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, 2009
 
 OR
 
  ̈ 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     ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). YES    ̈     NO     ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definition of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
 
 Large
Accelerated Filer  ̈    Accelerated
Filer  ̈   Non-Accelerated
Filer    ̈  Smaller
Reporting Company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 YES     ̈     NO    x
 
 Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
 
 Class
              Outstanding
      at November 13, 2009Common
      Stock, $0.01 Par Value
              13,438,209
      shares
  
  ATLANTIC
COAST FEDERAL CORPORATION
 
 Form
10-Q Quarterly Report
 
 Table
of Contents
 
 
 PART
I. FINANCIAL INFORMATION
 
 Page NumberItem
      1.
                    Financial
      Statements
                    3Item
      2.
                    Management’s
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                    27Item
      3.
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    42Item
      4.
                    Controls
      and Procedures
                    44PART
      II.  OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    45Item
      1A.
                    Risk
      Factors
                    45Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    46Item
      3.
                    Defaults
      upon Senior Securities
                    46Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    46Item
      5.
                    Other
      Information
                    46Item
      6.
                    Exhibits
                    46Form
      10-Q
                    Signature
      Page
                    47Ex-31.1
                    Section
      302 Certification of CEO
                    48Ex-31.2
                    Section
      302 Certification of CFO
                    49Ex-32
                    Section
      906 Certification of CEO and CFO
                    50
  
  PART
I. FINANCIAL INFORMATION
 Item
I.  Financial Statements
 ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 September
30, 2009 (unaudited) and December 31, 2008
 (Dollars
in Thousands, Except Share Information)
  September
      30,
                                          
                                          
                                          December
      31,2009
                                          
                                          
                                          2008ASSETSCash
      and due from financial institutions
                                          
                                          $
                                          6,717
                                          
                                          
                                          $
                                          10,025Short-term
      interest earning deposits
                                          
                                          
                                          43,334
                                          
                                          
                                          
                                          24,033Total
      cash and cash equivalents
                                          
                                          
                                          50,051
                                          
                                          
                                          
                                          34,058Securities
      available for sale
                                          
                                          
                                          172,386
                                          
                                          
                                          
                                          147,474Real
      estate mortgages held for sale
                                          
                                          
                                          7,316
                                          
                                          
                                          
                                          736Loans,
      net of allowance of $14,775 at September 30, 2009and
      $10,598 at December 31, 2008
                                          
                                          
                                          647,303
                                          
                                          
                                          
                                          741,879Federal
      Home Loan Bank stock
                                          
                                          
                                          9,961
                                          
                                          
                                          
                                          9,996Accrued
      interest receivable
                                          
                                          
                                          3,416
                                          
                                          
                                          
                                          3,934Land,
      premises and equipment
                                          
                                          
                                          16,395
                                          
                                          
                                          
                                          16,562Bank
      owned life insurance
                                          
                                          
                                          22,723
                                          
                                          
                                          
                                          22,173Other
      real estate owned
                                          
                                          
                                          3,132
                                          
                                          
                                          
                                          3,332Goodwill
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,811Other
      assets (includes net deferred tax asset of $7,142 at September
      30,2009
      and $7,727 at December 31, 2008)
                                          
                                          
                                          12,597
                                          
                                          
                                          
                                          13,134Total
      assets
                                          
                                          $
                                          945,280
                                          
                                          
                                          $
                                          996,089LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
      demand
                                          
                                          $
                                          36,244
                                          
                                          
                                          $
                                          33,192Interest-bearing
      demand
                                          
                                          
                                          76,307
                                          
                                          
                                          
                                          67,714Savings
      and money market
                                          
                                          
                                          179,965
                                          
                                          
                                          
                                          164,388Time
                                          
                                          
                                          307,641
                                          
                                          
                                          
                                          359,312Total
      deposits
                                          
                                          
                                          600,157
                                          
                                          
                                          
                                          624,606Federal
      Home Loan Bank advances
                                          
                                          
                                          177,670
                                          
                                          
                                          
                                          184,850Securities
      sold under agreements to repurchase
                                          
                                          
                                          92,800
                                          
                                          
                                          
                                          92,800Accrued
      expenses and other liabilities
                                          
                                          
                                          8,858
                                          
                                          
                                          
                                          9,873Total
      liabilities
                                          
                                          
                                          879,485
                                          
                                          
                                          
                                          912,129Commitments
      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,
    sharesissued
      of 14,813,469 at September 30, 2009 and December 31, 2008
                                          
                                          
                                          148
                                          
                                          
                                          
                                          148Additional
      paid in capital
                                          
                                          
                                          61,055
                                          
                                          
                                          
                                          60,061Unearned
      employee stock ownership plan (ESOP) shares of 197,846 atSeptember
      30, 2009 and 232,760 at December 31, 2008
                                          
                                          
                                          (1,978
                                          )
                                          
                                          
                                          (2,328
                                          )Retained
      earnings
                                          
                                          
                                          26,262
                                          
                                          
                                          
                                          46,201Accumulated
      other comprehensive income (loss)
                                          
                                          
                                          212
                                          
                                          
                                          
                                          (308
                                          )Treasury
      stock, at cost, 1,375,260 shares at September 30, 2009 and1,361,633
      at December 31, 2008
                                          
                                          
                                          (19,904
                                          )
                                          
                                          
                                          (19,814
                                          )Total
      stockholders' equity
                                          
                                          
                                          65,795
                                          
                                          
                                          
                                          83,960Total
      liabilities and stockholders' equity
                                          
                                          $
                                          945,280
                                          
                                          
                                          $
                                          996,089
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  3
  ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
STATEMENTS OF INCOME
 (Dollars
in Thousands, Except Share Information)
 (unaudited)
  Three
      months ended Sept. 30,
                                                                        
                                                                        
                                                                        Nine
      months ended Sept. 30,2009
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2009
                                                                        
                                                                        
                                                                        2008Interest
      and dividend incomeLoans,
      including fees
                                                                        
                                                                        $
                                                                        10,094
                                                                        
                                                                        
                                                                        $
                                                                        11,657
                                                                        
                                                                        
                                                                        $
                                                                        31,183
                                                                        
                                                                        
                                                                        $
                                                                        34,787Securities
      and interest-earning depositsin
      other financial institutions
                                                                        
                                                                        
                                                                        2,123
                                                                        
                                                                        
                                                                        
                                                                        2,183
                                                                        
                                                                        
                                                                        
                                                                        5,987
                                                                        
                                                                        
                                                                        
                                                                        6,857Total
      interest and dividend income
                                                                        
                                                                        
                                                                        12,217
                                                                        
                                                                        
                                                                        
                                                                        13,840
                                                                        
                                                                        
                                                                        
                                                                        37,170
                                                                        
                                                                        
                                                                        
                                                                        41,644Interest
      expenseDeposits
                                                                        
                                                                        
                                                                        
                                                                        3,819
                                                                        
                                                                        
                                                                        
                                                                        4,964
                                                                        
                                                                        
                                                                        
                                                                        12,566
                                                                        
                                                                        
                                                                        
                                                                        15,426Federal
      Home Loan Bank advances
                                                                        
                                                                        
                                                                        1,714
                                                                        
                                                                        
                                                                        
                                                                        1,983
                                                                        
                                                                        
                                                                        
                                                                        5,135
                                                                        
                                                                        
                                                                        
                                                                        5,596Securities
      sold under agreements to repurchase
                                                                        
                                                                        
                                                                        1,085
                                                                        
                                                                        
                                                                        
                                                                        963
                                                                        
                                                                        
                                                                        
                                                                        3,085
                                                                        
                                                                        
                                                                        
                                                                        2,763Total
      interest expense
                                                                        
                                                                        
                                                                        6,618
                                                                        
                                                                        
                                                                        
                                                                        7,910
                                                                        
                                                                        
                                                                        
                                                                        20,786
                                                                        
                                                                        
                                                                        
                                                                        23,785Net
      interest income
                                                                        
                                                                        
                                                                        
                                                                        5,599
                                                                        
                                                                        
                                                                        
                                                                        5,930
                                                                        
                                                                        
                                                                        
                                                                        16,384
                                                                        
                                                                        
                                                                        
                                                                        17,859Provision
      for loan losses
                                                                        
                                                                        
                                                                        6,650
                                                                        
                                                                        
                                                                        
                                                                        3,749
                                                                        
                                                                        
                                                                        
                                                                        18,657
                                                                        
                                                                        
                                                                        
                                                                        9,240Net
      interest income (loss) after provision for loan losses
                                                                        
                                                                        
                                                                        (1,051
                                                                        )
                                                                        
                                                                        
                                                                        2,181
                                                                        
                                                                        
                                                                        
                                                                        (2,273
                                                                        )
                                                                        
                                                                        
                                                                        8,619Noninterest
      incomeService
      charges and fees
                                                                        
                                                                        
                                                                        1,099
                                                                        
                                                                        
                                                                        
                                                                        1,299
                                                                        
                                                                        
                                                                        
                                                                        3,119
                                                                        
                                                                        
                                                                        
                                                                        3,649Gain
      on sale of real estate mortgages held for sale
                                                                        
                                                                        
                                                                        147
                                                                        
                                                                        
                                                                        
                                                                        46
                                                                        
                                                                        
                                                                        
                                                                        448
                                                                        
                                                                        
                                                                        
                                                                        82Loss
      on sale of loans
                                                                        
                                                                        
                                                                        (1,317
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (1,245
                                                                        )
                                                                        
                                                                        
                                                                        -Gain
      on sale of securities available for sale
                                                                        
                                                                        
                                                                        117
                                                                        
                                                                        
                                                                        
                                                                        177
                                                                        
                                                                        
                                                                        
                                                                        333
                                                                        
                                                                        
                                                                        
                                                                        260Other
      than temporary impairment losses on AFS debt securities:Total
      other-than-temporary impairment losses
                                                                        
                                                                        
                                                                        (568
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (2,695
                                                                        )
                                                                        
                                                                        
                                                                        -Less:
      Portion of other-than-temporary impairment lossesrecognized
      in OCI
                                                                        
                                                                        
                                                                        316
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,122
                                                                        
                                                                        
                                                                        
                                                                        -Net
      impairment losses recognized in earningson
      AFS debt securities:
                                                                        
                                                                        
                                                                        (252
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (1,573
                                                                        )
                                                                        
                                                                        
                                                                        -Loss
      on sale of foreclosed assets
                                                                        
                                                                        
                                                                        (318
                                                                        )
                                                                        
                                                                        
                                                                        (63
                                                                        )
                                                                        
                                                                        
                                                                        (1,308
                                                                        )
                                                                        
                                                                        
                                                                        (239
                                                                        )Interchange
      fees
                                                                        
                                                                        
                                                                        235
                                                                        
                                                                        
                                                                        
                                                                        224
                                                                        
                                                                        
                                                                        
                                                                        685
                                                                        
                                                                        
                                                                        
                                                                        675Bank
      owned life insurance earnings
                                                                        
                                                                        
                                                                        195
                                                                        
                                                                        
                                                                        
                                                                        252
                                                                        
                                                                        
                                                                        
                                                                        549
                                                                        
                                                                        
                                                                        
                                                                        739Life
      insurance proceeds in excess of cash surrender value
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,634Other
                                                                        
                                                                        
                                                                        
                                                                        2,015
                                                                        
                                                                        
                                                                        
                                                                        1,097
                                                                        
                                                                        
                                                                        
                                                                        2,213
                                                                        
                                                                        
                                                                        
                                                                        1,4201,921
                                                                        
                                                                        
                                                                        
                                                                        3,032
                                                                        
                                                                        
                                                                        
                                                                        3,221
                                                                        
                                                                        
                                                                        
                                                                        9,220Noninterest
      expenseCompensation
      and benefits
                                                                        
                                                                        
                                                                        2,861
                                                                        
                                                                        
                                                                        
                                                                        3,183
                                                                        
                                                                        
                                                                        
                                                                        8,403
                                                                        
                                                                        
                                                                        
                                                                        9,584Final
      plan benefits for deceased executive officer
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,032Occupancy
      and equipment
                                                                        
                                                                        
                                                                        674
                                                                        
                                                                        
                                                                        
                                                                        689
                                                                        
                                                                        
                                                                        
                                                                        1,962
                                                                        
                                                                        
                                                                        
                                                                        2,021FDIC
      insurance premiums
                                                                        
                                                                        
                                                                        422
                                                                        
                                                                        
                                                                        
                                                                        38
                                                                        
                                                                        
                                                                        
                                                                        1,435
                                                                        
                                                                        
                                                                        
                                                                        369Outside
      professional services
                                                                        
                                                                        
                                                                        316
                                                                        
                                                                        
                                                                        
                                                                        353
                                                                        
                                                                        
                                                                        
                                                                        1,477
                                                                        
                                                                        
                                                                        
                                                                        1,407Collection
      expense and repossessed asset losses
                                                                        
                                                                        
                                                                        355
                                                                        
                                                                        
                                                                        
                                                                        125
                                                                        
                                                                        
                                                                        
                                                                        831
                                                                        
                                                                        
                                                                        
                                                                        358Goodwill
      impairment
                                                                        
                                                                        
                                                                        2,811
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,811
                                                                        
                                                                        
                                                                        
                                                                        -Other
                                                                        
                                                                        
                                                                        1,115
                                                                        
                                                                        
                                                                        
                                                                        1,483
                                                                        
                                                                        
                                                                        
                                                                        3,597
                                                                        
                                                                        
                                                                        
                                                                        4,1828,554
                                                                        
                                                                        
                                                                        
                                                                        5,871
                                                                        
                                                                        
                                                                        
                                                                        20,516
                                                                        
                                                                        
                                                                        
                                                                        18,953Loss
      before income tax expense (benefit)
                                                                        
                                                                        
                                                                        (7,684
                                                                        )
                                                                        
                                                                        
                                                                        (658
                                                                        )
                                                                        
                                                                        
                                                                        (19,568
                                                                        )
                                                                        
                                                                        
                                                                        (1,114
                                                                        )Income
      tax expense (benefit)
                                                                        
                                                                        
                                                                        4,472
                                                                        
                                                                        
                                                                        
                                                                        (329
                                                                        )
                                                                        
                                                                        
                                                                        282
                                                                        
                                                                        
                                                                        
                                                                        (1,519
                                                                        )Net
      income (loss)
                                                                        
                                                                        $
                                                                        (12,156
                                                                        )
                                                                        
                                                                        $
                                                                        (329
                                                                        )
                                                                        
                                                                        $
                                                                        (19,850
                                                                        )
                                                                        
                                                                        $
                                                                        405Earnings
      (loss) per common share:Basic
                                                                        
                                                                        
                                                                        $
                                                                        (0.93
                                                                        )
                                                                        
                                                                        $
                                                                        (0.03
                                                                        )
                                                                        
                                                                        $
                                                                        (1.52
                                                                        )
                                                                        
                                                                        $
                                                                        0.03Diluted
                                                                        
                                                                        
                                                                        $
                                                                        (0.93
                                                                        )
                                                                        
                                                                        $
                                                                        (0.03
                                                                        )
                                                                        
                                                                        $
                                                                        (1.52
                                                                        )
                                                                        
                                                                        $
                                                                        0.03Dividends
      declared per common share
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        0.11
                                                                        
                                                                        
                                                                        $
                                                                        0.02
                                                                        
                                                                        
                                                                        $
                                                                        0.38
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  4
  ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME (LOSS)
 For
the Nine Months Ended September 30, 2009
 (Dollars
in Thousands, Except Share Information)
 (unaudited)
 
 ACCUMULATEDADDITIONAL
                            
                            
                            UNEARNED
                            
                            
                            
                            
                            
                            OTHERCOMMON
                            
                            
                            PAID
      IN
                            
                            
                            ESOP
                            
                            
                            RETAINED
                            
                            
                            COMPREHENSIVE
                            
                            
                            TREASURY
                            
                            
                            TOTALSTOCK
                            
                            
                            CAPITAL
                            
                            
                            STOCK
                            
                            
                            EARNINGS
                            
                            
                            INCOME
      (LOSS)
                            
                            
                            STOCK
                            
                            
                            EQUITYFor
      the nine months ended  September 30, 2009Balance
      at January 1, 2009
                            
                            $
                            148
                            
                            
                            $
                            60,061
                            
                            
                            $
                            (2,328
                            )
                            
                            $
                            46,201
                            
                            
                            $
                            (308
                            )
                            
                            $
                            (19,814
                            )
                            
                            $
                            83,960ESOP
      shares earned, 34,914 shares
                            
                            
                            -
                            
                            
                            
                            (171
                            )
                            
                            
                            350
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            179Management
      restricted stock expense
                            
                            
                            -
                            
                            
                            
                            484
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            484Stock
      options expense
                            
                            
                            -
                            
                            
                            
                            236
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            236Dividends
      declared ( $0.02 per share)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (89
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (89
                            )Director's
      deferred compensation
                            
                            
                            -
                            
                            
                            
