**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended September 30, 2008**





**OR**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 000-50962**





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





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





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





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





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





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




YES  ̈**** NO x





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




Class
            Outstanding
                at November 3, 2008Common
                Stock, $0.01 Par Value
            13,075,301
                shares





**ATLANTIC
      COAST FEDERAL CORPORATION**





**Form
      10-Q Quarterly Report**





**Table
      of Contents**





**PART
      I. FINANCIAL INFORMATION**





Page NumberItem
                1.
            Financial
                Statements
            3Item
                2.
            Management’s
                Discussion and Analysis ofFinancial
                Condition and Results of Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            28Item
                4.
            Controls
                and Procedures
            29**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            30Item
                1A.
            Risk
                Factors
            30Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            31Item
                3.
            Defaults
                upon Senior Securities
            31Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            31Item
                5.
            Other
                Information
            31Item
                6.
            Exhibits
            31Form
                10-Q
            Signature
                Page
            32Ex-31.1
            Section
                302 Certification of CEOEx-31.2
            Section
                302 Certification of CFOEx-32
            Section
                906 Certification of CEO and CFO









**PART
      I. FINANCIAL INFORMATION**


**Item
      I. Financial Statements**


**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**September
      30, 2008 (unaudited) and December 31, 2007**


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


September 30,
            
            December 31,2008
            
            2007ASSETSCash
                and due from financial institutions
            
            $
            4,659
            
            $
            4,726Short-term
                interest earning deposits
            
            
            39,967
            
            
            24,584Total
                cash and cash equivalents
            
            
            44,626
            
            
            29,310Securities
                available for sale
            
            
            143,043
            
            
            134,216Real
                estate mortgages held for sale
            
            
            147
            
            
            640Loans,
                net of allowance of $8,603 at September 30, 2008 and $6,482 at December
                31, 2007
            
            
            740,028
            
            
            703,513Federal
                Home Loan Bank stock
            
            
            11,020
            
            
            9,293Accrued
                interest receivable
            
            
            3,872
            
            
            4,080Land,
                premises and equipment
            
            
            16,315
            
            
            16,973Bank
                owned life insurance
            
            
            21,965
            
            
            22,227Other
                real estate owned
            
            
            4,019
            
            
            1,726Goodwill
            
            
            2,811
            
            
            2,661Other
                assets
            
            
            12,137
            
            
            6,387Total
                assets
            
            $
            999,983
            
            $
            931,026LIABILITIES
                AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
                demand
            
            $
            36,324
            
            $
            35,284Interest-bearing
                demand
            
            
            64,658
            
            
            45,893Savings
                and money market
            
            
            156,946
            
            
            184,899Time
            
            
            347,373
            
            
            316,654Total
                deposits
            
            
            605,301
            
            
            582,730Securities
                sold under agreements to repurchase
            
            
            92,800
            
            
            78,500Federal
                Home Loan Bank advances
            
            
            207,576
            
            
            173,000Accrued
                expenses and other liabilities
            
            
            7,370
            
            
            6,990Total
                liabilities
            
            
            913,047
            
            
            841,220Commitments
                and contingencies
            
            
            -
            
            
            -Preferred
                stock: $0.01 par value; 2,000,000 shares authorized none
                issued
            
            
            -
            
            
            -Common
                stock: $0.01 par value; 18,000,000 shares authorized, shares issued
                of
                14,813,469 at September 30, 2008 and December 31, 2007
            
            
            148
            
            
            148Additional
                paid in capital
            
            
            59,832
            
            
            59,082Unearned
                employee stock ownership plan (ESOP) shares of 244,398 at September
                30,
                2008 and 279,312 at December 31, 2007
            
            
            (2,444
            )
            
            (2,793
            )Retained
                earnings
            
            
            49,855
            
            
            51,182Accumulated
                other comprehensive income (loss)
            
            
            (836
            )
            
            104Treasury
                stock, at cost, 1,321,318 shares at September 30, 2008 and 1,131,867
                at
                December 31, 2007
            
            
            (19,619
            )
            
            (17,917
            )Total
                stockholders' equity
            
            
            86,936
            
            
            89,806Total
                liabilities and stockholders' equity
            
            $
            999,983
            
            $
            931,026





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


3




**ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **(Dollars
        in Thousands, Except Share Information)**
 **(unaudited)**


Three months ended September 30,
            
            Nine months ended September 30,2008
            
            2007
            
            2008
            
            2007Interest
                and dividend incomeLoans,
                including fees
            
            $
            11,657
            
            $
            11,927
            
            $
            34,787
            
            $
            34,459Securities
                    and interest-earning deposits in other financial
                    institutions
            
            
            2,183
            
            
            2,336
            
            
            6,857
            
            
            6,826Total
                interest and dividend income
            
            
            13,840
            
            
            14,263
            
            
            41,644
            
            
            41,285Interest
                expenseDeposits
            
            
            4,964
            
            
            6,129
            
            
            15,426
            
            
            17,944Federal
                Home Loan Bank advances
            
            
            1,983
            
            
            1,671
            
            
            5,596
            
            
            4,879Securities
                sold under agreements to repurchase
            
            
            963
            
            
            733
            
            
            2,763
            
            
            1,841Total
                interest expense
            
            
            7,910
            
            
            8,533
            
            
            23,785
            
            
            24,664Net
                interest income
            
            
            5,930
            
            
            5,730
            
            
            17,859
            
            
            16,621Provision
                for loan losses
            
            
            3,749
            
            
            438
            
            
            9,240
            
            
            1,243Net
                interest income after provision for loan losses
            
            
            2,181
            
            
            5,292
            
            
            8,619
            
            
            15,378Noninterest
                incomeService
                charges and fees
            
            
            1,299
            
            
            1,326
            
            
            3,649
            
            
            3,866Gain
                on sale of real estate mortgages held for sale
            
            
            46
            
            
            11
            
            
            82
            
            
            26Gain
                (loss) on sale of securities available for sale
            
            
            177
            
            
            -
            
            
            260
            
            
            (46
            )Gain
                (loss) on sale of foreclosed assets
            
            
            (63
            )
            
            (116
            )
            
            (239
            )
            
            (114
            )Gain
                on redemption of Visa class B common stock
            
            
            -
            
            
            -
            
            
            79
            
            
            -Commission
                income
            
            
            83
            
            
            85
            
            
            227
            
            
            222Interchange
                fees
            
            
            224
            
            
            229
            
            
            675
            
            
            672Bank
                owned life insurance earnings
            
            
            252
            
            
            211
            
            
            739
            
            
            639Life
                insurance proceeds on deceased executive officer
            
            
            -
            
            
            -
            
            
            2,634
            
            
            -Other
            
            
            1,014
            
            
            (232
            )
            
            1,114
            
            
            1373,032
            
            
            1,514
            
            
            9,220
            
            
            5,402Noninterest
                expenseCompensation
                and benefits
            
            
            3,183
            
            
            3,147
            
            
            9,584
            
            
            9,317Final
                  plan benefits for deceased executive officerunder
                  certain compensation plans
            
            
            -
            
            
            -
            
            
            1,032
            
            
            -Occupancy
                and equipment
            
            
            689
            
            
            595
            
            
            2,021
            
            
            1,787Data
                processing
            
            
            251
            
            
            234
            
            
            734
            
            
            838Advertising
            
            
            217
            
            
            123
            
            
            461
            
            
            420Outside
                professional services
            
            
            353
            
            
            456
            
            
            1,407
            
            
            1,828Interchange
                charges
            
            
            48
            
            
            104
            
            
            169
            
            
            297Collection
                expense and repossessed asset losses
            
            
            125
            
            
            59
            
            
            358
            
            
            192Telephone
            
            
            147
            
            
            122
            
            
            450
            
            
            348Other
            
            
            858
            
            
            830
            
            
            2,737
            
            
            2,5625,871
            
            
            5,670
            
            
            18,953
            
            
            17,589(Loss)
                income before income tax expense
            
            
            (658
            )
            
            1,136
            
            
            (1,114
            )
            
            3,191Income
                tax (benefit) expense
            
            
            (329
            )
            
            347
            
            
            (1,519
            )
            
            982Net
                (loss) income
            
            $
            (329
            )
            $
            789
            
            $
            405
            
            $
            2,209(Loss)
                earnings per common share:Basic
            
            $
            (0.03
            )
            $
            0.06
            
            $
            0.03
            
            $
            0.17Diluted
            
            $
            (0.03
            )
            $
            0.06
            
            $
            0.03
            
            $
            0.17Dividends
                declared per common share
            
            $
            0.11
            
            $
            0.15
            
            $
            0.38
            
            $
            0.42




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


4




**ATLANTIC
      COAST FEDERAL CORPORATION**


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


**For
      the Nine Months Ended September 30, 2008 and September 30,
      2007**


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


**(unaudited)**


**ACCUMULATED****ADDITIONAL**
            
            **UNEARNED**
            
            
            
            **OTHER****COMMON**
            
            **PAID IN**
            
            **ESOP**
            
            **RETAINED**
            
            **COMPREHENSIVE**
            
            **TREASURY**
            
            **TOTAL****STOCK**
            
            **CAPITAL**
            
            **STOCK**
            
            **EARNINGS**
            
            **INCOME**
            
            **STOCK**
            
            **EQUITY**For
                the nine months ended September 30, 2008Balance
                at January 1, 2008
            
            $
            148
            
            $
            59,082
            
            $
            (2,793
            )
            $
            51,182
            
            $
            104
            
            $
            (17,917
            )
            $
            89,806ESOP
                shares earned, 34,914 shares
            
            
            -
            
            
            (43
            )
            
            349
            
            
            -
            
            
            -
            
            
            -
            
            
            306Management
                restricted stock expense
            
            
            -
            
            
            452
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            452Stock
                options expense
            
            
            -
            
            
            318
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            318Dividends
                declared ( $0.38 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,732
            )
            
            -
            
            
            -
            
            
            (1,732
            )Director's
                deferred compensation
            
            
            -
            
            
            16
            
            
            -
            
            
            -
            
            
            -
            
            
            (16
            )
            
            -Shares
                relinquished
            
            
            -
            
            
            7
            
            
            -
            
            
            -
            
            
            -
            
            
            (60
            )
            
            (53
            )Treasury
                stock purchased at cost, 182,729 shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,626
            )
            
            (1,626
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            405
            
            
            -
            
            
            -
            
            
            405Other
                comprehensive (loss) income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (940
            )
            
            -
            
            
            (940
            )Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            405
            
            
            (940
            )
            
            -
            
            
            (535
            )Balance
                at September 30, 2008
            
            $
            148
            
            $
            59,832
            
            $
            (2,444
            )
            $
            49,855
            
            $
            (836
            )
            $
            (19,619
            )
            $
            86,936For
                the nine months ended September 30, 2007Balance
                at January 1, 2007
            
