**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, 2007**





**OR**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 000-50962**





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





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





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





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





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





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




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





Class
            Outstanding
                at November 5, 2007Common
                Stock, $0.01 Par Value
            13,675,825
                shares





**ATLANTIC
      COAST FEDERAL CORPORATION**





**Form
      10-Q Quarterly Report**





**Table
      of Contents**





**PART
      I. FINANCIAL INFORMATION**





Page NumberItem
                1.
            Financial
                Statements
            2Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            28Item
                4.
            Controls
                and Procedures
            30PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            30Item
                1A
            Risk
                Factors
            30Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            30Item
                3.
            Defaults
                upon Senior Securities
            31Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            31Item
                5.
            Other
                Information
            31Item
                6.
            Exhibits
            31Form
                10-Q
            Signature
                Page
            32Ex-31.1
            Section
                302 Certification of CEO
            33Ex-31.2
            Section
                302 Certification of CFO
            34Ex-32
            Section
                906 Certification of CEO and CFO
            35


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









**PART
        I. FINANCIAL INFORMATION**


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**September
      30, 2007 (unaudited) and December 31, 2006**


**(Dollars
      in Thousands, Except Share Information)**





2007
            
            2006ASSETSCash
                and due from financial institutions
            
            $
            7,556
            
            $
            10,571Short-term
                interest earning deposits
            
            
            42,347
            
            
            30,486Total
                cash and cash equivalents
            
            
            49,903
            
            
            41,057Other
                interest earning deposits in other financial institutions
            
            
            -
            
            
            1,200Securities
                available for sale
            
            
            133,681
            
            
            99,231Real
                estate mortgages held for sale
            
            
            1,228
            
            
            4,365Loans,
                  net of allowance for loan losses of $5,802 at September 30, 2007
                  and$4,705 at December 31, 2006
            
            
            669,225
            
            
            639,517Federal
                Home Loan Bank stock
            
            
            8,528
            
            
            7,948Accrued
                interest receivable
            
            
            3,862
            
            
            3,499Land,
                premises and equipment
            
            
            17,006
            
            
            17,610Bank
                owned life insurance
            
            
            22,005
            
            
            21,366Other
                real estate owned
            
            
            1,643
            
            
            286Goodwill
            
            
            2,661
            
            
            2,661Other
                assets
            
            
            6,006
            
            
            4,339Total
                assets
            
            $
            915,748
            
            $
            843,079LIABILITIES
                AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
                demand
            
            $
            41,468
            
            $
            38,301Interest-bearing
                demand
            
            
            49,633
            
            
            52,895Savings
                and money market
            
            
            209,286
            
            
            158,229Time
            
            
            297,626
            
            
            323,627Total
                deposits
            
            
            598,013
            
            
            573,052Securities
                sold under agreements to repurchase
            
            
            63,500
            
            
            29,000Federal
                Home Loan Bank advances
            
            
            156,000
            
            
            144,000Accrued
                expenses and other liabilities
            
            
            7,442
            
            
            5,940Total
                liabilities
            
            
            824,955
            
            
            751,992Commitments
                and contingencies
            
            
            -
            
            
            -Preferred
                stock: $0.01 par value; 2,000,000 shares authorizednone
                issued
            
            
            -
            
            
            -Common
                stock: $0.01 par value; 18,000,000 shares authorized, shares issued
                of
                14,813,469 at September 30, 2007 and December 31, 2006; shares outstanding
                of 13,675,825 at September 30, 2007 and 13,784,330 at December 31,
                2006
            
            
            148
            
            
            148Additional
                paid in capital
            
            
            58,806
            
            
            57,708Unearned
                employee stock ownership plan (ESOP) shares of 290,950 at September
                30,
                2007 and 325,864 at December 31, 2006
            
            
            (2,910
            )
            
            (3,259
            )Retained
                earnings
            
            
            52,978
            
            
            52,711Accumulated
                other comprehensive loss
            
            
            (270
            )
            
            (204
            )Treasury
                stock, at cost, 1,137,644 shares at September 30, 2007 and1,029,139 at December 31, 2006
            
            
            (17,959
            )
            
            (16,017
            )Total
                stockholders' equity
            
            
            90,793
            
            
            91,087Total
                liabilities and stockholders' equity
            
            $
            915,748
            
            $
            843,079





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




2




**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(Dollars
      in Thousands, Except Share Information)**


**(unaudited)**





Three months ended September 30,
            
            Nine months ended September 30,2007
            
            2006
            
            2007
            
            2006Interest
                and dividend incomeLoans,
                including fees
            
            $
            11,927
            
            $
            10,612
            
            $
            34,459
            
            $
            30,015Securities
                and interest-earning depositsin other financial
                institutions
            
            
            2,336
            
            
            1,394
            
            
            6,826
            
            
            3,662Total
                interest and dividend income
            
            
            14,263
            
            
            12,006
            
            
            41,285
            
            
            33,677Interest
                expenseDeposits
            
            
            6,129
            
            
            4,927
            
            
            17,944
            
            
            13,028Federal
                Home Loan Bank advances
            
            
            1,671
            
            
            1,382
            
            
            4,879
            
            
            4,099Securities
                sold under agreements to repurchase
            
            
            733
            
            
            139
            
            
            1,841
            
            
            333Total
                interest expense
            
            
            8,533
            
            
            6,448
            
            
            24,664
            
            
            17,460Net
                interest income
            
            
            5,730
            
            
            5,558
            
            
            16,621
            
            
            16,217Provision
                for (recovery of) loan losses
            
            
            438
            
            
            (98
            )
            
            1,243
            
            
            183Net
                interest income after provision for loan losses
            
            
            5,292
            
            
            5,656
            
            
            15,378
            
            
            16,034Noninterest
                incomeService
                charges and fees
            
            
            1,326
            
            
            1,516
            
            
            3,866
            
            
            4,360Gain
                on sale of real estate mortgages held for sale
            
            
            11
            
            
            35
            
            
            26
            
            
            51Loss
                on sale of securities available for sale
            
            
            -
            
            
            -
            
            
            (46
            )
            
            (165
            )Loss
                on sale of foreclosed assets
            
            
            (116
            )
            
            (5
            )
            
            (114
            )
            
            (10
            )Commission
                income
            
            
            85
            
            
            90
            
            
            222
            
            
            239Interchange
                fees
            
            
            229
            
            
            193
            
            
            672
            
            
            588Bank
                owned life insurance earnings
            
            
            211
            
            
            214
            
            
            639
            
            
            629Other
            
            
            (232
            )
            
            (80
            )
            
            137
            
            
            3481,514
            
            
            1,963
            
            
            5,402
            
            
            6,040Noninterest
                expenseCompensation
                and benefits
            
            
            3,147
            
            
            2,805
            
            
            9,317
            
            
            8,049Occupancy
                and equipment
            
            
            595
            
            
            612
            
            
            1,787
            
            
            1,609Data
                processing
            
            
            234
            
            
            329
            
            
            838
            
            
            1,134Advertising
            
            
            123
            
            
            201
            
            
            420
            
            
            631Outside
                professional services
            
            
            456
            
            
            367
            
            
            1,828
            
            
            1,317Interchange
                charges
            
            
            104
            
            
            92
            
            
            297
            
            
            420Collection
                expense and repossessed asset losses
            
            
            59
            
            
            55
            
            
            192
            
            
            218Telephone
            
            
            122
            
            
            116
            
            
            348
            
            
            359Other
            
            
            830
            
            
            826
            
            
            2,562
            
            
            2,1545,670
            
            
            5,403
            
            
            17,589
            
            
            15,891Income
                before income tax expense
            
            
            1,136
            
            
            2,216
            
            
            3,191
            
            
            6,183Income
                tax expense
            
            
            347
            
            
            698
            
            
            982
            
            
            1,965Net
                income
            
            $
            789
            
            $
            1,518
            
            $
            2,209
            
            $
            4,218Earnings
                per common share:Basic
            
            $
            0.06
            
            $
            0.11
            
            $
            0.17
            
            $
            0.31Diluted
            
            $
            0.06
            
            $
            0.11
            
            $
            0.17
            
            $
            0.31Dividends
                declared per common share
            
            $
            0.15
            
            $
            0.11
            
            $
            0.42
            
            $
            0.30


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




3




**ATLANTIC
      COAST FEDERAL CORPORATION**


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


**For
      the Nine Months Ended September 30, 2007 and 2006**


**(Dollars
      in Thousands, Except Share Information)**


**(unaudited)**




**ACCUMULATED****ADDITIONAL**
            
            **UNEARNED**
            
            
            
            **OTHER****COMMON**
            
            **PAID
                IN**
            
            **ESOP**
            
            **RETAINED**
            
            **COMPREHENSIVE**
            
            **TREASURY**
            
            **TOTAL****STOCK**
            
            **CAPITAL**
            
            **STOCK**
            
            **EARNINGS**
            
            **INCOME
                (LOSS)**
            
            **STOCK**
            
            **EQUITY**For
                the nine months ended September 30, 2007Balance
                at January 1, 2007
            
            $
            148
            
            $
            57,708
            
            $
            (3,259
            )
            $
            52,711
            
            $
            (204
            )
            $
            (16,017
            )
            $
            91,087ESOP
                shares earned, 34,914 shares
            
            
            -
            
            
            245
            
            
            349
            
            
            -
            
            
            -
            
            
            -
            
            
            594Stock
                options exercised
            
            
            -
            
            
            (18
            )
            
            -
            
            
            -
            
            
            -
            
            
            65
            
            
            47Stock
                awards
            
            
            -
            
            
            (28
            )
            
            -
            
            
            -
            
            
            -
            
            
            116
            
            
            88Management
                restricted stock expense
            
            
            -
            
            
            510
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            510Stock
                options expense
            
            
            -
            
            
            250
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            250Dividends
                declared ( $0.42 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,942
            )
            
            -
            
            
            -
            
            
            (1,942
            )Shares
                relinquished
            
            
            -
            
            
            139
            
            
            -
            
            
            -
            
            
            -
            
            
            (155
            )
            
            (16
            )Treasury
                stock purchased at cost, 105,838 shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,968
            )
            
            (1,968
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,209
            
            
            -
            
            
            -
            
            
            2,209Other
                comprehensive income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (66
            )
            
            -
            
            
            (66
            )Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,143Balance
                at September 30, 2007
            