                            16
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (16
                            )
                            
                            
                            -Capital
      contribution by parent
                            
                            
                            -
                            
                            
                            
                            400
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            400RRP
      shares relinquished, 6,227 shares
                            
                            
                            -
                            
                            
                            
                            29
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (45
                            )
                            
                            
                            (16
                            )Treasury
      stock  purchased at cost, 7,400 shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (29
                            )
                            
                            
                            (29
                            )Comprehensive
      income:Net
      income (loss)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (19,850
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (19,850
                            )Other
      comprehensive incomeNet
      change in unrealized losses on securities available-for-sale net of
      reclassification and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,188
                            
                            
                            
                            -
                            
                            
                            
                            1,188Change
      in unrealized gains (losses) on securities available-for-sale for which a
      portion of an other-than-temporary impairment has been recognized in
      earnings, net of reclassification and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (668
                            )
                            
                            
                            -
                            
                            
                            
                            (668
                            )Total
      comprehensive income (loss)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (19,850
                            )
                            
                            
                            520
                            
                            
                            
                            -
                            
                            
                            
                            (19,330
                            )Balance
      at September 30, 2009
                            
                            $
                            148
                            
                            
                            $
                            61,055
                            
                            
                            $
                            (1,978
                            )
                            
                            $
                            26,262
                            
                            
                            $
                            212
                            
                            
                            $
                            (19,904
                            )
                            
                            $
                            65,795
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  5
 
 ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME (LOSS)
 For
the Nine Months Ended September 30, 2008
 (Dollars
in Thousands, Except Share Information)
 (unaudited)
 
 ACCUMULATEDADDITIONAL
                      
                      
                      UNEARNED
                      
                      
                      
                      
                      
                      OTHERCOMMON
                      
                      
                      PAID
      IN
                      
                      
                      ESOP
                      
                      
                      RETAINED
                      
                      
                      COMPREHENSIVE
                      
                      
                      TREASURY
                      
                      
                      TOTALSTOCK
                      
                      
                      CAPITAL
                      
                      
                      STOCK
                      
                      
                      EARNINGS
                      
                      
                      INCOME
      (LOSS)
                      
                      
                      STOCK
                      
                      
                      EQUITYFor
      the nine months ended September 30, 2008Balance
      at January 1, 2008
                      
                      $
                      148
                      
                      
                      $
                      59,082
                      
                      
                      $
                      (2,793
                      )
                      
                      $
                      51,182
                      
                      
                      $
                      104
                      
                      
                      $
                      (17,917
                      )
                      
                      $
                      89,806ESOP
      shares earned, 34,914 shares
                      
                      
                      -
                      
                      
                      
                      (43
                      )
                      
                      
                      349
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      306Management
      restricted stock expense
                      
                      
                      -
                      
                      
                      
                      452
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      452Stock
      options expense
                      
                      
                      -
                      
                      
                      
                      318
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      318Dividend
      declared ($0.38 per share)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,732
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,732
                      )Director's
      deferred compensation
                      
                      
                      -
                      
                      
                      
                      16
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (16
                      )
                      
                      
                      -Shares
      relinquished
                      
                      
                      -
                      
                      
                      
                      7
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (60
                      )
                      
                      
                      (53
                      )Treasury
      stock  purchased at cost, 182,729 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,626
                      )
                      
                      
                      (1,626
                      )Comprehensive
      income:Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      405
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      405Other
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (940
                      )
                      
                      
                      -
                      
                      
                      
                      (940
                      )Total
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      405
                      
                      
                      
                      (940
                      )
                      
                      
                      -
                      
                      
                      
                      (535
                      )Balance
      at September 30, 2008
                      
                      $
                      148
                      
                      
                      $
                      59,832
                      
                      
                      $
                      (2,444
                      )
                      
                      $
                      49,855
                      
                      
                      $
                      (836
                      )
                      
                      $
                      (19,619
                      )
                      
                      $
                      86,936
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  6
  ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)
 
 Nine
      months ended September 30,2009
                              
                              
                              2008Cash
      flows from operating activitiesNet
      (loss) income
                              
                              
                              (19,850
                              )
                              
                              
                              405Adjustments
      to reconcile net (loss) income toto
      net cash from operating activities:Provision
      for loan losses
                              
                              
                              18,657
                              
                              
                              
                              9,240Gain
      on sale of real estate mortgages held for sale
                              
                              
                              (448
                              )
                              
                              
                              (82
                              )Loss
      on sale of portfolio loans
                              
                              
                              1,245
                              
                              
                              
                              -Loans
      originated for sale
                              
                              
                              (69,199
                              )
                              
                              
                              (7,084
                              )Proceeds
      from loan sales
                              
                              
                              63,067
                              
                              
                              
                              7,577Loss
      on sale of other real estate owned
                              
                              
                              1,308
                              
                              
                              
                              238Gain
      on sale of securities available for sale
                              
                              
                              (333
                              )
                              
                              
                              (260
                              )Other
      than temporary impairment loss on AFS securities
                              
                              
                              1,573
                              
                              
                              
                              -Loss
      on disposal of equipment
                              
                              
                              52
                              
                              
                              
                              1,050ESOP
      compensation expense
                              
                              
                              179
                              
                              
                              
                              308Share-based
      compensation expense
                              
                              
                              720
                              
                              
                              
                              802Net
      depreciation and amortization
                              
                              
                              1,691
                              
                              
                              
                              1,522Net
      change in accrued interest receivable
                              
                              
                              518
                              
                              
                              
                              208(Increase)
      decrease in cash surrender value of bank owned life
    insurance
                              
                              
                              (550
                              )
                              
                              
                              262Goodwill
      impairment
                              
                              
                              2,811
                              
                              
                              
                              -Net
      change in other assets
                              
                              
                              183
                              
                              
                              
                              (5,177
                              )Net
      change in accrued expensesand
      other liabilities
                              
                              
                              (1,015
                              )
                              
                              
                              379Net
      cash from operating activites
                              
                              
                              609
                              
                              
                              
                              9,388Cash
      flows from investing activitiesProceeds
      from maturities and paymentsof
      securites available for sale
                              
                              
                              40,622
                              
                              
                              
                              22,017Proceeds
      from the sales of securitiesavailable
      for sale
                              
                              
                              47,295
                              
                              
                              
                              55,896Purchase
      of securities available for sale
                              
                              
                              (113,674
                              )
                              
                              
                              (87,968
                              )Proceeds
      from sale of portfolio loans
                              
                              
                              16,020
                              
                              
                              
                              -Net
      change in loans
                              
                              
                              54,982
                              
                              
                              
                              (49,600
                              )Expenditures
      on premises and equipment
                              
                              
                              (758
                              )
                              
                              
                              (1,223
                              )Proceeds
      from the sale of other real estate owned
                              
                              
                              2,226
                              
                              
                              
                              679Purchase
      of residential mortgage brokerage operations
                              
                              
                              -
                              
                              
                              
                              (150
                              )Purchase
      of FHLB stock
                              
                              
                              (1,028
                              )
                              
                              
                              (2,177
                              )Redemption
      of FHLB stock
                              
                              
                              1,063
                              
                              
                              
                              450Net
      cash from investing activities
                              
                              
                              46,748
                              
                              
                              
                              (62,076
                              )
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
   7
  ATLANTIC
COAST FEDERAL CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)
 
 2009
                          
                          
                          2008Cash
      flows from financing activitiesNet
      (decrease) increase in deposits
                          
                          $
                          (24,449
                          )
                          
                          $
                          22,571Proceeds
      from FHLB advances
                          
                          
                          20,000
                          
                          
                          
                          103,000Proceeds
      from sale of securitiesunder
      agreements to repurchase
                          
                          
                          -
                          
                          
                          
                          14,300Repayment
      of FHLB advances
                          
                          
                          (27,180
                          )
                          
                          
                          (68,424
                          )Capital
      contribution from parent
                          
                          
                          400
                          
                          
                          
                          -Share
      based compensation items
                          
                          
                          28
                          
                          
                          
                          -Treasury
      stock repurchased
                          
                          
                          (29
                          )
                          
                          
                          (1,711
                          )RRP
      relinquished
                          
                          
                          (45
                          )
                          
                          
                          -Dividends
      paid
                          
                          
                          (89
                          )
                          
                          
                          (1,732
                          )Net
      cash from financing activities
                          
                          
                          (31,364
                          )
                          
                          
                          68,004Net
      change in cash and cash equivalents
                          
                          
                          15,993
                          
                          
                          
                          15,316Cash
      and equivalents beginning of period
                          
                          
                          34,058
                          
                          
                          
                          29,310Cash
      and equivalents at end of period
                          
                          $
                          50,051
                          
                          
                          $
                          44,626Supplemental
      information:Interest
      paid
                          
                          $
                          20,973
                          
                          
                          $
                          23,935Income
      tax paid
                          
                          
                          9
                          
                          
                          
                          11Supplemental
      noncash disclosures:Loans
      transferred to other real estate
                          
                          $
                          3,333
                          
                          
                          $
                          3,212Loans
      transferred to held for sale
                          
                          
                          3,008
                          
                          
                          
                          -
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  8
  ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 NOTE
1.  BASIS OF PRESENTATION
 
 The
accompanying unaudited consolidated financial statements include Atlantic Coast
Federal Corporation (or the “Company”) and its wholly owned subsidiary, Atlantic
Coast Bank (the “Bank”).  All significant inter-company balances and
transactions have been eliminated in consolidation.  The principal
activity of the Company is the ownership of the Bank’s common stock, as such,
the terms “Company” and “Bank” may be used interchangeably throughout this Form
10-Q.
 
 The
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 the instructions for Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.  In the opinion
of management, all adjustments (all of which are normal and recurring in nature)
considered necessary for (i) a fair presentation and (ii) to make such
statements not misleading, have been included.  Operating results for
the nine month period ended September 30, 2009 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2009.  The 2008 Atlantic Coast Federal Corporation consolidated
financial statements, as presented in the Company’s Annual Report on Form 10-K,
should be read in conjunction with these statements.
 
 Certain
items in the September 30, 2009 financial statements have been reclassified to
conform to the current presentation.
 
 These
financial statements consider events that occurred through November 13,
2009.
 
 NOTE
2.  USE OF ESTIMATES
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expense
during the reported periods, as well as the disclosures
provided.  Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses, realization of deferred tax
assets, valuation of intangible assets 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
 
 FASB ASC 320-10— In
April 2009, the FASB issued new guidance impacting FASB ASC 320-10,
Investments — Debt and Equity Securities (FASB Staff Position No. FAS 115-2
and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). This guidance amends
the other-than-temporary impairment guidance in U.S. generally accepted
accounting principles for debt securities. If an entity determines that it has
an other-than-temporary impairment on a security, it must recognize the credit
loss on the security in the income statement. The credit loss is defined as the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis. FASB ASC 320-10 expands disclosures about
other-than-temporary impairment and requires that the annual disclosures in
existing generally accepted accounting principles be made for interim reporting
periods. The Company adopted this guidance for the interim reporting period
ending March 31, 2009. See Note 4 to the consolidated financial statements
for the impact on the Company of adopting this new guidance.
  9
  NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS(continued)
 
 FASB ASC 805 —In December 2007, the FASB issued new guidance impacting FASB ASC
805, Business Combinations(SFAS No. 141(R) — Business Combinations). The new guidance
establishes principles and requirements for how an acquiring company
(1) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  The
impact of adoption on January 1, 2009 was not material to the Company’s results
of operations or financial position.
 
 FASB ASC 815-10— In March 2008, the FASB issued FASB ASC 815-10, Derivatives and
Hedging (Statement No. 161 — Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133). FASB ASC 815-10 requires enhanced disclosures about how
and why an entity uses derivative instruments, how derivative instruments and
related items are accounted for and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. The new standard became effective for the Company on January 1,
2009. The adoption of this standard did not have a material impact on the
Company’s consolidated financial position or results of operations and the
required disclosures have been included.
 
 FASB ASC
855 —In May 2009, the FASB issued FASB ASC 855, Subsequent Events
(Statement No. 165 — Subsequent Events). FASB ASC
855 establishes the period after the balance sheet date during which management
shall evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements and the circumstances under which an
entity shall recognize events or transactions that occur after the balance sheet
date. FASB ASC 855 also requires disclosure of the date through which subsequent
events have been evaluated. The Company adopted this standard for the interim
reporting period ending June 30, 2009. The adoption of this standard did
not have a material impact on the Company’s consolidated financial position or
results of operations.
 
 FASB ASC 820— In
April 2009, the FASB issued new guidance impacting FASB ASC 820, Fair Value
Measurements and Disclosures (FASB Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). This
provides additional guidance on determining fair value when the volume and level
of activity for the asset or liability have significantly decreased when
compared with normal market activity for the asset or liability. A significant
decrease in the volume or level of activity for the asset or liability is an
indication that transactions or quoted prices may not be determinative of fair
value because transactions may not be orderly. In that circumstance, further
analysis of transactions or quoted prices is needed, and an adjustment to the
transactions or quoted prices may be necessary to estimate fair value. The
Company adopted this guidance for the interim reporting period ending
March 31, 2009 and it did not have a material impact on the Company’s
consolidated financial position or results of operations.
 
 FASB
ASC 105-10 —In June 2009, the FASB issued FASB ASC 105-10,
Generally Accepted Accounting Principles (Statement No. 168 — The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles). The new guidance replaces SFAS No. 162 and
establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles (“GAAP”). Rules and
interpretative releases of the Securities and Exchange Commission under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
new standard became effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of this
statement did not have a material impact on the Company’s consolidated financial
position or results of operations. Technical references to generally accepted
accounting principles included in the Notes to Consolidated Financial Statements
are provided under the new FASB ASC structure with the prior terminology
included parenthetically.
  10
 
 NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS(continued)
 
 FASB ASC
825-10-50— In
April 2009, the FASB issued new guidance impacting FASB ASC 825-10-50,
Financial Instruments (FASB Staff Position No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair
Value of Financial Instruments). This guidance amends existing GAAP to
require disclosures about fair values of financial instruments for interim
reporting periods as well as in annual financial statements. The guidance also
amends existing GAAP to require those disclosures in summarized financial
information at interim reporting periods. The Company adopted this standard for
the interim reporting period ending March 31, 2009.
 
 NOTE
4.  AVAILABLE FOR SALE SECURITIES
 
 The
following table summarizes the amortized cost and fair value of the
available-for-sale investment securities and the corresponding amounts of
unrealized gains and losses therein:
 
 Amortized
                                          Cost
                                        
                                        
                                        Unrealized
                                          Gains
                                        
                                        
                                        Unrealized
                                          Losses
                                        
                                        
                                        Fair
      ValueSeptember
      30, 2009
                                        
                                        (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                                        
                                        $
                                        994
                                        
                                        
                                        $
                                        2
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        996State
      and municipal
                                        
                                        
                                        2,670
                                        
                                        
                                        
                                        156
                                        
                                        
                                        
                                        (85
                                        )
                                        
                                        
                                        2,741Mortgage-backed
      securities residential
                                        
                                        
                                        44,988
                                        
                                        
                                        
                                        1,120
                                        
                                        
                                        
                                        (12
                                        )
                                        
                                        
                                        46,096Collateralized
      mortgage obligations U.S. Govt.
                                        
                                        
                                        101,986
                                        
                                        
                                        
                                        1,524
                                        
                                        
                                        
                                        (215
                                        )
                                        
                                        
                                        103,295Collateralized
      mortgage obligations - other
                                        
                                        
                                        21,407
                                        
                                        
                                        
                                        488
                                        
                                        
                                        
                                        (2,637
                                        )
                                        
                                        
                                        19,258$
                                        172,045
                                        
                                        
                                        $
                                        3,290
                                        
                                        
                                        $
                                        (2,949
                                        )
                                        
                                        $
                                        172,386
 
 December
      31, 2008
                      
                      (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                      
                      $
                      13,864
                      
                      
                      $
                      371
                      
                      
                      $
                      (35
                      )
                      
                      $
                      14,200State
      and municipal
                      
                      
                      2,664
                      
                      
                      
                      7
                      
                      
                      
                      (158
                      )
                      
                      
                      2,513Mortgage-backed
      securities residential
                      
                      
                      37,339
                      
                      
                      
                      661
                      
                      
                      
                      (52
                      )
                      
                      
                      37,948Collateralized
      mortgage obligations U.S. Govt.
                      