            $
            148
            
            $
            57,708
            
            $
            (3,259
            )
            $
            52,711
            
            $
            (204
            )
            $
            (16,017
            )
            $
            91,087ESOP
                shares earned, 34,914 shares
            
            
            -
            
            
            245
            
            
            349
            
            
            -
            
            
            -
            
            
            -
            
            
            594Stock
                options exercised
            
            
            -
            
            
            (18
            )
            
            -
            
            
            -
            
            
            -
            
            
            65
            
            
            47Stock
                awards
            
            
            -
            
            
            (28
            )
            
            -
            
            
            -
            
            
            -
            
            
            116
            
            
            88Management
                restricted stock expense
            
            
            -
            
            
            510
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            510Stock
                options expense
            
            
            -
            
            
            250
            
            
            -
            
            
            -
            
            
            -
            
            
            (155
            )
            
            95Dividend
                declared ($0.42 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,942
            )
            
            -
            
            
            -
            
            
            (1,942
            )Shares
                relinquished
            
            
            -
            
            
            139
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            139Treasury
                stock purchased at cost, 105,838 shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,968
            )
            
            (1,968
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,209
            
            
            -
            
            
            -
            
            
            2,209Other
                comprehensive (loss) income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (66
            )
            
            -
            
            
            (66
            )Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,209
            
            
            (66
            )
            
            -
            
            
            2,143Balance
                at September 30, 2007
            
            $
            148
            
            $
            58,806
            
            $
            (2,910
            )
            $
            52,978
            
            $
            (270
            )
            $
            (17,959
            )
            $
            90,793




The
      accompanying notes are an integral part of these
      unaudited consolidated financial statements.   5




**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Dollars
      in Thousands)**


**(unaudited)**


Nine months ended September 30,2008
            
            2007Cash
                flows from operating activitiesNet
                income
            
            
            405
            
            
            2,209Adjustments
                to reconcile net income to to
                net cash from operating activities:Provision
                for loan losses
            
            
            9,240
            
            
            1,243Gain
                on sale of real estate mortgages held for sale
            
            
            (82
            )
            
            (26
            )Loans
                originated for sale
            
            
            (7,084
            )
            
            (67,981
            )Proceeds
                from loan sales
            
            
            7,577
            
            
            71,144Loss
                (gain) on sale of other real estate owned
            
            
            239
            
            
            114(Gain)
                  loss on sale of securitiesavailable for sale
            
            
            (260
            )
            
            46Loss
                on disposal of equipment
            
            
            1,050
            
            
            113ESOP
                compensation expense
            
            
            307
            
            
            594Share-based
                compensation expense
            
            
            802
            
            
            760Net
                depreciation and amortization
            
            
            1,522
            
            
            1,466Net
                change in accrued interest receivable
            
            
            208
            
            
            (364
            )(Decrease)
                increase in cash surrender value of bank owned life insurance
            
            
            262
            
            
            (639
            )Net
                change in other assets
            
            
            (5,177
            )
            
            (1,631
            )Net
                  change in accrued expensesand other liabilities
            
            
            379
            
            
            1,503Net
                cash from operating activites
            
            
            9,388
            
            
            8,551Cash
                flows from investing activitiesProceeds
                  from maturities and paymentsof securites available for
                  sale
            
            
            22,017
            
            
            13,289Proceeds
                  from the sales of securitiesavailable for sale
            
            
            55,896
            
            
            14,619Purchase
                of securities available for sale
            
            
            (87,968
            )
            
            (62,512
            )Loans
                purchased
            
            
            -
            
            
            (14,027
            )Net
                change in loans
            
            
            (49,600
            )
            
            (19,113
            )Expenditures
                on premises and equipment
            
            
            (1,223
            )
            
            (584
            )Proceeds
                from the sale of other real estate owned
            
            
            679
            
            
            333Purchase
                of residential mortgage brokerage operations
            
            
            (150
            )
            
            -Purchase
                of FHLB stock
            
            
            (2,177
            )
            
            (580
            )Redemption
                of FHLB stock
            
            
            450
            
            
            -Net
                change in other investments
            
            
            -
            
            
            1,200Net
                cash from investing activities
            
            
            (62,076
            )
            
            (67,375
            )




The
      accompanying notes are an integral part of these
      unaudited consolidated financial statements.   6
  **ATLANTIC
        COAST FEDERAL CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Dollars
        in Thousands)**
 **(unaudited)**




Nine months ended September 30,2008
            
            2007Cash
                flows from financing activitiesNet
                increase in deposits
            
            $
            22,571
            
            $
            24,961FHLB
                advances
            
            
            103,000
            
            
            50,000Proceeds
                from sale of securitiesunder
                agreements to repurchase
            
            
            14,300
            
            
            34,500Repayment
                of FHLB advances
            
            
            (68,424
            )
            
            (38,000
            )Proceeds
                     from exercise of stock options,including
                tax benefit
            
            
            -
            
            
            135Shares
                relinquished
            
            
            (85
            )
            
            (16
            )Treasury
                stock repurchased
            
            
            (1,626
            )
            
            (1,968
            )Dividends
                paid
            
            
            (1,732
            )
            
            (1,815
            )Net
                cash from financing activities
            
            
            68,004
            
            
            67,797Net
                change in cash and cash equivalents
            
            
            15,316
            
            
            8,846Cash
                and equivalents beginning of period
            
            
            29,310
            
            
            41,057Cash
                and equivalents at end of period
            
            $
            44,626
            
            $
            49,903Supplemental
                information:Interest
                paid
            
            $
            23,935
            
            $
            24,185Income
                tax paid
            
            
            11
            
            
            1,746Supplemental
                noncash disclosures:Loans
                transferred to other real estate
            
            $
            3,212
            
            $
            1,804




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


7




**ATLANTIC
      COAST FEDERAL CORPORATION**


**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2008**


**(Unaudited)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements include Atlantic Coast
      Federal Corporation (or the “Company”) and its wholly owned subsidiary, Atlantic
      Coast Bank (the “Bank”). Also included in the unaudited consolidated financial
      statements is Atlantic Coast Holdings, Inc. (“Holdings”) a wholly owned
      subsidiary of the Bank, which manages and invests in certain securities, and
      owns 100% of the common stock and 85% of the Preferred Stock of Coastal
      Properties, Inc., a real estate investment trust (the “REIT”). All significant
      inter-company balances and transactions have been eliminated in consolidation.
      The principal activity of the Company is the ownership of the Bank’s common
      stock, as such, the terms “Company” and “Bank” may be used interchangeably
      throughout this Form 10-Q.





The
      unaudited consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and with the instructions for Form 10-Q.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. In the opinion of management, all adjustments
      (all of which are normal and recurring in nature) considered necessary for
      (i) a
      fair presentation and (ii) to make such statements not misleading, have been
      included. Operating results for the three and nine month periods ended September
      30, 2008 are not necessarily indicative of the results that may be expected
      for
      the year ending December 31, 2008. The 2007 Atlantic Coast Federal
      Corporation consolidated financial statements, as presented in the Company’s
      Annual Report on Form 10-K, should be read in conjunction with these statements.





Certain
      items in the September 30, 2007 Form 10-Q may have been reclassified to conform
      to the current presentation.





**NOTE
      2. USE OF ESTIMATES**





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





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





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 157 (SFAS No. 157), *Fair
      Value Measurements* .
      This
      Statement defines fair value, establishes a framework for measuring fair value
      and expands disclosures about fair value measurements. This Statement
      establishes a fair value hierarchy about the assumptions used to measure fair
      value and clarifies assumptions about risk and the effect of a restriction
      on
      the sale or use of an asset. The standard is effective for fiscal years
      beginning after November 15, 2007. In February 2008, the FASB issued Staff
      Position (“FSP”) 157-2, *Effective
      Date of FASB Statement No. 157* .
      This
      FSP delays the effective date of SFAS 157 for all nonfinancial assets and
      nonfinancial liabilities, except those that are recognized or disclosed at
      fair
      value on a recurring basis (at least annually) for fiscal years beginning after
      November


8





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





15,
      2008,
      and interim periods within those fiscal years. On October 10, 2008 the FASB
      issued FSP 157-3, *Determining
      the Fair Value of a Financial Asset When the Market for that Asset Is Not
      Active,* which
      provides an example that illustrates key considerations in determining the
      fair
      value of a financial asset when the market for that asset is not active. The
      FSP
      does not change existing generally accepted accounting principles. The FSP
      provides clarification for how to consider various inputs in determining fair
      value under current market conditions consistent with the principles of FAS
      157.
      The FSP includes only one example, as the FASB emphasized the need to apply
      reasonable judgment to each specific fact pattern. Several additional concepts
      addressed in the FSP include distressed sales; the use of 3rd party pricing
      information, the use of internal assumptions and the relevance of observable
      data, among others. The FSP was effective upon issuance, including prior periods
      for which financial statements have not yet been issued. Therefore, it first
      applies to September 30, 2008 interim and annual financial statements. The
      impact of adoption was not material to the Company’s consolidated balance sheet
      or results of operations.





In
      February 2007, FASB issued Statement of Financial Accounting Standards No.
      159
      (SFAS No. 159), *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      including an amendment of Statement No. 115. The standard provides companies
      with an option to report selected financial assets and liabilities at fair
      value
      and establishes presentation and disclosure requirements designed to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar types of assets and liabilities. The Company did not elect the fair
      value option for any financial assets or financial liabilities as of January
      1,
      2008, the effective date of the standard.





On
      September 5, 2007 the SEC issued Staff Accounting Bulletin No. 109 “Written Loan
      Commitments Recorded at Fair Value through Earnings” (“SAB 109”). Previously,
      SAB 105, “Application of Accounting Principles to Loan Commitments,” stated that
      in measuring the fair value of a derivative loan commitment, a company should
      not incorporate the expected net future cash flows related to the associated
      servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
      expected net future cash flows related to the associated servicing of the loan
      should be included in measuring fair value for all written loan commitments
      that
      are accounted for at fair value through earnings. SAB 105 also indicated that
      internally-developed intangible assets should not be recorded as part of the
      fair value of a derivative loan commitment, and SAB 109 retains the view. SAB
      109 is effective for derivative loan commitments issued or modified in fiscal
      quarters beginning after December 15, 2007. The impact of the adoption on
      January 1, 2008 was not material to the Company’s consolidated balance sheet or
      results of operations.





