UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2010





Commission
file number: 000-50962





ATLANTIC
COAST FEDERAL CORPORATION


(Exact
name of registrant as specified in its charter)





Federal
              59-3764686(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer Identification No.)505
      Haines Avenue
                Waycross,
      Georgia
              31501(Address
      of principal executive offices)
              (Zip
      Code)





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





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


YES x  NO
 ̈.





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


YES  ̈  NO
 ̈.





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





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





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


YES  ̈  NO
x.





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





Class
              Outstanding
      at May 13, 2010Common
      Stock, $0.01 Par Value
              13,415,545
      shares







ATLANTIC
COAST FEDERAL CORPORATION




Form
10-Q Quarterly Report





Table
of Contents




Page
      NumberPART
      I. FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                  26Item
      3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  39Item
      4.
                  Controls
      and Procedures
                  40PART
      II.  OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  41Item
      1A.
                  Risk
      Factors
                  41Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  41Item
      3.
                  Defaults
      upon Senior Securities
                  41Item
      4.
                  Reserved
                  41Item
      5.
                  Other
      Information
                  41Item
      6.
                  Exhibits
                  41Form
      10-Q
                  Signature
      Page
                  42Ex-31.1
                  Section
      302 Certification of CEO
                  43Ex-31.2
                  Section
      302 Certification of CFO
                  44Ex-32
                  Section
      906 Certification of CEO and CFO
                  45









PART
I. FINANCIAL INFORMATION
 Item
I.  Financial Statements
 ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 March
31, 2010 and December 31, 2009
 (Dollars
in Thousands, Except Share Information)
 (unaudited)




March 31,
                              
                              
                              December 31,2010
                              
                              
                              2009ASSETSCash
      and due from financial institutions
                              
                              $
                              9,591
                              
                              
                              $
                              8,211Short-term
      interest-earning deposits
                              
                              
                              28,370
                              
                              
                              
                              28,933Total
      cash and cash equivalents
                              
                              
                              37,961
                              
                              
                              
                              37,144Securities
      available for sale
                              
                              
                              204,217
                              
                              
                              
                              177,938Loans
      held for sale
                              
                              
                              5,253
                              
                              
                              
                              8,990Loans,
      net of allowance of $13,308 in 2010and
      $13,810 in 2009
                              
                              
                              599,858
                              
                              
                              
                              614,371Federal
      Home Loan Bank stock, at cost
                              
                              
                              10,023
                              
                              
                              
                              10,023Land,
      premises and equipment, net
                              
                              
                              15,935
                              
                              
                              
                              16,014Bank
      owned life insurance
                              
                              
                              22,983
                              
                              
                              
                              22,806Other
      real estate owned
                              
                              
                              5,035
                              
                              
                              
                              5,028Accrued
      interest receivable and other assets
                              
                              
                              12,756
                              
                              
                              
                              13,247Total
      assets
                              
                              $
                              914,021
                              
                              
                              $
                              905,561LIABILITIES AND STOCKHOLDERS'
      EQUITYDepositsNon-interest-bearing
      demand
                              
                              $
                              35,370
                              
                              
                              $
                              34,988Interest-bearing
      demand
                              
                              
                              79,052
                              
                              
                              
                              79,192Savings
      and money market
                              
                              
                              168,059
                              
                              
                              
                              160,784Time
                              
                              
                              302,211
                              
                              
                              
                              280,480Total
      deposits
                              
                              
                              584,692
                              
                              
                              
                              555,444Securities
      sold under agreement to repurchase
                              
                              
                              92,800
                              
                              
                              
                              92,800Federal
      Home Loan Bank advances
                              
                              
                              172,718
                              
                              
                              
                              182,694Other
      borrowings
                              
                              
                              2,200
                              
                              
                              
                              12,200Accrued
      expenses and other liabilities
                              
                              
                              5,240
                              
                              
                              
                              5,882Total
      liabilities
                              
                              
                              857,650
                              
                              
                              
                              849,020Commitments
      and contingent liabilities
                              
                              
                              -
                              
                              
                              
                              -Preferred
      stock: $0.01 par value; 2,000,000 shares authorizednone
      issued
                              
                              
                              -
                              
                              
                              
                              -Common
      stock: $0.01 par value; 18,000,000 shares
      authorized,shares
      issued 14,813,469 at March 31, 2010 and December 31, 2009
                              
                              
                              148
                              
                              
                              
                              148Additional
      paid in capital
                              
                              
                              61,418
                              
                              
                              
                              61,225Unearned
      employee stock ownership plan (ESOP) shares of 174,570at
      March 31, 2010 and 186,208 at December 31, 2009
                              
                              
                              (1,746
                              )
                              
                              
                              (1,862
                              )Retained
      earnings
                              
                              
                              14,018
                              
                              
                              
                              16,777Accumulated
      other comprehensive income
                              
                              
                              2,483
                              
                              
                              
                              152Treasury
      stock, at cost, 1,397,760 shares at March 31, 2010and
      1,375,260 at December 31, 2009
                              
                              
                              (19,950
                              )
                              
                              
                              (19,899
                              )Total
      stockholders' equity
                              
                              
                              56,371
                              
                              
                              
                              56,541Total
      liabilities and stockholders' equity
                              
                              $
                              914,021
                              
                              
                              $
                              905,561





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




3




ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars
in Thousands, Except Share Information)
 (unaudited)




Three months ended March 31,2010
                  
                  
                  2009Interest
      and dividend incomeLoans,
      including fees
                  
                  $
                  9,190
                  
                  
                  $
                  10,823Securities
      and interest-earning depositsin
      other financial institutions
                  
                  
                  2,012
                  
                  
                  
                  2,00311,202
                  
                  
                  
                  12,826Interest
      expenseDeposits
                  
                  
                  2,820
                  
                  
                  
                  4,557Federal
      Home Loan Bank advances
                  
                  
                  1,554
                  
                  
                  
                  1,712Securities
      sold under agreements to repurchase
                  
                  
                  1,148
                  
                  
                  
                  983Other
      borrowings
                  
                  
                  45
                  
                  
                  
                  -5,567
                  
                  
                  
                  7,252Net
      interest income
                  
                  
                  5,635
                  
                  
                  
                  5,574Provision
      for loan losses
                  
                  
                  3,722
                  
                  
                  
                  5,812Net
      interest income (loss) after provision for loan losses
                  
                  
                  1,913
                  
                  
                  
                  (238
                  )Non-interest
      income (loss)Service
      charges and fees
                  
                  
                  856
                  
                  
                  
                  992Gain
      on sale of loans held for sale
                  
                  
                  104
                  
                  
                  
                  185Loss
      on sale of portfolio loans
                  
                  
                  (273
                  )
                  
                  
                  -Gain
      on sale of securities available for sale
                  
                  
                  -
                  
                  
                  
                  96Other
      than temporary impairment loss:Total
      impairment loss
                  
                  
                  (700
                  )
                  
                  
                  344Gain
      (loss) recognized in other comprehensive income
                  
                  
                  625
                  
                  
                  
                  (518
                  )Net
      impairment loss recognized in earnings
                  
                  
                  (75
                  )
                  
                  
                  (174
                  )Interchange
      fees
                  
                  
                  222
                  
                  
                  
                  215Other
                  
                  
                  243
                  
                  
                  
                  2261,077
                  
                  
                  
                  1,540Non-interest
      expenseCompensation
      and benefits
                  
                  
                  2,570
                  
                  
                  
                  2,575Occupancy
      and equipment
                  
                  
                  554
                  
                  
                  
                  621FDIC
      insurance premiums
                  
                  
                  449
                  
                  
                  
                  336Foreclosed
      assets, net
                  
                  
                  92
                  
                  
                  
                  705Data
      processing
                  
                  
                  255
                  
                  
                  
                  260Outside
      professional services
                  
                  
                  359
                  
                  
                  
                  425Collection
      expense and repossessed asset losses
                  
                  
                  393
                  
                  
                  
                  204Other
                  
                  
                  1,077
                  
                  
                  
                  8945,749
                  
                  
                  
                  6,020Loss
      before income tax benefit
                  
                  
                  (2,759
                  )
                  
                  
                  (4,718
                  )Income
      tax benefit
                  
                  
                  -
                  
                  
                  
                  (1,657
                  )Net
      loss
                  
                  $
                  (2,759
                  )
                  
                  $
                  (3,061
                  )Loss
      per common share:Basic
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.23
                  )Diluted
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.23
                  )Dividends
      declared per common share
                  
                  $
                  -
                  
                  
                  $
                  0.01




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


4




ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME (LOSS)
 For
the Three Months Ended March 31, 2010
 (Dollars
in Thousands, Except Share Information)
 (unaudited)




ACCUMULATEDADDITIONAL
                            
                            
                            UNEARNED
                            
                            
                            
                            
                            
                            OTHERCOMMON
                            
                            
                            PAID IN
                            
                            
                            ESOP
                            
                            
                            RETAINED
                            
                            
                            COMPREHENSIVE
                            
                            
                            TREASURY
                            
                            
                            TOTALSTOCK
                            
                            
                            CAPITAL
                            
                            
                            SHARES
                            
                            
                            EARNINGS
                            
                            
                            INCOME (LOSS)
                            
                            
                            STOCK
                            
                            
                            EQUITYFor
      the three months ended March 31, 2010Balance
      at January 1, 2010
                            
                            $
                            148
                            
                            
                            $
                            61,225
                            
                            
                            $
                            (1,862
                            )
                            
                            $
                            16,777
                            
                            
                            $
                            152
                            
                            
                            $
                            (19,899
                            )
                            
                            $
                            56,541ESOP
      shares earned, 11,638 shares
                            
                            
                            -
                            
                            
                            
                            (64
                            )
                            
                            
                            116
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            52Management
      restricted stock expense
                            
                            
                            -
                            
                            
                            
                            161
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            161Stock
      options expense
                            
                            
                            -
                            
                            
                            
                            79
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            79Director's
      deferred compensation
                            
                            
                            -
                            
                            
                            
                            17
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (17
                            )
                            
                            
                            -Treasury
      stock  purchased at cost, 22,500 shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (34
                            )
                            
                            
                            (34
                            )Comprehensive
      income (loss):Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,759
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,759
                            )Other
      comprehensive income (loss)Net
      change in unrealized losses onsecurities
      available-for-sale net ofreclassification
      and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,706
                            
                            
                            
                            -
                            
                            
                            
                            1,706Change
      in unrealized gains (losses)on
      securities available-for-sale forwhich
      a portion of an other-than-temporaryimpairment
      has been recognized in earnings,net
      of reclassification and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            625
                            
                            
                            
                            -
                            
                            
                            
                            625Total
      comprehensive income (loss)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,759
                            )
                            
                            
                            2,331
                            
                            
                            
                            -
                            
                            
                            
                            (428
                            )Balance
      at March 31, 2010
                            
                            $
                            148
                            
                            
                            $
                            61,418
                            
                            
                            $
                            (1,746
                            )
                            
                            $
                            14,018
                            
                            
                            $
                            2,483
                            
                            
                            $
                            (19,950
                            )
                            
                            $
                            56,371




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




5




ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME (LOSS)
 For
the Three Months Ended March 31, 2009
 (Dollars
in Thousands, Except Share Information)
 (unaudited)