                      
                      75,852
                      
                      
                      
                      402
                      
                      
                      
                      (178
                      )
                      
                      
                      76,076Collateralized
      mortgage obligations - other
                      
                      
                      18,288
                      
                      
                      
                      -
                      
                      
                      
                      (1,551
                      )
                      
                      
                      16,737$
                      148,007
                      
                      
                      $
                      1,441
                      
                      
                      $
                      (1,974
                      )
                      
                      $
                      147,474
  11
 
 NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
 
 The
amortized cost and fair value of debt securities segregated by contractual
maturity as of September 30, 2009, is shown below.  Expected
maturities may differ from contractual maturities if borrowers have the right to
call or prepay obligations with or without call or prepayment
penalties.  Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
 
 September 30, 2009(Dollars
      in Thousands)Amortized
                    
                    
                    FairCost
                    
                    
                    ValueDue
      in one year or less
                    
                    $
                    -
                    
                    
                    $
                    -Due
      from one to five years
                    
                    
                    -
                    
                    
                    
                    -Due
      from five to ten years
                    
                    
                    434
                    
                    
                    
                    466Due
      after ten years
                    
                    
                    3,230
                    
                    
                    
                    3,271Mortgage-backed
      securities - residential
                    
                    
                    44,988
                    
                    
                    
                    46,096Collateralized
      mortgage obligations - U.S. Government
                    
                    
                    101,986
                    
                    
                    
                    103,295Collateralized
      mortgage obligations - other
                    
                    
                    21,407
                    
                    
                    
                    19,258Total
                    
                    $
                    172,045
                    
                    
                    $
                    172,386
 
 The
following table summarizes the investment securities with unrealized losses at
September 30, 2009 and December 31, 2008, aggregated by investment category and
length of time in a continuous unrealized loss position:
  (Dollars
      in Thousands)Less
      than 12 Months
                                                                                
                                                                                
                                                                                12
      Months or More
                                                                                
                                                                                
                                                                                TotalFair
                                                                                
                                                                                
                                                                                Unrealized
                                                                                
                                                                                
                                                                                Fair
                                                                                
                                                                                
                                                                                Unrealized
                                                                                
                                                                                
                                                                                Fair
                                                                                
                                                                                
                                                                                UnrealizedDescription of Securities
                                                                                
                                                                                Value
                                                                                
                                                                                
                                                                                Losses
                                                                                
                                                                                
                                                                                Value
                                                                                
                                                                                
                                                                                Losses
                                                                                
                                                                                
                                                                                Value
                                                                                
                                                                                
                                                                                LossesSeptember 30, 2009Government-sponsoredenterprises
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -State
      and municipal
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                378
                                                                                
                                                                                
                                                                                
                                                                                (85
                                                                                )
                                                                                
                                                                                
                                                                                378
                                                                                
                                                                                
                                                                                
                                                                                (85
                                                                                )Mortgage-backed
      securities - residential
                                                                                
                                                                                
                                                                                72
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                870
                                                                                
                                                                                
                                                                                
                                                                                (12
                                                                                )
                                                                                
                                                                                
                                                                                942
                                                                                
                                                                                
                                                                                
                                                                                (12
                                                                                )Collateralized
      mortgage obligations - U.S. Govt.
                                                                                
                                                                                
                                                                                26,892
                                                                                
                                                                                
                                                                                
                                                                                (215
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                26,892
                                                                                
                                                                                
                                                                                
                                                                                (215
                                                                                )Collateralized
      mortgage obligations - other
                                                                                
                                                                                
                                                                                5,558
                                                                                
                                                                                
                                                                                
                                                                                (503
                                                                                )
                                                                                
                                                                                
                                                                                7,547
                                                                                
                                                                                
                                                                                
                                                                                (2,134
                                                                                )
                                                                                
                                                                                
                                                                                13,105
                                                                                
                                                                                
                                                                                
                                                                                (2,637
                                                                                )Total
                                                                                
                                                                                $
                                                                                32,522
                                                                                
                                                                                
                                                                                $
                                                                                (718
                                                                                )
                                                                                
                                                                                $
                                                                                8,795
                                                                                
                                                                                
                                                                                $
                                                                                (2,231
                                                                                )
                                                                                
                                                                                $
                                                                                41,317
                                                                                
                                                                                
                                                                                $
                                                                                (2,949
                                                                                )December 31, 2008Government-sponsoredenterprises
                                                                                
                                                                                $
                                                                                940
                                                                                
                                                                                
                                                                                $
                                                                                (35
                                                                                )
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                940
                                                                                
                                                                                
                                                                                $
                                                                                (35
                                                                                )State
      and municipal
                                                                                
                                                                                
                                                                                1,015
                                                                                
                                                                                
                                                                                
                                                                                (33
                                                                                )
                                                                                
                                                                                
                                                                                823
                                                                                
                                                                                
                                                                                
                                                                                (125
                                                                                )
                                                                                
                                                                                
                                                                                1,838
                                                                                
                                                                                
                                                                                
                                                                                (158
                                                                                )Mortgage-backed
      securities - residential
                                                                                
                                                                                
                                                                                3,616
                                                                                
                                                                                
                                                                                
                                                                                (52
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                3,616
                                                                                
                                                                                
                                                                                
                                                                                (52
                                                                                )Collateralized
      mortgage obligations - U.S. Govt.
                                                                                
                                                                                
                                                                                24,593
                                                                                
                                                                                
                                                                                
                                                                                (178
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                24,593
                                                                                
                                                                                
                                                                                
                                                                                (178
                                                                                )Collateralized
      mortgage obligations - other
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                16,737
                                                                                
                                                                                
                                                                                
                                                                                (1,551
                                                                                )
                                                                                
                                                                                
                                                                                16,737
                                                                                
                                                                                
                                                                                
                                                                                (1,551
                                                                                )Total
                                                                                
                                                                                $
                                                                                30,164
                                                                                
                                                                                
                                                                                $
                                                                                (298
                                                                                )
                                                                                
                                                                                $
                                                                                17,560
                                                                                
                                                                                
                                                                                $
                                                                                (1,676
                                                                                )
                                                                                
                                                                                $
                                                                                47,724
                                                                                
                                                                                
                                                                                $
                                                                                (1,974
                                                                                )
 
 Proceeds
from sales, maturities and calls of securities available for sale were
$87.9 million and $77.9 million for the nine months ended September 30,
2009 and 2008, respectively. Gross gains of $502,000 and $550,000 and gross
losses of $169,000 and $290,000 were realized on these sales during the nine
months ended September 30, 2009 and 2008, respectively.
  Proceeds from sales and
calls of securities available for sale were $23.8 million and $26.9 million
for the three months ended September 30, 2009 and 2008, respectively. Gross
gains of $237,000 and $327,000 and gross
losses of $120,000 and $150,000 were realized on these sales during the
three months ended September 30, 2009 and 2008,
respectively.
  12
  NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
  Gains and
losses on sales of securities are recorded on the trade date and determined
using the specific identification method.
  Other-Than-Temporary-Impairment
  Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.
  In
evaluating OTTI, management considers many factors, including: (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgment and is based on the
information available to management at a point in time.
  The
amount of the OTTI recognized in earnings depends on whether we intend to sell
the security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss. If we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss, the OTTI recognized in earnings
is equal to the entire difference between it’s amortized cost basis and its fair
value at the balance sheet date. If we do not intend to sell the security and it
is not more likely than not that we will be required to sell the security before
recovery of its amortized cost basis less any current-period loss, the OTTI is
separated into the amount representing the credit loss and the amount related to
all other factors. The amount of the total OTTI related to the credit loss is
determined based on the present value of cash flows expected to be collected and
is recognized as a charge to  earnings. The amount of the total OTTI
related to other factors is recognized in other comprehensive income, net of
applicable taxes. The previous amortized cost basis less the OTTI recognized in
earnings becomes the new amortized cost basis of the investment.
  As of
September 30, 2009, the Company’s security portfolio consisted of 131
securities, 45 of which were in an unrealized loss position. Nearly all
unrealized losses are related to debt securities whose underlying collateral is
residential mortgages.  However, the majority of these securities were
issued by government sponsored organizations as discussed below.
  At
September 30, 2009, approximately $149.4 million, or 89% of the debt securities
collateralized by residential mortgages held by the Company were issued by U.S.
government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac
and Ginnie Mae, institutions which the government has affirmed its commitment to
support. Because the decline in fair value is attributable to changes in
interest rates and illiquidity, and not credit quality, and because the Company
does not have the intent to sell these securities and it is likely it will not
be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired
at September 30, 2009.
  Collateralized Mortgage
Obligations - Other
  The
Company’s securities portfolio also includes non-agency collateralized mortgage
obligations with a fair value of $19.3 million at September 30,
2009. The Company evaluated the historical and expected future performance
of the underlying collateral to determine if a future loss is expected which
would result in a principal write-down.  As a part of the evaluation,
the Company reviewed deal specific data including
loan-to-value (“LTV”), delinquency, foreclosures and cumulative loss to insure
it has adequate credit support.  This evaluation was completed
utilizing a model to project future performance using collateral specific
assumptions, such as expected future default rates and
prepayments.
 The
Company recorded an expense for other-than-temporary impairment of approximately
$1.6 million in non-interest income on six private label mortgage-backed
securities for the nine months ended September 30, 2009.  The
remainder of the private label portfolio is investment grade, there have been no
down-grades and thus we believe there is no other-than-temporary
impairment.
  13
  NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
 
 The table
below presents a roll-forward of the credit losses recognized in earnings for
the three month period ended September 30, 2009:
 
 (Dollars
      in Thousands)Beginning
      balance, July 1, 2009
                    
                    $
                    1,320Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                    
                    
                    112Additions/SubtractionsAmounts
      realized for securities sold during the period
                    
                    
                    -Amounts
      related to securities for which the company intends to sell or that it
      will be more likely than not the company will be required to sell prior to
      recovery of amortized cost basis
                    
                    
                    -Reductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                    
                    
                    -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                    
                    
                    141Ending
      balance, September 30, 2009
                    
                    $
                    1,573
  14
  NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
 
 The table
below presents a roll-forward of the credit losses recognized in earnings for
the nine month period ended September 30, 2009:
 
 (Dollars
      in Thousands)Beginning
      balance, January 1, 2009
                    
                    $
                    0Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                    
                    
                    1,573Additions/SubtractionsAmounts
      realized for securities sold during the period
                    
                    
                    -Amounts
      related to securities for which the company intends to sell or that it
      will be more likely than not the company will be required to sell prior to
      recovery of amortized cost basis
                    
                    
                    -Reductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                    
                    
                    -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                    
                    
                    -Ending
      balance, September 30, 2009
                    
                    $
                    1,573
  15
  NOTE
5 - LOANS, NET
 
 Loans. Following is a
comparative composition of net loans as of September 30, 2009 and
December 31, 2008:
 
 September 30,
                                            2009
                                          
                                          
                                          % of total
                                            loans
                                          
                                          
                                          December 31,
                                            2008
                                          
                                          
                                          % of total
                                            loans(Dollars
      In Thousands)Real estate loans:One-to-four
      family
                                          
                                          $
                                          321,238
                                          
                                          
                                          
                                          48.9
                                          %
                                          
                                          $
                                          370,783
                                          
                                          
                                          
                                          49.9
                                          %Commercial
                                          
                                          
                                          84,099
                                          
                                          
                                          
                                          12.8
                                          %
                                          
                                          
                                          84,134
                                          
                                          
                                          
                                          11.3
                                          %Other
      ( land & multifamily)
                                          
                                          
                                          38,929
                                          
                                          
                                          
                                          5.9
                                          %
                                          
                                          
                                          43,901
                                          
                                          
                                          
                                          5.9
                                          %Total
      real estate loans
                                          
                                          
                                          444,266
                                          
                                          
                                          
                                          67.6
                                          %
                                          
                                          
                                          498,818
                                          
                                          
                                          
                                          67.1
                                          %Real estate construction
    loans:One-to-four
      family
                                          
                                          
                                          4,226
                                          
                                          
                                          
                                          0.6
                                          %
                                          
                                          
                                          8,974
                                          
                                          
                                          
                                          1.2
                                          %Commercial
                                          
                                          
                                          7,649
                                          
                                          
                                          
                                          1.2
                                          %
                                          
                                          
                                          10,883
                                          
                                          
                                          
                                          1.5
                                          %Acquisition
      & development
                                          
                                          
                                          3,658
                                          
                                          
                                          
                                          0.6
                                          %
                                          
                                          
                                          5,008
                                          
                                          
                                          
                                          0.6
                                          %Total
      real estate construction loans
                                          
                                          
                                          15,533
                                          
                                          
                                          
                                          2.4
                                          %
                                          
                                          
                                          24,865
                                          
                                          
                                          
                                          3.3
                                          %Other loans:Home
      equity
                                          
                                          
                                          99,512
                                          
                                          
                                          
                                          15.2
                                          %
                                          
                                          
                                          107,525
                                          
                                          
                                          
                                          14.5
                                          %Consumer
                                          
                                          
                                          78,235
                                          
                                          
                                          
                                          11.9
                                          %
                                          
                                          
                                          87,162
                                          
                                          
                                          
                                          11.7
                                          %Commercial
                                          
                                          
                                          19,206
                                          
                                          
                                          
                                          2.9
                                          %
                                          
                                          
                                          25,273
                                          
                                          
                                          
                                          3.4
                                          %Total
      other loans
                                          
                                          
                                          196,953
                                          
                                          
                                          
                                          30.0
                                          %
                                          
                                          
                                          219,960
                                          
                                          
                                          
                                          29.6
                                          %Total
      loans
                                          
                                          
                                          656,752
                                          
                                          
                                          
                                          100
                                          %
                                          
                                          
                                          743,643
                                          
                                          
                                          
                                          100
                                          %Allowance
      for loan losses
                                          
                                          
                                          (14,775
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (10,598
                                          )Net
      deferred loan costs
                                          
                                          
                                          5,228
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          8,662Premiums
      on purchased loans
                                          
                                          
                                          98
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          172Loans,
      net
                                          
                                          $
                                          647,303
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          741,879
  16
  NOTE 5 - LOANS, NET(continued)
 
 Allowance
for loan losses activity for the nine months ended September 30, 2009 and 2008
was as follows:
 
 2009
                    
                    
                    2008(Dollars
      in Thousands)Beginning
      balance, January 1
                    
                    $
                    10,598
                    
                    
                    $
                    6,482Loans
      charged-off
                    
                    
                    (15,202
                    )
                    
                    
                    (8,051
                    )Recoveries
                    
                    
                    722
                    
                    
                    
                    932Net
      charge-offs
                    
                    
                    (14,480
                    )
                    
                    
                    (7,119
                    )Provision
      for loan losses
                    
                    
                    18,657
                    
                    
                    
                    9,240Ending
      balance, September 30
                    
                    $
                    14,775
                    
                    
                    $
                    8,603
 
 Impaired
loans as of September 30, 2009 and December 31, 2008 were as
follows:
 
 (Dollars
      in Thousands)September
                      30,
      2009
                    
                    
                    December
                      31,
      2008Loans
      with no allocated allowance for loan losses
                    
                    $
                    25,733
                    
                    
                    $
                    7,004Loans
      with an allocated allowance for loan losses
                    
                    
                    21,075
                    
                    
                    
                    17,472Total
                    
                    $
                    46,808
                    
                    
                    $
                    24,476Amount
      of the allowance for loan losses allocated to impaired
    loans
                    
                    $
                    6,029
                    
                    
                    $
                    3,525
 
 Impaired
loans include troubled debt restructurings of $19.7 million at September 30,
2009 and $7.0 million at December 31, 2008.  Non-performing loans,
including non-accrual loans, at September 30, 2009 and December 31, 2008 were
$40.9 million and $25.5 million, respectively.  There were no loans
over 90 days past-due and still accruing interest as of September 30, 2009 and
December 31, 2008.  Non-performing loans include both smaller balance
homogeneous loans that are collectively evaluated for impairment and
individually classified as impaired loans.
 
 NOTE
6.  INTEREST RATE SWAPS
 
 The
Company utilizes interest rate swap agreements as part of its asset liability
management strategy to help manage its interest rate risk position by mitigating
the impact of significant unexpected fluctuations in earnings caused by interest
rate volatility or changes in the yield curve. The notional amount of the
interest rate swaps does not represent amounts exchanged by the parties. The
amount exchanged is determined by reference to the notional amount and the other
terms of the individual interest rate swap agreements.
 