            $
            148
            
            $
            58,806
            
            $
            (2,910
            )
            $
            52,978
            
            $
            (270
            )
            $
            (17,959
            )
            $
            90,793For
                the nine months ended September 30, 2006Balance
                at January 1, 2006
            
            $
            148
            
            $
            56,876
            
            $
            (3,724
            )
            $
            49,630
            
            $
            (408
            )
            
            ($9,603
            )
            $
            92,919ESOP
                shares earned, 34,914 shares
            
            
            -
            
            
            191
            
            
            349
            
            
            -
            
            
            -
            
            
            -
            
            
            540Management
                restricted stock expense
            
            
            -
            
            
            444
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            444Stock
                options expense
            
            
            -
            
            
            229
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            229Dividend
                declared ($0.30 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,481
            )
            
            -
            
            
            -
            
            
            (1,481
            )Treasury
                stock purchased at cost, 335,782 shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,899
            )
            
            (5,899
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,218
            
            
            -
            
            
            -
            
            
            4,218Other
                comprehensive income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            32
            
            
            -
            
            
            32Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,250Balance
                at September 30, 2006
            
            $
            148
            
            $
            57,740
            
            $
            (3,375
            )
            $
            52,367
            
            $
            (376
            )
            $
            (15,502
            )
            $
            91,002




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




4


ATLANTIC
        COAST FEDERAL CORPORATION
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Dollars
        in Thousands)
 (unaudited)
 
 Nine months ended September 30,2007
              
              2008Cash
                  flows from operating activities
              
              $
              2,209
              
              $
              4,218Net
                  incomeAdustments
                  to reconcile net income to net cash from operating
                  activities:Provision
                  for loan losses
              
              
              1,243
              
              
              183Gain
                  on sale of real estate mortgages held for sale
              
              
              (26
              )
              
              (51
              )Loan
                  originated for sale
              
              
              (67,981
              )
              
              (14,948
              )Proceeds
                  from loan sales
              
              
              71,144
              
              
              9,637Gain
                  on sale of other real estate owned
              
              
              113
              
              
              10Loss
                  on sale of securities available for sale
              
              
              46
              
              
              165Loss
                  on disposal of equipment
              
              
              114
              
              
              85ESOP
                  compensation expense
              
              
              594
              
              
              540Share-based
                  compensation expense
              
              
              760
              
              
              673Net
                  depreciation and amortization
              
              
              1,466
              
              
              1,400Net
                  change in accrued interest receivable
              
              
              (364
              )
              
              (742
              )Increase
                  in cash surrender value of blank owned life insurance
              
              
              (639
              )
              
              (629
              )Net
                  change in other assets
              
              
              (1,631
              )
              
              185Net
                  change in accrued expenses and other liabilities
              
              
              1,503
              
              
              (644
              )Net
                  cash from operating activities
              
              
              8,551
              
              
              82**Cash
                  flows from investing activities**Proceeds
                  from maturities and payments of securites available for
                  sale
              
              
              13,289
              
              
              11,750Proceeds
                  from the sales of securities available for sale
              
              
              14,619
              
              
              15,934Purchase
                  of securities available for sale
              
              
              (62,512
              )
              
              (33,801
              )Loans
                  purchased
              
              
              (14,027
              )
              
              (22,711
              )Net
                  change in loans
              
              
              (19,113
              )
              
              (21,542
              )Expenditures
                  on premises and equipment
              
              
              (584
              )
              
              (2,449
              )Proceeds
                  from the sale of other real estate owned
              
              
              333
              
              
              513Net
                  (purchase) redemption of FHLB stock
              
              
              (580
              )
              
              (648
              )Net
                  change in other investments
              
              
              1,200
              
              
              300Net
                  cash from investing activities
              
              
              (67,375
              )
              
              (52,654
              )
 
 (Continued)
  5




**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Dollars
      in Thousands)**


**(unaudited)**





Nine
                months ended September 30,2007
            
            2006Cash
                flows from financing activitiesNet
                increase in deposits
            
            $
            24,961
            
            $
            29,728FHLB
                advances
            
            
            50,000
            
            
            20,000Proceeds
                from sale of securitiesunder agreements to
                repurchase
            
            
            34,500
            
            
            12,000Repayment
                of FHLB advances
            
            
            (38,000
            )
            
            (10,000
            )Proceeds
                from exercise of stock options
            
            
            135
            
            
            -Shares
                relinquished
            
            
            (16
            )
            
            -Treasury
                stock repurchased
            
            
            (1,968
            )
            
            (5,899
            )Dividends
                paid
            
            
            (1,815
            )
            
            (1,377
            )Net
                cash from financing activities
            
            
            67,797
            
            
            44,452Net
                change in cash and cash equivalents
            
            
            8,846
            
            
            (8,120
            )Cash
                and equivalents beginning of period
            
            
            41,057
            
            
            37,959Cash
                and equivalents at end of period
            
            $
            49,903
            
            $
            29,839Supplemental
                information:Interest
                paid
            
            $
            24,185
            
            $
            17,209Income
                taxes paid
            
            
            1,746
            
            
            3,151Supplemental
                noncash disclosures:Loans
                transferred to other real estate
            
            $
            1,804
            
            $
            401





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




6




**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2007**


**(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”), which was formerly known as Atlantic Coast Federal. The
      Company changed the name of the Bank on July 17, 2006 to better reflect the
      nature of the Bank’s operations. Also included in the unaudited consolidated
      financial statements is Atlantic Coast Holdings, Inc. (“Holdings”) a wholly
      owned subsidiary of the Bank, which manages and invests in certain securities,
      and owns 100% of the common stock and 85% of the Preferred Stock of Coastal
      Properties, Inc., a real estate investment trust (the “REIT”). All significant
      inter-company balances and transactions have been eliminated in consolidation.
      The principal activity of the Company is the ownership of the Bank, 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 instructions for Form 10-Q.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. In the opinion of management, all adjustments
      (all of which are normal and recurring in nature) considered necessary for
      a
      fair presentation have been included. Operating results for the three and nine
      month periods ended September 30, 2007 are not necessarily indicative of the
      results that may be expected for the year ending December 31, 2007. The
      2006 Atlantic Coast Federal Corporation consolidated financial statements,
      as
      restated to change the Company’s accounting for certain interest rate swap
      derivatives previously designated and accounted for as cash flow hedges under
      Statement of Financial Accounting Standards No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      133”), as presented in the Company’s Form 10-K/A, should be read in conjunction
      with these statements.





Certain
      items in the September 30, 2006 Form 10-Q were reclassified/restated to conform
      to the current presentation.





**NOTE
      2. USE OF ESTIMATES**





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets, 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
      including goodwill and the fair values of securities and other financial
      instruments are particularly susceptible to material change in the near term.





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





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“FAS
      159”), which permits companies to measure many financial instruments and certain
      other items at fair value that are not currently required to be measured at
      fair
      value. FAS 159 is effective as of the beginning an entity’s first fiscal year
      that begins after November 15, 2007. The Company is presently assessing the
      impact FAS 159 may have on its financial statements, but no determination has
      been made at this time.


7





**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2007**


**(Unaudited)**





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





The
      Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes-An Interpretation of FASB No.
      10* 9,
      which
      prescribes a recognition threshold and measurement attribute for a tax position
      taken or expected to be taken in a tax return, on January 1,


2007.
      The
      adoption of FIN 48 had no affect on the Company’s financial statements. The
      Company has no unrecognized tax benefits or liabilities and does not anticipate
      any increase in unrecognized benefits or liabilities during 2007 relative to
      any
      positions taken prior to January 1, 2007.





It
      is the
      Company’s policy to recognize interest and penalties accrued relative to
      unrecognized tax benefits in their respective federal or state income tax
      expense accounts. The Company had no amounts accrued as of January 1, 2007.
      The
      Company and its subsidiaries file U.S. Corporation federal income tax returns
      and Georgia and Florida Corporation income tax returns. These returns are
      subject to examination by taxing authorities for all years after
      2002.





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.





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





**NOTE
      4. AVAILABLE FOR SALE SECURITIES**





The
      Company evaluates securities for other-than-temporary impairment, at least
      on a
      quarterly basis, and more frequently when economic or market concerns warrant
      such evaluation. Consideration is given to the length of time and the extent
      to
      which the fair value has been below cost, the financial condition and near-term
      prospects of the issuer, and the intent and ability of the Company to retain
      its
      investment in the issuer for a period of time sufficient to allow for any
      anticipated recovery in fair value. In analyzing an issuer's financial
      condition, the Company may consider whether the securities are issued by the
      federal government or one of its agencies, whether downgrades by bond rating
      agencies have occurred, and the results of reviews of the issuer's financial
      condition. As of September 30, 2007 gross unrealized losses on available for
      sale securities were $1.8 million and are largely due to the current interest
      rate environment relative to the interest rate of the securities. These
      unrealized losses are considered temporary as the fair value should return
      to
      par as the securities reach maturity.





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





Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $63.5 million at September 30, 2007. The Company
      had
      $29.0 million of such agreements as of December 31, 2006.


8


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2007**


**(Unaudited)**





**NOTE
      5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE** (Continued)





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 at September 30, 2007 is summarized as follows:





(Dollars in Thousands)Average
                  daily balance for the nine month period
              
              $
              55,887Average
                  interest rate for the nine month period
              
              
              4.51
              %Maximum
                  month-end balance during the nine month
                  period
              
              $
              63,500Weighted
                  average interest rate at period end
              
              
              4.52
              %




**NOTE
      6. DIVIDENDS**





During
      the third quarter of 2007, the Company’s board of directors declared a regular
      quarterly cash dividend at a rate of $0.15 per share. The dividend was payable
      on October 29, 2007 for stockholders of record on October 12, 2007. Atlantic
      Coast Federal, MHC (“MHC”) which holds 8,728,500 shares, or approximately 63.8%
      of the Company’s total outstanding common stock, waived receipt of the
      third quarter dividend on its owned shares, as was done throughout 2006.




Total
      dividends charged to retained earnings for the nine months ended September
      30,
      2007 were $1,942,000.