ACCUMULATEDADDITIONAL
                            
                            
                            UNEARNED
                            
                            
                            
                            
                            
                            OTHERCOMMON
                            
                            
                            PAID IN
                            
                            
                            ESOP
                            
                            
                            RETAINED
                            
                            
                            COMPREHENSIVE
                            
                            
                            TREASURY
                            
                            
                            TOTALSTOCK
                            
                            
                            CAPITAL
                            
                            
                            SHARES
                            
                            
                            EARNINGS
                            
                            
                            INCOME (LOSS)
                            
                            
                            STOCK
                            
                            
                            EQUITYFor
      the three months ended March 31, 2009Balance
      at January 1, 2009
                            
                            $
                            148
                            
                            
                            $
                            60,061
                            
                            
                            $
                            (2,328
                            )
                            
                            $
                            46,201
                            
                            
                            $
                            (308
                            )
                            
                            $
                            (19,814
                            )
                            
                            $
                            83,960ESOP
      shares earned, 11,638 shares
                            
                            
                            -
                            
                            
                            
                            (77
                            )
                            
                            
                            117
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            40Management
      restricted stock expense
                            
                            
                            -
                            
                            
                            
                            161
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            161Stock
      options expense
                            
                            
                            -
                            
                            
                            
                            79
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            79Dividend
      declared ($0.01 per share)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (45
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (45
                            )Director's
      deferred compensation
                            
                            
                            -
                            
                            
                            
                            4
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (4
                            )
                            
                            
                            -Treasury
      stock  purchased at cost, 7,400 shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (29
                            )
                            
                            
                            (29
                            )Comprehensive
      income (loss):Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,061
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,061
                            )Other
      comprehensive income (loss)Net
      change in unrealized gains onsecurities
      available-for-sale net ofreclassification
      and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            269
                            
                            
                            
                            -
                            
                            
                            
                            269Change
      in unrealized gains (losses)on
      securities available-for-sale forwhich
      a portion of an other-than-temporaryimpairment
      has been recognized in earnings,net
      of reclassification and taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (518
                            )
                            
                            
                            -
                            
                            
                            
                            (518
                            )Total
      comprehensive income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,061
                            )
                            
                            
                            (249
                            )
                            
                            
                            -
                            
                            
                            
                            (3,310
                            )Balance
      at March 31, 2009
                            
                            $
                            148
                            
                            
                            $
                            60,228
                            
                            
                            $
                            (2,211
                            )
                            
                            $
                            43,095
                            
                            
                            $
                            (557
                            )
                            
                            $
                            (19,847
                            )
                            
                            $
                            80,856




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




6




ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)




Three
      months ended March 31,2010
                          
                          
                          2009Cash
      flows from operating activitiesNet
      loss
                          
                          
                          (2,759
                          )
                          
                          
                          (3,061
                          )Adjustments
      to reconcile net loss toto
      net cash from operating activities:Provision
      for loan losses
                          
                          
                          3,722
                          
                          
                          
                          5,812Gain
      on sale of loans held for sale
                          
                          
                          (104
                          )
                          
                          
                          (185
                          )Loss
      on sale of portfolio loans
                          
                          
                          273
                          
                          
                          
                          -Loans
      originated for sale
                          
                          
                          (17,632
                          )
                          
                          
                          (14,292
                          )Proceeds
      from loan sales
                          
                          
                          21,480
                          
                          
                          
                          23,891Foreclosed
      assets, net
                          
                          
                          92
                          
                          
                          
                          705Gain
      on sale of securities available for sale
                          
                          
                          -
                          
                          
                          
                          (96
                          )Other
      than temporary impairment loss on AFS securities
                          
                          
                          75
                          
                          
                          
                          174Loss
      on disposal of equipment
                          
                          
                          -
                          
                          
                          
                          10ESOP
      compensation expense
                          
                          
                          52
                          
                          
                          
                          40Share-based
      compensation expense
                          
                          
                          240
                          
                          
                          
                          240Net
      depreciation and amortization
                          
                          
                          602
                          
                          
                          
                          395Net
      change in accrued interest receivable
                          
                          
                          35
                          
                          
                          
                          130Net
      change in cash surrender value of bank owned life
insurance
                          
                          
                          (177
                          )
                          
                          
                          (176
                          )Net
      change in other assets
                          
                          
                          548
                          
                          
                          
                          (2,389
                          )Net
      change in accrued expensesand
      other liabilities
                          
                          
                          (642
                          )
                          
                          
                          (9
                          )Net
      cash from operating activites
                          
                          
                          5,805
                          
                          
                          
                          11,189Cash
      flows from investing activitiesProceeds
      from maturities and paymentsof
      securites available for sale
                          
                          
                          15,256
                          
                          
                          
                          10,180Proceeds
      from the sales of securitiesavailable
      for sale
                          
                          
                          -
                          
                          
                          
                          18,471Purchase
      of securities available for sale
                          
                          
                          (39,691
                          )
                          
                          
                          (51,451
                          )Proceeds
      from sale of portfolio loans
                          
                          
                          866
                          
                          
                          
                          -Net
      change in loans
                          
                          
                          8,781
                          
                          
                          
                          10,529Expenditures
      on premises and equipment
                          
                          
                          (156
                          )
                          
                          
                          (191
                          )Proceeds
      from the sale of other real estate owned
                          
                          
                          718
                          
                          
                          
                          732Purchase
      of FHLB stock
                          
                          
                          -
                          
                          
                          
                          (1,028
                          )Redemption
      of FHLB stock
                          
                          
                          -
                          
                          
                          
                          900Net
      cash from investing activities
                          
                          
                          (14,226
                          )
                          
                          
                          (11,858
                          )








7




ATLANTIC
COAST FEDERAL CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars
in Thousands)
 (unaudited)


Three
      months ended March 31,2010
                    
                    
                    2009Cash
      flows from financing activitiesNet
      change in deposits
                    
                    $
                    29,248
                    
                    
                    $
                    9,301Proceeds
      from FHLB advances
                    
                    
                    -
                    
                    
                    
                    20,000Repayment
      of FHLB advances
                    
                    
                    (9,976
                    )
                    
                    
                    (27,226
                    )Repayment
      of other borrowings
                    
                    
                    (10,000
                    )
                    
                    
                    -Treasury
      stock repurchased
                    
                    
                    (34
                    )
                    
                    
                    (29
                    )Dividends
      paid
                    
                    
                    -
                    
                    
                    
                    (45
                    )Net
      cash from financing activities
                    
                    
                    9,238
                    
                    
                    
                    2,001Net
      change in cash and cash equivalents
                    
                    
                    817
                    
                    
                    
                    1,332Cash
      and equivalents beginning of period
                    
                    
                    37,144
                    
                    
                    
                    34,058Cash
      and equivalents at end of period
                    
                    $
                    37,961
                    
                    
                    $
                    35,390Supplemental
      information:Interest
      paid
                    
                    $
                    5,641
                    
                    
                    $
                    7,276Income
      tax paid
                    
                    
                    15
                    
                    
                    
                    15Supplemental
      noncash disclosures:Loans
      transferred to other real estate
                    
                    $
                    823
                    
                    
                    $
                    785




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


8


ATLANTIC
COAST FEDERAL CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2010


(Unaudited)





NOTE
1.  BASIS OF PRESENTATION





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





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





Certain
items in the March 31, 2009 financial statements have been reclassified to
conform to the current presentation.  The reclassifications have no
effect on net income or stockholders’ equity as previously
reported.





NOTE
2.  USE OF ESTIMATES





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




9




NOTE
3.  IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS





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





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





In
January 2010, the FASB issued Accounting Standards Update No. 210-06, an Amendment of FASB Statement
No. 157 Fair Value Measurements (ASC 820), which amended guidance
requiring new disclosures as follows:





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





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





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





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





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




10




NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS (continued)





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





NOTE
4.  AVAILABLE FOR SALE SECURITIES





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




Amortized
                            Cost
                          
                          
                          Unrealized
                            Gains
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Fair Value(Dollars
      in Thousands)March
      31, 2010U.S.
      Government-sponsored enterprises
                          
                          $
                          27,998
                          
                          
                          $
                          87
                          
                          
                          $
                          (3
                          )
                          
                          $
                          28,082State
      and municipal
                          
                          
                          947
                          
                          
                          
                          -
                          
                          
                          
                          (96
                          )
                          
                          
                          851Mortgage-backed
      securities residential
                          
                          
                          48,541
                          
                          
                          
                          1,246
                          
                          
                          
                          (127
                          )
                          
                          
                          49,660Collateralized
      mortgage obligations U.S. Govt.
                          
                          
                          103,462
                          
                          
                          
                          1,478
                          
                          
                          
                          (355
                          )
                          
                          
                          104,585Collateralized
      mortgage obligations - other
                          
                          
                          20,787
                          
                          
                          
                          1,559
                          
                          
                          
                          (1,307
                          )
                          
                          
                          21,039$
                          201,735
                          
                          
                          $
                          4,370
                          
                          
                          $
                          (1,888
                          )
                          
                          $
                          204,217(Dollars
      in Thousands)December
      31, 2009U.S.
      Government-sponsored enterprises
                          
                          $
                          15,998
                          
                          
                          $
                          -
                          
                          
                          $
                          (246
                          )
                          
                          $
                          15,752State
      and municipal
                          
                          
                          947
                          
                          
                          
                          -
                          
                          
                          
                          (103
                          )
                          
                          
                          844Mortgage-backed
      securities residential
                          
                          
                          37,390
                          
                          
                          
                          1,028
                          
                          
                          
                          (8
                          )
                          
                          
                          38,410Collateralized
      mortgage obligations U.S. Govt.
                          
                          
                          101,236
                          
                          
                          
                          1,530
                          
                          
                          
                          (327
                          )
                          
                          
                          102,439Collateralized
      mortgage obligations - other
                          
                          
                          22,116
                          
                          
                          
                          534
                          
                          
                          
                          (2,157
                          )
                          
                          
                          20,493$
                          177,687
                          
                          
                          $
                          3,092
                          
                          
                          $
                          (2,841
                          )
                          
                          $
                          177,938





The
amortized cost and fair value of debt securities segregated by contractual
maturity as of March 31, 2010, is shown below.  Expected maturities
may differ from contractual maturities if borrowers have the right to call or
prepay obligations with or without call or prepayment
penalties.  Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.