 The
Company’s interest rate swap agreements do not qualify for hedge accounting
treatment, accordingly changes in fair value are reported in current period
earnings.
  17
  NOTE 6.  INTEREST RATE
SWAPS (continued)
 
 At
September 30, 2009, summary information about these interest-rate swaps is as
follows:
 
 2009(Dollars
      in Thousands)Notional
      amounts
                    
                    $
                    50,000Weighted
      average pay rates (3 month LIBOR, 2.50% floor)
                    
                    
                    2.50
                    %Weighted average receive rates (3 month LIBOR, 4.37%
      cap)
                    
                    
                    0.29
                    %Weighted
      average maturity (years)
                    
                    
                    1.50
 
 The
following tables summarize the fair value of the interest rate swaps utilized by
the Company:
 
 Liability Interest Rate
    SwapsSeptember 30, 2009
                              
                              December
      31, 2008(Dollars
      in thousands)Balance
      Sheet
                              
                              
                              
                              Balance
      SheetLocation
                              
                              Fair
      Value
                              
                              Location
                              
                              Fair
      ValueInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                              Accrued
      expenses
                                and
      other liabilities
                              
                              $
                              602
                              
                              Accrued
      expenses
                                and
      other liabilities
                              
                              $
                              618Total
      interest rate swaps not designated as hedging instruments under SFAS
      133:Total
      interest rate swaps
                              
                              
                              $
                              602
                              
                              
                              
                              $
                              618
 
 The
effect of interest rate swaps for the nine months ended September 30, 2009 and
2008 are as follows:
  Nine
      Months EndedSeptember
      30, 2009
                          
                          
                          September
      30, 2008Location
      of Gain or (Loss)
                          
                          (Dollars
      in Thousands)Recognized
      in Non-interest
                          
                          Amount
      of the Gain or (Loss)Income
                          
                          Recognized
      in IncomeInterest
      rate swaps not designated as hedging instruments  under SFAS
      133:Interest
      rate contracts
                          Other
                          
                          $
                          (237
                          )
                          
                          $
                          -Total
                          
                          
                          $
                          (237
                          )
                          
                          $
                          -
 
 NOTE
7.  DIVIDENDS
 
 During
the third quarter of 2009, the Company’s board of directors suspended the
payment of dividends.
 
 Total
dividends charged to retained earnings for the nine months ended September 30,
2009 were approximately $89,000.
  18
  NOTE
8.  EARNINGS (LOSS) PER COMMON SHARE
 
 Basic
earnings (loss) per common share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period, reduced
for average unallocated ESOP shares and average unearned restricted stock
awards. Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the average number of common shares outstanding for the period
increased for the dilutive effect of unvested stock options and stock awards.
The dilutive effect of the unvested stock options and stock awards is calculated
under the treasury stock method utilizing the average market value of the
Company’s stock for the period. A reconciliation of the numerator and
denominator of the basic and diluted earnings (loss) per common share
computation for the three and nine months ended September 30, 2009 and 2008 is
as follows:
 
 (Dollars
      in Thousands, except per share data)For
      the three months
                                    
                                    
                                    For
      the nine monthsended
      September 30,
                                    
                                    
                                    ended
      September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008BasicNet
      income (loss)
                                    
                                    $
                                    (12,156
                                    )
                                    
                                    $
                                    (329
                                    )
                                    
                                    $
                                    (19,850
                                    )
                                    
                                    $
                                    405Weighted
      average common shares outstanding
                                    
                                    
                                    13,419,026
                                    
                                    
                                    
                                    13,520,085
                                    
                                    
                                    
                                    13,427,182
                                    
                                    
                                    
                                    13,588,801Less:
      Average unallocated ESOP shares
                                    
                                    
                                    (232,760
                                    )
                                    
                                    
                                    (279,312
                                    )
                                    
                                    
                                    (232,760
                                    )
                                    
                                    
                                    (279,312
                                    )Average
      unvested restricted stock awards
                                    
                                    
                                    (63,955
                                    )
                                    
                                    
                                    (117,020
                                    )
                                    
                                    
                                    (94,253
                                    )
                                    
                                    
                                    (153,664
                                    )Average
      Shares
                                    
                                    
                                    13,122,311
                                    
                                    
                                    
                                    13,123,753
                                    
                                    
                                    
                                    13,100,169
                                    
                                    
                                    
                                    13,155,825Basic
      earnings (loss) per common share
                                    
                                    $
                                    (0.93
                                    )
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (1.52
                                    )
                                    
                                    $
                                    0.03DilutedNet
      Income (loss)
                                    
                                    $
                                    (12,156
                                    )
                                    
                                    $
                                    (329
                                    )
                                    
                                    $
                                    (19,850
                                    )
                                    
                                    $
                                    405Weighted
      average shares outstanding from above
                                    
                                    
                                    13,122,311
                                    
                                    
                                    
                                    13,123,753
                                    
                                    
                                    
                                    13,100,169
                                    
                                    
                                    
                                    13,155,825Add:Dilutive
      effects of assumed exercise of stock options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Dilutive
      effects of full vesting of stock awards
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    71,919Average
      shares and dilutive potential common shares
                                    
                                    
                                    13,122,311
                                    
                                    
                                    
                                    13,123,753
                                    
                                    
                                    
                                    13,100,169
                                    
                                    
                                    
                                    13,227,744Diluted
      earnings (loss) per common share
                                    
                                    $
                                    (0.93
                                    )
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (1.52
                                    )
                                    
                                    $
                                    0.03
 
 Stock
options for 559,101 and 497,606 shares of common stock were not considered in
computing diluted earnings per common share for the three and nine months ended
September 30, 2009 and 2008, respectively, because they were
anti-dilutive.
  19
  NOTE
9.  TOTAL COMPREHENSIVE INCOME (LOSS)
 
 Comprehensive income consists of net
income and other comprehensive income.  Other comprehensive income
includes unrealized gains and losses on securities available-for-sale and
unrealized gains and losses on cash flow hedges.  Following is a
summary  of other comprehensive income (loss) for the three and nine
months ended September 30, 2009 and 2008:
 
 (Dollars
      in Thousands)Three months ended September
      30,
                                                              
                                                              
                                                              Nine months ended September
    30,2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2008Net
      income (loss)
                                                              
                                                              $
                                                              (12,156
                                                              )
                                                              
                                                              $
                                                              (329
                                                              )
                                                              
                                                              $
                                                              (19,850
                                                              )
                                                              
                                                              $
                                                              405Other
      comprehensive income (loss):Change
      in securities available for sale:Unrealized
      holding gains (losses)arising
      during the period
                                                              
                                                              
                                                              1,397
                                                              
                                                              
                                                              
                                                              1,502
                                                              
                                                              
                                                              
                                                              2,329
                                                              
                                                              
                                                              
                                                              (1,854
                                                              )Less
      reclassification adjustments for (gains)losses
      recognized in income
                                                              
                                                              
                                                              117
                                                              
                                                              
                                                              
                                                              (177
                                                              )
                                                              
                                                              
                                                              (333
                                                              )
                                                              
                                                              
                                                              (339
                                                              )Net
      unrealized (losses) gains
                                                              
                                                              
                                                              1,280
                                                              
                                                              
                                                              
                                                              1,679
                                                              
                                                              
                                                              
                                                              1,996
                                                              
                                                              
                                                              
                                                              (1,515
                                                              )Income
      tax effect
                                                              
                                                              
                                                              (486
                                                              )
                                                              
                                                              
                                                              (628
                                                              )
                                                              
                                                              
                                                              (808
                                                              )
                                                              
                                                              
                                                              575Net
      of tax amount
                                                              
                                                              
                                                              794
                                                              
                                                              
                                                              
                                                              1,051
                                                              
                                                              
                                                              
                                                              1,188
                                                              
                                                              
                                                              
                                                              (940
                                                              )Other-than-temporary-impairment
      onavailable-for-sale
      debt securities recordedin
      other comprehensive income
                                                              
                                                              
                                                              (696
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              451
                                                              
                                                              
                                                              
                                                              -Less
      other-than-temporary-impairment onavailable-for-sale
      debt securities associatedwith
      credit loss realized in income
                                                              
                                                              
                                                              252
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              1,573
                                                              
                                                              
                                                              
                                                              -Income
      tax effect
                                                              
                                                              
                                                              (360
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (454
                                                              )
                                                              
                                                              
                                                              -Net
      of tax amount
                                                              
                                                              
                                                              (588
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (668
                                                              )
                                                              
                                                              
                                                              -Change
      in fair value of derivatives usedfor
      cash flow hedges
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              309
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Less
      reclassification adjustments for (gains)losses
      recognized in income
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Net
      unrealized gains and (losses)
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              309
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Income
      tax effect
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (117
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Total
      other comprehensive income (loss)
                                                              
                                                              
                                                              206
                                                              
                                                              
                                                              
                                                              1,243
                                                              
                                                              
                                                              
                                                              520
                                                              
                                                              
                                                              
                                                              (940
                                                              )Comprehensive
      income (loss)
                                                              
                                                              $
                                                              (11,950
                                                              )
                                                              
                                                              $
                                                              914
                                                              
                                                              
                                                              $
                                                              (19,330
                                                              )
                                                              
                                                              $
                                                              (535
                                                              )
  20
  NOTE
10.  FAIR VALUE
  Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The fair value hierarchy requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair values:
 
 Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
 
 Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
 
 Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
 
 Investment
Securities:
 The fair
values for investment securities are determined by quoted market prices, if
available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2).
For securities where quoted prices or market prices of similar securities are
not available, fair values are calculated using discounted cash flows or other
market indicators (Level 3). Discounted cash flows are calculated using spread
to swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading is more
liquid, broker quotes are used (if available) to validate the model. Rating
agency and industry research reports as well as defaults and deferrals on
individual securities are reviewed and incorporated into the
calculations.
  Interest Rate
Swaps:
 The fair
value of interest rate swaps is based on derivative valuation models using
market data inputs as of the valuation date (Level 2 inputs).
  21
 NOTE 10.  FAIR VALUE(continued)
 
 Assets and Liabilities
Measured on a Recurring Basis
 
 Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
 
 Fair
      Value Measurements at September 30, 2009 Using:September
      30,
                      2009
                    
                    
                    Quoted
                      Prices
      in
                      Active
                      Markets
                      for
      Identical
                      Assets
                      (Level
      1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level
      3)(Dollars
      in Thousands)Assets:Available
      for saleU.S.
      government-sponsored entities and  agencies
                    
                    $
                    996
                    
                    
                    
                    -
                    
                    
                    $
                    996
                    
                    
                    
                    -State
      and municipal
                    
                    
                    2,741
                    
                    
                    
                    -
                    
                    
                    
                    2,741
                    
                    
                    
                    -Mortgage-backed
      securities – residential
                    
                    
                    46,096
                    
                    
                    
                    -
                    
                    
                    
                    46,096
                    
                    
                    
                    -Collateralized
      mortgage obligations – U.S. Govt.
                    
                    
                    103,295
                    
                    
                    
                    -
                    
                    
                    
                    103,295Collateralized
      mortgage obligations - other
                    
                    
                    19,258
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,258Liabilities:Interest
      rate swap
                    
                    $
                    (602
                    )
                    
                    $
                    -
                    
                    
                    $
                    (602
                    )
                    
                    $
                    -
 
 Fair
      Value Measurements at December 31, 2008 Using:December
      31,
                      2008
                    
                    
                    Quoted
                      Prices
      in
                      Active
                      Markets
                      For
                      Identical
                      Assets
                      (Level
      1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level
      3)(Dollars
      in Thousands)Assets:Available
      for sale securitiesU.S.
      government-sponsored entities and agencies
                    
                    $
                    14,200
                    
                    
                    
                    -
                    
                    
                    $
                    14,200
                    
                    
                    
                    -State
      and municipal
                    
                    
                    2,513
                    
                    
                    
                    -
                    
                    
                    
                    2,513
                    
                    
                    
                    -Mortgage-backed
      securities – residential
                    
                    
                    37,948
                    
                    
                    
                    -
                    
                    
                    
                    37,948
                    
                    
                    
                    -Collateralized
      mortgage obligations – U.S. Govt.
                    
                    
                    76,076
                    
                    
                    
                    
                    
                    
                    
                    76,076Collateralized
      mortgage obligations – other
                    
                    
                    16,737
                    
                    
                    
                    8,693
                    
                    
                    
                    8,044
                    
                    
                    
                    19,258Liabilities:Interest
      rate swap
                    
                    $
                    (618
                    )
                    
                    $
                    -
                    
                    
                    $
                    (618
                    )
                    
                    $
                    -
 
 Fair
value adjustments for interest rate swaps resulted in a gain of $16,000 for the
nine months ended September 30, 2009.
  22
  NOTE 10. FAIR VALUE(continued)
 
 The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable
inputs (Level 3) for the three and nine month periods ended September 30,
2009:
 
 InvestmentSecuritiesAvailable-for-sale(Dollars
      in thousands)Balance
      of recurring Level 3 assets at July 1, 2009
                        
                        $
                        21,541Total
      realized and unrealized gains (losses):Included
      in earnings - realized
                        
                        
                        -Included
      in earnings - unrealized
                        
                        
                        (230
                        )Included
      other comprehensive income
                        
                        
                        -Proceeds
      from maturities and payments, net
                        
                        
                        (2,053
                        )Transfers
      in and/or out of level 3
                        
                        
                        -Balance
      of recurring Level 3 assets at September 30, 2009
                        
                        $
                        19,258
 
 InvestmentSecuritiesAvailable-for-saleBalance
      of recurring Level 3 assets at January 1, 2009
                      
                      $
                      -Total
      realized and unrealized gains (losses):
                      
                      
                      -Included
      in earnings - realized
                      
                      
                      -Included
      in earnings - unrealized
                      
                      
                      (230
                      )Included
      in other comprehensive income
                      
                      
                      -Proceeds
      from maturities and payments, net
                      
                      
                      (2,053
                      )Transfers
      in and/or out of level 3
                      
                      
                      21,541Balance
      of recurring Level 3 assets at September 30, 2009
                      
                      $
                      19,258
 
 Continued
illiquidity in the market for certain types of debt securities has resulted in
unreliable or unavailable fair values; accordingly the Company determined that
debt securities totaling $19,258 were more appropriately evaluated as Level 3
assets as of September 30, 2009.
  23
  NOTE 10.  FAIR VALUE(continued)
 
 Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
 Fair
      Value Measurements at September 30, 2009 Using:September
      30, 2009
                                                                        
                                                                        
                                                                        Quoted
      Prices in Active Markets for Identical Assets
                                                                          (Level
      1)
                                                                        
                                                                        
                                                                        Significant
      Other Observable Inputs (Level 2)
                                                                        
                                                                        
                                                                        Significant
      Unobservable Inputs
                                                                          (Level
      3)(Dollars
      in Thousands)Assets:Other
      real estate owned
                                                                        
                                                                        $
                                                                        3,132
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        3,132Impaired
      loans – collateral dependent
                                                                        
                                                                        
                                                                        21,075
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        21,075Total
      assets at fair value
                                                                        
                                                                        $
                                                                        24,207
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        24,207
 Fair
      Value Measurements at December 31, 2008 Using:December
      31, 2008
                    
                    
                    Quoted
      Prices in Active Markets for Identical Assets
                      (Level
      1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservable Inputs
                      (Level
      3)(Dollars
      in Thousands)Assets:Impaired
      loans – collateral dependent
                    
                    
                    13,947
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    13,947
 Other Real Estate
Owned:
 Assets
acquired through or in lieu of loan foreclosure are initially recorded at fair
value, based on appraisals, less estimated selling costs, at the date of
foreclosure, establishing a new cost basis.  The fair value of the
Company’s other real estate owned is determined using Level 3 inputs which
include current and prior appraisals and estimated costs to
sell.  Changes in fair value are recorded directly as an adjustment to
current earnings through non-interest expense.  Costs relating to
improvement of property may be capitalized, whereas costs relating to the
holding of property are expensed.
 
 Impaired
loans:
 Impaired
loans which are collateral dependent are measured for impairment using the fair
value of the collateral; collateral dependent loans had a carrying amount of
$15.0 million, net of a valuation allowance of $6.0 million at September 30,
2009.  Provision for loan losses of $1.7 million and $4.0 million was
recorded during the three months and nine months ended September 30, 2009,
respectively.
 24
  NOTE
11.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 Carrying
amount and estimated fair value of financial instruments, not previously
presented, at year end were as follows:
 As
      of September 30,
                    
                    
                    As
      of December 31,2009
                    
                    
                    2008Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    EstimatedAmount
                    
                    
                    Fair
      Value
                    
                    
                    Amount
                    
                    
                    Fair
      ValueFINANCIAL
      ASSETS
                    
                    (Dollars
      in Thousands)Cash
      and cash equivalents
                    
                    $
                    50,051
                    
                    
                    $
                    50,051
                    
                    
                    $
                    34,058
                    
                    
                    $
                    34,058Real
      estate mortgages held for sale
                    
                    
                    7,316
                    
                    
                    
                    7,316
                    
                    
                    
                    736
                    
                    
                    
                    736Loans,
      net
                    
                    
                    647,303
                    
                    
                    
                    647,353
                    
                    
                    
                    741,879
                    
                    
                    
                    733,142Federal
      Home Loan Bank stock
                    
                    
                    9,961
                    
                    
                    
                    n/a
                    
                    
                    
                    9,996
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    3,416
                    
                    
                    
                    3,416
                    
                    
                    
                    3,934
                    
                    
                    
                    3,934FINANCIAL
      LIABILITIESDeposits
                    
                    
                    600,157
                    
                    
                    
                    602,274
                    
                    
                    
                    624,606
                    
                    
                    
                    627,049Securities
      sold under agreements to repurchase
                    
                    
                    92,800
                    
                    
                    
                    104,232
                    
                    
                    
                    92,800
                    
                    
                    
                    106,327Federal
      Home Loan Bank advances
                    
                    
                    177,670
                    
                    
                    
                    189,427
                    
                    
                    
                    184,850
                    
                    
                    
                    216,869Accrued
      interest payable
                    
                    
                    1,254
                    
                    
                    
                    1,254
                    
                    
                    
                    1,441
                    
                    
                    
                    1,441
 The
methods and assumptions used to estimate fair value are described as
follows:
 
 Carrying
amount is the estimated fair value for cash and cash equivalents, accrued
interest, demand and savings deposits and variable rate loans or deposits that
re-price frequently and fully.  For fixed rate loans or deposits and
for variable rate loans or deposits with infrequent re-pricing or re-pricing
limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk.  Fair value of debt
(FHLB advances and securities sold under agreements to repurchase) is based on
current rates for similar financing. It was not practicable to determine the
fair vale of FHLB stock due to restrictions placed on its
transferability.  The estimated fair value of other financial
instruments and off-balance-sheet loan commitments approximate cost and are not
considered significant to this presentation.
 