In
      March
      2008, FASB issued Statement of Financial Accounting Standards No. 161 (SFAS
      No.
      161), “Disclosures about Derivative Instruments and Hedging Activities.” SFAS
      No. 161 establishes, among other things, the disclosure requirements for
      derivative instruments and for hedging activities. This Statement amends and
      expands the disclosure requirements of Statement No. 133 with the intent to
      provide users of financial statements with an enhanced understanding of: how
      and
      why an entity uses derivative instruments; how derivative instruments and
      related hedged items are accounted for under Statement No. 133 and its related
      interpretations; how derivative instruments and related hedged items affect
      an
      entity’s financial position, financial performance, and cash flows. This
      Statement requires qualitative disclosures about objectives and strategies
      for
      using derivatives, qualitative disclosures about fair value amounts of and
      gains
      and losses on derivative instruments, and disclosures about credit-risk-related
      contingent features in derivative agreements. SFAS No. 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008. The Company will adopt SFAS No. 161 on January 1, 2009,
      and
      does not expect the adoption to have a material impact on the financial
      statements.


9





**NOTE
      4.** **AVAILABLE FOR SALE SECURITIES**





The
      Company evaluates securities for other-than-temporary impairment, at least
      on a
      quarterly basis, and more frequently when economic or market concerns warrant
      such evaluation. Consideration is given to the length of time and the extent
      to
      which the fair value has been less than cost, the financial condition and
      near-term prospects of the issuer, the credit risk of the underlying assets,
      and
      the intent and ability of the Company to retain its investment in the issuer
      for
      a period of time sufficient to allow for any anticipated recovery in fair value.
      In analyzing an issuer's financial condition, the Company may consider whether
      the securities are issued by the federal government or one of its agencies,
      whether downgrades by bond rating agencies have occurred, and the results of
      reviews of the issuer's financial condition.





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





Securities
      sold under agreements to repurchase were $92.8 million and are secured by
      mortgage-backed securities with a carrying amount of $102.9 million at September
      30, 2008. The Company had $78.5 million of such agreements as of
      December 31, 2007.





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




(Dollars in Thousands)Average
                daily balance during the period
            
            $
            88,741Average
                interest rate during the period
            
            
            4.15
            %Maximum
                month-end balance
            
            $
            92,800Weighted
                average interest rate at period end
            
            
            4.12
            %





**NOTE
      6. DIVIDENDS**





During
      the third quarter of 2008, the Company’s board of directors declared a regular
      quarterly cash dividend at a rate of $0.11 per share. The dividend was payable
      on October 27, 2008 for stockholders of record on October 10, 2008. Atlantic
      Coast Federal, MHC (“MHC”) which holds 8,728,500 shares, or approximately 64.7%
      of the Company’s total outstanding common stock at September 30, 2008 has
      informed the Company it has waived receipt of the third quarter dividend on
      its
      owned shares, as was done in the first quarter and second quarter of 2008 and
      throughout 2007.




Total
      dividends charged to retained earnings for the nine months ended September
      30,
      2008 were $1,732,000.





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





Basic
      earnings per common share is computed by dividing net income by the
      weighted-average number of common shares outstanding for the period, reduced
      for
      average unallocated ESOP shares and average unearned restricted stock awards.
      Diluted earnings per common share is computed by dividing net income by the
      average number of common shares outstanding for the period increased for the
      dilutive effect of unvested stock options and stock awards. The dilutive effect
      of the unvested stock options and stock awards is calculated under the treasury
      stock method utilizing the average market value of the Company’s stock for the
      period. A reconciliation of the numerator and denominator of the basic and
      diluted earnings per common share computation for the three and nine months
      ended September 30, 2008 and 2007 is as follows:


10





**NOTE
      7. EARNINGS (LOSS) PER COMMON SHARE** (continued)





For the three months
            
            For the nine monthsended September 30,
            
            ended September 30,2008
            
            2007
            
            2008
            
            2007BasicNet
                (loss) income
            
            $
            (329
            )
            $
            789
            
            $
            405
            
            $
            2,209Weighted
                average common shares outstanding
            
            
            13,520,085
            
            
            13,673,347
            
            
            13,588,801
            
            
            13,700,331Less:
                Average unallocated ESOP shares
            
            
            (279,312
            )
            
            (325,864
            )
            
            (279,312
            )
            
            (325,864
            )Average
                unvested restricted stock awards
            
            
            (117,020
            )
            
            (179,128
            )
            
            (153,664
            )
            
            (210,552
            )Average
                Shares
            
            
            13,123,753
            
            
            13,168,355
            
            
            13,155,825
            
            
            13,163,915Basic
                (loss) earnings per common share
            
            $
            (0.03
            )
            $
            0.06
            
            $
            0.03
            
            $
            0.17DilutedNet
                (loss) income
            
            $
            (329
            )
            $
            789
            
            $
            405
            
            $
            2,209Weighted
                  average common shares outstanding per common share
            
            
            13,123,753
            
            
            13,168,355
            
            
            13,155,825
            
            
            13,163,91551,445Add:Dilutive
                    effects of assumed exercise of stock options Dilutive effects
                    of full
                    vesting of stock awards
            
            
            78,992
            
            
            86,449
            
            
            71,919
            
            
            70,396Average
                shares and dilutive potential common shares
            
            
            13,202,745
            
            
            13,254,804
            
            
            13,227,744
            
            
            13,285,756Diluted
                (loss) earnings per common share
            
            $
            (0.03
            )
            $
            0.06
            
            $
            0.03
            
            $
            0.17





Stock
      options for 497,606 and 610,681 shares of common stock were not considered
      in
      computing diluted earnings per common share for the three and nine months ended
      September 30, 2008 and 2007, respectively, because they were anti-dilutive.


11


**NOTE
      8. OTHER COMPREHENSIVE INCOME (LOSS)**





Comprehensive
      income components and related taxes for the nine months ended September 30,
      2008
      and 2007 were as follows:


(Dollars in Thousands)Three months ended September 30,
            
            Nine months ended September 30,2008
            
            2007
            
            2008
            
            2007Unrealized
                holding (gains) losses on securities available for sale
            
            $
            1,502
            
            $
            1,775
            
            $
            (1,854
            )
            $
            (54
            )Less
                reclassification adjustments for (gains) losses recognized in income
            
            
            (177
            )
            
            -
            
            
            (339
            )
            
            46Net
                unrealized losses (gains)
            
            
            1,679
            
            
            1,775
            
            
            (1,515
            )
            
            (100
            )Tax
                effect
            
            
            (628
            )
            
            (666
            )
            
            575
            
            
            34Net-of-tax
                amount
            
            
            1,051
            
            
            1,109
            
            
            (940
            )
            
            (66
            )Change
                in fair value of derivatives used for cash flow hedges
            
            
            309
            
            
            -
            
            
            -
            
            
            -Less
                reclassification adjustments for (gains) losses recognized in income
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                unrealized gains and (losses)
            
            
            309
            
            
            -
            
            
            -
            
            
            -Tax
                effect
            
            
            (117
            )
            
            -
            
            
            
            
            
            -Net-of-tax
                amount
            
            
            192
            
            
            -
            
            
            -
            
            
            -Other
                comprehensive income (loss)
            
            $
            1,243
            
            $
            1,109
            
            $
            (940
            )
            $
            (66
            )




**NOTE
      9. FAIR VALUE**





Statement
      157 establishes a fair value hierarchy which requires an entity to maximize
      the
      use of observable inputs and minimize the use of unobservable inputs when
      measuring fair value. The standard describes three levels of inputs that may
      be
      used to measure fair value:





Level
      1:
      Quoted prices (unadjusted) or 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.





Securities
      Available for Sale


The
      fair
      values of securities available for sale are determined by obtaining quoted
      prices on nationally recognized securities exchanges (Level 1 inputs) or matrix
      pricing, which is a mathematical technique widely used in the industry to value
      debt securities without relying exclusively on quoted prices for the specific
      securities but rather by relying on the securities relationship to other
      benchmark quoted securities (Level 2 inputs).





Impaired
      Loans


The
      fair
      values of impaired loans that are collateral dependent are based on a valuation
      model which incorporates the most current real estate appraisals available,
      as
      well as assumptions used to estimate the fair value of all non-real estate
      collateral as defined in the Bank’s internal loan policy (Level
      inputs). ****


12


**NOTE
      9. FAIR VALUE** (continued)





Derivatives


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





Assets
      and Liabilities Measured on a Recurring Basis





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




Fair
                Value Measurements at September 30, 2008 Using:September
              30,
                2008
            
            Quoted
              Prices
                in
              Active
              Markets
              for
              Identical
              Assets
              (Level
                1)
            
            Significant
              Other
              Observable
              Inputs
              (Level
                2)
            
            Significant
              Unobservable
              Inputs
              (Level
                3)*(Dollars
                in Thousands)*Assets:Impaired
                loans – collateral dependent
            
            $
            14,127
            
            $
            14,127Available
                for sale securities
            
            $
            143,043
            
            $
            9,258
            
            $
            133,785
            
            $
            -Liabilities:Cash
                flow swap
            
            $
            74
            
            $
            -
            
            $
            74
            
            $
            -





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
      $14.1 million, with a valuation allowance of $2.7 million as of September 30,
      2008.





Fair
      value adjustments for interest rate swaps resulted in net income of $77,000
      for
      the three and nine months ended September 30, 2008.


13


**ATLANTIC
      COAST FEDERAL CORPORATION**





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





**Forward-Looking
      Statements**




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




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




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




**Critical
      Accounting Policies**





Certain
      accounting policies are important to the portrayal of the Company’s financial
      condition, since they require management to make difficult, complex or
      subjective judgments, some of which may relate to matters that are inherently
      uncertain. Estimates associated with these policies are susceptible to material
      changes as a result of changes in facts and circumstances, including, but
      without limitation, changes in interest rates, performance of the economy,
      financial condition of borrowers and laws and regulations. Management believes
      that its critical accounting policies include determining the allowance for
      loan
      losses, determining the fair value of securities, accounting for deferred income
      taxes, and the valuation of goodwill. Atlantic Coast Federal Corporation’s
      accounting policies are discussed in detail in Note 1 of the Notes to
      Consolidated Financial Statements included in Item 8 of our Annual Report on
      Form 10-K for the year ended December 31, 2007 filed with the Securities and
      Exchange Commission.





An
      allowance for loan losses 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. Management’s methodology for
      assessing the appropriateness of the allowance consists of several key elements,
      which include a SFAS No. 5, *Accounting
      for Contingencies* (“SFAS
      5”) component by type of loan and specific allowances for identified problem
      loans. The allowance incorporates the results of measuring impaired loans as
      provided in SFAS 114 and SFAS No. 118, *Accounting
      by Creditors for Impairment of a Loan - Income Recognition and
      Disclosures* .
      These
      accounting standards prescribe the measurement methods and disclosures related
      to impaired loans.