**NOTE
      7. EARNINGS PER COMMON SHARE**





Basic
      earnings per common share is computed by dividing net income by the
      weighted-average number of common shares outstanding for the period, reduced
      for
      average unallocated ESOP shares and average unearned restricted stock awards.
      Diluted earnings per common share is computed by dividing net income by the
      weighted-average number of common shares outstanding for the period increased
      for the dilutive effect of unvested stock options and stock awards. The dilutive
      effect of the unvested stock options and stock awards is calculated under the
      treasury stock method utilizing the average market value of the Company’s stock
      for the period. A reconciliation of the numerator and denominator of the basic
      and diluted earnings per common share computation for the three and nine months
      ended September 30, 2007 and 2006, is as follows:


9




**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **September
        30, 2007**
 **(Unaudited)**


**NOTE
      7. EARNINGS PER COMMON SHARE** (Continued)





For
                the three months
            
            For
                the nine monthsended
                September 30,
            
            ended
                September 30,2007
            
            2006
            
            2007
            
            2006(Dollars
                in Thousands, except share
                information)BasicNet
                income
            
            $
            789
            
            $
            1,518
            
            $
            2,209
            
            $
            4,218Weighted
                average common shares outstanding
            
            
            13,673,347
            
            
            14,057,845
            
            
            13,700,331
            
            
            14,114,967Less:
                Average unallocated ESOP shares
            
            
            (325,864
            )
            
            (372,416
            )
            
            (325,864
            )
            
            (372,416
            )Average
                unvested restricted stock awards
            
            
            (179,128
            )
            
            (214,818
            )
            
            (210,552
            )
            
            (245,529
            )Average
                Shares
            
            
            13,168,355
            
            
            13,470,611
            
            
            13,163,915
            
            
            13,497,022Basic
                earnings per common share
            
            $
            0.06
            
            $
            0.11
            
            $
            0.17
            
            $
            0.31DilutedNet
                Income
            
            $
            789
            
            $
            1,518
            
            $
            2,209
            
            $
            4,218Weighted
                average common shares outstanding per common share
            
            
            13,168,355
            
            
            13,470,611
            
            
            13,163,915
            
            
            13,497,022Add:Dilutive
                effects of assumed exercise of stock options
            
            
            
            
            
            17,751
            
            
            51,445
            
            
            5,917Dilutive
                effects of full vesting of stock awards
            
            
            86,449
            
            
            67,136
            
            
            70,396
            
            
            76,069Average
                shares and dilutive potential common shares
            
            
            13,254,804
            
            
            13,555,498
            
            
            13,285,756
            
            
            13,579,008Diluted
                earnings per common share
            
            $
            0.06
            
            $
            0.11
            
            $
            0.17
            
            $
            0.31





Stock
      options for 610,681 and 8,000 shares of common stock were not considered in
      computing diluted earnings per common share for the three and nine months ended
      September 30, 2007 and 2006, respectively, because they were anti-dilutive.


10


**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **September
        30, 2007**
 **(Unaudited)**


**NOTE
      8. OTHER COMPREHENSIVE INCOME**





Comprehensive
      income components and related taxes for the three and nine months ended
      September 30, 2007 and 2006 were as follows:





Three
                months ended September 30,
            
            Nine
                months ended September 30,2007
            
            2006
            
            2007
            
            2006(Dollars
                in Thousands)Unrealized
                holding gains (losses) on securities available for sale
            
            $
            1,775
            
            $
            603
            
            $
            (54
            )
            $
            219Less
                  reclassification adjustments for gains(losses) recognized in
                  income
            
            
            -
            
            
            -
            
            
            (46
            )
            
            (165
            )Net
                unrealized gains (losses)
            
            
            1,775
            
            
            603
            
            
            (100
            )
            
            54Tax
                effect
            
            
            (666
            )
            
            (220
            )
            
            34
            
            
            (22
            )Net-of-tax
                amount
            
            
            1,109
            
            
            383
            
            
            (66
            )
            
            32Other
                comprehensive gain (loss)
            
            $
            1,109
            
            $
            383
            
            $
            (66
            )
            $
            32





**NOTE
      9 - STOCK CONVERSION**





On
      May 7,
      2007, Board of Directors of Atlantic Coast Federal, MHC (the “Mutual Holding
      Company”) approved a plan of conversion and reorganization to convert the Mutual
      Holding Company from the mutual to stock form of organization. Pursuant to
      the
      plan of conversion and reorganization, on October 17, 2007 the Company announced
      that Atlantic Coast Financial Corporation, a Maryland holding company formed
      in
      connection with the stock conversion to become the stock holding company of
      Atlantic Coast Bank, and Atlantic Coast Federal, MHC had received conditional
      approval from the Office of Thrift Supervision, on October 12, 2007, to
      commence its second step conversion and offering. Atlantic Coast Federal
      Corporation also announced that the registration statement relating to the
      sale
      of common stock of Atlantic Coast Financial Corporation was declared effective
      by the Securities and Exchange Commission on October 12, 2007. The
      conversion is expected to be completed
      in the fourth quarter of 2007.




The
      Mutual Holding Company is a federally chartered mutual holding company and
      currently owns approximately 63.8%, of the outstanding shares of common stock
      of
      the Company, which owns 100% of the issued and outstanding shares of the capital
      stock of Atlantic Coast Bank. Under the terms of Atlantic Coast Federal, MHC’s
      plan of conversion and reorganization, Atlantic Coast Federal, MHC will convert
      from the mutual holding company to the stock holding company corporate
      structure. As part of the conversion, Atlantic Coast Financial Corporation
      is
      offering for sale in a subscription and community offering, and possibly in
      a
      syndicated community offering, the majority ownership interest of the Company
      that is currently owned by the Mutual Holding Company. Upon the completion
      of
      the conversion and offering, the Mutual Holding Company will cease to exist,
      and
      the Company will complete the transition from partial to full public stock
      ownership. Upon completion of the conversion, existing public stockholders
      of
      Atlantic Coast Federal Corporation will receive shares of common stock of
      Atlantic Coast Financial Corporation in exchange for their shares of Atlantic
      Coast Federal Corporation common stock in order to maintain the public
      stockholders’ existing percentage ownership in our organization (excluding any
      new shares purchased by them in the offering).




In
      connection with the conversion, shares of common stock of Atlantic Coast
      Financial Corporation, representing the ownership interest of the Mutual Holding
      Company, will be offered for sale to depositors of the Bank. The following
      persons and employee benefit plans have subscription rights to purchase shares
      of common stock of the new holding company in the following order of priority:
      (1)




11





**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2007**


**(Unaudited)**


**NOTE
      9 - STOCK CONVERSION** (continued)





depositors
      of record as of the close of business on March 31, 2006; (2) the Bank's tax
      qualified employee benefit plans, including the employee stock ownership plan
      and the 401(k) plan; (3) depositors of record as of the close of business on
      September 30, 2007; and (4) depositors of record on October 5, 2007. If
      necessary, shares will be offered to the general public.





The
      conversion is subject to final approval by the Office of Thrift Supervision
      as
      well as approval by the Mutual Holding Company's members (depositors of the
      Bank) and the Company's stockholders. Proxy materials setting forth information
      relating to the conversion and offering were mailed on October 22, 2007 to
      the
      members of the Mutual Holding Company and stockholders of the Company for their
      consideration.




Expenses
      capitalized related to the stock conversion were approximately $626,000 as
      of
      September 30, 2007. Expenses capitalized will be netted from proceeds if the
      offering is successful. Alternatively, expenses capitalized will be expensed
      in
      the event the offering is terminated.


12


**ATLANTIC
      COAST FEDERAL CORPORATION**





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





**Forward-Looking
      Statements**




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




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




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




**Critical
      Accounting Policies**





Certain
      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, accounting for deferred income
      taxes, and the valuation of goodwill. Atlantic Coast Federal Corporation’s
      accounting policies are discussed in detail in Note 2 of the Notes to
      Consolidated Financial Statements included in Item 8 of our Annual Report on
      Form 10-K/A filed with the Securities and Exchange Commission.





The
      allowance for loan losses is a valuation allowance for probable incurred credit
      losses, increased by the provision for loan losses and decreased by charge-offs
      less recoveries. In evaluating the level of the allowance for loan losses,
      management considers historical loss experience, the types and amount of loans
      in the loan portfolio, the source of origination of those loans, adverse
      situations that may affect the borrowers' ability to repay, estimated value
      of
      any underlying collateral, the stability of the residential real estate markets
      in which the Company originates and purchases loans, and prevailing national
      and
      local economic conditions. Allocations of the allowance may be made for specific
      loans, but the entire allowance is available for any loan that, in management’s
      judgment, should be charged-off. Loan losses are charged against the allowance
      when management believes the uncollectibility of a loan balance is confirmed.
      The allowance consists of specific and general components. The specific
      component relates to loans that are individually evaluated and determined to
      be
      impaired. Loans individually evaluated are generally large balance and/or
      complex loans, such as multi-family and commercial real estate loans. This
      evaluation is often based on significant estimates and assumptions due to the
      level of subjectivity and judgment necessary to account for highly uncertain
      matters or the susceptibility of such matters to change. The general component
      relates to large groups of small balance homogeneous loans that are evaluated
      in
      the aggregate based on historical loss experience adjusted for current
      factors.


13




Management
        believes that the allowance for loan losses and related provision expense
        are
        particularly susceptible to material change in both the short and long term
        due
        to changes in prevailing national and local economic conditions, including:
        decreases in real estate values, changes in interest rates, adverse employment
        conditions, changes in the monetary and fiscal policies of the federal and
        the
        Florida and Georgia state governments and other significant external events.
        The
        allowance for loan losses was $5.8 million at September 30, 2007, and $4.5
        million at September 30, 2006. The provision for loan loss expense was $1.2
        million for the nine months ended September 30, 2007, and $183,000 for the
        same
        period in 2006. The period over period change was due to several factors;
        (1)
        the collection of a large commercial real estate loan previously classified
        as
        impaired and the reversal of the associated reserve during 2006, (2) the
        positive impact of credit improvements on several other loans during 2006,
        (3)
        additional provision for loan loss expense necessary for the increase in
        non-performing loans as described in “Comparison of Financial Condition at
        September 30, 2007 and December 31, 2006-Allowance for loan losses”, (4)
        continued credit quality concerns generally, and specifically in the Florida
        market; and (5) to a lesser extent, growth in the Company’s loan porffolio. This
        is explained in more detail in Item 2 of this Form 10-Q, “Managements Discussion
        and Analysis of Financial Condition and Results of Operations”. The allowance
        for loan losses at September 30, 2007 was 0.86% of total loans, Compared
        to
        0.75% at June 30, 2007, and 0.72% at September 30, 2006. Management believes
        the
        current level of the allowance for loan losses relative to total loans is
        indicative of the overall credit quality of the portfolio adjusted for
        prevailing national and local market conditions at the end of the third quarter
        of 2007. However, on-going industry wide credit quality concerns, as well
        as
        local market economic conditions could result in increased non-performing
        loans
        that may result in further provision expense as management deems necessary
        to
        mitigate potential credit risk in its portfolio.