11




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)




March 31, 2010(Dollars in Thousands)Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  -
                  
                  
                  $
                  -Due
      from one to five years
                  
                  
                  -
                  
                  
                  
                  -Due
      from five to ten years
                  
                  
                  -
                  
                  
                  
                  -Due
      after ten years
                  
                  
                  28,945
                  
                  
                  
                  28,933Mortgage-backed
      securities - residential
                  
                  
                  48,541
                  
                  
                  
                  49,660Collateralized
      mortgage obligations - U.S. Government
                  
                  
                  103,462
                  
                  
                  
                  104,585Collateralized
      mortgage obligations - other
                  
                  
                  20,787
                  
                  
                  
                  21,039Total
                  
                  $
                  201,735
                  
                  
                  $
                  204,217




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





(Dollars in Thousands)Less than 12 Months
                                        
                                        
                                        12 Months or More
                                        
                                        
                                        TotalFair
                                        
                                        
                                        Unrealized
                                        
                                        
                                        Fair
                                        
                                        
                                        Unrealized
                                        
                                        
                                        Fair
                                        
                                        
                                        UnrealizedDescription of Securities
                                        
                                        Value
                                        
                                        
                                        Losses
                                        
                                        
                                        Value
                                        
                                        
                                        Losses
                                        
                                        
                                        Value
                                        
                                        
                                        LossesMarch
      31, 2010Government-sponsored enterprises
                                        
                                        $
                                        2,997
                                        
                                        
                                        $
                                        (3
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,997
                                        
                                        
                                        $
                                        (3
                                        )State
      and municipal
                                        
                                        
                                        851
                                        
                                        
                                        
                                        (96
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        851
                                        
                                        
                                        
                                        (96
                                        )Mortgage-backed
      securities - residential
                                        
                                        
                                        17,491
                                        
                                        
                                        
                                        (127
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        17,491
                                        
                                        
                                        
                                        (127
                                        )Collateralized
      mortgage obligations - U.S. Govt.
                                        
                                        
                                        42,495
                                        
                                        
                                        
                                        (355
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        42,495
                                        
                                        
                                        
                                        (355
                                        )Collateralized
      mortgage obligations - other
                                        
                                        
                                        8,164
                                        
                                        
                                        
                                        (1,287
                                        )
                                        
                                        
                                        839
                                        
                                        
                                        
                                        (20
                                        )
                                        
                                        
                                        9,003
                                        
                                        
                                        
                                        (1,307
                                        )Total
                                        
                                        $
                                        71,998
                                        
                                        
                                        $
                                        (1,868
                                        )
                                        
                                        $
                                        839
                                        
                                        
                                        $
                                        (20
                                        )
                                        
                                        $
                                        72,837
                                        
                                        
                                        $
                                        (1,888
                                        )December
      31, 2009Government-sponsored enterprises
                                        
                                        $
                                        15,752
                                        
                                        
                                        $
                                        (246
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        15,752
                                        
                                        
                                        $
                                        (246
                                        )State
      and municipal
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        844
                                        
                                        
                                        
                                        (103
                                        )
                                        
                                        
                                        844
                                        
                                        
                                        
                                        (103
                                        )Mortgage-backed
      securities - residential
                                        
                                        
                                        7,206
                                        
                                        
                                        
                                        (8
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,206
                                        
                                        
                                        
                                        (8
                                        )Collateralized
      mortgage obligations - U.S. Govt.
                                        
                                        
                                        34,820
                                        
                                        
                                        
                                        (327
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        34,820
                                        
                                        
                                        
                                        (327
                                        )Collateralized
      mortgage obligations - other
                                        
                                        
                                        7,118
                                        
                                        
                                        
                                        (203
                                        )
                                        
                                        
                                        9,462
                                        
                                        
                                        
                                        (1,954
                                        )
                                        
                                        
                                        16,580
                                        
                                        
                                        
                                        (2,157
                                        )Total
                                        
                                        $
                                        64,896
                                        
                                        
                                        $
                                        (784
                                        )
                                        
                                        $
                                        10,306
                                        
                                        
                                        $
                                        (2,057
                                        )
                                        
                                        $
                                        75,202
                                        
                                        
                                        $
                                        (2,841
                                        )




Proceeds
from sales, maturities and calls of securities available for sale were
$15.3 million and $28.7 million for the three months ended March 31, 2010
and 2009, respectively. Gross gains of $0 and $107,000 and gross losses of $0
and $11,000 were realized on these sales during the three months ended March 31,
2010 and 2009, respectively.  The Company had no sales of available
for sale securities during the three months ended March 31, 2010.




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




12




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)




Other-Than-Temporary-Impairment




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




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




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




As of
March 31, 2010 the Company’s security portfolio consisted of 110 securities, 28
of which were in an unrealized loss position. Nearly all unrealized losses are
related to debt securities whose underlying collateral is residential
mortgages.  However, the majority of these securities were issued by
government sponsored organizations as discussed below.




At March
31, 2010, approximately $182.3 million, or 89% of the debt securities held
by the Company were issued by U.S. government-sponsored entities and agencies,
primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the
government has affirmed its commitment to support. Because the decline in fair
value is attributable to changes in interest rates and illiquidity, and not
credit quality, and because the Company does not have the intent to sell these
securities and it is likely it will not be required to sell the securities
before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at March 31, 2010.




Collateralized Mortgage
Obligations - Other




The
Company’s securities portfolio also included non-agency collateralized mortgage
obligations with a fair value of $21.0 million at March 31, 2010. The
Company evaluated the historical and expected future performance of the
underlying collateral to determine if a future loss is expected which would
result in a principal write-down.  As a part of the evaluation, the
Company reviewed deal specific data including loan-to-value (“LTV”),
delinquency, foreclosures and cumulative loss to insure it has adequate credit
support.  This evaluation was completed utilizing a model to project
future performance using collateral specific assumptions, such as expected
future default rates, loss severity and prepayments.





13




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)





The
Company recorded an expense for other-than-temporary impairment of approximately
$75,000 in non-interest income (loss) on one private label mortgage-backed
mezzanine (support) bond for the three months ended March 31, 2010.





The table
below presents a reconciliation of the credit losses recognized in earnings for
the three month period ended March 31, 2010 and 2009:




March 31,2010
                                    
                                    
                                    2009(Dollars in Thousands)Beginning
      balance, January 1
                                    
                                    $
                                    4,467
                                    
                                    
                                    $
                                    -Amounts
      related to credit loss for whichan
      other-than-temporary impairmentwas
      not previously recognized
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Amounts
      realized for securities sold during the periodAmounts
      related to securities for which the companyintends
      to sell or that it will be more likely than notthe
      company will be required to sell prior torecovery
      of amortized cost basis
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Reductions
      for increase in cash flows expected to becollected
      that are recognized over the remaininglife
      of the security
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Increases
      to the amount related to the creditloss
      for which other-than-temporary impairment was previouslyrecognized
                                    
                                    
                                    75
                                    
                                    
                                    
                                    174Ending
      balance, March 31
                                    
                                    $
                                    4,542
                                    
                                    
                                    $
                                    174




14


NOTE
5 - LOANS, NET





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





March
      31, 2010
                      
                      
                      %
      of total
                        loans
                      
                      
                      December
      31,
                        2009
                      
                      
                      %
      of total
                        loans(Dollars
      in Thousands)Real estate loans:One-to-four
      family
                      
                      $
                      299,314
                      
                      
                      
                      49.2
                      %
                      
                      $
                      306,968
                      
                      
                      
                      49.3
                      %Commercial
                      
                      
                      77,584
                      
                      
                      
                      12.8
                      %
                      
                      
                      77,403
                      
                      
                      
                      12.4
                      %Other
      ( land and multi-family)
                      
                      
                      35,999
                      
                      
                      
                      5.9
                      %
                      
                      
                      37,591
                      
                      
                      
                      6.0
                      %Total
      real estate loans
                      
                      
                      412,897
                      
                      
                      
                      67.9
                      %
                      
                      
                      421,962
                      
                      
                      
                      67.7
                      %Real
      estate construction loans:One-to-four
      family
                      
                      
                      3,293
                      
                      
                      
                      0.5
                      %
                      
                      
                      4,189
                      
                      
                      
                      0.7
                      %Commercial
                      
                      
                      7,521
                      
                      
                      
                      1.2
                      %
                      
                      
                      8,022
                      
                      
                      
                      1.3
                      %Acquisition
      and development
                      
                      
                      2,871
                      
                      
                      
                      0.5
                      %
                      
                      
                      3,148
                      
                      
                      
                      0.4
                      %Total
      real estate construction loans
                      
                      
                      13,685
                      
                      
                      
                      2.3
                      %
                      
                      
                      15,359
                      
                      
                      
                      2.5
                      %Other loans:Home
      equity
                      
                      
                      91,644
                      
                      
                      
                      15.1
                      %
                      
                      
                      93,929
                      
                      
                      
                      15.1
                      %Consumer
                      
                      
                      71,961
                      
                      
                      
                      11.8
                      %
                      
                      
                      73,870
                      
                      
                      
                      11.9
                      %Commercial
                      
                      
                      17,667
                      
                      
                      
                      2.9
                      %
                      
                      
                      17,848
                      
                      
                      
                      2.9
                      %Total
      other loans
                      
                      
                      181,272
                      
                      
                      
                      29.8
                      %
                      
                      
                      185,647
                      
                      
                      
                      29.8
                      %Total
      loans
                      
                      
                      607,854
                      
                      
                      
                      100
                      %
                      
                      
                      622,968
                      
                      
                      
                      100
                      %Allowance
      for loan losses
                      
                      
                      (13,308
                      )
                      
                      
                      
                      
                      
                      
                      (13,810
                      )Net
      deferred loan costs
                      
                      
                      5,231
                      
                      
                      
                      
                      
                      
                      
                      5,122Premiums
      on purchased loans
                      
                      
                      81
                      
                      
                      
                      
                      
                      
                      
                      91Loans,
      net
                      
                      $
                      599,858
                      
                      
                      
                      
                      
                      
                      $
                      614,371




15


NOTE 5 - LOANS, NET(continued)





Allowance
for loan losses activity for the three months ended March 31, 2010 and 2009 was
as follows:





2010
                  
                  
                  2009(Dollars
      in Thousands)Beginning
      balance, January 1
                  
                  $
                  13,810
                  
                  
                  $
                  10,598Loans
      charged-off
                  
                  
                  (4,354
                  )
                  
                  
                  (2,331
                  )Recoveries
                  
                  
                  130
                  
                  
                  
                  345Net
      charge-offs
                  
                  
                  (4,224
                  )
                  
                  
                  (1,986
                  )Provision
      for loan losses
                  
                  
                  3,722
                  
                  
                  
                  5,812Ending
      balance, March 31
                  
                  $
                  13,308
                  
                  
                  $
                  14,424





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


March 31, 2010
                          
                          
                          December 31,2009(Dollars
      in Thousands)Loans
      with no allocated allowance for loan losses
                          
                          $
                          19,156
                          
                          
                          $
                          27,692Loans
      with an allocated allowance for loan losses
                          
                          
                          19,541
                          
                          
                          
                          16,700Total
                          
                          $
                          38,697
                          
                          
                          $
                          44,392Amount
      of the allowance for loan losses allocated to impaired
    loans
                          
                          $
                          5,296
                          
                          
                          $
                          5,398Amount
      of charge-offs taken on period-endimpaired
      loans
                          
                          $
                          298
                          
                          
                          $
                          2,157





Impaired
loans included troubled debt restructurings of $20.1 million at March 31, 2010
and $22.7 million at December 31, 2009, of which $18.4 million and $19.9 million
respectively, were performing according to the modified
terms.  Non-performing loans, including non-accrual loans, at March
31, 2010 and December 31, 2009 were $34.4 million and $35.2 million,
respectively.  There were no loans over 90 days past-due and still
accruing interest as of March 31, 2010 and December 31,
2009.  Non-performing loans include both smaller balance homogeneous
loans that are collectively evaluated for impairment and individually classified
as impaired loans.





