on loans decreased to $9.3 million for the
three months ended September 30, 2010 from $10.1 million for the same period in
2009.  This decrease was due primarily to a decline in the average
balance of loans, which decreased $67.3 million to $617.5 million for the three
months ended September 30, 2010 from $684.8 million for the prior year
period.  Interest income earned on securities decreased for the three
months ended September 30, 2010 as compared to the same period in 2009, as the
increase in the average balance of $18.2 million was more than offset by lower
interest rates on new purchases of securities, which resulted in a 91 basis
point decline in average rate.
 
 Interest
income was adversely impacted by continued low interest rates and the
unavailability of higher yielding interest-earning assets.
 
 Interest expense. Interest
expense declined by $1.3 million to $5.3 million for the three months ended
September 30, 2010 from $6.6 million for the three months ended September 30,
2009.  The decrease in interest expense for the three months ended
September 30, 2010, as compared to the same period in 2009, was due to lower
average rates paid on interest-bearing liabilities, primarily time deposits, as
well as the decrease in average outstanding balances of time
deposits.  The average rate paid on time deposits decreased 110 basis
points to 2.51% for the three months ended September 30, 2010 as compared to
3.61% the same period in 2009.  Interest expense includes $114,000
related to other borrowings for the three months ended September 30, 2010
compared to $0 for the three months ended September 30, 2009.
  41
 
 Net interest
income.Net interest income increased $284,000 to $5.9 million
for the three months ended September 30, 2010 from $5.6 million for the three
months ended September 30, 2009, as the decrease in interest expense was greater
than the decrease in interest income. Our net interest rate spread, which is the
difference between the interest rate earned on interest-earning assets and the
interest rate paid on interest-bearing liabilities, increased 42 basis points to
2.65% for the third quarter of 2010 as compared to 2.23% for the same quarter in
2009.  For the same comparative periods, our net interest margin,
which is net interest income expressed as a percentage of our average interest
earning assets, increased 32 basis points to 2.78% as compared to 2.46% for the
same quarter in 2009.  The improvement in net interest margin was
primarily due to the 81 basis point decrease in the average interest rate of
deposits, to 1.84% for the three months ended September 30, 2010 as compared to
2.65% for the same period in 2009.
 
 Provision for loan
losses. Provision for loan losses of $3.1 million and $6.7
million were made during the three months ended September 30, 2010 and 2009,
respectively.  The decrease in the provision for loan losses was
primarily due to a provision for loan losses of $2.0 million recorded during the
third quarter of 2009 to provide a general allowance for loans held in the
portfolio, previously supported by a cash deposit maintained with the Company by
an ongoing originator and lower charge-offs. Net charge-offs in 2010 also
included $759,000 of partial write-downs on one- to four-family residential
loans that became non-performing during the three months ended September 30,
2010.  Net charge-offs for the three months ended September 30, 2010
were $2.4 million as compared to $3.7 million for the same period in 2009. Home
equity loan charge-offs were $274,000 during the three months ended September
30, 2010 as compared to $1.7 million during the same period in
2009.    Beginning in the second quarter of 2009 the Company
adopted the policy of writing down loans when they are classified as
non-performing rather than recording a general allocation.
 
 Non-interest income. The
components of non-interest income for the three months ended September 30, 2010
and 2009 were as follows:
 
 Increase(decrease)2010
                  
                  
                  2009
                  
                  
                  Dollars
                  
                  
                  Percentage(Dollars in Thousands)Service
      charges and fees
                  
                  $
                  1,032
                  
                  
                  $
                  1,111
                  
                  
                  $
                  (79
                  )
                  
                  
                  -7.1
                  %Gain
      on sale of loans held for sale
                  
                  
                  349
                  
                  
                  
                  147
                  
                  
                  
                  202
                  
                  
                  
                  137.4
                  %Gain
      (loss) on sale of portfolio loans
                  
                  
                  46
                  
                  
                  
                  (1,317
                  )
                  
                  
                  1,363
                  
                  
                  
                  -(Loss)
      gain on available for sale securities
                  
                  
                  (397
                  )
                  
                  
                  117
                  
                  
                  
                  (514
                  )
                  
                  
                  -439.3
                  %Other
      than temporary impairment losses
                  
                  
                  -
                  
                  
                  
                  (252
                  )
                  
                  
                  252
                  
                  
                  
                  -100.0
                  %Interchange
      fees
                  
                  
                  241
                  
                  
                  
                  235
                  
                  
                  
                  6
                  
                  
                  
                  2.6
                  %Other
                  
                  
                  287
                  
                  
                  
                  2,210
                  
                  
                  
                  (1,923
                  )
                  
                  
                  -87.0
                  %$
                  1,558
                  
                  
                  $
                  2,251
                  
                  
                  $
                  (693
                  )
                  
                  
                  -30.8
                  %
 
 Non-interest
income for the three months ended September 30, 2010 decreased $693,000 to $1.6
million as compared to $2.3 million for the same three months in
2009.  The decrease was primarily due to the non-recurrence of other
non-interest income items in 2009 including a $2.0 million gain resulting from a
settlement agreement with an ongoing originator whereby the Company assumed
responsibility for credit losses on a pool of loans, and a $397,000 loss on sale
of available-for-sale securities during the three months ended September 30,
2010, partially offset by the non-recurrence of other non-interest income items
in 2009 including the loss on sale of portfolio loans of $1.3 million as well as
a $252,000 other-than-temporary-impairment loss.
  42
  Non-interest expense. The
components of non-interest expense for the three months ended September 30,
2010 and 2009 were as follows:
 
 Increase(decrease)2010
                            
                            
                            2009
                            
                            
                            Dollars
                            
                            
                            Percentage(Dollars in Thousands)Compensation
      and benefits
                            
                            $
                            2,838
                            
                            
                            $
                            2,861
                            
                            
                            $
                            (23
                            )
                            