 NOTE
12.  GOODWILL
 
 Goodwill
is tested at least annually for impairment, more frequently if events or
circumstances indicate impairment may exist.  The recessionary
economic conditions have significantly affected the banking industry in general,
and have had an adverse impact on our financial results.  Financial
results for 2009 have been negatively impacted by an increase in credit losses
in our loan portfolio, a lower net interest margin due to increased balances of
non-performing loans, recognition of other-than-temporary-impairment (OTTI) on
certain of our available-for-sale securities and higher loan collection
expenses.  Our stock price has continued to trade at a price below
book value since the fourth quarter of 2008.  Accordingly, an
assessment of goodwill impairment was performed during the third quarter of 2009
in advance of the date of normal annual review.  Based on the results
of that analysis, an impairment charge of $2.8 million was recorded in the third
quarter of 2009, leaving no goodwill on the balance sheet at September 30,
2009.  This non-cash chargehad no
impact on the Bank's operations, liquidity, regulatory capital or its
well-capitalized status.
 25
 NOTE
13.  INCOME TAXES
 
 Under
generally accepted accounting principles, the Company considers at each
reporting period all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed to reduce its deferred tax asset to an amount that is more likely than
not to be realized.
 
 A
determination of the need for a valuation allowance for the deferred tax assets
is dependent upon management’s evaluation of both positive and negative
evidence.  Positive evidence includes the probability of achieving
forecasted future taxable income, applicable tax planning strategies and
assessments of the current and future economic and business
conditions.  Negative evidence includes the Company’s cumulative
losses and expiring tax credit carryforwards.
 
 At
September 30, 2009, the Company evaluated the expected realization of its
federal and state deferred tax assets which, prior to a valuation allowance,
totaled $14.2 million and was primarily comprised of future tax benefits
associated with the allowance for loan losses and net operating loss
carryforwards.  Based on this evaluation it was concluded a valuation
allowance equal to $7.1 million was required for the federal deferred tax
asset.  This valuation allowance was recognized as a charge to income
tax expense for the three months ended September 30, 2009.  The
realization of the deferred tax asset is dependent upon generating taxable
income.  The Company continues to maintain a 100% valuation allowance
for the state deferred tax asset.
 
 If the
valuation allowance is reduced or eliminated, future tax benefits will be
recognized as a reduction to income tax expense that will have a positive
non-cash impact on our net income and stockholders’ equity.
 
 Income
tax expense was as follows:
 Quarter
      to date
                          
                          
                          Year
      to dateSeptember 30, 2009
                          
                          
                          September 30, 2009Pre-tax
      loss
                          
                          $
                          (7,683
                          )
                          
                          $
                          (19,568
                          )Effective
      tax rate
                          
                          
                          37.21
                          %
                          
                          
                          38.06
                          %Tax
      expense
                          
                          
                          (2,859
                          )
                          
                          
                          (7,448
                          )Increase
      in valuation allowance - federal
                          
                          
                          7,142
                          
                          
                          
                          7,142Increase
      in valuation allowance - state
                          
                          
                          189
                          
                          
                          
                          588Income
      tax expense
                          
                          $
                          4,472
                          
                          
                          $
                          282
 
 NOTE
14. SALE OF BRANCH
 
 On
September 1, 2009, Atlantic Coast Bank, the subsidiary of Atlantic Coast Federal
Corporation, entered into a Purchase
and Assumption Agreement (the "Agreement") with HeritageBank of the South
("HeritageBank") regarding the sale of Atlantic Coast Bank's Lake City, Florida
branch to HeritageBank. Under the Agreement, HeritageBank will assume
approximately $44.1 million in deposits and purchase approximately $11.9 million
in consumer and residential mortgage loans; the loans are being sold at par
subject to a 60 day “put back”, the deposits are being sold for a 1% premium.
The impact on net income in 2009 and going forward is not expected to be
material. The transaction, subject to final regulatory approval, is expected to
close late in the fourth quarter of 2009.
  NOTE
15. SUBSEQUENT EVENT
 
 On
November 6, 2009 legislation was signed into law which will enable the Company
to carry back tax net operating losses five years versus the two years currently
allowed.  The Company currently has a valuation allowance offsetting its net
operating losses due to the uncertainly of its ability to realize them in future
years.  The extended carry back period
will be available to the Company in the fourth quarter to offset approximately
$1.2 million against the net deferred
tax asset of $7.1 million.
 
 26





ATLANTIC
COAST FEDERAL CORPORATION





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





Forward-Looking
Statements




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




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




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




Critical
Accounting Policies





Certain
accounting policies are important to the portrayal of the Company’s financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain.  Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and circumstances,
including, but without limitation, changes in interest rates, performance of the
economy, financial condition of borrowers and laws and
regulations.  Management believes that its critical accounting
policies include determining the allowance for loan losses, determining the fair
value of securities, the valuation of goodwill and accounting for deferred
income taxes.  Atlantic Coast Federal Corporation’s accounting
policies are discussed in detail in Note 1 of the Notes to the Consolidated
Financial Statements included in Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2008 filed with the Securities and Exchange
Commission.





Allowance
for Loan Losses




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


27


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





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





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





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





Fair
Value of Securities Available for Sale




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


28




When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If an we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between the its amortized cost basis and its fair value at the balance sheet
date. If we do not intend to sell the security and it is not more likely than
not that we will be required to sell the security before recovery of its
amortized cost basis less any current-period loss, the OTTI is separated into
the amount representing the credit loss and the amount related to all other
factors. The amount of the total related to the credit loss is determined based
on the present value of cash flows expected to be collected and is recognized as
a charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.





Valuation
of Goodwill





Goodwill
is tested at least annually for impairment, more frequently if events or
circumstances indicate impairment may exist.  The recessionary
economic conditions have significantly affected the banking industry in general,
and have had an adverse impact on our financial results.  Financial
results for 2009 have been negatively impacted by an increase in credit losses
in our loan portfolio, a lower net interest margin due to increased balances of
non-performing loans, recognition of other-than-temporary-impairment (OTTI) on
certain of our available-for-sale securities and higher loan collection
expenses.  The stock price has continued to trade at a price below
book value since the fourth quarter of 2008.  Accordingly, an
assessment of goodwill impairment was performed during the third quarter of 2009
in advance of the date of normal annual review.  Based on the results
of that analysis, an impairment charge of $2.8 million was recorded in the third
quarter of 2009, leaving no goodwill on the balance sheet at September 30,
2009.  This non-cash chargehad no
impact on the Bank's operations, liquidity, regulatory capital or its
well-capitalized status.





Deferred
Income Taxes





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





All
available evidence, both positive and negative, is considered when determining
whether or not a valuation allowance is necessary to reduce the carrying amount
to a balance that is considered more likely than not to be
realized.  The determination of the realizability of deferred tax
assets is highly subjective and dependent upon judgment concerning management’s
evaluation of such evidence.  Positive evidence considered includes
the probability of achieving forecasted taxable income and the ability to
implement tax planning strategies to accelerate taxable income
recognition.  Negative evidence includes the Company’s cumulative
losses.  Following the initial establishment of a valuation allowance,
if the Company is unable to generate sufficient pre-tax income in future periods
or otherwise fails to meet forecasted operating results, an additional valuation
allowance may be required.  Any valuation allowance is required to be
recorded during the period identified.  The Bank’s deferred tax asset,
net of valuation allowance, was approximately $7.1 million as of September 30,
2009.


29





Comparison
of Financial Condition at September 30, 2009 and December 31, 2008





General.Total assets
decreased $50.8 million to $945.3 million at September 30, 2009 as compared to
$996.1 million at December 31, 2008.  The primary reason for the
decline in assets was a decrease in gross loans of $90.4 million, partially
offset by higher investments in available for sale securities and cash and cash
equivalents.  Core deposits grew by a combined $27.2 million, but were
offset by a decline in time deposits of $51.7 million.




Following
is a summarized comparative balance sheet as of September 30, 2009 and December
31, 2008:


September
      30,
                                        
                                        
                                        December
      31,
                                        
                                        
                                        Increase
      (decrease)2009
                                        
                                        
                                        2008
                                        
                                        
                                        Dollars
                                        
                                        
                                        Percentage(Dollars
      in Thousands)AssetsCash
      and cash equivalents
                                        
                                        $
                                        50,051
                                        
                                        
                                        $
                                        34,058
                                        
                                        
                                        $
                                        15,993
                                        
                                        
                                        
                                        47.0
                                        %Securitites
      available for sale
                                        
                                        
                                        172,386
                                        
                                        
                                        
                                        147,474
                                        
                                        
                                        
                                        24,912
                                        
                                        
                                        
                                        16.9
                                        %Loans
                                        
                                        
                                        662,078
                                        
                                        
                                        
                                        752,477
                                        
                                        
                                        
                                        (90,399
                                        )
                                        
                                        
                                        -12.0
                                        %Allowance
      for loan losses
                                        
                                        
                                        (14,775
                                        )
                                        
                                        
                                        (10,598
                                        )
                                        
                                        
                                        (4,177
                                        )
                                        
                                        
                                        39.4
                                        %Loans,
      net
                                        
                                        
                                        647,303
                                        
                                        
                                        
                                        741,879
                                        
                                        
                                        
                                        (94,576
                                        )
                                        
                                        
                                        -12.7
                                        %Real
      estate mortgages held for sale
                                        
                                        
                                        7,316
                                        
                                        
                                        
                                        736
                                        
                                        
                                        
                                        6,580
                                        
                                        
                                        
                                        894.0
                                        %Other
      assets
                                        
                                        
                                        68,224
                                        
                                        
                                        
                                        71,942
                                        
                                        
                                        
                                        (3,718
                                        )
                                        
                                        
                                        -5.2
                                        %Total
      assets
                                        
                                        $
                                        945,280
                                        
                                        
                                        $
                                        996,089
                                        
                                        
                                        $
                                        (50,809
                                        )
                                        
                                        
                                        -5.1
                                        %Liabilities
      and Stockholders' equityDepositsNon-interest
      bearing demand
                                        
                                        $
                                        36,244
                                        
                                        
                                        $
                                        33,192
                                        
                                        
                                        $
                                        3,052
                                        
                                        
                                        
                                        9.2
                                        %Interest
      bearing demand
                                        
                                        
                                        76,307
                                        
                                        
                                        
                                        67,714
                                        
                                        
                                        
                                        8,593
                                        
                                        
                                        
                                        12.7
                                        %Savings
      and money market
                                        
                                        
                                        179,965
                                        
                                        
                                        
                                        164,388
                                        
                                        
                                        
                                        15,577
                                        
                                        
                                        
                                        9.5
                                        %Time
                                        
                                        
                                        307,641
                                        
                                        
                                        
                                        359,312
                                        
                                        
                                        
                                        (51,671
                                        )
                                        
                                        
                                        -14.4
                                        %Total
      deposits
                                        
                                        
                                        600,157
                                        
                                        
                                        
                                        624,606
                                        
                                        
                                        
                                        (24,449
                                        )
                                        
                                        
                                        -3.9
                                        %Federal
      Home Loan Bank advances
                                        
                                        
                                        177,670
                                        
                                        
                                        
                                        184,850
                                        
                                        
                                        
                                        (7,180
                                        )
                                        
                                        
                                        -3.9
                                        %Securities
      sold under agreements to repurchase
                                        
                                        
                                        92,800
                                        
                                        
                                        
                                        92,800
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        0.0
                                        %Accrued
      expenses and other liabilities
                                        
                                        
                                        8,858
                                        
                                        
                                        
                                        9,873
                                        
                                        
                                        
                                        (1,015
                                        )
                                        
                                        
                                        -10.3
                                        %Total
      liabilities
                                        
                                        
                                        879,485
                                        
                                        
                                        
                                        912,129
                                        
                                        
                                        
                                        (32,644
                                        )
                                        
                                        
                                        -3.6
                                        %Stockholders'
      equity
                                        
                                        
                                        65,795
                                        
                                        
                                        
                                        83,960
                                        
                                        
                                        
                                        (18,165
                                        )
                                        
                                        
                                        -21.6
                                        %Total
      liabilities and stockholders' equity
                                        
                                        $
                                        945,280
                                        
                                        
                                        $
                                        996,089
                                        
                                        
                                        $
                                        (50,809
                                        )
                                        
                                        
                                        -5.1
                                        %





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.  The increase in cash and cash equivalents during the
first nine months of 2009 was due primarily to the liquidity created as a result
of the rapid decline in portfolio loans which exceeded the decrease in total
deposits.  Management expects the balances in cash and cash
equivalents will fluctuate as other interest earning assets mature, as
management identifies opportunities for longer-term investments that fit the
Company’s growth strategy, and as daily operating liquidity increases or
decreases.





Securities available for
sale.  Securities available for sale is composed principally of
debt securities of U.S. Government-sponsored enterprises, and mortgage-backed
securities.  The investment portfolio increased approximately $24.9
million to $172.4 million at September 30, 2009, net of purchases, sales and
maturities.  Gain on sale of securities available for sale was
approximately $333,000.  Expense for other-than-temporary impairment
was approximately $1.6 million in non-interest income on six private label
mortgage-backed securities for the nine months ended September 30,
2009.


30


As part
of our asset and liability management strategy, we leveraged our growth in
securities available for sale via securities sold under agreements to repurchase
to take advantage of favorable interest rate spreads and to reduce overall
exposure to interest rate risk.  As a result of the unprecedented
decline in interest rates, as well as illiquidity in the mortgage-backed
securities market, coupled with the overall decline in the Bank’s credit
quality, the Bank has been subject to margin and fair value calls from the third
party counterparties to the repurchase agreements which has necessitated the
Bank post additional collateral to cover the outstanding securities sold under
agreements to repurchase positions.  Additionally, given the
collateral requirements of these transactions, the current interest rate
environment and the illiquidity in the marketplace, the liquidity of the
available for sale securities portfolio is currently
limited.  Management intends to hold these positions for the
foreseeable future and will continue to evaluate its options as the economic
environment improves and liquidity returns to the
marketplace.





Loans.  Gross
portfolio loans declined approximately 12% to $656.8 million at September
30, 2009 as compared to $743.6 million at December 31, 2008 due to increased
payoffs of one- to four-family residential loans in the first nine months of
2009, combined with the sale of approximately $13 million in one-to four family
residential loans near par in the first quarter of 2009 as well as the sale of
approximately $3.0 million of non-performing loans in the third quarter of
2009.





Total
loan originations decreased $44.3 million to $92.8 million for the nine months
ended September 30, 2009 from $137.1 million for the nine months ended September
30, 2008. Origination of loans held for sale in the secondary market increased
$56.7 million during the first nine months of 2009, while portfolio loan
production decreased $101.0 million to $29.7 million during the same
period.  Portfolio loan production of all loan types, and in
particular one- to four-family residential loans have been negatively impacted
by the decline in real estate values, slowing residential real estate sales
activity and the overall recessionary economy in the Bank’s
markets.





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





Allowance for loan losses. Our
allowance for loan losses was 2.23% and 1.43% of total loans outstanding at
September 30, 2009 and December 31, 2008, respectively.





As shown
in the table below, non-performing loans totaled $40.9 million or 6.17% of total
loans and $25.5 million, or 3.43% of total loans at September 30, 2009, and
December 31, 2008, respectively.  Total impaired loans increased
to $46.8 million at September 30, 2009 from $24.5 million at December 31,
2008.  As of September 30, 2009 non-performing one-to four-family
residential loans of $10.4 million had been written-down to the estimated fair
value of their collateral and are expected to be resolved with no additional
material loss, absent further declines in the fair value of the collateral, or
decision to sell loans as distressed assets. The total allowance allocated for
impaired loans increased to $6.0 million at September 30, 2009 from $3.5 million
at December 31, 2008. The increase in non-performing loans was primarily the
result of general deterioration in commercial and other real estate as
recessionary economic conditions continued. The increase in impaired loans was
primarily related to certain commercial loan participations in our general
market area.  The Company ceased involvement in new loan
participations following a commitment made on December 31, 2006, and funded in
May 2007.  As of September 30, 2009, and December 31, 2008, all
non-performing loans were classified as non-accrual, and there were no loans 90
days past due and accruing interest as of September 30, 2009, and December
31, 2008.  Non-performing loans, excluding small balance homogeneous
loans, increased to $18.5 million at September 30, 2009, from $8.3 million at
December 31, 2008.   Troubled debt restructured (TDR) loans
increased to $19.7 million as of September 30, 2009, from $7.0 million at
December 31, 2008.  These loans were primarily comprised of
residential mortgage loans collateralized by real estate and were evaluated for
impairment as required under GAAP.