NOTE
6.  INTEREST RATE SWAPS





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





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


16


NOTE 6.  INTEREST RATE
SWAPS (continued)





At March
31, 2010, summary information about these interest-rate swaps is as
follows:





March 31, 2010(Dollars in Thousands)Notional
      amounts
                    
                    $
                    50,000Weighted
      average pay rates (3 month LIBOR, 2.50% floor)
                    
                    
                    2.50
                    %Weighted
      average receive rates (3 month LIBOR, 4.37% cap)
                    
                    
                    0.28
                    %Weighted
      average maturity (years)
                    
                    
                    1.0Fair
      value of interest rate swaps
                    
                    
                    (470
                    )





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





Liability Interest Rate SwapsMarch 31, 2010
                      
                      December 31, 2009(Dollars in thousands)Balance Sheet
                      
                      
                      
                      Balance SheetLocation
                      
                      Fair Value
                      
                      Location
                      
                      Fair ValueInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                      
                      Accrued
      expenses and other liabilities
                      
                      $
                      (470
                      )
                      Accrued
      expenses and other liabilities
                      
                      $
                      (520
                      )Total
      interest rate swaps not designated as hedging instruments under SFAS
      133:Total
      interest rate swaps
                      
                      
                      
                      $
                      (470
                      )
                      
                      
                      $
                      (520
                      )





The
effect of interest rate swaps for the three months ended March 31, 2010 and 2009
are as follows:





Three Months EndedMarch 31, 2010
                    
                    
                    March 31, 2009Location of Gain or (Loss)
                    
                    (Dollars in Thousands)Recognized in Non-interest
                    
                    Amount of the Gain or (Loss)Income
                    
                    Recognized in IncomeInterest
      rate swaps not designated as hedging instruments under SFAS
      133:Interest
      rate contracts
                    
                    Other
                    
                    $
                    50
                    
                    
                    $
                    (26
                    )Total
                    
                    
                    
                    $
                    50
                    
                    
                    $
                    (26
                    )


17


NOTE
7.  LOSS PER COMMON SHARE





Basic
loss per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the period, reduced for average
unallocated ESOP shares and average unearned restricted stock awards. Diluted
loss per common share is computed by dividing net loss by the average number of
common shares outstanding for the period increased for the dilutive effect of
unvested stock options and stock awards. The dilutive effect of the unvested
stock options and stock awards is calculated under the treasury stock method
utilizing the average market value of the Company’s stock for the period. A
reconciliation of the numerator and denominator of the basic and diluted loss
per common share computation for the three months ended March 31, 2010 and 2009
is as follows:





(Dollars
      in Thousands, except per share data)For
      the three monthsended
      March 31,2010
                  
                  
                  2009BasicNet
      loss
                  
                  $
                  (2,759
                  )
                  
                  $
                  (3,061
                  )Weighted
      average common shares outstanding
                  
                  
                  13,391,202
                  
                  
                  
                  13,435,116Less:
      Average unallocated ESOP shares
                  
                  
                  (186,208
                  )
                  
                  
                  (232,760
                  )Average
      unvested restricted stock awards
                  
                  
                  (57,728
                  )
                  
                  
                  (110,817
                  )Average
      Shares
                  
                  
                  13,147,266
                  
                  
                  
                  13,091,539Basic
      loss per common share
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.23
                  )DilutedNet
      loss
                  
                  $
                  (2,759
                  )
                  
                  $
                  (3,061
                  )Weighted
      average shares outstanding from above
                  
                  
                  13,147,266
                  
                  
                  
                  13,091,539Add:Dilutive
      effects of assumed exercise of stock optionsDilutive
      effects of full vesting of stock awards
                  
                  
                  -
                  
                  
                  
                  -Average
      shares and dilutive potential common shares
                  
                  
                  13,147,266
                  
                  
                  
                  13,091,539Diluted
      loss per common share
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.23
                  )





Stock
options for shares of common stock were not considered in computing diluted
earnings per common share for the three months ended March 31, 2010 and 2009,
respectively.  There was no dilutive effect as each period reported a
net loss.


18


NOTE
8.  TOTAL COMPREHENSIVE LOSS





Comprehensive
loss consists of net loss and other comprehensive income
(loss).  Other comprehensive income (loss) includes unrealized gains
and losses on securities available-for-sale and unrealized gains and losses on
cash flow hedges.  Following is a summary  of other
comprehensive income (loss) for the three months ended March 31, 2010 and
2009:





(Dollars
      in Thousands)Three months ended March
31,2010
                  
                  
                  2009Net
      loss
                  
                  $
                  (2,759
                  )
                  
                  $
                  (3,061
                  )Other
      comprehensive income (loss):Change
      in securities available for sale:Unrealized
      holding gains (losses) arising during the period
                  
                  
                  1,638
                  
                  
                  
                  546Less
      reclassification adjustments for (gains) losses recognized in
      income
                  
                  
                  -
                  
                  
                  
                  (96
                  )Net
      unrealized gains
                  
                  
                  1,638
                  
                  
                  
                  450Income
      tax effect
                  
                  
                  68
                  
                  
                  
                  (181
                  )Net
      of tax effect
                  
                  
                  1,706
                  
                  
                  
                  269Other-than-temporary-impairment
      on available-for-sale debt securities recorded in other comprehensive
      income
                  
                  
                  675
                  
                  
                  
                  (692
                  )Less
      other-than-temporary-impairment on available-for-sale debt securities
      associated with credit loss realized in income
                  
                  
                  (75
                  )
                  
                  
                  (174
                  )Income
      tax effect
                  
                  
                  25
                  
                  
                  
                  348Net
      of tax effect
                  
                  
                  625
                  
                  
                  
                  (518
                  )Total
      other comprehensive income (loss)
                  
                  
                  2,331
                  
                  
                  
                  (249
                  )Comprehensive
      loss
                  
                  $
                  (428
                  )
                  
                  $
                  (3,310
                  )


19





NOTE
9.  FAIR VALUE




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





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





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





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





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





Investment
Securities:


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





Interest Rate
Swaps:


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


20


NOTE 9.  FAIR VALUE(continued)





Assets and Liabilities
Measured on a Recurring Basis





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





Fair Value Measurements at March 31, 2010 Using:Quoted
                    Prices in
                    Active
                    Markets
                    for
                    Identical
                    Assets
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    Inputs(Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)(Dollars
      in Thousands)Assets:Available
      for saleU.S.
      government-sponsored entities and  agencies
                  
                  $
                  28,082
                  
                  
                  
                  -
                  
                  
                  $
                  28,082
                  
                  
                  
                  -State
      and municipal
                  
                  
                  851
                  
                  
                  
                  -
                  
                  
                  
                  851
                  
                  
                  
                  -Mortgage-backed
      securities – residential
                  
                  
                  49,660
                  
                  
                  
                  -
                  
                  
                  
                  49,660
                  
                  
                  
                  -Collateralized
      mortgage obligations – U.S. Govt.
                  
                  
                  104,585
                  
                  
                  
                  -
                  
                  
                  
                  104,585Collateralized
      mortgage obligations - other
                  
                  
                  21,039
                  
                  
                  
                  -
                  
                  
                  
                  10,483
                  
                  
                  
                  10,556Liabilities:Interest
      rate swap
                  
                  $
                  (470
                  )
                  
                  $
                  -
                  
                  
                  $
                  (470
                  )
                  
                  $
                  11,181





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





Fair
value adjustments for interest rate swaps resulted in a gain of $50,000 for the
three months ended March 31, 2010.


21


NOTE 9.  FAIR VALUE(continued)





The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant


unobservable
inputs (Level 3) for the three month period ended March 31, 2010:





InvestmentSecuritiesAvailable-for-sale(Dollars in thousands)Balance
      of recurring Level 3 assets at January 1, 2010
                  
                  $
                  1,352Total
      realized and unrealized gains (losses):Included
      in earnings - realized
                  
                  
                  -Included
      in earnings - unrealized
                  
                  
                  -Included
      other comprehensive income
                  
                  
                  -Proceeds
      from maturities and payments, net
                  
                  
                  (53
                  )Transfers
      in and/or out of Level 3
                  
                  
                  9,257Balance
      of recurring Level 3 assets at March 31, 2010
                  
                  $
                  10,556





Market
conditions for certain debt securities has resulted in unreliable or unavailable
fair values, often resulting
in transfers in and / or out of Level 3.  The Company determined that
five debt securities totaling
$10.6 million were more appropriately evaluated as Level 3 assets as of March
31, 2010.  These five
securities were priced as Level 2 assets at December 31,
2009.   Three securities evaluated as Level 3 assets as
of December 31, 2009 were priced as Level 2 assets as of March 31,
2010.





Level 3
assets were evaluated utilizing models to project future performance using
collateral specific Assumptions,
such as expected future default rates, expected future severity rates,
prepayments and recoveries.





There
were no sales of investment securities available-for-sale during the three
months ended March 31, 2010.


22





NOTE 9.  FAIR VALUE(continued)





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





Fair Value Measurements at March 31, 2010 Using:Quoted
                      Prices in
                      Active
                      Markets
                      for
                      Identical
                      Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)(Dollars
      in Thousands)Assets:Other
      real estate owned
                    
                    $
                    5,035
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,035Impaired
      loans – collateral dependent
                    
                    
                    33,630
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    33,630





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





Other Real Estate
Owned:


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





Impaired
loans:


Impaired
loans which are collateral dependent are measured for impairment using the fair
value of the collateral.  Collateral dependent loans had a carrying
amount of $33.6 million and $28.8 million, net of a valuation allowance of $5.3
million and $5.4 million at March 31, 2010 and December 31, 2009,
respectively.  Provision for loan losses of $298,000 and $2.3 million
was recorded on impaired loans during the three months ended March 31, 2010 and
2009, respectively.


23


NOTE
10.  FAIR VALUE OF FINANCIAL INSTRUMENTS





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





As of March 31,
                    
                    
                    As of December 31,2010
                    
                    
                    2009Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    EstimatedAmount
                    
                    
                    Fair Value
                    
                    
                    Amount
                    
                    
                    Fair Value(Dollars
      in Thousands)FINANCIAL
      ASSETSCash
      and cash equivalents
                    
                    $
                    37,961
                    
                    
                    $
                    37,961
                    
                    
                    $
                    37,144
                    
                    
                    $
                    37,144Loans
      held for sale
                    
                    
                    5,253
                    
                    
                    
                    5,253
                    
                    
                    
                    8,990
                    
                    
                    
                    8,990Loans,
      net
                    
                    
                    599,858
                    
                    
                    
                    599,680
                    
                    
                    
                    614,371
                    
                    
                    
                    614,229Federal
      Home Loan Bank stock
                    
                    
                    10,023
                    
                    
                    
                    n/a
                    
                    
                    
                    10,023
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    3,225
                    
                    
                    
                    3,225
                    
                    
                    
                    3,261
                    
                    
                    
                    3,261FINANCIAL
      LIABILITIESDeposits
                    
                    
                    584,692
                    
                    
                    
                    586,604
                    
                    
                    
                    555,444
                    
                    
                    
                    557,094Securities
      sold under agreements to repurchase
                    
                    
                    92,800
                    
                    
                    
                    102,798
                    
                    
                    
                    92,800
                    
                    
                    
                    102,537Federal
      Home Loan Bank advances
                    
                    
                    172,718
                    
                    
                    
                    181,705
                    
                    
                    
                    182,694
                    
                    
                    
                    201,227Accrued
      interest payable
                    
                    
                    1,244
                    
                    
                    
                    1,244
                    
                    
                    
                    1,318
                    
                    
                    
                    1,318





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





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





NOTE
11.  INCOME TAXES





Under
generally accepted accounting principles, the Company considers at each
reporting period all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed to reduce its deferred tax asset to an amount that is more likely than
not to be realized.





