**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





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





**OR**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 000-50962**





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





Registrant's
      telephone number, including area code (800) 342-2824





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES **x** NO **o**





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





Large
      Accelerated Filer **o**  Accelerated
      Filer
**o**  Non-Accelerated
      Filer
**x**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   YES
      **o** NO
**x**




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





Class
            Outstanding
                at November 10, 2006Common
                Stock, $0.01 Par Value
            13,815,740





**ATLANTIC
      COAST FEDERAL CORPORATION**





**Form
      10-Q Quarterly Report**





**Table
      of Contents**





**PART
      I. FINANCIAL INFORMATION**





Page
                NumberItem
                1.
            
            Financial
                Statements
            
            2Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            13Item
                3.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            31Item
                4.
            
            Controls
                and Procedures
            
            32**PART
                II. OTHER INFORMATION**Item
                1.
            
            Legal
                Proceedings
            
            33Item
                1A
            
            Risk
                Factors
            
            33Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            33Item
                3.
            
            Defaults
                Upon Senior Securities
            
            33Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            33Item
                5.
            
            Other
                Information
            
            33Item
                6.
            
            Exhibits
            
            33Form
                10-Q
            
            Signature
                Page
            
            34Ex-31.1
            
            Section
                302 Certification of CEOEx-31.2
            
            Section
                302 Certification of CFOEx-32
            
            Section
                906 Certification of CEO and CFO










**PART
      I: FINANCIAL INFORMATION**





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





**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


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


2006
              
              2005**ASSETS**Cash
                  and due from financial institutions
              
              $
              8,242,596
              
              $
              22,041,346Short-term
                  interest bearing deposits
              
              
              21,596,654
              
              
              15,917,657Total
                  cash and cash equivalents
              
              
              29,839,250
              
              
              37,959,003Other
                  interest bearing deposits in other financial institutions
              
              
              1,500,000
              
              
              1,800,000Securities
                  available for sale
              
              
              77,901,462
              
              
              71,964,998Real
                  estate mortgages held for sale
              
              
              5,463,105
              
              
              99,853Loans,
                  net of allowance for loan losses of $4,497,952 at September 30,2006
                  and $4,586,736 at December 31, 2005
              
              
              623,627,925
              
              
              580,440,609Federal
                  Home Loan Bank stock
              
              
              7,722,700
              
              
              7,074,400Accrued
                  interest receivable
              
              
              3,463,958
              
              
              2,722,398Land,
                  premises and equipment
              
              
              16,000,274
              
              
              14,485,195Bank
                  owned life insurance
              
              
              21,154,902
              
              
              20,526,254Other
                  real estate owned
              
              
              188,270
              
              
              310,000Goodwill
              
              
              2,661,190
              
              
              2,661,190Other
                  assets
              
              
              3,607,495
              
              
              3,804,603Total
                  assets
              
              $
              793,130,531
              
              $
              743,848,503**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**DepositsNon-interest-bearing
                  demand
              
              $
              41,746,775
              
              $
              38,454,438Interest-bearing
                  demand
              
              
              49,430,947
              
              
              79,738,995Savings
                  and money market
              
              
              136,910,220
              
              
              100,259,277Time
              
              
              317,961,720
              
              
              297,868,790Total
                  deposits
              
              
              546,049,662
              
              
              516,321,500Securities
                  sold under agreements to repurchase
              
              
              12,000,000
              
              
              -Federal
                  Home Loan Bank advances
              
              
              139,000,000
              
              
              129,000,000Accrued
                  expenses and other liabilities
              
              
              5,078,580
              
              
              5,610,335Total
                  liabilities
              
              
              702,128,242
              
              
              650,931,835Commitments
                  and contingencies
              
              
              -
              
              
              -Preferred
                  stock: $0.01 par value; 2,000,000 shares authorizednone
                  issued
              
              
              -
              
              
              -Common
                  stock: $0.01 par value; 18,000,000 shares authorized;shares
                  issued: 14,813,469 at September 30, 2006 and 14,805,969 atDecember
                  31, 2005; shares outstanding: 13,808,313 at September 30, 2006and
                  14,141,350 at December 31, 2005
              
              
              148,135
              
              
              148,060Additional
                  paid in capital
              
              
              57,740,143
              
              
              56,876,105Unearned
                  employee stock ownership plan (ESOP) shares of 337,502at
                  September 30, 2006 and 372,416 at December 31, 2005
              
              
              (3,375,020
              )
              
              (3,724,160
              )Retained
                  earnings
              
              
              51,948,380
              
              
              49,193,384Accumulated
                  other comprehensive income (loss)
              
              
              42,422
              
              
              26,193Treasury
                  stock, at cost, 1,005,156 shares at September 30, 2006and
                  664,619 shares at December 31, 2005
              
              
              (15,501,771
              )
              
              (9,602,914
              )Total
                  stockholders' equity
              
              
              91,002,289
              
              
              92,916,668Total
                  liabilities and stockholders' equity
              
              $
              793,130,531
              
              $
              743,848,503


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


2





**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(unaudited)**


Three
                  Months
              
              Nine
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2006
              
              2005
              
              2006
              
              2005Interest
                  and dividend incomeLoans,
                  including fees
              
              $
              10,612,669
              
              $
              8,330,514
              
              $
              30,015,163
              
              $
              24,532,289Securities
                  and interest-bearing depositsin
                  other financial institutions
              
              
              1,393,752
              
              
              1,076,299
              
              
              3,662,047
              
              
              2,464,245Securities
                  purchased under agreements to resell
              
              
              -
              
              
              -
              
              
              -
              
              
              72,412Total
                  interest and dividend income
              
              
              12,006,421
              
              
              9,406,813
              
              
              33,677,210
              
              
              27,068,946Interest
                  expenseDeposits
              
              
              4,927,177
              
              
              3,227,839
              
              
              13,028,001
              
              
              8,547,046Federal
                  Home Loan Bank advances
              
              
              1,333,146
              
              
              1,355,530
              
              
              3,952,697
              
              
              3,636,035Securities
                  sold under agreements to repurchase
              
              
              138,591
              
              
              -
              
              
              333,157
              
              
              -Total
                  interest expense
              
              
              6,398,914
              
              
              4,583,369
              
              
              17,313,855
              
              
              12,183,081Net
                  interest income
              
              
              5,607,507
              
              
              4,823,444
              
              
              16,363,355
              
              
              14,885,865Provision
                  (credit) for loan losses
              
              
              (97,588
              )
              
              442,095
              
              
              182,851
              
              
              1,542,384Net
                  interest income after provision for loan losses
              
              
              5,705,095
              
              
              4,381,349
              
              
              16,180,504
              
              
              13,343,481Noninterest
                  incomeService
                  charges and fees
              
              
              1,516,394
              
              
              1,640,849
              
              
              4,360,083
              
              
              3,769,943Net
                  gain (loss) on available for sale securities
              
              
              -
              
              
              (211
              )
              
              (165,495
              )
              
              (211
              )Gain
                  on sale of real estate mortgages held for sale
              
              
              35,299
              
              
              49,161
              
              
              51,203
              
              
              113,795Gain
                  (loss) on sale of foreclosed assets
              
              
              (8,735
              )
              
              (1,221
              )
              
              (9,936
              )
              
              40,505Commission
                  income
              
              
              90,007
              
              
              126,176
              
              
              238,919
              
              
              328,416Interchange
                  fees
              
              
              193,403
              
              
              187,950
              
              
              587,593
              
              
              561,186Bank
                  owned life insurance earnings
              
              
              214,134
              
              
              187,500
              
              
              628,648
              
              
              391,541Other
              
              
              53,537
              
              
              68,610
              
              
              229,295
              
              
              135,2402,094,039
              
              
              2,258,814
              
              
              5,920,310
              
              
              5,340,415Noninterest
                  expenseCompensation
                  and benefits
              
              
              2,804,812
              
              
              2,402,174
              
              
              8,049,037
              
              
              6,985,955Occupancy
                  and equipment
              
              
              611,751
              
              
              459,640
              
              
              1,609,165
              
              
              1,267,672Data
                  processing
              
              
              328,717
              
              
              436,648
              
              
              1,134,302
              
              
              978,133Advertising
              
              
              200,645
              
              
              166,162
              
              
              631,134
              
              
              445,723Outside
                  professional services
              
              
              367,145
              
              
              526,903
              
              
              1,316,868
              
              
              1,775,286Interchange
                  charges
              
              
              91,936
              
              
              161,313
              
              
              419,981
              
              
              462,709Collection
                  expense and repossessed asset losses
              
              
              54,854
              
              
              83,925
              
              
              218,213
              
              
              246,733Telephone
              
              
              116,000
              
              
              162,541
              
              
              358,857
              
              
              411,762Other
              
              
              827,471
              
              
              714,055
              
              
              2,154,300
              
              
              2,023,4325,403,331
              
              
              5,113,361
              
              
              15,891,857
              
              
              14,597,405Income
                  before income tax expense
              
              
              2,395,803
              
              
              1,526,802
              
              
              6,208,957
              
              
              4,086,491Income
                  tax expense(benefit)
              
              
              759,344
              
              
              (387,683
              )
              
              1,972,905
              
              
              487,151Net
                  income
              
              $
              1,636,459
              
              $
              1,914,485
              
              $
              4,236,052
              
              $
              3,599,340Earnings
                  per common share:Basic
              
              $
              0.12
              
              $
              0.14
              
              $
              0.31
              
              $
              0.25Diluted
              
              $
              0.12
              
              $
              0.14
              
              $
              0.31
              
              $
              0.25Dividends
                  declared per common share
              
              $
              0.11
              
              $
              0.07
              
              $
              0.30
              
              $
              0.18





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


3





**ATLANTIC
      COAST FEDERAL CORPORATION**


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


**ACCUMULATED****ADDITIONAL**
              
              **UNEARNED**
              
              
              
              **OTHER****COMMON**
              
              **PAID
                  IN**
              
              **ESOP**
              
              **RETAINED**
              
              **COMPREHENSIVE**
              
              **TREASURY**
              
              **TOTAL****STOCK**
              
              **CAPITAL**
              
              **STOCK**
              
              **EARNINGS**
              
              **INCOME(LOSS)**
              
              **STOCK**
              
              **EQUITY**For
                  the nine months ended September 30, 2006Balance
                  at January 1, 2006
              
              $
              148,060
              
              $
              56,876,105
              
              $
              (3,724,160
              )
              $
              49,193,384
              
              $
              26,193
              
              $
              (9,602,914
              )
              $
              92,916,668ESOP
                  shares earned, 34,914 shares
              
              
              
              
              
              191,093
              
              
              349,140
              
              
              
              
              
              
              
              
              
              
              
              540,233Management
                  restricted stock issued, 7,500 shares
              
              
              75
              
              
              (75
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Management
                  restricted stock expense
              
              
              
              
              
              444,343
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              444,343Stock
                  options expense
              
              
              
              
              
              228,677
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              228,677Dividends
                  declared ( $.30 per share)
              
              
              
              
              
              
              
              
              
              
              
              (1,481,056
              )
              
              
              
              
              
              
              
              (1,481,056
              )Treasury
                  stock purchased at cost
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,898,857
              )
              
              (5,898,857
              )Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              4,236,052
              
              
              
              
              
              
              
              
              4,236,052Other
                  comprehensive income(loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16,229
              