14





The
      SFAS
      5 component is calculated by applying loss factors to outstanding loans based
      on
      the internal risk evaluation of the loans or pools of loans. Changes in risk
      evaluations of both performing and non-performing loans affect the amount of
      the
      SFAS 5 component. Loss factors are based on the Bank’s historical 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 loss experience in particular segments of the portfolio. These factors
      weighed more prominently in the allowance calculation for 2007 and the first
      nine months of 2008, and management believes this trend will continue in the
      near term.





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





Management
      also evaluates the allowance for loan losses based on a review of individual
      loans. This evaluation is inherently subjective as it requires material
      estimates including the amounts and timing of future cash flows management
      expects to receive on impaired loans that may be susceptible to significant
      change. For all specifically reviewed loans where it is probable that the Bank
      will be unable to collect all amounts due according to the terms of the loan
      agreement, impairment is determined by computing a fair value based on either
      discounted cash flows using the loan’s initial interest rate or the fair value
      of the collateral if the loan is collateral dependent. Large groups of smaller
      balance homogeneous loans are collectively evaluated for impairment and are
      excluded from specific impairment evaluation. For these loans, the allowance
      for
      loan losses is calculated in accordance with the allowance for loan losses
      policy described above.





The
      allowance for loan losses was $8.6 million at September 30, 2008, and $5.8
      million at September 30, 2007. The allowance for loan losses as a percentage
      of
      total loans was 1.15% at September 30, 2008, and 0.86% as of September 30,
      2007.
      The provision for loan losses was $9.2 million for the nine months ended
      September 30, 2008, and $1.2 million for the same period in 2007. The increase
      in the provision for loan losses in the first nine months of 2008 was due
      primarily to higher net charge-offs as well as applying greater loss factors
      to
      the outstanding loans, resulting from declining credit quality in light of
      the
      ongoing deterioration in the local economy and declining real estate values
      over
      the past year.





Securities
      available for sale are carried at fair value, with unrealized holding gains
      and
      losses reported separately in accumulated other comprehensive income, net of
      tax. At least quarterly, the Company adjusts the carrying value of the
      securities to fair value based on a combination of Level 1 and Level 2 inputs.
      Other comprehensive loss resulting from changes in the fair market value of
      Atlantic Coast Federal Corporation’s available for sale securities portfolio
      totaled $940,000 and $66,000 for the nine months ended September 30, 2008 and
      2007, respectively. Additionally, securities available for sale are required
      to
      be written down to fair value when a decline in fair value is not temporary;
      therefore, future changes in the fair value of securities could have a
      significant impact on Atlantic Coast Federal Corporation’s operating results. In
      determining whether a market value decline is other than temporary, management
      considers the reason for the decline, including the credit risk of the
      underlying assets, the extent of the decline and the duration of the decline.
      The Company does not have any equity investments in government sponsored
      entities FNMA or FHLMC, or any trust preferred securities.





The
      Bank
      assesses the carrying value of goodwill at least annually in order to determine
      if it is impaired. In reviewing the carrying value of goodwill, management
      assesses the recoverability of such assets by evaluating the fair value of
      the
      Company’s community banking segment, which is the Bank’s only business segment.
      Any impairment would be required to be recorded during the period identified.
      The Bank’s goodwill totaled $2.8 million as of September 30, 2008; therefore, if
      goodwill was determined to be impaired, the financial results of the Company
      could be materially impacted.




15




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





**Comparison
      of Financial Condition at September 30, 2008 and December 31,
      2007**





**General.** Year
      to
      date asset growth at September 30, 2008 as compared to December 31, 2007
      was 7.4%, or approximately 10% annuualized. Loan growth outpaced deposit growth,
      resulting in the Bank leveraging this growth through additional borrowings,
      primarily FHLB of Atlanta advances and securities sold under agreements to
      repurchase. Loan growth during the first nine months of 2008 continued the
      Bank’s renewed focus on internal loan production and the gradual expansion of
      its commercial lending business to take advantage of local market
      opportunities.





Following
      is a summarized comparative balance sheet as of September 30, 2008 and December
      31, 2007:





September 30,
            
            December 31,
            
            Increase (decrease)2008
            
            2007
            
            Dollars
            
            PercentageAssets
            
            (Dollars
                in Thousands)Cash
                and cash equivalents
            
            $
            44,626
            
            $
            29,310
            
            $
            15,316
            
            
            52.3
            %Securitites
                available for sale
            
            
            143,043
            
            
            134,216
            
            
            8,827
            
            
            6.6
            %Loans
            
            
            748,631
            
            
            709,995
            
            
            38,636
            
            
            5.4
            %Allowance
                for loan losses
            
            
            (8,603
            )
            
            (6,482
            )
            
            (2,121
            )
            
            32.7
            %Loans,
                net
            
            
            740,028
            
            
            703,513
            
            
            36,515
            
            
            5.2
            %Real
                estate mortgages held for sale
            
            
            147
            
            
            640
            
            
            (493
            )
            
            -77.0
            %Other
                assets
            
            
            72,139
            
            
            63,347
            
            
            8,792
            
            
            13.9
            %Total
                assets
            
            $
            999,983
            
            $
            931,026
            
            $
            68,957
            
            
            7.4
            %Liabilities
                and Stockholders' equityDepositsNon-interest
                bearing demand
            
            $
            36,324
            
            $
            35,284
            
            $
            1,040
            
            
            2.9
            %Interest
                bearing demand
            
            
            64,658
            
            
            45,893
            
            
            18,765
            
            
            40.9
            %Savings
                and money market
            
            
            156,946
            
            
            184,899
            
            
            (27,953
            )
            
            -15.1
            %Time
            
            
            347,373
            
            
            316,654
            
            
            30,719
            
            
            9.7
            %Total
                deposits
            
            
            605,301
            
            
            582,730
            
            
            22,571
            
            
            3.9
            %Federal
                Home Loan Bank advances
            
            
            207,576
            
            
            173,000
            
            
            34,576
            
            
            20.0
            %Securities
                sold under agreements to repurchase
            
            
            92,800
            
            
            78,500
            
            
            14,300
            
            
            18.2
            %Accrued
                expenses and other liabilities
            
            
            7,370
            
            
            6,990
            
            
            380
            
            
            5.4
            %Total
                liabilities
            
            
            913,047
            
            
            841,220
            
            
            71,827
            
            
            8.5
            %Stockholders'
                equity
            
            
            86,936
            
            
            89,806
            
            
            (2,870
            )
            
            -3.2
            %Total
                liabilities and stockholders' equity
            
            $
            999,983
            
            $
            931,026
            
            $
            68,957
            
            
            7.4
            %





**Cash
      and cash equivalents** .
      Cash
      and cash equivalents are comprised of cash-on-hand and interest earning and
      non-interest earning balances held in other depository institutions. The
      increase in cash and cash equivalents from December 31, 2007 was due primarily
      to the growth in deposits and the liquidation of certain available for sale
      securities. Management expects the balances in cash and cash equivalents will
      fluctuate as other interest earning assets mature, as management identifies
      opportunities for longer-term investments that fit the Company’s growth
      strategy, and as daily operating liquidity increases or decreases.


16





**Securities
      available for sale** .
      Securities available for sale is composed principally of debt securities of
      U.S.
      Government-sponsored organizations, or mortgage-backed securities. During the
      nine months ended September 30, 2008, the Company restructured its securities
      portfolio in order to improve overall liquidity. As such, the Company purchased
      $88.0 million of government sponsored mortgage-backed securities and sold $55.9
      million of primarily municipal bonds and private issue mortgage-backed
      securities. The investment portfolio increased by approximately $8.8 million
      to
      $143.0 million at September 30, 2008, net of purchases, sales and maturities.
      Gain on sale of securities available for sale was approximately $260,000 for
      the
      nine months ended September 30, 2008.





**Loans** .
      Following is a comparative composition of net loans as of September 30, 2008
      and
      December 31, 2007:




September 30,
              2008
            
            % of total
              loans
            
            December 31,
              2007
            
            % of total
              loans(Dollars
                In Thousands)Real
                estate loans:One-to-four
                family
            
            $
            373,812
            
            
            50.4
            %
            $
            377,956
            
            
            53.5
            %Commercial
            
            
            75,684
            
            
            10.2
            %
            
            74,748
            
            
            10.6
            %Other
                ( land & multifamily)
            
            
            46,756
            
            
            6.3
            %
            
            40,698
            
            
            5.8
            %Total
                real estate loans
            
            
            496,252
            
            
            66.9
            %
            
            493,402
            
            
            69.9
            %Real
                estate construction loans:One-to-four
                family
            
            
            10,982
            
            
            1.5
            %
            
            13,448
            
            
            1.9
            %Commercial
            
            
            15,746
            
            
            2.1
            %
            
            11,129
            
            
            1.6
            %Acquisition
                & development
            
            
            5,367
            
            
            0.7
            %
            
            5,329
            
            
            0.7
            %Total
                real estate construction loans
            
            
            32,095
            
            
            4.3
            %
            
            29,906
            
            
            4.2
            %Other
                loans:Home
                equity
            
            
            107,894
            
            
            14.6
            %
            
            98,410
            
            
            13.9
            %Consumer
            
            
            80,228
            
            
            10.8
            %
            
            64,673
            
            
            9.2
            %Commercial
            
            
            24,960
            
            
            3.4
            %
            
            20,009
            
            
            2.8
            %Total
                other loans
            
            
            213,082
            
            
            28.8
            %
            
            183,092
            
            
            25.9
            %Total
                loans
            
            
            741,429
            
            
            100
            %
            
            706,400
            
            
            100
            %Allowance
                for loan losses
            
            
            (8,603
            )
            
            
            
            
            (6,482
            )Net
                deferred loan costs
            
            
            7,003
            
            
            
            
            
            3,256Premiums
                on purchased loans
            
            
            199
            
            
            
            
            
            339Loans,
                net
            
            $
            740,028
            
            
            
            
            $
            703,513





The
      composition of our net loan portfolio is heavily weighted in loans secured
      by
      first mortgages, home equity loans, or second mortgages, all secured by one-
      to
      four-family residences, with approximately 65% of our loans invested in those
      types of loans at September 30, 2008, and 67% at December 31, 2007. As of
      September 30, 2008 our one- to four-family residential mortgages, as a
      percentage of total loans, decreased approximately 3% compared to the year-end
      2007 balance, with new loan production nearly offset by payments on existing
      loans. Loan growth in one-to-four family mortgages has been negatively impacted
      by a slowing in residential real estate sales activity in the Bank’s markets.
      Recent reports by state and national real estate organizations have reported
      substantial declines in residential real estate activity in the Northeast
      Florida markets, as well as in Florida in general. As a result of these factors,
      management believes that growth in one- to four-family residential mortgages
      may
      be limited in the near term.