                            
                            -0.8
                            %Occupancy
      and equipment
                            
                            
                            547
                            
                            
                            
                            674
                            
                            
                            
                            (127
                            )
                            
                            
                            -18.8
                            %FDIC
      insurance premiums
                            
                            
                            400
                            
                            
                            
                            422
                            
                            
                            
                            (22
                            )
                            
                            
                            -5.2
                            %Foreclosed
      assets, net
                            
                            
                            560
                            
                            
                            
                            318
                            
                            
                            
                            242
                            
                            
                            
                            76.1
                            %Data
      processing
                            
                            
                            309
                            
                            
                            
                            251
                            
                            
                            
                            58
                            
                            
                            
                            23.1
                            %Outside
      professional services
                            
                            
                            465
                            
                            
                            
                            316
                            
                            
                            
                            149
                            
                            
                            
                            47.2
                            %Collection
      expense and repossessedasset
      losses
                            
                            
                            326
                            
                            
                            
                            355
                            
                            
                            
                            (29
                            )
                            
                            
                            -8.2
                            %Goodwill
      impairment
                            
                            
                            -
                            
                            
                            
                            2,811
                            
                            
                            
                            (2,811
                            )
                            
                            
                            -100.0
                            %Other
                            
                            
                            1,060
                            
                            
                            
                            876
                            
                            
                            
                            184
                            
                            
                            
                            21.0
                            %$
                            6,505
                            
                            
                            $
                            8,884
                            
                            
                            $
                            (2,379
                            )
                            
                            
                            -26.8
                            %
 
 Non-interest
expense decreased $2.4 million to $6.5 million for the three months ended
September 30, 2010 from $8.9 million for the same three months ended September
30, 2009.  Components of the decrease included the non-recurrence of a
$2.8 million write-off of the entire amount of the Company’s goodwill during
2009, partially offset by a higher loss on foreclosed assets, higher other
expenses including advertising and insurance, as well as higher outside
professional services.
 
 Income tax.The Company
recorded no income tax benefit for the three months ended September 30, 2010 as
compared to an expense of $4.5 million for the same period in 2009 due to the
Company’s establishment of a valuation reserve for net deferred tax assets
during 2009.  The recognition of future tax benefits or the reversal
of the valuation reserve is dependent upon the Company’s ability to generate
future taxable income.
 
 Comparison of Results of Operations
for the Nine Months Ended September 30, 2010 and 2009.
 
 General.Net loss for the nine
months ended September 30, 2010 was $9.0 million, which was an improvement of
$10.9 million from a net loss of $19.9 million for the same period in
2009.  The $10.6 million reduction in loss before income taxes was
primarily due to a $1.4 million increase in net interest income, a reduction in
provision for loans losses of $4.4 million, a $1.0 million increase in
non-interest income and a decrease in non-interest expense of $3.8
million.
  43
 
 Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the nine months ended September 30, 2010 and 2009. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
 
 For the nine months ended September 30,2010
                        
                        
                        2009(Dollars in Thousands)Average
                          Balance
                        
                        
                        Interest
                        
                        
                        AverageYield
                          /Cost
                        
                        
                        Average
                          Balance
                        
                        
                        Interest
                        
                        
                        AverageYield
                          /CostINTEREST-EARNING ASSETSLoans
      receivable(1)
                        
                        $
                        621,703
                        
                        
                        $
                        27,997
                        
                        
                        
                        6.00
                        %
                        
                        $
                        714,394
                        
                        
                        $
                        31,182
                        
                        
                        
                        5.82
                        %Securites(2)
                        
                        
                        199,873
                        
                        
                        
                        5,954
                        
                        
                        
                        3.97
                        %
                        
                        
                        169,450
                        
                        
                        
                        5,902
                        
                        
                        
                        4.64
                        %Other
      interest-earning assets(3)
                        
                        
                        31,216
                        
                        
                        
                        142
                        
                        
                        
                        0.61
                        %
                        
                        
                        47,174
                        
                        
                        
                        86
                        
                        
                        
                        0.24
                        %Total
      interest-earning assets
                        
                        
                        852,792
                        
                        
                        
                        34,093
                        
                        
                        
                        5.33
                        %
                        
                        
                        931,018
                        
                        
                        
                        37,170
                        
                        
                        
                        5.32
                        %Non-interest
      earning assets
                        
                        
                        51,342
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        58,747Total
      assets
                        
                        $
                        904,134
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        989,765INTEREST-BEARING
LIABILITIESSavings
      deposits
                        
                        $
                        46,157
                        
                        
                        $
                        233
                        
                        
                        
                        0.67
                        %
                        
                        $
                        34,621
                        
                        
                        $
                        99
                        
                        
                        
                        0.38
                        %Interest
      bearing demand accounts
                        
                        
                        78,075
                        
                        
                        
                        885
                        
                        
                        
                        1.51
                        %
                        
                        
                        73,712
                        
                        
                        
                        1,076
                        
                        
                        
                        1.95
                        %Money
      market accounts
                        
                        
                        123,174
                        
                        
                        
                        1,075
                        
                        
                        
                        1.16
                        %
                        
                        
                        139,766
                        
                        
                        
                        1,834
                        
                        
                        
                        1.75
                        %Time
      deposits
                        
                        
                        292,254
                        
                        
                        
                        5,732
                        
                        
                        
                        2.62
                        %
                        
                        
                        337,970
                        
                        
                        
                        9,556
                        
                        
                        
                        3.77
                        %Securities
      sold under agreements to repurchase
                        
                        
                        92,800
                        
                        
                        
                        3,508
                        
                        
                        
                        5.04
                        %
                        
                        
                        92,800
                        
                        
                        
                        5,135
                        
                        
                        
                        7.38
                        %Federal
      Home Loan Bank advances
                        
                        
                        171,577
                        
                        
                        
                        4,675
                        
                        
                        
                        3.63
                        %
                        
                        
                        182,688
                        
                        
                        