              
              
              
              
              16,229Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,252,281Balance
                  at September 30, 2006 (unaudited)
              
              $
              148,135
              
              $
              57,740,143
              
              $
              (3,375,020
              )
              $
              51,948,380
              
              $
              42,422
              
              $
              (15,501,771
              )
              $
              91,002,289For
                  the nine months ended September 30, 2005Balance
                  at January 1, 2005
              
              $
              145,475
              
              $
              56,332,850
              
              $
              (4,189,680
              )
              $
              46,412,522
              
              $
              (904
              )
              $
              -
              
              $
              98,700,263ESOP
                  shares earned, 34,914 shares
              
              
              
              
              
              98,323
              
              
              349,140
              
              
              
              
              
              
              
              
              
              
              
              447,463Management
                  restricted stock granted
              
              
              2,585
              
              
              (2,585
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Management
                  restricted stock expense
              
              
              
              
              
              143,619
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              143,619Stock
                  options expense
              
              
              
              
              
              28,966
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              28,966Dividend
                  declared ($.18 per share)
              
              
              
              
              
              
              
              
              
              
              
              (1,493,850
              )
              
              
              
              
              
              
              
              (1,493,850
              )Treasury
                  stock purchased at cost
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,048,025
              )
              
              (4,048,025
              )Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              3,599,340
              
              
              
              
              
              
              
              
              3,599,340Other
                  comprehensive income(loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              114,305
              
              
              
              
              
              114,305Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,713,645Balance
                  at September 30, 2005 (unaudited)
              
              $
              148,060
              
              $
              56,601,173
              
              $
              (3,840,540
              )
              $
              48,518,012
              
              $
              113,401
              
              $
              (4,048,025
              )
              $
              97,492,081





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


4


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**


Nine
                  MonthsEnded
                  September 30,2006
              
              2005Cash
                  flows from operating activitiesNet
                  income
              
              $
              4,236,052
              
              $
              3,599,340Adjustments
                  to reconcile net income toto
                  net cash from operating activities:Provision
                  for loan losses
              
              
              182,851
              
              
              1,542,384Net
                  loss on available for sale securities
              
              
              165,495
              
              
              211Gain
                  on sale of real estate mortgages held for sale
              
              
              (51,203
              )
              
              (113,795
              )Loans
                  originated for sale
              
              
              (14,948,783
              )
              
              (9,164,089
              )Proceeds
                  from loan sales
              
              
              9,636,734
              
              
              9,252,029(Gain)
                  loss on sale of other real estate owned
              
              
              9,936
              
              
              (40,505
              )Loss
                  on disposal of equipment
              
              
              84,484
              
              
              -ESOP
                  compensation expense
              
              
              540,233
              
              
              447,463Share-based
                  compensation expense
              
              
              673,020
              
              
              172,585Net
                  depreciation and amortization
              
              
              1,400,236
              
              
              1,391,664Net
                  change in accrued interest receivable
              
              
              (741,560
              )
              
              (379,063
              )Increase
                  in cash surrender value ofbank
                  owned life insurance
              
              
              (628,648
              )
              
              (391,541
              )Net
                  change in other assets
              
              
              159,081
              
              
              (1,217,170
              )Net
                  change in accrued expensesand
                  other liabilities
              
              
              (635,635
              )
              
              1,174,638Net
                  cash from operating activites
              
              
              82,293
              
              
              6,274,151Cash
                  flows from investing activitiesNet
                  change in securities purchased underagreements
                  to resell
              
              
              -
              
              
              11,800,000Proceeds
                  from maturities and paymentsof
                  securites available for sale
              
              
              11,749,559
              
              
              23,915,634Proceeds
                  from the sales of securitiesavailable
                  for sale
              
              
              15,934,506
              
              
              1,210,000Purchase
                  of securities available for sale
              
              
              (33,801,249
              )
              
              (43,678,308
              )Loans
                  purchased
              
              
              (22,711,364
              )
              
              (27,279,491
              )Net
                  change in loans
              
              
              (21,541,749
              )
              
              (14,771,453
              )Expenditures
                  on premises and equipment
              
              
              (2,448,696
              )
              
              (4,152,035
              )Proceeds
                  from the sale of other real estate owned
              
              
              513,118
              
              
              581,184Net
                  (purchase) redemption of FHLB stock
              
              
              (648,300
              )
              
              (1,563,000
              )Purchase
                  of bank owned life insurance
              
              
              -
              
              
              (15,000,000
              )Net
                  change in other investments
              
              
              300,000
              
              
              (900,000
              )Net
                  cash from investing activities
              
              
              (52,654,175
              )
              
              (69,837,469
              )


(Continued)


5


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**


Nine
                  MonthsEnded
                  September 30,2006
              
              2005Cash
                  flows from financing activitiesNet
                  increase in deposits
              
              $
              29,728,162
              
              $
              66,464,922FHLB
                  advances
              
              
              20,000,000
              
              
              30,000,000Net
                  change in securities sold underagreements
                  to repurchase
              
              
              12,000,000
              
              
              -Repayment
                  of FHLB advances
              
              
              (10,000,000
              )
              
              (1,314,286
              )Treasury
                  stock repurchased
              
              
              (5,898,857
              )
              
              (4,048,025
              )Dividends
                  paid
              
              
              (1,377,176
              )
              
              (1,117,714
              )Net
                  cash from financing activities
              
              
              44,452,129
              
              
              89,984,897Net
                  change in cash and cash equivalents
              
              
              (8,119,753
              )
              
              26,421,579Cash
                  and equivalents beginning of period
              
              
              37,959,003
              
              
              25,707,885Cash
                  and equivalents at end of period
              
              $
              29,839,250
              
              $
              52,129,464Supplemental
                  information:Interest
                  paid
              
              $
              17,209,215
              
              $
              11,910,639Income
                  taxes paid
              
              
              3,151,000
              
              
              942,700Supplemental
                  noncash disclosures:Loans
                  transferred to other real estate
              
              $
              401,323
              
              $
              544,000Other
                  real estate exchanged for loans
              
              
              -





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


6


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





**NOTE
      1. BASIS OF PRESENTATION**





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





The
      unaudited consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and with instructions for Form 10-Q.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. In the opinion of management, all adjustments
      (all of which are normal and recurring in nature) considered necessary for
      a
      fair presentation have been included. Operating results for the three and nine
      month periods ended September 30, 2006 are not necessarily indicative of the
      results that may be expected for the year ending December 31, 2006. The
      2005 Atlantic Coast Federal Corporation consolidated financial statements,
      as
      presented in the Company’s Form 10-K, should be read in conjunction with these
      statements.





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





**NOTE
      2. USE OF ESTIMATES**





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





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





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


7


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





**NOTE
      3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS (Continued)**





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





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





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS
      157”), which addresses how companies should measure fair value when they are
      required to use a fair value measure for recognition or disclosure purposes
      under generally accepted accounting principles (“GAAP”). FAS 157, which is
      effective for fiscal years beginning after November 15, 2007, does not require
      new fair value measurements, however it does establish a common definition
      of
      fair value and expands disclosures about fair value measurements. The Company
      is
      presently assessing the impact FAS 157 may have on its financial statements,
      but
      no determination has been made at this time.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans” (“FAS 158”). This accounting
      standard amends SFAS No. 87, “ Employers’ Accounting for Pensions,” SFAS No. 88,
“Employer Accounting for Settlements and Curtailments of Defined Benefit Pension
      Plans and for Termination Benefits,” SFAS No. 106, “Employers’ Accounting for
      Postretirement Benefits Other than Pensions,” and SFAS No. 132(Revised),
“Employer Disclosures about Pensions and Other Postretirement Benefits.” Under
      FAS 158, companies must recognize the over funded or under funded status of
      single-employer funded defined benefit plans as an asset or liability in its
      statement of financial condition. In addition, FAS 158 requires changes in
      the
      funded status be recognized as part of comprehensive income as of the date
      of
      the Company’s year-end statement of financial condition. Relative to the
      requirement to recognize the funded status of a benefit plan, and the related
      disclosure requirements, the effective date of FAS 158 is fiscal years ending
      after December 15, 2006 for companies with publicly traded equity securities.
      The requirement for measuring plan assets and benefit obligations as of the
      employers fiscal year-end statement of condition is effective for fiscal years
      ending after December 15, 2008 for publicly traded companies. The Company is
      presently assessing the impact FAS 158 may have on its financial statements,
      but
      no determination has been made at this time.


8


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





In
      September 2006, the SEC (“SEC”) issued SEC Staff Accounting Bulletin-Topic 1N,
“Financial Statements -Considering the Effects of Prior Year Misstatements When
      Quantifying Misstatements in Current Year Financial Statements.”(“SAB 108”). SAB
      108 addresses how a public company should quantify the effect of an error on
      the
      financial statements by requiring a dual approach to compute the amount of
      a
      misstatement. The dual approach encompasses both a current year income statement
      perspective (“rollover” method) and a year-end balance sheet perspective (“iron
      curtain” method). Companies that will need to change their method of computing
      the amount of an error must adopt the dual approach for fiscal years ending
      after November 15, 2006. The Company is
      presently assessing the impact of SAB 108 may have on its financial statements,
      but no determination has been made at this time.





**NOTE
      4. AVAILABLE FOR SALE SECURITIES**





For
      purposes of managing its net interest margin, the Company had identified for
      disposal at March 31, 2006, certain FHLB debt securities. The securities, which
      were reported as available for sale securities, had an original cost of $16.0
      million, an approximate carrying value of $15.8 million and a weighted average
      yield of 3.84%. Due to the planned sale of the securities, the $177,000
      difference between the original acquired cost and the estimated market value
      at
      March 31, 2006, was deemed to be an other-than-temporary loss and, accordingly,
      was charged to earnings as a net loss on securities available for sale for
      the
      three months ended March 31, 2006. As planned, the identified securities were
      sold during the second quarter resulting in a realized loss of $166,000. There
      were no disposals of available for sale securities during the quarter ended
      September 30, 2006.





The
      Company evaluates securities for other-than-temporary impairment, at least
      on a
      quarterly basis, and more frequently when economic or market concerns warrant
      such evaluation. Consideration is given to the length of time and the extent
      to
      which the fair value has been less than cost, the financial condition and
      near-term prospects of the issuer, and the intent and ability of the Company
      to
      retain its investment in the issuer for a period of time sufficient to allow
      for
      any anticipated recovery in fair value. In analyzing an issuer's financial
      condition, the Company may consider whether the securities are issued by the
      federal government or one of its agencies, whether downgrades by bond rating
      agencies have occurred, and the results of reviews of the issuer's financial
      condition. As of September 30, 2006 unrealized losses on available for sale
      securities were $760,000 and are largely due to the current interest rate
      environment, relative to the interest rate of the securities, and as the
      securities approach maturity the fair value will return to par.





**NOTE
      5. REAL ESTATE MORTGAGES HELD FOR SALE**





Real
      estate mortgages held for sale are comprised entirely of loans secured by one-
      to four-family residential residences. Approximately $5.4 million of the balance
      outstanding at September 30, 2006, is composed of individual residential
      mortgage loans assigned to the Company in connection with a loan agreement
      with
      a mortgage broker entered into during 2006. Under the terms of the loan
      agreement, the Company provides funds to the mortgage broker for individual
      mortgage loan closings. In exchange the Company accepts an assignment of the
      individual mortgage loan pending its sale to various third-party investors
      arranged by the mortgage broker. Upon acceptance for purchase by the third-party
      investor, the loan agreement with the mortgage broker requires the Company
      to
      reassign the loan back to the mortgage broker at par, for completion of the
      sale. As of September 30, 2006, the weighted average number of days outstanding
      of real estate mortgages held for sale was 21 days.