17





Total
      loan production of $137.1 million during the nine months ended September 30,
      2008 was derived through the Bank’s retail and commercial businesses and
      represented a diversified array of loan products offered by the Bank.





**Allowance
      for loan losse** s.
      Our
      allowance for loan losses was 1.15% and 0.86% of total loans outstanding at
      September 30, 2008 and December 31, 2007, respectively. Allowance for loan
      losses activity for the nine months ended September 30, 2008 and 2007 was as
      follows:





At September 30,
            
            At September 30,2008
            
            2007(Dollars
                in Thousands)Beginning
                balance
            
            $
            6,482
            
            $
            4,705Loans
                charged-off
            
            
            (8,051
            )
            
            (1,642
            )Recoveries
            
            
            932
            
            
            1,496Net
                charge-offs
            
            
            (7,119
            )
            
            (146
            )Provision
                for loan losses
            
            
            9,240
            
            
            1,243Ending
                balance
            
            $
            8,603
            
            $
            5,802





The
      allowance for loan losses consists of general allowance allocations made for
      pools of homogeneous loans and specific allocations on individual loans for
      which management has significant concerns regarding the borrowers’ ability to
      repay the loans in accordance with the terms of the loans. The increase in
      the
      provision for loan losses in the first nine months of 2008 was due primarily
      to
      higher net charge-offs as well as applying greater loss factors to the
      outstanding loans, resulting from declining credit quality in light of the
      ongoing deterioration in the local economy and declining real estate values
      over
      the past year. Non-performing loans totaled $22.3 million and $7.8 million
      at
      September 30, 2008, and December 31, 2007, respectively. The increase in
      non-performing loans was caused primarily by the transfer of $6.1 million of
      commercial real estate participation and real estate development loans to
      non-accrual status during the second quarter of 2008. Total impaired loans
      increased to $14.1 million at September 30, 2008 from $5.4 million at December
      31, 2007. The total allowance allocated for impaired loans increased to $2.7
      million at September 30, 2008 from $1.4 million at December 31, 2007. The
      increase in both non-performing and impaired loans was primarily the result
      of
      certain commercial loan participations in our general market area. The Company
      ceased involvement in new loan participations following a commitment made on
      December 31, 2006, and funded in May 2007. As of September 30, 2008, and
      December 31, 2007, all non-performing loans were classified as non-accrual,
      and
      there were no loans 90 days past due and accruing interest as of
      September 30, 2008, and December 31, 2007. Non-performing loans, excluding
      small balance homogeneous loans, increased to $11.8 million at September 30,
      2008, from $4.4 million at December 31, 2007. Restructured loans increased
      to
      $7.5 million as of September 30, 2008, from $0 at December 31,
      2007.





**Deposits** .
      Total
      deposit account balances were $605.3 million at September 30, 2008, an increase
      of $22.6 million from $582.7 million at December 31, 2007. Interest bearing
      demand accounts increased $18.8 million due primarily to the introduction of
      a
      new high-yield transaction based product during the half of 2008., Time deposit
      accounts increased $30.7 million, offset by a $27.9 million decrease in savings
      and money market accounts due to disintermediation between these products as
      a
      result of certain rate adjustments and promotions during 2008. Management
      believes future deposit growth will be limited due to intense competition within
      our market areas.


18




**Securities
      sold under agreements to repurchase.** Historically, the Company has primarily utilized advances from the Federal
      Home
      Loan Bank of Atlanta (“FHLB”) or broker originated certificates of deposit as an
      alternative to organic deposits for funding its lending and investment
      activities. While management expects FHLB advances to continue to be a source
      of
      funds in the future, the Company also expects to continue to utilize the sale
      of
      securities under an agreement to repurchase as an alternative source of funds
      as
      well.




Securities
      sold under agreements to repurchase are secured by mortgage-backed securities
      with a carrying
      amount of $102.9 million at September 30, 2008. The agreements carry various
      periods of fixed interest rates that convert to callable floating rates in
      the
      future. Upon conversion, each agreement may be
      terminated in whole by the lender each following quarter. At maturity or
      termination, the securities underlying
      the agreements will be returned to the Company. As of September 30, 2008, the
      weighted average
      rate of the agreements was 4.12%. Depending on the availability of suitable
      securities and the prevailing
      interest rates and terms of alternative source of funds, the Company may
      continue to sell securities
      under agreements to repurchase in the future.





**Federal
      Home Loan Bank advances.** FHLB
      advances had a weighted-average maturity of 64 months and a
      weighted- average rate of 3.80% at September 30, 2008. The $34.6 million
      increase in FHLB borrowings at
      September 30, 2008 as compared to December 31, 2007 was due to additional
      borrowings of $103.0 million
      used to replace advances that matured and fund loan growth, offset by repayments
      of $68.4 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 source of funds.
      However, with the FDIC's
      current proposal to raise deposit insurance premiums to recapitalize the Deposit
      Insurance Fund, which
      takes into consideration an institution's FHLB borrowings, our FDIC assessment
      could increase if we
      continue to borrow heavily from the FHLB. There can be no assurance that the
      proposal will be adopted
      in its current form.





Stockholders'
      equity. Stockholders' equity decreased to approximately $86.9 million at
      September 30, 2008 from $89.8 million at December 31, 2007 primarily due to
      the
      payment of cash dividends, share repurchases
      and the decline in other comprehensive income. In September 2008, the Company's
      board of directors
      declared a regular quarterly cash dividend at a rate of $0.11 per share. The
      dividend was payable
      on October 27, 2008, for stockholders of record on October 10, 2008. Atlantic
      Coast Federal, MHC which holds 8,728,500 shares, or 64.7% of the Company's
      total
      outstanding stock, informed the Company it
      waived
      receipt of this dividend as it had with respect to the first, second and third
      quarter dividend on its
      owned
      shares. Total
      dividends for the nine months ended September 30, 2008 charged to stockholders'
      equity was approximately $1.7 million and approximately $3.3 million of dividend payments
      were waived by the MHC. Management expects the MHC to waive receipt of payment
      on future
      dividends for its owned shares.





In
      September 2006 the Company's Board of Directors approved a repurchase plan
      to
      permit the Company to
      purchase, over a 12-month period, up to 10%, or 478,000 shares of its
      outstanding common stock. The plan
      was
      suspended in May 2007 when the Company was considering a second-step conversion.
      This plan
      was
      reactivated during the first quarter of 2008. Under this stock repurchase plan,
      the Company has repurchased
      approximately 416,000 shares at an average price of $15.64 per share, including approximately
      183,000 shares repurchased at an average price of $8.90 during the nine months
      ended September
      30, 2008. On August 1, 2008, the Company announced it had expanded and extended
      its current
      stock repurchase program, authorizing the repurchase of up to 220,000 additional
      shares or approximately
      5% of its currently outstanding publicly held (not including shares held by
      the
      MHC) shares
      of
      common stock, increasing to 277,000 the total shares subject to repurchase,
      and
      extending the program
      to July 31, 2009, unless completed sooner or otherwise extended, As of September
      30, 2008, approximately
      220,000 shares of common stock remained to be repurchased under this plan
      although no assurances
      can be made regarding the number of shares, if any, that will actually be
      purchased, or the price
      that will be paid for such shares.





The
      Company's equity to assets ratio decreased to 8.69% at September 30, 2008,
      from
      9.65% at December 31,
      2007.
      The decrease was primarily due to the change in other comprehensive income,
      common stock for
      the
      third quarter of 2008 as compared to the same quarter of 2007, as a result
      of
      restructuring a number
      of
      advances at slightly lower rates.




19




The
      Company’s equity to assets ratio decreased to 8.69% at September 30, 2008, from
      9.65% at December 31, 2007. The decrease was primarily due to the change in
      other comprehensive income, common stock repurchased under the Company’s stock
      repurchase plan and the rate of asset growth through September 30, 2008. 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 11.5%, Tier 1 capital
      to risk-weighted assets was 10.7%, and Tier 1 capital to adjusted total assets
      was 7.4% at September 30, 2008. These ratios as of December 31, 2007 were 12.1%,
      11.2% and 7.7%, respectively.





**Comparison
      of Results of Operations for the Three Months Ended September 30, 2008 and
      2007** .





**General** . **** The
      Company had a net loss for the three months ended September 30, 2008, was
      $329,000, which was a decrease of $1.1 million from net income of $789,000
      for
      the same period in 2007.





**Average
      Balances, Net Interest Income, Yields Earned and Rates Paid** .
      The
      following table sets forth certain information for the three months ended
      September 30, 2008 and 2007. The average yields and costs are derived by
      dividing income or expense by the average balance of assets or liabilities,
      respectively, for the periods presented.




For
                  the three months ended September 30,2008
              
              2007(Dollars
                  in Thousands)Average
                Balance
              
              Interest
              
              Average
                Yield /Cost
              
              Average
                Balance
              
              Interest
              
              Average
                Yield /CostINTEREST-EARNING
                  ASSETSLoans
                  receivable(1)
              
              $
              741,912
              
              $
              11,657
              
              
              6.28
              %
              $
              678,350
              
              $
              11,927
              
              
              7.03
              %Securites(2)
              
              
              143,080
              
              
              1,956
              
              
              5.47
              %
              
              130,943
              
              
              1,786
              
              
              5.46
              %Other
                  interest-earning assets(3)
              
              
              37,360
              
              
              227
              
              
              2.43
              %
              
              40,681
              
              
              550
              
              
              5.41
              %Total
                  interest-earning assets
              
              
              922,352
              
              
              13,840
              
              
              6.01
              %
              
              849,974
              
              
              14,263
              
              
              6.72
              %Non-interest
                  earning assets
              
              
              58,788
              
              
              
              
              
              
              
              
              54,887Total
                  assets
              
              $
              981,140
              
              
              
              
              
              
              
              $
              904,861INTEREST-BEARING
                  LIABILITIESSavings
                  deposits
              
              $
              35,479
              
              $
              34
              
              
              0.38
              %
              $
              39,207
              
              $
              37
              
              
              0.38
              %Interest
                  bearing demand accounts
              
              
              63,799
              
              
              424
              
              
              2.66
              %
              
              48,895
              
              
              372
              
              
              3.04
              %Money
                  market accounts
              
              
              121,382
              
              
              952
              
              
              3.14
              %
              
              173,905
              
              
              2,015
              
              
              4.63
              %Time
                  deposits
              
              
              331,404
              
              
              3,554
              
              
              4.29
              %
              
              293,145
              
              
              3,705
              
              
              5.06
              %Federal
                  Home Loan Bank advances
              
              
              201,167
              
              
              1,983
              
              
              3.94
              %
              
              149,109
              
              
              1,671
              
              
              4.48
              %Securities
                  sold under agreements to repurchase
              