                        3,085
                        
                        
                        
                        2.25
                        %Other
      borrowings
                        
                        
                        3,218
                        
                        
                        
                        203
                        
                        
                        
                        8.41
                        %
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        #DIV/0!Total
      interest-bearing liabilities
                        
                        
                        807,255
                        
                        
                        
                        16,311
                        
                        
                        
                        2.69
                        %
                        
                        
                        861,557
                        
                        
                        
                        20,785
                        
                        
                        
                        3.22
                        %Non-interest
      bearing liabilities
                        
                        
                        40,814
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        48,283Total
      liabilities
                        
                        
                        848,069
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        909,840Stockholders'
      equity
                        
                        
                        56,065
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        79,925Total
      liabilities and stockholders' equity
                        
                        $
                        904,134
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        989,765Net
      interest income
                        
                        
                        
                        
                        
                        $
                        17,782
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        16,385Net
      interest spread
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2.64
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2.11
                        %Net
      earning assets
                        
                        $
                        45,537
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        69,461Net
      interest margin(4)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2.78
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2.35
                        %Average
      interest-earning assets to average interest-bearing
      liabilities
                        
                        
                        
                        
                        
                        
                        105.64
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        108.06
                        %
 
 (1)
              Calculated
      net of deferred loan fees. Nonaccrual loans included as loans carrying a
      zero yield.
 (2)
              Calculated
      based on carrying value. Not full tax equivalents, as the numbers would
      not change materially from those presented  in the
      table.
 (3)
              Includes
      Federal Home Loan Bank stock at cost and term deposits with other
      financial institutions.
 (4)
              Net
      interest income divided by average interest-earning
  assets.
  44
  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 nine months ended September 30,
2010 as compared to the same period in 2009. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume multiplied by the old
rate; and (2) changes in rate, which are changes in rate multiplied by the old
volume; and (3) changes not solely attributable to rate or volume have been
allocated proportionately to the change due to volume and the change due to
rate.
  Increase/(Decrease)
                                                        
                                                        
                                                        TotalDue to
                                                        
                                                        
                                                        IncreaseVolume
                                                        
                                                        
                                                        Rate
                                                        
                                                        
                                                        (Decrease)(Dollars in Thousands)INTEREST-EARNING ASSETSLoans
      receivable
                                                        
                                                        $
                                                        (4,149
                                                        )
                                                        
                                                        $
                                                        964
                                                        
                                                        
                                                        $
                                                        (3,185
                                                        )Securities
                                                        
                                                        
                                                        983
                                                        
                                                        
                                                        
                                                        (929
                                                        )
                                                        
                                                        
                                                        54Other
      interest-earning assets
                                                        
                                                        
                                                        (38
                                                        )
                                                        
                                                        
                                                        93
                                                        
                                                        
                                                        
                                                        55Total
      interest-earning assets
                                                        
                                                        
                                                        (3,204
                                                        )
                                                        
                                                        
                                                        128
                                                        
                                                        
                                                        
                                                        (3,076
                                                        )INTEREST-BEARING
LIABILITIESSavings
      deposits
                                                        
                                                        
                                                        41
                                                        
                                                        
                                                        
                                                        92
                                                        
                                                        
                                                        
                                                        133Interest
      bearing demand accounts
                                                        
                                                        
                                                        61
                                                        
                                                        
                                                        
                                                        (252
                                                        )
                                                        
                                                        
                                                        (191
                                                        )Money
      market accounts
                                                        
                                                        
                                                        (199
                                                        )
                                                        
                                                        
                                                        (560
                                                        )
                                                        
                                                        
                                                        (759
                                                        )Time
      deposits
                                                        
                                                        
                                                        (1,171
                                                        )
                                                        
                                                        
                                                        (2,653
                                                        )
                                                        
                                                        
                                                        (3,824
                                                        )Securities
      sold under agreements to repurchase
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        422
                                                        
                                                        
                                                        
                                                        422Federal
      Home Loan Bank advances
                                                        
                                                        
                                                        (306
                                                        )
                                                        
                                                        
                                                        (153
                                                        )
                                                        
                                                        
                                                        (459
                                                        )Other
      borrowings
                                                        
                                                        
                                                        203
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        203Total
      interest-bearing liabilities
                                                        
                                                        
                                                        (1,371
                                                        )
                                                        
                                                        
                                                        (3,104
                                                        )
                                                        
                                                        
                                                        (4,475
                                                        )Net
      interest income
                                                        
                                                        $
                                                        (1,833
                                                        )
                                                        
                                                        $
                                                        3,232
                                                        
                                                        
                                                        $
                                                        1,399
 
 Interest income.Total
interest income declined $3.1 million to $34.1 million for the nine months ended
September 30, 2010 from $37.2 million for the nine months ended September 30,
2009 because of a decrease in interest income on loans.  Interest
income on loans decreased to $28.0 million for the nine months ended September
30, 2010 from $31.2 million for the same period in 2009.  This
decrease was due primarily to a decline in the average balance of loans, which
decreased $92.7 million to $621.7 million for the nine months ended September
30, 2010 from $714.4 million for the prior year period.  Interest
income earned on securities increased for the nine months ended September 30,
2010 as compared to the same period in 2009 due to an increase in the average
balance of $30.4 million, which was nearly offset by lower interest rates on new
purchases of comparable securities, which resulted in a 67 basis point decline
in average rate.
 
 Interest
income was adversely impacted by continued low interest rates and the
unavailability of higher yielding interest-earning assets.
 