A
determination of the need for a valuation allowance for the deferred tax assets
is dependent upon management’s evaluation of both positive and negative
evidence.  Positive evidence includes the probability of achieving
forecasted future taxable income, applicable tax planning strategies and
assessments of the current and future economic and business
conditions.  Negative evidence includes the Company’s cumulative
losses and expiring tax credit carryforwards.





At March
31, 2010, the Company evaluated the expected realization of its federal and
state deferred tax assets which, prior to a valuation allowance, totaled $16.4
million and was primarily comprised of future tax benefits associated with the
allowance for loan losses and net operating loss carryforwards.  Based
on this evaluation it was concluded that a 100% valuation allowance continues to
be required for the federal deferred tax asset.  The realization of
the deferred tax asset is dependent upon generating taxable
income.  The Company also continues to maintain a 100% valuation
allowance for the state deferred tax asset.





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


24


NOTE 11.  INCOME
TAXES (continued)





Income
tax expense (benefit) was as follows:





YeartodateMarch 31, 2010
                        
                        
                        March 31, 2009Pre-tax
      loss
                        
                        $
                        (2,759
                        )
                        
                        $
                        (4,718
                        )Effective
      tax rate
                        
                        
                        38.2
                        %
                        
                        
                        35.1
                        %Tax
      benefit
                        
                        
                        (1,053
                        )
                        
                        
                        (1,657
                        )Increase
      in valuation allowance - federal
                        
                        
                        976
                        
                        
                        
                        -Increase
      in valuation allowance - state
                        
                        
                        77
                        
                        
                        
                        -Income
      tax expense (benefit)
                        
                        $
                        -
                        
                        
                        $
                        (1,657
                        )


25


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 and accounting for deferred income
taxes.  Atlantic Coast Federal Corporation’s accounting policies are
discussed in detail in Note 1 of the Notes to the Consolidated Financial
Statements included in Item 8 of our Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the Securities and Exchange
Commission.





Allowance
for Loan Losses





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


26


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





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





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





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





Fair
Value of Securities Available for Sale




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


27




When OTTI
is determined to have occurred, the amount of the OTTI recognized in earnings
depends on whether we intend to sell the security or it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss. If we intend to sell the
security or it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI recognized in earnings is equal to the entire difference
between its amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI is separated into the amount
representing the credit loss and the amount related to all other factors. The
amount of the total related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized as a
charge to earnings. The amount of the OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment.  The Company recorded an
expense for other-than-temporary impairment of approximately $75,000 in
non-interest income (loss) on one private label mortgage-backed mezzanine
(support) bond for the three months ended March 31, 2010.





Deferred
Income Taxes





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





All
available evidence, both positive and negative, is considered when determining
whether or not a valuation allowance is necessary to reduce the carrying amount
to a balance that is considered more likely than not to be
realized.  The determination of the realizability of deferred tax
assets is highly subjective and dependent upon judgment concerning management’s
evaluation of such evidence.  Positive evidence considered includes
the probability of achieving forecasted taxable income and the ability to
implement tax planning strategies to accelerate taxable income
recognition.  Negative evidence includes the Company’s cumulative
losses.  Following the initial establishment of a valuation allowance,
if the Company is unable to generate sufficient pre-tax income in future periods
or otherwise fails to meet forecasted operating results, an additional valuation
allowance may be required.  Any valuation allowance is required to be
recorded during the period identified.  As of March 31, 2010, the
Company had a valuation allowance of $16.4 million, or 100% of the net deferred
tax asset.





Comparison
of Financial Condition at March 31, 2010 and December 31, 2009





General.Total assets
increased $8.4 million to $914.0 million at March 31, 2010 as compared to $905.6
million at December 31, 2009.  The primary reason for the
increase in assets was an increase in available for sale securities of $26.3
million, partially offset by the decline in loans of $15.0 million as well as a
decrease in loans held for sale of $3.7 million.  Total deposits
increased $29.2 million to $584.7 million at March 31, 2010 from $555.4 million
at December 31, 2009.  Core deposits grew by a combined $7.5 million,
while time deposits increased $21.7 million, primarily due to growth in brokered
deposits.


28





Following
is a summarized comparative balance sheet as of March 31, 2010 and December 31,
2009:





March 31,
                    
                    
                    December 31,
                    
                    
                    Increase (decrease)2010
                    
                    
                    2009
                    
                    
                    Dollars
                    
                    
                    Percentage(Dollars
      in Thousands)AssetsCash
      and cash equivalents
                    
                    $
                    37,961
                    
                    
                    $
                    37,144
                    
                    
                    $
                    817
                    
                    
                    
                    2.2
                    %Securitites
      available for sale
                    
                    
                    204,217
                    
                    
                    
                    177,938
                    
                    
                    
                    26,279
                    
                    
                    
                    14.8
                    %Loans
                    
                    
                    613,166
                    
                    
                    
                    628,181
                    
                    
                    
                    (15,015
                    )
                    
                    
                    -2.4
                    %Allowance
      for loan losses
                    
                    
                    (13,308
                    )
                    
                    
                    (13,810
                    )
                    
                    
                    502
                    
                    
                    
                    -3.6
                    %Loans,
      net
                    
                    
                    599,858
                    
                    
                    
                    614,371
                    
                    
                    
                    (14,513
                    )
                    
                    
                    -2.4
                    %Loans
      held for sale
                    
                    
                    5,253
                    
                    
                    
                    8,990
                    
                    
                    
                    (3,737
                    )
                    
                    
                    -41.6
                    %Other
      assets
                    
                    
                    66,732
                    
                    
                    
                    67,118
                    
                    
                    
                    (386
                    )
                    
                    
                    -0.6
                    %Total
      assets
                    
                    $
                    914,021
                    
                    
                    $
                    905,561
                    
                    
                    $
                    8,460
                    
                    
                    
                    0.9
                    %Liabilities
      and Stockholders' equityDepositsNon-interest
      bearing demand
                    
                    $
                    35,370
                    
                    
                    $
                    34,988
                    
                    
                    $
                    382
                    
                    
                    
                    1.1
                    %Interest
      bearing demand
                    
                    
                    79,052
                    
                    
                    
                    79,192
                    
                    
                    
                    (140
                    )
                    
                    
                    -0.2
                    %Savings
      and money market
                    
                    
                    168,059
                    
                    
                    
                    160,784
                    
                    
                    
                    7,275
                    
                    
                    
                    4.5
                    %Time
                    
                    
                    302,211
                    
                    
                    
                    280,480
                    
                    
                    
                    21,731
                    
                    
                    
                    7.7
                    %Total
      deposits
                    
                    
                    584,692
                    
                    
                    
                    555,444
                    
                    
                    
                    29,248
                    
                    
                    
                    5.3
                    %Federal
      Home Loan Bank advances
                    
                    
                    172,718
                    
                    
                    
                    182,694
                    
                    
                    
                    (9,976
                    )
                    
                    
                    -5.5
                    %Securities
      sold under agreements to repurchase
                    
                    
                    92,800
                    
                    
                    
                    92,800
                    
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Other
      borrowings
                    
                    
                    2,200
                    
                    
                    
                    12,200
                    
                    
                    
                    (10,000
                    )
                    
                    
                    -82.0
                    %Accrued
      expenses and other liabilities
                    
                    
                    5,240
                    
                    
                    
                    5,882
                    
                    
                    
                    (642
                    )
                    
                    
                    -10.9
                    %Total
      liabilities
                    
                    
                    857,650
                    
                    
                    
                    849,020
                    
                    
                    
                    8,630
                    
                    
                    
                    1.0
                    %Stockholders'
      equity
                    
                    
                    56,371
                    
                    
                    
                    56,541
                    
                    
                    
                    (170
                    )
                    
                    
                    -0.3
                    %Total
      liabilities and stockholders' equity
                    
                    $
                    914,021
                    
                    
                    $
                    905,561
                    
                    
                    $
                    8,460
                    
                    
                    
                    0.9
                    %





Securities available for
sale.  Securities available for sale is comprised principally
of debt securities of U.S. Government-sponsored enterprises and mortgage-backed
securities.  The investment portfolio increased approximately $26.3
million to $204.2 million at March 31, 2010, net of purchases, sales and
maturities.  The increase in securities available for sale was the
result of increased payoffs of one- to four-family residential loans combined
with limited market demand for portfolio loan originations. There were no sales
of securities available for sale during the three months ended March 31,
2010.  Expense for other-than-temporary impairment was approximately
$75,000 in non-interest income on one private label mortgage-backed mezzanine
(support) security for the three months ended March 31, 2010.





At March 31, 2010Amortized
                    
                    
                    Fair
                    
                    
                    Number ofCost
                    
                    
                    Value
                    
                    
                    Securities
                    
                    
                    OTTI(Dollars in Thousands)Private
      label mortgage-backed securities with OTTI
                    
                    $
                    5,832
                    
                    
                    $
                    5,200
                    
                    
                    
                    7
                    
                    
                    $
                    4,542Private
      label mortgage-backed securities with no OTTI
                    
                    
                    14,955
                    
                    
                    
                    15,839
                    
                    
                    
                    11
                    
                    
                    
                    -Total
      private label mortgage-backed securities
                    
                    $
                    20,787
                    
                    
                    $
                    21,039
                    
                    
                    
                    18
                    
                    
                    $
                    4,542





At March
31, 2010, approximately $182.3 million, or 89% of the debt securities held
by the Company were issued by U.S. government-sponsored entities and agencies,
primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the
government has affirmed its commitment to support. Because the decline in fair
value is attributable to changes in interest rates and illiquidity, and not
credit quality, and because the Company does not have the intent to sell these
securities and it is likely it will not be required to sell the securities
before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at March 31,
2010.


29


Loans.  Portfolio
loans declined approximately 2% to $599.9 million at March 31, 2010 as compared
to $614.4 million at December 31, 2009 due to increased payoffs of one- to
four-family residential loans in the first three months of 2010, combined with
the sale of approximately $866,000 of non-performing loans in the first quarter
of 2010.





Total
loan originations increased $4.0 million to $33.2 million for the three months
ended March 31, 2010 from $29.2 million for the same period in 2009. Origination
of loans held for sale in the secondary market decreased $836,000 to $16.8
million during the first three months of 2010, from $17.6 million for the same
period in 2009, while portfolio loan production increased $4.8 million to $16.4
million for the three months ended March 31, 2010 from $11.6 million for the
same period in 2009.  Portfolio loan production of all loan types, and
in particular one- to four-family residential loans, continue to be negatively
impacted by a weak real estate economy marked by declining real estate values,
slow residential real estate sales activity and the overall recessionary economy
in the Bank’s markets.