Securities
      available for sale are carried at fair value, with unrealized holding gains
      and
      losses reported separately in accumulated other comprehensive income (loss),
      net
      of tax. On a monthly basis, the Company adjusts the carrying value of the
      securities to fair value based on third-party market quotes. Other comprehensive
      (loss) income resulting from changes in the fair market value of Atlantic Coast
      Federal Corporation’s available for sale securities portfolio totaled $(66,000)
      and $32,000 for the nine months ended September 30, 2007 and 2006, respectively.
      Additionally, securities available for sale are required to be written down
      to
      fair value when a decline in fair value is not temporary; therefore, future
      changes in the fair value of securities could have a significant impact on
      Atlantic Coast Federal Corporation’s operating results. In determining whether a
      market value decline is other than temporary, management considers the reason
      for the decline, the extent of the decline and the duration of the
      decline.





The
      Bank
      assesses the carrying value of goodwill at least annually in order to determine
      if it is impaired. In reviewing the carrying value of goodwill, management
      assesses the recoverability of such assets by evaluating the fair value of
      the
      Company’s community banking segment, which is the Bank’s only business segment.
      Any impairment would be required to be recorded during the period identified.
      The Bank’s goodwill totaled $2.7 million as of September 30, 2007; therefore, if
      goodwill was determined to be impaired, the financial results could be
      materially impacted.





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




14




by
      taxing authorities of the positions taken by
      management could result in a material adjustment to the financial
      statements.




**Comparison
      of Financial Condition at September 30, 2007 and December 31,
      2006**





**General.** Annualized
      asset growth at September 30, 2007 as compared to December 31, 2006 was
      approximately 11%. Loan growth slightly outpaced deposit growth, as the Bank
      continues to offer competitive rates within its geographic market. Prepayments
      decreased 18% in the three months ended September 30, 2007 as compared to the
      three months ended June 30, 2007. Loan growth as a percentage of loan production
      also slowed for the three months ended September 30, 2007 as compared to the
      three months ended June 30, 2007, tracking with the general slowing of real
      estate lending within our markets. As
      part
      of its ongoing asset and liability management strategy, the Company continued
      to
      leverage its growth in securities available for sale to take advantage of
      favorable interest rate spreads and to reduce its exposure to interest rate
      risk.





Following
      is a summarized comparative balance sheet as of September 30, 2007 and December
      31, 2006:





September
                30,
            
            December
                31,
            
            Increase
                (decrease)2007
            
            2006
            
            Dollars
            
            PercentageAssets
            
            (Dollars
                in Thousands)Cash
                and cash equivalents
            
            $
            49,903
            
            $
            41,057
            
            $
            8,846
            
            
            21.5
            %Other
                interest earning investments
            
            
            -
            
            
            1,200
            
            
            (1,200
            )
            
            -100.0
            %Securitites
                available for sale
            
            
            133,681
            
            
            99,231
            
            
            34,450
            
            
            34.7
            %Loans
            
            
            675,027
            
            
            644,222
            
            
            30,805
            
            
            4.8
            %Allowance
                for loan losses
            
            
            (5,802
            )
            
            (4,705
            )
            
            (1,097
            )
            
            23.3
            %Loans,
                net
            
            
            669,225
            
            
            639,517
            
            
            29,708
            
            
            4.6
            %Loans
                held for sale
            
            
            1,228
            
            
            4,365
            
            
            (3,137
            )
            
            -71.9
            %Other
                assets
            
            
            61,711
            
            
            57,709
            
            
            4,002
            
            
            6.9
            %Total
                assets
            
            $
            915,748
            
            $
            843,079
            
            $
            72,669
            
            
            8.6
            %Liabilities
                and Stockholders' equity DepositsNon-interest
                bearing
            
            $
            41,468
            
            $
            38,301
            
            $
            3,167
            
            
            8.3
            %Interest
                bearing transaction accounts
            
            
            49,633
            
            
            52,895
            
            
            (3,262
            )
            
            -6.2
            %Savings
                and money market
            
            
            209,286
            
            
            158,229
            
            
            51,057
            
            
            32.3
            %Time
            
            
            297,626
            
            
            323,627
            
            
            (26,001
            )
            
            -8.0
            %Total
                deposits
            
            
            598,013
            
            
            573,052
            
            
            24,961
            
            
            4.4
            %Federal
                Home Loan Bank advances
            
            
            156,000
            
            
            144,000
            
            
            12,000
            
            
            8.3
            %Securities
                sold under agreements to repurchase
            
            
            63,500
            
            
            29,000
            
            
            34,500
            
            
            119.0
            %Accrued
                expenses and other liabilities
            
            
            7,442
            
            
            5,940
            
            
            1,502
            
            
            25.3
            %Total
                liabilities
            
            
            824,955
            
            
            751,992
            
            
            72,963
            
            
            9.7
            %Stockholders'
                equity
            
            
            90,793
            
            
            91,087
            
            
            (294
            )
            
            -0.3
            %Total
                liabilities and stockholders' equity
            
            $
            915,748
            
            $
            843,079
            
            $
            72,669
            
            
            8.6
            %





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





**Securities
      available for sale** .
      Securities available for sale are composed principally of debt securities of
      U.S. Government-sponsored organizations and mortgage-backed securities. In
      the
      near-term we expect the composition of our investment portfolio to continue
      to
      be heavily weighted in these types of securities. During the nine months ended
      September 30, 2007, the Company purchased $62.5 million of investment
      securities, increasing the investment balance by approximately $34.5 million
      to
      $133.7 million, net of maturities and sales of $28.0 million at September 30,
      2007.


15


**Loans** .
      Following is a comparative composition of net loans as of September 30, 2007
      and
      December 31, 2006:





September
                30,
              2007
            
            %
                of total
              loans
            
            December
                31,
              2006
            
            %
                of total
              loans(Dollars
                In Thousands)Real
                estate loans:One-to-four
                family
            
            $
            342,401
            
            
            51.0
            %
            $
            334,000
            
            
            52.2
            %Commercial
            
            
            73,532
            
            
            11.0
            %
            
            60,912
            
            
            9.5
            %Other
                ( Land & Multifamily)
            
            
            40,737
            
            
            6.1
            %
            
            34,446
            
            
            5.4
            %Total
                real estate loans
            
            
            456,670
            
            
            68.1
            %
            
            429,358
            
            
            67.1
            %Construction
                loans:One-to-four
                family
            
            
            16,051
            
            
            2.4
            %
            
            32,467
            
            
            5.1
            %Commercial
            
            
            9,704
            
            
            1.4
            %
            
            2,862
            
            
            0.4
            %Acquisition
                and development
            
            
            3,332
            
            
            0.5
            %
            
            2,103
            
            
            0.3
            %Total
                real estate construction loans
            
            
            29,087
            
            
            4.3
            %
            
            37,432
            
            
            5.8
            %Other
                loans:Home
                equity
            
            
            100,354
            
            
            14.9
            %
            
            91,062
            
            
            14.2
            %Consumer
            
            
            65,551
            
            
            9.8
            %
            
            63,630
            
            
            9.9
            %Commercial
            
            
            19,807
            
            
            2.9
            %
            
            19,044
            
            
            3.0
            %Total
                other loans
            
            
            185,712
            
            
            27.6
            %
            
            173,736
            
            
            27.1
            %Total
                loans
            
            
            671,469
            
            
            100
            %
            
            640,526
            
            
            100
            %Allowance
                for loan losses
            
            
            (5,802
            )
            
            
            
            
            (4,705
            )Net
                deferred loan costs
            
            
            3,366
            
            
            
            
            
            3,348Premiums
                on purchased loans
            
            
            192
            
            
            
            
            
            348Loans,
                net
            
            $
            669,225
            
            
            
            
            $
            639,517





The
      composition of our net loan portfolio is heavily weighted in loans secured
      by
      first mortgages, home equity loans, or second mortgages, all secured by one-
      to
      four-family residences, with approximately 66% of our loans invested in those
      types of loans at both September 30, 2007, and December 31, 2006. As of
      September 30, 2007 our one- to four-family residential mortgages, as a
      percentage of total loans, was approximately the same as the year-end
      2006 balance. Growth in the first mortgage loan portfolio has been negatively
      impacted by a slowing in residential real estate sales activity in the Bank’s
      markets. Recent reports by state and national real estate organizations have
      reported substantial declines in residential real estate activity in the
      northeast Florida markets, as well as in Florida in general. As a result of
      these factors, management believes that growth in one- to four-family
      residential mortgages will be slow to moderate in the near term. During the
      nine
      months ended September 30, 2007, the Company purchased $14.0 million of one-
      to
      four-family residential loans, to supplement our internal loan originations.
      Depending on liquidity, earning needs, and the availability of high quality
      loans, management expects to continue to purchase one- to four-family
      residential mortgage loans to supplement our internal loan originations.





Total
      loan production of $135.0 million during the nine months ended September 30,
      2007 was derived from a diversified array of loan products including first
      mortgages, consumer, home equity, commercial, construction and other loans.
      The
      interest rate terms for most of these loan products are indexed to various
      indices, including the current prime rate and, as such, tend to have more
      favorable interest margins as compared to our cost of funds.




16


**Allowance
      for loan losse** s.
      Our
      allowance for loan losses was 0.86% and 0.73% of total loans outstanding at
      September 30, 2007 and December 31, 2006, respectively. Allowance for loan
      losses activity at and for the nine months ended September 30, 2007 and 2006
      was
      as follows:





At
                September 30,2007
            
            2006(Dollars
                in Thousands)Beginning
                balance
            
            $
            4,705
            
            $
            4,587Loans
                charged-off
            
            
            (1,642
            )
            
            (946
            )Recoveries
            
            
            1,496
            
            
            674Net
                charge-offs
            
            
            (146
            )
            
            (272
            )Provision
                for loan losses
            
            
            1,243
            
            
            183Ending
                balance
            
            $
            5,802
            
            $
            4,498





The
      allowance for loan losses consists of general and specific components. The
      specific component relates to loans that are individually evaluated and
      determined to be impaired. Loans individually evaluated are generally large
      balance and/or complex loans, such as commercial real estate loans. The general
      component relates to large groups of small balance homogeneous loans that are
      evaluated in the aggregate based on historical loss experience adjusted for
      current factors.