9


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





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





Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $12,568,000 at September 30, 2006. The Company had
      no
      such agreements as of December 31, 2005.





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





Average
                daily balance
            
            $
            9,704,000Average
                interest rate
            
            
            4.53
            %Maximum
                month-end balance
            
            $
            12,000,000Weighted
                average interest rate at period end
            
            
            4.53
            %





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





**NOTE
      7. INTEREST RATE SWAPS**





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





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





Notional
                amounts
            
            $
            10,000,000Weighted
                average pay rates
            
            
            3.43
            %Weighted
                average receive rates
            
            
            5.52
            %Weighted
                average maturity
            
            
            7.3
                yearsFair
                value
            
            $
            676,000





**NOTE
      8. DIVIDENDS**





During
      the third quarter of 2006, the Company’s board of directors declared a regular
      quarterly cash dividend at a rate of $0.11 per share. The dividend was payable
      on October 30, 2006 for stockholders of record on October 13, 2006. Atlantic
      Coast Federal, MHC (“MHC”) which holds 8,728,500 shares, or approximately 63.0%
      of the Company’s total outstanding common stock has informed the Company that it
      will waive receipt of the third quarter dividend on its owned shares, as was
      done in the first half of 2006.




Total
      dividends charged to retained earnings for the nine months ended September
      30,
      2006 were $1,481,056.


10


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





**NOTE
      9. EARNINGS PER COMMON SHARE**





Basic
      earnings per common share is computed by dividing net income by the
      weighted-average number of common shares outstanding for the period, reduced
      for
      average unallocated ESOP shares and average unearned restricted stock awards.
      Diluted earnings per common share is computed by dividing net income by the
      weighted-average number of common shares outstanding for the period increased
      for the dilutive effect of unvested stock options and stock awards. The dilutive
      effect of the unvested stock options and stock awards is calculated under the
      treasury stock method utilizing the average market value of the Company’s stock
      for the period. A reconciliation of the numerator and denominator of the basic
      and diluted earnings per common share computation for the three and nine months
      ended September 30, 2006 and 2005, is as follows:





For
                the three months
              ended
                September 30,
            
            For
                the nine months
              ended
                September 30,2006
            
            2005
            
            2006
            
            2005BasicNet
                income
            
            $
            1,636,459
            
            $
            1,914,485
            
            $
            4,236,052
            
            $
            3,599,340Weighted
                average common shares outstanding
            
            
            14,057,845
            
            
            14,732,808
            
            
            14,114,967
            
            
            14,609,948Less:
                Average unallocated ESOP shares
            
            
            372,416
            
            
            418,968
            
            
            372,416
            
            
            418,968Average
                unvested restricted stockawards
            
            
            214,818
            
            
            258,469
            
            
            245,529
            
            
            87,103Average
                shares
            
            
            13,470,611
            
            
            14,055,371
            
            
            13,497,023
            
            
            14,103,877Basic
                earnings per common share
            
            $
            0.12
            
            $
            0.14
            
            $
            0.31
            
            $
            0.25DilutedNet
                income
            
            $
            1,636,459
            
            $
            1,914,485
            
            $
            4,236,052
            
            $
            3,599,340Weighted
                average common shares outstandingfor
                basic earnings per common share
            
            
            13,470,611
            
            
            14,055,371
            
            
            13,497,023
            
            
            14,103,877Add:
                Dilutive effects of assumed exercisesof
                stock options
            
            
            17,751
            
            
            -
            
            
            5,917
            
            
            -Add:
                Dilutive effects of full vesting ofstock
                awards
            
            
            67,136
            
            
            37,532
            
            
            76,069
            
            
            12,511Average
                shares and dilutive potentialcommon
                shares
            
            
            13,555,498
            
            
            14,092,903
            
            
            13,579,009
            
            
            14,116,388Diluted
                earnings per common share
            
            $
            0.12
            
            $
            0.14
            
            $
            0.31
            
            $
            0.25





Stock
      options for 8,000 and 360,065 shares of common stock were not considered in
      computing diluted earnings per common share for the three and nine months ended
      September 30, 2006 and 2005, respectively, because they are anti-dilutive.


11


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





**NOTE
      10. OTHER COMPREHENSIVE INCOME**





Comprehensive
      income components and related taxes for the three and nine months ended
      September 30, 2006 and 2005 were as follows:





For
                the three months
              ended
                September 30,
            
            For
                the nine months
              ended
                September 30,2006
            
            2005
            
            2006
            
            2005Unrealized
                holding gains and (losses) onsecurities
                available for sale
            
            $
            603,229
            
            $
            (94,176
            )
            $
            (111,238
            )
            $
            (241,313
            )Less
                  reclassification adjustments for gains
                  (losses) recognized in income
            
            
            -
            
            
            (211
            )
            
            (165,495
            )
            
            (211
            )Net
                unrealized gains and (losses)
            
            
            603,229
            
            
            (93,965
            )
            
            54,257
            
            
            (241,102
            )Tax
                effect
            
            
            (220,703
            )
            
            35,707
            
            
            (21,935
            )
            
            91,619Net-of-tax
                amount
            
            
            382,526
            
            
            (58,258
            )
            
            32,322
            
            
            (149,483
            )Change
                in fair value of derivatives used forcash
                flow hedges
            
            
            (180,000
            )
            
            306,411
            
            
            181,894
            
            
            425,466Less
                reclassification adjustments for(gains)
                recognized in income
            
            
            -
            
            
            -
            
            
            (207,850
            )
            
            -Net
                unrealized gains and (losses)
            
            
            (180,000
            )
            
            306,411
            
            
            (25,956
            )
            
            425,466Tax
              effect
            
            
            68,400
            
            
            (116,437
            )
            
            9,863
            
            
            (161,678
            )Net-of-tax
                amount
            
            
            (111,600
            )
            
            189,974
            
            
            (16,093
            )
            
            263,788Other
                comprehensive income
            
            $
            270,926
            
            $
            131,716
            
            $
            16,229
            
            $
            114,305





**NOTE
      11. INCOME TAXES**





Net
      income for the three and nine months ended September 30, 2005, included an
      income tax benefit of $895,000 for the elimination of a tax-related contingent
      liability for the same amount. The tax-related contingent liability had been
      established by the Company in 2000 upon becoming a taxable entity and reflected
      the tax effect of the bad debt deduction taken by the Company in 2000 and 2001
      calendar tax years. The Company believed the filing position was supportable
      based upon a reasonable interpretation of federal income tax laws and the
      underlying regulations. However, due to the lack of prior rulings on similar
      fact patterns, it was unknown whether the accounting method would be sustained
      upon audit by either federal or state tax authorities. The applicable statue
      of
      limitations expired with respect to the 2001 tax year on September 15, 2005,
      making the contingent liability unnecessary.




12


**ATLANTIC
      COAST FEDERAL CORPORATION**





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





**Forward-Looking
      Statements**




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




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




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




**Critical
      Accounting Policies**





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





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


13


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





We
      believe that the allowance for loan losses and related provision expense are
      particularly susceptible to material change in the near term as a result of
      significant changes in individual borrower circumstances on larger balance
      loans. The provision for loan loss expense was $183,000 for the nine months
      ended September 30, 2006, and $1.5 million for the same period in 2005. This
      decrease was due to the recording of a $400,000 specific reserve in the first
      quarter of 2005 on one impaired loan relationship while specific reserves in
      2006 have declined with improving credit quality. In addition net loan
      charge-offs in the first three quarters of 2005, as compared to the same period
      in 2006, were significantly higher.





Securities
      available for sale are carried at fair value, with unrealized holding gains
      and
      losses reported separately in accumulated other comprehensive income (loss),
      net
      of tax. Atlantic Coast Federal Corporation obtains market values from a third
      party on a monthly basis in order to adjust the securities to fair value. Other
      comprehensive income (loss) resulting from changes in the fair market value
      of
      Atlantic Coast Federal Corporation’s available for sale securities portfolio
      totaled $32,000 and $(149,000) for the nine months ended September 30, 2006
      and
      2005, respectively. Additionally, securities available for sale are required
      to
      be written down to fair value when a decline in fair value is not temporary;
      therefore, future changes in the fair value of securities could have a
      significant impact on Atlantic Coast Federal Corporation’s operating results. In
      determining whether a market value decline is other than temporary, management
      considers the reason for the decline, the extent of the decline and the duration
      of the decline.





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





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




14


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





**General.** Our
      balance sheet growth for the period ended September 30, 2006 as compared to
      December 31, 2005 indicates an annualized asset growth rate of
      approximately 8.8% reflecting a slowing pace of loan and deposit growth compared
      to the first and second quarters of 2006, which had annualized asset growth
      rates of 14% and 9.4%, respectively.





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


September
                  30,
              
              December
                  31,
              
              Increase
                  (decrease)2006
              
              2005
              
              Dollars
              
              PercentageAssets
              
              (Dollars
                  in Thousands)Cash
                  and cash equivalents
              
              $
              29,839
              
              $
              37,959
              
              $
              (8,120
              )
              
              -21.4
              %Other
                  interest bearing investments
              
              
              1,500
              
              
              1,800
              
              
              (300
              )
              
              -16.7
              %Securitites
                  available for sale
              
              
              77,901
              
              
              71,965
              
              
              5,936
              
              
              8.2
              %Loans
              
              
              628,126
              
              
              585,028
              
              
              43,098
              
              
              7.4
              %Allowance
                  for loan losses
              
              
              (4,498
              )
              
              (4,587
              )
              
              89
              
              
              -1.9
              %Loans,
                  net
              
              
              623,628
              
              
              580,441
              
              
              43,187
              
              
              7.4
              %Loans
                  held for sale
              
              
              5,463
              
              
              100
              
              
              5,363
              
              
              5363.0
              %Other
                  assets
              
              
              54,800
              
              
              51,584
              
              
              3,216
              
              
              6.2
              %Total
                  assets
              
              $
              793,131
              
              $
              743,849
              
              $
              49,282
              
              
              6.6
              %Liabilities
                  and Stockholders' equityDepositsNon-interest
                  bearing
              
              $
              41,747
              
              $
              38,454
              
              $
              3,293
              
              
              8.6
              %Interest
                  bearing transaction accounts
              
              
              49,431
              
              
              79,739
              
              
              (30,308
              )
              
              -38.0
              %Savings
                  and money market
              
              
              136,910
              
              
              100,260
              
              
              36,650
              
              
              36.6
              %Time
              
              
              317,962
              
              
              297,869
              
              
              20,093
              
              
              6.7
              %Total
                  deposits
              
              
              546,050
              
              
              516,322
              
              
              29,728
              
              
              5.8
              %Securities
                  sold under agreements to repurchase
              
              
              12,000
              
              
              -
              
              
              12,000
              
              
              100.0
              %Federal
                  Home Loan Bank advances
              
              
              139,000
              
              
              129,000
              
              
              10,000
              
              
              7.8
              %Accrued
                  expenses and other liabilities
              
              
              5,079
              
              
              5,610
              
              
              (531
              )
              
              -9.5
              %Total
                  liabilities
              
              
              702,129
              
              
              650,932
              
              
              51,197
              
              
              7.9
              %Stockholders'
                  equity
              
              
              91,002
              
              
              92,917
              
              
              (1,915
              )
              
              -2.1
              %Total
                  liabilities and stockholders' equity
              
              $
              793,131
              
              $
              743,849
              
              $
              49,282
              
              
              6.6
              %




**Cash
      and cash equivalents** .
      Cash
      and cash equivalents are comprised of cash-on-hand and interest earning and
      non-interest earning balances held in other depository institutions. We expect
      the balances we maintain in cash and cash equivalents will fluctuate as our
      other interest earning assets mature, or we identify opportunities for
      longer-term investments that fit the Company’s growth strategy. The decline in
      balances from December 31, 2005 as compared to end of the third quarter 2006,
      was primarily due to improved efficiencies in collection of deposit items drawn
      on other financial institutions.