 Interest expense. Interest
expense declined by $4.5 million to $16.3 million for the nine months ended
September 30, 2010 from $20.8 million for the nine months ended September 30,
2009.  The decrease in interest expense for the nine months ended
September 30, 2010, as compared to the same period in 2009, was due to the
combination of lower average rates paid on interest-bearing liabilities,
primarily time deposits, as well as the decrease in average outstanding balances
of time deposits.  The average rate paid on time deposits decreased
115 basis points to 2.62% for the nine months ended September 30, 2010 as
compared to 3.77% the same period in 2009.  Interest expense includes
$203,000 related to other borrowings for the nine months ended September 30,
2010 as compared to $0 for the nine months ended September 30,
2009.
  45
  Net interest
income.Net interest income increased $1.4 million to $17.8
million for the nine months ended September 30, 2010 from $16.4 million for the
nine months ended September 30, 2009, as the decrease in interest expense was
greater than the decrease in interest income. Our net interest rate spread,
which is the difference between the interest rate earned on interest-earning
assets and the interest rate paid on interest-bearing liabilities, increased 54
basis points to 2.64% for the nine months ended September 30, 2010 as compared
to 2.10% for the same period in 2009.  For the same comparative
periods, our net interest margin, which is net interest income expressed as a
percentage of our average interest earning assets, increased 43 basis points to
2.78% as compared to 2.35% for the same period in 2009.  The
improvement in net interest margin was primarily due to the 89 basis point
decrease in the average interest rate of deposits, to 1.96% for the nine months
ended September 30, 2010 as compared to 2.85% for the same period in
2009.
 
 Provision for loan
losses.Provision for loan losses of $14.3 million and $18.7
million were made during the nine months ended September 30, 2010 and 2009,
respectively.  The decrease in provision for loan losses was primarily
due to a provision for loan losses of $2.0 million recorded during the third
quarter of 2009 to provide a general allowance for loans held in the portfolio,
previously supported by a cash deposit maintained with the Company by an ongoing
originator, the $41.4 million decrease in the balance of portfolio loans as of
September 30, 2010 as compared to December 31, 2009, offset by an increase in
charge-offs.  Net charge-offs for the nine months ended September 30,
2010 were $17.2 million as compared to $14.5 million for the same period in
2009.  The increased charge-offs included $2.7 million of loss on a
distressed loan sale of $6.3 million of non-performing one- to four-family
residential loans in June 2010. Net charge-offs in 2010 also included $3.4
million of partial write-downs on one- to four-family residential loans that
became non-performing during the nine months ended September 30, 2010 as well as
a $3.3 million charge-off on one non-performing commercial loan, for which a
specific allowance had previously been established. Beginning in the second
quarter of 2009 the Company adopted the policy of writing down loans when they
are classified as non-performing rather than recording a general
allocation.
 
 Non-interest
income.  The components of non-interest income for the nine
months ended September 30, 2010 and 2009 were as follows:
 
 Increase(decrease)2010
                                
                                
                                2009
                                
                                
                                Dollars
                                
                                
                                Percentage(Dollars
      in Thousands)Service
      charges and fees
                                
                                $
                                2,864
                                
                                
                                $
                                3,153
                                
                                
                                $
                                (289
                                )
                                
                                
                                -9.2
                                %Gain
      on sale of loans held for sale
                                
                                
                                531
                                
                                
                                
                                448
                                
                                
                                
                                83
                                
                                
                                
                                18.5
                                %Loss
      on sale of portfolio loans
                                
                                
                                (114
                                )
                                
                                
                                (1,245
                                )
                                
                                
                                1,131
                                
                                
                                
                                -Gain
      on available for sale securities
                                
                                
                                831
                                
                                
                                
                                333
                                
                                
                                
                                498
                                
                                
                                
                                149.5
                                %Other
      than temporary impairment losses
                                
                                
                                (81
                                )
                                
                                
                                (1,573
                                )
                                
                                
                                1,492
                                
                                
                                
                                -94.9
                                %Interchange
      fees
                                
                                
                                704
                                
                                
                                
                                685
                                
                                
                                
                                19
                                
                                
                                
                                2.8
                                %Other
                                
                                
                                849
                                
                                
                                
                                2,762
                                
                                
                                
                                (1,913
                                )
                                
                                
                                -69.3
                                %$
                                5,584
                                
                                
                                $
                                4,563
                                
                                
                                $
                                1,021
                                
                                
                                
                                22.4
                                %
 
 Non-interest
income for the nine months ended September 30, 2010 increased $1.0 million to
$5.6 million as compared to $4.6 million for the same nine months in
2009.  The increase was primarily due to the $1.5 million lower
other-than-temporary-impairment loss, the $1.1 million lower loss on sale of
portfolio loans, and the $498,000 higher gain on sale of available-for-sale
securities and $83,000 higher gain on sale of loans held for sale , partially
offset by the non-recurrence of other non-interest income items in 2009
including a $2.0 million gain resulting from a settlement agreement with an
ongoing originator whereby the Company assumed responsibility for credit losses
on a pool of loans.
  46
 
 Non-interest expense. The
components of non-interest expense for the nine months ended September 30,
2010 and 2009 were as follows:
 
 Increase(decrease)2010
                          
                          
                          2009
                          
                          
                          Dollars
                          
                          
                          Percentage(Dollars in Thousands)Compensation
      and benefits
                          
                          $
                          7,845
                          
                          
                          $
                          8,403
                          
                          
                          $
                          (558
                          )
                          
                          
                          -6.6
                          %Occupancy
      and equipment
                          
                          
                          1,632
                          
                          
                          
                          1,962
                          
                          
                          
                          (330
                          )
                          
                          
                          -16.8
                          %FDIC
      insurance premiums
                          
                          
                          1,246
                          
                          
                          
                          1,435
                          
                          
                          
                          (189
                          )
                          
                          
                          -13.2
                          %Foreclosed
      assets, net
                          
                          
                          681
                          
                          
                          
                          1,308
                          
                          
                          
                          (627
                          )
                          
                          
                          -47.9
                          %Data
      processing
                          
                          
                          966
                          
                          
                          
                          760
                          
                          
                          
                          206
                          
                          
                          
                          27.1
                          %Outside
      professional services
                          
                          
                          1,195
                          
                          
                          