31





Nonaccrual loans:
                                            
                                            September
                                            
                                            
                                            December2009
                                            
                                            
                                            2008Real EstateOne-to-four-family
                                            
                                            $
                                            11,445
                                            
                                            
                                            $
                                            10,319Commercial
                                            
                                            
                                            10,588
                                            
                                            
                                            
                                            5,126Other
                                            
                                            
                                            8,970
                                            
                                            
                                            
                                            2,941Construction
      - One-to-four-family
                                            
                                            
                                            -
                                            
                                            
                                            
                                            86Construction
      - Commercial
                                            
                                            
                                            4,988
                                            
                                            
                                            
                                            3,169Construction
      - Acquisition & Development
                                            
                                            
                                            404
                                            
                                            
                                            
                                            1,812Other Loans - ConsumerHome
      Equity
                                            
                                            
                                            2,957
                                            
                                            
                                            
                                            1,525Other
                                            
                                            
                                            1,506
                                            
                                            
                                            
                                            387Commercial
                                            
                                            
                                            -
                                            
                                            
                                            
                                            170Total
      non-performing loans
                                            
                                            
                                            40,858
                                            
                                            
                                            
                                            25,535Foreclosed
      assets
                                            
                                            
                                            3,132
                                            
                                            
                                            
                                            3,332Total
      non-performing assets
                                            
                                            $
                                            43,990
                                            
                                            
                                            $
                                            28,867Total
      troubled debt restructurings (TDR)
                                            
                                            $
                                            19,750
                                            
                                            
                                            $
                                            7,004Total
      impaired loans (including TDR)
                                            
                                            $
                                            46,808
                                            
                                            
                                            $
                                            24,476Non-performing
      loans to total loans
                                            
                                            
                                            6.17
                                            %
                                            
                                            
                                            3.43
                                            %Non-performing
      loans to total assets
                                            
                                            
                                            4.32
                                            %
                                            
                                            
                                            2.56
                                            %Non-performing
      assets to total assets
                                            
                                            
                                            4.65
                                            %
                                            
                                            
                                            2.90
                                            %





Loan
charge-offs included approximately $5.2 million in 2009 of partial charge-offs
of one-to four- family residential loans identified as non-performing. Due to
the decline in real estate values over the last 12-18 months,  the
Company believes it  is appropriate and prudent  to reduce
the carrying balance of non-performing one-to four-family residential loans by
the expected loss amount rather than providing a general allowance. Charge-offs
in 2009 also included $3.3 million of specific reserve on commercial loans
transferred to other real estate or for which an extended collection period is
underway or expected.  The remaining amounts charged-off in 2009 and
2008 principally represent losses on short-sales or foreclosures of one-to four-
family residential loans, home equity and other consumer
loans.   The increase in the provision for loan losses in the
first nine months of 2009 was primarily due to residential charge-offs described
above as well as an increased specific allowance due to the ongoing
deterioration of certain commercial loan participations in the Company's general
market area.


32





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


Allowance
      for Loan Loss AnalysisSeptember
      30,
              
              
              December
      31,2009
              
              
              2008Balance
      at beginning of period
              
              $
              10,598
              
              
              $
              6,482Charge-offs:Real Estate
      LoansOne-to
      four-family
              
              
              5,982
              
              
              
              3,514Commercial
              
              
              690
              
              
              
              3,393Other
      (Land & Multi-family)
              
              
              3,393
              
              
              
              777Real Estate
      Construction LoansConstruction
      One-to four family
              
              
              50
              
              
              
              336Construction
      Commercial
              
              
              -
              
              
              
              -Acquistion
      & Development
              
              
              -
              
              
              
              -Other LoansHome
      equity
              
              
              3,696
              
              
              
              1,392Consumer
              
              
              801
              
              
              
              1,232Commercial
              
              
              590
              
              
              
              345Total
      charge-offs
              
              
              15,202
              
              
              
              10,989Recoveries:Real Estate
      LoansOne-to
      four-family
              
              
              212
              
              
              
              25Commercial
              
              
              -
              
              
              
              550Other
      (Land & Multi-family)
              
              
              17
              
              
              
              45Real Estate
      Construction LoansConstruction
      One-to four family
              
              
              -
              
              
              
              -Construction
      Commercial
              
              
              -
              
              
              
              -Acquistion
      & Develpoment
              
              
              -
              
              
              
              -Other
      LoansHome
      equity
              
              
              204
              
              
              
              3Consumer
              
              
              271
              
              
              
              533Commercial
              
              
              18
              
              
              
              1Total
      recoveries
              
              
              722
              
              
              
              1,157Net
      charge-offs
              
              
              14,480
              
              
              
              9,832Provision
      for loan losses
              
              
              18,657
              
              
              
              13,948Balance
      at end of period
              
              $
              14,775
              
              
              $
              10,598


Deferred Income
Taxes.  At September 30, 2009, the Company recorded $7.1
million in income tax expense representing a 50% valuation allowance for its net
federal deferred tax assets.  The Company believes it is more likely
than not that the remaining deferred assets will be realized. This determination
was based largely on the Company’s ability to implement tax planning strategies
to accelerate taxable income and its ability to generate future taxable income.
The Company believes, based on its internal earnings projections, it will
generate sufficient future taxable income that will result in the realization of
no less than 50% of the Company’s deferred tax assets. This positive evidence
was sufficient to overcome the negative evidence of cumulative losses that was
caused primarily by the significant loan loss provisions that have been realized
in the past 12 months and a 2.8 million non-cash goodwill impairment
charge recorded in the third quarter of 2009. It is possible that future
conditions may differ substantially from those anticipated in determining the
need for a valuation allowance on deferred tax assets and adjustments may be
required in the future.


33


Deposits. Total deposits
account balances were $600.2 million at September 30, 2009, a decrease of $24.4
million from $624.6 million at December 31, 2008.   The $51.7
million decrease in time deposits was partially offset by a $27.2 million
increase in core deposits as consumers have demonstrated a preference for
shorter duration, more liquid deposit products.  This increase in core
deposits occurred as depositors increased their non-interest bearing demand
accounts $3.1 million and also increased their interest bearing demand accounts
$8.6 million  Management believes future deposit growth will be more
limited than in the past as the Company attempts to level deposit balances with
declines in loan balances.




Federal Home Loan Bank
advances. FHLB advances had a weighted-average maturity of 65 months and
a weighted-average rate of 3.65% at September 30, 2009.   The
$7.2 million decrease in FHLB borrowings at September 30, 2009 as compared to
December 31, 2008 was due to repayments of $27.2 million partially offset by
additional borrowings of $20.0 million.   The Company expects to
continue to utilize FHLB advances to manage short and long- term liquidity needs
to the extent it has borrowing capacity, needs funding and the interest expense
of FHLB advances is attractive compared to deposits and other alternative
sources of funds. However, with the FDIC’s new deposit insurance premium raising
deposit assessments to recapitalize the Deposit Insurance Fund, which takes into
consideration an institution’s FHLB borrowings, our FDIC assessment may
increase, should any additional FHLB borrowings outpace deposit
growth.




Securities sold under agreements to
repurchase. Securities sold under agreements to repurchase are secured by
mortgage-backed securities with a carrying amount of $120.0 million at September
30, 2009.  The agreements carry various periods of fixed interest
rates that convert to callable floating rates in the future.  Upon
conversion, each agreement may be terminated in whole by the lender each
following quarter.  At maturity or termination, the securities
underlying the agreements will be returned to the Company.  The
Company had $92.8 million of such agreements as of September 30, 2009 and
December 31, 2008.




Securities
sold under agreements to repurchase are financing arrangements that mature
within ten years.  At maturity, the securities underlying the
agreements are returned to the Company.  Information concerning
securities sold under agreements to repurchase is summarized as
follows:





(Dollars
      in Thousands)Average
      daily balance during the period
                    
                    $
                    92,800Average
      interest rate during the period
                    
                    
                    4.43
                    %Maximum
      month-end balance
                    
                    $
                    92,800Weighted
      average interest rate at period end
                    
                    
                    4.68
                    %





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




Stockholders’
equity.  Stockholders’ equity decreased by approximately $18.2
million to $65.8 million at September 30, 2009 from $84.0 million at December
31, 2008 primarily due to the net loss of $19.9 million, partially offset by the
increase in other comprehensive income.  In September 2009, the
Company’s board of directors suspended the payment of cash
dividends.  Total dividends for the nine months ended September 30,
2009 charged to stockholders’ equity was approximately $89,000 and approximately
$175,000 of dividend payments were waived by the MHC.




In March
2009, as part of a capital preservation plan, the Company suspended its stock
repurchase program begun in September 2006 and amended on August 1,
2008.




The
Company’s equity to assets ratio decreased to 6.96% at September 30, 2009, from
8.43% at December 31, 2008. The decrease was primarily due to the net loss of
$19.9 million for the nine months ended September 30, 2009 partially offset by
the increase in other comprehensive income. Despite this decrease, the Bank
continued to be well in excess of all minimum regulatory capital requirements,
and is considered “well capitalized” under those formulas.  Total
risk-based capital to risk-weighted assets was 11.6%, Tier 1 capital to
risk-weighted assets was 10.4%, and Tier 1 capital to adjusted total assets was
6.4% at September 30, 2009. These ratios as of December 31, 2008 were 11.1%,
10.2% and 7.1%, respectively.


34





Comparison of Results of Operations
for the Three Months Ended September 30, 2009 and 2008.





General.Net loss for the three
months ended September 30, 2009, was $12.2 million, which was an increase of
$11.8 million from a net loss of $329,000 for the same period in 2008 due to the
establishment of a valuation allowance for federal deferred tax assets, an
increase in the provision for loan losses, a loss from impairment of goodwill, a
decline in net interest income and an OTTI charge.





Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the three months ended September 30, 2009 and 2008. 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 30,2009
                                                                                    
                                                                                    
                                                                                    2008(Dollars
      in Thousands)Average
                                                                                      Balance
                                                                                    
                                                                                    
                                                                                    Interest
                                                                                    
                                                                                    
                                                                                    Average
      Yield
                                                                                      /Cost
                                                                                    
                                                                                    
                                                                                    Average
                                                                                      Balance
                                                                                    
                                                                                    
                                                                                    Interest
                                                                                    
                                                                                    
                                                                                    Average
      Yield
                                                                                      /CostINTEREST-EARNING
      ASSETSLoans
      receivable(1)
                                                                                    
                                                                                    $
                                                                                    684,784
                                                                                    
                                                                                    
                                                                                    $
                                                                                    10,094
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.90
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    741,912
                                                                                    
                                                                                    
                                                                                    $
                                                                                    11,657
                                                                                    
                                                                                    
                                                                                    
                                                                                    6.28
                                                                                    %Securites(2)
                                                                                    
                                                                                    
                                                                                    180,391
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,080
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.61
                                                                                    %
                                                                                    
                                                                                    
                                                                                    143,080
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,956
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.47
                                                                                    %Other
      interest-earning assets(3)
                                                                                    
                                                                                    
                                                                                    46,365
                                                                                    
                                                                                    
                                                                                    
                                                                                    43
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.37
                                                                                    %
                                                                                    
                                                                                    
                                                                                    37,360
                                                                                    
                                                                                    
                                                                                    
                                                                                    227
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.43
                                                                                    %Total
      interest-earning assets
                                                                                    
                                                                                    
                                                                                    911,540
                                                                                    
                                                                                    
                                                                                    
                                                                                    12,217
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.36
                                                                                    %
                                                                                    
                                                                                    
                                                                                    922,352
                                                                                    
                                                                                    
                                                                                    
                                                                                    13,840
                                                                                    
                                                                                    
                                                                                    
                                                                                    6.01
                                                                                    %Non-interest
      earning assets
                                                                                    
                                                                                    
                                                                                    60,138
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    58,788Total
      assets
                                                                                    
                                                                                    $
                                                                                    971,678
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    $
                                                                                    981,140INTEREST-BEARING
      LIABILITIESSavings
      deposits
                                                                                    
                                                                                    $
                                                                                    34,978
                                                                                    
                                                                                    
                                                                                    $
                                                                                    34
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.39
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    35,479
                                                                                    
                                                                                    
                                                                                    $
                                                                                    34
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.38
                                                                                    %Interest
      bearing demand accounts
                                                                                    
                                                                                    
                                                                                    76,012
                                                                                    
                                                                                    
                                                                                    
                                                                                    353
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.86
                                                                                    %
                                                                                    
                                                                                    
                                                                                    63,799
                                                                                    
                                                                                    
                                                                                    
                                                                                    424
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.66
                                                                                    %Money
      market accounts
                                                                                    
                                                                                    
                                                                                    142,344
                                                                                    
                                                                                    
                                                                                    
                                                                                    525
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.48
                                                                                    %
                                                                                    
                                                                                    
                                                                                    121,382
                                                                                    
                                                                                    
                                                                                    
                                                                                    952
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.14
                                                                                    %Time
      deposits
                                                                                    
                                                                                    
                                                                                    322,273
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,907
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.61
                                                                                    %
                                                                                    
                                                                                    
                                                                                    331,404
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,554
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.29
                                                                                    %Federal
      Home Loan Bank advances
                                                                                    
                                                                                    
                                                                                    177,656
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,714
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.86
                                                                                    %
                                                                                    
                                                                                    
                                                                                    201,167
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,983
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.94
                                                                                    %Securities
      sold under agreements to repurchase
                                                                                    
                                                                                    
                                                                                    92,800
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,085
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.68
                                                                                    %
                                                                                    
                                                                                    
                                                                                    93,836
                                                                                    
                                                                                    
                                                                                    
                                                                                    963
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.11
                                                                                    %Total
      interest-bearing liabilities
                                                                                    
                                                                                    
                                                                                    846,063
                                                                                    
                                                                                    
                                                                                    
                                                                                    6,618
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.13
                                                                                    %
                                                                                    
                                                                                    
                                                                                    847,067
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,910
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.73
                                                                                    %Non-interest
      bearing liabilities
                                                                                    
                                                                                    
                                                                                    48,276
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    47,254Total
      liabilities
                                                                                    
                                                                                    
                                                                                    894,339
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    894,321Stockholders'
      equity
                                                                                    
                                                                                    
                                                                                    77,339
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    86,819Total
      liabilities and stockholders' equity
                                                                                    
                                                                                    $
                                                                                    971,678
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    $
                                                                                    981,140Net
      interest income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,599
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,930Net
      interest spread
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.23
                                                                                    %
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.28
                                                                                    %Net
      earning assets
                                                                                    
                                                                                    $
                                                                                    65,477
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    $
                                                                                    75,285Net
      interest margin(4)
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.46
                                                                                    %
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.57
                                                                                    %Average
      interest-earning assets to
                                                                                      average
      interest-bearing
      liabilities
                                                                                    
                                                                                    
                                                                                    
                                                                                    107.74
                                                                                    %
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    108.89
                                                                                    %





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


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


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


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


35


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,
2009 as compared to the same period in 2008. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume multiplied by the old
rate; and (2) changes in rate, which are changes in rate multiplied by the old
volume; and (3) changes not solely attributable to rate or volume have been
allocated proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                                            
                                            
                                            TotalDue
      to
                                            
                                            
                                            IncreaseVolume
                                            
                                            
                                            Rate
                                            
                                            
                                            (Decrease)(Dollars
      in Thousands)INTEREST-EARNING
      ASSETSLoans
      receivable
                                            
                                            $
                                            (867
                                            )
                                            
                                            $
                                            (695
                                            )
                                            
                                            $
                                            (1,562
                                            )Securities
                                            
                                            
                                            460
                                            
                                            
                                            
                                            (336
                                            )
                                            
                                            
                                            124Other
      interest-earning assets
                                            
                                            
                                            45
                                            
                                            
                                            
                                            (229
                                            )
                                            
                                            
                                            (184
                                            )Total
      interest-earning assets
                                            
                                            
                                            (362
                                            )
                                            
                                            
                                            (1,260
                                            )
                                            
                                            
                                            (1,622
                                            )INTEREST-BEARING
      LIABILITIESSavings
      deposits
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            1Interest
      bearing demand accounts
                                            
                                            
                                            72
                                            
                                            
                                            
                                            (143
                                            )
                                            
                                            
                                            (71
                                            )Money
      market accounts
                                            
                                            
                                            143
                                            
                                            
                                            
                                            (569
                                            )
                                            
                                            
                                            (426
                                            )Time
      deposits
                                            
                                            
                                            (96
                                            )
                                            
                                            
                                            (552
                                            )
                                            
                                            
                                            (648
                                            )Federal
      Home Loan Bank advances
                                            
                                            
                                            (228
                                            )
                                            
                                            
                                            (41
                                            )
                                            
                                            
                                            (269
                                            )Securities
      sold under agreements to repurchase
                                            
                                            
                                            (11
                                            )
                                            
                                            
                                            132
                                            
                                            
                                            
                                            121Total
      interest-bearing liabilities
                                            
                                            
                                            (120
                                            )
                                            
                                            
                                            (1,172
                                            )
                                            
                                            
                                            (1,292
                                            )Net
      interest income
                                            
                                            $
                                            (242
                                            )
                                            
                                            $
                                            (88
                                            )
                                            
                                            $
                                            (330
                                            )





Interest income.Interest
income declined $1.6 million to $12.2 million for the three months ended
September 30, 2009 from $13.8 million for the three months ended September 30,
2008 due principally to an increase in non-performing loans as well as a decline
in average interest rates on interest-earning assets to 5.36% from
6.01%.  The average daily prime rate decreased 175 basis points from
5.00% to 3.25% for the comparative three- month periods ended September 30, 2009
and 2008.   Approximately 19% of the Bank’s loans are indexed to
the prime rate.  Interest income from loans also decreased, due to the
decrease in average balances on loans which decreased to $684.8 million for the
three months ended September 30, 2009 from $741.9 million for the prior year
period.