**Securities
      available for sale** .
      Securities available for sale is composed principally of debt securities of
      U.S.
      Government-sponsored organizations, or mortgage-backed securities. In the
      near-term we expect the composition of our investment in securities available
      for sale to continue to be heavily weighted in mortgage-backed securities or
      the
      debt of government-sponsored organizations. During the nine months ended
      September 30, 2006, the Company purchased approximately $33.8 million of
      investment securities, which includes securities purchased to replace those
      designated for sale as of March 31, 2006 (see **** Comparison
      of Results of Operation for the Nine Months Ended September 30, 2006 and 2005-
      Non-interest Expense), nearly all of which were mortgage-backed securities
      or
      the debt of government-sponsored organizations.




15




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


September
              
              %
                  of total
              
              
              December
              
              %
                  of total
              
              
              Increase
                  (decrease)30,
                  2006
              
              loans
              
              
              31,
                  2005
              
              loans
              
              
              Dollars
              
              Percentage(Dollars
                  In Thousands)Commercial
                  non-mortgage
              
              $
              12,372
              
              
              2.0
              %
              
              $
              6,880
              
              
              1.2
              %
              
              $
              5,492
              
              
              79.8
              %Commercial
                  real estate and multifamily
              
              
              78,633
              
              
              12.6
              %
              
              
              66,726
              
              
              11.5
              %
              
              
              11,907
              
              
              17.8
              %Construction
                  loans
              
              
              36,199
              
              
              5.8
              %
              
              
              26,820
              
              
              4.6
              %
              
              
              9,379
              
              
              35.0
              %One-
                  to four- family residential mortgages
              
              
              331,521
              
              
              53.1
              %
              
              
              324,681
              
              
              55.9
              %
              
              
              6,840
              
              
              2.1
              %Consumer
                  and other loansAutomobile
              
              
              28,965
              
              
              4.6
              %
              
              
              31,133
              
              
              5.4
              %
              
              
              (2,168
              )
              
              -7.0
              %Unsecured
              
              
              17,780
              
              
              2.8
              %
              
              
              18,188
              
              
              3.1
              %
              
              
              (408
              )
              
              -2.2
              %Home
                  equity
              
              
              87,265
              
              
              14.0
              %
              
              
              79,016
              
              
              13.6
              %
              
              
              8,249
              
              
              10.4
              %Land
              
              
              15,645
              
              
              2.5
              %
              
              
              14,200
              
              
              2.4
              %
              
              
              1,445
              
              
              10.2
              %Other
              
              
              16,188
              
              
              2.6
              %
              
              
              13,525
              
              
              2.3
              %
              
              
              2,663
              
              
              19.7
              %Total
                  loans
              
              
              624,568
              
              
              
              
              
              
              581,169
              
              
              
              
              
              
              43,399
              
              
              7.5
              %Allowance
                  for loan losses
              
              
              (4,498
              )
              
              -0.7
              %
              
              
              (4,587
              )
              
              -0.8
              %
              
              
              89
              
              
              -1.9
              %Net
                  deferred loan (fees) costs
              
              
              3,163
              
              
              0.5
              %
              
              
              3,164
              
              
              0.5
              %
              
              
              (1
              )
              
              0.0
              %Premiums
                  on purchased loans
              
              
              395
              
              
              0.1
              %
              
              
              695
              
              
              0.1
              %
              
              
              (300
              )
              
              -43.2
              %Loans,
                  net
              
              $
              623,628
              
              
              
              
              
              $
              580,441
              
              
              
              
              
              $
              43,187
              
              
              7.4
              %




The
      composition of our net loan portfolio is heavily weighted toward loans secured
      by first mortgages, home equity loans, or second mortgages, all secured by
      one-
      to four-family residences, with approximately 67% of our loans invested in
      those
      types of loans at September 30, 2006, and 70% at December 31, 2005. The
      balance as of September 30, 2006 of our largest loan category, one- to
      four-family residential mortgages, has remained virtually flat compared to
      the
      year-end 2005 balance. The limited growth reflects a change made to our
      marketing strategy in the second half of 2005 to reduce our emphasis on this
      category of loans due to the ongoing flat/inverted yield curve, which continued
      to hold interest rates on longer-term loans low relative to our cost of funds.
      More recently, our growth has been negatively impacted by a slowing in
      residential real estate sales activity in our markets. Recent reports by state
      and national real estate organizations have reported substantial declines in
      residential real estate sales activity in our Northeast Florida markets, as
      well
      as in Florida in general. As a result of these factors we believe, in the near
      term, our growth in one- to four-family residential mortgages will be slow
      to
      moderate. Thus far in 2006, we purchased $22.7 million of variable-rate one-
      to
      four-family residential loans, to supplement our normal retail loan
      originations. Depending on liquidity, earning needs, and the availability of
      high quality loans, we expect to continue to purchase adjustable rate one-
      to
      four-family residential mortgage loans to supplement our internal loan
      originations and maintain at least our current balance.





Total
      loan growth during the nine months ended September 30, 2006, was primarily
      achieved from home equity loans, construction loans, primarily for the
      construction of one- to four-family residential properties, and commercial
      real
      estate loans. The growth in commercial real estate loans has been primarily
      from
      loans to real estate developers for the acquisition and development of one-
      to
      four-family residential developments. The interest rate terms for these loan
      types are generally indexed to the current prime rate and, as such, have more
      favorable interest margins relative to our cost of funds. The majority of the
      construction loan balances at September 30, 2006 and December 31, 2005 are
      composed of loans acquired from mortgage brokers under arrangements requiring
      that, at the completion of construction, the balance will be paid off with
      permanent financing from a third party lender. Given the current interest rate
      environment the Company expects to continue in the near term to focus its
      lending efforts on home equity lending products and financing the construction
      of one- to four-family residences.


16


**Allowance
      for loan losse** s.
      Our
      allowance for loan losses was .72% and .78% of total loans outstanding at
      September 30, 2006 and December 31, 2005, respectively. Allowance for loan
      losses activity for the nine months ended September 30, 2006 and 2005 was as
      follows:


2006
              
              2005(In
                  Thousands)Beginning
                  balance
              
              $
              4,587
              
              $
              3,956Loans
                  charged-off
              
              
              (946
              )
              
              (1,832
              )Recoveries
              
              
              674
              
              
              586Net
                  charge-offs
              
              
              (272
              )
              
              (1,246
              )Provision
                  for loan losses
              
              
              183
              
              
              1,542Ending
                  balance
              
              $
              4,498
              
              $
              4,252


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





The
      allowance for loan losses consists of general allowance allocations made for
      pools of homogeneous loans and specific allocations on individual loans for
      which management has significant concerns regarding the borrowers’ ability to
      repay the loans in accordance with the terms of the loans. Non-performing loans
      totaled approximately $3.0 million and $2.6 million at September 30, 2006,
      and
      December 31, 2005, respectively, and total impaired loans decreased to
      approximately $3.5 million at September 30, 2006 from approximately $4.5 million
      at December 31, 2005, due to improving credit conditions of borrowers or loan
      payoffs. The total allowance allocated for impaired loans was approximately
      $600,000 at September 30, 2006 and $1.0 million as of December 31, 2005. As
      of
      September 30, 2006, and December 31, 2005, all non-performing loans were
      classified as non-accrual, and we did not have any restructured loans or loans
      90 days past due and accruing interest as of September 30, 2006, and
      December 31, 2005. Non-performing loans, excluding small balance homogeneous
      loans, were $1.6 million and $1.2 million at September 30, 2006 and December
      31,
      2005, respectively, and, all such non-performing loans were also reported as
      impaired loans. The increase to non-performing loans was principally due to
      a
      single commercial real estate loan that is well collateralized and for which
      we
      expect no losses.





Other
      consumer loans include a non-performing loan representing a pool of leases
      we
      purchased in 2001 with a balance of approximately $775,000 as of September
      30,
      2006. We have $150,000 of our allowance for loan losses allocated for this
      loan.
      Collection of the total amount owed on the leases from the surety who had
      provided payment performance bonds for the leases, continues to be vigorously
      pursued in court under the terms of the bonds. The balance due is approximately
      $1.7 million (representing the balance outstanding prior to the charge-offs
      being taken). Total legal fees incurred on this matter for the nine months
      ended
      September 30, 2006 and 2005 were $127,000 and $236,000, respectively. Collection
      of any amount, including the $625,000 net amount included in our consolidated
      financial statements at September 30, 2006, or the gross amount of $1.7 million,
      cannot be assured. We believe there is a possibility that no amount will be
      collected in the future; therefore, we may incur additional losses up to the
      $625,000 net amount remaining as an asset. Additionally, we anticipate we will
      incur additional legal costs as we pursue collection on the surety
      bonds.




**Deposits** .
      Savings
      and money market deposit account balances grew during the nine months ended
      September 30, 2006 as compared to the end of 2005, as the Bank increased the
      interest rates paid on its money market products to meet the rate of competitors
      in its markets. While raising the interest rates was necessary to both protect
      and grow deposit balances, we believe to a certain degree it has led to a
      disintermediation within our deposit products, particularly from our
      interest-bearing demand accounts, whose balances have declined during the first
      nine months of 2006 nearly off setting the growth in money market account
      balances over the same period of time. To increase the growth of new deposit
      balances, the Company began offering a unique interest bearing demand account
      in
      June 2006. The account offers the highest interest rate in the market for an
      interest bearing demand account, has no tiers and no minimum balance
      requirement. During the third quarter of 2006, the Company has experienced
      an
      increase in new accounts, demonstrating market interest, however the average
      balance of individual new accounts has been modest. The Company intends to
      continue an active marketing of the new account through the end of
      2006.




17




The
      increase in time deposits as of September 30, 2006, as compared to the end
      of
      2005, includes approximately $22.1 million of additional brokered deposits.
      The
      brokered deposits have been used to replace maturing certificate of deposits
      and
      fund loan growth. We expect future deposit growth as we expand our products
      and
      services in new and existing markets particularly in core deposits, and we
      also
      anticipate we will continue to purchase brokered deposits to meet liquidity
      demands when interest rates are favorable.




The
      growth in non-interest bearing deposits as of September 30, 2006, as compared
      to
      December 31, 2005, was primarily due to timing associated with automated
      clearing house deposits (ACH) and other month-end deposits.