Non-performing
      loans totaled $7.1 million and $3.1 million, or 1.05% and 0.48% of total loans,
      at September 30, 2007, and December 31, 2006, and total impaired loans
      increased to $4.3 million at September 30, 2007 from $2.0 million at December
      31, 2006. Substantially all of the increase in non-performing loans was due
      to
      the addition of two northeast Florida commercial real estate construction
      participation loans during the third quarter of 2007. The first loan is a
      well-collateralized credit that is 90 or more days past due as of September
      30, 2007. In June 2007, the Company became aware of an administrative oversight
      made by the lead bank whereby the borrower failed to fund the interest reserve
      on the project, and as a result, the loan had been over-funded by the
      participant banks. Subsequently the Company denied any future advances until
      the
      borrower funded the interest reserve in accordance with the original terms
      of
      the agreement. The borrower refused and defaulted on the loan. Given the
      underlying collateral value, the Company believes no specific reserve is
      necessary on this loan. The second credit is an acquisition and development
      loan
      that matured in September 2007. The Company has a $2.1 million participation
      in
      a $7.7 million loan which is secured by property that was expected to be sold
      to
      a national builder following completion of improvements. The builder failed
      to
      take possession of the property under the original terms of the contract. Based
      on an uncertain development timeline for the property and a recent appraisal,
      the Company downgraded this loan to substandard and established a $564,000
      reserve, accounting for approximately $2.1 million of the $2.3 million increase
      in impaired loans since December 31, 2006. Net charge-offs on an annualized
      basis reflected a net recovery of 0.17% in the third quarter of 2007, due
      primarily to a $793,000 recovery on a commercial real estate loan charged off
      in
      2003, versus net charge-offs of 0.18% in the second quarter of 2007 and 0.02%
      in
      the third quarter of 2006.





**Deposits** .
      Savings
      and money market deposit account balances increased at September 30, 2007 from
      December 31, 2006 due primarily to a carryover into 2007 of the attractive
      pricing being offered on the Company’s money market accounts. The Company
      increased deposit rates in late 2006 in response to competition within its
      market, to both protect and grow deposit balances and fund loan
      growth.




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




17


Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying amount of $63.5 million at September 30, 2007. 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. As of September
      30,
      2007, the weighted average rate of the agreements was 4.52%.





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





**Federal
      Home Loan Bank advances** .
      FHLB
      advances had a weighted-average maturity of 79 months and a weighted-average
      rate of 4.36% at September 30, 2007. The increase in FHLB borrowings at
      September 30, 2007 as compared to December 31, 2006 was due to additional
      borrowings of $50.0 million to replace maturities of $38.0 million and fund
      loan
      growth. 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 source of funds.





**Stockholders’
      equity** .
      Stockholders’ equity decreased slightly to approximately $90.8 million at
      September 30, 2007, from $91.1 million at December 31, 2006, as net income
      offset cash dividends and share repurchases. In September 2007, the Company’s
      board of directors declared a regular quarterly cash dividend at a rate of
      $0.15
      per share. The dividend was payable on October 29, 2007, for stockholders of
      record on October 12, 2007. Atlantic Coast Federal, MHC which holds 8,728,500
      shares, or 63.8% of the Company’s total outstanding stock, waived receipt of the
      first, second and third quarter dividends on its owned shares. Total
      dividends for the nine months ended September 30, 2007 charged to stockholders’
equity was approximately $1.9 million, and approximately $3.7 million of
      dividend payments were waived by Atlantic Coast Federal, MHC. We expect Atlantic
      Coast Federal, MHC to waive receipt of payment on future dividends for its
      owned
      shares.




In
      September 2006 the Company’s Board of Directors approved a new repurchase plan
      to permit the Company to purchase, over a 12-month period, up to 10%, or 478,000
      shares of its outstanding common stock. Since the approval of the new stock
      repurchase plan the Company repurchased approximately 295,000 shares at an
      average price of $18.16 per share, including approximately 106,000 shares
      repurchased at an average price of $18.59 during the nine months ended September
      30, 2007. Due to the announced plan of conversion the Company suspended the
      repurchase plan.




The
      equity to assets ratio decreased to 9.9% at September 30, 2007, from 10.8%
      at
      December 31, 2006. The decrease was primarily due to common stock repurchased
      under the Company’s stock repurchase plan, the change in the fair market value
      of available-for-sale securities, and the rate of asset growth through September
      30, 2007. Despite this decrease, we continued to be well in excess of all
      minimum regulatory capital requirements, and are considered “well capitalized”
under those formulas. Total risk-based capital to risk-weighted assets was
      12.9%, Tier 1 capital to risk-weighted assets was 11.9%, and Tier 1 capital
      to total adjusted total assets was 8.0% at September 30, 2007. These ratios
      as
      of December 31, 2006 were 13.8%, 13.1% and 9.3%, respectively.


18


**Comparison
      of Results of Operations for the Three Months Ended September 30, 2007 and
      2006** .





**General** . **** Our
      net
      income for the three months ended September 30, 2007, was $789,000, a decrease
      of $729,000 from $1.5 million for the same period in 2006. The decline in
      earnings was due primarily to an adjustment in the fair market value of our
      interest rate swaps, higher non-interest expenses and to a lesser extent an
      increase in the provision for loan losses. Net interest income increased 3.1%,
      or $172,000 in the third quarter of 2007, compared to the same quarter in 2006,
      due primarily to the growth in average balance of interest-earning assets and
      to
      a lesser extent higher interest rates, which slightly outpaced the growth in
      average balance of  interest-bearing liabilities and the associated
      cost of funds. Non-interest income for the three months ended September 30,
      2007
      decreased 22.9%, or $449,000 as compared to the same three months in 2006.
      Non-interest expense grew $267,000, or 4.9%, to $5.7 million for the three
      months ended September 30, 2007, from $5.4 million for the same three months
      in
      2006.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the three months ended
      September 30, 2007 and 2006. 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 30,2007
            
            2006(Dollars in Thousands)Average
              Balance
            
            Interest
            
            Average Yield
              /Cost
            
            Average
              Balance
            
            Interest
            
            Average Yield
              /CostINTEREST-EARNING ASSETSLoans
                receivable(1)
            
            $
            678,350
            
            $
            11,927
            
            
            7.03
            %
            $
            623,667
            
            $
            10,612
            
            
            6.81
            %Securites(2)
            
            
            130,943
            
            
            1,786
            
            
            5.46
            %
            
            74,461
            
            
            948
            
            
            5.09
            %Other
                interest-earning assets(3)
            
            
            40,681
            
            
            550
            
            
            5.41
            %
            
            33,005
            
            
            446
            
            
            5.41
            %Total
                interest-earning assets
            
            
            849,974
            
            
            14,263
            
            
            6.72
            %
            
            731,133
            
            
            12,006
            
            
            6.56
            %Non-interest
                earning assets
            
            
            54,887
            
            
            
            
            
            
            
            
            50,682Total
                assets
            
            $
            904,861
            
            
            
            
            
            
            
            $
            781,815INTEREST-BEARING
                LIABILITIESSavings
                deposits
            
            $
            39,207
            
            $
            37
            
            
            0.38
            %
            $
            47,744
            
            $
            47
            
            
            0.39
            %Interest
                bearing demand accounts
            
            
            48,895
            
            
            372
            
            
            3.04
            %
            
            51,193
            
            
            382
            
            
            2.98
            %Money
                market accounts
            
            
            173,905
            
            
            2,015
            
            
            4.63
            %
            
            83,651
            
            
            867
            
            
            4.15
            %Time
                deposits
            
            
            293,145
            
            
            3,705
            
            
            5.06
            %
            
            321,622
            
            
            3,631
            
            
            4.52
            %Federal
                Home Loan Bank advances
            
            
            149,109
            
            
            1,671
            
            
            4.48
            %
            
            123,565
            
            
            1,382
            
            
            4.47
            %Securities
                sold under agreements to repurchase
            
            
            63,500
            
            
            733
            
            
            4.62
            %
            
            12,000
            
            
            139
            
            
            4.63
            %Total
                interest-bearing liabilities
            
            
            767,761
            
            
            8,533
            
            
            4.44
            %
            
            639,775
            
            
            6,448
            
            
            4.04
            %Non-interest
                bearing liabilities
            
            
            46,224
            
            
            
            
            
            
            
            
            47,765Total
                liabilities
            
            
            813,985
            
            
            
            
            
            
            
            
            687,540Stockholders'
                equity
            
            
            90,876
            
            
            
            
            
            
            
            
            94,275Total
                liabilities and stockholders' equity
            
            $
            904,861
            
            
            
            
            
            
            
            $
            781,815Net
                interest income
            
            
            
            
            $
            5,730
            
            
            
            
            
            
            
            $
            5,558Net
                interest spread
            
            
            
            
            
            
            
            
            2.28
            %
            
            
            
            
            
            
            
            2.52
            %Net
                earning assets
            
            $
            82,213
            
            
            
            
            
            
            
            $
            91,358Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.70
            %
            
            
            
            
            
            
            
            3.04
            %Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            110.71
            %
            
            
            
            
            
            
            
            114.28
            %





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


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


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


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




19


**Rate/Volume
      Analysis** .
      The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities as of and for the three months ended September
      30,
      2007 as compared to the same period in 2006. 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
                ASSETS**Loans
                receivable
            
            $
            953
            
            $
            361
            
            $
            1,314Securities
            
            
            766
            
            
            73
            
            
            839Other
                interest-earning assets
            
            
            104
            
            
            -
            
            
            104Total
                interest-earning assets
            
            
            1,823
            
            
            434
            
            
            2,257**INTEREST-BEARING
                LIABILITIES**Savings
                deposits
            
            
            (8
            )
            
            (2
            )
            
            (10
            )Interest
                bearing demand accounts
            
            
            (17
            )
            
            7
            
            
            (10
            )Money
                market accounts
            
            
            1,035
            
            
            113
            
            
            1,148Time
                deposits
            
            
            (338
            )
            
            413
            
            
            75Federal
                Home Loan Bank advances
            
            
            286
            
            
            2
            
            
            288Securities
                sold under agreements to repurchase
            
            
            594
            
            
            -
            
            
            594Total
                interest-bearing liabilities
            
            
            1,552
            
            
            533
            
            
            2,085Net
                interest income
            
            $
            271
            
            $
            (99
            )
            $
            172





**Interest
      income.** As
      shown
      in the table above the increase in interest income for the three months ended
      September 30, 2007, as compared to the same period in 2006, was primarily
      attributed to growth in average outstanding interest-earning assets, while
      higher rates also was a contributing factor. Loans accounted for approximately
      58% of the interest income growth, or $1.3 million for the quarter ended
      September 30, 2007, as compared to the same quarter in 2006.