              
              93,836
              
              
              963
              
              
              4.11
              %
              
              63,500
              
              
              733
              
              
              4.62
              %Total
                  interest-bearing liabilities
              
              
              847,067
              
              
              7,910
              
              
              3.73
              %
              
              767,761
              
              
              8,533
              
              
              4.44
              %Non-interest
                  bearing liabilities
              
              
              47,254
              
              
              
              
              
              
              
              
              46,224Total
                  liabilities
              
              
              894,321
              
              
              
              
              
              
              
              
              813,985Stockholders'
                  equity
              
              
              86,819
              
              
              
              
              
              
              
              
              90,876Total
                  liabilities and stockholders' equity
              
              $
              981,140
              
              
              
              
              
              
              
              $
              904,861Net
                  interest income
              
              
              
              
              $
              5,930
              
              
              
              
              
              
              
              $
              5,730Net
                  interest spread
              
              
              
              
              
              
              
              
              2.28
              %
              
              
              
              
              
              
              
              2.28
              %Net
                  earning assets
              
              $
              75,285
              
              
              
              
              
              
              
              $
              82,213Net
                  interest margin(4)
              
              
              
              
              
              
              
              
              2.57
              %
              
              
              
              
              
              
              
              2.70
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              
              
              
              108.89
              %
              
              
              
              
              
              
              
              110.71
              %




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


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


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


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


20




**Rate/Volume
      Analysis** .
      The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities as of and for the three months ended September
      30,
      2008 as compared to the same period in 2007. For each category of
      interest-earning assets and interest-bearing liabilities, information is
      provided on changes attributable to (1) changes in volume multiplied by the
      old
      rate; and (2) changes in rate, which are changes in rate multiplied by the
      old
      volume; and (3) changes not solely attributable to rate or volume have been
      allocated proportionately to the change due to volume and the change due to
      rate.


Increase/(Decrease)
              
              TotalDue to
              
              IncreaseVolume
              
              Rate
              
              (Decrease)(Dollars
                  in Thousands)**INTEREST-EARNING
                  ASSETS**Loans
                  receivable
              
              $
              1,062
              
              $
              (1,332
              )
              $
              (270
              )Securities
              
              
              166
              
              
              4
              
              
              170Other
                  interest-earning assets
              
              
              (42
              )
              
              (281
              )
              
              (323
              )Total
                  interest-earning assets
              
              
              1,186
              
              
              (1,609
              )
              
              (423
              )**INTEREST-BEARING
                  LIABILITIES**Savings
                  deposits
              
              
              (4
              )
              
              -
              
              
              (4
              )Interest
                  bearing demand accounts
              
              
              103
              
              
              (51
              )
              
              52Money
                  market accounts
              
              
              (513
              )
              
              (550
              )
              
              (1,063
              )Time
                  deposits
              
              
              450
              
              
              (601
              )
              
              (151
              )Federal
                  Home Loan Bank advances
              
              
              531
              
              
              (219
              )
              
              312Securities
                  sold under agreements to repurchase
              
              
              319
              
              
              (88
              )
              
              231Total
                  interest-bearing liabilities
              
              
              886
              
              
              (1,509
              )
              
              (623
              )Net
                  interest income
              
              $
              300
              
              $
              (100
              )
              $
              200





**Interest
      income.** As
      shown
      in the table above the decrease in interest income for the three months ended
      September 30, 2008, as compared to the same period in 2007, was attributed
      to a
      decline in average interest rates, which was partially offset by growth in
      the
      average outstanding balance of interest-earning assets. The prime rate has
      decreased 275 basis points from 7.75% to 5.00% since September 30, 2007 and
      225
      basis points from 7.25% to 5.00% since December 31, 2007.





Interest
      income from loans decreased, as the increase in average balances was more than
      offset by the decrease in average interest rates. The growth in interest income
      from investment securities for the quarter ended September 30, 2008, as compared
      to the same quarter in 2007 was due to higher average balances of $143.1 million
      for the three months ended September 30, 2008 as compared to $130.9 million
      for
      the same three month period in the prior year. The decline in interest income
      from other interest-earning assets was due to a decline in average interest
      rates as well as lower average balances of $37.4 million for the three months
      ended September 30, 2008 as compared to $40.7 million for the same three month
      period in the prior year.





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





**Interest
      expense.** The
      decrease in interest expense for the three months ended September 30, 2008,
      as
      compared to the same period in 2007, was due to lower average rates on
      interest-bearing liabilities, offset by growth in average outstanding balances
      of both Federal Home Loan Bank advances and securities sold under agreements
      to
      repurchase. In order to fund loan growth, which has exceeded deposit growth,
      the
      Company has continued to utilize FHLB advances. Interest expense on FHLB
      borrowings declined for the third quarter of 2008 as compared to the same
      quarter of 2007, as a result of restructuring a number of advances at slightly
      lower rates.


21


**Net
        interest income**. Net interest income increased during the three months
        ended September 30, 2008, as
        compared to the same period in 2007, as the decrease in interest expense
        outpaced the decrease in interest
        income. As discussed above, the growth in average outstanding balances in
        our
        loan portfolio has enabled
        the Company to mitigate the decline in average interest rates of the loan
        portfolio. Our net interest
        rate spread, which is the difference between the interest yield earned on
        interest-earning assets and
        the
        interest rate paid on interest-bearing liabilities, was unchanged at 2.28%
        for
        the third quarter of 2008
        as
        compared to the same quarter in 2007. For the same comparative periods, our
        net
        interest margin, which
        is
        net interest income expressed as a percentage of our average interest earning
        assets, decreased 13
        basis
        points to 2.57%.
 
 **Provision
        for loan losses**. Management establishes provisions for loan losses,
        which are charged to operations,
        at a level required to reflect probable incurred credit losses in the loan
        portfolio. In evaluating the
        level
        of the allowance for loan losses, management considers historical loss
        experience, the types of loans
        and
        the amount of loans in the loan portfolio, the source of origination of those
        loans, adverse situations
        that may affect borrowers' ability to repay, estimated value of any underlying
        collateral, and prevailing
        economic conditions. Large groups of smaller balance homogeneous loans, such
        as
        residential real
        estate, small commercial real estate, home equity and consumer loans, are
        evaluated in the aggregate using
        historical loss factors adjusted for current economic conditions, source
        of loan
        origination, and other
        relevant data. Larger non-homogeneous loans, such as commercial loans for
        which
        management has
        concerns about the borrowers' ability to repay, are evaluated individually,
        and
        specific allowance allocations
        are provided for such loans when necessary.
 
 Based
        on
        management's evaluation of these factors, provisions of $3.7 million and
        $438,000 were made during
        the three months ended September 30, 2008 and 2007, respectively. The
        year-over-year increase was primarily due to declines in both credit quality
        and
        real estate values and an increase in net charge-offs. Net charge-offs for
        the
        quarter ended September 30, 2008, were $3.3 million, which included a
        net- charge-off
        of $1.7 million related to the sale of $4.4 million of non-performing
        residential mortgage loans. By
        comparison, the Company had net recoveries for the same three months in 2007
        of
        $293,000. From time
        to
        time, the Company may continue to sell non-performing assets when it believes
        the resolution will likely be long-term.
 
 The
        appropriateness of the allowance is reviewed and established by management
        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. While management
        uses
        available information to recognize losses on loans, future loan loss provisions
        may be necessary based on changes in
        economic conditions and changes in borrower situations. In addition, various
        regulatory agencies, as an integral part of their examination process,
        periodically review the allowance for loan losses and may require
        us to recognize additional provisions based on their judgment of information
        available to them at the
        time
        of their examination. The allowance for loan losses as of September 30, 2008,
        was maintained at a
        level
        that represents management's best estimate of probable incurred losses in
        the
        loan portfolio.


22


**Non-interest
      income** .
      The
      components of non-interest income for the three months ended September 30,
      2008
      and 2007 were as follows:





Increase(decrease)2008
            
            2007
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            1,299
            
            $
            1,326
            
            $
            (27
            )
            
            -2.0
            %Gain
                on sale of real estate mortgages held for sale
            
            
            46
            
            
            11
            
            
            35
            
            
            318.2
            %Loss
                on sale of foreclosed assets
            
            
            (63
            )
            
            (116
            )
            
            53
            
            
            -45.7
            %Gain
                (loss) on available for sale securities
            
            
            177
            
            
            -
            
            
            177
            
            
            -Commission
                income
            
            
            83
            
            
            85
            
            
            (2
            )
            
            -2.4
            %Interchange
                fees
            
            
            224
            
            
            229
            
            
            (5
            )
            
            -2.2
            %Bank
                owned life insurance earnings
            
            
            252
            
            
            211
            
            
            41
            
            
            19.4
            %Other
            
            
            1,014
            
            
            (232
            )
            
            1,246
            
            
            -537.1
            %$
            3,032
            
            $
            1,514
            
            $
            1,518
            
            
            100.3
            %





Non-interest
      income for the three months ended September 30, 2008 increased $1.5 million to
      $3.0
      million as compared to $1.5 million for the same three months in 2007. The
      primary components of the increase in other income included a gain on the
      previously announced sale of our Fernandina Beach branch of $595,000, a gain
      on
      extinguishment of FHLB debt of $232,000 and an increase in fair value of swaps
      of $382,000.





**Non-interest
      expense** .
      The
      components of non-interest expense for the three months ended September 30,
      2008 and 2007 were as follows:





Increase(decrease)2008
            
            2007
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            3,183
            
            $
            3,147
            
            $
            36
            
            
            1.1
            %Occupancy
                and equipment
            
            
            689
            
            
            595
            
            
            94
            
            
            15.8
            %Data
                processing
            
            
            251
            
            
            234
            
            
            17
            
            
            7.3
            %Advertising
            
            
            217
            
            
            123
            
            
            94
            
            
            76.4
            %Outside
                professional services
            
            
            353
            
            
            456
            
            
            (103
            )
            
            -22.6
            %Interchange
                charges
            
            
            48
            
            
            104
            
            
            (56
            )
            
            -53.8
            %Collection
                      expense and repossessed asset losses
            
            
            125
            
            
            59
            
            
            66
            
            
            111.9
            %Telephone
            
            
            147
            
            
            122
            
            
            25
            
            
            20.5
            %Other
            
            
            858
            
            
            830
            
            
            28
            
            
            3.4
            %$
            5,871
            
            $
            5,670
            
            $
            201
            
            
            3.5
            %





Non-interest
      expense increased by $201,000 to $5.9 million for the three months ended
      September 30, 2008 from $5.7 million for the three months ended September 30,
      2007 primarily due to: (a) higher occupancy and equipment resulting from higher
      facilities expenses, partially offset by lower depreciation expense; (b) higher
      advertising expenses as the Bank increased its product marketing; and (c) higher
      collection expenses due to increased non-performing loans; partially offset
      by
      (d) declining outside professional services expenses as a result of lower legal
      and consulting fees during the quarter.