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




Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $12.6 million at September 30, 2006 and mature in
      February 2011, or, beginning in February 2007, may be terminated in whole by
      the
      lender each following quarter. At maturity or termination, the securities
      underlying the agreements will be returned to the Company. At the date of the
      transaction, the interest rate was fixed at 4.53% until February 2007, at which
      time it converts to a floating rate of 8.50% minus 3-month LIBOR up to a maximum
      rate of 5.75%.





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





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




Following
      the pre-payment of the advance discussed above, the maturity of another $5.0
      million advance on April 6, 2006, and the addition of two borrowings totaling
      $20.0 million during the third quarter of 2006, FHLB advances had a weighted-
      average maturity of 68 months and a weighted- average rate of 4.39% at September
      30, 2006. The Company expects to continue to utilize FHLB advances to manage
      short and long- term liquidity needs to the extent it has borrowing capacity,
      needs funding and the interest cost of FHLB advances is attractive compared
      to
      deposits and other alternative source of funds.


18


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




Balance
                  at December 31, 2005
              
              $
              92,917Increases
                  to stockholders' equity:Net
                  income for the nine months endedSeptember
                  30, 2006
              
              
              4,236Net
                  other comprehensive income(loss)
              
              
              16ESOP
                  shares allocated to employees
              
              
              540Management
                  restricted stock earned under Recognition Plan
              
              
              444Stock
                  options earned under Stock Option Plan
              
              
              229Total
                  increases to stockholders' equity
              
              
              5,465Decreases
                  to stockholders' equity:Dividends
              
              
              (1,481
              )Treasury
                  stock purchased at cost
              
              
              (5,899
              )Total
                  decreases to stockholders' equity
              
              
              (7,380
              )Balance
                  at September 30, 2006
              
              $
              91,002




Management
      restricted stock earned under the Recognition Plan and stock options earned
      under the Stock Option Plan reflect the recognition of compensation expense
      under FAS 123-R. The Company early adopted FAS 123-R during the third quarter
      of
      2005 to account for its share based compensation plans. Under this new
      accounting standard, the cost of awards granted under the Recognition Plan
      and
      the Stock Option Plan are being amortized over the vesting period of five years,
      which begins on the date of grant.





In
      September 2006, the Company’s board of directors declared a regular quarterly
      cash dividend at a rate of $0.11 per share. The dividend was payable on October
      30, 2006, for stockholders of record on October 13, 2006. Atlantic Coast
      Federal, MHC which holds 8,728,500 shares, or approximately 63% of the Company’s
      total outstanding stock has informed the Company that it will waive receipt
      of
      the third quarter dividend on its owned shares. Accordingly, stockholders’
equity for the three months ended September 30, 2006, was reduced approximately
      $518,000 for the declared dividend. Total dividends for the nine months ended
      September 30, 2006, charged to stockholders’ equity was approximately $1.5
      million, and approximately $2.6 million of dividend payments were waived by
      the
      MHC. We expect the MHC to waive receipt of payment on future dividends for
      its
      owned shares.





In
      August
      2006 the Company completed its stock repurchase plan that began in early
      November 2005 by repurchasing approximately 200,000 shares of its common stock
      at an average price of $17.28 per share. In September 2006 the Company’s Board
      of Directors approved a new repurchase plan to permit the Company to purchase,
      over a 12-month period, up to 10%, or 478,000 shares of its outstanding common
      stock. Following the approval of the new stock repurchase plan the Company
      repurchased approximately 136,000 shares at an average price of $17.82 per
      share. As of September 30, 2006 approximately 342,000 shares of common stock
      remained to be repurchased under this plan although no assurances can be made
      regarding the number of shares, if any, that will actually be purchased, or
      the
      price that will be paid for such shares.





The
      equity to assets ratio decreased to 11.47% at September 30, 2006, from 12.49%
      at
      December 31, 2005. The decrease was primarily due to common stock repurchased
      under the Company’s stock repurchase plans and the rate of asset growth through
      September 30, 2006. Despite this decrease, we continued to be well in excess
      of
      all minimum regulatory capital requirements, and are considered “well
      capitalized” under those formulas. Total risk-based capital to risk-weighted
      assets was 14.20%, Tier 1 capital to risk-weighted assets was 13.41%, and
      Tier 1 capital to total adjusted total assets was 9.73% at September 30, 2006.
      These ratios as of December 31, 2005 were 15.90%, 15.00% and 10.00%,
      respectively.




19




**Comparison
      of Results of Operations for the Three Months Ended September 30, 2006 and
      2005** .





**General** . **** Our
      net
      income for the three months ended September 30, 2006, was $1.6 million, which
      was $278,000 less than for the same period in 2005 primarily due to the
      recognition in 2005 of a tax benefit from the elimination of a tax-related
      contingent liability of $895,000. Income before income tax expense was $2.4
      million for the three months ended September 30, 2006, which was $869,000 higher
      than for the same period in 2005, primarily due to a decrease in provision
      for
      loan losses of $540,000. Net interest income increased 16.3%, or $783,000 in
      the
      third quarter of 2006, compared to the same quarter in 2005, as growth in
      interest earning assets combined with an increase in the interest yield on
      such
      assets, offsetting the rising cost of deposits. Non-interest income for the
      three months ended September 30, 2006 declined by 7.3% to $2.1 million as
      compared to $2.3 million for the same three months in 2005, due primarily to
      decreased service charges and fees. Non-interest expense grew $290,000, or
      5.7%,
      to $5.4 million for the quarter ended September 30, 2006, from $5.1 million
      for
      the same quarter in 2005 due to increased compensation and benefit costs and
      other operating costs.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the three months ended
      September 30, 2006 and 2005. The average yields and costs are derived by
      dividing income or expense by the average balance of assets or liabilities,
      respectively, for the periods presented.




For
                  the three months ended September 30,2006
              
              2005(Dollars
                  in Thousands)Average
                  Balance
              
              Interest
              
              Average
                  Yield /Cost
              
              Average
                  Balance
              
              Interest
              
              Average
                  Yield /CostINTEREST-EARNING
                  ASSETSLoans
                  receivable(1)
              
              $
              618,974
              
              $
              10,613
              
              
              6.86
              %
              $
              549,264
              
              $
              8,331
              
              
              6.07
              %Securites(2)
              
              
              74,461
              
              
              947
              
              
              5.09
              %
              
              69,487
              
              
              596
              
              
              3.43
              %Other
                  interest-earning assets(3)
              
              
              33,005
              
              
              446
              
              
              5.41
              %
              
              55,355
              
              
              480
              
              
              3.47
              %Total
                  interest-earning assets
              
              
              726,440
              
              
              12,006
              
              
              6.60
              %
              
              674,106
              
              
              9,407
              
              
              5.59
              %Non-interest
                  earning assets
              
              
              55,375
              
              
              
              
              
              
              
              
              50,588Total
                  assets
              
              $
              781,815
              
              
              
              
              
              
              
              $
              724,694INTEREST-BEARING
                  LIABILITIESSavings
                  deposits
              
              $
              47,744
              
              $
              47
              
              
              0.39
              %
              $
              59,367
              
              $
              61
              
              
              0.41
              %Interest
                  bearing demand accounts
              
              
              51,193
              
              
              382
              
              
              2.98
              %
              
              71,734
              
              
              431
              
              
              2.40
              %Money
                  market accounts
              
              
              83,652
              
              
              867
              
              
              4.15
              %
              
              53,079
              
              
              358
              
              
              2.70
              %Time
                  deposits
              
              
              321,622
              
              
              3,631
              
              
              4.52
              %
              
              267,901
              
              
              2,377
              
              
              3.55
              %Federal
                  Home Loan Bank advances
              
              
              123,566
              
              
              1,333
              
              
              4.32
              %
              
              129,008
              
              
              1,356
              
              
              4.20
              %Securities
                  sold under agreements to repurchase
              
              
              12,000
              
              
              139
              
              
              4.59
              %
              
              -
              
              
              -
              
              
              -Total
                  interest-bearing liabilities
              
              
              639,777
              
              
              6,399
              
              
              4.00
              %
              
              581,089
              
              
              4,583
              
              
              3.16
              %Non-interest
                  bearing liabilities
              
              
              47,763
              
              
              
              
              
              
              
              
              43,527Total
                  liabilities
              
              
              687,540
              
              
              
              
              
              
              
              
              624,616Stockholders'
                  equity
              
              
              94,275
              
              
              
              
              
              
              
              
              100,078Total
                  liabilities and stockholders' equity
              
              $
              781,815
              
              
              
              
              
              
              
              $
              724,694Net
                  interest income
              
              
              
              
              $
              5,607
              
              
              
              
              
              
              
              $
              4,824Net
                  interest spread
              
              
              
              
              
              
              
              
              2.60
              %
              
              
              
              
              
              
              
              2.43
              %Net
                  earning assets
              
              $
              86,663
              
              
              
              
              
              
              
              $
              93,017Net
                  interest margin(4)
              
              
              
              
              
              
              
              
              3.09
              %
              
              
              
              
              
              
              
              2.86
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              
              
              
              113.55
              %
              
              
              
              
              
              
              
              116.01
              %
  (1)
                  Calculated net of deferred loan fees and loss reserve. Nonaccrual
                  loans
                  included as loans carrying a zero yield(2)
                  Calculated based on carrying value. Not full tax equivalents, as
                  the
                  numbers would not change materially from those presented in the
                  table.(3)
                  Includes Federal Home Loan Bank stock at cost and term deposits
                  with other
                  financial institutions.(4)
                  Net interest income divided by average interest-earning
                  assets.


20


**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 September
      30,
      2006 as compared to the same period in 2005. For each category of
      interest-earning assets and interest-bearing liabilities, information is
      provided on changes attributable to (1) changes in volume multiplied by the
      old
      rate; and (2) changes in rate, which are changes in rate multiplied by the
      old
      volume; and (3) changes not solely attributable to rate or volume have been
      allocated proportionately to the change due to volume and the change due to
      rate.


Increase/(Decrease)
              
              TotalDue
                  to
              
              IncreaseVolume
              
              Rate
              
              (Decrease)**INTEREST-EARNING
                  ASSETS**
              
              (In
                  Thousands)Loans
                  receivable
              
              $
              1,125
              
              $
              1,157
              
              $
              2,282Securites
              
              
              45
              
              
              306
              
              
              351Other
                  interest-earning assets
              
              
              (240
              )
              
              206
              
              
              (34
              )Total
                  interest-earning assets
              
              
              930
              
              
              1,669
              
              
              2,599**INTEREST-BEARING
                  LIABILITIES**Savings
                  deposits
              
              
              (12
              )
              
              (2
              )
              
              (14
              )Interest
                  bearing demand accounts
              
              
              (140
              )
              
              91
              
              
              (49
              )Money
                  market accounts
              
              
              264
              
              
              245
              
              
              509Time
                  deposits
              
              
              532
              
              
              722
              
              
              1,254Federal
                  Home Loan Bank advances
              
              
              (59
              )
              
              36
              
              
              (23
              )Securities
                  sold under agreements to repurchase
              
              
              139
              
              
              -
              
              
              139Total
                  interest-bearing liabilities
              
              
              724
              
              
              1,092
              
              
              1,816Net
                  interest income
              
              $
              206
              
              $
              577
              
              $
              783




**Interest
      income.** As
      shown
      in the table above the majority of the increase in interest income for the
      three
      months ended September 30, 2006, as compared to the same period in 2005, was
      attributed to the rate earned on interest-earning assets, although growth in
      average outstanding interest-earning assets also was a contributing factor.
      Loans accounted for approximately 87% of the interest income growth, or $2.3
      million for the quarter ended September 30, 2006, as compared to the same
      quarter in 2005. The increased interest income from loans was due nearly equally
      to increased average outstanding balances and the yield earned on the loans
      balances as a result of growth in prime interest rate-based loans. As discussed
      above in “Comparison of Financial Condition at September 30, 2006 and December
      31, 2005 - Loans,” the flat yield curve over the last 12 months and a
      softening in residential real estate sales has led the Company to increase
      its
      emphasis on prime rate interest-based loans, such as home equity lending,
      construction loans and commercial real estate loans. The growth in average
      outstanding balances of home equity loans, construction loans and commercial
      real estate loans for the three months ended September 30, 2006, as compared
      to
      the same period in 2005, accounted for approximately 64%, or $45.3 million
      of
      the total $71.0 million in average loan growth. During these same periods,
      the
      average prime rate increased 183 basis points from 6.42% to 8.25%.