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





Allowance for loan losses. The
allowance for loan losses was $13.3 million or 2.17% of total loans compared to
$13.4 million or 2.22% of total loans outstanding at March 31, 2010 and December
31, 2009, respectively.





Non-performing assets:
                          
                          March 31,
                          
                          
                          December 31,2010
                          
                          
                          2009(Dollars in Thousands)Real Estate LoansOne-to-four-family
                          
                          $
                          12,309
                          
                          
                          $
                          12,343Commercial
                          
                          
                          3,890
                          
                          
                          
                          3,895Other
                          
                          
                          9,676
                          
                          
                          
                          9,638Construction
      - One-to-four-family
                          
                          
                          -
                          
                          
                          
                          -Construction
      - Commercial
                          
                          
                          4,988
                          
                          
                          
                          4,988Construction
      - Acquisition & Development
                          
                          
                          404
                          
                          
                          
                          404Other Loans - ConsumerHome
      Equity
                          
                          
                          2,467
                          
                          
                          
                          2,973Other
                          
                          
                          656
                          
                          
                          
                          909Commercial
                          
                          
                          -
                          
                          
                          
                          -Total
      non-performing loans
                          
                          
                          34,390
                          
                          
                          
                          35,150Foreclosed
      assets
                          
                          
                          5,035
                          
                          
                          
                          5,028Total
      non-performing assets
                          
                          $
                          39,425
                          
                          
                          $
                          40,178Total
      troubled debt restructurings (TDR)
                          
                          $
                          20,086
                          
                          
                          $
                          22,660Total
      impaired loans (including TDR)
                          
                          $
                          38,697
                          
                          
                          $
                          44,392Non-performing
      loans to total loans
                          
                          
                          5.61
                          %
                          
                          
                          5.64
                          %Non-performing
      loans to total assets
                          
                          
                          3.76
                          %
                          
                          
                          3.85
                          %Non-performing
      assets to total assets
                          
                          
                          4.31
                          %
                          
                          
                          4.44
                          %


30




As shown
in the table above, non-performing loans were $34.4 million or 5.61% of total
loans and $35.2 million, or 5.64% of total loans at March 31, 2010, and
December 31, 2009, respectively.  Total impaired loans decreased
to $38.7 million at March 31, 2010 from $44.4 million at December 31,
2009.  As of March 31, 2010 total non-performing one- to four-family
residential loans of $12.3 million included $10.1 million of one- to four-family
residential loans that had been written-down to the estimated fair value of
their collateral.  Further declines in the fair value of the
collateral, or a decision to sell loans as distressed assets, could result in
additional losses. The total allowance allocated for impaired loans decreased to
$5.3 million at March 31, 2010 from $5.4 million at December 31,
2009.  As of March 31, 2010, and December 31, 2009, all
non-performing loans were classified as non-accrual, and there were no loans 90
days past due and accruing interest as of March 31, 2010, and December 31,
2009.  Non-performing loans, excluding small balance homogeneous
loans, increased slightly to $17.3 million at March 31, 2010, from $17.2 million
at December 31, 2009.   Troubled debt restructured (“TDR”) loans
decreased to $20.1 million as of March 31, 2010, from $22.7 million at December
31, 2009.  These loans were primarily comprised of residential
mortgage loans collateralized by real estate and were evaluated for impairment
as required under GAAP.





A
comparison of the general and specific components of the allowance for loan
losses to non-performing loans as of March 31, 2010 is summarized as
follows:





Comparison
      of Loan Loss Allowance to Non-Performing LoansMarch
      31, 2010Non-
                            Performing
                            Loans
                          
                          
                          Amount
      of
                            General
      and
                            Specific
      Loan
                            Loss
                            Allowance
                          
                          
                          % of
      General
                            and
      Specific
                            Loan
      Loss
                            Allowance
      to
                            Non-
                            Performing
                            Loans(Dollars
      in Thousands)Real
      Estate LoansOne-to
      four-family
                          
                          $
                          12,309
                          
                          
                          $
                          2,791
                          
                          
                          
                          22.67
                          %Commercial
                          
                          
                          3,890
                          
                          
                          
                          763
                          
                          
                          
                          19.61
                          %Other
      (land & multi-family)
                          
                          
                          9,676
                          
                          
                          
                          1,342
                          
                          
                          
                          13.87
                          %Real
      Estate ConstructionConstruction
      One-to four family
                          
                          
                          -
                          
                          
                          
                          7
                          
                          
                          
                          -Construction
      Commercial
                          
                          
                          4,988
                          
                          
                          
                          3,315
                          
                          
                          
                          66.46
                          %Acquistion
      & Development
                          
                          
                          404
                          
                          
                          
                          110
                          
                          
                          
                          27.23
                          %Other
      LoansHome
      Equity
                          
                          
                          2,467
                          
                          
                          
                          2,150
                          
                          
                          
                          87.15
                          %Consumer
                          
                          
                          656
                          
                          
                          
                          2,585
                          
                          
                          
                          394.05
                          %Commercial
                          
                          
                          -
                          
                          
                          
                          245
                          
                          
                          
                          -Totals
                          
                          $
                          34,390
                          
                          
                          $
                          13,308
                          
                          
                          
                          38.70
                          %




31





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





March
      31,
                                
                                
                                March
      31,2010
                                
                                
                                2009Balance
      at beginning of period
                                
                                $
                                13,810
                                
                                
                                $
                                10,598Charge-offs:Real Estate LoansOne-to
      four-family
                                
                                
                                1,880
                                
                                
                                
                                561Commercial
                                
                                
                                115
                                
                                
                                
                                228Other
      (Land & Multi-family)
                                
                                
                                518
                                
                                
                                
                                32Real Estate Construction
    LoansConstruction
      One-to four family
                                
                                
                                -
                                
                                
                                
                                50Construction
      Commercial
                                
                                
                                -
                                
                                
                                
                                -Acquistion
      & Development
                                
                                
                                -
                                
                                
                                
                                -Other LoansHome
      equity
                                
                                
                                706
                                
                                
                                
                                836Consumer
                                
                                
                                437
                                
                                
                                
                                336Commercial
                                
                                
                                698
                                
                                
                                
                                288Total
      charge-offs
                                
                                
                                4,354
                                
                                
                                
                                2,331Recoveries:Real Estate LoansOne-to
      four-family
                                
                                
                                54
                                
                                
                                
                                124Commercial
                                
                                
                                -
                                
                                
                                
                                -Other
      (Land & Multi-family)
                                
                                
                                1
                                
                                
                                
                                15Real Estate Construction
    LoansConstruction
      One-to four family
                                
                                
                                -
                                
                                
                                
                                -Construction
      Commercial
                                
                                
                                -
                                
                                
                                
                                -Acquistion
      & Develpoment
                                
                                
                                -
                                
                                
                                
                                -Other LoansHome
      equity
                                
                                
                                4
                                
                                
                                
                                109Consumer
                                
                                
                                71
                                
                                
                                
                                97Commercial
                                
                                
                                -
                                
                                
                                
                                -Total
      recoveries
                                
                                
                                130
                                
                                
                                
                                345Net
      charge-offs
                                
                                
                                4,224
                                
                                
                                
                                1,986Provision
      for loan losses
                                
                                
                                3,722
                                
                                
                                
                                5,812Balance
      at end of period
                                
                                $
                                13,308
                                
                                
                                $
                                14,424





During
the three months ended March 31, 2010 loan charge-offs included approximately
$1.3 million  of partial charge-offs of one-to four- family
residential loans identified as non-performing. Due to the decline in real
estate values over the past two years, the Company believes it is appropriate
and prudent to reduce the carrying balance of non-performing one-to four-family
residential loans by the expected loss amount rather than providing a general
allowance. Charge-offs in 2010 also included $1.2 million on commercial loans
and other (land and multi-family) loans.


32





Deferred Income
Taxes.  As of both March 31, 2010 and December 31, 2009 the
Company concluded that, while improved operating results are expected as the
economy begins to improve and the Bank’s non-performing assets decline, the
variability of the credit related costs are such that a more likely than not
conclusion of realization could not be supported. Consequently the Company has
recorded a 100% valuation allowance of $16.4 million for the full amount of the
net federal and state deferred tax assets as of March 31, 2010. Until such time
as the Company determines it is more likely than not that it is able to generate
taxable income, no tax benefits will be recorded in future years to reduce net
losses before taxes. However, at such time in the future that the Company
records taxable income or determines that realization of the deferred tax asset
is more likely than not, some or all of the valuation allowance is available as
a tax benefit.




Deposits. Total deposit
account balances were $584.7 million at March 31, 2010, an increase of $29.2
million from $555.4 million at December 31, 2009.  The $21.7 million
increase in time deposits was primarily due to higher brokered deposits acquired
in conjunction with the sale of our Lake City, Florida branch on December 31,
2009.  The relatively low rates on brokered deposits during the
quarter also made them an attractive source of funds.  The remainder
of the increase in deposits occurred as depositors increased their savings and
money market accounts $7.3 million.  As a part of its capital
preservation strategy, the Bank intentionally lowered rates on time deposits in
the second half of 2009 in order to reduce those deposits consistent with loan
balances decreases (see the discussion above under Loans). Management believes
near term deposit growth will be moderate with an emphasis on core deposits to
match asset growth expectations. Dramatic changes in the short-term interest
rate environment could affect the availability of deposits in our local market
and therefore cause the Bank to promote time deposit growth in order to meet
liquidity needs.




Securities sold under agreements to
repurchase. Securities sold under agreements to repurchase are secured by
mortgage-backed securities with a carrying amount of $118.4 million at March 31,
2010, compared to $119.9 million at December 31, 2009.  The agreements
carry various periods of fixed interest rates that convert to callable floating
rates in the future.  Upon conversion, each agreement may be
terminated in whole by the lender each following quarter; there is no
termination penalty if terminated by the lender.  There have been no
early terminations.  At maturity or termination, the securities
underlying the agreements will be returned to the Company.  The
Company had $92.8 million of such agreements as of March 31, 2010 and
December 31, 2009.





Securities
sold under agreements to repurchase are financing arrangements that mature
within ten years, beginning in January 2014.  At maturity, the
securities underlying the agreements are returned to the
Company.  Information concerning securities sold under agreements to
repurchase as of March 31, 2010 is summarized as follows:





(Dollars in Thousands)Average
      daily balance during the period
                  
                  $
                  92,800Average
      interest rate during the period
                  
                  
                  4.95
                  %Maximum
      month-end balance
                  
                  $
                  92,800Weighted
      average interest rate at period end
                  
                  
                  5.04
                  %





Depending
on the availability of suitable securities and the prevailing interest rates and
terms of alternative sources of funds, the Company may continue to sell
securities under agreements to repurchase in the future to fund growth; however
the Company does not plan to be active in the market in the near
term.