**Income
      tax (benefit) expense.** Income
      tax expense decreased $676,000 to a tax benefit of $329,000 for the three months
      ended September 30, 2008, from an expense of $347,000 for the same period in
      2007 due
      to
      our net loss for the quarter.


23




**Comparison
      of Results of Operations for the Nine Months Ended September 30, 2008 and
      2007** .





**General** . **** Net
      income for the nine months ended September 30, 2008, was $405,000, which was
      a
      decrease of $1.8 million from $2.2 million for the same period in 2007. The
      current year’s earnings have been significantly impacted by the receipt of life
      insurance benefits, net of certain final compensation expenses, related to
      the
      recent death of an executive officer, and by an increase 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 nine months ended
      September 30, 2008 and 2007. The average yields and costs are derived by
      dividing income or expense by the average balance of assets or liabilities,
      respectively, for the periods presented.




For the nine months ended September 30,2008
            
            2007(Dollars in Thousands)Average
              Balance
            
            Interest
            
            Average Yield
              /Cost
            
            Average
              Balance
            
            Interest
            
            Average Yield
              /CostINTEREST-EARNING
                ASSETSLoans
                receivable(1)
            
            $
            722,516
            
            $
            34,787
            
            
            6.42
            %
            $
            661,848
            
            $
            34,459
            
            
            6.94
            %Securites(2)
            
            
            146,682
            
            
            5,932
            
            
            5.39
            %
            
            124,429
            
            
            5,018
            
            
            5.38
            %Other
                interest-earning assets(3)
            
            
            38,626
            
            
            925
            
            
            3.19
            %
            
            44,701
            
            
            1,808
            
            
            5.39
            %Total
                interest-earning assets
            
            
            907,824
            
            
            41,644
            
            
            6.12
            %
            
            830,978
            
            
            41,285
            
            
            6.62
            %Non-interest
                earning assets
            
            
            56,826
            
            
            
            
            
            
            
            
            54,330Total
                assets
            
            $
            964,650
            
            
            
            
            
            
            
            $
            885,308INTEREST-BEARING
                LIABILITIESSavings
                deposits
            
            $
            35,670
            
            $
            100
            
            
            0.37
            %
            $
            40,756
            
            $
            120
            
            
            0.39
            %Interest
                bearing demand accounts
            
            
            56,054
            
            
            976
            
            
            2.32
            %
            
            50,731
            
            
            1,160
            
            
            3.05
            %Money
                market accounts
            
            
            133,199
            
            
            3,016
            
            
            3.02
            %
            
            154,403
            
            
            5,340
            
            
            4.61
            %Time
                deposits
            
            
            329,972
            
            
            11,334
            
            
            4.58
            %
            
            303,085
            
            
            11,324
            
            
            4.98
            %Federal
                Home Loan Bank advances
            
            
            185,525
            
            
            5,596
            
            
            4.02
            %
            
            144,918
            
            
            4,879
            
            
            4.49
            %Securities
                sold under agreements to repurchase
            
            
            88,741
            
            
            2,763
            
            
            4.15
            %
            
            53,808
            
            
            1,841
            
            
            4.56
            %Total
                interest-bearing liabilities
            
            
            829,161
            
            
            23,785
            
            
            3.83
            %
            
            747,701
            
            
            24,664
            
            
            4.40
            %Non-interest
                bearing liabilities
            
            
            46,550
            
            
            
            
            
            
            
            
            46,437Total
                liabilities
            
            
            875,711
            
            
            
            
            
            
            
            
            794,138Stockholders'
                equity
            
            
            88,939
            
            
            
            
            
            
            
            
            91,170Total
                liabilities and stockholders' equity
            
            $
            964,650
            
            
            
            
            
            
            
            $
            885,308Net
                interest income
            
            
            
            
            $
            17,859
            
            
            
            
            
            
            
            $
            16,621Net
                interest spread
            
            
            
            
            
            
            
            
            2.29
            %
            
            
            
            
            
            
            
            2.23
            %Net
                earning assets
            
            $
            78,663
            
            
            
            
            
            
            
            $
            83,277Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.62
            %
            
            
            
            
            
            
            
            2.67
            %Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            109.49
            %
            
            
            
            
            
            
            
            111.14
            %





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


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


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


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


24


**Rate/Volume
      Analysis** .
      The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities as of and for the nine months ended September
      30,
      2008 as compared to the same period in 2007. For each category of
      interest-earning assets and interest-bearing liabilities, information is
      provided on changes attributable to (1) changes in volume multiplied by the
      old
      rate; and (2) changes in rate, which are changes in rate multiplied by the
      old
      volume; and (3) changes not solely attributable to rate or volume have been
      allocated proportionately to the change due to volume and the change due to
      rate.





Increase/(Decrease)
            
            TotalDue to
            
            IncreaseVolume
            
            Rate
            
            (Decrease)(Dollars
                in Thousands)**INTEREST-EARNING
                ASSETS**Loans
                receivable
            
            $
            3,028
            
            $
            (2,700
            )
            $
            328Securities
            
            
            900
            
            
            14
            
            
            914Other
                interest-earning assets
            
            
            (221
            )
            
            (662
            )
            
            (883
            )Total
                interest-earning assets
            
            
            3,707
            
            
            (3,348
            )
            
            359**INTEREST-BEARING
                LIABILITIES**Savings
                deposits
            
            
            (14
            )
            
            (6
            )
            
            (20
            )Interest
                bearing demand accounts
            
            
            113
            
            
            (296
            )
            
            (183
            )Money
                market accounts
            
            
            (661
            )
            
            (1,663
            )
            
            (2,324
            )Time
                deposits
            
            
            962
            
            
            (952
            )
            
            10Federal
                Home Loan Bank advances
            
            
            1,263
            
            
            (547
            )
            
            716Securities
                sold under agreements to repurchase
            
            
            1,101
            
            
            (179
            )
            
            922Total
                interest-bearing liabilities
            
            
            2,764
            
            
            (3,643
            )
            
            (879
            )Net
                interest income
            
            $
            943
            
            $
            295
            
            $
            1,238





**Interest
      income.**As shown in the table above the increase in interest income for
      the nine months ended September 30, 2008, as compared to the same period in
      2007, was attributable to growth in the average outstanding balance of
      interest-earning assets offset by lower average rates. Higher average balances
      of securities accounted for the majority of the interest income growth, offset
      by a decline in interest income from other interest-earning assets. The
      increased interest income from loans was due to an increase in average
      outstanding balances to $722.5 million for the nine months ended September
      30,
      2008 from $661.8. million for the same period from the prior year, offset by
      a
      decline in average interest rates, as the prime rate has decreased 275 basis
      points from 7.75% to 5.00% since September 30, 2007 and 225 basis points from
      7.25% to 5.00% since December 31, 2007.





The
      growth in interest income from investment securities for the nine months ended
      September 30, 2008, as compared to the same period in 2007 was mainly due to
      higher average balances of $146.7 million for the nine months ended September
      30, 2008 as compared to $124.4 million for the same nine month period in the
      prior year. The decline in interest income from other interest-earning assets
      was due to a decline in average interest rates as well as lower average balances
      of $38.6 million for the nine months ended September 30, 2008 as compared to
      $44.7 million for the same nine month period in the prior year.





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





**Interest
      expense.** The
      decrease in interest expense for the nine months ended September 30, 2008,
      as
      compared to the same period in 2007 was due to lower average rates paid on
      interest-bearing liabilities, largely as a result of the Federal Reserve
      lowering short-term interest rates by 225 basis points since December 31, 2007,
      offset by growth in average outstanding balances of interest-bearing deposit
      accounts. In order to fund loan growth and maintain deposit market share, the
      Company has continued to pay attractive interest rates on its money-market
      accounts, interest bearing demand accounts and time deposits. The rate of
      interest expense on our FHLB borrowings declined for the first nine months
      of
      2008 as compared to the same quarter of 2007, primarily as a result of
      restructuring a number of advances at lower rates.


25





**Net
      interest income.** Net
      interest income increased slightly during the nine months ended September 30,
      2008, as compared to the same period in 2007, as a result of the growth in
      interest income as well as the decrease in interest expense. As discussed above,
      the growth in average outstanding balances in our loan portfolio has enabled
      the
      Company to increase the overall income of the loan portfolio. Our net interest
      rate spread, which is the difference between the interest yield earned on
      interest-earning assets and the interest rate paid on interest-bearing
      liabilities, increased 6 basis points to 2.29% for the first nine months of
      2008
      as compared to the same period in 2007. For the same comparative periods, our
      net interest margin, which is net interest income expressed as a percentage
      of
      our average interest earning assets, declined 5 basis points to 2.62%. The
      decline in the net interest margin is due to the increase in non-performing
      assets.





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





Based
      on
      management’s evaluation of these factors, provisions of $9.2 million and $1.2
      million were made during the nine months ended September 30, 2008 and 2007,
      respectively. The year-over-year increase was primarily due to declines in
      both
      credit quality and real estate values and an increase in net charge-offs. Net
      charge-offs for the nine months ended September 30, 2008, were $6.0 million,
      which included net-charge-offs of $1.7 million related to the disposal of
      $4,400,000 of non-performing residential mortgage loans and $1.1 million related
      to a commercial real-estate participation loan located in northeast Florida.
      By
      comparison, net charge-offs for the same nine months in 2007 were $146,000.





The
      appropriateness of the allowance is reviewed and established by management
      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. While management uses available
      information to recognize losses on loans, future loan loss provisions may be
      necessary based on changes in economic conditions and changes in borrower
      situations. In addition, various regulatory agencies, as an integral part of
      their examination process, periodically review the allowance for loan losses
      and
      may require us to recognize additional provisions based on their judgment of
      information available to them at the time of their examination. The allowance
      for loan losses as of September 30, 2008, was maintained at a level that
      represents management’s best estimate of probable incurred losses in the loan
      portfolio.