Interest
income from investment securities increased, as the increase in average balances
offset the decrease in average interest rates.  The decline in
interest income from other interest-earning assets was due to a decline in
average interest rates, partially offset by slightly higher average balances for
the three months ended September 30, 2009 as compared to the same three month
period in the prior year.





Our
interest income could be adversely impacted by continued low interest rates, the
availability of the type of interest-earning assets desired by the Company, and
increased non-performing loans.





Interest expense. Interest
expense declined by $1.3 million to $6.6 million for the three months ended
September 30, 2009 from $7.9 million for the three months ended September 30,
2008.  The decrease in interest expense for the three months ended
September 30, 2009, as compared to the same period in 2008, was due to lower
average rates on interest-bearing liabilities, partially offset by the increase
in average outstanding balances of deposits.  Interest expense on FHLB
borrowings declined for the third quarter of 2009 as compared to the same
quarter of 2008, as a result of restructuring a number of advances at slightly
lower rates during the latter part of 2008.


36





Net interest
income.Net interest income decreased $331,000, to $5.6
million for the three months ended September 30, 2009, from $5.9 million for the
three months ended September 30, 2008, as the decrease in interest income
outpaced the decrease in interest expense. Our net interest rate spread, which
is the difference between the interest rate earned on interest-earning assets
and the interest rate paid on interest-bearing liabilities, decreased 5 basis
points to 2.23% for the third quarter of 2009 as compared to 2.28% for the same
quarter in 2008.  For the same comparative periods, our net interest
margin, which is net interest income expressed as a percentage of our average
interest earning assets, decreased 11 basis points to 2.46%.





Provision for loan
losses. Provision for loan losses of $6.7 million and $3.7
million were made during the three months ended September 30, 2009 and 2008,
respectively.  The year-over-year increase was due to declines in both
credit quality and real estate values, an increase in net charge-offs and a
provision for loan losses of $2.0 million recorded to provide a general
allowance for loans held in the portfolio, previously supported by a cash
deposit maintained with the Company by an ongoing originator, which was settled
during the third quarter of 2009.  Under the terms of the settlement
agreement, the Company is now fully responsible for credit losses on these
loans.  Net charge-offs for the quarter ended September 30, 2009, were
$3.7 million, which included a partial charge-off of $2.0 million of
non-performing residential mortgage loans, $300,000 of additional net
charge-offs of residential loans foreclosed on or sold in short-sales
transactions, and $500,000 of non-performing commercial loans.  By
comparison, the Company had net charge-offs for the same three months in 2008 of
$3.3 million.





Non-interest income. The
components of non-interest income for the three months ended September 30, 2009
and 2008 were as follows:


Increase(decrease)2009
                                      
                                      
                                      2008
                                      
                                      
                                      Dollars
                                      
                                      
                                      Percentage(Dollars
      in Thousands)Service
      charges and fees
                                      
                                      $
                                      1,099
                                      
                                      
                                      $
                                      1,299
                                      
                                      
                                      $
                                      (200
                                      )
                                      
                                      
                                      -15.4
                                      %Gain
      (loss) on sale of real estate mortgagesheld for
      sale
                                      
                                      
                                      147
                                      
                                      
                                      
                                      46
                                      
                                      
                                      
                                      101
                                      
                                      
                                      
                                      219.6
                                      %Loss
      on sale of loans
                                      
                                      
                                      (1,317
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,317
                                      )
                                      
                                      
                                      -Loss
      on sale of foreclosed assets
                                      
                                      
                                      (318
                                      )
                                      
                                      
                                      (63
                                      )
                                      
                                      
                                      (255
                                      )
                                      
                                      
                                      404.8
                                      %Gain
      (loss) on available for sale securities
                                      
                                      
                                      117
                                      
                                      
                                      
                                      177
                                      
                                      
                                      
                                      (60
                                      )
                                      
                                      
                                      -33.9
                                      %Other
      than temporary impairment losses
                                      
                                      
                                      (252
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (252
                                      )
                                      
                                      
                                      -Interchange
      fees
                                      
                                      
                                      235
                                      
                                      
                                      
                                      224
                                      
                                      
                                      
                                      11
                                      
                                      
                                      
                                      4.9
                                      %Bank
      owned life insurance earnings
                                      
                                      
                                      195
                                      
                                      
                                      
                                      252
                                      
                                      
                                      
                                      (57
                                      )
                                      
                                      
                                      -22.6
                                      %Other
                                      
                                      
                                      2,015
                                      
                                      
                                      
                                      1,097
                                      
                                      
                                      
                                      918
                                      
                                      
                                      
                                      83.7
                                      %$
                                      1,921
                                      
                                      
                                      $
                                      3,032
                                      
                                      
                                      $
                                      (1,111
                                      )
                                      
                                      
                                      -36.6
                                      %





Non-interest
income for the three months ended September 30, 2009 decreased $1.1 million to
$1.9 million as compared to $3.0 million for the same three months in
2008.  The decrease was primarily due to the $1.3 million loss on the
sale of $3.0 million of non-performing loans, an other-than-temporary-impairment
(OTTI) charge of $252,000 on five private label mortgage-backed securities and a
larger loss on sale of foreclosed assets, offset by a gain of $2.0 million
resulting from a settlement agreement with an ongoing originator whereby the
Company assumed responsibility for credit losses on a pool of
loans.  Non-interest income also declined due to the non-recurrence of
other non-interest income items in 2008, including gains of $600,000 on the sale
of a branch and $250,000 on the extinguishment of Federal Home Loan Bank of
Atlanta debt.


37





Non-interest expense. The
components of non-interest expense for the three months ended September 30,
2009 and 2008 were as follows:





Increase(decrease)2009
                  
                  
                  2008
                  
                  
                  Dollars
                  
                  
                  Percentage(Dollars
      in Thousands)Compensation
      and benefits
                  
                  $
                  2,861
                  
                  
                  $
                  3,183
                  
                  
                  $
                  (322
                  )
                  
                  
                  -10.1
                  %Occupancy
      and equipment
                  
                  
                  674
                  
                  
                  
                  689
                  
                  
                  
                  (15
                  )
                  
                  
                  -2.2
                  %FDIC
      insurance premiums
                  
                  
                  422
                  
                  
                  
                  38
                  
                  
                  
                  384
                  
                  
                  
                  1010.5
                  %Outside
      professional services
                  
                  
                  316
                  
                  
                  
                  353
                  
                  
                  
                  (37
                  )
                  
                  
                  -10.5
                  %Collection
      expense and repossessedasset
      losses
                  
                  
                  355
                  
                  
                  
                  125
                  
                  
                  
                  230
                  
                  
                  
                  184.0
                  %Goodwill
      impairment
                  
                  
                  2,811
                  
                  
                  
                  -
                  
                  
                  
                  2,811
                  
                  
                  
                  -Other
                  
                  
                  1,115
                  
                  
                  
                  1,483
                  
                  
                  
                  (368
                  )
                  
                  
                  -24.8
                  %$
                  8,554
                  
                  
                  $
                  5,871
                  
                  
                  $
                  2,683
                  
                  
                  
                  45.7
                  %





Non-interest
expense increased by $2.7 million to $8.6 million for the three months ended
September 30, 2009 from $5.9 million for the same three months ended September
30, 2008.  The increase was primarily due to the $2.8 million
write-off of the entire amount of the Company’s goodwill.  Other
components of the increase include higher FDIC insurance premiums and increased
legal, collection and administrative expenses associated with other real estate
owned and foreclosures, partially offset by lower compensation and benefits as a
result of the Company’s initiatives to reduce expenses and increase
efficiencies, which began in the second quarter of 2008, with further steps
implemented in late 2008 and early 2009.





As an
FDIC-insured institution, the Bank is required to pay deposit insurance premiums
to the FDIC.  Because the FDIC’s deposit insurance fund fell below
prescribed levels in 2008, the FDIC has announced increased premiums for all
insured depository institutions, including the Bank, in order to begin
recapitalizing the fund.    Additional special assessments
are possible in the future.  These changes will result in increased
deposit insurance expense for the Bank in 2009.  These increases will
be reflected in other non-interest expenses in the Bank's income
statement.





Income tax.Income tax expense
increased $4.8 million to a tax expense of $4.5 million for the three months
ended September 30, 2009, from a benefit of $329,000 for the same period in 2008
primarily due to the establishment of the aforementioned valuation reserve for
federal deferred tax assets of $7.1 million, partially offset by the larger
pre-tax loss for the quarter.





Comparison of Results of Operations
for the Nine Months Ended September 30, 2009 and 2008.





General.Net loss for the nine
months ended September 30, 2009, was $19.9 million, which was a decrease of
$20.3 million from net income of $405,000 for the same period in 2008 due to the
establishment of a valuation allowance for federal deferred tax assets, an
increase in the provision for loan losses, a loss from impairment of Goodwill, a
decline in net interest income and an OTTI charge.


38





Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the nine months ended September 30, 2009 and 2008. 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 30,2009
                                                                                                
                                                                                                
                                                                                                2008(Dollars
      in Thousands)Average
                                                                                                  Balance
                                                                                                
                                                                                                
                                                                                                Interest
                                                                                                
                                                                                                
                                                                                                Average
      Yield
                                                                                                  /Cost
                                                                                                
                                                                                                
                                                                                                Average
                                                                                                  Balance
                                                                                                
                                                                                                
                                                                                                Interest
                                                                                                
                                                                                                
                                                                                                Average
      Yield
                                                                                                  /CostINTEREST-EARNING
      ASSETSLoans
      receivable(1)
                                                                                                
                                                                                                $
                                                                                                714,394
                                                                                                
                                                                                                
                                                                                                $
                                                                                                31,182
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.82
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                722,516
                                                                                                
                                                                                                
                                                                                                $
                                                                                                34,787
                                                                                                
                                                                                                
                                                                                                
                                                                                                6.42
                                                                                                %Securites(2)
                                                                                                
                                                                                                
                                                                                                169,450
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,902
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.64
                                                                                                %
                                                                                                
                                                                                                
                                                                                                146,682
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,932
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.39
                                                                                                %Other
      interest-earning assets(3)
                                                                                                
                                                                                                
                                                                                                47,174
                                                                                                
                                                                                                
                                                                                                
                                                                                                86
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.24
                                                                                                %
                                                                                                
                                                                                                
                                                                                                38,626
                                                                                                
                                                                                                
                                                                                                
                                                                                                925
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.19
                                                                                                %Total
      interest-earning assets
                                                                                                
                                                                                                
                                                                                                931,018
                                                                                                
                                                                                                
                                                                                                
                                                                                                37,170
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.32
                                                                                                %
                                                                                                
                                                                                                
                                                                                                907,824
                                                                                                
                                                                                                
                                                                                                
                                                                                                41,644
                                                                                                
                                                                                                
                                                                                                
                                                                                                6.12
                                                                                                %Non-interest
      earning assets
                                                                                                
                                                                                                
                                                                                                58,747
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                56,826Total
      assets
                                                                                                
                                                                                                $
                                                                                                989,765
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                964,650INTEREST-BEARING
      LIABILITIESSavings
      deposits
                                                                                                
                                                                                                $
                                                                                                34,621
                                                                                                
                                                                                                
                                                                                                $
                                                                                                99
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.38
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                35,670
                                                                                                
                                                                                                
                                                                                                $
                                                                                                100
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.37
                                                                                                %Interest
      bearing demand accounts
                                                                                                
                                                                                                
                                                                                                73,712
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,076
                                                                                                
                                                                                                
                                                                                                
                                                                                                1.95
                                                                                                %
                                                                                                
                                                                                                
                                                                                                56,054
                                                                                                
                                                                                                
                                                                                                
                                                                                                976
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.32
                                                                                                %Money
      market accounts
                                                                                                
                                                                                                
                                                                                                139,766
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,834
                                                                                                
                                                                                                
                                                                                                
                                                                                                1.75
                                                                                                %
                                                                                                
                                                                                                
                                                                                                133,199
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,016
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.02
                                                                                                %Time
      deposits
                                                                                                
                                                                                                
                                                                                                337,970
                                                                                                
                                                                                                
                                                                                                
                                                                                                9,556
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.77
                                                                                                %
                                                                                                
                                                                                                
                                                                                                329,972
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,334
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.58
                                                                                                %Federal
      Home Loan Bank advances
                                                                                                
                                                                                                
                                                                                                182,688
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,135
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.75
                                                                                                %
                                                                                                
                                                                                                
                                                                                                185,525
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,596
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.02
                                                                                                %Securities
      sold under agreements to repurchase
                                                                                                
                                                                                                
                                                                                                92,800
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,085
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.43
                                                                                                %
                                                                                                
                                                                                                
                                                                                                88,741
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,763
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.15
                                                                                                %Total
      interest-bearing liabilities
                                                                                                
                                                                                                
                                                                                                861,557
                                                                                                
                                                                                                
                                                                                                
                                                                                                20,785
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.22
                                                                                                %
                                                                                                
                                                                                                
                                                                                                829,161
                                                                                                
                                                                                                
                                                                                                
                                                                                                23,785
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.83
                                                                                                %Non-interest
      bearing liabilities
                                                                                                
                                                                                                
                                                                                                48,283
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                46,550Total
      liabilities
                                                                                                
                                                                                                
                                                                                                909,840
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                875,711Stockholders'
      equity
                                                                                                
                                                                                                
                                                                                                79,925
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                88,939Total
      liabilities and stockholders' equity
                                                                                                
                                                                                                $
                                                                                                989,765
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                964,650Net
      interest income
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,385
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                17,859Net
      interest spread
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.11
                                                                                                %
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.29
                                                                                                %Net
      earning assets
                                                                                                
                                                                                                $
                                                                                                69,461
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                78,663Net
      interest margin(4)
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.35
                                                                                                %
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.62
                                                                                                %Average
      interest-earning assets to
                                                                                                  average
      interest-bearing
      liabilities
                                                                                                
                                                                                                
                                                                                                
                                                                                                108.06
                                                                                                %
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                109.49
                                                                                                %





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


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


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


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


39


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,
2009 as compared to the same period in 2008. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume multiplied by the old
rate; and (2) changes in rate, which are changes in rate multiplied by the old
volume; and (3) changes not solely attributable to rate or volume have been
allocated proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                                            
                                            
                                            TotalDue
      to
                                            
                                            
                                            IncreaseVolume
                                            
                                            
                                            Rate
                                            
                                            
                                            (Decrease)(Dollars
      in Thousands)INTEREST-EARNING
      ASSETSLoans
      receivable
                                            
                                            $
                                            (387
                                            )
                                            
                                            $
                                            (3,218
                                            )
                                            
                                            $
                                            (3,605
                                            )Securities
                                            
                                            
                                            853
                                            
                                            
                                            
                                            (883
                                            )
                                            
                                            
                                            (30
                                            )Other
      interest-earning assets
                                            
                                            
                                            168
                                            
                                            
                                            
                                            (1,007
                                            )
                                            
                                            
                                            (839
                                            )Total
      interest-earning assets
                                            
                                            
                                            634
                                            
                                            
                                            
                                            (5,108
                                            )
                                            
                                            
                                            (4,474
                                            )INTEREST-BEARING
      LIABILITIESSavings
      deposits
                                            
                                            
                                            (3
                                            )
                                            
                                            
                                            2
                                            
                                            
                                            
                                            (1
                                            )Interest
      bearing demand accounts
                                            
                                            
                                            275
                                            
                                            
                                            
                                            (176
                                            )
                                            
                                            
                                            99Money
      market accounts
                                            
                                            
                                            142
                                            
                                            
                                            
                                            (1,324
                                            )
                                            
                                            
                                            (1,182
                                            )Time
      deposits
                                            
                                            
                                            269
                                            
                                            
                                            
                                            (2,046
                                            )
                                            
                                            
                                            (1,777
                                            )Federal
      Home Loan Bank advances
                                            
                                            
                                            (85
                                            )
                                            
                                            
                                            (376
                                            )
                                            
                                            
                                            (461
                                            )Securities
      sold under agreements to repurchase
                                            
                                            
                                            130
                                            
                                            
                                            
                                            193
                                            
                                            
                                            
                                            323Total
      interest-bearing liabilities
                                            
                                            
                                            728
                                            
                                            
                                            
                                            (3,727
                                            )
                                            
                                            
                                            (2,999
                                            )Net
      interest income
                                            
                                            $
                                            (94
                                            )
                                            
                                            $
                                            (1,381
                                            )
                                            
                                            $
                                            (1,475
                                            )





Interest income.Interest
income declined $4.5 million to $37.2 million for the nine months ended
September 30, 2009 from $41.6 million for the nine months ended September 30,
2008 due principally to an increase in non-performing loans, as well as a
decline in average interest rates on interest-earning assets to 5.32% from
6.12%.  The prime rate has decreased 175 basis points from 5.00% to
3.25% for the comparative nine month periods ended September 30, 2009 and 2008.
Approximately 19% of the Bank’s loans are indexed to the prime
rate.  Interest income from loans also decreased due to the decrease
in average balances on loans which decreased to $714.4 million for the nine
months ended September 30, 2009 from $722.5 million for the prior year
period.