                          1,477
                          
                          
                          
                          (282
                          )
                          
                          
                          -19.1
                          %Collection
      expense and repossessedasset
      losses
                          
                          
                          1,324
                          
                          
                          
                          831
                          
                          
                          
                          493
                          
                          
                          
                          59.3
                          %Goodwill
      impairment
                          
                          
                          -
                          
                          
                          
                          2,811
                          
                          
                          
                          (2,811
                          )
                          
                          
                          -100.0
                          %Other
                          
                          
                          3,161
                          
                          
                          
                          2,837
                          
                          
                          
                          324
                          
                          
                          
                          11.4
                          %$
                          18,050
                          
                          
                          $
                          21,824
                          
                          
                          $
                          (3,774
                          )
                          
                          
                          -17.3
                          %
 
 Non-interest
expense decreased $3.8 million to $18.1 million for the nine months ended
September 30, 2010 from $21.8 million for the same nine months ended September
30, 2009.  Components of the decrease included the non-recurrence of a
$2.8 million write-off of the entire amount of the Company’s goodwill during
2009, lower compensation and benefits due to expense reduction initiatives
implemented during 2009, lower occupancy and equipment expenses due primarily to
the sale of our Lake City, Florida branch on December 31, 2009 and the
relocation of our Florida Regional Center in June 2009, lower outside
professional services and a lower loss on foreclosed assets, partially offset by
increased legal, collection and administrative expenses associated with other
real estate owned and foreclosures.
 
 Income tax.The Company
recorded no income tax benefit for the nine months ended September 30, 2010 as
compared to an expense of $282,000 for the same period in 2009 due to the
Company’s establishment of a valuation reserve for net deferred tax assets
during 2009.  The recognition of future tax benefits or the reversal
of the valuation reserve is dependent upon the Company’s ability to generate
future taxable income.
 
 Liquidity
 
 Management
maintains a liquidity position it believes adequate to provide funding for loan
demand and deposit run-off that may occur in the normal course of business. The
Company relies on a number of different sources in order to meet potential
liquidity demands. The primary sources of funds are increases in deposit
accounts and cash flows from loan payments and the securities
portfolio.  The scheduled amortization of loans and securities as well
as proceeds from borrowings, are predictable sources of funds.  Other
funding sources, however, such as deposit inflows from new deposits, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.
 
 During
the nine months ended September 30, 2010, cash and cash equivalents decreased
$15.5 million from $37.1 million as of December 31, 2009, to $21.6 million as of
September 30, 2010. Cash used in operating activities of $32.0 million, combined
with cash used in financing activities of $7.2 million, was more than cash from
investing activities of $23.7 million.  Primary sources of cash were
from sales of loans held for sale of $180.4 million, proceeds from maturities
and payments of available-for-sale securities of $68.1 million, proceeds from
sales of securities available-for-sale of $41.0 million, proceeds from FHLB
advances of $33.1 million, net increases in deposits of $14.9 million, net
decreases in loans of $12.9 million, proceeds from sale of portfolio loans of
$7.0 million and proceeds from other borrowings of $5.0
million.  Primary uses of cash included loans originated for sale
$220.5 million, purchases of available-for-sale securities of $104.6 million,
repayments of FHLB borrowings of $48.0 million and repayments of other
borrowings of $12.2 million.
 
 47
 
 During
2009, cash and cash equivalents increased $16.0 million from $34.1 million as of
December 31, 2008, to $50.1 million as of September 30, 2009.  Cash
from investing activities of $46.7 million and cash from operating activities of
$609,000 was more than cash used in financing activities of $31.4
million.  Primary sources of cash were net decreases in loans of $55.0
million, proceeds from sales of securities available-for-sale of $47.3 million,
proceeds from maturities and payments of available-for-sale securities of $40.6
million, FHLB borrowings of $20.0 million and proceeds from sale of portfolio
loans of $16.0 million. Primary uses of cash included purchases of
available-for-sale securities of $113.7 million and net decreases in deposit
accounts of $24.4 million. The additional borrowings from the FHLB as well as
some cash were used to replace maturing FHLB debt of $27.2 million.
 
 ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 The
Company is subject to interest rate risk to the extent that its interest-bearing
liabilities, primarily deposits and FHLB advances, re-price more rapidly or at
different rates than its interest-earning assets. In order to minimize the
potential for adverse effects of material prolonged increases or decreases in
interest rates on our results of operations, management has adopted an asset and
liability management policy.  The Board of Directors sets the asset
and liability policy for the Company, which is implemented by the
Asset/Liability Committee (“Committee”).
 
 The
purpose of this Committee is to communicate, coordinate and control
asset/liability management consistent with our business plan and board approved
policies.  The Committee establishes and monitors the volume and mix
of assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs.  The objectives are to
manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk, and profitability goals.
 
 The
Committee generally meets at least monthly to review, among other things,
economic conditions and interest rate outlook, current and projected liquidity
needs and capital position, anticipated changes in the volume and mix of assets
and liabilities and interest rate exposure limits versus current projections
pursuant to market value of portfolio equity analysis and income
simulations.  The Committee utilizes two models, a Net Portfolio Value
model and a Net Interest Income Sensitivity model, as discussed below. The
Committee recommends appropriate strategy changes based on this
review.  The Committee is responsible for reviewing and reporting the
effects of the policy implementations and strategies to the Board of Directors
at least quarterly.
 
 A key
element of Atlantic Coast Federal Corporation’s asset/liability plan is to
protect net earnings by managing the maturity or re-pricing mismatch between its
interest-earning assets and rate-sensitive liabilities.  Historically,
the Company has sought to reduce exposure to its earnings through the use of
adjustable rate loans and through the sale of certain fixed rate loans in the
secondary market, and by extending funding maturities through the use of FHLB
advances.
 
 Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off-balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  Given
the current relatively low level of market interest rates, an NPV calculation
for an interest rate decrease of greater than 100 basis points has not been
prepared.  A basis point equals one-hundredth of one percent, and 100
basis points equals one percent.  An increase in interest rates from
3% to 4% would mean, for example, a 100 basis point increase in the “Change in
Interest Rates” column below.
 
 Net Interest
Income Sensitivity.Net interest income is the difference
between the interest income we earn on our interest-earning assets, such as
loans and securities, and the interest we pay on our interest-bearing
liabilities, such as deposits and borrowings.  In our model, we
estimate what our net interest income would be for a rolling forward
twelve-month period using historical data for assumptions such as loan
prepayment rates and deposit decay rates, the current term structure for
interest rates, and current deposit and loan offering rates. We then calculate
what the net interest income would be for the same period in the event of an
instantaneous 100, 200 and 300 basis point increase or a 100 basis point
decrease in market interest rates.
  48
 
 At September 30, 2010NPV as a Percentage ofPresent Value of Assets (3)
                    
                    
                    Net Interest IncomeChange in
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Increase (Decrease) inInterest Rates
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Increase
                    
                    
                    Estimated
                    
                    
                    Estimated Net Interest(basis points)
                    
                    Estimated
                    
                    
                    Estimated (Decrease) in
      NPV
                    
                    
                    
                    
                    
                    (Decrease)
                    
                    
                    Net Interest
                    
                    
                    Income(1)
                    
                    NPV (2)
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    NPV Ratio (4)
                    
                    
                    (basis points)
                    
                    
                    Income
                    
                    
                    Amount
                    
                    
                    Percent(Dollars
      in Thousands)+300
                    
                    $
                    55,023
                    
                    
                    $
                    (3,645
                    )
                    
                    
                    (6.2
                    )%
                    
                    
                    6.19
                    %
                    
                    
                    (12
                    )
                    
                    $
                    24,480
                    
                    
                    $
                    (482
                    )
                    
                    
                    (1.93
                    )%+200
                    
                    
                    61,375
                    
                    
                    
                    2,707
                    
                    
                    
                    4.6
                    %
                    
                    
                    6.78
                    %
                    
                    
                    47
                    
                    
                    
                    24,760
                    
                    
                    
                    (202
                    )
                    
                    
                    (0.81
                    )%+100
                    
                    
                    63,544
                    
                    
                    
                    4,876
                    
                    
                    
                    8.3
                    %
                    
                    
                    6.90
                    %
                    
                    
                    60
                    
                    
                    
                    24,862
                    
                    
                    
                    (100
                    )
                    
                    
                    (0.40
                    )%0
                    
                    
                    58,668
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6.31
                    %
                    
                    
                    -
                    
                    
                    
                    24,962
                    
                    
                    
                    -
                    
                    
                    
                    --100
                    
                    
                    52,028
                    
                    
                    
                    (6,640
                    )
                    
                    
                    (11.3
                    )%
                    
                    
                    5.56
                    %
                    
                    
                    (75
                    )
                    
                    
                    24,817
                    
                    
                    
                    (145
                    )
                    
                    
                    (0.58
                    )%
 
 (1)
              Assumes
      an instantaneous uniform change in interest rates at all
      maturities.
 (2)
              NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet
contracts.
 (3)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.
 (4)
              NPV
      Ratio represents NPV divided by the present value of
    assets.
  In
managing its asset/liability mix the Company, depending on the relationship
between long and short-term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities.  Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or re-pricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch.  Management believes that Atlantic Coast Federal
Corporation’s level of interest rate risk is acceptable under this
approach.  In evaluating Atlantic Coast Federal Corporation’s exposure
to interest rate movements, certain shortcomings inherent in the NII/NPV
methodology must be considered.  For example, although certain assets
and liabilities may have similar maturities or re-pricing periods, they may
react in different degrees to changes in market interest rates.  Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in interest rates.  Additionally, certain
assets, such as adjustable-rate mortgages, have features that restrict changes
in interest rates on a short-term basis and over the life of the
asset.  Further, in the event of a significant change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in our NII/NPV methodology.  Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.  Atlantic Coast Federal Corporation considers all of
these factors in monitoring its exposure to interest rate risk.
 
 ITEM
4.   CONTROLS AND PROCEDURES
 
 (a) Evaluation of disclosure
controls and procedures. As of the end of the period covered by this
Quarterly Report on Form 10-Q, the Registrant’s principal executive officer and
principal financial officer have concluded that the Registrant’s disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Securities and Exchange Act of 1934 (the “Exchange Act”)) are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and
forms.
 
 (b) Changes in internal
controls. There were no changes in the Registrant’s internal control over
financial reporting (as defined in Rule 13a-15(f)) that occurred during the
quarter ended September 30, 2010, that have materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  49
 
 ATLANTIC
COAST FEDERAL CORPORATION
 
 FORM
10-Q
 
 September
30, 2010
 
 Part
II - Other Information
  Item
      1.
              Legal
      Proceedings
 The
Company is involved in various legal actions and claims arising in the normal
course of business.  In the opinion of management, these legal actions
and claims are not expected to have a material adverse impact on the Company’s
financial condition and results of operations.
 