33





Federal Home Loan Bank
advances. FHLB advances had a weighted-average maturity of 58 months and
a weighted-average rate of 3.54% at March 31, 2010.   The
decrease in FHLB borrowings to $172.7 million at March 31, 2010 as compared to
December 31, 2009 was due to repayments of $10.0 million.  The Company
expects to continue to utilize FHLB advances to manage short and long- term
liquidity needs to the extent it has borrowing capacity, needs funding and the
interest expense of FHLB advances is attractive compared to deposits and other
alternative sources of funds. However, with the FDIC’s new deposit insurance
premium assessment schedule raising assessment rates in order to recapitalize
the Deposit Insurance Fund, which takes into consideration an institution’s FHLB
borrowings, our FDIC assessment may increase, should any additional FHLB
borrowings outpace deposit growth.




Other
borrowings.  Other borrowings were $2.2 million at March 31,
2010.  The Company borrowed $2.2 million from another financial
institution in December 2009 which is secured by shares of the Company’s common
stock owned by Atlantic Coast Federal, MHC. The entire amount of this loan was
contributed to Atlantic Coast Bank as additional capital.




Stockholders’
equity.  Stockholders’ equity decreased by approximately
$170,000 to $56.4 million at March 31, 2010 from $56.5 million at December 31,
2009 as the net loss of $2.8 million for the three months ended March 31, 2010
was partially offset by the increase in other comprehensive
income.  Other comprehensive income for the three months ended March
31, 2010 was $2.3 million due to higher market values on available-for-sale
securities.




The
Company’s equity to assets ratio decreased to 6.17% at March 31, 2010, from
6.24% at December 31, 2009. The decrease was due to the net loss of $2.8 million
for the three months ended March 31, 2010, partially offset by the increase in
other comprehensive income. Despite this decrease, the Bank continued to be well
in excess of all minimum regulatory capital requirements, and is considered
“well capitalized” under those formulas.  Total risk-based capital to
risk-weighted assets was 11.3%, Tier 1 capital to risk-weighted assets was
10.0%, and Tier 1 capital to adjusted total assets was 5.8% at March 31, 2010.
These ratios as of December 31, 2009 were 11.4%, 10.2% and 6.1%,
respectively.





Comparison of Results of Operations
for the Three Months Ended March 31, 2010 and 2009.





General.Net loss for the three
months ended March 31, 2010, was $2.8 million, which was a decrease of $300,000
from a net loss of $3.1 million for the same period in 2009.  The net
loss for the three months ended March 31, 2009 was net of a tax benefit of $1.7
million.  The Company did not record any tax benefit for the three
months ended March 31, 2010 following the establishment of a 100% valuation
allowance on the net deferred tax asset during the last six months of
2009.  The loss before income taxes was $2.8 million for the three
months ended March 31, 2010 as compared to $4.7 million for the same period in
2009.  The reduction in loss before income taxes was primarily due to
a $2.1 million decrease in the provision for loan losses.





Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the three months ended March 31, 2010 and 2009. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.


34





For the three months ended March
      31,2010
                      
                      
                      2009(Dollars
      in Thousands)Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Average
      Yield
                        /Cost
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                      
                      
                      AverageYield
                        /CostINTEREST-EARNING
      ASSETSLoans receivable(1)
                      
                      $
                      628,452
                      
                      
                      $
                      9,190
                      
                      
                      
                      5.85
                      %
                      
                      $
                      742,157
                      
                      
                      $
                      10,823
                      
                      
                      
                      5.83
                      %Securites(2)
                      
                      
                      190,779
                      
                      
                      
                      1,965
                      
                      
                      
                      4.12
                      %
                      
                      
                      161,518
                      
                      
                      
                      1,983
                      
                      
                      
                      4.91
                      %Other interest-earning assets(3)
                      
                      
                      33,398
                      
                      
                      
                      47
                      
                      
                      
                      0.56
                      %
                      
                      
                      45,139
                      
                      
                      
                      20
                      
                      
                      
                      0.18
                      %Total
      interest-earning assets
                      
                      
                      852,629
                      
                      
                      
                      11,202
                      
                      
                      
                      5.26
                      %
                      
                      
                      948,814
                      
                      
                      
                      12,826
                      
                      
                      
                      5.42
                      %Non-interest
      earning assets
                      
                      
                      53,997
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      59,132Total
      assets
                      
                      $
                      906,626
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,007,946INTEREST-BEARING
      LIABILITIESSavings
      deposits
                      
                      $
                      38,503
                      
                      
                      $
                      54
                      
                      
                      
                      0.56
                      %
                      
                      $
                      33,709
                      
                      
                      $
                      32
                      
                      
                      
                      0.38
                      %Interest
      bearing demand accounts
                      
                      
                      78,089
                      
                      
                      
                      345
                      
                      
                      
                      1.77
                      %
                      
                      
                      70,840
                      
                      
                      
                      363
                      
                      
                      
                      2.05
                      %Money
      market accounts
                      
                      
                      125,981
                      
                      
                      
                      411
                      
                      
                      
                      1.30
                      %
                      
                      
                      136,404
                      
                      
                      
                      727
                      
                      
                      
                      2.13
                      %Time
      deposits
                      
                      
                      296,121
                      
                      
                      
                      2,010
                      
                      
                      
                      2.72
                      %
                      
                      
                      350,610
                      
                      
                      
                      3,435
                      
                      
                      
                      3.92
                      %Securities
      sold under agreements to repurchase
                      
                      
                      92,800
                      
                      
                      
                      1,148
                      
                      
                      
                      4.95
                      %
                      
                      
                      92,800
                      
                      
                      
                      983
                      
                      
                      
                      4.24
                      %Federal
      Home Loan Bank advances
                      
                      
                      174,259
                      
                      
                      
                      1,554
                      
                      
                      
                      3.57
                      %
                      
                      
                      192,944
                      
                      
                      
                      1,712
                      
                      
                      
                      3.55
                      %Other
      borrowings
                      
                      
                      2,533
                      
                      
                      
                      45
                      
                      
                      
                      7.11
                      %
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      interest-bearing liabilities
                      
                      
                      808,286
                      
                      
                      
                      5,567
                      
                      
                      
                      2.75
                      %
                      
                      
                      877,307
                      
                      
                      
                      7,252
                      
                      
                      
                      3.30
                      %Non-interest
      bearing liabilities
                      
                      
                      40,664
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      48,090Total
      liabilities
                      
                      
                      848,950
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      925,397Stockholders'
      equity
                      
                      
                      57,676
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      82,549Total
      liabilities and stockholders' equity
                      
                      $
                      906,626
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,007,946Net
      interest income
                      
                      
                      
                      
                      
                      $
                      5,635
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      5,574Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.51
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.12
                      %Net
      earning assets
                      
                      $
                      44,343
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      71,507Net interest margin(4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.64
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.35
                      %Average
      interest-earning assets to average interest-bearing
      liabilities
                      
                      
                      
                      
                      
                      
                      105.49
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      108.15
                      %





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


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


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


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


35


Rate/Volume Analysis. The
following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities as of and for the three months ended March 31, 2010
as compared to the same period in 2009. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                      
                      
                      TotalDue to
                      
                      
                      IncreaseVolume
                      
                      
                      Rate
                      
                      
                      (Decrease)(Dollars
      in Thousands)INTEREST-EARNING ASSETSLoans
      receivable
                      
                      $
                      (1,663
                      )
                      
                      $
                      30
                      
                      
                      $
                      (1,633
                      )Securities
                      
                      
                      329
                      
                      
                      
                      (347
                      )
                      
                      
                      (18
                      )Other
      interest-earning assets
                      
                      
                      (6
                      )
                      
                      
                      33
                      
                      
                      
                      27Total
      interest-earning assets
                      
                      
                      (1,340
                      )
                      
                      
                      (284
                      )
                      
                      
                      (1,624
                      )INTEREST-BEARING
LIABILITIESSavings
      deposits
                      
                      
                      5
                      
                      
                      
                      17
                      
                      
                      
                      22Interest
      bearing demand accounts
                      
                      
                      36
                      
                      
                      
                      (54
                      )
                      
                      
                      (18
                      )Money
      market accounts
                      
                      
                      (52
                      )
                      
                      
                      (264
                      )
                      
                      
                      (316
                      )Time
      deposits
                      
                      
                      (479
                      )
                      
                      
                      (946
                      )
                      
                      
                      (1,425
                      )Securities
      sold under agreements to repurchase
                      
                      
                      -
                      
                      
                      
                      165
                      
                      
                      
                      165Federal
      Home Loan Bank advances
                      
                      
                      (167
                      )
                      
                      
                      9
                      
                      
                      
                      (158
                      )Other
      borrowings
                      
                      
                      45
                      
                      
                      
                      -
                      
                      
                      
                      45Total
      interest-bearing liabilities
                      
                      
                      (612
                      )
                      
                      
                      (1,073
                      )
                      
                      
                      (1,685
                      )Net
      interest income
                      
                      $
                      (728
                      )
                      
                      $
                      789
                      
                      
                      $
                      61





Interest income.Total
interest income declined $1.6 million to $11.2 million for the three months
ended March 31, 2010 from $12.8 million for the three months ended March 31,
2009 because of a decrease in interest income on loans.  Interest
income on loans decreased to $9.2 million for the three months ended March 31,
2010 from $10.8 million for the same period in 2009.  This decrease
was due primarily to a decline in the average balance of loans, which decreased
$113.7 million, to $628.5 million for the three months ended March 31, 2010 from
$742.2 million for the prior year period.  Interest income earned on
securities decreased slightly for the three months ended March 31, 2010 as
compared to the same period in 2009, despite an increase in the average balance
of $29.3 million, due to lower interest rates on new purchases of comparable
securities, which resulted in a 79 basis point decline in average
rate.





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





Interest expense. Interest
expense declined by $1.7 million to $5.6 million for the three months ended
March 31, 2010 from $7.3 million for the three months ended March 31,
2009.  The decrease in interest expense for the three months ended
March 31, 2010, as compared to the same period in 2009, was due to lower average
rates paid on interest-bearing liabilities, primarily time deposits, as well as
the decrease in average outstanding balances of time deposits.  The
average rate paid on time deposits decreased 120 basis points to 2.72% for the
three months ended March 31, 2010 as compared to 3.92% the same period in
2009.


36





Net interest
income.Net interest income was unchanged at $5.6 million for
the three months ended March 31, 2010, and 2009, as the decrease in interest
expense offset the decrease in interest income. Our net interest rate spread,
which is the difference between the interest rate earned on interest-earning
assets and the interest rate paid on interest-bearing liabilities, increased 39
basis points to 2.51% for the first quarter of 2010 as compared to 2.12% for the
same quarter in 2009.  For the same comparative periods, our net
interest margin, which is net interest income expressed as a percentage of our
average interest earning assets, increased 29 basis points to 2.64% as compared
to 2.35% for the same quarter in 2009.  The improvement in net
interest margin was primarily due to the 98 basis point decrease in the average
interest rate of deposits, to 2.09% for the three months ended March 31, 2010 as
compared to 3.07% for the same period in 2009.