Interest
income from investment securities decreased, as the increase in average balances
was more than offset by the decrease in average interest rates.  The
decline in interest income from other interest-earning assets was primarily due
to a decline in average interest rates for the nine months ended September 30,
2009 as compared to the same nine month period in the prior year.





Our
interest income could be adversely impacted by continued low interest rates, the
availability of the type of interest-earning assets desired by the Company, and
increased non-performing loans.





Interest expense. Interest
expense declined by $3.0 million to $20.8 million for the nine months ended
September 30, 2009 from $23.8 million for the nine months ended September 30,
2008.  The decrease in interest expense for the nine months ended
September 30, 2009, as compared to the same period in 2008, was due to lower
average rates on interest-bearing liabilities, offset by growth in average
outstanding balances of deposits.  Interest expense on FHLB borrowings
declined for the first nine months of 2009 as compared to the same period of
2008, as a result of restructuring a number of advances at slightly lower rates
during the latter part of 2008.


40





Net interest
income.Net interest income decreased $1.5 million, to $16.4
million for the nine months ended September 30, 2009, from $17.9 million for the
nine months ended September 30, 2008, as the decrease in interest income
outpaced the decrease in interest expense. Our net interest rate spread, which
is the difference between the interest rate earned on interest-earning assets
and the interest rate paid on interest-bearing liabilities, decreased 18 basis
points to 2.11% for the first nine months of 2009 as compared to 2.29% for the
same period in 2008.  For the same comparative periods, our net
interest margin, which is net interest income expressed as a percentage of our
average interest earning assets, decreased 27 basis points to
2.35%.




Provision for loan
losses.Provision for loan losses of $18.7 million and $9.2
million were made during the nine months ended September 30, 2009 and 2008,
respectively.  The year-over-year increase was due to declines in both
credit quality and real estate values, an increase in net charge-offs and a
provision for loan losses of $2.0 million recorded to provide a general
allowance for loans held in the portfolio, previously supported by a cash
deposit maintained with the Company by an ongoing originator, which was settled
during the third quarter of 2009.  Under the terms of the settlement
agreement, the Company is now fully responsible for credit losses on these
loans.  Net charge-offs for the nine months ended September 30, 2009,
were $14.5 million.  By comparison, the Company had net charge-offs
for the same nine months in 2008 of $7.1 million.




Non-interest income. The
components of non-interest income for the nine months ended September 30, 2009
and 2008 were as follows:


Increase(decrease)2009
                      
                      
                      2008
                      
                      
                      Dollars
                      
                      
                      Percentage(Dollars
      in Thousands)Service
      charges and fees
                      
                      $
                      3,119
                      
                      
                      $
                      3,649
                      
                      
                      $
                      (530
                      )
                      
                      
                      -14.5
                      %(Loss)
      gain on sale of real estate mortgages held for sale
                      
                      
                      520
                      
                      
                      
                      82
                      
                      
                      
                      438
                      
                      
                      
                      534.1
                      %Loss
      on sale of loans
                      
                      
                      (1,317
                      )
                      
                      
                      -
                      
                      
                      
                      (1,317
                      )
                      
                      
                      -Loss
      on sale of foreclosed assets
                      
                      
                      (1,308
                      )
                      
                      
                      (239
                      )
                      
                      
                      (1,069
                      )
                      
                      
                      447.3
                      %Gain
      (loss) on available for sale securities
                      
                      
                      333
                      
                      
                      
                      260
                      
                      
                      
                      73
                      
                      
                      
                      28.1
                      %Other
      than temporary impairment losses
                      
                      
                      (1,573
                      )
                      
                      
                      -
                      
                      
                      
                      (1,573
                      )
                      
                      
                      -Interchange
      fees
                      
                      
                      685
                      
                      
                      
                      675
                      
                      
                      
                      10
                      
                      
                      
                      1.5
                      %Bank
      owned life insurance earnings
                      
                      
                      549
                      
                      
                      
                      739
                      
                      
                      
                      (190
                      )
                      
                      
                      -25.7
                      %Life
      insurance proceeds on deceased executive officer
                      
                      
                      -
                      
                      
                      
                      2,634
                      
                      
                      
                      (2,634
                      )
                      
                      
                      -100.0
                      %Other
                      
                      
                      2,213
                      
                      
                      
                      1,420
                      
                      
                      
                      793
                      
                      
                      
                      55.8
                      %$
                      3,221
                      
                      
                      $
                      9,220
                      
                      
                      $
                      (5,999
                      )
                      
                      
                      -65.1
                      %





Non-interest
income for the nine months ended September 30, 2009 decreased $6.0 million to
$3.2 million as compared to $9.2 million for the same nine months in
2008.  The decrease was primarily due to a $1.3 million loss on the
sale of $3.0 million of non-performing loans, an other-than-temporary-impairment
(OTTI) charge of $1.6 million on six private label mortgage-backed securities, a
larger loss on sale of foreclosed assets and lower service charges and fees,
offset by a gain of $2.0 million resulting from a settlement agreement with an
ongoing originator whereby the Company assumed responsibility for credit losses
on a pool of loans.  Non-interest income also declined due to the
non-recurrence of other non-interest items in 2008, including life insurance
proceeds on a deceased executive of $2.6 million and gains of $600,000 on the
sale of a branch and $250,000 on the extinguishment of Federal Home Loan Bank of
Atlanta debt.


41





Non-interest expense. The
components of non-interest expense for the nine months ended September 30,
2009 and 2008 were as follows:





Increase(decrease)2009
                    
                    
                    2008
                    
                    
                    Dollars
                    
                    
                    Percentage(Dollars
      in Thousands)Compensation
      and benefits
                    
                    $
                    8,403
                    
                    
                    $
                    9,584
                    
                    
                    $
                    (1,181
                    )
                    
                    
                    -12.3
                    %Final
      plan benefits for deceased executive
                    
                    
                    -
                    
                    
                    
                    1,032
                    
                    
                    
                    (1,032
                    )
                    
                    
                    -100.0
                    %Occupancy
      and equipment
                    
                    
                    1,962
                    
                    
                    
                    2,021
                    
                    
                    
                    (59
                    )
                    
                    
                    -2.9
                    %FDIC
      insurance premiums
                    
                    
                    1,435
                    
                    
                    
                    369
                    
                    
                    
                    1,066
                    
                    
                    
                    288.9
                    %Outside
      professional services
                    
                    
                    1,477
                    
                    
                    
                    1,407
                    
                    
                    
                    70
                    
                    
                    
                    5.0
                    %Collection
      expense and repossessedasset losses
                    
                    
                    831
                    
                    
                    
                    358
                    
                    
                    
                    473
                    
                    
                    
                    132.1
                    %Goodwill
      impairment
                    
                    
                    2,811
                    
                    
                    
                    -
                    
                    
                    
                    2,811
                    
                    
                    
                    n/mOther
                    
                    
                    3,597
                    
                    
                    
                    4,182
                    
                    
                    
                    (585
                    )
                    
                    
                    -14.0
                    %$
                    20,516
                    
                    
                    $
                    18,953
                    
                    
                    $
                    1,563
                    
                    
                    
                    8.2
                    %





Non-interest
expense increased by $1.6 million to $20.5 million for the nine months ended
September 30, 2009 from $19.0 million for the nine months ended September 30,
2008.  The increase was primarily due to the $2.8 million write-off of
the entire amount of the Company’s goodwill.  Other components of the
increase include higher FDIC insurance premiums and increased legal, collection
and administrative expenses associated with other real estate owned and
foreclosures, partially offset by lower compensation and benefits as a result of
the Company’s initiatives to reduce expenses and increase efficiencies, which
began in the second quarter of 2008, with further steps implemented in late 2008
and early 2009.  Non-interest expense also declined due to the
non-recurrence of other non-interest expense items in 2008, including the
payment of final plan benefits on a deceased executive of $1.0
million.





As an
FDIC-insured institution, the Bank is required to pay deposit insurance premiums
to the FDIC.  Because the FDIC’s deposit insurance fund fell below
prescribed levels in 2008, the FDIC has announced increased premiums for all
insured depository institutions, including the Bank, in order to begin
recapitalizing the fund.    Additional special assessments
are possible in the future.





These
changes will result in increased deposit insurance expense for the Bank in
2009.  These increases will be reflected in other non-interest
expenses in the Bank's income statement.





Income tax.  Income
tax expense increased $1.8 million to a tax expense of $282,000 for the nine
months ended September 30, 2009, from a benefit of $1.5 million for the same
period in 2008 largely due to the establishment of a valuation reserve for
federal deferred tax assets of $7.1 million, partially offset by the larger
pre-tax loss.





ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





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


42





The
Committee generally meets at least monthly to review, among other things,
economic conditions and interest rate outlook, current and projected liquidity
needs and capital position, anticipated changes in the volume and mix of assets
and liabilities and interest rate exposure limits versus current projections
pursuant to market value of portfolio equity analysis and income
simulations.  The Committee 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.  Given the
duration of the unusual interest rate environment, the Company currently
evaluates only the shift in yield curve up 300 basis points and down 100 basis
points. Management believes 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, 2009, is
as follows:





Economic
      Value of Equity and Duration of Assets and Liabilities at September 30,
      2009
                              Change
      in Interest RateDecrease
                            
                            
                            Increase
                            
                            
                            Increase
                            
                            
                            Increase1%
                            
                            
                            1%
                            
                            
                            2%
                            
                            
                            3%Duration
      of assets(1)
                            
                            
                            2.40
                            
                            
                            
                            3.03
                            
                            
                            
                            3.02
                            
                            
                            
                            3.00Duration
      of liabilities(1)
                            
                            
                            3.05
                            
                            
                            
                            2.84
                            
                            
                            
                            2.83
                            
                            
                            
                            2.80Differential
      in duration
                            
                            
                            -0.65
                            
                            
                            
                            0.19
                            
                            
                            
                            0.19
                            
                            
                            
                            0.20Amount
      of change in  Economic Value of Equity(2)
                            
                            $
                            (6,285,045
                            )
                            
                            $
                            (1,814,196
                            )
                            
                            $
                            (3,693,658
                            )
                            
                            $
                            (5,638,384
                            )Percentage
      change in Economic Value of Equity(2)
                            
                            
                            -7.50
                            %
                            
                            
                            -2.20
                            %
                            
                            
                            -4.40
                            %
                            
                            
                            -6.72
                            %





(1)  Expressed
as number of years before asset/liability re-prices to achieve stated rate of
interest rate increase.


(2)  Represents the
cumulative five year pre-tax impact on the Company’s equity due to increased or
(decreased) net interest margin.





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


43


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.





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, 2009, that have materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


44





ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





September
30, 2009





Part
II - Other Information


Item 1.
                                        Legal
      Proceedings
                                          The
      Company is involved in various legal actions and claims arising in the
      normal course of business.  In the opinion of management, these
      legal actions and claims are not expected to have a material adverse
      impact on the Company’s financial condition and results of
      operations.Item
      1A.
                                        Risk
      Factors
                                          In
      addition to the other information contained this Quarterly Report on Form
      10-Q, the following risk factors represent material updates and additions
      to the risk factor previously disclosed in the Company’s Annual Report on
      Form 10-K for the Fiscal Year Ended December 31, 2008, as filed with the
      Securities and Exchange Commission. Additional risks not presently known
      to us, or that we currently deem immaterial, may also adversely affect our
      business, financial condition or results of operations. Further, to the
      extent that any of the information contained in this Quarterly Report on
      Form 10-Q constitutes forward-looking statements, the risk factor set
      forth below also is a cautionary statement identifying important
      factors that could cause our actual results to differ materially from
      those expressed in any forward-looking statements made by or on behalf of
      us.A
      Legislative Proposal Has Been Introduced That Would Eliminate our Primary
      Federal Regulator, Require the Association to Convert to a National Bank
      or State Bank, and Require Atlantic Coast Federal, MHC and the Holding
      Company to Become Bank Holding Companies.The
      U.S. Treasury Department recently released a legislative proposal that
      would implement sweeping changes to the current bank regulatory
      structure.  The proposal would create a new federal banking
      regulator, the National Bank Supervisor, and merge our current primary
      federal regulator, the Office of Thrift Supervision, as well as the Office
      of the Comptroller of the Currency (the primary federal regulator for
      national banks) into this new federal bank regulator.  The
      proposal would also eliminate federal savings associations and require all
      federal savings associations, such as Atlantic Coast Bank, to elect,
      within six months of the effective date of the legislation, to convert to
      a national bank, state bank or state savings association.  A
      federal savings association that does not make the election would, by
      operation of law, convert into a national bank within one year of the
      effect date of the
legislation.


45




If
      Atlantic Coast Bank is required to convert to a national bank, Atlantic
      Coast Federal, MHC and the Holding Company would become bank holding
      companies subject to supervision by the Board of Governors of the Federal
      Reserve System (the “Federal Reserve”) as opposed to the Office of Thrift
      Supervision.  The Federal Reserve has historically looked to
      Office of Thrift Supervision regulations in its regulation of mutual
      holding companies and processing of mutual holding company applications;
      however, it is not obligated to follow such regulations.  One
      important Office of Thrift Supervision regulation that the Federal Reserve
      does not follow relates to the ability of mutual holding companies to
      waive the receipt of dividends declared on the common stock of their stock
      holding company or savings bank subsidiaries.  While Office of
      Thrift Supervision regulations permit mutual holding companies to waive
      the receipt dividends, subject to filing a notice with the Office of
      Thrift Supervision and receiving its non-objection, the Federal Reserve’s
      current policy is to prohibit mutual holding companies from waiving the
      receipt of dividends so long as the subsidiary savings bank is well
      capitalized.  Moreover, Office of Thrift Supervision regulations
      provide that it will not take into account the amount of waived dividends
      in determining an appropriate exchange ratio for minority shares in the
      event of the conversion of a mutual holding company to stock
      form.  If the Office of Thrift Supervision is eliminated, the
      Federal Reserve becomes the exclusive regulator of mutual holding
      companies, and the Federal Reserve retains its current policy regarding
      dividend waivers by mutual holding companies, Atlantic Coast Federal, MHC
      would not be permitted to waive the receipt of dividends declared by the
      Holding Company. This would have an adverse impact on our ability to pay
      dividends and, consequently, the value of our common
  stock.Item 2.
                                                      Unregistered Sales of
      Equity Securities and Use of ProceedsNone.   The
      Company suspended its stock repurchase program in March
    2009.Item
      3.
                                                      Defaults Upon Senior
      SecuritiesNoneItem
      4.
                                                      Submission of Matters
      to a Vote of Security HoldersNoneItem
      5.
                                                      Other
      InformationNoneItem
      6.
                                                      Exhibits


a.
              Exhibits31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.
              Certification
      of Chief Executive Officer and Chief Financial Officer of Atlantic Coast
      Federal Corporation pursuant to Section
906


46


ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





September
30, 2009





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
      16, 2009
                /s/
      Robert J. Larison, Jr.Robert
      J. Larison, Jr., President and Chief
                  Executive
      OfficerDate:  November
      16, 2009
                /s/
      Thomas B. Wagers, Sr.Thomas
      B. Wagers, Sr. Senior Vice–President and
                  Chief
      Financial Officer


47