 Item
      1A.
              Risk
      Factors
  We
have been advised by the Office of Thrift Supervision (“OTS”) that we will be
required toenter into a supervisory agreement with the agency, which will limit
our operations and mayadversely affect our financial
performance.
  Following
our most recent examination, we were informed by the OTS that it would
requireAtlantic Coast Bank and Atlantic Coast Federal Corporation to enter into
supervisory agreementswith the agency containing provisions substantially
similar to those contained in the existing memorandum of understanding in
addition to other operating restrictions as noted below. The Bank was also
informed that in a separate agreement, the Office of Thrift Supervision will
impose an Individual Minimum Capital Requirement for Atlantic Coast Bank that
will require it to achieve and maintain levels of capital greater than those
required for a federal savings bank to be classified as
well-capitalized.  The Company anticipates, based upon discussions
with the Office of Thrift Supervision, that the Individual Minimum Capital
Requirement will require that Atlantic Coast Bank reach a core capital level of
up to 7% by March 31, 2011 or June 30, 2011 and a risk based capital level of up
to 11% by March 31, 2011 or June 30, 2011and maintain these
levels until the Office of Thrift Supervision removes the requirement. Until the
Individual Minimum Capital Requirement is finalized, the Bank will not know with
certainty the precise capital levels we will be required to reach and maintain
or the exact date when the Bank will need to meet such
requirements.
  Until the
supervisory agreements and Individual Minimum Capital Requirement are finalized,
which the Company anticipates will be before the end of 2010, the Company will
not know with certainty the scope of the requirements and restrictions that will
be placed upon Atlantic Coast Federal Corporation and Atlantic Coast
Bank.  In the event the Company and Bank are in material
non-compliance with the terms of the supervisory agreements and Individual
Minimum Capital Requirement, the Office of Thrift Supervision has the authority
to subject us to the terms of a more restrictive enforcement order such as a
cease and desist order, to impose civil money penalties on the Company and Bank
and our directors and officers, and to remove directors and officers from their
positions with Atlantic Coast Federal Corporation and Atlantic Coast
Bank.
  The
Office of Thrift Supervision has informed us that the supervisory agreements
will subject us to the following additional operating
restrictions:  (1) Atlantic Coast Federal Corporation and Atlantic
Coast Bank may not increase their assets in any quarter greater than the amount
of interest credited on its deposit accounts without prior written approval from
the Office of Thrift Supervision; (2) Atlantic Coast Federal Corporation and
Atlantic Coast Bank may not add any new director to their Boards of Directors,
employ any new senior executive officer or change the duties of any senior
executive officer without providing 30 days advance written notice to the Office
of Thrift Supervision; (3) Atlantic Coast Federal Corporation and Atlantic Coast
Bank may not make any payment or enter into an agreement to make a payment, to
an officer or employee that is contingent upon their termination of service,
subject to certain exceptions; (4) prior written approval of the Office of
Thrift Supervision must be obtained before the payment of any dividend or other
capital distribution by Atlantic Coast Federal Corporation or Atlantic Coast
Bank; (5) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not
enter into, renew or revise any contractual arrangement related to compensation
or benefits with any director or officer unless they receive prior approval of
the Office of Thrift Supervision; (6) Atlantic Coast Federal Corporation and
Atlantic Coast Bank may not enter into any third party contracts outside of the
normal course of business without providing 30 days advance written notice to
the Office of Thrift Supervision and receiving a written notice of
non-objection; (7) Atlantic Coast Federal Corporation and Atlantic Coast Bank
are not eligible to have applications or notices processed by the Office of
Thrift Supervision on an expedited basis, which would make executing future
mergers and acquisitions more difficult; (8) Atlantic Coast Federal Corporation
and Atlantic Coast Bank may not engage in transactions with any affiliate or
subsidiary without providing 30 days advance written notice to the Office of
Thrift Supervision and receiving a written notice of non-objection; and (9)
Atlantic Coast Bank may not increase the level of brokered deposits, excluding
interest credited, without the prior written approval of the Office of Thrift
Supervision.
  50
 
 We
have experienced net losses for the nine months of 2010 and each of the last two
fiscal years and we may not return to profitability in the near
future.
 
 We have
experienced net losses of $9.0 million for the first nine months of 2010 and
$29.3 million and $2.8 million for the years ended December 31, 2009 and 2008,
respectively. The losses have been primarily related to non-performing assets,
which necessitated a provision for loan losses of $24.9 million for the year
ended December 31, 2009, compared to a provision of $13.9 million for the year
ended December 31, 2008. We charged off $21.7 million of loans during 2009 as
compared to $9.8 million during 2008. Non-accrual loans (generally loans 90 days
or more past due in principal or interest payments) decreased to $21.6 million,
or 3.67% of total loans at September 30, 2010, compared to 25.5 million, or
3.43% of total loans at December 31, 2008. We experienced other than temporary
impairment losses in the investment portfolio of $4.5 million and $81,000 for
the year ended December 31, 2009 and for the first nine months of 2010,
respectively. In addition, during the year ended December 31, 2009, management
deemed it appropriate to write off our entire goodwill balance of $2.8 million,
and establish a valuation allowance of $16.2 million, or 100% of our net
deferred tax asset. As a result of these factors and other conditions such as
weakness in our local economy, we may not be able to generate sustainable net
income or achieve profitability in the near future.
 
 Our
memorandum of understanding with the Office of Thrift Supervision imposes
certain limits on our operations and could affect our liquidity.
 
 In August
2009, Atlantic Coast Bank entered into a memorandum of understanding with the
Office of Thrift Supervision addressing certain areas of our operations. Under
the memorandum we are required to (1) utilize a four quarter roll forward budget
to address, among other things, capital adequacy, appropriate allowances for
loan and lease losses and a liquidity analysis, (2) ensure that the book value
of our bank owned life insurance does not exceed 25% of our total capital, (3)
review and enhance our liquidity policy, (4) develop a written plan to mitigate
any risks to our capital and liquidity from our repurchase agreements, (5)
reduce our brokered deposits to not more than $52.5 million by June 30, 2011,
(6) obtain Office of Thrift Supervision approval for the payment of any
dividends, (7) develop a plan to enhance our compliance management program
(including Bank Secrecy Act and anti-money laundering programs) and (8) correct
all deficiencies and weaknesses identified in our 2009 Report of Examination.
The requirement to reduce the level of brokered deposits may affect our ability
to have sufficient liquid assets for our operations. It may also cause us to pay
higher rates on retail deposits to replace our use of brokered deposits. We may
not increase our level of brokered deposits above the limit permitted by the
Office of Thrift Supervision without the prior approval of the agency. We
believe we will be able to reduce the level of our brokered deposits from $61.3
million as of September 30, 2010 to the level required by the memorandum of
understanding within the required time period. The restriction on the payment of
dividends without Office of Thrift Supervision approval will affect our ability
to pay dividends in the future unless we have sufficient assets at Atlantic
Coast Financial Corporation to pay dividends without reliance on dividends from
Atlantic Coast Bank. We have addressed all the corrective actions mandated in
the memorandum and we believe we are in compliance with the requirements of the
memorandum. In the event that Atlantic Coast Bank should become in material
non-compliance with the memorandum of understanding, the Office of Thrift
Supervision has the authority to subject us to a more formal enforcement action,
such as a cease and desist order.
 