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





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


21


**Interest
      expense.** The
      increase in interest expense for the three months ended September 30, 2006,
      as
      compared to the same period in 2005, was partially due to growth in average
      outstanding balances of interest-bearing deposit accounts, but more
      significantly due to increases to interest rates paid on those accounts. During
      the period of time from the end of the third quarter of 2005, until the end
      of
      the third quarter of 2006, the Federal Reserve Board increased the target rate
      for Federal Funds borrowings by 150 basis points, from 3.75% to 5.25%. In
      general, this led to significant rate increases on interest-bearing deposit
      accounts in our markets, where there is intense competition for deposits among
      financial institutions. In order to fund loan growth and maintain deposit market
      share, the Company has increased interest rates on its money-market accounts,
      interest bearing demand accounts and time deposits. The rate of interest expense
      on our FHLB advances has remained relatively flat for the third quarter of
      2006
      as compared to the same quarter of 2005, as new advances have generally had
      longer maturities and, therefore, we have benefited from the flat or inverted
      yield curve. Given the current rate environment, and the stiff competition
      for
      deposits in our market, we do not expect interest rates paid on deposits to
      decline in the near term.





**Net
      interest income.** Net
      interest income increased during the three months ended September 30, 2006,
      as
      compared to the same period in 2005, as the growth in interest income outpaced
      the growth in interest expense. As discussed above, increases in prime rate
      based loans has, in part, enabled the Company to increase the overall yield
      of
      the loan portfolio, in addition to steady growth in average outstanding
      balances. In addition, yields on securities have increased as short-term
      interest rates have tracked upward. Our net interest spread, which is the
      difference between the interest yield earned on interest earning assets and
      the
      interest rate paid on interest bearing liabilities, increased 17 basis points
      for the third quarter of 2006 as compared to the same quarter in 2005. For
      the
      same comparative periods, our net interest margin, which is net interest income
      expressed as a percentage of our average interest earning assets increased
      23
      basis points. Although our net interest spread and net interest margin have
      grown over a comparative quarter for the first time since the third quarter
      of
      2005, the ratios have also remained relatively flat since the fourth quarter
      of
      2005 due primarily to the composition of our loan portfolio and the increasing
      cost of deposits.


Net
                  Interest
              
              Net
                  InterestComparative
                  Quarters
              
              Spread
              
              Margin3rd
                  quarter-2006
              
              
              2.60
              %
              
              3.09
              %2005
              
              
              2.43
              %
              
              2.86
              %increase
              
              
              0.17
              %
              
              0.23
              %2nd
                  quarter-2006
              
              
              2.65
              %
              
              3.09
              %2005
              
              
              2.66
              %
              
              3.11
              %decline
              
              
              -0.01
              %
              
              -0.02
              %1st
                  quarter-2006
              
              
              2.66
              %
              
              3.04
              %2005
              
              
              2.73
              %
              
              3.21
              %decline
              
              
              -0.07
              %
              
              -0.17
              %4th
                  quarter-2005
              
              
              2.65
              %
              
              3.06
              %2004
              
              
              2.80
              %
              
              3.34
              %decline
              
              
              -0.15
              %
              
              -0.28
              %3rd
                  quarter-2005
              
              
              2.43
              %
              
              2.86
              %2004
              
              
              3.12
              %
              
              3.50
              %decline
              
              
              -0.69
              %
              
              -0.64
              %





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





22




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





Based
      on
      management’s evaluation of these factors, a credit to provision of $(98,000) and
      provision of $442,000 were made during the three months ended September 30,
      2006
      and 2005, respectively. The credit to the provision for loan losses occurred
      as
      result of reductions in specific reserves for impaired loans due to loan
      pay-offs and improved borrower financial condition. In addition, net charge-offs
      for the quarter ended September 30, 2006, were $24,000. By comparison, net
      charge-offs for the same three months in 2005 were $380,000.





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





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


Increase
                  (decrease)2006
              
              2005
              
              Dollars
              
              Percentage(Dollars
                  in Thousands)Service
                  charges and fees
              
              $
              1,516
              
              $
              1,641
              
              $
              (125
              )
              
              -7.6
              %Net
                  loss on available for sale securities
              
              
              -
              
              
              -
              
              
              11
              
              
              -100.0
              %Gain
                  on sale of real estate mortgagesheld
                  for sale
              
              
              35
              
              
              49
              
              
              (14
              )
              
              -28.6
              %Gain
                  on sale of foreclosed assets
              
              
              (8
              )
              
              (1
              )
              
              (7
              )
              
              700.0
              %Commission
                  income
              
              
              90
              
              
              126
              
              
              (36
              )
              
              -28.6
              %Interchange
                  fees
              
              
              193
              
              
              188
              
              
              5
              
              
              2.7
              %Bank
                  owned life insurance earnings
              
              
              214
              
              
              188
              
              
              26
              
              
              13.8
              %Other
              
              
              54
              
              
              68
              
              
              (14
              )
              
              -20.6
              %$
              2,094
              
              $
              2,259
              
              $
              (165
              )
              
              -7.3
              %


23


Services
      charges and fees, which are earned primarily based on transaction services
      for
      deposit account customers, decreased primarily as a result of lower NSF fees
      which more than offset continued growth in ATM and check card overdraft fees.
      The implementation of overdraft fees for ATM and check card overdrafts was
      part
      of several fee income initiatives started in 2005, which focused on improving
      our discipline over service charge fees and collections. We expect service
      charges and fees to remain flat in the near term but to begin to increase in
      the
      second half of 2007 as new branch locations become fully operational and begin
      to experience deposit account growth.





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


Increase
                  (decrease)2006
              
              2005
              
              Dollars
              
              Percentage(Dollars
                  in Thousands)Compensation
                  and benefits
              
              $
              2,805
              
              $
              2,402
              
              $
              403
              
              
              16.8
              %Occupancy
                  and equipment
              
              
              612
              
              
              460
              
              
              152
              
              
              33.0
              %Data
                  processing
              
              
              329
              
              
              437
              
              
              (108
              )
              
              -24.7
              %Advertising
              
              
              200
              
              
              166
              
              
              34
              
              
              20.5
              %Outside
                  professional services
              
              
              367
              
              
              527
              
              
              (160
              )
              
              -30.4
              %Interchange
                  charges
              
              
              92
              
              
              161
              
              
              (69
              )
              
              -42.9
              %Collection
                  expense and repossessedasset
                  losses
              
              
              55
              
              
              84
              
              
              (29
              )
              
              -34.5
              %Telephone
              
              
              116
              
              
              162
              
              
              (46
              )
              
              -28.4
              %Other
              
              
              827
              
              
              714
              
              
              113
              
              
              15.8
              %$
              5,403
              
              $
              5,113
              
              $
              290
              
              
              5.7
              %


Nearly
      60% of the increase to compensation and benefit expense for the three months
      ended September 30, 2006, as compared to the same period in 2005, was due
      to increased salaries. Normal annual merit increases for associates account
      for
      a portion of the increase, along with cost for branch personnel hired in advance
      for a new branch opening in October 2006 and a second new branch to open in
      the
      first quarter of 2007. In addition, the Company has added associates for sales
      and service of its private banking business in Florida. Increased occupancy
      and
      equipment costs for the quarter ended September 30, 2006, as compared to the
      same quarter in 2005 was primarily due to equipment disposal and clean-up costs
      associated with branch renovations completed during the three months ended
      September 30, 2006. The decrease to data processing costs for the three months
      ended September 30, 2006, as compared to the same period in 2005, was primarily
      due to decreased software licensing costs for the Company’s operating system
      that resulted from negotiations of a new contract with the vendor. Outside
      and
      professional services cost decreased for the three months ended September 30,
      2006 as compared to the same period in 2005, as the Company incurred significant
      fees associated with Sarbanes-Oxley initiatives and tax planning initiatives
      that have not been incurred in 2006.





In
      general, we expect non-interest expense will increase in future periods as
      a
      result of continued growth and expansion and the costs associated with our
      operation as a public company.





**Income
      tax expense.** Income
      tax expense increased $1.2 million to $759,000 for the three months ended
      September 30, 2006, from $(388,000) for the same period in 2005. The
      increase was primarily due to the elimination of a tax-related contingent
      liability in the third quarter of 2005 of $895,000. The contingent liability
      had
      been established by the Company in 2000 upon becoming a taxable entity and
      reflected the tax effect of a tax accounting method utilized by the Company
      in
      2000 and 2001 calendar tax years. The Company believed the filing position
      was
      supportable based upon a reasonable interpretation of federal income tax laws
      and the underlying regulations. However, due to the lack of prior rulings on
      similar fact patterns, it was unknown whether the accounting method would be
      sustained upon audit by either federal or state tax authorities. The applicable
      statute of limitations expired with respect to the 2001 tax year on September
      15, 2005, making the contingency reserve unnecessary. We anticipate that income
      tax expense will continue to vary as income before income taxes
      varies.




24


**Comparison
      of Results of Operations for the Nine Months Ended September 30, 2006 and
      2005** .





**General** . **** Our
      net
      income for the nine months ended September 30, 2006, was $4.2 million, which
      was
      $637,000 more than for the same period in 2005. Net interest income increased
      9.9%, or $1.5 million in the nine months ended September 30, 2006 to $16.4
      million , compared to the same period in 2005, on growth in interest earning
      assets combined with an increase in the interest yield on such assets that
      offset the rising cost of deposits. Provision for loan losses decreased 88.1%,
      or $1.4 million to $183,000 for the nine months ended September 30, 2006, as
      compared to $1.5 million in the same period in 2005, on the basis of improved
      credit quality. Non-interest income for the nine months ended September 30,
      2006
      grew by 10.9% to $5.9 million, as compared to $5.3 million for the same nine
      months in 2005, due primarily to increased service charges and fees. The
      increase in non-interest income was offset by increased non-interest expense
      which grew $1.3 million, or 8.9%, to $15.9 million for the nine months ended
      September 30, 2006, from $14.6 million for the same period 2005, due to
      increased compensation and benefit costs and other operating costs.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the nine months ended
      September 30, 2006 and 2005. The average yields and costs are derived by
      dividing income or expense by the average balance of assets or liabilities,
      respectively, for the periods presented.