The
      growth in interest income from investment securities and other interest-earning
      assets for the quarter ended September 30, 2007, as compared to the same quarter
      in 2006 was mainly due to higher average balances and to a lesser extent higher
      yields as the Company continued to leverage its growth in securities available
      for sale to take advantage of favorable interest rate spreads and to reduce
      our
      exposure to interest rate risk.





Management
      expects interest income will increase as the Company continues to grow and
      diversify its average interest earning assets in order to maximize interest
      earned on such assets. Growth in interest earnings assets is partly dependent
      on
      funding from deposit growth in existing markets as well as from new branches
      opened in the second-half of 2006. Our interest income could be adversely
      impacted by: continued low interest rates on longer-term loans, such as one-
      to
      four-family residential loans; softening of the residential real-estate lending
      market resulting in lower demand for one- to four-family residential loans,
      and
      the availability of higher interest-earning assets.





**Interest
      expense.** The
      increase in interest expense for the three months ended September 30, 2007,
      as
      compared to the same period in 2006, was largely due to higher cost of funds
      quarter to quarter of approximately 40 basis points as well as growth in average
      outstanding balances of interest-bearing deposit accounts. In order to fund
      loan
      growth and maintain deposit market share, the Company has continued to pay
      attractive interest rates on its money-market accounts, interest bearing demand
      accounts and time deposits. The rate of interest expense on our FHLB advances
      also increased for the third quarter of 2007 as compared to the same quarter
      of
      2006, as new advances have generally been at higher rates due to the increase
      in
      short-term rates during the second quarter of 2006. Given the intense
      competition for deposits in our market, management does not expect interest
      rates paid on deposits to materially decline in the near term.


20


**Net
      interest income.** Net
      interest income increased during the three months ended September 30, 2007,
      as
      compared to the same period in 2006, as the growth in interest income outpaced
      the growth in interest expense. While this increase was primarily attributable
      to the growth in interest earning assets, the increase in funding rates have
      outpaced the increase in asset yields, resulting in a 24 basis point decline
      in
      net interest spread from 2.52% to 2.28%, which is the difference between the
      interest yield earned on interest earning assets and the interest rate paid
      on
      interest-bearing liabilities, for the third quarter of 2007 as compared to
      the
      same quarter in 2006. 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  from 3.04% to 2.70% or 34 basis points.





Our
      rapid
      loan growth which began during 2004, primarily in adjustable rate one- to
      four-family residential mortgages (ARMs), as well as the near-complete
      refinancing of our existing residential mortgage portfolio, occurred during
      a
      period of unprecedented low interest rates. Due to the various interest rate
      reset terms of our ARM products, changes in market interest rates do not
      generally result in immediate changes in interest rate yields. Given the delay
      in ARM product re-pricing to changes in market rates, a lending environment
      characterized by a flat yield curve and the fact that 38% of our loan
      portfolio is comprised of longer-term fixed rate one- to four-family residential
      loans, management believes the yield curve will continue to put pressure on
      net
      interest margin for the remainder of 2007, but does not expect the situation
      to
      worsen significantly. However, management also expects interest income to grow
      as the Company continues to emphasize loan growth in home equity, construction
      and commercial loans.





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




Based
        on
        management’s evaluation of these factors, a provision of $438,000 was made
        during the three months ended September 30, 2007. No provision was made during
        the three months ended September 30, 2006. In addition, a recovery of $98,000
        was made during the three months ended September 30, 2006. The quarter over
        quarter change was due to several factors; (1) the collection of a large
        commercial real estate loan previously classified as impaired and the reversal
        of the associated reserve during 2006, (2) the positive impact of credit
        improvements on several other loans during 2006, (3) additional provision
        for
        loan loss expense necessary for the increase in non-performing loans as
        described in” Comparison of Financial Condition at September 30, 2007 and
        December 31, 2006-Allowance for loan losses”, (4) continued credit quality
        concerns generally, and specifically in the Florida market; and (5) to a
        lesser
        extent, growth in the Company’s loan portfolio. Net recoveries for the quarter
        ended September 30, 2007, were $293,000. By comparison, net charge-offs for
        the
        same three months in 2006 were $24,000. The net recoveries in the third quarter
        of 2007 were due primarily to a $793,000 recovery on a commercial loan charged
        off in 2003.





Management
      assesses the allowance for loan losses on a quarterly basis and makes provisions
      for loan losses as necessary in order to maintain the allowance for loan losses
      based on all known and inherent losses that are both probable and can be
      reasonably estimated. While management uses available information to recognize
      losses on loans, future loan loss provisions may be necessary based on changes
      in economic conditions and changes in borrower situations. In addition, the
      Office of Thrift Supervision, as an integral part of its examination
      process, periodically reviews the allowance for loan losses and may require
      us
      to recognize additional provisions based on its judgment of information
      available to the agency at the time of their examination. The allowance for
      loan
      losses as of September 30, 2007, was maintained at a level that represents
      management’s best estimate of probable losses in the loan
      portfolio.


21


**Non-interest
      income** .
      The
      components of non-interest income for the three months ended September 30,
      2007
      and 2006 were as follows:





Increase(decrease)2007
            
            2006
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            1,326
            
            $
            1,516
            
            $
            (190
            )
            
            -12.5
            %Gain
                on sale of real estate mortgages held for sale
            
            
            11
            
            
            35
            
            
            (24
            )
            
            -68.6
            %Loss
                on sale of foreclosed assets
            
            
            (116
            )
            
            (5
            )
            
            (111
            )
            
            2220.0
            %Commission
                income
            
            
            85
            
            
            90
            
            
            (5
            )
            
            -5.6
            %Interchange
                fees
            
            
            229
            
            
            193
            
            
            36
            
            
            18.7
            %Bank
                owned life insurance earnings
            
            
            211
            
            
            214
            
            
            (3
            )
            
            -1.4
            %Other
            
            
            (232
            )
            
            (80
            )
            
            (152
            )
            
            190.0
            %Total
            
            $
            1,514
            
            $
            1,963
            
            $
            (449
            )
            
            -22.9
            %





The
      decrease in non-interest income was due primarily to a decline in service
      charges and fees, higher losses on sale of foreclosed assets and by the decrease
      in fair market value of interest rate swaps recorded in other non-interest
      income. Services charges and fees, which are transactional based charges
      assessed on deposit accounts, declined primarily due to a decrease in the number
      of returned items (i.e., non-sufficient funds or “NSF”) and the associated fees
      which more than offset the continued growth in ATM and check card overdraft
      fees.





**Non-interest
      expense** .
      The
      components of non-interest expense for the three months ended September 30,
      2007 and 2006 were as follows:





Increase(decrease)2007
            
            2006
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            3,147
            
            $
            2,805
            
            $
            342
            
            
            12.2
            %Occupancy
                and equipment
            
            
            595
            
            
            612
            
            
            (17
            )
            
            -2.8
            %Data
                processing
            
            
            234
            
            
            329
            
            
            (95
            )
            
            -28.9
            %Advertising
            
            
            123
            
            
            201
            
            
            (78
            )
            
            -38.8
            %Outside
                professional services
            
            
            456
            
            
            367
            
            
            89
            
            
            24.3
            %Interchange
                charges
            
            
            104
            
            
            92
            
            
            12
            
            
            13.0
            %Collection
                expense and repossessed asset losses
            
            
            59
            
            
            55
            
            
            4
            
            
            7.3
            %Telephone
            
            
            122
            
            
            116
            
            
            6
            
            
            5.2
            %Other
            
            
            830
            
            
            826
            
            
            4
            
            
            0.5
            %Total
            
            $
            5,670
            
            $
            5,403
            
            $
            267
            
            
            4.9
            %




Approximately
      70% of the increase to compensation and benefit expense for the three months
      ended September 30, 2007, as compared to the same period in 2006, was due
      to increased salaries. This
      increase reflected personnel costs associated with a new branch opened in
      Jacksonville in the fall of 2006, the expansion of the Company's private banking
      activities, new executive additions, and higher salaries for regular annual
      salary increases. These higher costs were offset to some extent by lower data
      processing costs and advertising expenses. In the near term, we expect that
      non-interest expenses will continue to put pressure on earnings as management
      continues to align the Company’s operations and organizational structure to meet
      its strategic growth and profitability objectives.


22


**Income
      tax expense.** Income
      tax expense decreased $351,000 to $347,000 for the three months ended September
      30, 2007, from $698,000 for the same period in 2006 due to a decrease in net
      income. Management anticipates that income tax expense will continue to vary as income
      before income taxes varies.