 51
  Financial reform legislation recently
enacted by Congress will, among other things, eliminate the Office of Thrift
Supervision, tighten capital standards, create a new Consumer
Financial  Protection Bureau and result in new laws and regulations
that are expected to increase our costs of operations.
 
 Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”), which will significantly change the current bank
regulatory structure and affect the lending, investment, trading and operating
activities of financial institutions and their holding companies. The Dodd-Frank
Act will eliminate our current primary federal regulator, the Office of Thrift
Supervision, and require Atlantic Coast Bank to be regulated by the Office of
the Comptroller of the Currency (the primary federal regulator for national
banks). The Dodd-Frank Act also authorizes the Board of Governors of the Federal
Reserve System to supervise and regulate all savings and loan holding companies
like Atlantic Coast Financial Corporation, in addition to bank holding companies
which it currently regulates. As a result, the Federal Reserve Board’s current
regulations applicable to bank holding companies, including holding company
capital requirements, will apply to savings and loan holding companies like
Atlantic Coast Financial Corporation. These capital requirements are
substantially similar to the capital requirements currently applicable to
Atlantic Coast Bank, as described in “Supervision and Regulation— Federal
Banking Regulation—Capital Requirements.” The Dodd-Frank Act also requires the
Federal Reserve Board to set minimum capital levels for bank holding companies
that are as stringent as those required for the insured depository subsidiaries,
and the components of Tier 1 capital would be restricted to capital instruments
that are currently considered to be Tier 1 capital for insured depository
institutions. The legislation also establishes a floor for capital of insured
depository institutions that cannot be lower than the standards in effect today,
and directs the federal banking regulators to implement new leverage and capital
requirements within 18 months that take into account off-balance sheet
activities and other risks, including risks relating to securitized products and
derivatives. The Dodd-Frank Act also creates a new Consumer Financial Protection
Bureau with broad powers to supervise and enforce consumer protection laws. The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as Atlantic Coast Bank, including the authority to prohibit
“unfair, deceptive or abusive” acts and practices. The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and savings
institutions with $10 billion or less in assets will be examined by their
applicable bank regulators. The new legislation also weakens the federal
preemption available for national banks and federal savings associations, and
gives state attorney generals the ability to enforce applicable federal consumer
protection laws.
 
 The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments. Assessments will now be based on the average consolidated
total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increases the maximum amount of deposit
insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2009, and non-interest bearing transaction
accounts have unlimited deposit insurance through December 31, 2013. Lastly, the
Dodd-Frank Act will increase stockholder influence over boards of directors by
requiring companies to give stockholders a non-binding vote on executive
compensation and so-called “golden parachute” payments, and by authorizing the
Securities and Exchange Commission to promulgate rules that would allow
stockholders to nominate their own candidates using a company’s proxy materials.
The legislation also directs the Federal Reserve Board to promulgate rules
prohibiting excessive compensation paid to bank holding company executives,
regardless of whether the company is publicly traded or not.
  52
  It is
difficult to predict at this time what effect the new legislation and
implementing regulations will have on community banks with regards to the
lending and credit practices of such banks. Moreover, many of the provisions of
the Dodd-Frank Act will not take effect for at least a year, and the legislation
requires various federal agencies to promulgate numerous and extensive
implementing regulations over the next several years. Although the substance and
scope of these regulations cannot be determined at this time, it is expected
that the legislation and implementing regulations, particularly those relating
to the new Consumer Financial Protection Bureau, will increase our operating and
compliance costs.
 
 Our Executive Chairman of the Board
also serves as the president and chief executive officer of another financial
institution and such responsibilities could affect his ability to devote
sufficient time to his position with Atlantic Coast Financial
Corporation.
 
 Our
Executive Chairman of the Board, Jay S. Sidhu, also serves as the president and
chief executive officer and a director of New Century Bank, located in
Phoenixville, Pennsylvania. As the president and chief executive officer of New
Century Bank, Mr. Sidhu is a full-time employee. Mr. Sidhu’s duties at New
Century Bank have the potential to cause him to devote less of his time to his
responsibilities at Atlantic Coast Financial Corporation, thereby potentially
reducing his effectiveness in overseeing our strategic plan. A reduction in the
time that Mr. Sidhu may devote to our operations could adversely affect our
ability to successfully implement our strategic plan and our results of
operations.
 
 Item
      2.
              Unregistered Sales of
      Equity Securities and Use of
Proceeds
 None.   The
Company suspended its stock repurchase program in March 2009.
 
 Item
      3.
              Defaults Upon Senior
      Securities
 None
 
 Item
      4.
              Removed
      and reserved
 
 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
  53
  ATLANTIC
COAST FEDERAL CORPORATION
 
 FORM
10-Q
 
 September
30, 2010
 
 Part
II - Other Information
 
 Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 ATLANTIC
      COAST FEDERAL CORPORATION(Registrant)Date:  November
      15, 2010
                /s/ G. Thomas
      FranklandG.
      Thomas Frankland, Interim President and
ChiefExecutive
      OfficerDate:  November
      15, 2010
                /s/ Thomas B. Wagers,
Sr.Thomas
      B. Wagers, Sr. Senior Vice–President andChief
      Financial Officer
  54