For
                  the nine months ended September 30,2006
              
              2005Average
                  Balance
              
              Interest
              
              Average
                  Yield /Cost
              
              Average
                  Balance
              
              Interest
              
              Average
                  Yield /CostINTEREST-EARNING
                  ASSETSLoans
                  receivable(1)
              
              $
              606,576
              
              $
              30,015
              
              
              6.60
              %
              $
              542,796
              
              $
              24,532
              
              
              6.03
              %Securites(2)
              
              
              71,492
              
              
              2,447
              
              
              4.56
              %
              
              60,221
              
              
              1,400
              
              
              3.10
              %Other
                  interest-earning assets(3)
              
              
              31,821
              
              
              1,215
              
              
              5.09
              %
              
              47,234
              
              
              1,137
              
              
              3.21
              %Total
                  interest-earning assets
              
              
              709,889
              
              
              33,677
              
              
              6.33
              %
              
              650,252
              
              
              27,069
              
              
              5.55
              %Non-interest-earning
                  assets
              
              
              56,713
              
              
              
              
              
              
              
              
              42,781Total
                  assets
              
              $
              766,602
              
              
              
              
              
              
              
              $
              693,033INTEREST-BEARING
                  LIABILITIESSavings
                  deposits
              
              $
              50,959
              
              
              152
              
              
              0.40
              %
              $
              62,943
              
              
              203
              
              
              0.43
              %Interest
                  on interest-bearing demand
              
              
              61,193
              
              
              1,182
              
              
              2.58
              %
              
              54,421
              
              
              813
              
              
              1.99
              %Money
                  market accounts
              
              
              68,550
              
              
              1,902
              
              
              3.70
              %
              
              56,070
              
              
              1,088
              
              
              2.59
              %Time
                  deposits
              
              
              310,027
              
              
              9,792
              
              
              4.21
              %
              
              260,556
              
              
              6,444
              
              
              3.30
              %Federal
                  Home Loan Bank advances
              
              
              125,171
              
              
              3,953
              
              
              4.21
              %
              
              116,249
              
              
              3,636
              
              
              4.17
              %Securities
                  sold under agreement to repurchase
              
              
              9,704
              
              
              333
              
              
              4.58
              %
              
              -
              
              
              -
              
              
              -Total
                  interest-bearing liabilities
              
              
              625,604
              
              
              17,314
              
              
              3.69
              %
              
              550,239
              
              
              12,184
              
              
              2.95
              %Non-interest-bearing
                  liabilities
              
              
              46,913
              
              
              
              
              
              
              
              
              42,321Total
                  liabilities
              
              
              672,517
              
              
              
              
              
              
              
              
              592,560Stockholders'
                  equity
              
              
              94,085
              
              
              
              
              
              
              
              
              100,473Total
                  liabilities and stockholders' equity
              
              $
              766,602
              
              
              
              
              
              
              
              $
              693,033Net
                  interest income
              
              
              
              
              $
              16,363
              
              
              
              
              
              
              
              $
              14,885Net
                  interest spread
              
              
              
              
              
              
              
              
              2.64
              %
              
              
              
              
              
              
              
              2.60
              %Net
                  earning assets
              
              $
              84,285
              
              
              
              
              
              
              
              $
              100,013Net
                  interest margin(4)
              
              
              
              
              
              
              
              
              3.07
              %
              
              
              
              
              
              
              
              3.05
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              
              
              
              113.47
              %
              
              
              
              
              
              
              
              118.18
              %
  (1)
                  Calculated net of deferred loan fees and loss reserve. Nonaccrual
                  loans
                  included as loans carrying a zero yield(2)
                  Calculated based on carrying value. Not full tax equivalents, as
                  the
                  numbers would not change materially from those presented in the
                  table.(3)
                  Includes Federal Home Loan Bank stock at cost and term deposits
                  with other
                  financial institutions.(4)
                  Net interest income divided by average interest-earning
                  assets.




25


**Rate/Volume
      Analysis** .
      The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities as of and for the nine months ended September
      30,
      2006 as compared to the same period in 2005. For each category of
      interest-earning assets and interest-bearing liabilities, information is
      provided on changes attributable to (1) changes in volume multiplied by the
      old
      rate; (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)**INTEREST-EARNING
                  ASSETS**
              
              (In
                  Thousands)Loans
                  receivable
              
              $
              3,034
              
              $
              2,449
              
              $
              5,483Securites
              
              
              297
              
              
              750
              
              
              1,047Other
                  interest-earning assets
              
              
              (449
              )
              
              527
              
              
              78Total
                  interest-earning assets
              
              
              2,882
              
              
              3,726
              
              
              6,608**INTEREST-BEARING
                  LIABILITIES**Savings
                  deposits
              
              
              (37
              )
              
              (14
              )
              
              (51
              )Interest
                  bearing demand accounts
              
              
              110
              
              
              259
              
              
              369Money
                  market accounts
              
              
              278
              
              
              536
              
              
              814Time
                  deposits
              
              
              1,361
              
              
              1,987
              
              
              3,348Federal
                  Home Loan Bank advances
              
              
              282
              
              
              35
              
              
              317Securities
                  sold under agreements to repurchase
              
              
              333
              
              
              -
              
              
              333Total
                  interest-bearing liabilities
              
              
              2,327
              
              
              2,803
              
              
              5,130Net
                  interest income
              
              $
              555
              
              $
              923
              
              $
              1,478




**Interest
      income.** As
      shown
      in the table above the increase in interest income for the nine months ended
      September 30, 2006, as compared to the same period in 2005, is predominantly
      due
      to the rate earned on interest-earning assets, although growth in average
      outstanding interest-earning assets also contributed to such growth. Loans
      accounted for approximately 83% of the interest income growth, or $5.5 million
      for the nine months ended September 30, 2006, as compared to the same period
      in
      2005. While the majority of the increased interest income from loans was due
      to
      increased average outstanding balances, the Company also increased its yield
      on
      average outstanding loan balances as a result of growth in prime interest
      rate-based loans. As discussed above in “Comparison of Financial Condition at
      September 30, 2006 and December 31, 2005 - Loans,” the flat/inverted yield curve
      over the last 12 months and a softening in residential real estate sales has
      led
      the Company to increase its emphasis on prime rate interest-based loans, such
      as
      home equity lending, construction loans and commercial real estate loans. The
      growth in average outstanding balances of home equity loans, construction loans
      and commercial real estate loans for the nine months ended September 30, 2006,
      as compared to the same period in 2005, accounted for approximately 66%, or
      $42.0 million of the total $64.0 million in average loan growth. During these
      same periods, the average prime rate increased 186 basis points from 6.12%
      to
      7.98%.





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





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


26


**Interest
      expense.** The
      increase in interest expense for the nine months ended September 30, 2006,
      as
      compared to the same period in 2005, was partially due to growth in average
      outstanding balances of interest-bearing deposit accounts, but more
      significantly due to increases to interest rates paid on those accounts. During
      the period of time from the end of the third quarter of 2005, until the end
      of
      the third quarter of 2006, the Federal Reserve Board increased the target rate
      for Federal Funds borrowings by 150 basis points, from 3.75% to 5.25%. In
      general, this has led to significant rate increases to interest-bearing deposit
      accounts in our markets, where competition for deposits among financial
      institutions is stiff. In order to fund loan growth and maintain deposit market
      share, the Company has increased interest rates on its money-market accounts,
      interest bearing demand accounts and time deposits. The rate of interest expense
      on our FHLB advances has remained relatively flat for the nine months ended
      September 30, 2006 as compared to the same period in 2005, as new advances
      have
      generally had longer maturities and, therefore we have benefited from the flat
      or inverted yield curve. Given the current interest rate environment, and the
      stiff competition for deposits in our market, we do not expect interest rates
      paid on deposits to decline in the near term.





**Net
      interest income.** Net
      interest income increased during the nine months ended September 30, 2006,
      as
      compared to the same period in 2005, as the growth in interest income outpaced
      the growth in interest expense. As discussed above, increases in prime rate
      based loans has, in part, enabled the Company to increase the overall yield
      of
      the loan portfolio, in addition to steady growth in average outstanding
      balances. In addition yields on securities have increased as short-term interest
      rates have tracked upward. Our net interest spread, which is the difference
      between the interest yield earned on interest earning assets and the interest
      rate paid on interest bearing liabilities, increased 4 basis points for the
      nine
      months ended September 30, 2006 as compared to the same nine months in 2005.
      For
      the same comparative periods, our net interest margin, which is net interest
      income expressed as a percentage of our average interest earning assets
      increased 2 basis points.





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





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





Based
      on
      management’s evaluation of these factors, provisions of $183,000 and $1.5
      million were made during the nine months ended September 30, 2006 and 2005,
      respectively. The decrease in the provision for loan losses was primarily due
      to
      a decline in specific reserves for large non-homogenous loans as a result of
      improved credit quality and a decrease in net-charge offs. For the nine months
      ended September 30, 2006 net charge-offs were $272,000, while for the same
      period in 2005, net charge-offs were $1.3 million.




27




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





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


Increase
                  (decrease)2006
              
              2005
              
              Dollars
              
              Percentage(Dollars
                  in Thousands)Service
                  charges and fees
              
              $
              4,360
              
              $
              3,770
              
              $
              590
              
              
              15.6
              %Net
                  loss on available for sale securities
              
              
              (166
              )
              
              -
              
              
              (166
              )
              
              -100.0
              %Gain
                  on sale of real estate mortgagesheld
                  for sale
              
              
              51
              
              
              114
              
              
              (63
              )
              
              -55.3
              %Gain
                  on sale of foreclosed assets
              
              
              (10
              )
              
              41
              
              
              (51
              )
              
              -124.4
              %Commission
                  income
              
              
              239
              
              
              328
              
              
              (89
              )
              
              -27.1
              %Interchange
                  fees
              
              
              588
              
              
              561
              
              
              27
              
              
              4.8
              %Bank
                  owned life insurance earnings
              
              
              629
              
              
              391
              
              
              238
              
              
              60.9
              %Other
              
              
              229
              
              
              135
              
              
              94
              
              
              69.6
              %$
              5,920
              
              $
              5,340
              
              $
              580
              
              
              10.9
              %




Services
      charges and fees, which are earned primarily based on transaction services
      for
      deposit account customers, increased as a result of increased ATM and check
      card
      overdraft fees which began in the third quarter of 2005. The implementation
      of
      overdraft fees for ATM and check card overdrafts was part of a several fee
      initiatives started in 2005, which focused on improving our discipline over
      service charge fees and collections. We expect the growth of service charges
      and
      fees for the remainder of 2006, as compared to 2005, to be flat as most of
      the
      initiatives became fully effective in the third and fourth quarters of 2005.
      New
      growth will principally result from expanded products and services in existing
      markets and new branches opened in the fourth quarter of 2006 and the first
      quarter of 2007.





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





The
      growth in bank owned life insurance earnings for the nine months ended September
      30, 2006, as compared to the same period in 2005, was due to an increase in
      the
      average amount invested from $13.1 million in 2005 to $20.8 million in 2006.