**Comparison
      of Results of Operations for the Nine Months Ended September 30, 2007 and
      2006** .





**General** . **** Our
      net
      income for the nine months ended September 30, 2007, was $2.2 million, which
      was
      a decrease of $2.0 million from $4.2 million for the same period in 2006
      primarily due to an increase in the provision for loan losses together with
      higher non-interest expenses. Net interest income increased 2.5%, or $404,000
      for the nine months ended September 30, 2007, compared to the same period in
      2006, due primarily to the growth in the average balance of interest-earning
      assets and to a lesser extent higher interest rates. Non-interest income for
      the
      nine months ended September 30, 2007 decreased by 10.6%, or $638,000, to $5.4
      million as compared to $6.0 million for the same nine months in 2006, due
      primarily to lower transactional based service charges and fees and the decrease
      in fair value of an interest rate swap. Non-interest expense grew $1.7 million,
      or 10.7%, to $17.6 million for the nine months ended September 30, 2007, from
      $15.9 million for the same period in 2006 due to increased compensation and
      benefit costs and other non-interest costs.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the nine months ended
      September 30, 2007 and 2006. 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
                30,2007
            
            2006(Dollars
                in Thousands)Average
              Balance
            
            Interest
            
            Average
                Yield /
              Cost
            
            Average
              Balance
            
            Interest
            
            Average
                Yield /
              CostINTEREST-EARNING
                ASSETSLoans
                receivable(1)
            
            $
            661,848
            
            $
            34,459
            
            
            6.94
            %
            $
            611,139
            
            $
            30,015
            
            
            6.55
            %Securites(2)
            
            
            124,429
            
            
            5,018
            
            
            5.38
            %
            
            71,481
            
            
            2,447
            
            
            4.56
            %Other
                interest-earning assets(3)
            
            
            44,701
            
            
            1,808
            
            
            5.39
            %
            
            31,816
            
            
            1,215
            
            
            5.09
            %Total
                interest-earning assets
            
            
            830,978
            
            
            41,285
            
            
            6.63
            %
            
            714,436
            
            
            33,677
            
            
            6.28
            %Non-interest
                earning assets
            
            
            54,330
            
            
            
            
            
            
            
            
            52,166Total
                assets
            
            $
            885,308
            
            
            
            
            
            
            
            $
            766,602INTEREST-BEARING
                LIABILITIESSavings
                deposits
            
            $
            40,756
            
            $
            120
            
            
            0.39
            %
            $
            50,979
            
            $
            152
            
            
            0.40
            %Interest
                bearing demand accounts
            
            
            50,731
            
            
            1,160
            
            
            3.05
            %
            
            61,281
            
            
            1,182
            
            
            2.57
            %Money
                market accounts
            
            
            154,403
            
            
            5,340
            
            
            4.61
            %
            
            68,426
            
            
            1,902
            
            
            3.71
            %Time
                deposits
            
            
            303,085
            
            
            11,324
            
            
            4.98
            %
            
            309,952
            
            
            9,791
            
            
            4.21
            %Federal
                Home Loan Bank advances
            
            
            144,918
            
            
            4,879
            
            
            4.49
            %
            
            125,192
            
            
            4,099
            
            
            4.37
            %Securities
                sold under agreements to repurchase
            
            
            53,808
            
            
            1,841
            
            
            4.56
            %
            
            9,678
            
            
            333
            
            
            4.59
            %Total
                interest-bearing liabilities
            
            
            747,701
            
            
            24,664
            
            
            4.40
            %
            
            625,508
            
            
            17,459
            
            
            3.72
            %Non-interest
                bearing liabilities
            
            
            46,437
            
            
            
            
            
            
            
            
            47,009Total
                liabilities
            
            
            794,138
            
            
            
            
            
            
            
            
            672,517Stockholders'
                equity
            
            
            91,170
            
            
            
            
            
            
            
            
            94,085Total
                liabilities and stockholders' equity
            
            $
            885,308
            
            
            
            
            
            
            
            $
            766,602Net
                interest income
            
            
            
            
            $
            16,621
            
            
            
            
            
            
            
            $
            16,218Net
                interest spread
            
            
            
            
            
            
            
            
            2.23
            %
            
            
            
            
            
            
            
            2.56
            %Net
                earning assets
            
            $
            83,277
            
            
            
            
            
            
            
            $
            88,928Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.67
            %
            
            
            
            
            
            
            
            3.03
            %Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            111.14
            %
            
            
            
            
            
            
            
            114.22
            %


(1) Calculated net of deferred loan fees and loss reserve. Nonaccrual loans included as loans carrying a zero yield(2) Calculated based on carrying value. Not full tax equivalents, as the numbers would not change materially from those presented in the table.(3) Includes Federal Home Loan Bank stock at cost and term deposits with other financial institutions.(4) Net interest income divided by average interest-earning assets.


23


**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,
      2007 as compared to the same period in 2006. 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
                  ASSETS**Loans
                  receivable
              
              $
              2,577
              
              $
              1,867
              
              $
              4,444Securities
              
              
              2,073
              
              
              499
              
              
              2,572Other
                  interest-earning assets
              
              
              517
              
              
              75
              
              
              592Total
                  interest-earning assets
              
              
              5,167
              
              
              2,441
              
              
              7,608**INTEREST-BEARING
                  LIABILITIES**Savings
                  deposits
              
              
              (30
              )
              
              (2
              )
              
              (32
              )Interest
                  bearing demand accounts
              
              
              (222
              )
              
              199
              
              
              (23
              )Money
                  market accounts
              
              
              2,878
              
              
              560
              
              
              3,438Time
                  deposits
              
              
              (221
              )
              
              1,754
              
              
              1,533Federal
                  Home Loan Bank advances
              
              
              661
              
              
              120
              
              
              781Securities
                  sold under agreements to repurchase
              
              
              1,510
              
              
              (2
              )
              
              1,508Total
                  interest-bearing liabilities
              
              
              4,576
              
              
              2,629
              
              
              7,205Net
                  interest income
              
              $
              591
              
              $
              (188
              )
              $
              403





**Interest
      income.** As
      shown
      in the table above the majority of the increase in interest income for the
      nine
      months ended September 30, 2007, as compared to the same period in 2006, was
      attributed to growth in average outstanding interest-earning assets, although
      the rate on interest-earning assets also was a contributing factor. Loans
      accounted for approximately 58% of the interest income growth, or $4.4 million
      for the nine months ended September 30, 2007, as compared to the same period
      in
      2006. The increased interest income from loans was primarily due to increased
      average outstanding balances and to a lesser extent the yield earned on the
      loans balances as a result of growth in loans indexed to the prime rate. The
      growth in average outstanding balances of home equity loans, adjustable-rate
      first mortgages, construction loans and commercial real estate loans for the
      nine months ended September 30, 2007, as compared to the same period in 2006,
      accounted for approximately 66%, or $31.0 million of the total $46.9 million
      in
      loan growth.





The
      growth in interest income from investment securities and other interest-earning
      assets for the nine ended September 30, 2007, as compared to the same period
      in
      2006 was mainly due to higher average balances as the Company continued to
      leverage its growth in securities available for sale to take advantage of
      favorable interest rate spreads and to reduce our exposure to interest rate
      risk.




Management
        expects interest income will increase as the Company continues to grow and
        diversify its average interest earning assets in order to maximize interest
        earned on such assets. Growth in interest earnings assets is partly dependent
        on
        funding from deposit growth in existing markets as well as from new branches
        opened in the second-half of 2006. Our interest income could be adversely
        impacted by: continued low interest rates on longer-term loans, such as one-
        to
        four-family residential loans; softening of the residential real-estate lending
        market resulting in lower demand for one- to four-family residential loans,
        and
        the availability of higher interest-earning assets.




24


**Interest
      expense.** The
      increase in interest expense for the nine months ended September 30, 2007,
      as
      compared to the same period in 2006, was largely due to growth in average
      outstanding balances of interest-bearing deposit accounts, as well as higher
      cost of funds period to period, from 3.72% to 4.40% or approximately 68
      basis points. In order to fund loan growth and maintain deposit market share,
      the Company has continued to pay attractive interest rates on its money-market
      accounts, interest bearing demand accounts and time deposits. The average rate
      of interest expense on our FHLB advances increased from 4.37% to 4.49% or 12
      basis points for the nine months ended September 30, 2007 as compared to the
      same period in 2006. Given the intense competition for deposits in our market,
      management does not expect interest rates paid on deposits to materially decline
      in the near term.





**Net
      interest income.** Net
      interest income increased during the nine months ended September 30, 2007,
      as
      compared to the same period in 2006, as the growth in interest income outpaced
      the growth in interest expense. As discussed above, increases in prime rate
      based loans and overall steady growth in average outstanding balances has
      enabled the Company to increase the overall yield of the loan portfolio. In
      addition, yields on securities have increased as short-term interest rates
      have
      tracked upward. While this increase is primarily attributable to the growth
      in
      interest-earning assets, the increase in funding rates have outpaced the
      increase in asset yields, resulting in a 33 basis point decline in net interest
      spread from 2.56% to 2.23%, which is the difference between the interest yield
      earned on interest earning assets and the interest rate paid on interest bearing
      liabilities, for the nine months ended September 30, 2007 as compared to the
      same period in 2006. For the same comparative periods, our net interest margin,
      which is net interest income, expressed as a percentage of our average balance
      of  interest-earning assets decreased from 3.03% to 2.67% or 36 basis
      points.





Our
      rapid
      loan growth which began during 2004, primarily in adjustable rate one- to
      four-family residential mortgages (ARMs), as well as the near-complete
      refinancing of our existing residential mortgage portfolio, occurred during
      a
      period of unprecedented low interest rates. Due to the various interest rate
      reset terms of our ARM products, increases in market interest rates do not
      generally result in immediate increases in interest rate yields. Given the
      delay
      in ARM product re-pricing to changes in market rates, a lending environment
      characterized by a flat yield curve and the fact that 38% of our loan
      portfolio is comprised of longer-term fixed rate one- to four-family residential
      loans, management believes the yield curve will continue to put pressure on
      net
      interest margin for the rest of 2007, but does not expect the situation to
      worsen significantly. However, management also expects interest income to grow
      as the Company continues to emphasize loan growth in home equity, construction
      and commercial loans.





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




Based
        on
        management’s evaluation of these factors, provisions of $1.2 million and
        $183,000 were made during the nine months ended September 30, 2007 and 2006,
        respectively. The year-over- year change was due to several factors; (1)
        the
        collection of a large commercial real estate loan previously classified as
        impaired and the reversal of the associated reserve during 2006, (2) the
        positive impact of credit improvements on several other loans during 2006,
        (3)
        additional provision for loan loss expense necessary for the increase in
        non-performing loans as described in “Comparison of Financial Condition at
        September 30, 2007 and December 31, 2006-Allowance for loan losses”, (4)
        continued credit quality concerns generally, and specifically in the Florida
        market, and (5) to a lesser extent, growth in the Company’s loan portfolio. Net
        charge-offs for the nine months ended September 30, 2007, were $146,000.
        By
        comparison, net charge-offs for the same nine months in 2006 were $272,000.


25


Management
      assesses the allowance for loan losses on a quarterly basis and makes provisions
      for loan losses as necessary in order to maintain the allowance for loan losses
      based on all known and inherent losses that are both probable and can be
      reasonably estimated. While management uses available information to recognize
      losses on loans, future loan loss provisions may be necessary based on changes
      in economic conditions and changes in borrower situations. In addition, various
      regulatory agencies, as an integral part of their examination process,
      periodically review the allowance for loan losses and may require us to
      recognize additional provisions based on their judgment of information available
      to them at the time of their examination. The allowance for loan losses as
      of
      September 30, 2007, is maintained at a level that represents management’s best
      estimate of probable losses in the loan portfolio.