Provision for loan
losses. Provision for loan losses of $3.7 million and $5.8
million were made during the three months ended March 31, 2010 and 2009,
respectively.  The decline in the provision for loan losses was due to
the recording of $2.0 million in specific allocations on four large commercial
loans during the three months ended March 31, 2009 as compared to $300,000
during the same period in 2010.  To a lesser extent, the $112.9
million decrease in the balance of portfolio loans as of March 31, 2010 as
compared to March 31, 2009 also contributed to the decrease in provision for
loan losses.  Net charge-offs for the three months ended March 31,
2010 were $4.2 million as compared to $2.0 million for the same period in
2009.  Net charge-offs in 2010 included $1.3 million of partial
write-downs on one- to four-family residential loans that became non-performing
during the three months ended March 31, 2010.  Beginning in the second
quarter of 2009 the Company adopted the policy of writing down loans when they
are classified as non-performing rather than recording a general allocation;
thus the three months ended March 31, 2009 did not have a similar
charge.  The first quarter of 2010 also included $1.2 million of
charge-offs on four commercial loans, while the Company did not record any
commercial loan charge-offs for the same period in 2009.





Non-interest income. The
components of non-interest income for the three months ended March 31, 2010 and
2009 were as follows:


Increase(decrease)2010
                
                
                2009
                
                
                Dollars
                
                
                Percentage(Dollars
      in Thousands)Service
      charges and fees
                
                $
                856
                
                
                $
                992
                
                
                $
                (136
                )
                
                
                -13.7
                %Gain
      on sale of loans held for sale
                
                
                104
                
                
                
                185
                
                
                
                (81
                )
                
                
                -43.8
                %Loss
      on sale of portfolio loans
                
                
                (273
                )
                
                
                -
                
                
                
                (273
                )
                
                
                -Gain
      on available for sale securities
                
                
                -
                
                
                
                96
                
                
                
                (96
                )
                
                
                -100.0
                %Other
      than temporary impairment losses
                
                
                (75
                )
                
                
                (174
                )
                
                
                99
                
                
                
                -56.9
                %Interchange
      fees
                
                
                222
                
                
                
                215
                
                
                
                7
                
                
                
                3.3
                %Bank
      owned life insurance earnings
                
                
                178
                
                
                
                175
                
                
                
                3
                
                
                
                1.7
                %Other
                
                
                65
                
                
                
                51
                
                
                
                14
                
                
                
                27.5
                %$
                1,077
                
                
                $
                1,540
                
                
                $
                (463
                )
                
                
                -30.1
                %





Non-interest
income for the three months ended March 31, 2010 decreased $463,000 to $1.1
million as compared to $1.5 million for the same three months in
2009.  The decrease was primarily due to the $273,000 loss on the sale
of $866,000 of non-performing loans, lower service charges and fees due to lower
volume of transactions, and lower gains on sale of both available-for-sale
securities and loans held for sale, partially offset by a lower
other-than-temporary-impairment loss.


37





Non-interest expense. The
components of non-interest expense for the three months ended March 31,
2010 and 2009 were as follows:





Increase(decrease)2010
                
                
                2009
                
                
                Dollars
                
                
                Percentage(Dollars
      in Thousands)Compensation
      and benefits
                
                $
                2,570
                
                
                $
                2,575
                
                
                $
                (5
                )
                
                
                -0.2
                %Occupancy
      and equipment
                
                
                554
                
                
                
                621
                
                
                
                (67
                )
                
                
                -10.8
                %FDIC
      insurance premiums
                
                
                449
                
                
                
                336
                
                
                
                113
                
                
                
                33.6
                %Foreclosed
      assets, net
                
                
                92
                
                
                
                705
                
                
                
                (613
                )
                
                
                -87.0
                %Data
      processing
                
                
                255
                
                
                
                260
                
                
                
                (5
                )
                
                
                -1.9
                %Outside
      professional services
                
                
                359
                
                
                
                425
                
                
                
                (66
                )
                
                
                -15.5
                %Collection
      expense and repossessedasset
      losses
                
                
                393
                
                
                
                204
                
                
                
                189
                
                
                
                92.6
                %Other
                
                
                1,077
                
                
                
                894
                
                
                
                183
                
                
                
                20.5
                %$
                5,749
                
                
                $
                6,020
                
                
                $
                (271
                )
                
                
                -4.5
                %





Non-interest
expense decreased by $271,000 to $5.7 million for the three months ended March
30, 2010 from $6.0 million for the same three months ended March 31,
2009.  Components of the decrease included a lower loss on foreclosed
assets, net partially offset by higher FDIC insurance premiums and increased
legal, collection and administrative expenses associated with other real estate
owned and foreclosures.





Income tax.The Company
recorded no income tax benefit for the three months ended March 31, 2010 as
compared to a benefit of $1.7 million for the same period in 2009 due to the
Company’s establishment of a 100% valuation reserve for net deferred tax assets
during the last six months of 2009.  The recognition of future tax
benefits or the reversal of the valuation reserve is dependent upon the
Company’s ability to generate future taxable income.





Liquidity





Management
maintains a liquidity position it believes adequate to provide funding for loan
demand and deposit run-off that may occur in the normal course of business. The
Company relies on a number of different sources in order to meet potential
liquidity demands. The primary sources of funds are increases in deposit
accounts and cash flows from loan payments and the securities
portfolio.  The scheduled amortization of loans and securities as well
as proceeds from borrowings, are predictable sources of funds.  Other
funding sources, however, such as deposit inflows from new deposits, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.





During
the three months ended March 31, 2010, cash and cash equivalents increased
$817,000 from $37.1 million as of December 31, 2009, to $38.0 million as of
March 31, 2010. Cash from operating activities of $5.8 million, combined with
cash from financing activities of $9.2 million, was more than cash used for
investing activities of $14.2 million.  Primary sources of cash were
from net increases in deposits of $29.2 million, proceeds from maturities and
payments of available-for-sale securities of $15.3 million and net decreases in
loans of $8.8 million.  Primary uses of cash included purchases of
available-for-sale securities of $39.7 million and repayments of FHLB borrowings
of $10.0 million and repayments of other borrowings of $10.0
million.





During
2009, cash and cash equivalents increased $1.3 million from $34.1 million as of
December 31, 2008, to $35.4 million as of March 31, 2009. Cash from operating
activities of $11.2 million, combined with cash from financing activities of
$2.0 million, was more than cash used for investing activities of $11.9
million.  Primary sources of cash were from FHLB borrowings of $20.0
million, proceeds from sales of securities available-for-sale of $18.5 million,
net decreases in loans of $10.5 million, proceeds from maturities and payments
of available-for-sale securities of $10.2 million and net increases in deposit
accounts of $9.3 million.  The additional borrowings from the FHLB
were used to replace maturing FHLB debt of $27.2 million.  Primary
uses of cash included purchases of available-for-sale securities of $51.5
million.


38





ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





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





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





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





As part
of its efforts to monitor and manage interest rate risk, the Company uses a
financial modeling tool that estimates the impact of different interest rate
scenarios on the value of the Company’s equity. This financial modeling tool is
referred to as Economic Value of Equity (“EVE”). In essence, this tool measures
the changes in equity due to the impact on net interest margin, over a five-year
horizon, from instantaneous and sustained parallel shifts in the yield curve, in
100 basis point increments, up and down 300 basis points.  Given the
duration of the unusual interest rate environment, the Company currently
evaluates only the shift in yield curve up 300 basis points and down 100 basis
points. Management believes the use of EVE improves the visibility of the effect
of current interest rate risk on future earnings under increasing or decreasing
interest rate environments. Accordingly, the Company believes it is in a better
position to be proactive in reducing future interest rate risk through
management of the growth of interest-earning assets and interest-bearing
liabilities within a meaningful time horizon.   The EVE,
considering the assumed changes in interest rates as of March 31, 2010, is as
follows:


39





Economic
      Value of Equity and Duration of Assets and Liabilities at March 31,
      2010Change
      in Interest RateDecrease
                    
                    
                    Increase
                    
                    
                    Increase
                    
                    
                    Increase1%
                    
                    
                    
                    1%
                    
                    
                    
                    2%
                    
                    
                    
                    3%Duration
      of assets(1)
                    
                    
                    4.82
                    
                    
                    
                    5.44
                    
                    
                    
                    5.64
                    
                    
                    
                    5.76Duration
      of liabilities(1)
                    
                    
                    1.48
                    
                    
                    
                    1.51
                    
                    
                    
                    1.53
                    
                    
                    
                    1.56Differential
      in duration
                    
                    
                    3.34
                    
                    
                    
                    3.93
                    
                    
                    
                    4.11
                    
                    
                    
                    4.20(Dollars
      in Thousands)Amount
      of change in  Economic Value of Equity(2)
                    
                    $
                    (187
                    )
                    
                    $
                    (5,070
                    )
                    
                    $
                    (16,578
                    )
                    
                    $
                    (29,645
                    )Percentage
      change in Economic Value of Equity(2)
                    
                    
                    -0.30
                    %
                    
                    
                    -8.01
                    %
                    
                    
                    -26.19
                    %
                    
                    
                    -46.83
                    %





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


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





In
managing its asset/liability mix the Company, depending on the relationship
between long and short-term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities.  Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or re-pricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch.  Management believes that Atlantic Coast Federal
Corporation’s level of interest rate risk is acceptable under this
approach.  In evaluating Atlantic Coast Federal Corporation’s exposure
to interest rate movements, certain shortcomings inherent in the EVE methodology
must be considered.  For example, although certain assets and
liabilities may have similar maturities or re-pricing periods, they may react in
different degrees to changes in market interest rates.  Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in interest rates.  Additionally, certain
assets, such as adjustable-rate mortgages, have features that restrict changes
in interest rates on a short-term basis and over the life of the
asset.  Further, in the event of a significant change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in our EVE methodology.  Finally, the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase.  Atlantic Coast Federal Corporation considers all of
these factors in monitoring its exposure to interest rate risk.





ITEM
4.   CONTROLS AND PROCEDURES





(a) Evaluation of disclosure
controls and procedures. As of the end of the period covered by this
Quarterly Report on Form 10-Q, the Registrant’s principal executive officer and
principal financial officer have concluded that the Registrant’s disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Securities and Exchange Act of 1934 (the “Exchange Act”)) are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and
forms.





(b)
Changes in internal
controls. There were no changes in the Registrant’s internal control over
financial reporting (as defined in Rule 13a-15(f)) that occurred during the
quarter ended March 31, 2010, that have materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


40





ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





March
31, 2010





Part
II - Other Information


Item
1.       Legal
Proceedings


The
Company is involved in various legal actions and claims arising in the normal
course of business.  In the opinion of management, these legal actions
and claims are not expected to have a material adverse impact on the Company’s
financial condition and results of operations.





Item
1A.    Risk
Factors


There
have been no material changes to the risk factors previously disclosed in the
Company’s     Annual Report on Form 10-K for the year
ended December 31, 2009.




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


None.   The
Company suspended its stock repurchase program in March 2009.





Item
3.       Defaults Upon Senior
Securities


None





Item
4.       Reserved





Item
5.       Other
Information


None





Item
6.       Exhibits


a.       
Exhibits


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


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


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


41


ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





March
31, 2010





Part
II - Other Information





Signatures





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





ATLANTIC
      COAST FEDERAL CORPORATION(Registrant)Date:  May
      17, 2010
            /s/   Robert J. Larison,
      Jr.Robert
      J. Larison, Jr., President and ChiefExecutive
      OfficerDate:  May
      17, 2010
            /s/   Thomas B. Wagers,
      Sr.Thomas
      B. Wagers, Sr. Senior Vice–President andChief
      Financial Officer




42