26




**Non-interest
      income** .
      The
      components of non-interest income for the nine months ended September 30, 2008
      and 2007 were as follows:





Increase(decrease)2008
            
            2007
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Service
                charges and fees
            
            $
            3,649
            
            $
            3,866
            
            $
            (217
            )
            
            -5.6
            %Gain
                on sale of real estate mortgages held for sale
            
            
            82
            
            
            26
            
            
            56
            
            
            215.4
            %(Loss)
                gain on sale of foreclosed assets
            
            
            (239
            )
            
            (114
            )
            
            (125
            )
            
            109.6
            %Gain
                (loss) on available for sale securities
            
            
            260
            
            
            (46
            )
            
            306
            
            
            -665.2
            %Gain
                on redemption of Visa class B common stock
            
            
            79
            
            
            -
            
            
            79
            
            
            n/aCommission
                income
            
            
            227
            
            
            222
            
            
            5
            
            
            2.3
            %Interchange
                fees
            
            
            675
            
            
            672
            
            
            3
            
            
            0.4
            %Bank
                owned life insurance earnings
            
            
            739
            
            
            639
            
            
            100
            
            
            15.6
            %Life
                insurance proceeds on deceased executive officer
            
            
            2,634
            
            
            -
            
            
            2,634
            
            
            n/aOther
            
            
            1,114
            
            
            137
            
            
            977
            
            
            713.1
            %$
            9,220
            
            $
            5,402
            
            $
            3,818
            
            
            70.7
            %





Non-interest
      income for the nine months ended September 30, 2008 increased $3.8 million
      to
      $9.2 million from $5.4 million for the same nine months in 2007 primarily due
      to
      the receipt of $2.6 million of life insurance benefits related to the recent
      death of an executive officer. Service charges and fees, which are transactional
      based charges accessed on deposit accounts, declined primarily due to a decrease
      in the number of returned items (i.e., non-sufficient funds or “NSF”) and the
      associated fees. This decline was offset by a gain on available for sale
      securities as well as a gain on the redemption of Visa class B common stock
      relating to Visa’s initial public offering. The primary components of the
      increase in other income included a gain on the previously announced sale of
      our
      Fernandina Beach branch of $595,000, a gain on extinguishment of FHLB debt
      of
      $232,000 and an increase in fair value of swaps of $77,000.




**Non-interest
      expense** .
      The
      components of non-interest expense for the nine months ended September 30,
      2008 and 2007 were as follows:





Increase(decrease)2008
            
            2007
            
            Dollars
            
            Percentage(Dollars
                in Thousands)Compensation
                and benefits
            
            $
            9,584
            
            $
            9,317
            
            $
            267
            
            
            2.9
            %Final
                plan benefits for executive officerunder
                certain compensation plans
            
            
            1,032
            
            
            -
            
            
            1,032
            
            
            n/aOccupancy
                and equipment
            
            
            2,021
            
            
            1,787
            
            
            234
            
            
            13.1
            %Data
                processing
            
            
            734
            
            
            838
            
            
            (104
            )
            
            -12.4
            %Advertising
            
            
            461
            
            
            420
            
            
            41
            
            
            9.8
            %Outside
                professional services
            
            
            1,407
            
            
            1,828
            
            
            (421
            )
            
            -23.0
            %Interchange
                charges
            
            
            169
            
            
            297
            
            
            (128
            )
            
            -43.1
            %Collection
                expense and repossessedasset
                losses
            
            
            358
            
            
            192
            
            
            166
            
            
            86.5
            %Telephone
            
            
            450
            
            
            348
            
            
            102
            
            
            29.3
            %Other
            
            
            2,737
            
            
            2,562
            
            
            175
            
            
            6.8
            %$
            18,953
            
            $
            17,589
            
            $
            1,364
            
            
            7.8
            %


27





The
      increase in non-interest expense of $1.4 million for the nine months ended
      September 30, 2008, as compared to the same period in 2007, was primarily
      due to final plan benefits for a deceased executive. The majority of the
      increase in compensation and benefit expense was due to increased salaries,
      offset by lower stock based compensation awards. The increase was primarily
      due
      to organizational changes, executive additions, and annual merit increases.
      Increased occupancy and equipment costs for the nine months ended September
      30,
      2008, as compared to the same period in 2007 was due to higher lease expense,
      higher real estate taxes and higher utilities, offset by lower depreciation
      expense. The decrease in data processing costs for the nine months ended
      September 30, 2008, as compared to the same period in 2007, was due to lower
      depreciation expense. Outside professional services decreased due to lower
      legal
      and consulting fees during the nine months ended September 30, 2008. Collection
      expense increased due to higher legal expenses incurred for foreclosure activity
      as a result of declines in both credit quality and real estate
      values.





**Income
      tax (benefit) expense.** Income
      tax expense decreased $2.5 million, to a tax benefit of $1.5 million for the
      nine months ended September 30, 2008, from an expense of $982,000 for the same
      period in 2007. The tax benefit was primarily due to an increase in taxable
      loss.





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





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





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





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. Management believes
      the use of EVE improves the visibility of the effect of current interest rate
      risk on future earnings under increasing or decreasing interest rate
      environments. Accordingly, the Company believes it is in a better position
      to be
      proactive in reducing future interest rate risk through management of the growth
      of interest-earning assets and interest-bearing liabilities within a meaningful
      time horizon. The EVE, considering the assumed changes in interest rates as
      of
      September 30, 2008, is as follows:


28




Economic Value of Equity and Duration of Assets and Liabilities at September 30, 2008Change in Interest RateDecrease
            
            Decrease
            
            Decrease
            
            Increase
            
            Increase
            
            Increase3%
            
            2%
            
            1%
            
            1%
            
            2%
            
            3%Duration
                of assets(1)
            
            
            2.77
            
            
            2.77
            
            
            2.92
            
            
            3.24
            
            
            3.25
            
            
            3.25Duration
                of liabilities(1)
            
            
            2.81
            
            
            2.81
            
            
            2.72
            
            
            3.04
            
            
            2.95
            
            
            2.95Differential
                in duration
            
            
            -0.04
            
            
            -0.04
            
            
            0.20
            
            
            0.20
            
            
            0.30
            
            
            0.30Amount
                of change in Economic Value of Equity(2)
            
            $
            (1,421,643
            )
            $
            (947,762
            )
            $
            2,001,243
            
            $
            (1,989,473
            )
            $
            (5,846,176
            )
            $
            (8,769,264
            )Percentage
                change in Economic Value of Equity(2)
            
            
            -1.49
            %
            
            -0.99
            %
            
            2.09
            %
            
            -2.08
            %
            
            -6.12
            %
            
            -9.18
            %





(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 September
      30, 2008, that have materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.


29





**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2008**





**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




Our
      Expenses Will Increase As A Result Of Increases In FDIC Insurance
      Premiums





The
      Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against
      institutions for deposit insurance. This assessment is based on the risk
      category of the institution and ranges from 5 to 43 basis points of the
      institution’s deposits. Federal law requires that the designated reserve ratio
      for the deposit insurance fund be established by the FDIC at 1.15% to 1.50%
      of
      estimated insured deposits. If this reserve ratio drops below 1.15% or the
      FDIC
      expects that it to do so within six months, the FDIC must, within 90 days,
      establish and implement a plan to restore the designated reserve ratio to 1.15%
      of estimated insured deposits within five years (absent extraordinary
      circumstances).





Recent
      bank failures coupled with deteriorating economic conditions have significantly
      reduced the deposit insurance fund’s reserve ratio. As of June 30, 2008, the
      designated reserve ratio was 1.01% of estimated insured deposits at March 31,
      2008. As a result of this reduced reserve ratio, on October 16, 2008, the FDIC
      published a proposed rule that would restore the reserve ratios to its required
      level. The proposed rule would raise the current deposit insurance assessment
      rates uniformly for all institutions by 7 basis points (to a range from 12
      to 50
      basis points) for the first quarter of 2009. The proposed rule would also alter
      the way the FDIC calculates federal deposit insurance assessment rates beginning
      in the second quarter of 2009 and thereafter.





Under
      the
      proposed rule, the FDIC would first establish an institution’s initial base
      assessment rate. This initial base assessment rate would range, depending on
      the
      risk category of the institution, from 10 to 45 basis points. The FDIC would
      then adjust the initial base assessment (higher or lower) to obtain the total
      base assessment rate. The adjustments to the initial base assessment rate would
      be based upon an institution’s levels of unsecured debt, secured liabilities,
      and brokered deposits. The total base assessment rate would range from 8 to
      77.5
      basis points of the institution’s deposits. There can be no assurance that the
      proposed rule will be implemented by the FDIC or implemented in its proposed
      form.





In
      addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
      increased the limit on FDIC insurance coverage for deposits to $250,000 through
      December 31, 2009, and the FDIC took action to provide coverage for newly-issued
      senior unsecured debt and non-interest bearing transaction accounts in excess
      of
      the $250,000 limit, for which institutions will be assessed additional premiums.





These
      actions will significantly increase the Company’s non-interest expense in 2009
      and in future years as long as the increased premiums are in
      place.


30


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





The
      table
      below sets forth information regarding the Company’s common stock repurchase
      plans. Purchases made during the quarter ended September 30, 2008 relate to
      the
      stock repurchase plan that was originally approved by the Company’s Board of
      Directors on September 1, 2006. Stock repurchased under this plan will be held
      as Treasury shares.




Period
            
            Total Number of
              Shares Purchased
            
            Average Price
              Paid per Share
            
            Total Number of
              Shares Purchased
              as Part of Publicly
              Announced Plans
              or Programs
            
            Maximum Number
              of Shares that May
              Yet Be Purchased
              Under the Plans or
              ProgramsJuly
                1, 2008 through July 31, 2008
            
            
            7,703
            
            $
            7.64
            
            
            7,703
            
            
            274,797August
                1, 2008 through August 31, 2008
            
            
            41,290
            
            
            8.05
            
            
            41,290
            
            
            233,507September
                1, 2008 through September 30, 2008
            
            
            13,590
            
            
            7.50
            
            
            13,590
            
            
            219,917Total
            
            
            62,583
            
            $
            7.88
            
            
            62,583
            
            
            219,917





Item
              3.
            Defaults
                Upon Senior Securities


None





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


None




Item
              5.
            Other
                Information


None





Item
              6.
            Exhibits


a.
            Exhibits




31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.
            Certification
                of Chief Executive Officer and Chief Financial Officer of Atlantic
                Coast
                Federal Corporation pursuant to Section
                906




31




**ATLANTIC
      COAST FEDERAL CORPORATION**





**FORM
      10-Q**





**September
      30, 2008**





**Part
      II - Other Information**





**Signatures**





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





ATLANTIC
                COAST FEDERAL CORPORATION(Registrant)Date:
                November 13, 2008
            /s/
                Robert J. Larison, Jr.Robert
                J. Larison, Jr., President and ChiefExecutive
                OfficerDate:
                November 13, 2008
            /s/
                Dawna R. MillerDawna
                R. Miller, Senior Vice–President andChief
                Financial Officer


32