**Non-interest
      income** .
      The
      components of non-interest income for the nine months ended September 30, 2007
      and 2006 were as follows:





Increase(decrease)2007
            
            2006
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            3,866
            
            $
            4,360
            
            $
            (494
            )
            
            -11.3
            %Net
                loss on available for sale securities
            
            
            (46
            )
            
            (165
            )
            
            119
            
            
            -72.1
            %Gain
                      on sale of real estate mortgages held for
                      sale
            
            
            26
            
            
            51
            
            
            (25
            )
            
            -49.0
            %Loss
                on sale of foreclosed assets
            
            
            (114
            )
            
            (10
            )
            
            (104
            )
            
            1040.0
            %Commission
                income
            
            
            222
            
            
            239
            
            
            (17
            )
            
            -7.1
            %Interchange
                fees
            
            
            672
            
            
            588
            
            
            84
            
            
            14.3
            %Bank
                owned life insurance earnings
            
            
            639
            
            
            629
            
            
            10
            
            
            1.6
            %Other
            
            
            137
            
            
            348
            
            
            (211
            )
            
            -60.6
            %Total
            
            $
            5,402
            
            $
            6,040
            
            $
            (638
            )
            
            -10.6
            %





The
      decrease in non-interest income was due primarily to a decline in service
      charges and fees, higher losses on sale of foreclosed assets and by the decrease
      in fair market value of interest rate swaps recorded in other non-interest
      income. Services charges and fees, which are transactional based charges
      accessed on deposit accounts, declined primarily due to a decrease in the number
      of returned items (i.e., non-sufficient funds or “NSF”) and the associated fees
      which more than offset the continued growth in ATM and check card overdraft
      fees.





**Non-interest
      expense** .
      The
      components of non-interest expense for the nine months ended September 30,
      2007 and 2006 were as follows:





Increase(decrease)2007
            
            2006
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            9,317
            
            $
            8,049
            
            $
            1,268
            
            
            15.8
            %Occupancy
                and equipment
            
            
            1,787
            
            
            1,609
            
            
            178
            
            
            11.1
            %Data
                processing
            
            
            838
            
            
            1,134
            
            
            (296
            )
            
            -26.1
            %Advertising
            
            
            420
            
            
            631
            
            
            (211
            )
            
            -33.4
            %Outside
                professional services
            
            
            1,828
            
            
            1,317
            
            
            511
            
            
            38.8
            %Interchange
                charges
            
            
            297
            
            
            420
            
            
            (123
            )
            
            -29.3
            %Collection
                expense and repossessed asset losses
            
            
            192
            
            
            218
            
            
            (26
            )
            
            -11.9
            %Telephone
            
            
            348
            
            
            359
            
            
            (11
            )
            
            -3.1
            %Other
            
            
            2,562
            
            
            2,154
            
            
            408
            
            
            18.9
            %Total
            
            $
            17,589
            
            $
            15,891
            
            $
            1,698
            
            
            10.7
            %




26


Approximately
      62% of the increase to compensation and benefit expense for the nine months
      ended September 30, 2007, as compared to the same period in 2006, was due
      to increased salaries. This
      increase reflected personnel costs associated with a new branch opened in
      Jacksonville in the fall of 2006, the expansion of the Company's private banking
      activities, new executive additions, and higher salaries for regular annual
      salary increases. Outside professional services also reflected higher legal
      and
      accounting fees related to the recent restatement of financial results and
      filings of amended reports with the Securities and Exchange Commission on Form
      10-K/A for 2006 and Form 10-Q/A for the first quarter of 2007 to correct the
      accounting treatment for two interest rate swap agreements, as well as increased
      legal fees for newly required executive compensation disclosures that were
      implemented in the Company's most recent proxy statement. Occupancy costs also
      rose due to the opening of the new branch, as did other non-interest expense,
      as
      a result of higher Federal Deposit Insurance Corporation premiums due to an
      increase in the assessment rate and a change in the timing of assessments.
      These
      higher costs were offset to some extent by lower data processing costs and
      advertising expenses. In the near term, we expect that non-interest expenses
      will continue to put pressure on earnings as management continues to align
      the
      Company’s operations and organizational structure to meet its strategic growth
      and profitability objectives.




**Income
      tax expense.** Income
      tax expense decreased $983,000 to $982,000 for the nine months ended September
      30, 2007, from $2.0 million for the same period in 2006 due to a decrease in
      net
      income. Management anticipates that income tax expense will continue to vary
      as
      income before income taxes varies.





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





The
      Company is subject to interest rate risk to the extent that its interest-bearing
      liabilities, primarily deposits and FHLB advances, re-price more rapidly or
      at
      different rates than its interest-earning assets. In order to minimize the
      potential for adverse effects of material prolonged increases or decreases
      in
      interest rates on our results of operations, the Company 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 (“ALCO”).





The
      purpose of ALCO is to communicate, coordinate and control asset/liability
      management consistent with our business plan and board approved policies. ALCO
      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.





ALCO
      generally meets on a quarterly basis to review, among other things, economic
      conditions and interest rate outlook, current and projected liquidity needs
      and
      capital position, anticipated changes in the volume and mix of assets and
      liabilities and interest rate exposure limits versus current projections
      pursuant to market value of portfolio equity analysis and income simulations.
      The committee recommends appropriate strategy changes based on this review.
      ALCO
      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. 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, 2007, was as follows:


27





Economic
                Value of Equityand
                Duration of Assets and Liabilities at September 30, 2007Change
                in Interest Rate(Dollars
                in Thousands)Decrease
            
            Decrease
            
            Decrease
            
            Increase
            
            Increase
            
            Increase3%
            
            2%
            
            1%
            
            1%
            
            2%
            
            3%Duration
                of assets(1)
            
            
            2.27
            
            
            2.27
            
            
            2.34
            
            
            2.38
            
            
            2.37
            
            
            2.37Duration
                of liabilities(1)
            
            
            2.32
            
            
            2.32
            
            
            2.32
            
            
            2.29
            
            
            2.27
            
            
            2.27Differential
                in duration
            
            
            -0.05
            
            
            -0.05
            
            
            0.02
            
            
            0.09
            
            
            0.10
            
            
            0.10Amount
                of change in Economic Value of Equity(2)
            
            $
            (1,278
            )
            $
            (852
            )
            $
            179
            
            $
            (817
            )
            $
            (1,959
            )
            $
            (2,938
            )Percentage
                change in Economic Value of Equity(2)
            
            
            -1.32
            %
            
            -0.88
            %
            
            0.19
            %
            
            -0.85
            %
            
            -2.03
            %
            
            -3.05
            %





(1)
      Expressed as number of years before asset/liability reprices 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.





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





We
      believe that certain factors afford Atlantic Coast Federal Corporation the
      ability to operate successfully despite its exposure to interest rate risk.
      Atlantic Coast Federal Corporation manages its interest rate risk by originating
      and retaining adjustable-rate loans in its portfolio and by selling most of
      our
      currently originated fixed-rate, one- to four-family real estate loans. Also,
      to
      a limited degree, management has utilized interest rate swap agreements as
      a
      part of our asset/liability management strategy to mitigate the impact to our
      net interest margin of sudden and unplanned interest rate changes. As of
      September 30, 2007, the Company held one interest rate swap agreement with
      a
      notional amount of $10.0 million and a fair value of approximately $525,000,
      which does not qualify for hedge accounting treatment. Finally, Atlantic Coast
      Federal Corporation’s investment strategy is to maintain a diversified portfolio
      of high quality investments that balances the goals of minimizing interest
      rate
      and credit risks while striving to maximize investment return and provide the
      liquidity necessary to meet funding needs.


28


**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, 2007, that have materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2007**





**Part
      II - Other Information**


Item1.
            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


Our
      non-interest expense, which consists primarily of the costs associated with
      operating our business, represents a high percentage of the income we generate.
      The cost of generating our income is measured by our efficiency ratio, which
      represents non-interest expense divided by the sum of our net interest income
      and our non-interest income. Our efficiency ratio has been affected by our
      efforts to expand our branch network and the corresponding infrastructure,
      as
      well as by the flat/inverted yield curve, which affects our ability to originate
      loans with interest rates sufficiently in excess of our deposit and borrowing
      costs. If we are able to lower our efficiency ratio, our ability to generate
      income from our operations will be more effective. For the years ended December
      31, 2006 and 2005, our efficiency ratios were 73.1% and 69.9%, respectively.
      Generally, this means that we spent $0.73 and $0.70 during 2006 and 2005 to
      generate $1.00 of income. This reflects a trend where our efficiency ratio
      has
      deteriorated **** from
      63.5% to 73.1% for the five-year period ended December 31, 2006. For the nine
      months ended September 30, 2007 and 2006, our efficiency ratio was 79.9% and
      71.4% respectively.





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


The
      table
      below sets forth information regarding the Company’s common stock repurchase
      plan that was approved by the Company’s Board of Directors on September 1, 2006.
      The purpose of the stock repurchase plan was to replace shares issued to key
      employees and outside directors under the Company’s Recognition Plan. Stock
      repurchased under this plan are held as Treasury shares.


29





Period
            
            Total Number of
              Shares Purchased
            
            Average Price
              Paid per
              Share
            
            Total Number of
              Shares Purchased
              as Part of
              Publicly
              Announced Plans
              or Programs
            
            Maximum
              Number of
              Shares that May
              Yet Be Purchased
              Under the Plans
              or ProgramsJuly
                1, 2007 through July 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            182,646August
                1, 2007 through August 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            182,646September
                1, 2007 through september 30, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            182,646Total
            
            
            -
            
            $
            -
            
            
            -
            
            
            182,646





Item
              3.
            Defaults
                Upon Senior Securities


None





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


None





Item
              5.
            Other
                Information


None





Item
              6.
            Exhibits


a.
            Exhibits


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


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


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


30


**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2007**





**Part
      II - Other Information**





**Signatures**




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




ATLANTIC
                COAST FEDERAL CORPORATION(Registrant)Date:
                November 14, 2007
            /s/
                Robert J. Larison, JrRobert
                J. Larison, Jr., President and ChiefExecutive
                OfficerDate:
                November 14, 2007
            /s/
                Dawna R. MillerDawna
                R. Miller, Senior Vice President andChief
                Financial Officer




31