28


Other
      non-interest income for the nine months ended September 30, 2006 included a
      gain
      of $208,000 resulting from the early termination of an interest rate swap
      agreement that had been used as a cash flow hedge for a FHLB advance of
      $5,000,000. In connection with our asset liability strategy, the FHLB advance
      was prepaid during the second quarter and the interest rate swap agreement
      was
      terminated with the counter-party resulting in the realized gain. We do not
      expect future gains from early termination of the remaining interest rate swap
      cash flow hedge, which at September 30, 2006 had a fair market value of
      $419,000, net of taxes.





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


Increase(decrease)2006
              
              2005
              
              Dollars
              
              Percentage(Dollars
                  in Thousands)Compensation
                  and benefits
              
              $
              8,049
              
              $
              6,986
              
              $
              1,063
              
              
              15.2
              %Occupancy
                  and equipment
              
              
              1,609
              
              
              1,267
              
              
              342
              
              
              27.0
              %Data
                  processing
              
              
              1,135
              
              
              978
              
              
              157
              
              
              16.1
              %Advertising
              
              
              631
              
              
              446
              
              
              185
              
              
              41.5
              %Outside
                  professional services
              
              
              1,317
              
              
              1,775
              
              
              (458
              )
              
              -25.8
              %Interchange
                  charges
              
              
              420
              
              
              463
              
              
              (43
              )
              
              -9.3
              %Collection
                  expense and repossessedasset
                  losses
              
              
              218
              
              
              247
              
              
              (29
              )
              
              -11.7
              %Telephone
              
              
              359
              
              
              412
              
              
              (53
              )
              
              -12.9
              %Other
              
              
              2,154
              
              
              2,023
              
              
              131
              
              
              6.5
              %$
              15,892
              
              $
              14,597
              
              $
              1,295
              
              
              8.9
              %


Compensation
      and benefit expense for the nine months ended September 30, 2006, as compared
      to
      the same period in 2005, increased $480,000 for the recognition of compensation
      expense for awards made under the Company’s share-based compensation plans which
      were initially awarded in the third quarter of 2005. The remaining increase
      to
      compensation and benefit expense was primarily due to increased salaries. Normal
      annual merit increases for associates account for a portion of the increase,
      along with additional associates for sales and service of our private banking
      customers in Florida and new branch personnel hired in advance of the branch
      opening in October 2006. Occupancy and equipment charges increased for the
      nine
      months ended September 30, 2006 as compared to the same period in 2005,
      primarily due to increased building and equipment maintenance costs, including
      the refurbishment costs at two branches during the third quarter of 2006, along
      with higher real estate tax expenses. The increased data processing costs for
      the nine months ended September 30, 2006, as compared to the same period in
      2005, were primarily due to increased software licensing costs for the Company’s
      operating system, the fees for which were based partly on the asset size of
      the
      Company during the first half of 2006. In the third quarter of 2006, the Company
      completed negotiations on a new contract for software licensing with terms
      that
      will result in reduced costs. Advertising expenses for the first nine months
      of
      2006 increased compared to the same period in 2005, as the Company has been
      more
      active in marketing through print and television advertisements. Outside and
      professional services cost decreased for the nine months ended September 30,
      2006 as compared to the same period in 2005, as the Company incurred significant
      fees associated with Sarbanes-Oxley initiatives and tax planning initiatives
      in
      2005 that have not been incurred in 2006.





In
      general, we expect non-interest expense will increase in future periods as
      a
      result of continued growth, expansion, and the costs associated with our
      operation as a public company.




29


**Income
      tax expense.** Income
      tax expense increased to $2.0 million for the nine months ended
      September 30, 2006, from $487,000 for the same period in 2005. The increase
      was primarily due to the elimination of a tax-related contingent liability
      in
      the third quarter of 2005 of $895,000. The contingent liability had been
      established by the Company in 2000 upon becoming a taxable entity and reflected
      the tax effect of a tax accounting method utilized by the Company in 2000 and
      2001 calendar tax years. The Company believed the filing position was
      supportable based upon a reasonable interpretation of federal income tax laws
      and the underlying regulations. However, due to the lack of prior rulings on
      similar fact patterns, it was unknown whether the accounting method would be
      sustained upon audit by either federal or state tax authorities. The applicable
      statute of limitations expired with respect to the 2001 tax year on September
      15, 2005, making the contingency reserve unnecessary. In addition income tax
      expense increased in 2006 as compared to 2005 due to an increase in income
      before income tax expense when comparing the two periods. The effective income
      tax rate on income before income taxes for the nine months ended September
      30,
      2006 was 31.8%, compared to 33.8% for the same period in 2005 before the tax
      benefit of $895,000. The decline in the effective tax rate is primarily due
      to
      increased income from Bank Owned Life Insurance, which is not taxable for
      federal income tax purposes. We anticipate that income tax expense will continue
      to vary as income before income taxes varies.




30


**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





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





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





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





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





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


Economic
                  Value of Equity and Duration of Assets and Liabilities at September
                  30,
                  2006Change
                  in Interest RateDecrease
              
              Decrease
              
              Decrease
              
              Increase
              
              Increase
              
              Increase3%
              
              2%
              
              1%
              
              1%
              
              2%
              
              3%Duration
                  of assets(1)
              
              
              2.83
              
              
              2.83
              
              
              2.86
              
              
              2.96
              
              
              2.98
              
              
              2.98Duration
                  of liabilities(1)
              
              
              2.45
              
              
              2.45
              
              
              2.45
              
              
              2.51
              
              
              2.51
              
              
              2.51Differential
                  in duration
              
              
              0.38
              
              
              0.38
              
              
              0.41
              
              
              0.45
              
              
              0.47
              
              
              0.47Amount
                  of change in Economic Value of Equity(2)
              
              $
              9,132,419
              
              $
              6,204,712
              
              $
              3,288,188
              
              $
              (3,620,845
              )
              $
              (7,632,533
              )
              $
              (11,448,799
              )Percentage
                  change in Economic Value of Equity(2)
              
              
              9.56
              %
              
              6.50
              %
              
              3.44
              %
              
              -3.79
              %
              
              -7.99
              %
              
              -11.99
              %
  (1)
                  Expressed as number of years before the asset/liability reprices
                  to
                  achieve stated rate of interest rate increase/decrease(2)
                  Represents the cummulative five year pre-tax impact on the Company's
                  equity due to increased or (decreased) net interest margin




31


In
      managing its asset/liability mix, the Company, depending on the relationship
      between long and short-term interest rates, market conditions and consumer
      preference, may place somewhat greater emphasis on maximizing its net interest
      margin than on strictly matching the interest rate sensitivity of its assets
      and
      liabilities. Management believes that the increased net income which may result
      from an acceptable mismatch in the actual maturity or re-pricing of its asset
      and liability portfolios can, during periods of declining or stable interest
      rates, provide sufficient returns to justify the increased exposure to sudden
      and unexpected increases in interest rates which may result from such a
      mismatch. Management believes that Atlantic Coast Federal Corporation’s level of
      interest rate risk is acceptable under this approach.





In
      evaluating Atlantic Coast Federal Corporation’s exposure to interest rate
      movements, certain shortcomings inherent in the EVE methodology must be
      considered. For example, although certain assets and liabilities may have
      similar maturities or re-pricing periods, they may react in different degrees
      to
      changes in market interest rates. Also, the interest rates on certain types
      of
      assets and liabilities may fluctuate in advance of changes in market interest
      rates, while interest rates on other types may lag behind changes in interest
      rates. Additionally, certain assets, such as adjustable-rate mortgages, have
      features that restrict changes in interest rates on a short-term basis and
      over
      the life of the asset. Further, in the event of a significant change in interest
      rates, prepayment and early withdrawal levels would likely deviate significantly
      from those assumed in our EVE methodology. Finally, the ability of many
      borrowers to service their debt may decrease in the event of an interest rate
      increase. Atlantic Coast Federal Corporation considers all of these factors
      in
      monitoring its exposure to interest rate risk.





We
      believe that certain factors afford Atlantic Coast Federal Corporation the
      ability to operate successfully despite its exposure to interest rate risk.
      Atlantic Coast Federal Corporation manages its interest rate risk by originating
      and retaining adjustable-rate loans in its portfolio and by selling most of
      our
      currently originated fixed-rate, one- to four-family real estate loans. Also,
      to
      a limited degree, we have utilized interest rate swap agreements as a part
      of
      our asset/liability management strategy to reduce interest rate risk. As of
      September 30, 2006, the Company held interest rate swaps agreements classified
      as cash flow hedges of certain FHLB advances with notional amounts totaling
      $10.0 million. We have determined that the fair value of these interest rate
      swaps was approximately $676,000 as of September 30, 2006. The Company also
      had
      two interest rate swaps with a combined notional value of $10.0 million as
      of
      September 30, 2006, used to promote our asset/liability management strategy
      by
      mitigating the impact to our net interest margin of sudden and unplanned
      interest rate changes. These swaps, which do not qualify for hedge accounting,
      had an estimated value on September 30, 2006 of $(43,000). Finally, Atlantic
      Coast Federal Corporation’s investment strategy is to maintain a diversified
      portfolio of high quality investments that balances the goals of minimizing
      interest rate and credit risks while striving to maximize investment return
      and
      provide the liquidity necessary to meet funding needs.





**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, 2006, that have materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.


32


**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2006**





**Part
      II - Other Information**





Item
      1.  Legal
      Proceedings


None.





Item
      1A.  Risk
      Factors


None.





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





The
      table
      below sets forth information regarding the Company’s common stock repurchase
      plans. Purchases made in July and August relate to the repurchase that was
      approved by the Company’s Board of Directors on September 23, 2005. The purpose
      of the stock repurchase plan was to replace shares issued to key employees
      and
      outside directors under the Company’s Recognition Plan. Purchases made in
      September relate to a stock repurchase plan approved by the Company’s Board of
      Directors on September 1, 2006. Stock repurchased under this plan will be
      held in Treasury for future deployment by the Company as needed.


Period
              
              Total
                  Number of Shares Purchased
              
              Average
                  Price Paid per Share
              
              Total
                  Number of Shares Purchased as Part of Publicly Announced Plans
                  or
                  Programs
              
              Maximum
                  Number of Shares that May Yet Be Purchased Under the Plans or
                  ProgramsJuly
                  1, 2006 through July 31, 2006
              
              
              0
              
              $
              -
              
              
              -
              
              
              200,032August
                  1, 2006 through August 31, 2006
              
              
              200,032
              
              
              17.28
              
              
              200,032
              
              
              0September
                  1, 2006 through September 30, 2006
              
              
              135,750
              
              
              17.82
              
              
              135,750
              
              
              342,250Total
              
              
              335,782
              
              $
              17.50
              
              
              335,782
              
              
              342,250


Item
      3. Defaults
      Upon Senior Securities


None





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


None





Item
      5.  Other
      Information


None





Item
      6.  Exhibits


a.  Exhibits


31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002





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





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


33


**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2006**





**Part
      II - Other Information**





**Signatures**





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




ATLANTIC
                COAST FEDERAL CORPORATION(Registrant)Date:
              November 14, 2006
            
            /s/
              Robert J. Larison, JrRobert
                J. Larison, Jr., President and
              Chief
                Executive
                Officer




Date: November 14, 2006
            
            /s/
              Jon C. Parker, Sr.Jon
                C. Parker, Sr., Senior Vice-President andChief
                Financial Officer




34